241

16. Tax Expendit

The Congressional Budget Act of 1974 (Public Law 

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

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

“revenue losses attributable to provisions of the Federal 

tax laws which allow a special exclusion, exemption, or 

deduction from gross income or which provide a special 

credit, a preferential rate of tax, or a deferral of tax liability.’’ These exceptions may be viewed as alternatives to

other policy instruments, such as spending or regulatory 

programs.

Identification and measurement of tax expenditures 

depends crucially on the baseline tax system against 

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

on a comprehensive income tax, which defines income as 

the sum of consumption and the change in net wealth in 

a given period of time.

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

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

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 2012

2018 using two methods of accounting: current revenue 

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

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

A discussion of performance measures and economic 

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

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

by the Government Performance and Results Act of 1993

TAX EPE

Tax Expenditure Estima

All tax expenditure estimates presented here are based 

upon current tax law enacted as of December 31, 2012.

Thus, the estimates assume that the Bush era tax cuts

expire as scheduled under the Tax Relief, Unemploymen

Insurance Reauthorization, and Job Creation Act of 2010

In most cases, expired or repealed provisions are not listed if their revenue effects result only from taxpayer activity occurring before fiscal year 2012. The estimates are

based on the economic assumptions from the Mid-Session 

Review of the 2013 Budget. The estimates do not reflec

the “American Taxpayer Relief Act of 2012” (ATRA), enacted into law on January 2, 2013, which extended m

tax expenditures, changed income tax rates, and provided 

Alternative Minimum Tax relief. Given the late passage

of the legislation, revised estimates will be included in the 

tax expenditure tables for the 2015 Budget. The tax-related provisions of ATRA are summarized in chapter 14 

this volume, “Governmental Receipts.” In contrast to the

general rule which drops expired provisions, and for the 

sake of continuity, the tables below show provisions that 

expired at the end of 2011 but were extended by ATRA

The total revenue effects for tax expenditures for fiscal

years 2012–2018 are displayed according to the Budget’s 

functional categories in Table 16–1. Descriptions of th

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 16–2 reports separately 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 form of tax liability that the various provisions affect. The ultimate beneficiaries of corporate ta

expenditures could be shareholders, employees, customers, or other providers of capital, depending on economic 

forces.

Table 16–3 ranks the major tax expenditures by the

size of their 2014–2018 revenue effect. The first column

provides the number of the provision in order to cross reference this table to Tables 16–1 through 16–3, as well as

to the descriptions below. 

1 These baseline concepts are thoroughly discussed in Special Analysis G of the 1985 Budget, where the former is referred to as the pre-1983

method and the latter the post-1982 method.
242 Analytical Pe

Interpreting Tax Expenditure Estima

The estimates shown for individual tax expenditures in

Tables 16–1, 16–2, and 16–3 do not necessarily equal the

increase in Federal revenues (or the change in the budget 

balance) that would result from repealing these special 

provisions, for the following reasons.

First, eliminating a tax expenditure may have incentive effects that alter economic behavior. These incentives

can affect the resulting magnitudes of the activity or of 

other tax provisions or Government programs. For example, if capital gains were taxed at ordinary rates, capital 

gain realizations would be expected to decline, resulting 

in lower tax receipts. Such behavioral effects are not reflected in the estimates.

Second, tax expenditures are interdependent even 

without incentive effects. Repeal of a tax expenditure provision can increase or decrease the tax revenues associated with other provisions. For example, even if behavior

does not change, repeal of an itemized deduction could 

increase the revenue costs from other deductions because 

some taxpayers would be moved into higher tax brackets. 

Alternatively, repeal of an itemized deduction could lower 

the revenue cost from other deductions if taxpayers are 

led to claim the standard deduction instead of itemizing. 

Similarly, if two provisions were repealed simultaneously, 

the increase in tax liability could be greater or less than 

the sum of the two separate tax expenditures, because 

each is estimated assuming that the other remains in 

force. In addition, the estimates reported in Table 16–1

are the totals of individual and corporate income tax 

revenue effects reported in Table 16–2 and do not reflect

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

Table 16–1 should be regarded as approximations

Present-Value Estima

The annual value of tax expenditures for tax deferrals

is reported on a cash basis in all tables except Table 16–4.

Cash-based estimates reflect the difference between taxes

deferred in the current year and incoming revenues that 

are received due to deferrals of taxes from prior years. 

Although such estimates are useful as a measure of cash 

flows into the Government, they do not accurately reflect 

the true economic cost of these provisions. For example, 

for a provision where activity levels have changed, so that 

incoming tax receipts from past deferrals are greater than 

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

in present-value terms current deferrals have a real cost 

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

enacted deferral provision, a cash-based estimate can 

overstate the real effect on receipts to the Government 

because the newly deferred taxes will ultimately be received. 

Discounted present-value estimates of revenue effects

are presented in Table 16–4 for certain provisions that

involve tax deferrals or other long-term revenue effects. 

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

The present-value estimates represent the revenue effects, net of future tax payments, that follow from activities undertaken during calendar year 2012 which cause

the deferrals or other long-term revenue effects. For instance, a pension contribution in 2012 would cause a deferral of tax payments on wages in 2012 and on pension 

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

years. In some future year, however, the 2012 pension 

contribution and accrued earnings will be paid out and 

taxes will be due; these receipts are included in the present-value estimate. In general, this conceptual approach 

is similar to the one used for reporting the budgetary effects of credit programs, where direct loans and guarantees in a given year affect future cash flows.

Tax Expenditure Baselin

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 Congressiona

Budget Act, which mandated the tax expenditure budget, 

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

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

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

reference tax law baseline. Tax expenditures may take

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

by the baseline tax system.

The normal tax baseline is patterned on a practical

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

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

allows personal exemptions, a standard deduction, and 

deduction of expenses incurred in earning income. It is 

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

specific definition of the taxpaying unit.

The reference tax law baseline is also patterned on

a comprehensive income tax, but it is closer to existing 

law. Reference law tax expenditures are limited to special

exceptions from a generally provided tax rule that serve 

programmatic functions in a way that is analogous to 

spending programs. Provisions under the reference law 

baseline are generally tax expenditures under the normal 

tax baseline, but the reverse is not always true.

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

tax. For example, under the normal and reference tax 

baselines:

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

income tax.

•	 There is a separate corporate income tax.
16. Tax Expend

Table 16–1. Estimates of Total Income Tax Expenditures For Fi

(in millions of dollars

Total from corporations and individuals

2012 2013 2014 2015 2016 2017 2018 2014–18

National Defens

1 Exclusion of benefits and allowances to armed forces personnel ................................... 14,140 14,640 15,150 14,170 14,350 14,840 15,430 73,940

International affairs:

2 Exclusion of income earned abroad by U.S. citizens ....................................................... 5,400 5,800 6,140 6,430 6,730 7,050 7,380 33,730

3 Exclusion of certain allowances for Federal employees abroad ...................................... 1,070 1,120 1,180 1,240 1,300 1,370 1,430 6,520

4 Inventory property sales source rules exception ............................................................. 3,310 3,610 3,940 4,300 4,690 5,120 5,590 23,640

5 Deferral of income from controlled foreign corporations (normal tax method) ................ 42,000 41,810 41,770 43,020 44,240 45,180 46,160 220,370

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

General science, space, and technology: 

7 Expensing of research and experimentation expenditures (normal tax method) ............ 3,740 4,810 5,040 5,530 6,560 7,610 8,470 33,210

8 Credit for increasing research activities ........................................................................... 4,390 2,320 2,130 1,970 1,820 1,680 1,530 9,130

Energy: 

9 Expensing of exploration and development costs, fuels .................................................. 470 790 880 630 390 260 180 2,340

10 Excess of percentage over cost depletion, fuels ............................................................. 890 900 940 940 950 950 950 4,730

11 Alternative fuel production credit ..................................................................................... 20 10 0 0 0 0 0 0

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

13 Capital gains treatment of royalties on coal ..................................................................... 90 80 60 80 90 100 110 440

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

15 Energy production credit 1 ............................................................................................... 1,500 1,730 1,770 1,730 1,640 1,440 1,100 7,680

16 Energy investment credit 1 ............................................................................................... 1,040 1,270 1,360 1,670 1,880 1,110 240 6,260

17 Alcohol fuel credits 2 ........................................................................................................ 140 110 50 30 10 10 0 100

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

19 Tax credit and deduction for clean-fuel burning vehicles ................................................. 100 180 260 400 610 670 500 2,440

20 Exclusion of utility conservation subsidies ....................................................................... 270 250 250 250 250 250 240 1,240

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

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

restructuring policy ..................................................................................................... –70 –180 –190 –180 –150 –120 –80 –720

23 Credit for investment in clean coal facilities ..................................................................... 380 400 420 500 320 170 170 1,580

24 Temporary 50% expensing for equipment used in the refining of liquid fuels .................. 680 610 –90 –700 –830 –880 –800 –3,300

25 Natural gas distribution pipelines treated as 15-year property ........................................ 110 100 100 100 110 120 120 550

26 Amortize all geological and geophysical expenditures over 2 years ................................ 90 110 110 90 80 70 70 420

27 Allowance of deduction for certain energy efficient commercial building property .......... 70 70 40 20 0 0 –20 40

28 Credit for construction of new energy efficient homes ..................................................... 70 40 20 0 0 0 0 20

29 Credit for energy efficiency improvements to existing homes .......................................... 780 0 0 0 0 0 0 0

30 Credit for energy efficient appliances .............................................................................. 210 300 130 120 100 0 0 350

31 Credit for residential energy efficient property ................................................................. 910 1,010 1,140 1,270 1,420 600 0 4,430

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

33 Advanced energy property credit ..................................................................................... 580 460 110 0 –30 –50 –50 –20

34 Advanced nuclear power production credit ...................................................................... 0 0 0 0 0 165 440 605

Natural resources and environment:

35 Expensing of exploration and development costs, nonfuel minerals ............................... 50 60 60 80 80 80 90 390

36 Excess of percentage over cost depletion, nonfuel minerals ........................................... 560 580 600 600 610 620 630 3,060

37 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities .......... 420 470 550 600 650 680 730 3,210

38 Capital gains treatment of certain timber income ............................................................ 90 80 60 80 90 100 110 440

39 Expensing of multiperiod timber growing costs ............................................................... 270 280 300 310 320 330 350 1,610

40 Tax incentives for preservation of historic structures ....................................................... 540 550 570 580 590 600 610 2,950

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

42 Industrial CO2 capture and sequestration tax credit ....................................................... 60 60 70 80 110 210 160 630

43 Deduction for endangered species recovery expenditures .............................................. 20 20 20 20 30 30 30 130

Agriculture: 

44 Expensing of certain capital outlays ................................................................................ 70 100 110 120 130 130 130 620

45 Expensing of certain multiperiod production costs .......................................................... 130 160 160 160 160 170 160 810
244 Analytical Pe

Table 16–1. Estimates of Total Income Tax Expenditures For Fiscal Year

(in millions of dollars

Total from corporations and individuals

2012 2013 2014 2015 2016 2017 2018 2014–18

46 Treatment of loans forgiven for solvent farmers ............................................................... 40 40 40 40 40 40 40 200

47 Capital gains treatment of certain income ....................................................................... 880 830 630 760 910 1,030 1,110 4,440

48 Income averaging for farmers .......................................................................................... 130 130 130 130 140 140 140 680

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

50 Expensing of reforestation expenditures ......................................................................... 60 70 80 80 80 90 100 430

Commerce and housing:

Financial institutions and insurance: 

51 Exemption of credit union income ............................................................................... 1,440 1,560 1,660 1,750 1,940 1,890 2,220 9,460

52 Exclusion of interest on life insurance savings ........................................................... 17,580 18,350 21,010 23,130 24,670 24,870 26,190 119,870

53 Special alternative tax on small property and casualty insurance companies ............ 10 10 10 10 10 10 10 50

54 Tax exemption of certain insurance companies owned by tax-exempt organizations 800 830 830 830 850 850 850 4,210

55 Small life insurance company deduction .................................................................... 20 20 20 20 20 20 20 100

56 Exclusion of interest spread of financial institutions ................................................... 150 1,400 2,330 2,660 2,910 3,170 3,400 14,470

Housing: 

57 Exclusion of interest on owner-occupied mortgage subsidy bonds ............................ 1,040 1,170 1,370 1,520 1,630 1,740 1,850 8,110

58 Exclusion of interest on rental housing bonds ............................................................ 880 990 1,170 1,290 1,370 1,470 1,570 6,870

59 Deductibility of mortgage interest on owner-occupied homes .................................... 81,890 93,090 101,470 112,730 126,950 142,040 156,990 640,180

60 Deductibility of State and local property tax on owner-occupied homes .................... 15,460 20,310 25,160 26,110 27,330 28,690 29,740 137,030

61 Deferral of income from installment sales ................................................................... 900 1,080 1,160 1,350 1,560 1,730 1,850 7,650

62 Capital gains exclusion on home sales ....................................................................... 30,900 38,130 45,870 48,790 52,310 56,070 60,160 263,200

63 Exclusion of net imputed rental income ...................................................................... 68,230 74,080 75,520 80,880 88,260 93,330 98,690 436,680

64 Exception from passive loss rules for $25,000 of rental loss ...................................... 10,200 12,250 14,420 16,070 16,950 17,730 18,510 83,680

65 Credit for low-income housing investments 6 .............................................................. 7,670 7,410 8,310 8,280 8,330 8,730 9,080 42,730

66 Accelerated depreciation on rental housing (normal tax method) .............................. 1,220 1,680 2,130 2,570 3,060 3,570 4,130 15,460

67 Discharge of mortgage indebtedness ......................................................................... 1,930 650 0 0 0 0 0 0

Commerce: 

68 Cancellation of indebtedness ..................................................................................... 150 110 90 70 50 –10 –70 130

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

70 Treatment of qualified dividends ................................................................................. 29,750 20,240 0 0 0 0 0 0

71 Capital gains (except agriculture, timber, iron ore, and coal) ...................................... 65,360 61,840 46,690 56,700 68,130 76,860 82,640 331,020

72 Capital gains exclusion of small corporation stock ..................................................... 50 130 370 720 750 500 410 2,750

73 Step-up basis of capital gains at death ....................................................................... 15,490 21,170 27,100 28,460 29,870 31,370 32,970 149,770

74 Carryover basis of capital gains on gifts ..................................................................... 2,830 3,550 3,540 4,230 4,980 5,620 6,100 24,470

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

76 Accelerated depreciation of buildings other than rental housing (normal tax method) ...... –7,120 –7,540 –7,570 –7,370 –7,210 –7,130 –7,100 –36,380

77 Accelerated depreciation of machinery and equipment (normal tax method) ............ 69,500 14,750 17,850 40,260 57,660 72,300 85,660 273,730

78 Expensing of certain small investments (normal tax method) .................................... 1,270 –530 –610 530 1,120 1,510 1,800 4,350

79 Graduated corporation income tax rate (normal tax method) ..................................... 4,270 4,300 4,210 4,180 4,170 4,240 4,250 21,050

80 Exclusion of interest on small issue bonds ................................................................. 240 270 320 350 370 400 420 1,860

81 Deduction for US production activities ........................................................................ 11,570 12,860 13,630 14,370 14,790 15,510 16,620 74,920

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

Transportation: 

83 Tonnage tax election for certain international shipping income 7 ..................................... 60 60 70 70 70 80 80 370

84 Exclusion of reimbursed employee parking expenses ..................................................... 2,640 2,880 3,010 3,140 3,290 3,450 3,610 16,500

85 Exclusion for employer-provided transit passes .............................................................. 590 660 700 760 820 870 930 4,080

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

87 Exclusion of interest on bonds for Highway Projects and rail-truck transfer facilities ...... 240 230 220 210 200 190 170 990

Community and regional development:

88 Investment credit for rehabilitation of structures (other than historic) .............................. 30 30 30 30 30 30 30 150

89 Exclusion of interest for airport, dock, and similar bonds ................................................ 690 780 920 1,010 1,090 1,160 1,230 5,410

90 Exemption of certain mutuals’ and cooperatives’ income ................................................ 130 130 140 140 140 150 150 720

91 Empowerment zones, the DC enterprise zone, and renewal communities ..................... 620 420 470 460 420 360 310 2,020
16. Tax Expend

Table 16–1. Estimates of Total Income Tax Expenditures For Fiscal Year

(in millions of dollars

Total from corporations and individuals

2012 2013 2014 2015 2016 2017 2018 2014–18

92 New markets tax credit .................................................................................................... 930 930 910 880 840 710 460 3,800

93 Expensing of environmental remediation costs ............................................................... –20 –180 –180 –170 –160 –160 –160 –830

94 Credit to holders of Gulf Tax Credit Bonds. ...................................................................... 90 100 120 130 140 150 160 700

95 Recovery Zone Bonds 8 ................................................................................................... 10 10 20 30 30 30 30 140

96 Tribal Economic Development Bonds .............................................................................. 0 30 50 50 50 50 60 260

Education, training, employment, and social services: 

Education: 

97 Exclusion of scholarship and fellowship income (normal tax method) ........................ 2,760 3,020 3,470 3,600 3,740 3,890 4,040 18,740

98 HOPE tax credit .......................................................................................................... 0 430 4,310 4,270 4,150 4,180 4,030 20,940

99 Lifetime Learning tax credit ........................................................................................ 2,000 2,290 4,450 4,420 4,340 4,260 4,160 21,630

100 American Opportunity Tax Credit 9 ............................................................................. 15,580 14,400 0 0 0 0 0 0

101 Education Individual Retirement Accounts ................................................................. 60 80 90 100 110 120 130 550

102 Deductibility of student-loan interest ........................................................................... 1,450 1,460 880 880 910 940 910 4,520

103 Deduction for higher education expenses .................................................................. 720 0 0 0 0 0 0 0

104 Qualified tuition programs ........................................................................................... 1,980 2,020 2,270 2,520 2,690 2,870 3,060 13,410

105 Exclusion of interest on student-loan bonds ............................................................... 470 530 620 680 730 770 830 3,630

106 Exclusion of interest on bonds for private nonprofit educational facilities ................... 2,150 2,440 2,870 3,160 3,400 3,610 3,870 16,910

107 Credit for holders of zone academy bonds 10 ............................................................. 200 200 180 160 130 120 110 700

108 Exclusion of interest on savings bonds redeemed to finance educational expenses .... 10 10 10 10 20 20 20 80

109 Parental personal exemption for students age 19 or over .......................................... 2,800 2,700 2,810 2,550 2,300 2,080 1,870 11,610

110 Deductibility of charitable contributions (education) ................................................... 3,960 4,590 5,080 5,450 5,920 6,430 6,940 29,820

111 Exclusion of employer-provided educational assistance ............................................ 670 240 0 0 0 0 0 0

112 Special deduction for teacher expenses ..................................................................... 170 0 0 0 0 0 0 0

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

114 Qualified school construction bonds 11 ....................................................................... 400 580 650 650 650 650 650 3,250

Training, employment, and social services: 

115 Work opportunity tax credit ......................................................................................... 1,130 970 660 370 160 80 30 1,300

116 Employer provided child care exclusion ...................................................................... 1,360 1,570 1,620 1,720 1,840 1,980 2,120 9,280

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

118 Assistance for adopted foster children ........................................................................ 530 530 560 590 630 670 710 3,160

119 Adoption credit and exclusion 12 ................................................................................. 62 330 110 80 80 80 80 430

120 Exclusion of employee meals and lodging (other than military) .................................. 5,591 6,109 6,592 6,903 7,113 7,336 7,750 35,694

121 Child credit 13 .............................................................................................................. 24,790 18,430 8,650 8,380 8,020 7,670 7,240 39,960

122 Credit for child and dependent care expenses ........................................................... 3,410 1,550 1,290 1,250 1,200 1,150 1,090 5,980

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

124 Deductibility of charitable contributions, other than education and health .................. 33,770 39,610 44,060 47,330 51,550 56,130 60,840 259,910

125 Exclusion of certain foster care payments .................................................................. 420 420 420 430 430 420 420 2,120

126 Exclusion of parsonage allowances ............................................................................ 700 760 820 890 960 1,040 1,120 4,830

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

Health:

128 Exclusion of employer contributions for medical insurance premiums and medical care 14 .... 184,320 202,530 212,820 224,610 239,620 256,850 272,360 1,206,260

129 Self-employed medical insurance premiums ................................................................... 5,210 6,140 6,740 7,160 7,650 8,240 8,860 38,650

130 Medical Savings Accounts / Health Savings Accounts .................................................... 1,520 1,600 1,680 1,760 1,880 2,000 2,130 9,450

131 Deductibility of medical expenses ................................................................................... 7,230 8,990 10,270 10,820 11,180 11,360 12,370 56,000

132 Exclusion of interest on hospital construction bonds ....................................................... 3,040 3,430 4,040 4,440 4,760 5,070 5,430 23,740

133 Refundable Premium Assistance Tax Credit 15 ................................................................ 0 0 0 –2,660 –3,810 –4,670 –4,930 –16,070

134 Credit for employee health insurance expenses of small business 16 .............................. 190 250 950 1,660 1,690 1,480 1,310 7,090

135 Deductibility of charitable contributions (health) .............................................................. 3,820 4,470 4,980 5,350 5,820 6,340 6,880 29,370

136 Tax credit for orphan drug research ................................................................................. 840 1,000 1,190 1,410 1,680 2,010 2,390 8,680

137 Special Blue Cross/Blue Shield deduction ...................................................................... 420 500 500 510 490 510 510 2,520

138 Tax credit for health insurance purchased by certain displaced and retired individuals 17 ...... 10 10 0 0 0 0 0 0

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

insurance .................................................................................................................... 330 360 400 440 490 510 530 2,370
246 Analytical Pe

Table 16–1. Estimates of Total Income Tax Expenditures For Fiscal Year

(in millions of dollars

Total from corporations and individuals

2012 2013 2014 2015 2016 2017 2018 2014–18

Income security:

140 Exclusion of railroad retirement system benefits ............................................................. 350 430 510 510 510 500 490 2,520

141 Exclusion of workers’ compensation benefits .................................................................. 10,080 9,120 11,440 11,570 11,680 11,800 11,950 58,440

142 Exclusion of public assistance benefits (normal tax method) .......................................... 720 750 780 810 840 870 910 4,210

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

144 Exclusion of military disability pensions .......................................................................... 110 150 160 160 160 160 160 800

Net exclusion of pension contributions and earnings: 

145 Defined benefit employer plans .................................................................................. 38,740 47,410 53,060 57,400 61,810 66,150 69,970 308,390

146 Defined contribution employer plans .......................................................................... 51,830 68,820 79,720 90,870 98,650 103,140 105,490 477,870

147 Individual Retirement Accounts .................................................................................. 16,180 21,240 19,260 19,370 20,620 21,970 23,360 104,580

148 Low and moderate income savers credit .................................................................... 1,110 1,180 1,220 1,243 1,250 1,270 1,270 6,253

149 Self-Employed plans ................................................................................................... 15,930 19,380 23,260 25,490 28,030 30,800 33,760 141,340

Exclusion of other employee benefits: 

150 Premiums on group term life insurance ...................................................................... 1,870 1,910 1,940 1,970 2,030 2,080 2,140 10,160

151 Premiums on accident and disability insurance .......................................................... 340 350 360 360 370 370 380 1,840

152 Income of trusts to finance supplementary unemployment benefits ................................ 20 20 30 40 50 60 70 250

153 Special ESOP rules ......................................................................................................... 810 1,190 1,260 1,330 1,410 1,500 1,580 7,080

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

155 Additional deduction for the elderly ................................................................................. 2,080 2,870 3,260 3,330 3,400 3,490 3,540 17,020

156 Tax credit for the elderly and disabled ............................................................................. 10 10 10 10 10 0 0 30

157 Deductibility of casualty losses ........................................................................................ 300 350 370 390 410 430 450 2,050

158 Earned income tax credit 18 ............................................................................................. 1,610 4,040 5,640 5,920 6,060 6,310 6,520 30,450

Social Security

Exclusion of social security benefits: 

159 Social Security benefits for retired workers ................................................................ 22,170 27,920 32,910 34,330 35,550 36,830 38,340 177,960

160 Social Security benefits for disabled workers ............................................................. 7,510 8,960 9,970 10,280 10,560 10,810 11,060 52,680

161 Social Security benefits for spouses, dependents and survivors ................................ 3,740 3,970 4,130 4,230 4,370 4,490 4,550 21,770

Veterans benefits and services:

162 Exclusion of veterans death benefits and disability compensation .................................. 4,240 5,210 6,880 7,480 8,140 8,860 9,640 41,000

163 Exclusion of veterans pensions ....................................................................................... 360 430 550 570 580 600 620 2,920

164 Exclusion of GI bill benefits ............................................................................................. 940 1,200 1,610 1,720 1,830 1,950 2,080 9,190

165 Exclusion of interest on veterans housing bonds ............................................................ 10 10 10 20 20 30 30 110

General purpose fiscal assistance: 

166 Exclusion of interest on public purpose State and local bonds ....................................... 25,950 29,270 34,420 37,920 40,680 43,330 46,340 202,690

167 Build America Bonds 19 .................................................................................................... 0 0 0 0 0 0 0 0

168 Deductibility of nonbusiness State and local taxes other than on owner-occupied 

homes ......................................................................................................................... 29,480 43,940 51,560 54,520 58,200 62,200 65,660 292,140

Interest:

169 Deferral of interest on U.S. savings bonds ....................................................................... 980 1,020 1,080 1,090 1,100 1,120 1,130 5,520

Addendum: Aid to State and local governments:

Deductibility of: 

Property taxes on owner-occupied homes ................................................................. 15,460 20,310 25,160 26,110 27,330 28,690 29,740 137,030

Nonbusiness State and local taxes other than on owner-occupied homes ................ 29,480 43,940 51,560 54,520 58,200 62,200 65,660 292,140

Exclusion of interest on State and local bonds for: 

Public purposes .......................................................................................................... 25,950 29,270 34,420 37,920 40,680 43,330 46,340 202,690

Energy facilities ........................................................................................................... 20 30 30 30 30 40 40 170

Water, sewage, and hazardous waste disposal facilities ............................................ 420 470 550 600 650 680 730 3,210

Small-issues ............................................................................................................... 240 270 320 350 370 400 420 1,860

Owner-occupied mortgage subsidies ......................................................................... 1,040 1,170 1,370 1,520 1,630 1,740 1,850 8,110

Rental housing ............................................................................................................ 880 990 1,170 1,290 1,370 1,470 1,570 6,870

Airports, docks, and similar facilities ........................................................................... 690 780 920 1,010 1,090 1,160 1,230 5,410
16. Tax Expend

Table 16–1. Estimates of Total Income Tax Expenditures For Fiscal Year

(in millions of dollars

Total from corporations and individuals

2012 2013 2014 2015 2016 2017 2018 2014–18

Student loans .............................................................................................................. 470 530 620 680 730 770 830 3,630

Private nonprofit educational facilities ........................................................................ 2,150 2,440 2,870 3,160 3,400 3,610 3,870 16,910

Hospital construction .................................................................................................. 3,040 3,430 4,040 4,440 4,760 5,070 5,430 23,740

Veterans’ housing ....................................................................................................... 10 10 10 20 20 30 30 110

GO Zone and GO Zone mortgage .............................................................................. 90 100 120 130 140 150 160 700

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

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

commenced in 2009 and 2010. The effect of the grant on outlays (in millions of dollars) is as follows: 2012 $5,080; 2013 $8,080; 2014 $4,710; 2015 $2,520; 2016 $1,580; 2017 $330; 

2018 $0.

2 In addition, the alcohol fuel mixture credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2012 $3,540; 2013 $0; 2014 $0; 2015 $0; 2016 $0; 2017 $0; 

2018 $0.

The alternative fuel mixture credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2012 $310; 2013 $10; 2014 $10; 2015 $0; 2016 $0; 2017 $0; 2018 $0.

3 In addition, the biodiesel producer tax credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2012 $800; 2013 $0; 2014 $0; 2015 $0; 2016 $0; 2017: $0; 

2018 $0.

4 In addition, the provision has outlay effects of (in millions of dollars): 2012 $40; 2013 $50; 2014 $50; 2015 $50; 2016 $50; 2017 $50; 2018 $50.

5 In addition, the provision has outlay effects of (in millions of dollars): 2012 $50; 2013 $60; 2014 $60; 2015 $60; 2016 $60; 2017 $60; 2018 $60.

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

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

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

8 In addition, recovery zone bonds have outlay effects (in millions of dollars) as follows: 2012 $160, 2013 $160, 2014 $160, 2015 $160, 2016 $160; and 2017 $160; 2018 $160.

9 The figures in the table indicate the effect of the American opportunity tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2012 $5,850; 2013 

$6,450; 2014 $970

10 In addition, the credit for holders of zone academy bonds has outlay effects of (in millions of dollars): 2012 $20; 2013 $30; 2014 $30; 2015 $30; 2016 $30; 2017 $30; and 2018 $30.

11 In addition, the provision for school construction bonds has outlay effects of (in millions of dollars): 2012 $780; 2013 $940; 2014 $940; 2015 $940; 2016 $940; 2017 $940, and 2018 

$940.

12 The figures in the table indicate the effect of the adoption tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2012 $700; and 2013 $50.

13 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: 2012 $22,620; 2013 $22,510; 2014 

$1,750; 2015 $1,720; 2016 $1,720; 2017 $1,690; and 2018 1,660.

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

2012 $107,760; 2013 $111,120; 2014 $112,620; 2015 $116,500; 2016 $122,730; 2017 $130,170; 2018 $135,170. 15 In addition, the premium assistance credit provision has outlay effects (in millions of dollars) as follows: 2014 $32,270; 2015 $58,130; 2016 $71,470; 2017 $78,130; 2018 $82,150.

16 In addition, the small business credit provision has outlay effects (in millions of dollars) as follows: 2012 $70; 2013 $60; 2014 $140; 2015 $240; 2016 $250; 2017 $220; 2018 $190.

17 The figures in the table indicate the effect of the health coverage tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2012 $130; 2013 

$120; 2014 $30.

18 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: 2012 $54,840; 2013 

$54,360; 2014 $47,700; 2015 $49,000; 2016 $49,870; 2017 $50,740; and 2018 $51,510.

19 In addition, Build America Bonds have outlay effects of (in millions of dollars): 2012 $3,190; 2013 $3,190; 2014 $3,190; 2015 $3,190; 2016 $3,190; 2017 $3,190; and 2018 $3,190.

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

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

Table 16–2. Estimates of Tax Expenditur

Individual Income Taxes for Fiscal Y

(in millions of dollars

Corporations Individuals

2012 2013 2014 2015 2016 2017 2018 2014–18 2012 2013 2014 2015 2016 2017 2018 2014–18

National Defens

1 Exclusion of benefits and allowances to 

armed forces personnel ......................... 14,140 14,640 15,150 14,170 14,350 14,840 15,430 73,940

International affairs:

2 Exclusion of income earned abroad by U.S. 

citizens ................................................... 5400 5800 6140 6430 6730 7050 7380 33,730

3 Exclusion of certain allowances for Federal 

employees abroad ................................. 1070 1120 1180 1240 1300 1370 1430 6,520

4 Inventory property sales source rules 

exception ............................................... 3,310 3,610 3,940 4,300 4,690 5,120 5,590 23,640

5 Deferral of income from controlled foreign 

corporations (normal tax method) ......... 42,000 41,810 41,770 43,020 44,240 45,180 46,160 220,370

6 Deferred taxes for financial firms on certain 

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

General science, space, and technology: 

7 Expensing of research and experimentation 

expenditures (normal tax method) ......... 3,600 4,610 4,820 5,300 6,280 7,290 8,100 31,790 140 200 220 230 280 320 370 1,420

8 Credit for increasing research activities ...... 4220 2320 2130 1970 1820 1680 1530 9,130 170 0

Energy: 

9 Expensing of exploration and development 

costs, fuels ............................................. 410 690 770 550 340 230 160 2,050 60 100 110 80 50 30 20 290

10 Excess of percentage over cost depletion, 

fuels ....................................................... 750 750 770 770 780 780 780 3,880 140 150 170 170 170 170 170 850

11 Alternative fuel production credit ................ 20 10 0 0 0 0 0 0 0 0 0 0 0 0 0 0

12 Exception from passive loss limitation 

for working interests in oil and gas 

properties .............................................. 10 10 10 10 10 10 10 50

13 Capital gains treatment of royalties on coal 90 80 60 80 90 100 110 440

14 Exclusion of interest on energy facility 

bonds ..................................................... 10 10 10 10 10 10 10 50 10 20 20 20 20 30 30 120

15 Energy production credit 1 .......................... 1,480 1,710 1,750 1,710 1,620 1,420 1,080 7,580 20 20 20 20 20 20 20 100

16 Energy investment credit 1 .......................... 920 1150 1240 1550 1750 1030 210 5,780 120 120 120 120 130 80 30 480

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

18 Bio-Diesel and small agri-biodiesel 

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

19 Tax credit and deduction for clean-fuel 

burning vehicles ..................................... 20 30 60 90 110 110 70 440 80 150 200 310 500 560 430 2,000

20 Exclusion of utility conservation subsidies .. 20 10 10 10 10 10 10 50 250 240 240 240 240 240 230 1,190

21 Credit for holding clean renewable energy 

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

22 Deferral of gain from dispositions of 

transmission property to implement 

FERC restructuring policy ...................... –70 –180 –190 –180 –150 –120 –80 –720

23 Credit for investment in clean coal facilities 360 380 400 480 310 160 160 1,510 20 20 20 20 10 10 10 70

24 Temporary 50% expensing for equipment 

used in the refining of liquid fuels .......... 680 610 –90 –700 –830 –880 –800 –3,300 0 0 0 0 0 0 0 0

25 Natural gas distribution pipelines treated as 

15-year property .................................... 110 100 100 100 110 120 120 550 0 0 0 0 0 0 0 0

26 Amortize all geological and geophysical 

expenditures over 2 years ...................... 70 80 80 70 60 50 50 310 20 30 30 20 20 20 20 110

27 Allowance of deduction for certain energy 

efficient commercial building property ... 30 30 20 10 0 0 –10 20 40 40 20 10 0 0 –10 20

28 Credit for construction of new energy 

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

29 Credit for energy efficiency improvements 

to existing homes ................................... 0 0 0 0 0 0 0 0 780 0 0 0 0 0 0 0

30 Credit for energy efficient appliances ......... 210 150 130 120 100 0 0 350 0 150 0 0 0 0 0 0

31 Credit for residential energy efficient 

property ................................................. 0 0 0 0 0 0 0 0 910 1,010 1,140 1,270 1,420 600 0 4,430

32 Qualified energy conservation bonds 5 ....... 10 10 10 10 10 10 10 50 10 20 20 20 20 20 20 100
16. Tax Expend

Table 16–2. Estimates of Tax Expenditures forth

Income Taxes for Fiscal Years 2012–201

(in millions of dollars

Corporations Individuals

2012 2013 2014 2015 2016 2017 2018 2014–18 2012 2013 2014 2015 2016 2017 2018 2014–18

33 Advanced Energy Property Credit .............. 500 390 80 0 –20 –40 –40 –20 80 70 30 0 –10 –10 –10 0

34 Advanced nuclear power production credit . 0 0 0 0 0 165 440 605 0 0 0 0 0 0 0 0

Natural resources and environment:

35 Expensing of exploration and development 

costs, nonfuel minerals .......................... 50 60 60 70 70 70 80 350 0 0 0 10 10 10 10 40

36 Excess of percentage over cost depletion, 

nonfuel minerals .................................... 530 540 550 550 560 570 580 2,810 30 40 50 50 50 50 50 250

37 Exclusion of interest on bonds for water, 

sewage, and hazardous waste facilities . 110 110 120 140 150 150 160 720 310 360 430 460 500 530 570 2,490

38 Capital gains treatment of certain timber 

income ................................................... 90 80 60 80 90 100 110 440

39 Expensing of multiperiod timber growing 

costs ...................................................... 170 170 180 180 190 200 210 960 100 110 120 130 130 130 140 650

40 Tax incentives for preservation of historic 

structures ............................................... 490 500 510 520 530 540 550 2,650 50 50 60 60 60 60 60 300

41 Exclusion of gain or loss on sale or 

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

42 Industrial CO2 capture and sequestration 

tax credit ................................................ 60 60 70 80 110 210 160 630 0 0 0 0 0 0 0 0

43 Deduction for endangered species recovery 

expenditures .......................................... 10 10 10 10 10 10 10 50 10 10 10 10 20 20 20 80

Agriculture: 

44 Expensing of certain capital outlays ........... 0 10 10 10 10 10 0 40 70 90 100 110 120 120 130 580

45 Expensing of certain multiperiod production 

costs ...................................................... 10 10 10 10 10 10 0 40 120 150 150 150 150 160 160 770

46 Treatment of loans forgiven for solvent 

farmers .................................................. 40 40 40 40 40 40 40 200

47 Capital gains treatment of certain income .... 880 830 630 760 910 1,030 1,110 4,440

48 Income averaging for farmers ..................... 130 130 130 130 140 140 140 680

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

50 Expensing of reforestation expenditures .... 20 20 20 20 20 20 30 110 40 50 60 60 60 70 70 320

Commerce and housing:

Financial institutions and insurance: 

51 Exemption of credit union income .......... 1,440 1,560 1,660 1,750 1,940 1,890 2,220 9,460

52 Exclusion of interest on life insurance 

savings .............................................. 2500 3310 3710 4000 4270 4680 4970 21,630 15080 15040 17300 19130 20400 20190 21220 98,240

53 Special alternative tax on small property 

and casualty insurance companies ... 10 10 10 10 10 10 10 50

54 Tax exemption of certain insurance 

companies owned by tax-exempt 

organizations .................................... 800 830 830 830 850 850 850 4,210

55 Small life insurance company deduction 20 20 20 20 20 20 20 100

56 Exclusion of interest spread of financial 

institutions ......................................... 150 1,400 2,330 2,660 2,910 3,170 3,400 14,470

Housing: 

57 Exclusion of interest on owner-occupied 

mortgage subsidy bonds .................. 270 270 300 350 370 390 410 1,820 770 900 1,070 1,170 1,260 1,350 1,440 6,290

58 Exclusion of interest on rental housing 

bonds ................................................ 230 230 260 300 310 330 350 1,550 650 760 910 990 1,060 1,140 1,220 5,320

59 Deductibility of mortgage interest on 

owner-occupied homes ..................... 81,890 93,090 101,470 112,730 126,950 142,040 156,990 640,180

60 Deductibility of State and local property 

tax on owner-occupied homes .......... 15,460 20,310 25,160 26,110 27,330 28,690 29,740 137,030

61 Deferral of income from installment 

sales ................................................. 900 1,080 1,160 1,350 1,560 1,730 1,850 7,650

62 Capital gains exclusion on home sales ... 30,900 38,130 45,870 48,790 52,310 56,070 60,160 263,200

63 Exclusion of net imputed rental income ... 68,230 74,080 75,520 80,880 88,260 93,330 98,690 436,680

64 Exception from passive loss rules for 

$25,000 of rental loss ....................... 10,200 12,250 14,420 16,070 16,950 17,730 18510 83,680
250 Analytical Pe

Table 16–2. Estimates of Tax Expenditures forth

Income Taxes for Fiscal Years 2012–201

(in millions of dollars

Corporations Individuals

2012 2013 2014 2015 2016 2017 2018 2014–18 2012 2013 2014 2015 2016 2017 2018 2014–18

65 Credit for low-income housing 

investments 6 .................................... 7,290 7,040 7,890 7,870 7,910 8,290 8,630 40,590 380 370 420 410 420 440 450 2,140

66 Accelerated depreciation on rental 

housing (normal tax method) ............ 210 260 320 390 470 560 660 2,400 1,010 1,420 1,810 2,180 2,590 3,010 3,470 13,060

67 Discharge of mortgage indebtedness .... 1,930 650 0 0 0 0 0 0

Commerce: 

68 Cancellation of indebtedness ................ 150 110 90 70 50 –10 –70 130

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

70 Treatment of qualified dividends ............ 29,750 20,240 0 0 0 0 0 0

71 Capital gains (except agriculture, timber, 

iron ore, and coal) ............................. 65,360 61,840 46,690 56,700 68,130 76,860 82,640 331,020

72 Capital gains exclusion of small 

corporation stock .............................. 50 130 370 720 750 500 410 2,750

73 Step-up basis of capital gains at death ... 15,490 21,170 27,100 28,460 29,870 31,370 32,970 149,770

74 Carryover basis of capital gains on gifts .... 2,830 3,550 3,540 4,230 4,980 5,620 6,100 24,470

75 Ordinary income treatment of loss from 

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

76 Accelerated depreciation of buildings 

other than rental housing (normal tax 

method) ............................................ –3,380 –3,310 –3,250 –3,200 –3,160 –3,150 –3,200 –15,960 –3,740 –4,230 –4,320 –4,170 –4,050 –3,980 –3,900 –20,420

77 Accelerated depreciation of machinery 

and equipment (normal tax method) . 45,950 7,940 9,330 24,160 35,810 45,840 55,410 170,550 23,550 6,810 8,520 16,100 21,850 26,460 30,250 103,180

78 Expensing of certain small investments 

(normal tax method) ......................... 60 –160 –160 10 100 160 210 320 1,210 –370 –450 520 1,020 1,350 1,590 4,030

79 Graduated corporation income tax rate 

(normal tax method) ......................... 4,270 4,300 4,210 4,180 4,170 4,240 4,250 21,050

80 Exclusion of interest on small issue 

bonds ................................................ 60 60 70 80 80 90 90 410 180 210 250 270 290 310 330 1,450

81 Deduction for US production activities ... 8750 9730 10310 10870 11190 11730 12570 56,670 2,820 3,130 3,320 3,500 3,600 3,780 4050 18,250

82 Special rules for certain film and TV 

production ......................................... 100 60 40 20 10 0 0 70 30 20 10 0 0 0 0 10

Transportation: 

83 Tonnage tax election for certain 

international shipping income 7 .............. 60 60 70 70 70 80 80 370

84 Exclusion of reimbursed employee parking 

expenses ............................................... 2,640 2,880 3,010 3,140 3,290 3,450 3,610 16,500

85 Exclusion for employer-provided transit 

passes ................................................... 590 660 700 760 820 870 930 4,080

86 Tax credit for certain expenditures for 

maintaining railroad tracks ..................... 100 60 40 20 10 0 0 70 30 20 10 0 0 0 0 10

87 Exclusion of interest on bonds for Highway 

Projects and rail-truck transfer facilities ... 60 60 50 50 50 50 40 240 180 170 170 160 150 140 130 750

Community and regional development:

88 Investment credit for rehabilitation of 

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

89 Exclusion of interest for airport, dock, and 

similar bonds ......................................... 180 180 200 230 250 260 270 1,210 510 600 720 780 840 900 960 4,200

90 Exemption of certain mutuals’ and 

cooperatives’ income ............................. 130 130 140 140 140 150 150 720

91 Empowerment zones, the DC enterprise 

zone, and renewal communities ............ 230 140 150 140 120 100 80 590 390 280 320 320 300 260 230 1,430

92 New markets tax credit ............................... 910 910 890 860 820 690 450 3,710 20 20 20 20 20 20 10 90

93 Expensing of environmental remediation 

costs ...................................................... –20 –150 –150 –140 –130 –130 –130 –680 0 –30 –30 –30 –30 –30 –30 –150

94 Credit to holders of Gulf Tax Credit Bonds. . 20 20 30 30 30 30 40 160 70 80 90 100 110 120 120 540

95 Recovery Zone Bonds 8 .............................. 0 0 0 10 10 10 10 40 10 10 20 20 20 20 20 100

96 Tribal Economic Development Bonds ......... 0 10 10 10 10 10 10 50 0 20 40 40 40 40 50 210
16. Tax Expend

Table 16–2. Estimates of Tax Expenditures forth

Income Taxes for Fiscal Years 2012–201

(in millions of dollars

Corporations Individuals

2012 2013 2014 2015 2016 2017 2018 2014–18 2012 2013 2014 2015 2016 2017 2018 2014–18

Education, training, employment, 

and social services: 

Education: 

97 Exclusion of scholarship and fellowship 

income (normal tax method) ............. 2,760 3,020 3,470 3,600 3,740 3,890 4,040 18,740

98 HOPE tax credit ..................................... 0 430 4,310 4,270 4,150 4,180 4,030 20,940

99 Lifetime Learning tax credit ................... 2,000 2,290 4,450 4,420 4,340 4,260 4,160 21,630

100 American Opportunity Tax Credit 9 ........ 15,580 14,400 0 0 0 0 0 0

101 Education Individual Retirement 

Accounts ........................................... 60 80 90 100 110 120 130 550

102 Deductibility of student-loan interest ...... 1,450 1,460 880 880 910 940 910 4,520

103 Deduction for higher education 

expenses .......................................... 720 0 0 0 0 0 0 0

104 Qualified tuition programs ...................... 1,980 2,020 2,270 2,520 2,690 2,870 3,060 13,410

105 Exclusion of interest on student-loan 

bonds ................................................ 120 120 140 160 170 170 180 820 350 410 480 520 560 600 650 2,810

106 Exclusion of interest on bonds for private 

nonprofit educational facilities ............ 560 560 630 720 770 800 850 3,770 1,590 1,880 2,240 2,440 2,630 2,810 3,020 13,140

107 Credit for holders of zone academy 

bonds 10 ............................................ 200 200 180 160 130 120 110 700

108 Exclusion of interest on savings bonds 

redeemed to finance educational 

expenses .......................................... 10 10 10 10 20 20 20 80

109 Parental personal exemption for 

students age 19 or over .................... 2,800 2,700 2,810 2,550 2,300 2,080 1,870 11,610

110 Deductibility of charitable contributions 

(education) ........................................ 690 740 790 840 890 940 980 4,440 3,270 3,850 4,290 4,610 5,030 5,490 5,960 25,380

111 Exclusion of employer-provided 

educational assistance ..................... 670 240 0 0 0 0 0 0

112 Special deduction for teacher expenses 170 0 0 0 0 0 0 0

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

114 Qualified school construction bonds 11 .... 110 150 160 160 160 160 160 800 290 430 490 490 490 490 490 2,450

Training, employment, and social services: 

115 Work opportunity tax credit .................... 870 820 600 330 150 70 30 1,180 260 150 60 40 10 10 0 120

116 Employer provided child care exclusion .... 1360 1570 1620 1720 1840 1980 2120 9,280

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

118 Assistance for adopted foster children ... 530 530 560 590 630 670 710 3,160

119 Adoption credit and exclusion 12 ............ 62 330 110 80 80 80 80 430

120 Exclusion of employee meals and 

lodging (other than military) .............. 0 0 0 0 0 0 0 0 5,591 6,109 6,592 6,903 7,113 7,336 7,750 35,694

121 Child credit 13 ......................................... 24,790 18,430 8,650 8,380 8,020 7,670 7,240 39,960

122 Credit for child and dependent care 

expenses .......................................... 3,410 1,550 1,290 1,250 1,200 1,150 1,090 5,980

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

124 Deductibility of charitable contributions, 

other than education and health ....... 1,510 1,600 1,690 1,770 1,860 1,940 2020 9,280 32,260 38,010 42,370 45,560 49,690 54,190 58,820 250,630

125 Exclusion of certain foster care 

payments .......................................... 420 420 420 430 430 420 420 2,120

126 Exclusion of parsonage allowances ....... 700 760 820 890 960 1,040 1,120 4,830

127 Employee retention credit for employers 

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

Health:

128 Exclusion of employer contributions for 

medical insurance premiums and 

medical care 14 ...................................... 184,320 202,530 212,820 224,610 239,620 256,850 272,360 1,206,260

129 Self-employed medical insurance premiums ... 5,210 6,140 6,740 7,160 7,650 8,240 8,860 38,650

130 Medical Savings Accounts / Health Savings 

Accounts ................................................ 1,520 1,600 1,680 1,760 1,880 2,000 2,130 9,450

131 Deductibility of medical expenses .............. 7,230 8,990 10,270 10,820 11,180 11,360 12,370 56,000
252 Analytical Pe

Table 16–2. Estimates of Tax Expenditures forth

Income Taxes for Fiscal Years 2012–201

(in millions of dollars

Corporations Individuals

2012 2013 2014 2015 2016 2017 2018 2014–18 2012 2013 2014 2015 2016 2017 2018 2014–18

132 Exclusion of interest on hospital 

construction bonds ................................ 790 790 890 1,020 1,080 1,130 1,200 5,320 2,250 2,640 3,150 3,420 3,680 3,940 4,230 18,420

133 Refundable Premium Assistance Tax 

Credit 15 ................................................. 0 0 0 –2,660 –3,810 –4,670 –4,930 –16,070

134 Credit for employee health insurance 

expenses of small business 16 ............... 70 90 330 580 590 520 460 2,480 120 160 620 1,080 1,100 960 850 4,610

135 Deductibility of charitable contributions 

(health) .................................................. 200 210 230 240 250 260 280 1,260 3,620 4,260 4,750 5,110 5,570 6,080 6,600 28,110

136 Tax credit for orphan drug research ............ 840 1,000 1,190 1,410 1,680 2,010 2,390 8,680

137 Special Blue Cross/Blue Shield deduction ... 420 500 500 510 490 510 510 2,520

138 Tax credit for health insurance purchased 

by certain displaced and retired 

individuals 17 .......................................... 10 10 0 0 0 0 0 0

139 Distributions from retirement plans for 

premiums for health and long-term care 

insurance ............................................... 330 360 400 440 490 510 530 2,370

Income security:

140 Exclusion of railroad retirement system 

benefits .................................................. 350 430 510 510 510 500 490 2,520

141 Exclusion of workers’ compensation 

benefits .................................................. 10,080 9,120 11,440 11,570 11,680 11,800 11,950 58,440

142 Exclusion of public assistance benefits 

(normal tax method) .............................. 720 750 780 810 840 870 910 4,210

143 Exclusion of special benefits for disabled 

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

144 Exclusion of military disability pensions ..... 110 150 160 160 160 160 160 800

Net exclusion of pension contributions and 

earnings: 

145 Defined benefit employer plans ............. 38,740 47,410 53,060 57,400 61,810 66,150 69,970 308,390

146 Defined contribution employer plans ..... 51,830 68,820 79,720 90,870 98,650 103,140 105,490 477,870

147 Individual Retirement Accounts ............. 16,180 21,240 19,260 19,370 20,620 21,970 23,360 104,580

148 Low and moderate income savers credit 1,110 1,180 1,220 1,243 1,250 1,270 1,270 6,253

149 Self-Employed plans .............................. 15930 19380 23260 25490 28030 30800 33760 141,340

Exclusion of other employee benefits: 

150 Premiums on group term life insurance ... 1,870 1,910 1,940 1,970 2,030 2,080 2,140 10,160

151 Premiums on accident and disability 

insurance .......................................... 340 350 360 360 370 370 380 1,840

152 Income of trusts to finance supplementary 

unemployment benefits .......................... 20 20 30 40 50 60 70 250

153 Special ESOP rules .................................... 740 1,090 1,160 1,230 1,310 1,390 1,470 6,560 70 100 100 100 100 110 110 520

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

155 Additional deduction for the elderly ............ 2,080 2,870 3,260 3,330 3,400 3,490 3,540 17,020

156 Tax credit for the elderly and disabled ........ 10 10 10 10 10 0 0 30

157 Deductibility of casualty losses ................... 300 350 370 390 410 430 450 2,050

158 Earned income tax credit 18 ........................ 1,610 4,040 5,640 5,920 6,060 6,310 6,520 30,450

Social Security

Exclusion of social security benefits: 

159 Social Security benefits for retired 

workers ............................................. 22,170 27,920 32,910 34,330 35,550 36,830 38,340 177,960

160 Social Security benefits for disabled 

workers ............................................. 7,510 8,960 9,970 10,280 10,560 10,810 11,060 52,680

161 Social Security benefits for spouses, 

dependents and survivors ................ 3,740 3,970 4,130 4,230 4,370 4,490 4,550 21,770

Veterans benefits and services:

162 Exclusion of veterans death benefits and 

disability compensation ......................... 4,240 5,210 6,880 7,480 8,140 8,860 9,640 41,000

163 Exclusion of veterans pensions .................. 360 430 550 570 580 600 620 2,920

164 Exclusion of GI bill benefits ........................ 940 1,200 1,610 1,720 1,830 1,950 2,080 9,190

165 Exclusion of interest on veterans housing 

bonds ..................................................... 0 0 0 0 0 10 10 20 10 10 10 20 20 20 20 90
16. Tax Expend

Table 16–2. Estimates of Tax Expenditures forth

Income Taxes for Fiscal Years 2012–201

(in millions of dollars

Corporations Individuals

2012 2013 2014 2015 2016 2017 2018 2014–18 2012 2013 2014 2015 2016 2017 2018 2014–18

General purpose fiscal assistance: 

166 Exclusion of interest on public purpose 

State and local bonds ............................ 6,750 6,720 7,570 8,720 9,240 9,670 10,240 45,440 19,200 22,550 26,850 29,200 31,440 33,660 36,100 157,250

167 Build America Bonds 19 ............................... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

168 Deductibility of nonbusiness State and local 

taxes other than on owner-occupied 

homes .................................................... 29,480 43,940 51,560 54,520 58,200 62,200 65,660 292,140

Interest:

169 Deferral of interest on U.S. savings bonds ... 980 1,020 1,080 1,090 1,100 1,120 1,130 5,520

Addendum: Aid to State and

local governments: 

Deductibility of: 

Property taxes on owner-occupied 

homes ............................................... 15,460 20,310 25,160 26,110 27,330 28,690 29,740 137,030

Nonbusiness State and local taxes other 

than on owner-occupied homes ........ 29,480 43,940 51,560 54,520 58,200 62,200 65,660 292,140

Exclusion of interest on State and local 

bonds for: 

Public purposes ..................................... 6,750 6,720 7,570 8,720 9,240 9,670 10,240 45,440 19,200 22,550 26,850 29,200 31,440 33,660 36,100 157,250

Energy facilities ...................................... 10 10 10 10 10 10 10 50 10 20 20 20 20 30 30 120

Water, sewage, and hazardous waste 

disposal facilities ............................... 110 110 120 140 150 150 160 720 310 360 430 460 500 530 570 2,490

Small-issues .......................................... 60 60 70 80 80 90 90 410 180 210 250 270 290 310 330 1,450

Owner-occupied mortgage subsidies .... 270 270 300 350 370 390 410 1,820 770 900 1,070 1,170 1,260 1,350 1,440 6,290

Rental housing ....................................... 230 230 260 300 310 330 350 1,550 650 760 910 990 1,060 1,140 1,220 5,320

Airports, docks, and similar facilities ...... 180 180 200 230 250 260 270 1,210 510 600 720 780 840 900 960 4,200

Student loans ......................................... 120 120 140 160 170 170 180 820 350 410 480 520 560 600 650 2,810

Private nonprofit educational facilities ... 560 560 630 720 770 800 850 3,770 1,590 1,880 2,240 2,440 2,630 2,810 3,020 13,140

Hospital construction ............................. 790 790 890 1,020 1,080 1,130 1,200 5,320 2,250 2,640 3,150 3,420 3,680 3,940 4,230 18,420

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

GO Zone and GO Zone mortgage ......... 20 20 30 30 30 30 40 160 70 80 90 100 110 120 120 540

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

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

2009 and 2010. The effect of the grant on outlays (in millions of dollars) is as follows: 2012 $5,080; 2013 $8,080; 2014 $4,710; 2015 $2,520; 2016 $1,580; 2017 $330; 2018 $0.

2 In addition, the alcohol fuel mixture credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2012 $3,540; 2013 $0; 2014 $0; 2015 $0; 2016 $0; 2017 $0; 2018 

$0. The alternative fuel mixture credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2012 $310; 2013 $10; 2014 $10; 2015 $0; 2016 $0; 2017 $0; 2018 $0.

3 In addition, the biodiesel producer tax credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2012 $800; 2013 $0; 2014 $0; 2015 $0; 2016 $0; 2017: $0; 2018 $0.

4 In addition, the provision has outlay effects of (in millions of dollars): 2012 $40; 2013 $50; 2014 $50; 2015 $50; 2016 $50; 2017 $50; 2018 $50.

5 In addition, the provision has outlay effects of (in millions of dollars): 2012 $50; 2013 $60; 2014 $60; 2015 $60; 2016 $60; 2017 $60; 2018 $60.

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

7 These figures do not account for the tonnage tax which shipping companies may opt into in lieu of the corporate income tax. The tonnage tax reduces the cost of this tax expenditure 

by $20 per year in each year of the budget.

8 In addition, recovery zone bonds have outlay effects (in millions of dollars) as follows: 2012 $160, 2013 $160, 2014 $160, 2015 $160, 2016 $160; and 2017 $160; 2018 $160.

9 The figures in the table indicate the effect of the American opportunity tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2012 $5,850; 2013 

$6,450; 2014 $970

10 In addition, the credit for holders of zone academy bonds has outlay effects of (in millions of dollars): 2012 $20; 2013 $30; 2014 $30; 2015 $30; 2016 $30; 2017 $30; and 2018 $30.

11 In addition, the provision for school construction bonds has outlay effects of (in millions of dollars): 2012 $780; 2013 $940; 2014 $940; 2015 $940; 2016 $940; 2017 $940, and 2018 $940.

12 The figures in the table indicate the effect of the adoption tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2012 $700; and 2013 $50.

13 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: 2012 $22,620; 2013 $22,510; 2014 

$1,750; 2015 $1,720; 2016 $1,720; 2017 $1,690; and 2018 1,660.

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

2012 $107,760; 2013 $111,120; 2014 $112,620; 2015 $116,500; 2016 $122,730; 2017 $130,170; 2018 $135,170.

15 In addition, the premium assistance credit provision has outlay effects (in millions of dollars) as follows: 2014 $32,270; 2015 $58,130; 2016 $71,470; 2017 $78,130; 2018 $82,150.

16 In addition, the small business credit provision has outlay effects (in millions of dollars) as follows: 2012 $70; 2013 $60; 2014 $140; 2015 $240; 2016 $250; 2017 $220; 2018 $190.

17 The figures in the table indicate the effect of the health coverage tax credit on receipts. The effect of the credit on outlays (in millions of dollars) is as follows: 2012 $130; 2013 $120; 2014 $30.

18 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: 2012 $54,840; 2013 

$54,360; 2014 $47,700; 2015 $49,000; 2016 $49,870; 2017 $50,740; and 2018 $51,510.

19 In addition, Build America Bonds have outlay effects of (in millions of dollars): 2012 $3,190; 2013 $3,190; 2014 $3,190; 2015 $3,190; 2016 $3,190; 2017 $3,190; and 2018 $3,190.
254 Analytical Pe

Table 16–3. Income Tax Expenditres Ranked by Total Fiscal Year 

(in millions of dollars

Provision 2014 2014-18

128 Exclusion of employer contributions for medical insurance premiums and medical care ..................................................................................................... 212,820 1,206,260

59 Deductibility of mortgage interest on owner-occupied homes .............................................................................................................................................. 101,470 640,180

146 Defined contribution employer plans .................................................................................................................................................................................... 79,720 477,870

63 Exclusion of net imputed rental income ................................................................................................................................................................................. 75,520 436,680

71 Capital gains (except agriculture, timber, iron ore, and coal) ................................................................................................................................................. 46,690 331,020

145 Defined benefit employer plans ............................................................................................................................................................................................ 53,060 308,390

168 Deductibility of nonbusiness State and local taxes other than on owner-occupied homes .................................................................................................. 51,560 292,140

77 Accelerated depreciation of machinery and equipment (normal tax method) ...................................................................................................................... 17,850 273,730

62 Capital gains exclusion on home sales ................................................................................................................................................................................. 45,870 263,200

124 Deductibility of charitable contributions, other than education and health ............................................................................................................................. 44,060 259,910

5 Deferral of income from controlled foreign corporations (normal tax method) ..................................................................................................................... 41,770 220,370

166 Exclusion of interest on public purpose State and local bonds ............................................................................................................................................ 34,420 202,690

159 Social Security benefits for retired workers .......................................................................................................................................................................... 32,910 177,960

73 Step-up basis of capital gains at death ................................................................................................................................................................................. 27,100 149,770

149 Self-Employed plans ............................................................................................................................................................................................................. 23,260 141,340

60 Deductibility of State and local property tax on owner-occupied homes .............................................................................................................................. 25,160 137,030

52 Exclusion of interest on life insurance savings ..................................................................................................................................................................... 21,010 119,870

147 Individual Retirement Accounts ............................................................................................................................................................................................ 19,260 104,580

64 Exception from passive loss rules for $25,000 of rental loss ................................................................................................................................................ 14,420 83,680

81 Deduction for US production activities ................................................................................................................................................................................... 13,630 74,920

1 Exclusion of benefits and allowances to armed forces personnel ........................................................................................................................................ 15,150 73,940

141 Exclusion of workers’ compensation benefits ........................................................................................................................................................................ 11,440 58,440

131 Deductibility of medical expenses ........................................................................................................................................................................................ 10,270 56,000

160 Social Security benefits for disabled workers ........................................................................................................................................................................ 9,970 52,680

65 Credit for low-income housing investments .......................................................................................................................................................................... 8,310 42,730

162 Exclusion of veterans death benefits and disability compensation ....................................................................................................................................... 6,880 41,000

121 Child credit ............................................................................................................................................................................................................................. 8,650 39,960

129 Self-employed medical insurance premiums ......................................................................................................................................................................... 6,740 38,650

120 Exclusion of employee meals and lodging (other than military) ........................................................................................................................................... 6,592 35,694

2 Exclusion of income earned abroad by U.S. citizens ............................................................................................................................................................ 6,140 33,730

7 Expensing of research and experimentation expenditures (normal tax method) ................................................................................................................. 5,040 33,210

158 Earned income tax credit ....................................................................................................................................................................................................... 5,640 30,450

110 Deductibility of charitable contributions (education) .............................................................................................................................................................. 5,080 29,820

135 Deductibility of charitable contributions (health) .................................................................................................................................................................... 4,980 29,370

74 Carryover basis of capital gains on gifts ............................................................................................................................................................................... 3,540 24,470

132 Exclusion of interest on hospital construction bonds ............................................................................................................................................................. 4,040 23,740

4 Inventory property sales source rules exception ................................................................................................................................................................... 3,940 23,640

161 Social Security benefits for spouses, dependents and survivors .......................................................................................................................................... 4,130 21,770

99 Lifetime Learning tax credit ................................................................................................................................................................................................... 4,450 21,630

79 Graduated corporation income tax rate (normal tax method) ............................................................................................................................................... 4,210 21,050

98 HOPE tax credit ..................................................................................................................................................................................................................... 4,310 20,940

97 Exclusion of scholarship and fellowship income (normal tax method) ................................................................................................................................. 3,470 18,740

155 Additional deduction for the elderly ...................................................................................................................................................................................... 3,260 17,020

106 Exclusion of interest on bonds for private nonprofit educational facilities ............................................................................................................................. 2,870 16,910

84 Exclusion of reimbursed employee parking expenses .......................................................................................................................................................... 3,010 16,500

66 Accelerated depreciation on rental housing (normal tax method) ........................................................................................................................................ 2,130 15,460

56 Exclusion of interest spread of financial institutions .............................................................................................................................................................. 2,330 14,470

104 Qualified Tuition Programs ..................................................................................................................................................................................................... 2,270 13,410

109 Parental personal exemption for students age 19 or over .................................................................................................................................................... 2,810 11,610

150 Premiums on group term life insurance ................................................................................................................................................................................ 1,940 10,160

51 Exemption of credit union income ........................................................................................................................................................................................ 1,660 9,460

130 Medical Savings Accounts / Health Savings Accounts .......................................................................................................................................................... 1,680 9,450

116 Employer provided child care exclusion ................................................................................................................................................................................. 1,620 9,280

164 Exclusion of GI bill benefits .................................................................................................................................................................................................. 1,610 9,190

8 Credit for increasing research activities ................................................................................................................................................................................ 2,130 9,130

136 Tax credit for orphan drug research ...................................................................................................................................................................................... 1,190 8,680
16. Tax Expend

Table 16–3. Income Tax Expenditres Ranked by Total Fiscal Year 2014-2018

(in millions of dollars

Provision 2014 2014-18

57 Exclusion of interest on owner-occupied mortgage subsidy bonds ...................................................................................................................................... 1,370 8,110

15 New technology credit .......................................................................................................................................................................................................... 1,770 7,680

61 Deferral of income from installment sales ............................................................................................................................................................................. 1,160 7,650

134 Credit for employee health insurance expenses of small business. ....................................................................................................................................... 950 7,090

153 Special ESOP rules ............................................................................................................................................................................................................... 1,260 7,080

58 Exclusion of interest on rental housing bonds ....................................................................................................................................................................... 1,170 6,870

3 Exclusion of certain allowances for Federal employees abroad ............................................................................................................................................ 1,180 6,520

16 Energy investment credit ....................................................................................................................................................................................................... 1,360 6,260

148 Low and moderate income savers credit ............................................................................................................................................................................... 1,220 6,253

122 Credit for child and dependent care expenses ..................................................................................................................................................................... 1,290 5,980

169 Deferral of interest on U.S. savings bonds ............................................................................................................................................................................ 1,080 5,520

89 Exclusion of interest for airport, dock, and similar bonds ...................................................................................................................................................... 920 5,410

126 Exclusion of parsonage allowances ..................................................................................................................................................................................... 820 4,830

10 Excess of percentage over cost depletion, fuels .................................................................................................................................................................. 940 4,730

102 Deductibility of student-loan interest ...................................................................................................................................................................................... 880 4,520

47 Capital gains treatment of certain income ............................................................................................................................................................................ 630 4,440

31 30% credit for residential purchases/installations of solar and fuel cells ............................................................................................................................... 1,140 4,430

78 Expensing of certain small investments (normal tax method) .............................................................................................................................................. -610 4,350

54 Tax exemption of certain insurance companies owned by tax-exempt organizations ........................................................................................................... 830 4,210

142 Exclusion of public assistance benefits (normal tax method) ............................................................................................................................................... 780 4,210

85 Exclusion for employer-provided transit passes ................................................................................................................................................................... 700 4,080

92 New markets tax credit .......................................................................................................................................................................................................... 910 3,800

105 Exclusion of interest on student-loan bonds ......................................................................................................................................................................... 620 3,630

114 Qualified school construction bonds ...................................................................................................................................................................................... 650 3,250

37 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities ................................................................................................................ 550 3,210

118 Assistance for adopted foster children ................................................................................................................................................................................... 560 3,160

36 Excess of percentage over cost depletion, nonfuel minerals ................................................................................................................................................ 600 3,060

40 Tax incentives for preservation of historic structures ............................................................................................................................................................ 570 2,950

163 Exclusion of veterans pensions ............................................................................................................................................................................................ 550 2,920

72 Capital gains exclusion of small corporation stock ................................................................................................................................................................ 370 2,750

137 Special Blue Cross/Blue Shield deduction ........................................................................................................................................................................... 500 2,520

140 Exclusion of railroad retirement system benefits .................................................................................................................................................................. 510 2,520

19 Tax credit and deduction for clean-fuel burning vehicles ....................................................................................................................................................... 260 2,440

139 Distributions from retirement plans for premiums for health and long-term care insurance .................................................................................................. 400 2,370

9 Expensing of exploration and development costs, fuels ....................................................................................................................................................... 880 2,340

125 Exclusion of certain foster care payments ............................................................................................................................................................................ 420 2,120

157 Deductibility of casualty losses ............................................................................................................................................................................................. 370 2,050

91 Empowerment zones, Enterprise communities, and Renewal communities ......................................................................................................................... 470 2,020

80 Exclusion of interest on small issue bonds ........................................................................................................................................................................... 320 1,860

151 Premiums on accident and disability insurance .................................................................................................................................................................... 360 1,840

39 Expensing of multiperiod timber growing costs .................................................................................................................................................................... 300 1,610

23 Credit for investment in clean coal facilities ........................................................................................................................................................................... 420 1,580

115 Work opportunity tax credit .................................................................................................................................................................................................... 660 1,300

20 Exclusion of utility conservation subsidies ............................................................................................................................................................................. 250 1,240

87 Exclusion of interest on bonds for Financing of Highway Projects and rail-truck transfer facilities ........................................................................................ 220 990

45 Expensing of certain multiperiod production costs ............................................................................................................................................................... 160 810

144 Exclusion of military disability pensions ............................................................................................................................................................................... 160 800

90 Exemption of certain mutuals’ and cooperatives’ income ..................................................................................................................................................... 140 720

94 Credit to holders of Gulf Tax Credit Bonds. ............................................................................................................................................................................ 120 700

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

48 Income averaging for farmers ................................................................................................................................................................................................ 130 680

42 Industrial CO2 capture and sequestration tax credit ............................................................................................................................................................. 70 630

44 Expensing of certain capital outlays ..................................................................................................................................................................................... 110 620

34 Advanced nuclear power production credit ............................................................................................................................................................................ 0 605

25 Natural gas distribution pipelines treated as 15-year property .............................................................................................................................................. 100 550

101 Education Individual Retirement Accounts ............................................................................................................................................................................ 90 550
256 Analytical Pe

Table 16–3. Income Tax Expenditres Ranked by Total Fiscal Year 2014-2018

(in millions of dollars

Provision 2014 2014-18

13 Capital gains treatment of royalties on coal .......................................................................................................................................................................... 60 440

38 Capital gains treatment of certain timber income ................................................................................................................................................................. 60 440

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

119 Adoption credit and exclusion ................................................................................................................................................................................................ 110 430

26 Amortize all geological and geophysical expenditures over 2 years ...................................................................................................................................... 110 420

35 Expensing of exploration and development costs, nonfuel minerals .................................................................................................................................... 60 390

83 Deferral of tax on shipping companies ................................................................................................................................................................................. 70 370

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

30 Credit for energy efficient appliances .................................................................................................................................................................................... 130 350

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

96 Tribal Economic Development Bonds .................................................................................................................................................................................... 50 260

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

152 Income of trusts to finance supplementary unemployment benefits ..................................................................................................................................... 30 250

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

46 Treatment of loans forgiven for solvent farmers ..................................................................................................................................................................... 40 200

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

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

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

88 Investment credit for rehabilitation of structures (other than historic) ................................................................................................................................... 30 150

95 Recovery Zone Bonds ........................................................................................................................................................................................................... 20 140

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

68 Cancellation of indebtedness ............................................................................................................................................................................................... 90 130

165 Exclusion of interest on veterans housing bonds .................................................................................................................................................................. 10 110

17 Alcohol fuel credits ................................................................................................................................................................................................................ 50 100

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

55 Small life insurance company deduction .............................................................................................................................................................................. 20 100

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

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

82 Special rules for certain film and TV production .................................................................................................................................................................... 50 80

86 Tax credit for certain expenditures for maintaining railroad tracks ......................................................................................................................................... 50 80

108 Exclusion of interest on savings bonds redeemed to finance educational expenses ............................................................................................................ 10 80

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

53 Special alternative tax on small property and casualty insurance companies ..................................................................................................................... 10 50

27 Allowance of deduction for certain energy efficient commercial building property ................................................................................................................ 40 40

156 Tax credit for the elderly and disabled .................................................................................................................................................................................. 10 30

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

41 Exclusion of gain or loss on sale or exchange of certain brownfield sites ............................................................................................................................. 10 10

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

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

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

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

67 Discharge of mortgage indebtedness .................................................................................................................................................................................... 0 0

70 Treatment of qualified dividends ............................................................................................................................................................................................ 0 0

100 Lifetime Learning tax credit ................................................................................................................................................................................................... 0 0

103 Deduction for higher education expenses ............................................................................................................................................................................. 0 0

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

112 Special deduction for teacher expenses ................................................................................................................................................................................ 0 0

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

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

138 Tax credit for health insurance purchased by certain displaced and retired individuals ........................................................................................................ 0 0

167 Build America Bonds ............................................................................................................................................................................................................. 0 0

33 Advanced Energy Property Credit ......................................................................................................................................................................................... 110 -20

22 Deferral of gain from dispositions of transmission property to implement FERC restructuring policy ................................................................................... -190 -720

93 Expensing of environmental remediation costs ..................................................................................................................................................................... -180 -830

24 Temporary 50% expensing for equipment used in the refining of liquid fuels ........................................................................................................................ -90 -3,300

133 Refundable Premium Assistance Tax Credit ......................................................................................................................................................................... 0 -16,070

76 Accelerated depreciation of buildings other than rental housing (normal tax method) ......................................................................................................... -7,570 -36,380
16. Tax Expend

•	 Noncorporate tax rates vary by level of income.

•	 Individual tax rates, including brackets, standard 

deduction, and personal exemptions, are allowed to 

vary with marital status.

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

adjust the cost basis of capital assets and debt for 

changes in the general price level. Thus, under a

comprehensive income tax baseline, the failure to 

take account of inflation in measuring depreciation, 

capital gains, and interest income would be regarded 

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

and failure to take account of inflation in measuring 

interest costs would be regarded as a positive tax 

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

Although the reference law and normal tax baselines 

are generally similar, areas of difference include:

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

baseline. Thus, corporate tax rates below the maximum

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

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

it specifies the current maximum rate as the baseline for 

the corporate income tax. The lower tax rates applied to

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

the baseline rate structure under both the reference and 

normal tax methods.

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

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

gross income include most transfer payments from the 

Government.2 The normal tax baseline also excludes gifts

between individuals from gross income. Under the normal

tax baseline, however, all cash transfer payments from 

the Government to private individuals are counted in 

gross income, and exemptions of such transfers from tax 

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

2 Gross income does, however, include transfer payments associated 

with past employment, such as Social Security benefits.

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

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

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

does not actively perform managerial or other participatory functions. 

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

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

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

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

Table 16–4. Present Value of Selec

for Activity in Cale

(in millions of dollars

Provision

2012 Present 

Value of 

Revenue Loss

5 Deferral of income from controlled foreign corporations (normal tax method) ....................................................................... 21,000

7 Expensing of research and experimentation expenditures (normal tax method) ................................................................... 2380

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

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

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

39 Expensing of multiperiod timber growing costs ...................................................................................................................... 130

45 Expensing of certain multiperiod production costs - agriculture ............................................................................................. -140

44 Expensing of certain capital outlays - agriculture ................................................................................................................... -100

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

52 Deferral of income on life insurance and annuity contracts .................................................................................................... 16,530

66 Accelerated depreciation on rental housing ........................................................................................................................... 7,270

76 Accelerated depreciation of buildings other than rental housing ............................................................................................ -17,740

77 Accelerated depreciation of machinery and equipment .......................................................................................................... 4,750

78 Expensing of certain small investments (normal tax method) ................................................................................................ -220

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

65 Credit for low-income housing investments ............................................................................................................................ 6,630

104 Deferral for state prepaid tuition plans .................................................................................................................................... 3,510

145 Defined benefit employer plans .............................................................................................................................................. 92,570

146 Defined contribution employer plans ...................................................................................................................................... 64,170

147 Exclusion of IRA contributions and earnings .......................................................................................................................... 1,030

147 Exclusion of Roth earnings and distributions ......................................................................................................................... 3,160

147 Exclusion of non-deductible IRA earnings .............................................................................................................................. 100

149 Exclusion of contributions and earnings for Self-Employed plans .......................................................................................... 2,540

166 Exclusion of interest on public-purpose bonds ....................................................................................................................... 15,170

Exclusion of interest on non-public purpose bonds ................................................................................................................ 5,460

169 Deferral of interest on U.S. savings bonds .............................................................................................................................. 223
258 Analytical Pe

Capital recovery. Under the reference tax law baseline

no tax expenditures arise from accelerated depreciation. 

Under the normal tax baseline, the depreciation allowance for property is computed using estimates of economic depreciation.

Treatment of foreign income. Both the normal and reference tax baselines allow a tax credit for foreign income 

taxes paid (up to the amount of U.S. income taxes that

would otherwise be due), which prevents double taxation 

of income earned abroad. Under the normal tax method,

however, controlled foreign corporations (CFCs) are no

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 und

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 i

not subject to U.S. tax until distributed to U.S. taxpayers

Under this baseline, deferral of tax on CFC income is n

a tax expenditure because U.S. taxpayers generally are

not taxed on accrued, but unrealized, income.

Descriptions of Income Tax Provisi

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, 2012

National Defen

1. Benefits and allowances to Armed Forces personnel.—Under the baseline tax system, all compensation,

including dedicated payments and in-kind benefits, should 

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

wages. As an example, a rental voucher of $100 is (approximately) equal in value to $100 of cash income. In contrast 

to this treatment, certain housing and meals, in addition to 

other benefits provided military personnel, either in cash 

or in kind, as well as certain amounts of pay related to combat service, are excluded from income subject to tax. 

2. Income earned abroad.—Under the baseline

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

properly included in their taxable income. It makes no 

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

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

and satisfy a foreign residency requirement to exclude 

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

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

these taxpayers receive a specific allowance for foreign 

housing from their employers, then they may also exclude 

such expenses to the extent that they do not exceed 30 

percent of the earned income inclusion, with geographical 

adjustments, over 16 percent of the earned income limit. 

If taxpayers do not receive a specific allowance for housing expenses, they may deduct housing expenses up to the 

amount by which foreign earned income exceeds their foreign earned income exclusion.

3. Exclusion of certain allowances for Federal 

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

income. It makes no difference whether the compensation 

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

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

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

Corps members who work outside the continental Unite

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

certain special allowances they receive to compensate 

them for the relatively high costs associated with living 

overseas. The allowances supplement wage income and

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

travel to and from the United States

4. Sales source rule exceptions.—The Unite

States generally taxes the worldwide income of U.S. persons and business entities. Under the baseline tax system, taxpayers receive a credit for foreign taxes pai

which is limited to the pre-credit U.S. tax on the foreign

source income. In contrast, the sales source rules for inventory property under current law allow U.S. exporters

to use more foreign tax credits by allowing the exporters 

to attribute a larger portion of their earnings abroad than 

would be the case if the allocation of earnings was based 

on actual economic activity.

5. Income of U.S.-controlled foreign corporations.—Under the baseline tax system, the United State

generally taxes the worldwide income of U.S. persons and

business entities. In contrast, certain active income of 

foreign corporations controlled by U.S. shareholders is not

subject to U.S. taxation when it is earned. The income becomes taxable only when the controlling U.S. shareholde

receive dividends or other distributions from their foreign 

stockholding. The reference law tax baseline reflects this

tax treatment where only realized income is taxed. Under

the normal tax method, however, the currently attributable foreign source pre-tax income from such a controlling interest is considered to be subject to U.S. taxation,

whether or not distributed. Thus, the normal tax method

considers the amount of controlled foreign corporation 

income not yet distributed to a U.S. shareholder as taxdeferred income

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

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

The baseline tax system would not allow the deferral of

tax or other relief targeted at particular industries or 

activities. In contrast, under current law, financial firms 

may defer taxes on income earned overseas in an active 

business. This provision expired at the end of 2011, but

ATRA extended it through December 31, 2013 (extensi

not shown in the tables).

General Science, Space, and Techno

7. Expensing R&E expenditures.—The baseline

tax system allows a deduction for the cost of producing 

income. It requires taxpayers to capitalize the costs associated with investments over time to better match the 

streams of income and associated costs, Research and
16. Tax Expend

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

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

the reference law baseline tax system would allow of expensing of R&E expenditures. In contrast, under the normal tax method, the expensing of R&E expenditures i

viewed as a tax expenditure. The baseline assumed for

the normal tax method is that all R&E expenditures are

successful and have an expected life of five years.

8. R&E credit.—The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. In

contrast, the Tax Code allows an R&E credit of 20 percent of qualified research expenditures in excess of a ba

amount. 

The base amount of the credit is generally determined

by multiplying a “fixed-base percentage” by the average amount of the company’s gross receipts for the prior 

four years. The taxpayer’s fixed base percentage generally is the ratio of its research expenses to gross receipts

for 1984 through 1988. Taxpayers can elect the alternative simplified credit regime, which is equal to 14 percent

(12 percent prior to 2009) of qualified research expenses 

that exceed 50 percent of the average qualified research 

expenses for the three preceding taxable years. Prior to 

January 1, 2009, taxpayers could also elect an alternative incremental credit regime. Under the alternative

incremental credit regime the taxpayer was assigned a 

three-tiered fixed base percentage that is lower than the 

fixed-base percentage that would otherwise apply, and 

the credit rate was reduced. The rates for the alternative

incremental credit ranged from 3 percent to 5 percent. 

Under current law as of December 31, the research credi

expired on December 31, 2011.  However, ATRA extend

the provision through December 31, 2013 (extension not

shown in the tables.) 

Energ

9. Exploration and development costs.—Under

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

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

well is measured appropriately each year. 

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

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

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

recovery of costs sooner, expensing is more generous for 

the taxpayer than would be amortization. Integrated oil 

companies may deduct only 70 percent of such costs and 

must amortize the remaining 30 percent over five years. 

The same rule applies to the exploration and development

costs of surface stripping and the construction of shafts 

and tunnels for other fuel minerals.

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

depletion is similar in concept to depreciation, in that the 

costs of developing or acquiring the asset are capitalized 

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

income.

In contrast, the Tax Code generally allows independent fuel and mineral producers and royalty owners t

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

depletion, taxpayers deduct a percentage of gross income 

from mineral production. In certain cases the deduction 

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

life of an investment, percentage depletion deductions can 

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

would cost depletion, which would limit deductions to an 

investment’s cost.

11. Alternative fuel production credit.—The

baseline tax system would not allow credits for particular 

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

a credit of $3 per oil-equivalent barrel of production (in 

2004 dollars) for coke or coke gas during a four-year period for qualified facilities. Qualifying facilities producing 

coke and coke gas must be placed in service by December

31, 2009. 

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

general rule limiting taxpayers’ ability to deduct losses 

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

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

materially participate, and there are numerous additional considerations brought to bear on the determination of 

which activities are passive for a given taxpayer. Losses

are limited in an attempt to limit tax sheltering activities. 

Passive losses that are unused may be carried forward 

and applied against future passive income. 

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

the taxpayer holds directly or through an entity that does 

not limit the liability of the taxpayer with respect to the 

interest.  Thus, taxpayers can deduct losses from such

working interests against nonpassive income without regard to whether they materially participate in the activity. 

13. Capital gains treatment of royalties on 

coal.— The baseline tax system generally would tax all

income under the regular tax rate schedule. It would 

not allow preferentially low tax rates to apply to certain 

types or sources of income. For individuals in 2012, tax 

rates on regular income vary from 10 percent to 35 percent, depending on the taxpayer’s income. In contrast, 

current law allows capital gains realized by individuals 
260 Analytical Pe

to be taxed at a preferentially low rate that is no higher 

than 15 percent. Certain sales of coal under royalty contracts qualify for taxation as capital gains rather than ordinary income, and so benefit from the preferentially low

15 percent maximum tax rate on capital gains. Beginning 

in 2013, the top statutory preferential tax rate on capital 

gains will be 20 percent.

14. Energy facility bonds.—The baseline tax system generally would tax all income under the regular tax

rate schedule. It would not allow preferentially low (or 

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

State and local bonds used to finance construction of certain energy facilities to be exempt from tax. These bonds

are generally subject to the State private-activity-bond 

annual volume cap.

15. Energy production credit.—The baseline tax

system would not allow credits for particular activities, 

investments, or industries. Instead, it generally would 

seek to tax uniformly all returns from investment-like 

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

certain electricity produced from wind energy, biomass, 

geothermal energy, solar energy, small irrigation power, 

municipal solid waste, or qualified hydropower and sold to 

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

16. Energy investment credit.—The baseline tax

system would not allow credits for particular activities, 

investments, or industries. Instead, it generally would 

seek to tax uniformly all returns from investment-like 

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

plants, geothermal heat pumps, small wind property and 

combined heat and power property. Owners of renewable

power facilities that qualify for the energy production 

credit may instead elect to take an energy investment 

credit.

17. Alcohol fuel credits.—The baseline tax system

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

tax uniformly all returns from investment-like activities. 

In contrast, the Tax Code provides an income tax credi

for ethanol derived from renewable sources and used as 

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

may claim a refundable excise tax credit. In addition, 

small ethanol producers are eligible for a separate income 

tax credit for ethanol production and a separate income 

tax credit is available for qualified cellulosic biofuel production. With the exception of the cellulosic biofuel credit, 

these provisions expired on December 31, 2011. However,

ATRA extended the provision through December 31, 20

(extension not shown in the tables).

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

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

tax uniformly all returns from investment-like activities. 

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

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

claim a refundable excise tax credit. In addition, small 

agri-biodiesel producers are eligible for a separate income 

tax credit for ethanol production and a separate credit 

is available for qualified renewable diesel fuel mixtures. 

This provision expired on December 31, 2011  However

ATRA extended the provision through December 31, 20

(extension not shown in the tables).

19. Credit for alternative motor vehicles and 

refueling property.—The baseline tax system would

not allow credits or deductions for particular activities, 

investments, or industries. Instead, it generally would 

seek to tax uniformly all returns from investment-like 

activities. In contrast, the Tax Code allows a number o

credits for certain types of vehicles and property. These

are available for hydrogen alternative fuel vehicle refueling property, fuel cell vehicles and plug-in electric-drive 

motor vehicles. The credits for non-hydrogen alternative

fuel vehicle refueling property, plug-in conversions, and 

low-speed, motorcycle, and three-wheeled plug-in electric 

vehicles expire on December 31, 2011. However, AT

extended the provision through December 31, 2013 (extension not shown in the tables)

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

variety of (measurable) accretions to wealth. In certain 

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

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

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

customer under the baseline tax system. In contrast, the 

Tax Code exempts these subsidies from the non-busines

customer’s gross income.

21. Credit to holders of clean renewable energy 

bonds.—The baseline tax system would uniformly tax all

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

Tax Code provides for the issuance of Clean Renewa

Energy Bonds which entitles the bond holder to a Federal 

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

volume issued in 2009–2010 is $2.4 billion. As of March 

2010, issuers of the unused authorization of such bonds 

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

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

policy.—The baseline tax system generally would tax

gains from sale of property when realized. It would not 

allow an exception for particular activities or individuals. 

However, the Tax Code allows utilities to defer gains fro

the sale of their transmission assets to a FERC-approve

independent transmission company. The sale of property

must be made prior to January 1, 2012. However, ATR

extended the provision through December 31, 2013 (extension not shown in the tables)

23. Credit for investment in clean coal facilities.—The baseline tax system would uniformly tax all

returns to investments and not allow credits for particu-
16. Tax Expend

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

investment tax credits for clean coal facilities producing 

electricity and for industrial gasification combined cycle 

projects. 

24. Temporary 50 percent expensing for equipment used in the refining of liquid fuels.—The baseline tax system allows the taxpayer to deduct the decline

in the economic value of an investment over its economic 

life. However, the Tax Code provides for an accelerate

recovery of the cost of certain investments in refineries by 

allowing partial expensing of the cost, thereby giving such 

investments a tax advantage.

25. Natural gas distribution pipelines treated 

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

taxpayers to deduct the decline in the economic value of 

an investment over its economic life. However, the Tax

Code allows depreciation of natural gas distribution pipelines (placed in service between 2005 and 2011) over a 15

year period. These deductions are accelerated relative to

deductions based on economic depreciation.

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

allows taxpayers to deduct the decline in the economic 

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

allows geological and geophysical expenditures incurred 

in connection with oil and gas exploration in the United

States to be amortized over two years for non-integrated 

oil companies.

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

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

particular industries. Instead, it generally would seek to 

tax uniformly all returns from investment-like activities. 

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

foot, for certain energy efficient commercial buildings.

28. Credit for construction of new energy efficient homes.—The baseline tax system would not allow

credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all 

returns from investment-like activities. However, the Tax

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

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

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

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

percent standard. This provision expired on Decembe

31, 2011. However, ATRA extended the provision throug

December 31, 2013 (extension not shown in the tables)

29. Credit for energy efficiency improvements 

to existing homes.—The baseline tax system would not

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

tax credit for expenditures made on insulation, exterior 

windows, and doors that improve the energy efficiency of 

homes and meet certain standards. The Tax Code also provides a credit for purchases of advanced main air circulating fans, natural gas, propane, or oil furnaces or hot wat

boilers, and other qualified energy efficient property. This

provision expired on December 31, 2011. However, AT

extended the provision through December 31, 2013 (extension not shown in tables.

30. Credit for energy efficient appliances.—The

baseline tax system would not allow credits for particular 

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

tax credits for the manufacture of efficient dishwashers, 

clothes washers, and refrigerators. The size of the credit

depends on the efficiency of the appliance. This provision

expired on December 31, 2011. However, ATRA extend

the provision through December 31, 2013 (extension not

shown in the tables).

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

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

Tax Code provides a credit for the purchase of a qualifie

photovoltaic property and solar water heating property, as 

well as for fuel cell power plants, geothermal heat pumps 

and small wind property.

32. Credit for qualified energy conservation 

bonds.—The baseline tax system would uniformly tax

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

Tax Code provides for the issuance of energy conservatio

bonds which entitle the bond holder to a Federal income 

tax credit in lieu of interest. The limit on the volume issued in 2009–2010 is $3.2 billion. As of March 2010, issuers of the unused authorization of such bonds could opt

to receive direct payment with the yield becoming fully 

taxable.

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

activities, investments, or industries. However, the Tax

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

project. The Treasury Department may award up to $2

billion in tax credits for qualified investments. 

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

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

tax uniformly all returns from investment-like activities. 

In contrast, the Tax Code allows a tax credit equal to 1.

cents times the number of kilowatt hours of electricity 

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

1,000 MW of capacity. The Treasury Department may allocate up to 6,000 megawatts of credit-eligible capaci

Natural Resources and Environm

35. Exploration and development costs.—The

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

associated with exploration and development of nonfuel 

minerals may be expensed rather than depreciated over 

the life of the asset.

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

law, however, most nonfuel mineral extractors may use 

percentage depletion (whereby the deduction is fixed as a 

percentage of revenue and can exceed total costs) rather 

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

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

Consequently, percentage depletion offers more generous

tax treatment than would cost depletion, which would 

limit deductions to an investment’s cost.

37. Sewage, water, solid and hazardous waste 

facility bonds.—The baseline tax system generally

would tax all income under the regular tax rate schedule. 

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

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

the Tax Code allows interest earned on State and loca

bonds used to finance construction of sewage, water, or 

hazardous waste facilities to be exempt from tax. These

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

38. Capital gains treatment of certain timber.—

The baseline tax system generally would tax all income

under the regular tax rate schedule. It would not allow 

preferentially low tax rates to apply to certain types or 

sources of income. However, under current law certain 

timber sales can be treated as a capital gain rather than 

ordinary income and therefore subject to the lower capital-gains tax rate. For individuals in 2012, tax rates on 

regular income vary from 10 percent to 35 percent, depending on the taxpayer’s income. In contrast, current 

law allows capital gains to be taxed at a preferentially 

low rate that is no higher than 15 percent. Beginning 

in 2013, the top statutory preferential tax rate on capital 

gains will be 20 percent.

39. Expensing multi-period timber growing 

costs.—The baseline tax system requires the taxpayer

to capitalize costs associated with investment property. 

However, most of the production costs of growing timber 

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

40. Historic preservation.—The baseline tax system would not allow credits for particular activities, investments, or industries. However, expenditures to preserve and restore certified historic structures qualify for

an investment tax credit of 20 percent under current 

law for certified rehabilitation activities. The taxpayer’s

recoverable basis must be reduced by the amount of the 

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

41. Exclusion of gain or loss on sale or exchange 

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

organization must pay taxes on income from activities 

unrelated to its nonprofit status. The Tax Code, howeve

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

of certain qualifying brownfield properties.

42. Industrial CO2 capture and sequestration 

tax credit.—The baseline tax system would uniformly

tax all returns to investments and not allow credits for 

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

for qualified carbon dioxide captured at a qualified facility 

and disposed of in secure geological storage. In addition, 

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

and as a tertiary injectant in a qualified enhanced oil or 

natural gas recovery project.

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

would tax all income under the regular tax rate schedule. 

It would not allow preferentially low tax rates to apply 

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

current law farmers can deduct up to 25 percent of their 

gross income for expenses incurred as a result of site and 

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

specific management actions included in species recovery 

plans approved pursuant to the Endangered Species Act 

of 1973.

Agricultur

44. Expensing certain capital outlays.—The

baseline tax system requires the taxpayer to capitalize 

costs associated with investment property. However, farmers may expense certain expenditures for feed and fertilizer as well as for soil and water conservation measures 

as well as other capital improvements under current law.

45. Expensing multi-period livestock and crop 

production costs.—The baseline tax system requires

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

crops with a production period greater than two years 

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

accelerating cost recovery.

46. Loans forgiven solvent farmers.—The baseline tax system requires debtors to include the amount of

loan forgiveness as income or else reduce their recoverable 

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

of forgiveness exceeds the basis, the excess forgiveness 

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

loan forgiveness reduces carryover losses, unused credits, 

and then basis, with the remainder of the forgiven debt 

excluded from taxation.

47. Capital gains treatment of certain income.—

For individuals in 2012, tax rates on regular income vary 

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

all income under the regular tax rate schedule. It would 

not allow preferentially low tax rates to apply to certain 

types or sources of income. In contrast, current law as of 

December 31, 2012 allowed capital gains to be taxed at a
16. Tax Expend

preferentially low rate that was no higher than 15 percent. Certain agricultural income, such as unharvested

crops, qualify for taxation as capital gains rather than ordinary income, and so benefit from the preferentially low 

15 percent maximum tax rate on capital gains. Under

ATRA, beginning in 2013, the top statutory preferentia

tax rate on capital gains will be 20 percent. However, the 

tables do not show the changes under ATR

48. Income averaging for farmers.—The baseline

tax system generally taxes all earned income each year at 

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

fishing over the previous three years.

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

The baseline tax system generally subjects capital gains

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

Code allows a taxpayer who sells stock in a farm refiner

to a farmers’ cooperative to defer recognition of the gain 

if the proceeds are re-invested in a qualified replacement 

property.

50. Expensing of reforestation expenditures.—

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

contrast, the Tax Code provides for the expensing of th

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

amortization of the remaining expenses.

Commerce and Housi

This category includes a number of tax expenditure

provisions that also affect economic activity in other 

functional categories. For example, provisions related to 

investment, such as accelerated depreciation, could be 

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

51. Credit union income exemption.—Under the

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

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

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

earnings of credit unions not distributed to members as 

interest or dividends are exempt from the income tax.

52. Deferral of income on life insurance and 

annuity contracts.—Under the baseline tax system,

individuals and corporations pay taxes on their income 

when it is (actually or constructively) received or accrued, 

depending on their method of accounting. Nevertheless,

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

annuity contracts. In general, investment income earned 

on qualified life insurance contracts held until death is 

permanently exempt from income tax. Investment income distributed prior to the death of the insured is taxexempt to the extent that investment in the contract is 

overstated (because premiums paid for the cost of life insurance protection are credited to investment in the contract), while the remaining distributed amounts are taxdeferred because income is not taxed on a current basis, 

but is recognized only when distributed from the contract. 

Investment income earned on annuities benefits from tax 

deferral.

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

taxes on their profits under the regular tax rate schedule. 

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

apply to certain types or sources of income. Under current

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

non-life insurance companies are generally tax-exempt if 

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

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

than $1.2 million of annual net premiums may elect to 

pay tax only on their taxable investment income.

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

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

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

Generally the income generated by life and property and 

casualty insurance companies is subject to tax, albeit by 

special rules. Insurance operations conducted by such exempt organizations as fraternal societies, voluntary employee benefit associations, and others, however, are exempt from tax.

55. Small life insurance company deduction.—

Under the baseline tax system, corporations pay taxes on

their profits under the regular tax rate schedule. It would 

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

certain types or sources of income. However, under current law small life insurance companies (with gross assets of less than $500 million) can deduct 60 percent of 

the first $3 million of otherwise taxable income. The deduction phases out for otherwise taxable income between

$3 million and $15 million.

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

all income under the regular tax rate schedule. It would 

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

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

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

market rate of interest on those deposits and paid explicit 

fees for the associated services, they would pay taxes on 

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

difference between the risk-free market interest rate and 

below-market interest rates on demand deposits, which 

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

57. Mortgage housing bonds.—The baseline tax

system generally would tax all income under the regular tax rate schedule. It would not allow preferentially 

low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allows interes

earned on State and local bonds used to finance homes 
264 Analytical Pe

purchased by first-time, low-to-moderate-income buyers 

to be exempt. These bonds are generally subject to the

State private-activity-bond annual volume cap.

58. Rental housing bonds.—The baseline tax system generally would tax all income under the regular tax

rate schedule. It would not allow preferentially low (or 

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

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

59. Interest on owner-occupied homes.—Under

the baseline tax system, expenses incurred in earning income would be deductible. However, such expenses would 

not be deductible when the income or the return on an 

investment is not taxed. In contrast, the Tax Code allow

an exclusion from a taxpayer’s taxable income for the 

value of owner-occupied housing services and also allows 

the owner-occupant to deduct mortgage interest paid on 

his or her primary and secondary residences as an itemized non-business deduction. In general, the mortgage interest deduction is limited to interest on debt no greater 

than the owner’s basis in the residence, and is also limited 

to interest on debt of no more than $1 million. Interest on 

up to $100,000 of other debt secured by a lien on a principal or second residence is also deductible, irrespective of 

the purpose of borrowing, provided the total debt does not 

exceed the fair market value of the residence. As an alternative to the deduction, holders of qualified Mortgage 

Credit Certificates issued by State or local governmenta

units or agencies may claim a tax credit equal to a proportion of their interest expense.

60. Taxes on owner-occupied homes.—Under the

baseline tax system, expenses incurred in earning income 

would be deductible. However, such expenses would not 

be deductible when the income or the return on an investment is not taxed. In contrast, the Tax Code allows a

exclusion from a taxpayer’s taxable income for the value 

of owner-occupied housing services and also allows the 

owner-occupant to deduct property taxes paid on his or 

her primary and secondary residences.

61. Installment sales.—The baseline tax system

generally would tax all income under the regular tax rate 

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

tax rates, or deferral of tax, to apply to certain types or 

sources of income. Dealers in real and personal property

(i.e., sellers who regularly hold property for sale or resale) 

cannot defer taxable income from installment sales until 

the receipt of the loan repayment. Nondealers (i.e., sellers

of real property used in their business) are required to 

pay interest on deferred taxes attributable to their total 

installment obligations in excess of $5 million. Only properties with sales prices exceeding $150,000 are includable in the total. The payment of a market rate of interes

eliminates the benefit of the tax deferral. The tax exemption for nondealers with total installment obligations of

less than $5 million is, therefore, a tax expenditure.

62. Capital gains exclusion on home sales.—The

baseline tax system would not allow deductions and exemptions for certain types of income. In contrast, the Tax

Code allows homeowners to exclude from gross income up

to $250,000 ($500,000 in the case of a married couple filing a joint return) of the capital gains from the sale of 

a principal residence. To qualify, the taxpayer must have

owned and used the property as the taxpayer’s principal 

residence for a total of at least two of the five years preceding the date of sale. In addition, the exclusion may not 

be used more than once every two years.

63. Imputed net rental income on owner-occupied housing.—Under the baseline tax system, the

taxable income of a taxpayer who is an owner-occupant 

would include the implicit value of gross rental income on 

housing services earned on the investment in owner-occupied housing and would allow a deduction for expenses, 

such as interest, depreciation, property taxes, and other 

costs, associated with earning such rental income.  In contrast, the Tax Code allows an exclusion from taxable income for the implicit gross rental income on housing services, while in certain circumstances allows a deductio

for some costs associated with such income, such as for 

mortgage interest and property taxes.

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

taxpayers’ ability to deduct losses from passive activities 

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

in which the taxpayer does not materially participate and 

there are numerous additional considerations brought to 

bear on the determination of which activities are passive 

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

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

passive income. 

In contrast to the general restrictions on passive losses, the Tax Code exempts owners of rental real estate activities from “passive income’’ limitations. The exempti

is limited to $25,000 in losses and phases out for taxpayers with income between $100,000 and $150,000. 

65. Low-income housing credit.—The baseline tax

system would uniformly tax all returns to investments 

and not allow credits for particular activities, investments, 

or industries. However, under current law taxpayers who 

invest in certain low-income housing are eligible for a tax 

credit. The credit rate is set so that the present value of

the credit is equal to 70 percent for new construction and 

30 percent for (1) housing receiving other Federal benefits 

(such as tax-exempt bond financing), or (2) substantially rehabilitated existing housing. The credit can exceed

these levels in certain statutorily defined and State designated areas where project development costs are higher. 

The credit is allowed in equal amounts over 10 years and

is generally subject to a volume cap. 

66. Accelerated depreciation of residential rental property.—Under an economic income tax, the costs of

acquiring a building are capitalized and depreciated over 

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

insures that the net income from the rental property is 

measured appropriately each year. However, the depreciation provisions of the Tax Code are part of the referenc
16. Tax Expend

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

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

67. Discharge of mortgage indebtedness.—Under

the baseline tax system, all income would generally be 

taxed under the regular tax rate schedule. The baseline

tax system would not allow preferentially low (or zero) 

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

In contrast, the Tax Code allows an exclusion from a taxpayer’s taxable income for any discharge of indebtednes

of up to $2 million ($1 million in the case of a married individual filing a separate return) from a qualified principal 

residence. The provision applies to debt discharged after

January 1, 2007, and before January 1, 2013. However, 

ATRA extended the provision through December 31, 20

(extension not shown in the tables.)

68. Cancellation of indebtedness.—The baseline

tax system generally would tax all income under the 

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

sources of income. In contrast, under current law individuals are not required to report the cancellation of certain indebtedness as current income. If the canceled debt 

is not reported as current income, however, the basis of 

the underlying property must be reduced by the amount 

canceled.

69. Imputed interest rules.—Under the baseline

tax system, 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. But under current law, and in general, any 

debt associated with the sale of property worth less than 

$250,000 is excepted from the general interest accounting rules. This general $250,000 exception is not a tax expenditure under reference law but is under normal law.

Exceptions above $250,000 are a tax expenditure under 

reference law; these exceptions include the following: (1) 

sales of personal residences worth more than $250,000, 

and (2) sales of farms and small businesses worth between $250,000 and $1 million.

70. Treatment of qualified dividends.— The baseline tax system generally would tax all income under the

regular tax rate schedule. It would not allow preferentially low tax rates to apply to certain types or sources 

of income. For individuals in 2012, tax rates on regular 

income vary from 10 percent to 35 percent, depending on 

the taxpayer’s income. In contrast, qualified dividends 

were taxed at a preferentially low rate that is no higher than 15 percent. Beginning in 2013, dividends would 

have been once again taxed as ordinary income. However, 

ATRA set a permanent statutory maximum tax rate of 2

percent (change not shown in the tables.) 

71. Capital gains (other than agriculture, timber, and coal).— The baseline tax system generally

would tax all income under the regular tax rate schedule. It would not allow preferentially low tax rates to apply to certain types or sources of income. For individuals 

in 2012, tax rates on regular income vary from 10 percent to 35 percent, depending on the taxpayer’s income. 

In contrast, capital gains on assets held for more than 

one year were taxed at a preferentially low rate that is 

no higher than 15 percent. Beginning in 2013, the top 

statutory preferential tax rate on capital gains will be 

20 percent.

72. Capital gains exclusion for small business 

stock.—The baseline tax system would not allow deductions and exemptions, or provide preferential treatment

of certain sources of income or types of activities. In contrast, the Tax Code provides an exclusion of 50 percen

(from a 28 percent tax rate) for capital gains from qualified small business stock held by individuals for more 

than 5 years; 75 percent for stock issued after February 

17, 2009 and before September 28, 2010; and 100 percent for stock issued after September 27, 2010 and before 

January 1, 2012. A qualified small business is a corporation whose gross assets do not exceed $50 million as of the 

date of issuance of the stock. ATRA extended the provision through December 31, 2013 (extension not shown 

the tables).

73. Step-up in basis of capital gains at death.— 

Under the baseline tax system, unrealized capital gains

would be taxed when assets are transferred at death or by 

gift. It would not allow for exempting gains upon transfer 

of the underlying assets to the heirs. In contrast, capital 

gains on assets held at the owner’s death are not subject 

to capital gains tax under current law. The cost basis of

the appreciated assets is adjusted to the market value at 

the owner’s date of death which becomes the basis for the 

heirs.

74. Carryover basis of capital gains on gifts.— 

Under the baseline tax system, unrealized capital gains

would be taxed when assets are transferred at death or by 

gift. In contrast, when a gift of appreciated asset is made 

under current law, the donor’s basis in the transferred 

property (the cost that was incurred when the transferred 

property was first acquired) carries over to the donee. The

carryover of the donor’s basis allows a continued deferral 

of unrealized capital gains.

75. Ordinary income treatment of losses from 

sale of small business corporate stock shares.—The

baseline tax system limits to $3,000 the write-off of losses 

from capital assets, with carryover of the excess to future 

years. In contrast, the Tax Code allows up to $100,00

in losses from the sale of small business corporate stock 

(capitalization less than $1 million) to be treated as ordinary losses and fully deducted.

76. Depreciation of non-rental-housing buildings.—Under an economic income tax, the costs of acquiring a building are capitalized and depreciated over time

in accordance with the decline in the property’s economic 

value due to wear and tear or obsolescence. This insures

that the net income from the property is measured appropriately each year. However, the depreciation provisions 

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

thus do not give rise to tax expenditures under reference 

law. Under normal law, however, depreciation allowances

reflect estimates of economic depreciation.
266 Analytical Pe

77. Accelerated depreciation of machinery and 

equipment.—Under an economic income tax, the costs

of acquiring machinery and equipment are capitalized 

and depreciated over time in accordance with the decline 

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

obsolescence. This insures that the net income from the

property is measured appropriately each year. However, 

the depreciation provisions of the Tax Code are part of th

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

depreciation allowances reflect estimates of economic depreciation.

78. Expensing of certain small investments.—

Under the reference law baseline, the costs of acquiring

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

Under the normal tax baseline, depreciation allowances

are estimates of economic depreciation. However, the Tax

Code allows qualifying investments by small businesses

in tangible property and certain computer software to be 

expensed rather than depreciated over time.

79. Graduated corporation income tax rate 

schedule.—Because the corporate rate schedule is part 

of reference tax law, it is not considered a tax expenditure 

under the reference method. A flat corporation income 

tax rate is taken as the baseline under the normal tax 

method; therefore the lower rate is considered a tax expenditure under this concept.

80. Small issue industrial development bonds.—

The baseline tax system generally would tax all income

under the regular tax rate schedule. It would not allow 

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

types or sources of income. In contrast, the Tax Code allows interest earned on small issue industrial development bonds (IDBs) issued by State and local governmen

to finance manufacturing facilities to be tax exempt. 

Depreciable property financed with small issue IDB

must be depreciated, however, using the straight-line 

method. The annual volume of small issue IDBs is subjec

to the unified volume cap discussed in the mortgage housing bond section above.

81. Deduction for U.S. production activities.—

The baseline tax system generally would tax all income

under the regular tax rate schedule. It would not allow 

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

types or sources of income. In contrast, the Tax Code allows for a deduction equal to a portion of taxable incom

attributable to domestic production.

82. Special rules for certain film and TV production.—The baseline tax system generally would tax

all income under the regular tax rate schedule. It would 

not allow deductions and exemptions or preferentially low 

(or zero) tax rates to apply to certain types or sources of 

income. In contrast, under current law taxpayers may 

deduct up to $15 million per production ($20 million in 

certain distressed areas) in non-capital expenditures incurred during the year..

Transportatio

83. Deferral of tax on U.S. shipping companies.—The baseline tax system generally would tax all

profits and income under the regular tax rate schedule. 

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

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

the Tax Code allows certain companies that operate U.

flag vessels to defer income taxes on that portion of their 

income used for shipping purposes, primarily construction, modernization and major repairs to ships, and repayment of loans to finance these investments. U.S. shipping companies may choose to be subject to a tonnage tax

based on gross shipping weight in lieu of an income tax, 

in which case profits would not be subject to tax under the 

regular tax rate schedule.

84. Exclusion of employee parking expenses.—

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

included in taxable income. Dedicated payments and inkind benefits represent accretions to wealth that do not

differ materially from cash wages. In contrast, the Tax

Code allows an exclusion from taxable income for employee parking expenses that are paid for by the employer or

that are received by the employee in lieu of wages. In 

2012, the maximum amount of the parking exclusion is 

$240 per month. The tax expenditure estimate does not

include any subsidy provided through employer-owned 

parking facilities.

85. Exclusion of employee transit pass expenses.—Under the baseline tax system, all compensation,

including dedicated payments and in-kind benefits, would 

be included in taxable income. Dedicated payments and

in-kind benefits represent accretions to wealth that do 

not differ materially from cash wages. In contrast, the 

Tax Code allows an exclusion from a taxpayer’s taxabl

income for passes, tokens, fare cards, and vanpool expenses that are paid for by an employer or that are received 

by the employee in lieu of wages to defray an employee’s 

commuting costs. Under current law as of Decembe

31, 2012, the maximum amount of the transit exclusion 

was $125 per month. However, ATRA extended parity o

employer-provided parking and transit benefits through 

2013 (retroactive through 2012), meaning that the maximum amount of transit exclusion is $240 per month in 

2012 and 2013 (extension not shown in tables.) 

86. Tax credit for certain expenditures for maintaining railroad tracks.—The baseline tax system

would not allow credits for particular activities, investments, or industries. However, under current law eligible 

taxpayers may claim a credit equal to the lesser of 50 

percent of maintenance expenditures and the product of 

$3,500 and the number of miles of track owned or leased. 

87. Exclusion of interest on bonds for financing 

of highway projects and rail-truck transfer facilities.—The baseline tax system generally would tax all

income under the regular tax rate schedule. It would 

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

certain types or sources of income. In contrast, the Tax

Code provides for $15 billion of tax-exempt bond author
16. Tax Expend

ity to finance qualified highway or surface freight transfer 

facilities. The authority to issue these bonds expires on

December 31, 2015

Community and Regional Developm

88. Rehabilitation of structures.—The baseline

tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. However, the Tax Code allows 

10-percent investment tax credit for the rehabilitation of 

buildings that are used for business or productive activities and that were erected before 1936 for other than residential purposes. The taxpayer’s recoverable basis must

be reduced by the amount of the credit. Qualified GO Zon

expenditures qualify for a 13 percent credit.

89. Airport, dock, and similar facility bonds.—

The baseline tax system generally would tax all income

under the regular tax rate schedule. It would not allow 

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

types or sources of income. In contrast, the Tax Code allows interest earned on State and local bonds issued t

finance high-speed rail facilities and Government-owned 

airports, docks, wharves, and sport and convention facilities to be tax-exempt. These bonds are not subject to a

volume cap.

90. Exemption of income of mutuals and cooperatives.—Under the baseline tax system, corporations pay

taxes on their profits under the regular tax rate schedule. 

In contrast, the Tax Code provides for the incomes of mutual and cooperative telephone and electric companies t

be exempt from tax if at least 85 percent of their revenues 

are derived from patron service charges.

91. Empowerment zones and renewal communities.—The baseline tax system generally would tax all

income under the regular tax rate schedule. It would not 

allow preferentially low (or zero) tax rates to apply to certain types or sources of income, tax credits, and write-offs 

faster than economic depreciation. In contrast, under current law qualifying businesses in designated economically 

depressed areas can receive tax benefits such as an employer wage credit, increased expensing of investment in 

equipment, special tax-exempt financing, accelerated depreciation, and certain capital gains incentives. A taxpayer’s ability to accrue new tax benefits for Empowerment 

Zones and theDC Enterprise Zone expired December

2011. However, ATRA extended the provision throug

December 31, 2013 (extension not shown in the tables).

92. New markets tax credit.—The baseline tax

system would not allow credits for particular activities, 

investments, or industries. However, under current law 

taxpayers who make qualified equity investments in a 

community development entity (CDE), which then make

qualified investments in low-income communities, are eligible for a tax credit received over 7 years. A CDE mus

first receive an allocation of tax credit from Treasury before it can sell the tax credit to the investor in exchange for

the equity investment. The total equity investment available for the credit across all CDEs is $5 billion in 201

the last year for which allocations can be made. However, 

ATRA extended the provision for two more years (extension not shown in tables

93. Expensing of environmental remediation 

costs.—Under the baseline tax system, the costs would

be amortized (or depreciated) over an estimate of the economic life of the building. This insures that the net income from the buildings is measured appropriately each

year. However, the Tax Code allows taxpayers who clea

up certain hazardous substances at a qualified site to expense the clean-up costs, even though the expenses will 

generally increase the value of the property significantly 

or appreciably prolong the life of the property.

94. Credit to holders of Gulf and Midwest Tax 

Credit Bonds.—The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, under current law taxpayers that own Gulf

and Midwest Tax Credit bonds receive a non-refundabl

tax credit rather than interest. The credit is included in

gross income.

95. Recovery Zone Bonds.—The baseline tax system would not allow credits for particular activities, investments, or industries. In addition, it would tax all income under the regular tax rate schedule. It would not

allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Cod

allows local governments to issue up $10 billion in taxable 

Recovery Zone Economic Development Bonds in 2009 a

2010 and receive a direct payment from Treasury equal to

45 percent of interest expenses. In addition, they would 

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

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

distress.

96. Tribal Economic Development Bonds.—The

baseline tax system generally would tax all income under 

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

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

in 2009 to allow Indian tribal governments to issue tax 

exempt “tribal economic development bonds.” There is a

national bond limitation of $2 billion.

Education, Training, Employmen

and Social Servic

97. Scholarship and fellowship income.—

Scholarships and fellowships are excluded from taxable 

income to the extent they pay for tuition and course-related expenses of the grantee. Similarly, tuition reductions 

for employees of educational institutions and their families are not included in taxable income. From an economic 

point of view, scholarships and fellowships are either gifts 

not conditioned on the performance of services, or they 

are rebates of educational costs. Thus, under the baseline

tax system of the reference law method, this exclusion is 

not a tax expenditure because this method does not include either gifts or price reductions in a taxpayer’s gross 

income. The exclusion, however, is considered a tax expenditure under the normal tax method, which includes

gift-like transfers of Government funds in gross income 
268 Analytical Pe

(many scholarships are derived directly or indirectly from 

Government funding).

98. HOPE tax credit.—The baseline tax system

would not allow credits for particular activities, investments, or industries. Under current law, however, the

non-refundable HOPE tax credit allows a credit for 100

percent of an eligible student’s first $1,200 of tuition and 

fees and 50 percent of the next $1,200 of tuition and fees. 

The credit only covers tuition and fees paid during the

first two years of a student’s post-secondary education. In 

2012, the credit is phased out ratably for taxpayers with 

modified AGI between $104,000 and $124,000 if married 

filing jointly ($52,000 and $62,000 for other taxpayers), 

indexed.

99. Lifetime Learning tax credit.—The baseline

tax system would not allow credits for particular activities, investments, or industries. Under current law, however, the non-refundable Lifetime Learning tax credit allows a credit for 20 percent of an eligible student’s tuiti

and fees, up to a maximum credit per return of $2,000. In 

2012, the credit is phased out ratably for taxpayers with 

modified AGI between $104,000 and $124,000 if married 

filing jointly ($52,000 and $62,000 for other taxpayers), 

indexed. The credit applies to both undergraduate and

graduate students.

100. American Opportunity Tax Credit.—The

baseline tax system would not allow credits for particular 

activities, investments, or industries. Under current law

in 2012, however, the American Opportunity tax credit

allows a partially refundable credit of up to $2,500 per 

eligible student for qualified tuition and related expenses 

paid during each of the first four years of the student’s 

post-secondary education. The credit is phased out for

taxpayers with modified adjusted gross income between 

$80,000 and $90,000 ($160,000 and $180,000 for married 

taxpayers filing a joint return). The credit expired at the

end of 2012, but was extended for five years under ATR

(extension not shown in tables.)

101. Education Individual Retirement Accounts 

(IRA).—The baseline tax system generally would tax all

income under the regular tax rate schedule. It would not 

allow preferentially low (or zero) tax rates to apply to certain types or sources of income. While contributions to 

an education IRA are not tax-deductible under current

law, investment income earned by education IRAs is not

taxed when earned, and investment income from an education IRA is tax-exempt when withdrawn to pay for a

student’s education expenses. The maximum contribution

to an education IRA in 2012 is $2,000 per beneficiary. In

2012, the maximum contribution is phased down ratably 

for taxpayers with modified AGI between $190,000 and 

$220,000 if married filing jointly ($95,000 and $110,000 

for other taxpayers).

102. Student-loan interest.—The baseline tax system accepts current law’s general rule limiting taxpayers’

ability to deduct non-business interest expenses. In contrast, taxpayers may claim an above-the-line deduction 

of up to $2,500 on interest paid on an education loan. In 

general, interest may only be deducted for the first five 

years in which interest payments are required, and the 

maximum deduction is phased down ratably for taxpayers 

with modified AGI between $60,000 and $75,000 if married filing jointly ($40,000 to $55,000 for other taxpayers), 

indexed from 2001. However, for tax years beginning on 

January 1, 2001 and before December 31, 2011, the first

five year requirement is suspended, and the phase down 

range for the deduction is raised. In 2012, the maximum 

deduction is phased down ratably for taxpayers with modified AGI between $125,000 and $155,000 if married filing 

jointly ($60,000 and $75,000 for other taxpayers).

103. Deduction for higher education expenses.—

The baseline tax system would not allow a deduction for

personal expenditures. In contrast, the Tax Code provides a maximum annual deduction of $4,000 in 2011 fo

qualified higher education expenses for taxpayers with 

adjusted gross income up to $130,000 on a joint return 

($65,000 for other taxpayers). Taxpayers with adjusted

gross income up to $160,000 on a joint return ($80,000 

for other taxpayers) may deduct up to $2,000. This provision expired on December 31, 2011  However, ATRA extended the provision through December 2013 (exten

not shown in the tables.) 

104. Qualified tuition programs.—The baseline

tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially 

low (or zero) tax rates to apply to certain types or sources 

of income. Some States have adopted prepaid tuition plans 

prepaid room and board plans, and college savings plans, 

which allow persons to pay in advance or save for college 

expenses for designated beneficiaries. Under current law,

investment income, or the return on prepayments, is not 

taxed when earned, and is tax-exempt when withdrawn 

to pay for qualified expenses.

105. Student-loan bonds.—The baseline tax system generally would tax all income under the regular

tax rate schedule. It would not allow preferentially low 

(or zero) tax rates to apply to certain types or sources of 

income. In contrast, interest earned on State and local 

bonds issued to finance student loans is tax-exempt under 

current law. The volume of all such private activity bonds

that each State may issue annually is limited.

106. Bonds for private nonprofit educational institutions.—The baseline tax system generally would tax

all income under the regular tax rate schedule. It would 

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

certain types or sources of income. In contrast, under current law interest earned on State and local Government 

bonds issued to finance the construction of facilities used 

by private nonprofit educational institutions is not taxed.

107. Credit for holders of zone academy bonds.—

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

law, however, financial institutions that own zone academy bonds receive a non-refundable tax credit rather than 

interest. The credit is included in gross income. Proceeds

from zone academy bonds may only be used to renovate, 

but not construct, qualifying schools and for certain other 

school purposes. Under current law, the total amount of

zone academy bonds that may be issued is limited to $1.4 

billion in 2009 and 2010. As of March 2010, issuers of the 
16. Tax Expend

unused authorization of such bonds could opt to receive 

direct payment with the yield becoming fully taxable. An 

additional $0.4 billion of these bonds with a tax credit was 

authorized to be issued before January 1, 2011. However, 

ATRA extended the provision through December 31, 20

(extension not shown in the tables).

108. U.S. savings bonds for education.—The

baseline tax system generally would tax all income under 

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

or sources of income. Under current law, however, interest earned on U.S. savings bonds issued after Decemb

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 $109,250 and $139,250 if married filing jointly 

($72,850 and $87,850 for other taxpayers) in 2012.

109. Dependent students age 19 or older.—Under

the baseline tax system, a personal exemption for the 

taxpayer is allowed. However, additional exemptions for 

targeted groups within a given filing status would not be 

allowed. In contrast, the Tax Code allows taxpayers t

claim personal exemptions for dependent children who 

are over the age of 18 and under the age of 24 and who 

(1) reside with the taxpayer for over half the year (with 

exceptions for temporary absences from home, such as for 

school attendance), (2) are full-time students, and (3) do 

not claim a personal exemption on their own tax returns.

110. Charitable contributions to educational institutions.—The baseline tax system would not allow a

deduction for personal expenditures. In contrast, the Tax

Code provides taxpayers a deduction for contributions to

nonprofit educational institutions. Moreover, taxpayers 

who donate capital assets to educational institutions can 

deduct the asset’s current value without being taxed on 

any appreciation in value. An individual’s total charitable 

contribution generally may not exceed 50 percent of adjusted gross income; a corporation’s total charitable contributions generally may not exceed 10 percent of pre-tax 

income.

111. Employer-provided educational assistance.—Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits,

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

from cash wages. Under current law, however, employerprovided educational assistance is excluded from an employee’s gross income even though the employer’s costs

for this assistance are a deductible business expense. The

maximum exclusion is $5,250 per taxpayer.

112. Special deduction for teacher expenses.—

The baseline tax system would not allow a deduction for

personal expenditures. In contrast, under current law educators in both public and private elementary and secondary schools, who work at least 900 hours during a school 

year as a teacher, instructor, counselor, principal or aide, 

may subtract up to $250 of qualified expenses when figuring their adjusted gross income (AGI). This provision

expired on December 31, 2011. However, ATRA extend

the provision through December 31, 2013 (extension not

shown in the tables.) 

113. Discharge of student loan indebtedness.—

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

included in taxable income. In contrast, the Tax Code allows certain professionals who perform in underserve

areas or specific fields, and as a consequence have their 

student loans discharged, not to recognize such discharge 

as income.

114. Qualified school construction bonds.—The

baseline tax system would not allow credits for particular 

activities, investments, or industries. Instead, it generally 

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

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

of qualified school construction bonds. The national volume limit is $22.4 billion over 2009 and 2010. As of March

2010, issuers of such bonds could opt to receive direct payment with the yield becoming fully taxable.

115. Work opportunity tax credit (WOTC).—The

baseline tax system would not allow credits for particular 

activities, investments, or industries. Instead, it generally 

would seek to tax uniformly all returns from investmentlike activities. In contrast, the Tax Code provides employers with a tax credit for qualified wages paid to individuals  The credit applies to employees who begin work on 

before December 31, 2011 and who are certified as members of various targeted groups. The amount of the credi

that can be claimed is 25 percent of qualified wages for 

employment less than 400 hours and 40 percent for employment of 400 hours or more. Generally, the maximum 

credit per employee is $2,400 and can only be claimed on 

the first year of wages an individual earns from an employer. However, the credit for long-term welfare recipients can be claimed on second year wages as well and has 

a $9,000 maximum. Employees must work at least 120 

hours to be eligible for the credit. Employers must reduce 

their deduction for wages paid by the amount of the credit 

claimed. The credit was extended to certain recently discharged unemployed veterans through December 31, 201

with a maximum credit of $9,600 for hiring eligible veterans. ATRA extended the provision through December 3

2013 (extension not shown in the tables). 

116. Employer-provided child care exclusion.—

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

included in taxable income. In contrast, under current 

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

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

117. Employer-provided child care credit.—The

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

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

Employer deductions for such expenses are reduced by 
270 Analytical Pe

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

118. Assistance for adopted foster children.—

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

included in taxable income. Taxpayers who adopt eligible

children from the public foster care system can receive 

monthly payments for the children’s significant and varied needs and a reimbursement of up to $2,000 for nonrecurring adoption expenses; special needs adoptions receive the maximum benefit even if that amount not spent. 

These payments are excluded from gross income under

current law.

119. Adoption credit and exclusion.—The baseline tax system would not allow credits for particular

activities. Instead, taxpayers can receive a tax credit for 

qualified adoption expenses under current law. The maximum credit is $12,650 per child for 2012, and is phasedout ratably for taxpayers with modified AGI between

$189,710 and $229,710. The credit amounts and the

phase-out thresholds are indexed for inflation. Taxpayers

may also exclude qualified adoption expenses provided or 

reimbursed by an employer from income, subject to the 

same maximum amounts and phase-out as the credit. The

same expenses cannot qualify for tax benefits under both 

programs; however, a taxpayer may use the benefits of the 

exclusion and the tax credit for different expenses. 

120. Employer-provided meals and lodging.—

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

included in taxable income. In contrast, under current law 

employer-provided meals and lodging are excluded from 

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

costs for these items are a deductible business expense.

121. Child credit.—The baseline tax system would

not allow credits for particular activities or targeted at 

specific groups. Under current law, however, taxpayers

with children under age 17 can qualify for a $1,000 partially refundable per child credit. Any unclaimed credit 

due to insufficient tax liability may be refundable – taxpayers may claim a refund for 15 percent of earnings in 

excess of a $3,000 floor, up to the amount of unused credit. 

Alternatively, taxpayers with three or more children may 

claim a refund of the amount of payroll taxes paid in excess of EITC received (up to the amount of unused credit

if this results in a larger refund. The credit is phased out

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

above $110,000 ($75,000 for single or head of household 

filers and $55,000 for married taxpayers filing separately). The maximum credit had been scheduled to decline to

$500 in 2013 under current law as of December 31 2012,

but ATRA made the $1,000 maximum credit permanent.

However, the tables do not show the changes under ATR

122. Child and dependent care expenses.—The

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

the Tax Code provides parents who work or attend schoo

and who have child and dependent care expenses a tax 

credit. In 2012, expenditures up to a maximum $3,000 for 

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

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

of qualified expenditures for taxpayers with incomes of 

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

excess of $15,000.

123. Disabled access expenditure credit.—The

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

Tax Code provides small businesses (less than $1 millio

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

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

remove access barriers for disabled persons. The credit is

limited to $5,000. 

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

allow a deduction for personal expenditures. In contrast, 

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

organizations. Taxpayers who donate capital assets to

charitable organizations can deduct the assets’ current 

value without being taxed on any appreciation in value. 

An individual’s total charitable contribution generally 

may not exceed 50 percent of adjusted gross income; a 

corporation’s total charitable contributions generally may 

not exceed 10 percent of pre-tax income.

125. Foster care payments.—The baseline tax system generally would tax all income under the regular tax

rate schedule. It would not allow preferentially low (or 

zero) tax rates to apply to certain types or sources of income. Foster parents provide a home and care for children 

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

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

they incur are nondeductible.

126. Parsonage allowances.—Under the baseline

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

income. Dedicated payments and in-kind benefits represent accretions to wealth that do not differ materially

from cash wages. In contrast, the Tax Code allows an exclusion from a clergyman’s taxable income for the value o

the clergyman’s housing allowance or the rental value of 

the clergyman’s parsonage.

127. Provide an employee retention credit to employers affected by certain natural disasters. -- The

baseline tax system would not allow credits for particular 

activities, investments, or industries. In contrast, the Tax

Code provides tax credits against the wages paid to eligible employees in selected areas affected by natural disasters such as hurricanes Katrina, Rita, Wilma, and Ike

Healt

128. Employer-paid medical insurance and expenses.—Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits,

should be included in taxable income. In contrast, under 

current law, employer-paid health insurance premiums 

and other medical expenses (including long-term care) 
16. Tax Expend

are deducted as a business expense by employers, but 

they are not included in employee gross income.

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

and remuneration, including dedicated payments and 

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

In contrast, under current law self-employed taxpayers 

may deduct their family health insurance premiums. 

Taxpayers without self-employment income are not eligible for this special deduction. The deduction is not available for any month in which the self-employed individua

is eligible to participate in an employer-subsidized health 

plan and the deduction may not exceed the self-employed 

individual’s earned income from self-employment.

130. Medical and health savings accounts.—

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

included in taxable income. Also, the baseline tax system 

would not allow a deduction for personal expenditures. 

In contrast, individual contributions to Archer Medical 

Savings Accounts (Archer MSAs) and Health Savings 

Accounts (HSAs) are allowed as a deduction in determining adjusted gross income whether or not the individual 

itemizes deductions. Employer contributions to Archer 

MSAs and HSAs are excluded from income and employment taxes. Archer MSAs and HSAs require that the individual have coverage by a qualifying high deductible 

health plan. Earnings from the accounts are excluded 

from taxable income. Distributions from the accounts

used for medical expenses are not taxable. The rules for

HSAs are generally more flexible than for Archer MSAs 

and the deductible contribution amounts are greater (in 

2012, $3100 for taxpayers with individual coverage and 

$6,250 for taxpayers with family coverage). Thus, HSAs

have largely replaced MSAs.

131. Medical care expenses.—The baseline tax

system would not allow a deduction for personal expenditures. In contrast, under current law personal expenditures for medical care (including the costs of prescription 

drugs) exceeding 7.5 percent of the taxpayer’s adjusted 

gross income are deductible. For tax years beginning after 2012, only medical expenditures exceeding 10 percent 

of the taxpayer’s adjusted gross income are deductible. 

However, for the years 2013, 2014, 2015 and 2016, if either the taxpayer or the taxpayer’s spouse turns 65 before 

the end of the taxable year, the threshold remains at 7.5 

percent of adjusted income.

132. Hospital construction bonds.—The baseline

tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially 

low (or zero) tax rates to apply to certain types or sources 

of income. In contrast, under current law interest earned 

on State and local government debt issued to finance hospital construction is excluded from income subject to tax.

133. Refundable Premium Assistance Tax 

Credit.—The baseline tax system would not allow credits for particular activities or targeted at specific groups.

In contrast, for taxable years ending after 2013, the Tax

Code provides a premium assistance credit to any eligible

taxpayer for any qualified health insurance purchased 

through a Health Insurance Exchange. In general, an 

eligible taxpayer is a taxpayer with annual household 

income between 100% and 400% of the federal poverty 

level for a family of the taxpayer’s size and that does not 

have access to affordable minimum essential health care 

coverage. The amount of the credit equals the lesser of (i)

the actual premiums paid by the taxpayer for such coverage or (ii) the difference between the cost of a statutorilyidentified benchmark plan offered on the exchange and 

a required payment by the taxpayer that increases with 

income. 

134. Credit for employee health insurance expenses of small business.—The baseline tax system

would not allow credits for particular activities or targeted at specific groups. In contrast, the Tax Code provides a tax credit to qualified small employers that mak

a certain level of non-elective contributions towards the 

purchase of certain health insurance coverage for its 

employees. To receive a credit, an employer must have

fewer than 25 full-time-equivalent employees whose average annual full-time-equivalent wages from the employer are less than $50,000 (indexed for taxable years 

after 2013). However, to receive a full credit, an employer 

must have no more than 10 full-time employees, and the 

average wage paid to these employees must be no more 

than $25,000 (indexed for taxable years after 2013). A 

qualifying employer may claim the credit for any taxable 

year beginning in 2010, 2011, 2012, and 2013 and for up 

to two years for insurance purchased through a Health 

Insurance Exchange thereafter. For taxable beginning 

in 2010, 2011, 2012, and 2013, the maximum credit is 35 

percent of premiums paid by qualified taxable employers 

and 25 percent of premiums paid by qualified tax-exempt 

organizations. For taxable years beginning in 2014 and 

later years, the maximum tax credit will increase to 50 

percent of premiums paid by qualified taxable employers 

and 35 percent of premiums paid by qualified tax-exempt 

organizations.

135. Charitable contributions to health institutions.—The baseline tax system would not allow a deduction for personal expenditures. In contrast, the Tax Co

provides individuals and corporations a deduction for contributions to nonprofit health institutions. Tax expenditures resulting from the deductibility of contributions to

other charitable institutions are listed under the education, training, employment, and social services function.

136. Orphan drugs.—The baseline tax system would

not allow credits for particular activities, investments, or 

industries. In contrast, under current law drug firms can 

claim a tax credit of 50 percent of the costs for clinical 

testing required by the Food and Drug Administration for

drugs that treat rare physical conditions or rare diseases.

137. Blue Cross and Blue Shield.—The baseline

tax system generally would tax all profits under the regular tax rate schedule. It would not allow preferentially 

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

In contrast, Blue Cross and Blue Shield health insurance

providers in existence on August 16, 1986 and certain 

other nonprofit health insurers are provided exceptions 

from otherwise applicable insurance company income tax 
272 Analytical Pe

accounting rules that substantially reduce their tax liabilities, provided that their percentage of total premium 

revenue expended on reimbursement for clinical services 

provided to enrollees is not less than 85 percent for the 

taxable year.

138. Tax credit for health insurance purchased 

by certain displaced and retired individuals.—The

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

Trade Act of 2002 provides a refundable tax credit of 65

percent for the purchase of health insurance coverage by 

individuals eligible for Trade Adjustment Assistance and

certain Pension Benefit Guarantee Corporation pension

recipients. The American Recovery and Reinvestme

Act and a subsequent extension increased the credit to 80 

percent in coverage months preceding March 2011. The

Trade Adjustment Assistance Extension Act of 2011 extended an enhanced credit of 72.5% through Decembe

2013, but eliminated the credit entirely beginning 

January 1, 2014.

139. Distributions for premiums for health and 

long-term care insurance.—Under the baseline tax

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

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

for premiums for health and long term care premiums of 

public safety officers.

Income Securit

140. Railroad retirement benefits.—Under the

baseline tax system, all compensation, including dedicated and deferred payments, should be included in taxable income. In contrast, railroad retirement benefits are 

not generally subject to the income tax unless the recipient’s gross income reaches a certain threshold under current law. The threshold is discussed more fully under the

Social Security function.

141. Workers’ compensation benefits.—Under the

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

in taxable income. However, workers compensation is not 

subject to the income tax under current law.

142. Public assistance benefits.—Under the reference law baseline tax system, gifts and transfers are

not treated as income to the recipients. In contrast, the 

normal tax method considers cash transfers from the 

Government as part of the recipients’ income, and thus, 

treats the exclusion for public assistance benefits under 

current law as a tax expenditure. 

143. Special benefits for disabled coal miners.—

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

included in taxable income. However, disability payments 

to former coal miners out of the Black Lung Trust Fund

although income to the recipient, are not subject to the 

income tax.

144. Military disability pensions.—Under the

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

taxable income. In contrast, most of the military pension 

income received by current disabled retired veterans is 

excluded from their income subject to tax.

145. Defined benefit employer plans.—Under the

baseline tax system, all compensation, including deferred 

and dedicated payments, should be included in taxable 

income. In contrast, under current law certain contributions to defined benefit pension plans are excluded from 

an employee’s gross income even though employers can 

deduct their contributions. In addition, the tax on the investment income earned by defined benefit pension plans 

is deferred until the money is withdrawn.

146. Defined contribution employer plans.—

Under the baseline tax system, all compensation, including deferred and dedicated payments, should be included

in taxable income. In contrast, under current law individual taxpayers and employers can make tax-preferred contributions to employer-provided 401(k) and similar plans 

(e.g. 403(b) plans and the Federal Government’s Thrift

Savings Plan). In 2012, an employee could exclude up to 

$17,000 (indexed) of wages from AGI under a qualified 

arrangement with an employer’s 401(k) plan. Employees 

age 50 or over could exclude up to $22,500 in contributions (indexed). The defined contribution plan limit, including both employee and employer contributions, is

$50,000 in 2012 (indexed). The tax on contributions made

by both employees and employers and the investment income earned by these plans is deferred until withdrawn.

147. Individual Retirement Accounts (IRAs).—

Under the baseline tax system, all compensation, including deferred and dedicated payments, should be included

in taxable income. In contrast, under current law individual taxpayers can take advantage of traditional and Roth

IRAs to defer or otherwise reduce the tax on the return

to their retirement savings. The IRA contribution limi

is $5,000 in 2012 (indexed); taxpayers age 50 or over are 

allowed to make additional “catch-up’’ contributions of 

$1,000. Contributions to a traditional IRA are generall

deductible but the deduction is phased out for workers 

with incomes above certain levels who, or whose spouses, 

are active participants in an employer-provided retirement plan. Contributions and account earnings are includible in income when withdrawn from traditional IRAs

Roth IRA contributions are not deductible, but earning

and withdrawals are exempt from taxation. Income limits 

also apply to Roth IRA contribution

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

The baseline tax system would not allow credits for particular activities or targeted at specific groups. In contrast, the Tax Code provides an additional incentive f

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 $57,500 for joint filers, $43,125 for head of 

household filers, and $28,750 for other filers in 2012. 

149. Self-Employed plans.—Under the baseline

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

In contrast, under current law self-employed individuals 

can make deductible contributions to their own retirement plans equal to 25 percent of their income, up to a 

maximum of $50,000 in 2012. Total plan contributions

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

on the investment income earned by self-employed SEP, 

SIMPLE, and qualified plans is deferred until withdrawn

150. Employer-provided life insurance benefits.—Under the baseline tax system, all compensation,

including deferred and dedicated payments, should be included in taxable income. In contrast, under current law 

employer-provided life insurance benefits are excluded 

from an employee’s gross income even though the employer’s costs for the insurance are a deductible business 

expense, but only to the extent that the employer’s share 

of the total costs does not exceed the cost of $50,000 of 

such insurance.

151. Employer-provided accident and disability 

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

should be included in taxable income. In contrast, and under current law, 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.

152. Employer-provided supplementary unemployment benefits.—Under the baseline tax system, all

compensation, including dedicated payments and in-kind 

benefits, should be included in taxable income. Employers 

may establish trusts to pay supplemental unemployment benefits to employees separated from employment. 

Investment income earned by such trusts is exempt from 

taxation.

153. Employer Stock Ownership Plan (ESOP) 

provisions.—ESOPs are a special type of tax-exempt

employee benefit plan. Under the baseline tax system,

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

contrast, employer-paid contributions (the value of stock 

issued to the ESOP) are deductible by the employer as

part of employee compensation costs. They are not included in the employees’ gross income for tax purposes,

however, until they are paid out as benefits. In addition, 

the following special income tax provisions for ESOPs are

intended to increase ownership of corporations by their 

employees: (1) annual employer contributions are subject 

to less restrictive limitations than other qualified retirement plans; (2) ESOPs may borrow to purchase employer

stock, guaranteed by their agreement with the employer 

that the debt will be serviced by his payment (deductible 

by him) of a portion of wages (excludable by the employees) to service the loan; (3) employees who sell appreciated company stock to the ESOP may defer any taxes due

until they withdraw benefits; and (4) dividends paid to 

ESOP-held stock are deductible by the employer

154. Additional deduction for the blind.—Under

the baseline tax system, the standard deduction is allowed. An additional standard deductions for targeted 

groups within a given filing status would not be allowed. 

In contrast, the Tax Code allows taxpayers who are blin

to claim an additional $1,450 standard deduction if single, or $1,150 if married in 2012.

155. Additional deduction for the elderly.—

Under the baseline tax system, the standard deduction is

allowed. An additional standard deductions for targeted 

groups within a given filing status would not be allowed. 

In contrast, the Tax Code allows taxpayers who are 6

years or older to claim an additional $1,450 standard deduction if single, or $1,150 if married in 2012.

156. Tax credit for the elderly and disabled.—

Under the baseline tax system, a credit targeted at a specific group within a given filing status or for particular

activities would not be allowed. In contrast, the Tax Cod

allows taxpayers who are 65 years of age or older, or who 

are permanently disabled, to claim a tax credit equal to 15 

percent of the sum of their earned and retirement income. 

The amount to which the 15 percent rate is applied is limited to no more than $5,000 for single individuals or married couples filing a joint return where only one spouse is

65 years of age or older and disabled, and up to $7,500 for 

joint returns where both spouses are 65 years of age or 

older and disabled. These limits are reduced by one-half

of the taxpayer’s adjusted gross income over $7,500 for 

single individuals and $10,000 for married couples filing 

a joint return. 

157. Casualty losses.—Under the baseline tax system, neither the purchase of property nor insurance premiums to protect its value are deductible as costs of earning income. Therefore, reimbursement for insured loss o

such property is not included as a part of gross income, 

and uninsured losses are not deductible. In contrast, the 

Tax Code provides a deduction for uninsured casualty an

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

total losses during the year exceed 10 percent of the taxpayer’s adjusted gross income.

158. Earned income tax credit (EITC).—The

baseline tax system would not allow credits for particular 

activities or targeted at specific groups. In contrast, the 

Tax Code provides an EITC to low-income workers a

maximum rate of 45 percent of income. For a family with 

one qualifying child, the credit is 34 percent of the first 

$9,320 of earned income in 2012. The credit is 40 percent

of the first $13,090 of income for a family with two qualifying children, and it is 45 percent of the first $13,090 of 

income for a family with three or more qualifying children. Low-income workers with no qualifying children

are eligible for a 7.65 percent credit on the first $6,210 of 

earned income. The credit is phased out at income levels and rates which depend upon how many qualifying

children are eligible and marital status. Earned income 

tax credits in excess of tax liabilities owed through the 

individual income tax system are refundable to individuals. After 2012, the additional benefit for families with 

three or more children was to be eliminated. However, 

ATRA permanently extended this provision (extensio

not shown in the tables).
274 Analytical Pe

Social Securi

159. Social Security benefits for retired workers.—Under the baseline tax system, all compensation,

including dedicated payments and in-kind benefits, would 

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

wages. Thus, the portion of Social Security benefits that

is attributable to employer contributions and earnings on 

employer and employee contributions (and not attributable to employee contributions) would be subject to tax.  

In contrast, the Tax Code may not tax all of the Socia

Security benefits that exceed the beneficiary’s contributions from previously taxed income. Actuarially, previously taxed contributions generally do not exceed 15 percent 

of benefits, even for retirees receiving the highest levels 

of benefits. Up to 85 percent of recipients’ Social Security

and tier 1 railroad retirement benefits are included in 

(phased into) the income tax base if the recipient’s provisional income exceeds certain base amounts. (Provisional 

income is equal to other items included in adjusted gross 

income plus foreign or U.S. possession income, tax-exempt

interest, and one half of Social Security and tier 1 railroad 

retirement benefits.) The untaxed portion of the benefits

received by taxpayers who are below the income amounts 

at which 85 percent of the benefits are taxable is counted 

as a tax expenditure.

160. Social Security benefits for the disabled.—

Under the baseline tax system, all compensation, including

dedicated payments and in-kind benefits, should be included in taxable income because they represent accretions to 

wealth that do not materially differ from cash wages. Under

current law, however, benefit payments from the Social 

Security Trust Fund for disability are fully or partially excluded from a beneficiary’s gross incomes. (See provision

number 161, Social Security benefits for retired workers.)

161. Social Security benefits for dependents and 

survivors.—Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income because they

represent accretions to wealth that do not materially differ from cash wages. Under current law, however, benefit

payments from the Social Security Trust Fund for dependents and survivors are fully or partially excluded from a

beneficiary’s gross income.

Veterans Benefits and Servic

162. Veterans death benefits and disability compensation.—Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income because they

represent accretions to wealth that do not materially differ from cash wages. In contrast, all compensation due to 

death or disability paid by the Veterans Administration is

excluded from taxable income under current law.

163. Veterans pension payments.—Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable

income because they represent accretions to wealth that 

do not materially differ from cash wages. Under current

law, however, pension payments made by the Veterans

Administration are excluded from gross income.

164. G.I. Bill benefits.—Under the baseline tax system, all compensation, including dedicated payments and

in-kind benefits, should be included in taxable income because they represent accretions to wealth that do not materially differ from cash wages. Under current law, however, G.I. Bill benefits paid by the Veterans Administratio

are excluded from gross income.

165. Tax-exempt mortgage bonds for veterans.—

The baseline tax system generally would tax all income

under the regular tax rate schedule. It would not allow 

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

types or sources of income. In contrast, under current 

law, interest earned on general obligation bonds issued by 

State and local governments to finance housing for veterans is excluded from taxable income.

General Governme

166. Public purpose State and local bonds.—The

baseline tax system generally would tax all income under the 

regular tax rate schedule. It would not allow preferentially 

low (or zero) tax rates to apply to certain types or sources of 

income. In contrast, under current law interest earned on 

State and local government bonds issued to finance publicpurpose construction (e.g., schools, roads, sewers), equipment acquisition, and other public purposes is tax-exempt. 

Interest on bonds issued by Indian tribal governments for 

essential governmental purposes is also tax-exempt.

167. Build America Bonds—The baseline tax system would not allow credits for particular activities or

targeted at specific group. In contrast, the Tax Code i

2009 allowed State and local governments to issue taxable bonds through 2010 and receive a direct payment 

from Treasury equal to 35 percent of interest expenses.

Alternatively, State and local governments may issue taxable bonds and the private lenders receive the 35 percent 

credit which is included in taxable income.

168. Deductibility of certain nonbusiness State 

and local taxes.—Under the baseline tax system, a deduction for personal consumption expenditures would not

be allowed. In contrast, the Tax Code allows taxpayer

who itemize their deductions to claim a deduction for 

State and local income taxes (or, at the taxpayer’s election, state and local sales taxes) and property taxes, even 

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

ATRA extended the provision through December 31, 20

(extension not shown in the tables.)

Interest

169. U.S. savings bonds.—The baseline tax system

would uniformly tax all returns to investments and not 

allow an exemption or deferral for particular activities, 

investments, or industries. In contrast, taxpayers may defer paying tax on interest earned on U.S. savings bonds

until the bonds are redeemed.
16. Tax Expend

A

Performance Measures and the Econom

Effects of Tax Expenditu

The Government Performance and Results Act of 199

(GPRA) directs Federal agencies to develop annual and

strategic plans for their programs and activities. These

plans set out performance objectives to be achieved over a 

specific time period. Most of these objectives are achieved 

through direct expenditure programs. Tax expenditures –

spending programs implemented through the tax code by 

reducing tax obligations for certain activities -- contribute 

to achieving these goals in a manner similar to direct expenditure programs. 

Tax expenditures by definition work through the tax

system and, particularly, the income tax. Thus, they may

be relatively advantageous policy approaches when the 

benefit or incentive is related to income and is intended to 

be widely available.4 Because there is an existing public 

administrative and private compliance structure for the 

tax system, income based programs that require little 

oversight might be efficiently run through the tax system. 

In addition, some tax expenditures actually simplify the 

operation of the tax system (for example, the exclusion 

for up to $500,000 of capital gains on home sales). Tax

expenditures also implicitly subsidize certain activities 

in a manner similar to direct expenditures. For example, 

exempting employer-sponsored health insurance from 

income taxation is equivalent to a direct spending subsidy equal to the forgone tax obligations for this type of 

compensation. Spending, regulatory or tax-disincentive 

policies can also modify behavior, but may have different economic effects. Finally, a variety of tax expenditure 

tools can be used, e.g., deductions; credits; exemptions; 

deferrals; floors; ceilings; phase-ins; phase-outs; and these 

can be dependent on income, expenses, or demographic 

characteristics (age, number of family members, etc.). 

This wide range of policy instruments means that tax

expenditures can be flexible and can have very different 

economic effects.

Tax expenditures also have limitations. In many cases

they add to the complexity of the tax system, which raises 

both administrative and compliance costs. For example, 

personal exemptions, deductions, credits, and phase-outs 

can complicate filing and decision-making. The income

tax system may have little or no contact with persons who 

have no or very low incomes, and does not require information on certain characteristics of individuals used in 

some spending programs, such as wealth or duration of 

employment. These features may reduce the effectiveness

of tax expenditures for addressing socioeconomic disparities. Tax expenditures also generally do not enable the

4 Although this chapter focuses upon tax expenditures under the income tax, tax expenditures also arise under the unified transfer, payroll, 

and excise tax systems. Such provisions can be useful when they relate 

to the base of those taxes, such as excise tax exemption for certain types 

of consumption deemed meritorious.

same degree of agency discretion as an outlay program. 

For example, grant or direct Federal service delivery programs can prioritize activities to be addressed with specific resources in a way that is difficult to emulate with 

tax expenditures.

Outlay programs have advantages where the direct

provision of government services is particularly warranted, such as equipping and maintaining the armed forces 

or administering the system of justice. Outlay programs

may also be specifically designed to meet the needs of 

low-income families who would not otherwise be subject 

to income taxes or need to file a tax return. Outlay programs may also receive more year-to-year oversight and

fine tuning through the legislative and executive budget 

process. In addition, many different types of spending 

programs include direct Government provision; credit 

programs; and payments to State and local governments, 

the private sector, or individuals in the form of grants or 

contracts provide flexibility for policy design. On the other

hand, certain outlay programs may rely less directly on 

economic incentives and private-market provision than 

tax incentives, thereby reducing the relative efficiency 

of spending programs for some goals. Finally, spending 

programs, particularly on the discretionary side, may respond less rapidly to changing activity levels and economic conditions than tax expenditures.

Regulations may have more direct and immediate effects than outlay and tax-expenditure programs because

regulations apply directly and immediately to the regulated party (i.e., the intended actor), generally in the 

private sector. Regulations can also be fine-tuned more

quickly than tax expenditures because they can often 

be changed as needed by the Executive Branch without 

legislation. Like tax expenditures, regulations often rely

largely on voluntary compliance, rather than detailed inspections and policing. As such, the public administrative 

costs tend to be modest relative to the private resource 

costs associated with modifying activities. Historically, 

regulations have tended to rely on proscriptive measures, 

as opposed to economic incentives. This reliance can diminish their economic efficiency, although this feature

can also promote full compliance where (as in certain 

safety-related cases) policymakers believe that trade-offs 

with economic considerations are not of paramount importance. Also, regulations generally do not directly affect 

Federal outlays or receipts. Thus, like tax expenditures,

they may escape the degree of scrutiny that outlay programs receive. Some policy objectives are achieved using 

multiple approaches. For example, minimum wage legislation, the earned income tax credit, and the food stamp 

program (SNAP) are regulatory, tax expenditure, and direct outlay programs, respectively, all having the objective

of improving the economic welfare of low-wage workers 

and families.
276 Analytical Pe

A Framework for Evaluating t

Effectiveness of Tax Expenditu

Across all major budgetary categories – from housing 

and health to space, technology, agriculture, and national 

defense tax expenditures make up a significant portion of 

Federal activity and affect every area of the economy. For 

these reasons, a comprehensive evaluation framework 

that examines incentives, direct results, and spillover effects will benefit the budgetary process by informing decisions on tax expenditure policy.

As described above, tax expenditures, like spending 

and regulatory programs, have a variety of objectives and 

economic effects. These include: encouraging certain types

of activities (e.g., saving for retirement or investing in certain sectors); increasing certain types of after-tax income 

(e.g., favorable tax treatment of Social Security income); 

and reducing private compliance costs and Government 

administrative costs (e.g., the exclusion for up to $500,000 

of capital gains on home sales). Some of these objectives 

are well suited to quantitative measurement and evaluation, while others are less well suited.

Performance measurement is generally concerned with 

inputs, outputs, and outcomes. In the case of tax expenditures, the principal input is usually the revenue effect. 

Outputs are quantitative or qualitative measures of goods

and services, or changes in income and investment, directly produced by these inputs. Outcomes, in turn, represent the changes in the economy, society, or environment

that are the ultimate goals of programs. Evaluations assess whether programs are meeting intended goals, but 

may also encompass analyzing whether initiatives are 

superior to other policy alternatives.

The Administration is working towards examining the

objectives and effects of the wide range of tax expenditures in our budget, despite challenges related to data 

availability, measurement, and analysis. Evaluations 

include an assessment of whether tax expenditures are 

achieving intended policy results in an efficient manner, 

with minimal burdens on individual taxpayers, consumers, and firms; and an examination of possible unintended 

effects and their consequences.

As an illustration of how evaluations can inform budgetary decisions, consider education and research and investment credits. 

Education. There are millions of individuals taking

advantage of tax credits designed to help pay for educational expenses. There are a number of different credits

available as well as other important forms of Federal support for higher education such as subsidized loans and 

grants. An evaluation would explore the possible relationships between use of the credits and the use of loans 

and grants, seeking to answer, for examples, whether the 

use of credits reduce or increase the likelihood of the students applying for loans. Such an evaluation would allow 

stakeholders to determine the most effective program – 

whether it is a tax credit, a subsidized loan, or a grant.

Investment. A series of tax expenditures reduce the 

cost of investment, both in specific activities such as research and experimentation, extractive industries, and 

certain financial activities and more generally throughout 

the economy, through accelerated depreciation for plant 

and equipment. These provisions can be evaluated along

a number of dimensions. For example, it is useful to consider the strength of the incentives by measuring their effects on the cost of capital (the return which investments 

must yield to cover their costs) and effective tax rates. The

impact of these provisions on the amounts of corresponding forms of investment (e.g., research spending, exploration activity, equipment) might also be estimated. In some 

cases, such as research, there is evidence that the investment can provide significant positive externalities—that 

is, economic benefits that are not reflected in the market 

transactions between private parties. It could be useful 

to quantify these externalities and compare them with 

the size of tax expenditures. Measures could also indicate 

the effects on production from these investments such 

as numbers or values of patents, energy production and 

reserves, and industrial production. Issues to be considered include the extent to which the preferences increase 

production (as opposed to benefiting existing output) and 

their cost-effectiveness relative to other policies. Analysis 

could also consider objectives that are more difficult to 

measure but still are ultimate goals, such as promoting 

the Nation’s technological base, energy security, environmental quality, or economic growth. Such an assessment

is likely to involve tax analysis as well as consideration of 

non-tax matters such as market structure, scientific, and 

other information (such as the effects of increased domestic fuel production on imports from various regions, or the 

effects of various energy sources on the environment).

The tax proposals subject to these analyses include

items that indirectly affect the estimated value of tax 

expenditures (such as changes in income tax rates), proposals that make reforms to improve tax compliance and 

administration, as well as proposals which would change, 

add, or delete tax expenditures. 

Barriers to Evaluation. Developing a framework that

is sufficiently comprehensive, accurate, and flexible is a 

significant challenge. Evaluations are constrained by the 

availability of appropriate data and challenges in economic modeling:

1. Data availability. Data may not exist, or may not exist in an analytically appropriate form, to conduc

rigorous evaluations of certain types of expenditures. 

For example, measuring the effects of tax expenditures designed to achieve tax neutrality for individuals and firms earning income abroad, and foreign 

firms could require data from foreign governments 

or firms which are not readily available.

2. Analytical constraints. Evaluations of tax expenditures face analytical constraints even when data 

are available. For example, individuals might have 

access to several tax expenditures and programs 

aimed at improving the same outcome. Isolating the 

effect of a single tax credit is challenging absent a 

well-specified research design. 
16. Tax Expend

3. Resources. Tax expenditure analyses are seriousl

constrained by staffing considerations. Evaluations 

typically require expert analysts who are often engaged in other more competing areas of work related 

to the budget.

The Executive Branch is focused on addressing these

challenges in order to lay the foundation for the analysis 

of tax expenditures comprehensively, alongside evaluations of the effectiveness of direct spending initiatives.

Current Administration Proposa

on Tax Expenditur

The Administration considers performance measurement, evaluations, and the economic effects of tax expenditures each year in its deliberation for the Budget and

proposals are informed by these analyses. The President’s

National Commission on Fiscal Responsibility and Ref

submitted a report in 2010 in which they said that the income tax system is unduly complicated and that the government should “sharply reduce rates, broaden the base, 

simplify the tax code, and reduce the many ‘tax expenditures’ —another name for spending through the tax code.”

The current Budget and enacted Administration policies include several proposals that would change existing

tax expenditures to raise revenue, eliminate ineffective 

or counterproductive tax expenditures, and enhance effective tax expenditures. The tax expenditure proposals in

the budget further the Administration’s goals of economic 

recovery and growth, clean and secure energy, a worldclass education for all Americans, and fairness in the tax 

code. Some of these proposals are highlighted below.

Reduce the value of certain tax expenditures. The

Administration proposes to limit the tax rate at which 

upper-income taxpayers can use itemized deductions and 

other tax preferences to reduce tax liability to a maximum 

of 28 percent.  This limitation would affect only married

taxpayers filing a joint return with income adjusted for 

these tax preferences of over $250,000 (at 2014 levels) 

and single taxpayers with income over $200,000 (at 2014 

levels).  The limit would apply to all itemized deductions,

tax-exempt interest, employer-sponsored health insurance, deductions and income exclusions for employee retirement contributions, and certain above-the-line deductions, effective for taxable years beginning after December

31, 2013. These are among the largest tax expenditures.

This proposal would make the tax code more equitable

because the value of the tax expenditure as a percentage 

of the deduction is proportional to one’s tax bracket, so it 

is less valuable to those in lower brackets. 

Reduce preferences for oil, gas, and coal. Current law

provides a number of credits and deductions that are targeted towards certain oil, gas, and coal activities. These

tax preferences run counter to our policies for reducing greenhouse gas emissions. In accordance with the 

President’s agreement at the G–20 summit in 2009 to 

phase out subsidies for fossil fuels so that we can transition to a 21st century energy economy, the Administration 

proposes to repeal a number of tax preferences available 

for fossil fuels.

Enhance and make permanent the Research and 

Experimentation (R&E) credit. The extension of this credit every year creates uncertainty reducing firms’ incentive

to expand their research activities. For this reason, and 

more generally to achieve the President’s R&D goals, th

Budget proposes making the R&E credit permanent.

 Make permanent the American Opportunity Tax Credit 

(AOTC), the expansion of the EITC for larger families, 

EITC marriage penalty relief, and the refundability of the 

child tax credit. These provisions were extended through

2017 in ATRA and the Budget assumes in its baselin

that these provisions would be permanently extended. 

Although permanent extension would increase the cost of 

these tax expenditures, it would increase the equity of the 

overall tax system and provide benefits to low and middle 

income families. 

Allow a range of tax expenditures to expire. The

Tax Reconciliation, Unemployment Insuran

Reauthorization, the Job Creation Act of 2010, and AT

have extended many provisions of the tax code, including many provisions identified as tax expenditures in this 

chapter. However, a number of provisions identified as tax 

expenditures have been allowed to expire. For instance, 

the Making Work Pay Credit, the sales tax deduction for

new cars and trucks, the above-the-line deduction for 

property taxes up to $500 for taxpayers who to not itemize, and the exemption from taxes for the first $2,400 of 

unemployment benefits were allowed to expire.