17. FEDERAL RECEIPTS
Receipts (budget and off-budget) are taxes and other
collections from the public that result from the exercise
of the Federal Government’s sovereign or governmental
powers. The difference between receipts and outlays
determines the surplus or deficit.
The Federal Government also collects income from
the public from market-oriented activities. Collections
from these activities, which are subtracted from gross
outlays, rather than added to taxes and other governmental
receipts, are discussed in the following Chapter.
Growth in receipts. Total receipts in 2006 are estimated
to be $2,177.6 billion, an increase of $124.7 billion
or 6.1 percent relative to 2005. Receipts are projected
to grow at an average annual rate of 6.7 percent
between 2006 and 2010, rising to $2,820.9 billion. This
growth in receipts is largely due to assumed increases
in incomes resulting from both real economic growth
and inflation.
As a share of GDP, receipts are projected to increase
from 16.8 percent in 2005 to 16.9 percent in 2006. The
receipts share of GDP is projected to increase annually
thereafter, rising to 17.7 percent in 2010.
Table 17–1. RECEIPTS BY SOURCE—SUMMARY
(in billions of dollars)
2004 Actual
Estimate
2005 2006 2007 2008 2009 2010
Individual income taxes ..................................................... 809.0 893.7 966.9 1,071.2 1,167.2 1,245.1 1,353.3
Corporation income taxes ................................................. 189.4 226.5 220.3 229.8 243.4 252.4 257.6
Social insurance and retirement receipts ......................... 733.4 773.7 818.8 866.2 911.7 959.1 1,016.2
(On-budget) .................................................................... (198.7) (212.4) (225.6) (237.0) (247.2) (258.4) (273.0)
(Off-budget) .................................................................... (534.7) (561.4) (593.2) (629.2) (664.6) (700.7) (743.2)
Excise taxes ....................................................................... 69.9 74.0 75.6 77.2 79.0 81.0 82.9
Estate and gift taxes ......................................................... 24.8 23.8 26.1 23.5 24.3 26.0 20.1
Customs duties .................................................................. 21.1 24.7 28.3 30.6 31.9 33.9 35.3
Miscellaneous receipts ...................................................... 32.6 36.4 41.6 45.6 49.5 52.6 55.4
Total receipts ............................................................... 1,880.1 2,052.8 2,177.6 2,344.2 2,507.0 2,650.0 2,820.9
(On-budget) ............................................................... (1,345.3) (1,491.5) (1,584.4) (1,715.0) (1,842.4) (1,949.3) (2,077.7)
(Off-budget) ............................................................... (534.7) (561.4) (593.2) (629.2) (664.6) (700.7) (743.2)
Total receipts as a percentage of GDP ....................... 16.3 16.8 16.9 17.2 17.5 17.5 17.7
Table 17–2. EFFECT ON RECEIPTS OF CHANGES IN THE SOCIAL SECURITY TAXABLE EARNINGS BASE
(In billions of dollars)
Estimate
2006 2007 2008 2009 2010
Social security (OASDI) taxable earnings base increases:
$90,000 to $93,000 on Jan. 1, 2006 ....................................................................... 1.4 3.8 4.2 4.8 5.4
$93,000 to $97,200 on Jan. 1, 2007 ....................................................................... ................ 2.0 5.4 6.1 6.9
$97,200 to $101,400 on Jan. 1, 2008 ..................................................................... ................ ................ 2.1 5.5 6.3
$101,400 to $106,200 on Jan. 1, 2009 ................................................................... ................ ................ ................ 2.4 6.5
$106,200 to $111,300 on Jan. 1, 2010 ................................................................... ................ ................ ................ ................ 2.6
264 ANALYTICAL PERSPECTIVES
ENACTED LEGISLATION
Several laws were enacted in 2004 that have an effect
on governmental receipts. The major legislative changes
affecting receipts are described below.
WORKING FAMILIES TAX RELIEF ACT OF
2004
The Working Families Tax Relief Act of 2004 (2004
tax relief act), which was signed by President Bush
on October 4, 2004, was the fourth major tax measure
enacted during this Administration. In addition to extending
key parts of the President’s tax relief plan for
working families, which were scheduled to expire at
the end of 2004, this Act provided tax relief to certain
military personnel with families, created a uniform definition
of a qualifying child for tax purposes, and reinstated
a number of expired or expiring business-related
tax incentives. The major provisions of this Act that
affect receipts are described below. The year-by-year
effect of these changes (as well as some of the changes
provided in the 2001 and 2003 tax cuts) on various
provisions of the tax code is shown in Chart 17–1.
Chart 17–1. Major Provisions of the Tax Code Under the 2001, 2003 and 2004 Tax Cuts
Provision 2003 2004 2005 2006 2007 2008 2009 2010 2011
Individual Income Tax
Rates
Rates reduced to
35, 33, 28, and
25 percent
Rates increased
to
39.6, 36, 31,
and 28 percent
10 Percent Bracket Top of bracket increased
to
$7,000/$14,000
for single/joint
filers and inflation-
indexed
Bracket eliminated,
making
lowest
bracket 15
percent
15 Percent Bracket for
Joint Filers
Top of bracket for
joint filers increased
to 200
percent of top
of bracket for
single filers
Top of bracket
for joint filers
reduced
to 167 percent
of top
of bracket
for single filers
Standard Deduction for
Joint Filers
Standard deduction
for joint filers increased
to 200
percent of
standard deduction
for single
filers
Standard deduction
for
joint filers
reduced to
167 percent
of standard
deduction
for single filers
Child Credit Tax credit for each
qualifying child
under age 17
increased to
$1,000
Tax credit for
each qualifying
child
under age
17 reduced
to $500
Estate Taxes Top rate reduced
to 49 percent
Top rate reduced
to 48
percent
Exempt
amount increased
to
$1.5 million
Top Rate reduced
to 47
percent
Top rate reduced
to 46 percent
Exempt amount increased
to $2
million
Top rate reduced
to 45
percent
Exempt
amount increased
to
$3.5 million
Estate tax repealed
Top rate increased
to
60 percent
Exempt
amount reduced
to $1
million
265 17. FEDERAL RECEIPTS
Chart 17–1. Major Provisions of the Tax Code Under the 2001, 2003 and 2004 Tax Cuts—Continued
Provision 2003 2004 2005 2006 2007 2008 2009 2010 2011
Small Business, Expensing
Deduction increased
to
$100,000, reduced
by
amount qualifying
property
exceeds
$400,000, and
both amounts
inflation-indexed
Includes software
Deduction declines
to
$25,000, reduced
by
amount
qualifying
property exceeds
$200,000
and
amounts not
inflation-indexed
Does not apply
to software
Capital Gains Tax rate on capital
gains reduced
to 5/15 percent
Tax on capital
gains eliminated
for
taxpayers in
10/15 percent
tax
brackets
Tax rate on
capital gains
increased to
10/20 percent
Dividends Tax rate on dividends
reduced
to 5/15 percent
Tax on dividends
eliminated
for
taxpayers in
10/15 percent
tax
brackets
Dividends
taxed at
standard income
tax
rates
Bonus Depreciation Bonus depreciation
increased to 50
percent of qualified
property
aquired after
5/5/03
Bonus depreciation
expires
Alternative Minimum
Tax
AMT exemption
amount increased
to
$40,250/$58,000
for single/joint
filers
AMT exemption
amount reduced
to $33,750/
$45,000 for single
/joint filers
Tax Relief for Families
Extend accelerated expansion of the 10-percent
individual income tax rate bracket.—The Economic
Growth and Tax Relief Reconciliation Act (2001 tax
cut) created a 10-percent individual income tax bracket,
which applied to the first $6,000 of taxable income for
single taxpayers and married taxpayers filing separate
returns (increasing to $7,000 for taxable years beginning
after December 31, 2007 and before January 1,
2011), the first $10,000 of taxable income for heads
of household, and the first $12,000 of taxable income
for married taxpayers filing a joint return (increasing
to $14,000 for taxable years beginning after December
31, 2007 and before January 1, 2011). The 2001 tax
cut provided for annual inflation adjustments to the
width of the 10-percent tax rate bracket, effective for
taxable years beginning after December 31, 2008. The
Jobs and Growth Tax Relief Reconciliation Act (2003
jobs and growth tax cut) accelerated the expansions
of the 10-percent tax rate bracket scheduled to be effective
beginning in taxable year 2008, to be effective in
taxable years 2003 and 2004. For taxable years beginning
after 2004 and before January 1, 2011, the taxable
income levels for the 10-percent individual income tax
rate bracket were scheduled to revert to the levels provided
under the 2001 tax cut. The 2003 jobs and growth
tax cut also provided for annual inflation adjustments
to the width of the 10-percent tax rate bracket for taxable
years beginning in 2004. The 2004 tax relief act
extended the expansions of the 10-percent tax rate
bracket provided under the 2003 jobs and growth tax
cut through taxable year 2007 and provided for continued
annual inflation adjustments to the width of 10-
percent tax rate bracket for taxable years beginning
after 2004. As provided under the 2001 tax cut, the
10-percent tax rate bracket will remain in effect for
taxable years 2008 through 2010, and will be eliminated
for taxable years beginning after December 31,
2010.
Extend accelerated increase in standard deduction
for married taxpayers filing a joint return.—
Under the 2001 tax cut, the standard deduction for
married taxpayers filing a joint return, which was 167
percent of the standard deduction for unmarried indi266
ANALYTICAL PERSPECTIVES
viduals, was increased to double the standard deduction
for single taxpayers over a five-year period. Under the
phasein, the standard deduction for married taxpayers
filing a joint return increased to 174 percent of the
standard deduction for single taxpayers in taxable year
2005, 184 percent in taxable year 2006, 187 percent
in taxable year 2007, 190 percent in taxable year 2008,
and 200 percent in taxable years 2009 and 2010. The
2003 jobs and growth tax cut accelerated the increase
in the standard deduction for married taxpayers filing
a joint return to 200 percent of the standard deduction
for single taxpayers, effective for taxable years 2003
and 2004. For taxable years 2005 through 2010, the
standard deduction for married taxpayers filing a joint
return was scheduled to revert to the levels provided
under the 2001 tax cut. The 2004 tax relief act extended
the expanded standard deduction for married
taxpayers filing a joint return provided under the 2003
jobs and growth tax cut to apply to taxable years 2005
through 2008. As provided under the 2001 tax cut, the
standard deduction for married taxpayers filing a joint
return will remain at 200 percent of the standard deduction
for single taxpayers in 2009 and 2010, but will
decline to 167 percent of the standard deduction for
single taxpayers, effective for taxable years beginning
after December 31, 2010.
Extend accelerated expansion of the 15-percent
individual income tax rate bracket for married
taxpayers filing a joint return.—Under the 2001 tax
cut, the maximum taxable income in the 15-percent
individual income tax rate bracket for married taxpayers
filing a joint return, which was 167 percent
of the corresponding amount for an unmarried individual,
was increased to twice the corresponding
amount for unmarried individuals over a four-year period.
Under the phasein, the maximum taxable income
in the 15-percent tax rate bracket for married taxpayers
filing a joint return increased to 180 percent of the
corresponding amount for single taxpayers in taxable
year 2005, 187 percent in taxable year 2006, 193 percent
in taxable year 2007, and 200 percent in taxable
years 2008, 2009 and 2010. The 2003 jobs and growth
tax cut accelerated the increase in the size of the 15-
percent tax rate bracket for married taxpayers filing
a joint return to twice the corresponding tax rate bracket
for single taxpayers, effective for taxable years 2003
and 2004. For taxable years 2005 through 2010, the
size of the 15-percent tax rate bracket for married taxpayers
filing a joint return was scheduled to revert
to the levels provided under the 2001 tax cut. The
2004 tax relief act extended the expanded 15-percent
tax rate bracket for married taxpayers filing a joint
return provided under the 2003 jobs and growth tax
cut through taxable year 2007. As provided under the
2001 tax cut, the maximum taxable income in the 15-
percent tax rate bracket for married taxpayers filing
a joint return will remain at twice the corresponding
tax rate bracket for single taxpayers in 2008, 2009,
and 2010, but will decline to 167 percent of the corresponding
amount for single taxpayers, effective for
taxable years beginning after December 31, 2010.
Extend accelerated increase in child tax credit.—
Under the 2001 tax cut, the maximum amount of
the tax credit for each qualifying child under the age
of 17 increased from $500 to $1,000 over a period of
10 years, as follows: the credit increased to $600 for
taxable years 2001 through 2004, $700 for taxable years
2005 through 2008, $800 for taxable year 2009, and
$1,000 for taxable year 2010. The 2003 jobs and growth
tax cut accelerated the increase in the credit to $1,000
per child, effective for taxable years 2003 and 2004.
For taxable years 2005 through 2010, the credit was
scheduled to revert to the levels provided under the
2001 tax cut. The 2004 tax relief act extended the increased
credit of $1,000 per child for five years, for
taxable years 2005 through 2009. As provided under
the 2001 tax cut, the credit will be $1,000 per child
for taxable year 2010, but will decline to $500 for taxable
years beginning after December 31, 2010.
Accelerate increase in refundability of child tax
credit.—Prior to enactment of the 2001 tax cut, taxpayers
with three or more qualifying children could
be eligible for a refundable additional child tax credit
if they had social security taxes, even if they had little
or no individual income tax liability. However, taxpayers
with one or two children were not eligible for
the refundable additional child tax credit. The 2001
tax cut extended eligibility for the refundable credit
to taxpayers with one or two children. Under the 2001
tax cut, the additional child tax credit was refundable
to the extent of 10 percent of the taxpayer’s earned
income in excess of $10,000 for taxable years 2001
through 2004; the percentage was scheduled to increase
to 15 percent for taxable years 2005 through 2010. The
$10,000 income threshold was indexed for inflation beginning
in 2002. The 2004 tax relief act accelerated
to 2004 the increase in refundability to 15 percent that
had been scheduled for 2005 under prior law.
Tax Relief for Military Families
Modify treatment of combat pay for purposes of
computing the child tax credit and earned income
tax crcdit (EITC).—Compensation received by an active
member of the Armed Forces for service in a combat
zone or while hospitalized as a result of wounds,
disease, or injury incurred while serving in a combat
zone is not included in gross income for tax purposes.
The 2004 tax relief act provided that combat pay otherwise
excluded from gross income is treated as earned
income for purposes of calculating the refundable portion
of the child credit, effective for taxable years beginning
after December 31, 2003. The 2004 tax relief act
also provided that a taxpayer could elect to treat combat
pay otherwise excluded from gross income as earned
income for purposes of the EITC, effective for taxable
years ending after October 4, 2004 and before January
1, 2006.
267 17. FEDERAL RECEIPTS
Alternative Minimum Tax (AMT) Relief for
Individuals
Extend AMT exemption amount.—An alternative
minimum tax is imposed on individuals to the extent
that the tentative minimum tax exceeds the regular
tax. An individual’s tentative minimum tax generally
is equal to the sum of: (1) 26 percent of the first
$175,000 ($87,500 in the case of a married individual
filing a separate return) of alternative minimum taxable
income (taxable income modified to take account
of specified preferences and adjustments) in excess of
an exemption amount and (2) 28 percent of the remaining
excess. The AMT exemption amounts, as provided
under the 2003 jobs and growth tax cut, were: (1)
$58,000 for married taxpayers filing a joint return and
surviving spouses for taxable years 2003 and 2004, declining
in 2005 to $45,000; (2) $40,250 for single taxpayers
for taxable years 2003 and 2004, declining in
2005 to $33,750; and (3) $29,000 for married taxpayers
filing a separate return and estates and trusts, for taxable
years 2003 and 2004, declining in 2005 to $22,500.
The exemption amounts are phased out by an amount
equal to 25 percent of the amount by which the individual’s
alternative minimum taxable income exceeds: (1)
$150,000 for married taxpayers filing a joint return
and surviving spouses; (2) $112,500 for single taxpayers;
and (3) $75,000 for married taxpayers filing
a separate return, estates and trusts. The 2004 tax
relief act extended for one year, through taxable year
2005, the exemption amounts provided under the 2003
jobs and growth tax cut for taxable years 2003 and
2004. Effective for taxable years beginning after December
31, 2005, the AMT exemption amounts will decline
to $33,750 for single taxpayers, $45,000 for married
taxpayers filing a joint return and surviving spouses,
and $22,500 for married taxpayers filing a separate
return and estates and trusts.
Extend ability to offset the AMT with nonrefundable
personal credits.—A temporary provision of prior
law permitted nonrefundable personal tax credits to offset
both the regular tax and the alternative minimum
tax for taxable years beginning before January 1, 2004.
The 2004 tax relief act extended minimum tax relief
for nonrefundable personal credits for two years, to
apply to taxable years 2004 and 2005. The extension
did not apply to the child credit, the saver credit, or
the adoption credit, which were provided AMT relief
through December 31, 2010 under the 2001 tax cut.
Tax Simplification
Establish uniform definition of a qualifying
child.—The tax code provides assistance to families
with children through the dependent exemption, headof-
household filing status, child tax credit, child and
dependent care tax credit, and EITC. Under prior law,
each provision defined an eligible ‘‘child’’ differently,
thereby requiring taxpayers to wade through pages of
bewildering rules and instructions, resulting in confusion
and error. Under the 2004 tax relief act, effective
for taxable years beginning after December 31, 2004,
a qualifying child must meet the following three tests:
(1) Relationship—The child must be the taxpayer’s biological
or adopted child, stepchild, sibling, step-sibling,
foster child, or a descendant of one of these individuals.
(2) Residence—The child must live with the taxpayer
in the same principal home in the United States for
more than half of the taxable year. (3) Age—The child
must be under age 19 (under age 24 in the case of
a full-time student), or totally and permanently disabled.
However, prior-law requirements that a child be
under age 13 for the dependent care credit and under
age 17 for the child tax credit, were maintained. Neither
the support nor gross income tests of prior law
apply to qualifying children who meet these three tests.
In addition, taxpayers are no longer required to meet
a household maintenance test when claiming the child
and dependent care tax credit. Taxpayers generally can
continue to claim individuals who do not meet the relationship,
residency, or age tests as dependents if they
meet the dependency requirements under prior law,
and no other taxpayer is eligible to claim the same
individual as a qualifying child. A tie-breaking rule applies
if a child would be a qualifying child with respect
to more than one individual and if more than one individual
claims a benefit with respect to that child.
Expiring Provisions
Extend the research and experimentation (R&E)
tax credit.—The 20-percent tax credit for qualified research
and experimentation expenditures above a base
amount and the alternative incremental credit expired
with respect to expenditures incurred after June 30,
2004. The 2004 tax relief act extended these credits
for eighteen months, to apply to expenditures incurred
before January 1, 2006.
Extend the work opportunity tax credit.—The
work opportunity tax credit provides incentives for hiring
individuals from certain targeted groups. The credit
generally applies to the first $6,000 of wages paid to
several categories of economically disadvantaged or
handicapped workers. The credit rate is 25 percent of
qualified wages for employment of at least 120 hours
but less than 400 hours and 40 percent for employment
of 400 or more hours. Under prior law, the credit was
available for qualified individuals who began work before
January 1, 2004. The 2004 tax relief act extended
the credit for two years, to apply to qualified individuals
beginning work after December 31, 2003 and before
January 1, 2006.
Extend the welfare-to-work tax credit.—The welfare-
to-work tax credit provides an incentive for hiring
certain recipients of long-term family assistance. The
credit is 35 percent of up to $10,000 of eligible wages
in the first year of employment and 50 percent of wages
up to $10,000 in the second year of employment. Eligible
wages include cash wages plus the cash value of
268 ANALYTICAL PERSPECTIVES
certain employer-paid health, dependent care, and educational
fringe benefits. The minimum employment period
that employees must work before employers can
claim the credit is 400 hours. The 2004 tax relief act
extended this credit for two years, to apply to qualified
individuals who begin work after December 31, 2003
and before January 1, 2006. Under prior law the credit
was available with respect to qualified individuals beginning
work before January 1, 2004.
Extend tax incentives for employment and investment
on Indian reservations.—The 2004 tax relief
act extended for one year, through December 31,
2005, the employment tax credit for qualified workers
employed on an Indian reservation and the accelerated
depreciation rules for qualified property used in the
active conduct of a trade or business within an Indian
reservation. The employment tax credit is not available
for employees involved in certain gaming activities or
who work in a building that houses certain gaming
activities. Similarly, property used to conduct or house
certain gaming activities is not eligible for the accelerated
depreciation recovery periods.
Extend authority to issue Qualified Zone Academy
Bonds.—State and local governments are allowed
to issue ‘‘qualified zone academy bonds,’’ the interest
on which is effectively paid by the Federal government
in the form of an annual income tax credit. The proceeds
of the bonds have to be used for teacher training,
purchases of equipment, curriculum development, or rehabilitation
and repairs at certain public school facilities.
Under prior law, a nationwide total of $400 million
of qualified zone academy bonds were authorized to
be issued in each of calendar years 1998 through 2003.
In addition, unused authority arising in 1998 and 1999
could be carried forward for up to three years and unused
authority arising in 2000 through 2003 could be
carried forward for up to two years. The 2004 tax relief
act authorized the issuance of an additional $400 million
of qualified zone academy bonds in each of calendar
years 2004 and 2005; unused authority can be carried
forward for up to two years.
Extend authority to issue Liberty Zone Bonds.—
The Job Creation and Worker Assistance Act (2002 economic
stimulus act) provided authority to issue an aggregate
of $8 billion of tax-exempt private activity
bonds during calendar years 2002, 2003, and 2004 for
the acquisition, construction, reconstruction, and renovation
of nonresidential real property, residential rental
property, and public utility property in the New York
City Liberty Zone. Authority to issue these bonds,
which are not subject to the aggregate annual State
private activity bond volume limit, was extended
through calendar year 2009 under the 2004 tax relief
act. The 2004 tax relief act also extended for one year,
through December 31, 2005, an expired provision that
allowed certain bonds used to finance projects in New
York City to be eligible for one additional advance refunding.
Extend the District of Columbia (DC) Enterprise
Zone.—The DC Enterprise Zone includes the DC Enterprise
Community and District of Columbia census
tracts with a poverty rate of at least 20 percent. Businesses
in the zone are eligible for: (1) A wage credit
equal to 20 percent of the first $15,000 in annual wages
paid to qualified employees who reside within the District
of Columbia; (2) $35,000 in increased section 179
expensing; and (3) in certain circumstances, tax-exempt
bond financing. In addition, a capital gains exclusion
is allowed for certain investments held more than five
years and made within the DC Zone, or within any
District of Columbia census tract with a poverty rate
of at least 10 percent. Under prior law, the DC Zone
incentives were in effect for the period from January
1, 1998 through December 31, 2003. The 2004 tax relief
act extended the DC Zone incentives for two years,
through December 31, 2005.
Extend the first-time homebuyer credit for the
District of Columbia.—A one-time, nonrefundable
$5,000 credit is available to purchasers of a principal
residence in the District of Columbia who have not
owned a residence in the District during the year preceding
the purchase. The credit phases out for taxpayers
with modified adjusted gross income between
$70,000 and $90,000 ($110,000 and $130,000 for joint
returns). Under prior law, the credit did not apply to
purchases after December 31, 2003. The credit was extended
for two years under the 2004 tax relief act,
making it available with respect to purchases after December
31, 2003 and before January 1, 2006.
Extend deduction for corporate donations of
computer technology.—The charitable contribution
deduction that may be claimed by corporations for donations
of inventory property generally is limited to
the lesser of fair market value or the corporation’s basis
in the property. However, corporations are provided
augmented deductions, not subject to this limitation,
for contributions of computer technology and equipment
to public libraries and to U.S. schools for educational
purposes in grades K-12. The 2004 tax relief act extended
the augmented deduction, which expired with
respect to donations made after December 31, 2003,
to apply to donations made before January 1, 2006.
Extend the above-the-line deduction for qualified
out-of-pocket classroom expenses.—Teachers who
itemize deductions (do not use the standard deduction)
and incur unreimbursed, job-related expenses are allowed
to deduct those expenses to the extent that when
combined with other miscellaneous itemized deductions
they exceed two percent of adjusted gross income (AGI).
Under prior law, certain teachers and other elementary
and secondary school professionals were allowed to
treat up to $250 in annual qualified out-of-pocket classroom
expenses as a non-itemized deduction (above-theline
deduction), effective for expenses incurred in taxable
years beginning after December 31, 2001 and before
January 1, 2004. Unreimbursed expenditures for
269 17. FEDERAL RECEIPTS
certain books, supplies and equipment related to classroom
instruction qualified for the above-the-line deduction.
Expenses claimed as an above-the-line deduction
could not be claimed as an itemized deduction. The
2004 tax relief act extended the above-the-line deduction
for two years, to apply to qualified out-of-pocket
expenditures incurred after December 31, 2003 and before
January 1, 2006.
Extend Archer Medical Savings Accounts
(MSAs).—Self-employed individuals and employees of
small firms are allowed to establish Archer MSAs; the
number of accounts is capped at 750,000. In addition
to other requirements: (1) individuals who establish Archer
MSAs must be covered by a high-deductible health
plan (and no other plan) with a deductible of at least
$1,750 but not greater than $2,650 for policies covering
a single person and a deductible of at least $3,500
but not greater than $5,250 in all other cases (these
amounts are indexed annually for inflation); (2) taxpreferred
contributions are limited to 65 percent of the
deductible for single policies and 75 percent of the deductible
for other policies; and (3) either an individual
or an employer, but not both, may make a tax-preferred
contribution to an Archer MSA for a particular year.
Under prior law, no new contributions could be made
to an Archer MSA after December 31, 2003, except
for the following: (1) those made by or on behalf of
individuals who previously had Archer MSA contributions
and (2) those made by individuals employed by
a participating employer. The 2004 tax relief act extended
the Archer MSA program for two years, thereby
allowing new Archer MSAs through December 31, 2005.
Extend tax on failure to comply with mental
health parity requirements applicable to group
health plans.—Under prior law, group health plans
that provided both medical and surgical benefits and
mental health benefits, could not impose aggregate lifetime
or annual dollar limits on mental health benefits
that were not imposed on substantially all medical and
surgical benefits. An excise tax of $100 per day for
each individual affected (during the period of noncompliance)
was imposed on an employer sponsoring
a group plan that failed to meet these requirements.
For a given taxable year, the tax was limited to the
lesser of 10 percent of the employer’s group health insurance
expenses for the prior taxable year or $500,000.
The mental health parity requirements expired with
respect to benefits for services provided on or after December
31, 2004. The excise tax imposed on plans that
failed to meet the requirements expired with respect
to benefits for services provided after December 31,
2003. The 2004 tax relief act extended the mental
health parity requirements to apply to benefits for services
provided before January 1, 2006. The act also extended
the excise tax, but only with respect to benefits
for services provided after October 3, 2004 and before
January 1, 2006. Therefore, the excise tax on failures
to meet the mental health parity requirements did not
apply to benefits for services provided after December
31, 2003 and before October 4, 2004.
Extend tax credit for the purchase of electric
vehicles.—A 10-percent tax credit, up to a maximum
of $4,000, is provided for the cost of a qualified electric
vehicle. Under prior law, the full amount of the credit
was available for purchases prior to January 1, 2004.
The credit began to phase down in 2004 and was not
available for purchases after December 31, 2006. The
2004 tax relief act extended the full amount of the
credit for two years, making it available for purchases
in 2004 and 2005. As provided under prior law, the
credit is reduced by 75 percent for purchases in 2006
and is not available for purchases after December 31,
2006.
Extend deduction for qualified clean-fuel vehicles
and qualified clean-fuel vehicle refueling
property.—Under prior law, certain costs of acquiring
clean-fuel vehicles (vehicles that use certain clean-burning
fuels) and property used to store or dispense cleanburning
fuels, could be expensed and deducted when
the property was placed in service. For qualified cleanfuel
vehicles, the maximum allowable deduction was
$50,000 for a truck or van with a gross vehicle weight
over 26,000 pounds, $5,000 for a van or truck with
a gross weight between 10,000 and 26,000 pounds; and
$2,000 in the case of any other motor vehicle. The full
amount of the deduction could be claimed for vehicles
placed in service before January 1, 2004, but began
to phase down for vehicles placed in service after December
31, 2003, and was not available after December
31, 2006. The 2004 tax relief act extended the full
amount of the deduction for two years, making it available
for vehicles placed in service in 2004 and 2005.
As provided under prior law, the deduction is reduced
by 75 percent for vehicles placed in service in 2006
and is not available for vehicles placed in service after
December 31, 2006.
Extend suspension of net income limitation on
percentage depletion from marginal oil and gas
wells.—Taxpayers are allowed to recover their investment
in oil and gas wells through depletion deductions.
For certain properties, deductions may be determined
using the percentage depletion method; however, in any
year, the amount deducted generally may not exceed
100 percent of the net income from the property. Under
prior law, for taxable years beginning after December
31, 1997 and before January 1, 2004, domestic oil and
gas production from ‘‘marginal’’ properties was exempt
from the 100-percent-of-net-income limitation. The 2004
tax relief act extended the exemption to apply to taxable
years beginning after December 31, 2003 and before
January 1, 2006.
Extend tax credit for producing electricity from
certain renewable sources.—Taxpayers are provided
a 1.5-cent-per-kilowatt-hour tax credit, adjusted for inflation
after 1992, for electricity produced from wind,
270 ANALYTICAL PERSPECTIVES
closed-loop biomass (organic material from a plant
grown exclusively for use at a qualified facility to
produce electricity), and poultry waste. To qualify for
the credit, the electricity must be sold to an unrelated
third party and, under prior law, had to be produced
during the first 10 years of production at a facility
placed in service before January 1, 2004. The 2004
tax relief act extended the credit for two years, to apply
to electricity produced at facilities placed in service before
January 1, 2006.
Extend expensing of brownfields remediation
costs.—Taxpayers are allowed to elect to treat certain
environmental remediation expenditures that would
otherwise be chargeable to a capital account as deductible
in the year paid or incurred. The 2004 tax relief
act extended this provision, which expired with respect
to expenditures paid or incurred after December 31,
2003, to apply to expenditures paid or incurred before
January 1, 2006.
Extend provisions permitting disclosure of tax
return information relating to terrorist activity.—
Prior law permitted disclosure of tax return information
relating to terrorism in two situations. The first was
when an executive of a Federal law enforcement or
intelligence agency had reason to believe that the return
information was relevant to a terrorist incident,
threat or activity and submitted a written request. The
second was when the Internal Revenue Service (IRS)
wished to apprise a Federal law enforcement agency
of a terrorist incident, threat or activity. The 2004 tax
relief act extended this disclosure authority, which expired
on December 31, 2003, through December 31,
2005.
AMERICAN JOBS CREATION ACT OF 2004
The American Jobs Creation Act of 2004 (2004 jobs
creation act) was signed by President Bush on October
22, 2004. This Act repealed the extraterritorial income
exclusion of prior law, which had been declared a prohibited
export subsidy by the World Trade Organization.
This Act also provided a deduction against domestic
manufacturing income, provided certain tax relief
to U.S. businesses and industries, reformed and simplified
the taxation of overseas operations of U.S. multinational
firms, reformed the Federal tobacco subsidy
program, provided a temporary itemized deduction for
State and local general sales taxes, and included revenue-
raising provisions. The major provisions of this
Act that affect receipts are described below.
Extraterritorial Income
Repeal exclusion for extraterritorial income
(ETI).—Under the ETI provisions of prior law, certain
income attributable to foreign trading gross receipts
was excluded from gross income for U.S. tax purposes.
The 2004 jobs creation act repealed the ETI provisions,
effective for transactions after December 31, 2004. Certain
transitional tax rules apply to transactions occurring
in 2005 and 2006, providing taxpayers with 80
percent and 60 percent, respectively, of the tax benefit
that would have been otherwise allowable under the
prior law ETI provisions. Moreover, the ETI provisions
of prior law remain in effect for transactions in the
ordinary course of a trade or business if such transactions
are pursuant to a binding contract between the
taxpayer and an unrelated person and the contract was
in effect on September 17, 2003 and at all times thereafter.
Provide deduction for domestic manufacturing.—
The 2004 jobs creation act provided a deduction
equal to a portion of the taxpayer’s qualified production
activities income, phased in over six years.
When fully effective for taxable years beginning after
2009, the deduction would be nine percent (three percent
for taxable years 2005 and 2006 and six percent
for taxable years 2007, 2008, and 2009) of the lesser
of: (1) qualified production activities income for the taxable
year; or (2) taxable income (determined without
regard to the deduction) for the year. However, the
deduction for a taxable year generally is limited to an
amount equal to 50 percent of W–2 wages of the employer
for the taxable year.
In general, qualified production activities income
equals domestic production gross receipts in excess of:
(1) the cost of goods sold that are allocable to such
receipts; (2) other deductions, expenses, or losses directly
allocable to such receipts; and (3) a proper share
of other deductions, expenses, and losses that are not
directly allocable to such receipts or another class of
income. Domestic production gross receipts generally
are gross receipts derived from: (1) any sale, lease, rental,
license, exchange, or other disposition of (a) qualifying
production property (generally any tangible personal
property, computer software or sound recordings)
manufactured, produced, grown, or extracted by the
taxpayer in whole or in significant part within the
United States; (b) any qualified film produced by the
taxpayer (generally any motion picture film or videotape
for which 50 percent or more of the total compensation
relating to the production of such film is
for specified services performed in the United States);
and (c) electricity, natural gas, or potable water produced
by the taxpayer in the United States; (2) construction
activities performed in the United States; or
(3) engineering or architectural services performed in
the United States for construction projects in the
United States. In general, domestic production gross
receipts do not include any receipts derived from: (1)
the sale of food or beverages prepared at a retail establishment;
(2) the transmission or distribution of electricity,
natural gas, or potable water; or (3) the leasing,
licensing, or rental of property used by a related person.
Business Tax Incentives
Extend temporarily increased expensing for
small businesses.—In lieu of depreciation, a small
business taxpayer may elect to deduct up to $25,000
271 17. FEDERAL RECEIPTS
of the cost of qualifying property placed in service during
the taxable year. Qualifying property includes certain
tangible property acquired by purchase for use in
the active conduct of a trade or business. The amount
that a taxpayer can expense is reduced by the amount
by which the taxpayer’s cost of qualifying property exceeds
$200,000. The deduction is also limited in any
taxable year by the amount of taxable income derived
from the active conduct by the taxpayer of any trade
or business. An election to expense these costs generally
must be made on the taxpayer’s original return for
the taxable year to which the election relates, and can
be revoked only with the consent of the IRS Commissioner.
Effective for taxable years 2003 through 2005,
the 2003 jobs and growth tax cut: (1) increased the
maximum deduction to $100,000; (2) increased the annual
investment limit to $400,000; (3) expanded the
definition of qualifying property to include off-the-shelf
computer software; and (4) allowed taxpayers to make
or revoke expensing elections on amended returns without
the consent of the IRS Commissioner. The 2003
jobs and growth tax cut also provided for the indexation
of the maximum deduction amount and investment
limit, effective for taxable years beginning after 2003
and before 2006. The 2004 jobs creation act extended
for two years, effective for taxable years 2006 and 2007,
the changes provided in the 2003 jobs and growth tax
cut.
Modify recovery period for depreciation of certain
leasehold improvements.—A taxpayer generally
must capitalize the cost of property used in a trade
or business and recover such cost over time through
annual deductions for depreciation or amortization.
Tangible property generally is depreciated under the
modified accelerated cost recovery system (MACRS).
Under this system, depreciation is determined by applying
specified recovery periods, placed-in-service conventions,
and depreciation methods to the cost of various
types of depreciable property. Depreciation allowances
for improvements made on leased property are determined
under MACRS, even if the recovery period assigned
to the property is longer than the term of the
lease. Therefore, if the leasehold improvement constitutes
an addition or improvement to nonresidential
real property, the improvement is depreciated using the
straight-line method over a 39-year recovery period, beginning
at the midpoint of the month the addition or
improvement was placed in service. The 2004 jobs creation
act reduced the recovery period for qualified leasehold
improvement property from 39 years to 15 years,
effective for such property placed in service after October
22, 2004 and before January 1, 2006. For purposes
of this provision, qualified leasehold improvement property
is defined as any improvement to an interior portion
of a building that is nonresidential real property:
(1) made under or pursuant to a lease either by the
lessee (or sublessee) or by the lessor of that portion
of the building occupied exclusively by the lessee (or
sublessee), and (2) placed in service more than three
years after the date the building was first placed in
service. Qualified leasehold improvement property does
not include any improvement for which the expenditure
is attributable to the enlargement of the building, any
elevator or escalator, any structural component benefiting
a common area, or the internal structural framework
of the building.
Modify recovery period for depreciation of certain
restaurant improvements.—Under MACRS, the
cost of nonresidential real property is depreciated using
the straight-line method over a 39-year recovery period.
The 2004 jobs creation act reduced the recovery period
for qualified restaurant property to 15 years, effective
for such property placed in service after October 22,
2004 and before January 1, 2006. For purposes of this
provision, qualified restaurant property is defined as
any improvement to a building if (1) such improvement
is placed in service more than three years after the
date such building was first placed in service and (2)
more than 50 percent of the building’s square footage
is devoted to the preparation of, and seating for onpremises
consumption of, prepared meals.
Modify income forecast method of depreciation.—
Under the income forecast method, a property’s
depreciation deduction for a taxable year is determined
by multiplying the adjusted basis of the property (determined
before adjustments for depreciation) by a fraction,
the numerator of which is the income generated
by the property during the year and the denominator
of which is the total forecasted or estimated income
expected to be generated prior to the close of the tenth
taxable year after the year the property was placed
in service. Any costs that are not recovered by the
end of the tenth taxable year after the property was
placed in service may be taken into account as depreciation
in such year. The cost of certain motion picture
films, sound recordings, copyrights, books, and patents
are eligible to be recovered using the income forecast
method. The 2004 jobs creation act stated that, solely
for purposes of computing the allowable deduction for
property under the income forecast method of depreciation,
participations and residuals may be included in
the adjusted basis of the property beginning in the
year such property is placed in service, but only if such
participations and residuals relate to income to be derived
from the property before the close of the tenth
taxable year following the year the property is placed
in service. Participations and residuals are defined as
costs the amount of which, by contract, varies with
the amount of income earned in connection with such
property. This act also stated that: (1) the amount of
income from the property to be taken into account
under the income forecast method is the gross income
from such property (disregarding distribution costs),
and (2) on a property-by-property basis, the taxpayer
may deduct the costs of participations and residuals
as they are paid, rather than accounting for them as
a capitalized cost under the income forecast method.
These changes were effective for property placed in
service after October 22, 2004.
272 ANALYTICAL PERSPECTIVES
Reform and simplify taxation of S Corporations.—
In general, S corporations do not pay Federal
income tax. Instead, an S corporation passes through
its items of income and loss to its shareholders. Each
shareholder separately accounts for his or her share
of these items on his or her individual income tax return.
A small business corporation (except those designated
ineligible under current law) may elect to be
an S corporation with the consent of all its shareholders,
and may terminate its election with the consent
of shareholders holding more than 50 percent of
the stock. Under prior law, a small business corporation
was defined as a domestic corporation with only one
class of stock and no more than 75 shareholders, all
of whom were individuals (and certain trusts, estates,
charities, and qualified retirement plans) and citizens
or residents of the United States. For purposes of the
75 shareholder limitation, a husband and wife were
treated as one shareholder. Ineligible small businesses
included financial institutions using the reserve method
of accounting for bad debts, insurance companies, corporations
electing the benefits of the Puerto Rico and
possessions tax credit, and Domestic International
Sales Corporations (DISCs) or former DISCs. The 2004
jobs creation act contained a number of provisions, generally
effective for taxable years beginning after December
31, 2004, that eased S corporation eligibility requirements
and affected the tax treatment of some S
corporation shareholders. Major changes: (1) increased
the limitation on the number of shareholders from 75
to 100; (2) allowed all members of a family to be treated
as one shareholder for purposes of the limitation on
the number of shareholders; (3) allowed an individual
retirement account (IRA) to be a shareholder of a bank
S corporation, but only to the extent of stock held on
October 22, 2004; (4) provided for the transfer of suspended
losses when stock in an S corporation is transferred
between spouses or as part of a divorce; and
(5) required the filing of information returns by qualified
subchapter S subsidiaries.
Repeal certain excise taxes on rail diesel fuel
and inland waterway barge fuels.—Under prior law,
diesel fuel used in trains and fuels used in barges operating
on the designated inland waterways system were
subject to a permanent 4.3-cents-per-gallon excise tax
that was deposited in the General Fund of the Treasury.
Under the 2004 jobs creation act, this tax declined
to 3.3 cents per gallon on January 1, 2005, will decline
to 2.3 cents per gallon on July 1, 2005, and will be
repealed effective January 1, 2007.
Provide tax credit for railroad track maintenance.—
The 2004 jobs creation act provided a 50-percent
business tax credit for qualified expenditures incurred
by eligible taxpayers for railroad track maintenance.
The credit, which is effective for expenditures
paid or incurred during taxable years beginning after
December 31, 2004 and before January 1, 2008, is limited
to the product of $3,500 times the number of miles
of railroad track owned or leased by an eligible taxpayer
as of the close of the taxable year. Qualified
expenditures are amounts expended for maintaining
railroad track (including roadbed, bridges, and related
track structures) owned or leased as of January 1, 2005,
by eligible taxpayers. Eligible taxpayers include: (1) certain
types of railroads and (2) a person who transports
property using the rail facilities of such railroads, or
anyone who furnishes railroad-related property or services
to such a person.
Suspend temporarily occupational taxes related
to distilled spirits, wine and beer.—Special occupational
taxes are imposed on producers and others engaged
in the marketing of distilled spirits, wine, and
beer. These taxes are payable annually, on July 1 of
each year. Under the 2004 jobs creation act, these occupational
taxes were suspended for the three-year period,
July 1, 2005 through June 30, 2008.
Tax Relief for Agriculture and Small
Manufacturers
Restructure incentives for alcohol-blended
fuels.—Under prior law an income tax credit and an
excise tax exemption were provided for ethanol and
renewable source methanol used as a fuel. In general,
the income tax credit for ethanol was 52 cents per
gallon, but small ethanol producers (those producing
less than 30 million gallons of ethanol per year) qualified
for a credit of 62 cents per gallon on the first
15 million gallons of ethanol produced in a year. A
credit of 60 cents per gallon was allowed for renewable
source methanol. As an alternative to the income tax
credit, blenders of alcohol fuels could claim a gasoline
tax exemption of 52 cents for each gallon of ethanol
and 60 cents for each gallon of renewable source methanol
blended into qualifying gasohol. The rates for the
ethanol income tax credit and exemption were each reduced
by 1 cent per gallon in 2005. The income tax
credit was scheduled to expire on December 31, 2007
and the excise tax exemption was scheduled to expire
on September 30, 2007. Neither the credit nor the exemption
applied during any period in which motor fuel
taxes dedicated to the Highway Trust Fund were limited
to 4.3 cents per gallon.
Under prior law, 2.5 cents per gallon of the tax on
alcohol-blended fuels was retained in the General Fund
of the Treasury, 0.1 cent per gallon was deposited in
the Leaking Underground Storage Tank (LUST) Trust
Fund, and the balance of the reduced rate was deposited
in the Highway Trust Fund.
The incentives for alcohol-blended fuels provided
under prior law were restructured under the 2004 jobs
creation act. The major changes provided in the act:
(1) repealed the gasoline excise tax exemption for most
alcohol-blended fuels, thereby levying the full amount
of the gasoline excise tax on alcohol-blended fuels sold
or used after December 31, 2004; (2) replaced the gasoline
excise tax exemption for alcohol-blended fuels with
two refundable excise tax credits (the alcohol fuel mixture
credit and the biodiesel mixture credit), to be paid
273 17. FEDERAL RECEIPTS
from the General Fund of the Treasury rather than
from the Highway Trust Fund; (3) provided that the
full amount of the excise tax on alcohol-blended fuels
(except for the 0.1 cent per gallon deposited in the
LUST Trust Fund) is deposited in the Highway Trust
Fund, effective for fuels sold or used after September
30, 2004; (4) extended the prior law income tax credit
for alcohol-blended fuels through December 31, 2010;
and (5) provided a new income tax credit for biodiesel
fuel and biodiesel fuel mixtures. The refundable alcohol
fuel mixture excise tax credit, effective for fuels sold
or used after December 31, 2004 and before January
1, 2011, is 51 cents for each gallon of ethanol (60 cents
for each gallon of renewable source methanol) used by
a taxpayer in producing an alcohol fuel mixture. The
refundable biodiesel mixture excise tax credit, effective
for fuels sold or used after December 31, 2004 and
before January 1, 2007, is 50 cents for each gallon
of biodiesel fuel ($1.00 for each gallon of agri-biodiesel
fuel) used by a taxpayer in producing a qualified biodiesel
fuel mixture. The income tax credit for biodiesel
fuel and biodiesel fuel mixtures is effective for fuels
sold or used after December 31, 2004 and before January
1, 2007, and is 50 cents for each gallon of biodiesel
fuel ($1.00 for each gallon of agri-biodiesel fuel) that
the taxpayer uses as fuel, sells at retail and places
in the fuel supply tank of the customer’s vehicle, or
uses in producing a qualified biodiesel fuel mixture.
Provide tax incentives for agriculture.—The 2004
jobs creation act provided a number of tax incentives
to taxpayers engaged in the agriculture business, which
included: (1) special rules for the recognition of gain
from the sale of livestock sold on account of drought,
flood, or other weather-related conditions; (2) modifications
allowing the small producer ethanol tax credit
to be passed through to members of a cooperative; (3)
extension of income averaging to taxpayers engaged in
the trade or business of fishing; (4) AMT relief for farmers
and fishermen using income averaging; and (5) expensing
of up to $10,000 of qualified reforestation expenditures.
Provide tax incentives for small manufacturers.—
The 2004 jobs creation act provided a number
of tax incentives to small manufacturers, which included:
(1) modification of the treatment of net income
from publicly traded partnerships as qualifying income
for regulated investment companies; (2) simplification
of the excise tax imposed on bows and arrows (with
further modifications provided in legislation modifying
the taxation of arrows and bows signed by the President
on December 23, 2004); (3) reduction of the excise
tax imposed on fishing tackle boxes from ten percent
to three percent; (4) repeal of the three-percent excise
tax imposed on sonar devices suitable for finding fish;
(5) extension of the placed in service date for bonus
depreciation for certain aircraft; (6) expensing and credits
allowed with respect to qualifying capital costs incurred
by small business refiners in complying with
the Highway Diesel Fuel Sulfur Control Requirements
of the Environmental Protection Agency; and (7) modification
of the qualified small issue bond capital expenditure
limit.
Tax Reform and Simplification for U.S. Business
Modify foreign tax credit.—Subject to various limitations,
U.S. taxpayers may credit foreign taxes paid
or accrued against U.S. tax on foreign-source income.
The 2004 jobs creation act made several changes to
the foreign tax credit rules. The major changes included
the following:
Modify foreign tax credit carryovers.—Under
prior law, the amount of creditable taxes paid or
accrued in any taxable year that exceeded the foreign
tax credit limitation in that particular year
was permitted to be carried back to the two immediately
preceding taxable years and carried forward
five taxable years and credited to the extent
that the taxpayer otherwise had excess foreign tax
credit limitation for those years. The 2004 jobs
creation act extended the excess foreign tax credit
carryforward period to ten years and limited the
carryback period to one year. In general, the extended
carryforward period is effective for excess
foreign taxes that can be carried forward to any
taxable year ending after October 22, 2004; the
shortened carryback period is effective for excess
foreign tax credits arising in taxable years beginning
after October 22, 2004.
Modify interest expense allocation rules.—
To determine taxable income for foreign tax credit
limitation purposes, a taxpayer must allocate and
apportion deductions between U.S.-source and foreign-
source income. Interest expense of a U.S. affiliated
group is allocated and apportioned between
U.S.-source and foreign-source income
based on the group’s total U.S. and foreign assets.
All members of a U.S.-affiliated group of corporations
generally are treated as a single corporation
and allocation of interest expense is made on the
basis of the assets of such members, ignoring the
debt and interest expense of foreign subsidiaries.
The 2004 jobs creation act modified the interest
allocation rules by providing a one-time election.
Under the election, foreign-source income would
be determined by allocating and apportioning interest
expense in an amount equal to the excess
(if any) of (1) the worldwide affiliated group’s total
interest expense multiplied by the ratio of foreign
assets of the worldwide affiliated group to total
assets, over (2) the interest expense of foreign
members of the worldwide affiliated group. These
changes in the interest expense allocation rules
are effective for taxable years beginning after December
31, 2008.
Recharacterize overall domestic loss.—A
taxpayer’s losses from foreign sources in excess
of income from foreign sources (an overall foreign
loss, or OFL) may offsets U.S.-source taxable income,
thereby reducing the effective tax rate on
274 ANALYTICAL PERSPECTIVES
U.S.-source income. To address this consequence,
to the extent that an OFL offsets U.S.-source taxable
income, foreign-source income in succeeding
years must be recharacterized as U.S.-source income
for foreign tax credit limitation purposes.
This OFL recapture rule has the effect of reducing
the foreign tax credit limitation in one or more
years following an OFL year, thereby reducing the
amount of U.S. tax that can be offset by the foreign
tax credit in those years. Under prior law,
there was no symmetrical treatment for overall
domestic losses that offset foreign source income
in a taxable year. The 2004 jobs creation act provided
that to the extent U.S.-source losses offset
foreign-source taxable income, U.S.-source income
in succeeding years is recharacterized as foreignsource
income for foreign tax credit limitation purposes
in a manner similar to the OFL recapture
rules. These changes with respect to overall domestic
losses are effective for taxable years beginning
after December 31, 2006.
Apply look-through approach to dividends
paid by a 10/50 company.—Special rules apply
in the case of dividends received from a foreign
corporation in which the taxpayer owns at least
10 percent of the stock by vote and which is not
a controlled foreign corporation (a ‘‘10/50 company’’).
Under prior law, dividends paid by a 10/
50 company out of earnings and profits accumulated
in taxable years after December 31, 2002
received ‘‘look-through’’ treatment based on the
character of the underlying earnings. In contrast,
dividends paid by a 10/50 company out of earnings
and profits accumulated in taxable years before
January 1, 2003 were subject to special basket
rules. Effective for taxable years beginning after
December 31, 2002, the 2004 jobs creation act generally
applied the look-through approach to dividends
paid by a 10/50 company, regardless of the
year in which the earnings and profits out of
which the dividends were paid were accumulated.
Consolidate foreign tax credit categories of
income.—Under prior law, the foreign tax credit
limitation rules were applied separately for nine
statutory limitation categories or ‘‘baskets.’’ Effective
for taxable years beginning after December
31, 2006, the 2004 jobs creation act generally reduced
the number of foreign tax credit limitation
categories from nine to two, with the foreign tax
credit limitation rules applied separately to passive
income and general income.
Provide AMT relief.—Taxpayers are permitted
to reduce their AMT liability by an AMT foreign
tax credit. Under prior law, the AMT foreign tax
credit was limited to 90 percent of the pre-credit
AMT. The 2004 jobs creation act repealed the 90-
percent limitation on the use of the AMT foreign
tax credit, effective for taxable years beginning
after December 31, 2004.
Modify subpart F rules.—Subpart F rules require
U.S. shareholders with a 10-percent or greater interest
in a controlled foreign corporation (CFC) to currently
include in income for U.S. tax purposes their pro-rata
share of the subpart F income of the CFC, whether
or not such income is currently distributed to the shareholders.
The 2004 jobs creation act made changes to
the subpart F rules, generally effective for taxable years
beginning after December 31, 2004. Principal changes
included the following: (1) The exceptions to the definition
of U.S. property were expanded to include: (a) securities
acquired and held by a CFC in the ordinary
course of its trade or business as a dealer in securities
and (b) obligations acquired by the CFC from a U.S.
person who is not a domestic corporation and is not
a U.S. shareholder of the CFC or a partnership, estate,
or trust in which the CFC or any related person is
a partner, beneficiary or trustee. (2) In general, the
sale of a partnership interest by a CFC would be treated
as a sale of a proportionate share of partnership
assets attributable to such interest. (3) The requirements
for gains or losses on commodities hedging transactions
to be excluded from the definition of foreign
personal holding company income were modified. (4)
The temporary exceptions from foreign personal holding
company income and foreign base company services income
provided for active financing income were modified.
(5) The subpart F rules relating to foreign base
company shipping income were repealed, and a safe
harbor was provided to treat certain rents derived from
leasing an aircraft or vessel in foreign commerce as
active income. (6) For purposes of the exception to the
definition of U.S. property, ‘‘banking business’’ was defined.
In addition, the anti-deferral rules applicable to
foreign personal holding companies and to foreign investment
companies were repealed; various other antideferral
rules were consolidated and modified.
Provide incentive to reinvest foreign earnings in
the United States.—Income from foreign operations
conducted by foreign corporate subsidiaries generally
is subject to U.S. tax when the income is distributed
as a dividend to the domestic corporation. Until such
repatriation, the U.S. tax on such income generally is
deferred. Under the 2004 jobs creation act, certain dividends
received by a U.S. corporation from controlled
foreign corporations were provided an 85-percent dividends-
received deduction. Various restrictions apply to
determine whether dividends are eligible for the deduction,
including a requirement that the funds be invested
in the United States. At the taxpayer’s election, the
deduction is available for dividends received either during
the taxpayer’s first taxable year beginning on or
after October 22, 2004, or during the taxpayer’s last
taxable year beginning before such date. Dividends received
after the election period will be taxed in the
normal manner under present law.
275 17. FEDERAL RECEIPTS
State and Local General Sales Taxes
Provide optional temporary deduction for State
and local general sales taxes.—An itemized deduction
is permitted for certain State and local taxes, including
individual income taxes, real property taxes,
and personal property taxes. Under prior law, a deduction
was not provided for State and local general sales
taxes (a tax imposed at one rate with respect to the
sale at retail of a broad range of classes of items).
Under the 2004 jobs creation act, effective for taxable
years beginning after December 31, 2003 and before
January 1, 2006, a taxpayer would be allowed to elect
to take an itemized deduction for State and local general
sales taxes in lieu of the itemized deduction for
State and local income taxes. The allowable deduction
could be determined by tallying the amount of general
State and local sales taxes paid on accumulated receipts,
or from tables prescribed by the Secretary of
the Treasury. A taxpayer tallying the amount of taxes
paid would be able to include taxes imposed at one
rate on the sale at retail of a broad range of classes
of items, as well as taxes imposed at a lower rate on
the sale at retail of food, clothing, medical supplies,
and motor vehicles. Taxes imposed at a higher rate
on the sale of motor vehicles would be deductible, but
only up to the amount that would have been imposed
at the general sales tax rate. The tables prescribed
by the Secretary of the Treasury would be based on
the average consumption of taxpayers on a State-by-
State basis and would take into account filing status,
number of dependents, adjusted gross income, and rates
of State and local general sales taxes. Taxpayers who
used the tables would be allowed to add to the table
amounts general sales taxes paid with respect to purchases
of motor vehicles, boats, and other items specified
by the Secretary that would not be reflected in
the tables.
Tobacco Reform
Reform the tobacco program.—Under prior law,
the Federal tobacco program had two main components:
a supply management component and a price support
component. The supply management component limited
and stabilized the quantity of tobacco marketed by
farmers through marketing quotas. Because marketing
quotas alone could not always guarantee tobacco prices,
Federal support prices were established and guaranteed
through the mechanism of nonrecourse loans available
on each farmer’s marketed crop. In 1982 legislation
was enacted to ensure that the nonrecourse loan program
was run at no-net-cost to the Federal government.
The 2004 jobs creation act repealed all aspects of
the Federal tobacco program, effective for crop years
beginning in 2005. Under the reformed program, quota
holders and producers of quota tobacco (owners, operators,
landlords, tenants, or sharecroppers who shared
in the risk of production) would be entitled to receive
payments in exchange for the termination of the quotas
and price supports of prior law. A base quota level
would be established for each tobacco quota holder and
each producer. Eligible tobacco quota holders would receive
$7 per pound on their basic quota allotment, paid
in equal installments over 10 years. Eligible producers
would receive $1 to $3 per pound, depending on the
extent of their quota-related activity in the 2002-2004
marketing years, multiplied by their base quota level,
paid in equal installments over 10 years.
Assessments would be imposed quarterly on each
manufacturer and importer of tobacco products sold in
the United States, effective for fiscal years 2005
through 2014. The assessments, which would be sufficient
to fund the payments to quota holders and producers
and other expenditures associated with the program,
would be based on the class of tobacco product
(cigarettes, snuff, chewing tobacco, pipe tobacco, rollyour-
own tobacco and cigars) and market share.
Miscellaneous Provisions
Permit stock life insurance companies to make
tax-free distributions from policyholder surplus
accounts.—Policyholder surplus accounts of stock life
insurance companies were established legislatively and
represent earnings of such companies that were
untaxed under prior law. Any direct or indirect distribution
to shareholders from an existing policyholder
surplus account of a stock life insurance company is
subject to tax at the corporate rate in the taxable year
of the distribution. Any distribution to shareholders is
treated as made: (1) first out of the shareholder surplus
account, to the extent thereof; (2) then out of the policyholder
surplus account, to the extent thereof; and (3)
finally, out of other accounts. A company may also elect
to subtract from its policyholder surplus account any
amount as of the close of a taxable year. For stock
life insurance companies, the 2004 jobs creation act
temporarily suspended the taxation of distributions to
shareholders from an existing policyholder surplus account.
The act also reversed the order in which distributions
reduce the various accounts, so that distributions
would be treated as: (1) first made out of the
policyholder surplus account, to the extent thereof; (2)
then out of the shareholder surplus account, to the
extent thereof; and (3) lastly out of other income. These
changes were effective for taxable years beginning after
December 31, 2004 and before January 1, 2007.
Modify method of accounting for naval shipbuilding
contracts.—Taxpayers generally must use
the percentage-of-completion method to determine taxable
income from long-term contracts. However, an exception
exists for certain ship construction contracts,
which may be accounted for using the 40/60 percentageof-
completion/capital cost method (PCCM). Under the
40/60 PCCM, 40 percent of the taxpayer’s long-term
contract income is subject to the percentage-of-completion
method, the remaining 60 percent must be reported
by consistently using the taxpayer’s exempt contract
method. Permissible exempt contract methods include
the percentage of completion method, the exempt-con276
ANALYTICAL PERSPECTIVES
tract percentage-of-completion method, and the completed
contract method. The 2004 jobs creation act allowed
qualified naval ship contracts to be accounted
for using the 40/60 PCCM during the first five taxable
years of the contract. The cumulative reduction in tax
resulting from the provision over the five-year period
must be recaptured and included in the taxpayer’s tax
liability in the sixth year. This change was effective
for contracts for which construction commenced after
October 22, 2004.
Defer gain on the disposition of electric transmission
property.—Gain on the sale or other disposition
of property is ordinarily recognized in the year
of sale. The 2004 jobs creation act permitted the gain
from certain sales of electric transmission property to
be recognized ratably over eight years beginning with
the year of sale, except to the extent proceeds of the
sale are not used to purchase replacement utility property.
To qualify for this treatment, the transmission
property must be sold to an independent transmission
company after October 22, 2004 and before January
1, 2007, and the proceeds from the sale must be used
to purchase replacement utility property. To the extent
the proceeds are not used to purchase replacement utility
property, gain is recognized in the year of the sale.
Expand resources eligible for the tax credit for
producing electricity from certain sources.—Taxpayers
are provided a 1.5-cent-per-kilowatt-hour tax
credit, adjusted for inflation after 1992, for electricity
produced from wind, closed-loop biomass (organic material
from a plant grown exclusively for use at a qualified
facility to produce electricity), and poultry waste.
To qualify for the credit under prior law, the electricity
had to be sold to an unrelated third party and had
to be produced during the first 10 years of production
at a qualified facility placed in service before January
1, 2006 and after December 31, 1999 for a poultry
waste facility, after December 31, 1992 for a closedloop
biomass facility and after December 31, 1993 for
a wind energy facility. Under the 2004 jobs creation
act, the credit was expanded to apply to electricity from
closed-loop biomass produced at a facility originally
placed in service before December 31, 1992 and modified
to use closed-loop biomass to co-fire with coal, other
biomass, or coal and other biomass before January 1,
2006. The credit for electricity produced by such facilities
would be equal to the otherwise allowable credit
multiplied by the ratio of the thermal content of the
closed-loop biomass fuel burned in the facility to the
thermal content of all fuels burned in the facility. The
2004 jobs creation act also expanded the credit to apply
to the following new qualifying sources: (1) open-loop
biomass (other than agricultural livestock waste nutrients)
used at a facility placed in service before January
1, 2006; (2) municipal solid waste, agricultural livestock
waste nutrients, geothermal energy, solar energy, small
irrigation power, landfill gas, and trash combustion
used at a qualifying facility placed in service after October
22, 2004 and before January 1, 2006; and (3) refined
coal produced at a qualifying facility placed in
service after October 22, 2004 and before January 1,
2009. For facilities using open-loop biomass, including
agricultural livestock waste nutrients, geothermal energy,
solar energy, small irrigation power, landfill gas,
or trash combustion, the credit period was reduced from
ten years to five years and (except for geothermal energy
and solar energy) the credit rate was reduced by
half. Facilities using refined coal could claim the credit
at a rate of $4.375 per ton (indexed for inflation).
Revenue Provisions
Modify tax treatment of corporate inversions.—
The 2004 jobs creation act addressed ‘‘inversion transactions,’’
which occur when a U.S. corporation reincorporates
in a foreign jurisdiction and replaces the U.S.
parent corporation of a multinational corporate group
with a foreign parent corporation. The 2004 jobs creation
act included provisions that addressed two types
of inversion transactions. These changes generally applied
to taxable years ending after March 4, 2003, effective
for companies (and certain partnerships) inverting
after that date:
Inversions with at least 80 percent identity
of stock ownership.—An inverting company generally
would continue to be taxed as a U.S. company
(that is, the inversion essentially would be
disregarded) if: (1) it acquired substantially all the
property of a U.S. corporation, (2) 80 percent or
more of its stock was held by former shareholders
of the U.S. corporation, and (3) its ‘‘expanded affiliated
group’’ did not have substantial business
activities in the country in which it was organized.
Inversions with at least 60 percent (but less
than 80 percent) identity of stock ownership.—
Any inversion gain recognized by an inverting
U.S. company generally would be taxed
and the use of tax attributes such as net operating
losses (NOLs) and foreign tax credits would be
limited if: (1) it acquired substantially all the
property of a U.S. corporation, (2) 60 percent or
more of its stock was held by former shareholders
of the U.S. corporation and (3) its ‘‘expanded affiliated
group’’ did not have substantial business activities
in the country in which it was organized.
Revise taxation of individuals who relinquish
U.S. citizenship or terminate long-term residency.—
An individual who gives up U.S. citizenship
or terminates long-term U.S. residency to avoid tax is
subject to an alternative tax regime for 10 years following
loss of citizenship or termination of residency.
The 2004 jobs creation act: (1) eliminated the subjective
‘‘principal purpose’’ standard and established objective
standards for determining whether former citizens or
long-term residents are subject to the alternative tax
regime; (2) provided tax-based rules for determining
when an individual is no longer a U.S. citizen or longterm
resident; (3) imposed full U.S. taxation on individuals
subject to the alternative tax regime who return
277 17. FEDERAL RECEIPTS
to the U.S. for extended periods; (4) imposed the U.S.
gift tax on gifts of stock of certain closely-held foreign
corporations that hold U.S.-situated property; and (5)
required individuals subject to the alternative tax regime
to file an annual return. These changes applied
to individuals who relinquished citizenship or terminated
residency after June 3, 2004.
Combat abusive tax avoidance transactions.—Although
the vast majority of taxpayers and practitioners
do their best to comply with the law, some actively
promote or engage in transactions structured to generate
tax benefits never intended by Congress. Such
abusive transactions harm the public fisc, erode the
public’s respect for the tax laws, and consume limited
IRS resources. The 2004 jobs creation act contained
several provisions designed to curtail the use of abusive
tax avoidance transactions. The major changes included:
(1) the imposition of new or increased penalties
on taxpayers who fail to disclose listed or reportable
transactions, report an interest in a foreign financial
account, or accurately report a listed or reportable
transaction; (2) the imposition of new or increased penalties
on tax shelter promoters who make false or
fraudulent claims to promote abusive tax avoidance
transactions, fail to maintain investor lists, or fail to
disclose listed or reportable transactions; (3) modification
of actions to enjoin conduct related to tax shelters
and reportable transactions; (4) expansion of the tax
shelter exception for Federal practitioner privilege to
apply to all tax shelters; (5) extension of the statute
of limitations for unreported listed transactions; and
(6) denial of a deduction for interest paid or accrued
on any portion of an underpayment of tax attributable
to an undisclosed listed transaction or an undisclosed
reportable avoidance transaction.
Modify taxation of partnerships.—Although a
partnership is a tax-reporting entity that must file an
annual partnership return, a partnership does not pay
Federal income tax. Instead, income or loss ‘‘flows
through’’ to the partners who are each taxed on their
distributive share of partnership taxable income. When
filing their Federal income tax return, each partner
must take into account their distributive share of certain
items of partnership income, gain, loss, deduction,
or credit. A partner generally is not taxed on distributions
of cash or property received from the partnership,
except to the extent that any money distributed exceeds
the partner’s adjusted basis in his partnership interest
immediately before the distribution. Taxable gain can
also result from distributions of property that were contributed
to the partnership with a fair market value
in excess of the adjusted basis (property with a builtin
gain) and from property distributions characterized
as sales and exchanges. The 2004 jobs creation act included
several provisions that affect the calculation and
allocation of partnership income and ownership interests.
The major changes, which generally were applicable
with respect to contributions of property, transfers
of partnership interests and distributions of partnership
property after October 22, 2004, included the following:
Disallow certain partnership loss transfers
and modify basis adjustments.—Built-in losses
with respect to contributed property would be
taken into account only by the contributing partner
and not by other partners. In determining
the amount of items allocated to partners other
than the contributing partner, the basis of the
contributed property would be the fair market
value at the time of contribution. If the contributing
partner’s partnership interest were transferred
or liquidated, the partnership’s adjusted
basis in the property would be based on the fair
market value at the time of contribution, and the
built-in loss would be eliminated.
Modify basis adjustment in stock held by
a partnership in a corporate partner.—In applying
the basis allocation rules to a distribution
in liquidation of a partner’s interest, a partnership
would be precluded from decreasing the basis of
corporate stock of a partner or a related person.
Any decrease in basis that would have otherwise
been allocated to the stock would be allocated to
other partnership assets. If the decrease in basis
exceeded the basis of the other partnership assets,
then the gain would be recognized by the partnership
in the amount of the excess.
Limit the transfer and importation of builtin
losses.—The basis of property with a net builtin
loss imported into the U.S. in a tax-free incorporation
or reorganization from persons not subject
to U.S. tax would be its fair market value,
thereby eliminating the built-in loss.
Reform the tax treatment for leasing arrangements
with tax-indifferent parties.—Certain leasing
arrangements (often referred to as sale-in/lease-out or
SILO arrangements) involving tax-indifferent parties
(including governments, charities, and foreign entities)
do not provide financing related to the construction,
purchase or refinancing of productive assets. Rather,
they involve the payment of an accommodation fee by
a U.S. taxpayer to the tax-indifferent party in exchange
for the right of the U.S. taxpayer to claim tax benefits
from the purported tax ownership of the property.
These arrangements usually result in no change in the
tax-indifferent party’s use or operation of the property,
and are designed to ensure that the U.S. taxpayer bears
only limited economic risk. The U.S. taxpayer enjoys
substantial current tax deductions, while postponing
the recognition of taxable income well into the future.
The 2004 jobs creation act limited a taxpayer’s annual
deductions or losses related to a lease with a tax-indifferent
party by: (1) modifying the recovery period of
certain property (qualified technological equipment,
computer software and certain intangibles) leased to
a tax-exempt entity to the longer of the property’s assigned
class life or 125 percent of the lease term; (2)
altering the definition of lease term for all property
leased to a tax-exempt entity to include the time period
278 ANALYTICAL PERSPECTIVES
a lessee is under a service contract or similar obligation
period; and (3) establishing rules to limit deductions
associated with such leases to the net income generated
from the lease unless the lease meets certain specified
criteria. These rules generally were effective with respect
to leases entered into after March 12, 2004, and
did not apply to short-term leases of five or fewer years,
with a modification for short-term leases of qualified
technological equipment. Disallowed deductions could
be carried forward and treated as deductions related
to the lease in the next taxable year, subject to the
same limitations, or taken when the taxpayer completely
disposed of its interest in the leased property.
Indian tribes and their instrumentalities were added
to the definition of tax-exempt entities required to depreciate
leased property on a straight line basis over
a recovery period equal to the longer of the property’s
assigned class life or 125 percent of the lease term.
Improve tax administration.—A number of provisions
included in the 2004 jobs creation act improved
tax administration. The major provisions: (1) clarified
the rules for payment of estimated tax with respect
to tax attributable to a deemed asset sale; (2) clarified
that the exclusion for gain on the sale or exchange
of a principal residence does not apply in cases where
the principal residence was acquired in a like-kind exchange
in which any gain was not recognized within
the prior five years; (3) allowed taxpayers to deposit
cash with the Internal Revenue Service (IRS) that could
subsequently be used to pay an underpayment of income,
gift, estate, generation-skipping, or certain excise
taxes; (4) authorized the IRS to enter into installment
agreements that provide for the partial payment of
taxes owed; (5) allowed the IRS to levy continuously
up to 100 percent of Federal payments to vendors; (6)
modified the rules regarding suspension of interest and
penalties where the IRS fails to contact the taxpayer;
(7) clarified the residence and income source rules relating
to U.S. possessions; (8) expanded the prior law provision
that disallowed a deduction for interest on certain
corporate convertible or equity-linked debt; (9) prevented
the mismatching of deductions for accrued interest
and original issue discount with their inclusion in
income in transactions with related foreign persons;
and (10) permitted private collection agencies to engage
in specific, limited activities to support IRS collection
efforts.
Reduce fuel tax evasion.—A number of provisions
included in the 2004 jobs creation act reduced fuel tax
evasion. These provisions, which generally were effective
after October 22, 2004, included: (1) codification
of the exemption from certain excise taxes for mobile
machinery vehicles; (2) modification of the definition
of an off-highway vehicle; (3) modification of the point
of taxation of aviation fuel from the sale by a producer
or importer to removal from a refinery or terminal,
or entry into the United States; (4) elimination of manual
dying of fuel and the imposition of penalties for
violation of fuel dying rules; (5) imposition of additional
registration requirements on bulk transfers of tax-exempt
fuel by pipeline, vessel or barge; (6) repeal of
the installment method for payment of the heavy highway
vehicle use tax and the elimination of reduced
rates for certain heavy highway vehicles; and (7) expansion
of taxable fuels to include transmix and diesel
fuel blend stocks.
Modify deductions for charitable contributions.—
The 2004 jobs creation act made several
changes to prior law rules regarding allowable deductions
for donations of contributed property. The major
changes included the following:
Modify rules for donations of patents and
other intellectual property.—In the initial year
of a contribution of a patent or other intellectual
property (other than certain copyrights or inventory),
the allowable deduction would be limited
to the lesser of the taxpayer’s basis in the donated
property or the fair market value of the property.
In addition, in that year and in future years, additional
amounts could be deducted based on a specified
percentage of the amount of royalties or other
revenue, if any, actually received by the donee
charity from the donated property. These additional
deductions would be allowed only to the
extent that the aggregate of the amounts calculated
exceeded the amount of the deduction
claimed in the initial year of the contribution. No
additional deductions would be permitted after the
expiration of the legal life of the patent or intellectual
property, or after the tenth anniversary of
the date the contribution was made. This change
was effective for contributions made after June
3, 2004.
Limit deductions for charitable contributions
of vehicles.—Under prior law, taxpayers
generally were permitted to deduct the fair market
value of donated vehicles, regardless of whether
the vehicle was actually used for a charitable
purpose or resold with the charity receiving some
revenue from the sale. Under the 2004 jobs creation
act, the amount of deduction for charitable
contributions of vehicles (generally including automobiles,
boats, and airplanes for which the
claimed value exceeded $500 and excluding inventory
property) would depend upon the use of the
vehicle by the donee organization. For vehicles
sold by the donee organization without any significant
intervening use or material improvement, the
amount of the deduction could not exceed the
gross proceeds from the sale. Deductions in excess
of $500 would have to be substantiated by a contemporaneous
written acknowledgement by the
donee. Strict penalties would be levied on donee
organizations knowingly furnishing false or fraudulent
acknowledgements. These changes were effective
for contributions made after December 31,
2004.
279 17. FEDERAL RECEIPTS
Require increased reporting for noncash
charitable contributions.—Under prior law, any
individual, closely-held corporation, personal service
corporation, or S corporation claiming a charitable
contribution deduction for a contribution of
property (other than publicly-traded securities) of
more than $5,000 ($10,000 in the case of nonpublicly
traded stock) was required to obtain a qualified
appraisal for the property. The 2004 jobs creation
act extended this requirement to all corporations.
In addition, the act required that all taxpayers
(whether an individual, a partnership, or
a corporation) provide a copy of the appraisal to
the IRS for deductions claimed in excess of
$500,000. The change was effective for contributions
made after June 3, 2004.
Modify treatment of nonqualified deferred compensation
plans.—Under prior law, the determination
of when amounts deferred under a nonqualified deferred
compensation arrangement were includible in the
gross income of the individual earning the compensation
depended on the facts and circumstances of the
arrangement. If the arrangement was unfunded, the
compensation generally was includible in income when
it was actually or constructively received. If the arrangement
was funded, then income was includible for
the year in which the individual’s rights were transferable
or not subject to a substantial risk of forfeiture.
Under the 2004 jobs creation act, all amounts deferred
under a nonqualified deferred compensation plan are
currently includible in the gross income of the individual
earning the compensation to the extent not subject
to a substantial risk of forfeiture and not previously
included in gross income, unless certain requirements
are satisfied. Such requirements include permissible
timing for deferral elections and distributions of deferred
amounts. If the requirements are not satisfied,
interest at the underpayment rate plus one percentage
point will be imposed on the underpayments that would
have occurred had the compensation been includible
in income when first deferred, or if later, when not
subject to a substantial risk of forfeiture. In addition,
the amount required to be included in income will be
subject to a 20-pecent additional tax. These changes
apply with respect to amounts deferred in taxable years
beginning after December 31, 2004.
Modify list of taxable vaccines.—A manufacturer’s
excise tax is imposed at the rate of 75 cents per dose
on the following vaccines routinely recommended for
administration to children: diphtheria, pertussis, tetanus,
measles, mumps, rubella, polio, haemophilus influenza
type B, hepatitis B, chicken pox, rotavirus
gastroenteritis, and streptococcus pneumoniae. The tax
applied to any vaccine that is a combination of vaccine
components equals 75 cents times the number of components
in the combined vaccine. Amounts equal to net
revenue from the excise tax are deposited in the Vaccine
Injury Compensation Trust Fund to finance compensation
awards under the Federal Vaccine Injury
Compensation Program for individuals who suffer certain
injuries following administration of the taxable
vaccines. The 2004 jobs creation act added any vaccine
against hepatitis A and any trivalent vaccine against
influenza to the list of taxable vaccines.
Extend IRS user fees.—The IRS has authority to
charge fees for written responses to questions from individuals,
corporations, and organizations related to their
tax status or the effects of particular transactions for
tax purposes. The 2004 jobs creation act extended authority
for these fees, which had expired effective with
requests made after December 31, 2004, through September
30, 2014.
Establish specific class lives for utility grading
costs.—A taxpayer is allowed a depreciation deduction
for the exhaustion, wear and tear, and obsolescence
of property that is used in a trade or business or held
for the production of income. For most tangible property
placed in service after 1986, the amount of the depreciation
deduction is determined under MACRS using
a statutorily prescribed depreciation method, recovery
period, and placed in service convention. Under prior
law, the cost of initially clearing and grading land improvements
were depreciated over a seven-year recovery
period under MACRS as assets for which no class life
was provided. Under the 2004 jobs creation act, depreciable
clearing and grading costs incurred to locate
transmission and distribution lines and pipelines were
assigned recovery periods of 20 years for electric utilities
and 15 years for gas utilities. These changes were
effective for property placed in service after October
22, 2004.
Modify treatment of start-up and organizational
expenditures.—Under prior law, at the election of the
taxpayer, start-up and organizational expenditures
could be amortized over a period of not less than 60
months, beginning with the month in which the trade
or business began. The 2004 jobs creation act allowed
a taxpayer to elect to deduct up to $5,000 of startup
and $5,000 of organizational expenditures in the
taxable year in which the trade or business began.
However, each $5,000 amount was reduced (but not
below zero) by the amount by which the cumulative
cost of start-up and organizational expenditures exceeded
$50,000, respectively. Start-up and organization expenditures
that were not deductible in the year in
which the trade or business began would be amortized
over a 15-year recovery period. The change was effective
for start-up and organizational expenditures incurred
after October 22, 2004. Start-up and organizational
expenditures incurred on or before October 22,
2004 would continue to be eligible to be amortized over
a period not less than 60 months. However, all startup
and organizational expenditures related to a particular
trade or business, whether incurred before or
after October 22, 2004, would be considered in determining
whether the cumulative cost of start-up or organizational
expenditures exceeded $50,000.
280 ANALYTICAL PERSPECTIVES
Limit deduction for certain entertainment expenses.—
In general, deductions are not allowed with
respect to an activity generally considered to be entertainment,
amusement or recreation, unless the taxpayer
establishes that the item was directly related
to (or, in certain cases, associated with) the active conduct
of the taxpayer’s trade or business, or a facility
(such as an airplane) used in connection with such activity.
However, under prior law, this general entertainment
expense disallowance rule did not apply to entertainment
expenses for goods, services, and facilities to
the extent that the expenses were (1) reported by the
taxpayer as compensation and wages to an employee,
or (2) includible in the gross income of a recipient who
was not an employee as compensation for services rendered
or as a prize or award. For specified individuals
(officers, directors, and 10-percent-or-greater owners of
private and publicly-held companies), the 2004 jobs creation
act disallowed the deduction, to the extent that
such expenses exceeded the amount treated as compensation
or includible in income for the individual,
with respect to expenses for (1) nonbusiness activity
generally considered to be entertainment, amusement
or recreation, or (2) a facility used in connection with
such activity. This change was effective for such expenses
incurred after October 22, 2004.
Limit expensing of sport utility vehicles.—Under
prior law, taxpayers purchasing a sport utility vehicle
for business use could expense and deduct up to
$100,000 of the cost in the year the vehicle was placed
in service. The 2004 jobs creation act reduced the
amount of expensing allowed with respect to the cost
of a sports utility vehicle from $100,000 to $25,000.
The change was effective for property placed in service
after October 22, 2004.
PENSION FUNDING EQUITY ACT OF 2004
This Act, which was signed by the President on April
10, 2004, made changes to the Employee Retirement
Income Security Act of 1974 (ERISA) and the Internal
Revenue Code that affect the operation of private pension
plans. The major provisions of the Act: (1) established
a two-year temporary replacement of the benchmark
interest rate for determining funding liabilities
of private sector pension plans; (2) established temporary
alternative minimum funding standards that reduced
funding requirements for commercial airlines,
steel companies, and certain other employers; and (3)
allowed certain multiemployer plans to temporarily
delay the amortization of specified losses. This Act also
contained a number of other provisions including: (1)
modification of the definition of a property and casualty
insurance company and the requirements for such companies
to be eligible for tax-exempt status; (2) repeal
of the prior law provision requiring reductions in deductions
of mutual life insurance companies for policyholder
dividends; and (3) extension, through December
31, 2013, of the prior law provision that allowed employers
to transfer excess defined benefit plan assets
to a special account for health benefits of retirees.
UNITED STATES-AUSTRALIA FREE TRADE
AGREEMENT IMPLEMENTATION ACT
This Act implemented the U.S.-Australia Free Trade
Agreement (FTA), as signed by the United States and
Australia on May 18, 2004. The U.S.-Australia FTA
advanced U.S. economic interests by providing increased
access to Australia’s markets for American
services, manufactured goods, and agricultural products.
The Agreement, which will create jobs and opportunities
in both countries, solidified our relationship
with an important partner in the global economy and
set a strong example of the benefits of free trade and
democracy.
UNITED STATES-MOROCCO FREE TRADE
AGREEMENT IMPLEMENTATION ACT
This Act implemented the U.S.-Morocco FTA, as
signed by the United States and Morocco on June 15,
2004. The U.S.-Morocco FTA advanced U.S. economic
interests by providing increased access to Morocco’s
markets for American manufactured goods, agricultural
products, services, and investment. The Agreement provided
a significant opportunity to encourage economic
reform and development in a moderate Muslim nation
and was an important step in implementing the President’s
plan for a broader U.S.-Middle East Free Trade
Area.
THE AGOA ACCELERATION ACT OF 2004
The African Growth and Opportunity Act (AGOA),
enacted in May 2000, reduced barriers to trade, thereby
increasing exports, creating jobs, and increasing opportunities
for Africans and Americans alike. It gave
American businesses greater confidence to invest in Africa,
and encouraged African nations to reform their
economies and governments to take advantage of the
opportunities that AGOA provided. The AGOA Acceleration
Act, which was signed by the President on July
13, 2004, built on that success by extending trade preferences
for certain imports from designated sub-Saharan
African countries through September 30, 2015. The
deadline for expiration of these benefits had been September
30, 2008 under prior law. The AGOA Acceleration
Act also extended the prior law deadline for use
of third country fabric benefits from September 30,
2004 to September 30, 2007. Under this provision, any
AGOA country with a per capita GNP less than $1,500
enjoys duty-free access (subject to caps on the amount
of imports as measured by square meter equivalents)
to the U.S. market for apparel made from fabric originating
anywhere in the world. This Act also expanded
benefits by modifying rules of origin for certain apparel
components, such as collars and cuffs, and expanded
the scope of eligible goods to include ethnic fabrics
made on machines, rather than just those made by
hand.
281 17. FEDERAL RECEIPTS
THE MISCELLANEOUS TRADE AND
TECHNICAL CORRECTIONS ACT OF 2004
This Act, which was signed by the President on December
3, 2004, provided for the temporary suspension
of tariffs on about 330 new items, including a wide
variety of chemicals, and a number of pigments and
dyes that are for the most part not made in the U.S.
and needed by U.S. manufacturers. This Act also extended
suspensions of tariffs on a number of items,
refunded tariffs on specified imports, and made technical
corrections to several trade laws.
ADMINISTRATION PROPOSALS
REFORM THE FEDERAL TAX SYSTEM
On January 7, 2005, the President established an
Advisory Panel on Federal Tax Reform to develop options
to improve the tax system. The current tax system
is complex, is perceived by many as unfair, and distorts
household and business decisions. The excessive time
taxpayers spend to understand and comply with the
tax system is a burden and wastes resources. Taxpayers
spend an estimated six billion hours to comply with
the tax system at a cost of more than $100 billion
annually. Individuals and businesses need a tax system
that is simpler, and easier to understand and comply
with. Faith in the fairness of our tax system is undermined
when taxpayers believe others can exploit the
complexities of the law to avoid paying tax. At the
same time, Americans deserve a tax code that will allow
them to make decisions based more on economic merit,
free of the distortions generated by the tax system.
The economic costs associated with these distortions
can total hundreds of billions of dollars annually.
The Advisory Panel will broadly focus on revenueneutral
reforms that make the tax system simpler, encourage
economic growth, and promote fairness, while
recognizing the importance of homeownership and charitable
giving in American society. Information on the
Advisory Panel and its deliberations can be found at
www.taxreformpanel.gov. The Advisory Panel will provide
options for reforming the tax system to the Secretary
of the Treasury no later than July 31, 2005.
These options will help the Treasury Secretary and others
within the Administration develop specific recommendations
for the President.
Pending the outcome of fundamental tax reform, the
President will continue to propose important policy initiatives
including permanent extension of the increased
expensing for small businesses and the reductions in
taxes on capital gains and dividends provided in the
2003 jobs and growth tax cut. The President’s policy
initiatives also include permanent extension of the provisions
of the 2001 tax cut scheduled to sunset on December
31, 2010, permanent extension of the research
and experimentation tax credit, and extension of many
other expiring provisions. In addition, the President’s
initiatives include incentives for charitable giving,
strengthening education, investing in health care, protecting
the environment, increasing energy production,
and promoting energy conservation.
This Budget also includes proposals designed to increase
opportunities for saving by simplifying and
rationalizing the many tax preferred savings vehicles
provided under current law, improve tax compliance,
curtail abusive tax avoidance activities, and strengthen
the employer-based pension system.
MAKE PERMANENT CERTAIN TAX CUTS
ENACTED IN 2001 AND 2003
Extend permanently reductions in individual income
taxes on capital gains and dividends.—The
maximum individual income tax rate on net capital
gains and dividends is 15 percent for taxpayers in individual
income tax rate brackets above 15 percent and
5 percent (zero in 2008) for lower income taxpayers.
The Administration proposes to extend permanently
these reduced rates (15 percent and zero), which are
scheduled to expire on December 31, 2008.
Extend permanently increased expensing for
small business.—Small business taxpayers are allowed
to expense up to $100,000 in annual investment
expenditures for qualifying property (expanded to include
off-the-shelf computer software) placed in service
in taxable years 2003 through 2007. The amount that
may be expensed is reduced by the amount by which
the taxpayer’s cost of qualifying property exceeds
$400,000. Both the deduction and annual investment
limits are indexed annually for inflation, effective for
taxable years beginning after 2003 and before 2008.
Also, with respect to a taxable year beginning after
2002 and before 2008, taxpayers are permitted to make
or revoke expensing elections on amended returns without
the consent of the IRS Commissioner. The Administration
proposes to extend permanently each of these
temporary provisions, applicable for qualifying property
(including off-the-shelf computer software) placed in
service in taxable years beginning after 2007.
Extend permanently provisions expiring in
2010.—Most of the provisions of the 2001 tax cut sunset
on December 31, 2010. The Administration proposes
to extend those provisions permanently.
TAX INCENTIVES
Simplify and Encourage Saving
Expand tax-free savings opportunities.—Under
current law, individuals can contribute to traditional
Individual Retirement Accounts (IRAs), nondeductible
IRAs, and Roth IRAs, each subject to different sets
of rules. For example, contributions to traditional IRAs
are deductible, while distributions are taxed; contributions
to Roth IRAs are taxed, but distributions are excluded
from income. In addition, eligibility to contribute
282 ANALYTICAL PERSPECTIVES
is subject to various age and income limits. While primarily
intended for retirement saving, withdrawals for
certain education, medical, and other non-retirement
expenses are penalty free. The eligibility and withdrawal
restrictions for these accounts complicate compliance
and limit incentives to save.
The Administration proposes to replace current law
IRAs with two new savings accounts: a Lifetime Savings
Account (LSA) and a Retirement Savings Account
(RSA). Regardless of age or income, individuals could
make annual nondeductible contributions of $5,000 to
an LSA and $5,000 (or earnings if less) to an RSA.
Distributions from an LSA would be excluded from income
and could be made at anytime for any purpose
without restriction. Distributions from an RSA would
be excluded from income after attaining age 58 or in
the event of death or disability. All other distributions
would be included in income (to the extent they exceed
basis) and subject to an additional tax. Distributions
would be deemed to come from basis first. The proposal
would be effective for contributions made after December
31, 2005 and future year contribution limits would
be indexed for inflation.
Existing Roth IRAs would be renamed RSAs and
would be subject to the new rules for RSAs. Existing
traditional and nondeductible IRAs could be converted
into an RSA by including the conversion amount (excluding
basis) in gross income, similar to a currentlaw
Roth conversion. However, no income limit would
apply to the ability to convert. Taxpayers who convert
IRAs to RSAs could spread the included conversion
amount over several years. Existing traditional or nondeductible
IRAs that are not converted to RSAs could
not accept new contributions. New traditional IRAs
could be created to accommodate rollovers from employer
plans, but they could not accept new individual
contributions. Individuals wishing to roll an amount
directly from an employer plan to an RSA could do
so by including the rollover amount (excluding basis)
in gross income (i.e., ‘‘converting’’ the rollover, similar
to a current law Roth conversion).
Saving will be further simplified and encouraged by
administrative changes already planned for the 2007
filing season that will allow taxpayers to have their
tax refunds directly deposited into more than one account.
Consequently, taxpayers will be able, for example,
to direct that a portion of their tax refunds be
deposited into an LSA or RSA.
Consolidate employer-based savings accounts.—
Current law provides multiple types of tax-preferred
employer-based savings accounts to encourage saving
for retirement. The accounts have similar goals but are
subject to different sets of rules regulating eligibility,
contribution limits, tax treatment, and withdrawal restrictions.
For example, 401(k) plans for private employers,
SIMPLE 401(k) plans for small employers, 403(b)
plans for 501(c)(3) organizations and public schools, and
457 plans for State and local governments are all subject
to different rules. To qualify for tax benefits, plans
must satisfy multiple requirements. Among the requirements,
the plan generally may not discriminate in favor
of highly compensated employees with regard either
to coverage or to amount or availability of contributions
or benefits. Rules covering employer-based savings accounts
are among the lengthiest and most complicated
sections of the tax code and associated regulations. This
complexity imposes substantial costs on employers, participants,
and the government, and likely has inhibited
the adoption of retirement plans by employers, especially
small employers.
The Administration proposes to consolidate 401(k),
SIMPLE 401(k), 403(b), and 457 plans, as well as SIMPLE
IRAs and SARSEPs, into a single type of plan—
Employee Retirement Savings Accounts (ERSAs)—that
would be available to all employers. ERSA non-discrimination
rules would be simpler and include a new ERSA
non-discrimination safe-harbor. Under one of the safeharbor
options, a plan would satisfy the nondiscrimination
rules with respect to employee deferrals and employee
contributions if it provided a 50-percent match
on elective contributions up to six percent of compensation.
By creating a simplified and uniform set of rules,
the proposal would substantially reduce complexity. The
proposal would be effective for taxable years beginning
after December 31, 2005.
Establish Individual Development Accounts
(IDAs).—The Administration proposes to allow eligible
individuals to make contributions to a new savings vehicle,
the Individual Development Account, which would
be set up and administered by qualified financial institutions,
nonprofit organizations, or Indian tribes (qualified
entities). Citizens or legal residents of the United
States between the ages of 18 and 60 who cannot be
claimed as a dependent on another taxpayer’s return,
are not students, and who meet certain income limitations
would be eligible to establish and contribute to
an IDA. A single taxpayer would be eligible to establish
and contribute to an IDA if his or her modified AGI
in the preceding taxable year did not exceed $20,000
($30,000 for heads of household, and $40,000 for married
taxpayers filing a joint return). These thresholds
would be indexed annually for inflation beginning in
2008. Qualified entities that set up and administer
IDAs would be required to match, dollar-for-dollar, the
first $500 contributed by an eligible individual to an
IDA in a taxable year. Qualified entities would be allowed
a 100 percent tax credit for up to $500 in annual
matching contributions to each IDA, and a $50 tax
credit for each IDA maintained at the end of a taxable
year with a balance of not less that $100 (excluding
the taxable year in which the account was established).
Matching contributions and the earnings on those contributions
would be deposited in a separate ‘‘parallel
account.’’ Contributions to an IDA by an eligible individual
would not be deductible, and earnings on those
contributions would be included in income. Matching
contributions by qualified entities and the earnings on
those contributions would be tax-free.
Withdrawals from the parallel account may be made
only for qualified purposes (higher education, the first283
17. FEDERAL RECEIPTS
time purchase of a home, business start-up, and qualified
rollovers). Withdrawals from the IDA for other
than qualified purposes may result in the forfeiture
of some or all matching contributions and the earnings
on those contributions. The proposal would be effective
for contributions made after December 31, 2006 and
before January 1, 2014, to the first 900,000 IDA accounts
opened before January 1, 2012.
Invest in Health Care
Provide a refundable tax credit for the purchase
of health insurance.—Current law provides a tax
preference for employer-provided group health insurance
plans, but not for individually purchased health
insurance coverage except to the extent that deductible
medical expenses exceed 7.5 percent of adjusted gross
income (AGI), the individual has self-employment income,
or the individual is eligible under the Trade Act
of 2002 to purchase certain types of qualified health
insurance. In addition, individuals are allowed to accumulate
funds in a health savings account (HSA) or
medical savings account (MSA) on a tax-preferred basis
to pay for medical expenses, provided they are covered
by an HSA high-deductible health plan (and no other
health plan). The Administration proposes to make
health insurance more affordable for individuals not
covered by an employer plan or a public program. Effective
for taxable years beginning after December 31,
2005, a new refundable tax credit would be provided
for the cost of health insurance purchased by individuals
under age 65. The credit would provide a subsidy
for a percentage of the health insurance premium, up
to a maximum includable premium. The maximum subsidy
percentage would be 90 percent for low-income
taxpayers and would phase down with income. The
maximum credit would be $1,000 for an adult and $500
for a child. The credit would be phased out at $30,000
for single taxpayers and $60,000 for families purchasing
a family policy.
If the health insurance qualifies as an HSA highdeductible
health plan, an individual may opt to contribute
30 percent of the credit to a special HSA that
could only be used to pay for medical expenses. Individuals
could claim the tax credit for health insurance
premiums paid as part of the normal tax-filing process.
Alternatively, beginning July 1, 2007, the tax credit
would be available in advance at the time the individual
purchases health insurance. The advance credit
would reduce the premium paid by the individual to
the health insurer, and the health insurer would be
reimbursed directly by the Department of Treasury for
the amount of the advance credit. Eligibility for an
advance credit would be based on an individual’s prior
year tax return. To qualify for the credit, a health insurance
policy would have to include coverage for catastrophic
medical expenses. Qualifying insurance could
be purchased in the individual market. Qualifying
health insurance could also be purchased through private
purchasing groups, State-sponsored insurance purchasing
pools, and high-risk pools. Such groups may
make purchasing health insurance easier and help reduce
health insurance costs and increase coverage options
for individuals, including older and higher-risk
individuals.
Provide an above-the-line deduction for high-deductible
insurance premiums.—Current law provides
a tax preference for employer-provided group health insurance
plans, but not for individually purchased health
insurance coverage except to the extent that deductible
medical expenses exceed 7.5 percent of AGI, the individual
has self-employment income, or the individual
is eligible under the Trade Act of 2002 to purchase
certain types of qualified health insurance. Current law
also allows individuals to accumulate funds in an HSA
or MSA on a tax-preferred basis to pay for medical
expenses, provided they are covered by a high-deductible
health plan (and no other health plan). The Administration
proposes to allow individuals who contribute
to an HSA because they are covered under an HSA
high-deductible health plan in the individual insurance
market to deduct the amount of the premium in determining
AGI (whether or not the person itemizes deductions).
Individuals claiming other credits or deductions
or covered by employer plans, public plans or otherwise
not eligible to contribute to an HSA would not qualify.
The provision would be effective to taxable years beginning
after December 31, 2005.
Provide a refundable tax credit for contributions
of small employers to employee HSAs.—Under current
law, employers are provided a deduction for the
cost of health coverage provided to employees and the
value of that coverage is not subject to tax for the
employees. Nevertheless, many American workers in
small firms are currently without health coverage. In
order to provide an incentive to small employers to
sponsor group health coverage, especially high-deductible
health coverage that encourages cost consciousness,
the Administration proposes to provide a refundable
tax credit for employer contributions to employee HSA
accounts of up to $200 for single coverage and up to
$500 for family coverage. The subsidy would be provided
to for-profit employers that normally employ
fewer than 100 employees. The employer would be required
to maintain a high-deductible health plan (as
defined for purposes of the HSA) accessible to all employees,
but the employer would not be required to
make contributions toward employees’ premiums under
the plan. The employer would not be entitled to a deduction
for the amount reimbursed by the credit and
the credit could not be carried back or carried forward.
The amount of the employer contribution to the HSA
for which a credit is claimed would be maintained in
a special HSA that would be subject to the rules currently
applicable to HSAs, except that withdrawals in
excess of qualified medical expenses would subject the
HSA owner to a tax equal to 100 percent of the amount
of the withdrawal. Sole proprietors, partners and Scorporation
shareholders would be eligible for the credit
to the extent their business is a small employer or
284 ANALYTICAL PERSPECTIVES
has no employees. However, self-employed individuals
would not be entitled to any deductions for the amount
reimbursed by the credit. The HSA tax credit would
be effective for taxable years beginning after December
31, 2005.
Improve the Health Coverage Tax Credit.—The
Health Coverage Tax Credit (HCTC) was created under
the Trade Act of 2002 for the purchase of qualified
health insurance. Eligible persons include certain individuals
who are receiving benefits under the TAA or
the Alternative TAA (ATAA) program and certain individuals
between the ages of 55 and 64 who are receiving
pension benefits from the Pension Benefit Guaranty
Corporation (PBGC). The tax credit is refundable and
can be claimed through an advance payment mechanism
at the time the insurance is purchased. To make
the requirements for qualified State-based coverage
under the HCTC more consistent with the rules applicable
under the Health Insurance Portability and Accountability
Act (HIPAA) and thus encourage more
plans to participate in the HCTC program, the Administration
proposes to allow State-based coverage to impose
a pre-existing condition restriction for a period
of up to 12 months, provided the plan reduces the restriction
period by the length of the eligible individual’s
creditable coverage (as of the date the individual applied
for the State-based coverage). This provision
would be effective for eligible individuals applying for
coverage after December 31, 2005. Also, in order to
prevent an individual from losing the benefit of the
HCTC just because his or her spouse becomes eligible
for Medicare, the Administration proposes to permit
spouses of HCTC-eligible individuals to claim the HCTC
when the HCTC-eligible individual becomes entitled to
Medicare coverage. The spouse, however, would have
to be at least 55 years old and meet the other HCTC
eligibility requirements. This provision would be effective
for taxable years beginning after December 31,
2005. Finally, to improve the administration of the
HCTC, the Administration proposes to: (1) modify the
definition of ‘‘other specified coverage’’ for ‘‘eligible
ATAA recipients,’’ to be the same as the definition applied
to ‘‘eligible TAA recipients;’’ (2) clarify that certain
PBGC pension recipients are eligible for the tax credit;
(3) allow State-based continuation coverage to qualify
without meeting the requirements for State-based
qualified coverage; (4) for purposes of the State-based
coverage rules, permit the Commonwealths of Puerto
Rico and Northern Mariana Islands, as well as American
Samoa, Guam, and the U.S. Virgin Islands to be
deemed as States; and (5) clarify the application of
the confidentiality and disclosure rules to the administration
of the advance credit.
Allow the orphan drug tax credit for certain predesignation
expenses.—Current law provides a 50-
percent credit for expenses related to human clinical
testing of drugs for the treatment of certain rare diseases
and conditions (‘‘orphan drugs’’). A taxpayer may
claim the credit only for expenses incurred after the
Food and Drug Administration (FDA) designates a drug
as a potential treatment for a rare disease or condition.
This creates an incentive to defer clinical testing for
orphan drugs until the taxpayer receives the FDA’s
approval and increases complexity for taxpayers by
treating pre-designation and post-designation clinical
expenses differently. The Administration proposes to
allow taxpayers to claim the orphan drug credit for
expenses incurred prior to FDA designation if designation
occurs before the due date (including extensions)
for filing the tax return for the year in which the FDA
application was filed. The proposal would be effective
for qualified expenses incurred after December 31,
2004.
Provide Incentives for Charitable Giving
Permit tax-free withdrawals from IRAs for charitable
contributions.—Under current law, eligible individuals
may make deductible or non-deductible contributions
to a traditional IRA. Pre-tax contributions
and earnings in a traditional IRA are included in income
when withdrawn. Effective for distributions after
date of enactment, the Administration proposes to allow
individuals who have attained age 65 to exclude from
gross income IRA distributions made directly to a charitable
organization. The exclusion would apply without
regard to the percentage-of-AGI limitations that apply
to deductible charitable contributions. The exclusion
would apply only to the extent the individual receives
no return benefit in exchange for the transfer, and no
charitable deduction would be allowed with respect to
any amount that is excludable from income under this
provision.
Expand and increase the enhanced charitable
deduction for contributions of food inventory.—A
taxpayer’s deduction for charitable contributions of inventory
generally is limited to the taxpayer’s basis
(typically cost) in the inventory. However, for certain
contributions of inventory, C corporations may claim
an enhanced deduction equal to the lesser of: (1) basis
plus one half of the fair market value in excess of
basis, or (2) two times basis. To be eligible for the
enhanced deduction, the contributed property generally
must be inventory of the taxpayer contributed to a
charitable organization and the donee must (1) use the
property consistent with the donee’s exempt purpose
solely for the care of the ill, the needy, or infants,
(2) not transfer the property in exchange for money,
other property, or services, and (3) provide the taxpayer
a written statement that the donee’s use of the property
will be consistent with such requirements. To use the
enhanced deduction, the taxpayer must establish that
the fair market value of the donated item exceeds basis.
Under the Administration’s proposal, which is designed
to encourage contributions of food inventory to
charitable organizations, any taxpayer engaged in a
trade or business would be eligible to claim an enhanced
deduction for donations of food inventory. The
enhanced deduction for donations of food inventory
285 17. FEDERAL RECEIPTS
would be increased to the lesser of: (1) fair market
value or (2) two times basis. However, to ensure consistent
treatment of all businesses claiming an enhanced
deduction for donations of food inventory, the
enhanced deduction for qualified food donations by S
corporations and non-corporate taxpayers would be limited
to 10 percent of net income from the trade or
business. A special provision would allow taxpayers
with a zero or low basis in the qualified food donation
(e.g., taxpayers that use the cash method of accounting
for purchases and sales, and taxpayers that are not
required to capitalize indirect costs) to assume a basis
equal to 25 percent of fair market value. The enhanced
deduction would be available only for donations of ‘‘apparently
wholesome food’’ (food intended for human consumption
that meets all quality and labeling standards
imposed by Federal, state, and local laws and regulations,
even though the food may not be readily marketable
due to appearance, age, freshness, grade, size, surplus,
or other conditions). The fair market value of ‘‘apparently
wholesome food’’ that cannot or will not be
sold solely due to internal standards of the taxpayer
or lack of market, would be determined by taking into
account the price at which the same or substantially
the same food items (as to both type and quality) are
sold by the taxpayer at the time of the contribution
or, if not sold at such time, in the recent past. These
proposed changes in the enhanced deduction for donations
of food inventory would be effective for taxable
years beginning after December 31, 2004.
Reform excise tax based on investment income
of private foundations.—Under current law, private
foundations that are exempt from Federal income tax
are subject to a two-percent excise tax on their net
investment income (one-percent if certain requirements
are met). The excise tax on private foundations that
are not exempt from Federal income tax, such as certain
charitable trusts, is equal to the excess of the
sum of the excise tax that would have been imposed
if the foundation were tax exempt and the amount of
the unrelated business income tax that would have
been imposed if the foundation were tax exempt, over
the income tax imposed on the foundation. To encourage
increased charitable activity and simplify the tax
laws, the Administration proposes to replace the two
rates of tax on the net investment income of private
foundations that are exempt from Federal income tax
with a single tax rate of one percent. The excise tax
on private foundations not exempt from Federal income
tax would be equal to the excess of the sum of the
one-percent excise tax that would have been imposed
if the foundation were tax exempt and the amount of
the unrelated business income tax what would have
been imposed if the foundation were tax exempt, over
the income tax imposed on the foundation. The proposed
change would be effective for taxable years beginning
after December 31, 2004.
Modify tax on unrelated business taxable income
of charitable remainder trusts.—A charitable remainder
annuity trust is a trust that is required to
pay, at least annually, a fixed dollar amount of at least
five percent of the initial value of the trust to a noncharity
for the life of an individual or for a period
of 20 years or less, with the remainder passing to charity.
A charitable remainder unitrust is a trust that
generally is required to pay, at least annually, a fixed
percentage of at least five percent of the fair market
value of the trust’s assets determined at least annually
to a non-charity for the life of an individual or for
a period of 20 years or less, with the remainder passing
to charity. A trust does not qualify as a charitable
remainder annuity trust if the annuity for a year is
greater than 50 percent of the initial fair market value
of the trust’s assets. A trust does not qualify as a charitable
remainder unitrust if the percentage of assets
that are required to be distributed at least annually
is greater than 50 percent. A trust does not qualify
as a charitable remainder annuity trust or a charitable
remainder unitrust unless the value of the remainder
interest in the trust is at least 10 percent of the value
of the assets contributed to the trust. Distributions
from a charitable remainder annuity trust or charitable
remainder unitrust, which are included in the income
of the beneficiary for the year that the amount is required
to be distributed, are treated in the following
order as: (1) ordinary income to the extent of the trust’s
undistributed ordinary income for that year and all
prior years; (2) capital gains to the extent of the trust’s
undistributed capital gain for that year and all prior
years; (3) other income to the extent of the trust’s undistributed
other income for that year and all prior
years; and (4) corpus (trust principal).
Charitable remainder annuity trusts and charitable
remainder unitrusts are exempt from Federal income
tax; however, such trusts lose their income tax exemption
for any year in which they have unrelated business
taxable income. Any taxes imposed on the trust are
required to be allocated to trust corpus. The Administration
proposes to levy a 100-percent excise tax on
the unrelated business taxable income of charitable remainder
trusts, in lieu of removing the Federal income
tax exemption for any year in which unrelated business
taxable income is incurred. This change, which is a
more appropriate remedy than loss of tax exemption,
is proposed to become effective for taxable years beginning
after December 31, 2004, regardless of when the
trust was created.
Modify basis adjustment to stock of S corporations
contributing appreciated property.—Under
current law, each shareholder in an S corporation separately
accounts for his or her pro rata share of the
S corporation’s charitable contributions in determining
his or her income tax liability. A shareholder’s basis
in the stock of the S corporation must be reduced by
the amount of his or her pro rata share of the S corporation’s
charitable contribution. In order to preserve
the benefit of providing a charitable contribution deduction
for contributions of appreciated property and to
prevent the recognition of gain on the contributed prop286
ANALYTICAL PERSPECTIVES
erty on the disposition of the S corporation stock, the
Administration proposes to allow a shareholder in an
S corporation to increase his or her basis in the stock
of an S corporation by an amount equal to the excess
of the shareholder’s pro rata share of the S corporation’s
charitable contribution over the stockholder’s pro
rata share of the adjusted basis of the contributed property.
The proposal would be effective for taxable years
beginning after December 31, 2004.
Repeal the $150 million limitation on qualified
501(c)(3) bonds.—Current law contains a $150 million
limitation on the volume of outstanding, non-hospital,
tax-exempt bonds for the benefit of any one 501(c)(3)
organization. The limitation was repealed in 1997 for
bonds issued after August 5, 1997, at least 95 percent
of the net proceeds of which are used to finance capital
expenditures incurred after that date. However, the
limitation continues to apply to bonds more than five
percent of the net proceeds of which finance or refinance
working capital expenditures, or capital expenditures
incurred on or before August 5, 1997. In order
to simplify the tax laws and provide consistent treatment
of bonds for 501(c)(3) organizations, the Administration
proposes to repeal the $150 million limitation
in its entirety.
Repeal certain restrictions on the use of qualified
501(c)(3) bonds for residential rental property.—
Tax-exempt, 501(c)(3) organizations generally
may utilize tax-exempt financing for charitable purposes.
However, existing law contains a special limitation
under which 501(c)(3) organizations may not use
tax-exempt financing to acquire existing residential
rental property for charitable purposes unless the property
is rented to low-income tenants or is substantially
rehabilitated. In order to simplify the tax laws and
provide consistent treatment of bonds for 501(c)(3) organizations,
the Administration proposes to repeal the
residential rental property limitation.
Strengthen Education
Extend, increase, and expand the above-the-line
deduction for qualified out-of-pocket classroom expenses.—
Under current law, teachers who itemize deductions
(do not use the standard deduction) and incur
unreimbursed, job-related expenses are allowed to deduct
those expenses to the extent that when combined
with other miscellaneous itemized deductions they exceeded
two percent of AGI. Current law also allows
certain teachers and other elementary and secondary
school professionals to treat up to $250 in annual qualified
out-of-pocket classroom expenses as a non-itemized
deduction (above-the-line deduction). This additional deduction
is effective for expenses incurred in taxable
years beginning after December 31, 2001 and before
January 1, 2006. Unreimbursed expenditures for certain
books, supplies, and equipment related to classroom
instruction qualify for the above-the-line deduction.
Expenses claimed as an above-the-line deduction
may not be claimed as an itemized deduction. The Administration
proposes to extend the above-the-line deduction
to apply to qualified out-of-pocket expenditures
incurred in taxable years beginning after December 31,
2005, to increase the deduction to $400, and to expand
the deduction to apply to unreimbursed expenditures
for certain professional training programs.
Encourage Telecommuting
Exclude from income the value of employer-provided
computers, software, and peripherals.—
Under current law, the value of computers and related
equipment and services provided by an employer to an
employee for home use is generally allocated between
business and personal use. The business-use portion
is excluded from the employee’s income whereas the
personal-use portion is subject to income and payroll
taxes. In order to simplify recordkeeping, improve compliance,
and encourage telecommuting, the Administration
proposes to allow individuals to exclude from income
the value of employer-provided computers and related
equipment and services necessary to perform work
for the employer at home. The employee would be required
to make substantial use of the equipment to
perform work for the employer. Substantial business
use would include standby use for periods when work
from home may be required by the employer, such as
during work closures caused by the threat of terrorism,
inclement weather, or natural disasters. The proposal
would be effective for taxable years beginning after December
31, 2005.
Provide Assistance to Distressed Areas
Establish Opportunity Zones.—The Administration
proposes to establish authority to designate 40 opportunity
zones (28 in urban areas and 12 in rural areas).
The zone designation and corresponding incentives
would be in effect from January 1, 2006 through December
31, 2015. To qualify to apply for zone status,
a community must either have suffered from a significant
decline in its economic base over the past decade
as measured by the loss of manufacturing and retail
establishments and manufacturing jobs, or be an existing
empowerment zone, renewal community or enterprise
community. The Secretary of Commerce would
select opportunity zones through a competitive process
based on the applicant’s ‘‘community transition plan’’
and ‘‘statement of economic transition.’’ The community
transition plan would have to set concrete, measurable
goals for reducing local regulatory and tax barriers to
construction, residential development and business creation.
The statement of economic transition would have
to demonstrate that the local community’s economic
base is in transition, as indicated by a declining job
base and labor force, and other measures, during the
past decade. In evaluating applications, the Secretary
of Commerce could consider other factors, including:
(1) changes in unemployment rates, poverty rates,
household income, homeownership and labor force participation;
(2) the educational attainment and average
287 17. FEDERAL RECEIPTS
age of the population; and (3) for urban areas, the number
of mass layoffs occurring in the area’s vicinity over
the previous decade. Empowerment zones and renewal
communities designated as opportunity zones would not
count against the limitation of 40 new opportunity
zones. Such communities would be required to relinquish
their current status and benefits once selected.
Opportunity zone benefits for converted empowerment
zones and renewal communities would expire on December
31, 2009. Tax benefits for enterprise communities
expired at the end of 2004. Enterprise communities
designated as opportunity zones would count
against the limitation of 40 new zones and opportunity
zone benefits would be in effect through 2015.
A number of tax incentives would be applicable to
opportunity zones. First, a business would be allowed
to exclude 25 percent of its taxable income if it qualified
as an ‘‘opportunity zone business’’ and it satisfied a
$5 million gross receipts test. The definition of an opportunity
zone business would be based on the definition
of a ‘‘qualified active low-income community business’’
for purposes of the new markets tax credit, treating
opportunity zones as low-income communities. Second,
an opportunity zone business would be allowed
to expense the cost of section 179 property that is qualified
zone property, up to an additional $100,000 above
the amounts generally available under current law.
Third, a commercial revitalization deduction would be
available for opportunity zones in a manner similar
to the deduction for renewal communities. A $12 million
annual cap on these deductions would apply to each
opportunity zone. Finally, individuals who live and
work in an opportunity zone would constitute a new
target group with respect to wages earned within the
zone under the proposed combined work opportunity
tax credit and welfare-to-work tax credit (see discussion
later in this Chapter).
Provide Disaster Relief
Provide tax relief for Federal Emergency Management
Agency (FEMA) hazard mitigation assistance
programs.—The Federal Emergency Management
Agency’s mitigation assistance programs provide
grants through State and local governments to businesses
and individuals for cost-effective responses to
natural hazards. FEMA may make grants in the aftermath
of a major disaster, in anticipation of a natural
hazard, or in areas of severe repetitive loss. Grants
may fund demolition, retro-fitting, elevation, or other
measures to reduce the cost of future property damage.
Under current tax law, gross income includes governmental
disaster payments unless they fall into certain
exceptions that generally provide for relief with respect
to damages or expenses incurred, but would not encompass
payments to mitigate future damage. Tax relief
is warranted to the extent that property owners may
decline to participate in mitigation assistance programs
because of the potential tax obligation. The Administration
proposes to exclude FEMA mitigation grants from
gross income. To prevent a double benefit, a business
that receives a tax-free mitigation grant and uses the
grant to purchase or repair property could not claim
a deduction for those expenses. The exclusion would
apply only to FEMA mitigation grants, and not to any
compensation from a mitigation assistance program for
the acquisition of property situated in a disaster or
hazard area. However, if FEMA acquires property, and
the owner replaces the property within a specified period,
then instead of reflecting the compensation in
gross income, the owner would have a carry-over cost
basis in the replacement property. If a mitigation assistance
program pays the cost of improving property,
the cost would be excluded from gross income, but there
would be no increase in the owner’s cost basis in the
property. Thus, if the property is later sold, any resulting
gain potentially would be taxable. The proposal generally
would be effective for mitigation assistance received
after December 31, 2004, but the Department
of Treasury would have administrative authority to provide
retroactive relief.
Increase Housing Opportunities
Provide tax credit for developers of affordable
single-family housing.—The Administration proposes
to provide annual tax credit authority to states (including
U.S. possessions) designed to promote the development
of affordable single-family housing in low-income
urban and rural neighborhoods. Beginning in calendar
year 2006, first-year credit authority equal to the
amount provided for low-income rental housing tax
credits would be made available to each state. That
amount was equal to the greater of $2.075 million or
$1.80 per capita for 2004, and is indexed annually for
inflation. State housing agencies would award first-year
credits to single-family housing units comprising a
project located in a census tract with median income
equal to 80 percent or less of area median income.
Units in condominiums and cooperatives could qualify
as single-family housing. Credits would be awarded as
a fixed amount for individual units comprising a
project. The present value of the credits, determined
on the date of a qualifying sale, could not exceed 50
percent of the cost of constructing a new home or rehabilitating
an existing property. The taxpayer (developer
or investor partnership) owning the housing unit immediately
prior to the sale to a qualified buyer would
be eligible to claim credits over a five-year period beginning
on the date of sale. Eligible homebuyers would
be required to have incomes equal to 80 percent or
less of area median income. Certain technical features
of the provision would follow similar features of current
law with respect to the low-income housing tax credit
and mortgage revenue bonds.
Protect the Environment
Extend permanently expensing of brownfields remediation
costs.—Taxpayers may elect, with respect
to expenditures paid or incurred before January 1,
2006, to treat certain environmental remediation expenditures
that would otherwise be chargeable to a cap288
ANALYTICAL PERSPECTIVES
ital account as deductible in the year paid or incurred.
The Administration proposes to extend this provision
permanently making it available for expenditures paid
or incurred after December 31, 2005, and facilitating
its use by businesses to undertake projects that may
be uncertain in overall duration.
Exclude 50 percent of gains from the sale of
property for conservation purposes.—The Administration
proposes to create a new incentive for private,
voluntary land protection. This incentive is a cost-effective,
non-regulatory approach to conservation. Under
the proposal, when land (or an interest in land or
water) is sold for conservation purposes, only 50 percent
of any gain would be included in the seller’s income.
This proposal applies to conservation easements and
similar sales of partial interests in land, such as development
rights and agricultural conservation easements,
for conservation purposes. To be eligible for the exclusion,
the sale may be either to a government agency
or to a qualified conservation organization, and the
buyer must supply a letter of intent that the acquisition
will serve conservation purposes. In addition, the taxpayer
or a member of the taxpayer’s family must have
owned the property for the three years immediately
preceding the sale. Antiabuse provisions will ensure
that the conservation purposes continue to be served.
The provision would be effective for sales taking place
after December 31, 2005 and before January 1, 2009.
Increase Energy Production and Promote
Energy Conservation
Extend the tax credit for producing electricity
from wind, biomass, and landfill gas and modify
the tax credit for electricity produced from biomass.—
Taxpayers are allowed a tax credit for electricity
produced from wind, biomass, landfill gas, and
certain other sources. Biomass includes closed-loop biomass
(organic material from a plant grown exclusively
for use at a qualifying facility to produce electricity)
and open-loop biomass (biomass from agricultural livestock
waste nutrients or cellulosic waste material derived
from forest-related resources, agricultural sources,
and other specified sources). Open-loop biomass does
not include biomass that is co-fired with coal. Thus,
electricity produced from biomass, other than closedloop
biomass, co-fired with coal does not qualify for
the credit. The credit rate is 1.5 cents per kilowatt
hour for electricity produced from wind and closed-loop
biomass and 0.75 cent per kilowatt hour for electricity
produced from open-loop biomass and landfill gas (both
rates are adjusted for inflation since 1992). To qualify
for the credit, the electricity must be produced at a
facility placed in service before January 1, 2006. The
Administration proposes to extend the credit for electricity
produced from wind, biomass other than agricultural
livestock waste nutrients, and landfill gas to electricity
produced at facilities placed in service before
January 1, 2008. In addition, a credit at 60 percent
of the generally applicable rate for electricity produced
from open-loop biomass would be allowed for electricity
produced from open-loop biomass (other than agricultural
livestock waste nutrients) co-fired in coal plants
during the period from January 1, 2006 through December
31, 2008.
Provide tax credit for residential solar energy
systems.—Current law provides a 10-percent investment
tax credit to businesses for qualifying equipment
that uses solar energy to generate electricity; to heat,
cool or provide hot water for use in a structure; or
to provide solar process heat. A credit currently is not
provided for nonbusiness purchases of solar energy
equipment. The Administration proposes a new tax
credit for individuals who purchase solar energy equipment
to generate electricity (photovoltaic equipment)
or heat water (solar water heating equipment) for use
in a dwelling unit that the individual uses as a residence,
provided the equipment is used exclusively for
purposes other than heating swimming pools. The proposed
nonrefundable credit would be equal to 15 percent
of the cost of the equipment and its installation;
each individual taxpayer would be allowed a maximum
credit of $2,000 for photovoltaic equipment and $2,000
for solar water heating equipment. The credit would
apply to photovoltaic equipment placed in service after
December 31, 2004 and before January 1, 2010 and
to solar water heating equipment placed in service after
December 31, 2004 and before January 1, 2008.
Modify treatment of nuclear decommissioning
funds.—Under current law, deductible contributions to
nuclear decommissioning funds are limited to the
amount included in the taxpayer’s cost of service for
ratemaking purposes. For deregulated utilities, this
limitation may result in the denial of any deduction
for contributions to a nuclear decommissioning fund.
The Administration proposes to repeal this limitation.
Also under current law, deductible contributions are
not permitted to exceed the amount the IRS determines
to be necessary to provide for level funding of an
amount equal to the taxpayer’s post-1983 decommissioning
costs. The Administration proposes to permit
funding of all decommissioning costs through deductible
contributions. Any portion of these additional contributions
relating to pre-1984 costs that exceeds the amount
previously deducted (other than under the nuclear decommissioning
fund rules) or excluded from the taxpayer’s
gross income on account of the taxpayer’s liability
for decommissioning costs, would be allowed as a
deduction ratably over the remaining useful life of the
nuclear power plant.
The Administration’s proposal would also permit taxpayers
to make deductible contributions to a qualified
fund after the end of the nuclear power plant’s estimated
useful life and would provide that nuclear decommissioning
costs are deductible when paid. These
changes in the treatment of nuclear decommissioning
funds are proposed to be effective for taxable years
beginning after December 31, 2004.
289 17. FEDERAL RECEIPTS
Provide tax credit for purchase of certain hybrid
and fuel cell vehicles.—Under current law, a 10-percent
tax credit up to a maximum of $4,000 is provided
for the cost of a qualified electric vehicle. The full
amount of the credit is available for purchases prior
to January 1, 2006. The credit is reduced by 75 percent
for purchases in 2006 and is not available for purchases
after December 31, 2006. A qualified electric vehicle
is a motor vehicle that is powered primarily by an
electric motor drawing current from rechargeable batteries,
fuel cells, or other portable sources of electric
current, the original use of which commences with the
taxpayer, and that is acquired for use by the taxpayer
and not for resale. Electric vehicles and hybrid vehicles
(those that have more than one source of power on
board the vehicle) have the potential to reduce petroleum
consumption, air pollution and greenhouse gas
emissions. To encourage the purchase of such vehicles,
the Administration is proposing the following tax credits:
(1) A credit of up to $4,000 would be provided
for the purchase of qualified hybrid vehicles after December
31, 2004 and before January 1, 2009. The
amount of the credit would depend on the percentage
of maximum available power provided by the rechargeable
energy storage system and the amount by which
the vehicle’s fuel economy exceeds the 2000 model year
city fuel economy. (2) A credit of up to $8,000 would
be provided for the purchase of new qualified fuel cell
vehicles after December 31, 2004 and before January
1, 2013. A minimum credit of $4,000 would be provided,
which would increase as the vehicle’s fuel efficiency
exceeded the 2000 model year city fuel economy, reaching
a maximum credit of $8,000 if the vehicle achieved
at least 300 percent of the 2000 model year city fuel
economy.
Provide tax credit for combined heat and power
property.—Combined heat and power (CHP) systems
are used to produce electricity (and/or mechanical
power) and usable thermal energy from a single primary
energy source. Depreciation allowances for CHP
property vary by asset use and capacity. No income
tax credit is provided under current law for investment
in CHP property. CHP systems utilize thermal energy
that is otherwise wasted in producing electricity by
more conventional methods and achieve a greater level
of overall energy efficiency, thereby lessening the consumption
of primary fossil fuels, lowering total energy
costs, and reducing carbon emissions. To encourage increased
energy efficiency by accelerating planned investments
and inducing additional investments in such
systems, the Administration is proposing a 10-percent
investment credit for qualified CHP systems with an
electrical capacity in excess of 50 kilowatts or with
a capacity to produce mechanical power in excess of
67 horsepower (or an equivalent combination of electrical
and mechanical energy capacities). A qualified
CHP system would be required to produce at least 20
percent of its total useful energy in the form of thermal
energy and at least 20 percent of its total useful energy
in the form of electrical or mechanical power (or a combination
thereof) and would also be required to satisfy
an energy-efficiency standard. For CHP systems with
an electrical capacity in excess of 50 megawatts (or
a mechanical energy capacity in excess of 67,000 horsepower),
the total energy efficiency would have to exceed
70 percent. For smaller systems, the total energy efficiency
would have to exceed 60 percent. Investments
in qualified CHP assets that are otherwise assigned
cost recovery periods of less than 15 years would be
eligible for the credit, provided that the taxpayer elects
to treat such property as having a 22-year class life
(and thus depreciates the property using a 15-year recovery
period). The credit, which would be treated as
an energy credit under the investment credit component
of the general business credit, and could not be used
in conjunction with any other credit for the same equipment,
would apply to investments in CHP property
placed in service after December 31, 2004 and before
January 1, 2010.
Restructure Assistance to New York City
Provide tax incentives for transportation infrastructure.—
The Administration proposes to restructure
the tax benefits for New York recovery that were enacted
in 2002. Some of the tax benefits that were provided
to New York following the attacks of September
11, 2001, likely will not be usable in the form in which
they were originally provided. As such, the Administration
proposed in the Mid-Session Review of the 2005
Budget to sunset certain existing New York Liberty
Zone tax benefits and in their place provide tax credits
to New York State and New York City for expenditures
incurred in building or improving transportation infrastructure
in or connecting with the New York Liberty
Zone. The tax credit would be available as of the date
of enactment, subject to an annual limit of $200 million
($2 billion in total over 10 years), evenly divided between
the State and the City. Any unused credit limit
in a given year would be added to the $200 million
allowable in the following year, including years beyond
the 10-year period of the credit. Similarly, expenditures
that could not be credited in a given year because of
the credit limit would be carried forward and used
against the next year’s limitation. The credit would be
allowed against any payments (e.g., income tax withholding)
made by the City and State under any provision
of the Internal Revenue Code, other than Social
Security and Medicare payroll taxes and excise taxes.
The Secretary of the Treasury may prescribe such rules
as are necessary to ensure that the expenditures are
made for the intended purpose.
Repeal certain New York City Liberty Zone incentives.—
The Administration proposes to terminate
the following tax incentives provided to qualified property
within the New York Liberty Zone under the 2002
economic stimulus act: (1) the additional first-year depreciation
deduction; (2) the five-year recovery period
for leasehold improvement property; (3) increased expensing
for small businesses; and (4) the extended re290
ANALYTICAL PERSPECTIVES
placement period for the nonrecognition of gain on involuntarily
converted property. These terminations are
proposed to be effective on the date of enactment. Property
placed in service after the date of enactment would
not be eligible for the first three incentives listed above
unless a binding written contract was in effect on the
date of enactment, in which case the property would
need to be placed in service by the original termination
dates provided in the 2002 economic stimulus act.
Other related changes to the Internal Revenue Code
would be made as appropriate.
SIMPLIFY THE TAX LAWS FOR FAMILIES
Simplify adoption tax benefits.—Under current
law, for taxable years beginning before January 1, 2011,
the following tax benefits are provided to taxpayers
who adopt children: (1) a nonrefundable tax credit for
qualified expenses incurred in the adoption of a child,
up to a certain limit; and (2) the exclusion from gross
income of qualified adoption expenses paid or reimbursed
by an employer under an adoption assistance
program, up to a certain limit.
Taxpayers may not claim the credit for expenses that
are excluded from gross income. In 2005, the limitation
on qualified adoption expenses for both the credit and
the exclusion is $10,630. Taxpayers who adopt children
with special needs may claim the full $10,630 credit
or exclusion even if adoption expenses are less than
this amount. Taxpayers may carry forward unused
credit amounts for up to five years. When modified
adjusted gross income exceeds $159,450 (in 2005), both
the credit amount and the amount excluded from gross
income are reduced pro-rata over the next $40,000 of
modified adjusted gross income. The maximum credit
and exclusion and the income at which the phase-out
range begins are indexed annually for inflation. For
taxable years beginning after December 31, 2010, taxpayers
will be able to claim the credit only for actual
expenses for the adoption of children with special
needs. For these taxpayers the qualified expense limit
will be $6,000, the credit will be reduced pro-rata between
$75,000 and $115,000 of modified adjusted gross
income, and the credit amount and phase-out range
will not be indexed annually for inflation. Taxpayers
may not exclude employer-provided adoption assistance
from gross income for taxable years beginning after
December 31, 2010.
To reduce marginal tax rates and simplify computations
of tax liabilities, the Administration is proposing
to eliminate the income-related phaseout of the adoption
tax credit and exclusion. The proposal would be
effective for taxable years beginning after December
31, 2005. The phaseout of adoption tax benefits increases
complexity for all taxpayers using the adoption
tax provisions, including the vast majority who are not
affected by the phaseouts; raises marginal tax rates
for taxpayers in the phase-out range; and with the
higher phase-out income levels under the 2001 tax cut,
affects fewer than 10,000 taxpayers. The broader eligibility
criteria, larger qualifying expense limitations, and
the employer exclusion would apply in taxable years
beginning after December 31, 2010 as a result of the
Administration’s proposal to extend the 2001 tax cut
provisions permanently.
Clarify eligibility of siblings and other family
members for child-related tax benefits.—The 2004
tax relief bill created a uniform definition of a child,
allowing, in many circumstances, a taxpayer to claim
the same child for five different child-related tax benefits.
Under the new rules, a qualifying child must meet
relationship, residency, and age tests. While the new
rules simplify the determination of eligibility for many
child-related tax benefits, the elimination of certain
complicated factual tests to determine if siblings and
certain other family members were eligible to claim
a qualifying child may have some unintended consequences.
The new rules effectively deny the EITC
to some young taxpayers who are the sole guardians
of their younger siblings. Yet some taxpayers will be
able to avoid income limitations on child-related tax
benefits by allowing other family members, who have
lower incomes, to claim the taxpayers’ sons or daughters
as qualifying children. To ensure that deserving
taxpayers receive child-related tax benefits, the Administration
proposes to clarify the eligibility of siblings
and other family members for these benefits. First, a
taxpayer would not be a qualifying child of another
individual if the taxpayer is older than that individual.
However, an individual could be a qualifying child of
a younger sibling if the individual is permanently and
totally disabled. Second, if a parent resides with his
or her child for over half the year, the parent would
be the only individual eligible to claim the child as
a qualifying child. The parent could waive the childrelated
tax benefits to another member of the household
who has higher adjusted gross income and is otherwise
eligible for the tax benefits. The proposal is effective
for taxable years beginning after December 31, 2004.
STRENGTHEN THE EMPLOYER-BASED
PENSION SYSTEM
Ensure fair treatment of older workers in cash
balance conversions and protect defined benefit
plans.—Qualified retirement plans consist of defined
benefit plans and defined contribution plans. In recent
years, many plan sponsors have adopted cash balance
and other ‘‘hybrid’’ plans that combine features of defined
benefit and defined contribution plans. A cash
balance plan is a defined benefit plan that provides
for annual ‘‘pay credits’’ to a participant’s ‘‘hypothetical
account’’ and ‘‘interest credits’’ on the balance in the
hypothetical account. Questions have been raised about
whether such plans satisfy the rules relating to age
discrimination and the calculation of lump sum distributions.
The Administration proposes to (1) ensure
fairness for older workers in cash balance conversions,
(2) protect the defined benefit system by clarifying the
status of cash balance plans, and (3) remove the effec291
17. FEDERAL RECEIPTS
tive ceiling on interest credits in cash balance plans.
All changes would be effective prospectively.
Strengthen funding for single-employer pension
plans.—Under current law, defined benefit pension
plans are subject to minimum funding requirements
imposed under both the Internal Revenue Code and
the Employee Retirement Income Security Act of 1974
(ERISA). In the case of a qualified plan, the Internal
Revenue Code excludes such contributions from gross
income and allows a deduction for the contributions,
subject to certain limits on the maximum deductible
amount. The calculation of the minimum funding requirements
and the limits on deductible contributions
are determined under a series of complex rules and
measures of assets and liability, many of which are
manipulable and none of which entail the use of an
accurate measure of the plan’s assets and its true liabilities.
The Administration proposes rationalizing the multiple
sets of funding rules applicable to single-employer
defined benefit plans and replacing them with a single
set of rules that provide for: (1) funding targets that
are based on meaningful, accurate measures of liabilities
that reflect the financial health of the employer;
(2) the use of market value of assets; (3) a seven-year
amortization period for funding shortfalls; (4) the opportunity
for an employer to make additional deductible
contributions in good years, even when the plan’s assets
are above the funding target; and (5) meaningful consequences
for employers and plans whose funded status
does not improve.
These funding rules changes and the addition of
meaningful consequences for employers and plans
whose funded status does not improve and improved
disclosure to plan participants, investors and regulators
are part of an overall package of reforms that will improve
the health of defined benefit pensions and the
PBGC guarantee system. As described in Chapter 7
of Analytical Perspectives and the Department of Labor
Chapter of the Budget volume, this overall package
includes reform of the premium structure for the PBGC,
revision in the application of the PBGC guarantee rates
and changes to the bankruptcy law.
Reflect market interest rates in lump sum payments.—
Current law generally requires that a lump
sum paid from a pension plan be calculated using the
rate of interest on 30-year Treasury securities for the
month preceding the distribution. Because there are
no 30-year Treasury securities outstanding, the interest
rate on the Treasury bond due February 15, 2031 is
used for this purpose. The Administration proposes to
require that these calculations reflect market interest
rates and lump sum calculations would be calculated
using interest rates that are drawn from a zero-coupon
corporate bond yield curve. The yield curve would be
issued monthly by the Secretary of Treasury and would
be based on the interest rates (averaged over 90 business
days) for high quality corporate bonds with varying
maturities. In order to avoid disruptions, the proposal
would be phased in for plan years beginning in
2007 and 2008 and would not be fully effective until
the plan year beginning in 2009.
CLOSE LOOPHOLES AND IMPROVE TAX
COMPLIANCE
Combat abusive foreign tax credit transactions.—
Current law allows taxpayers a credit
against U.S. taxes for foreign taxes incurred with respect
to foreign income, subject to specified limits. The
Administration proposes to provide the Department of
Treasury with additional regulatory authority to ensure
that the foreign tax credit rules cannot be used to
achieve inappropriate results that are not consistent
with the underlying economics of the transactions in
which the foreign tax credits arise. The regulatory authority
would allow the Department of Treasury to prevent
the inappropriate separation of foreign taxes from
the related foreign income in cases where taxes are
imposed on any person in respect of income of an entity.
Regulations could provide for the disallowance of a
credit for all or a portion of the foreign taxes or the
reallocation of the foreign taxes among the participants
to the transaction.
Modify the active trade or business test.—Current
law allows corporations to avoid recognizing gain in
certain spin-off and split-off transactions provided that,
among other things, the active trade or business test
is satisfied. The active trade or business test requires
that immediately after the distribution, the distributing
corporation and the corporation the stock of which is
distributed (the controlled corporation) be engaged in
a trade or business that has been actively conducted
throughout the five-year period ending on the date of
the distribution. There is no statutory requirement that
a certain percentage of the distributing corporation’s
or controlled corporation’s assets be used in that active
trade or business in order for the active trade or business
test to be satisfied. Because certain non-pro rata
distributions resemble redemptions for cash, the Administration
proposes to require that in the case of
a non-pro rata distribution, in order for a corporation
to satisfy the active trade or business test, as of the
date of the distribution, at least 50 percent of its assets,
by value, must be used or held for use in a trade
or business that satisfies the active trade or business
test.
Impose penalties on charities that fail to enforce
conservation easements.—Although gifts of partial interests
in property generally are not deductible as charitable
contributions, current law allows a deduction for
certain restrictions granted in perpetuity on the use
that may be made of real property (such as an easement).
A deduction is allowed only if the contribution
is made to a qualified organization exclusively for conservation
purposes. To qualify to receive such qualified
conservation contributions, a charity must have a commitment
to protect the conservation purposes of the
292 ANALYTICAL PERSPECTIVES
donation and have the resources to enforce the restrictions.
The Department of Treasury is concerned that
in some cases charities are failing to monitor and enforce
the conservation restrictions for which charitable
contribution deductions were claimed. The proposal
would impose significant penalties on any charity that
removes or fails to enforce such a conservation restriction,
or transfers the easement without ensuring that
the conservation purposes will be protected in perpetuity.
The amount of the penalty would be determined
based on the value of the easement shown on
the appraisal summary provided to the charity by the
donor. The Secretary of the Treasury would be authorized
to waive the penalty in certain circumstances. The
Secretary of the Treasury also would be authorized to
require such additional reporting as may be necessary
or appropriate to ensure that the conservation purposes
are protected in perpetuity.
Eliminate the special exclusion from unrelated
business taxable income for gain or loss on the
sale or exchange of certain brownfields.—In general,
an organization that is otherwise exempt from
Federal income tax is taxed on income from any trade
or business regularly carried on by the organization
that is not substantially related to the organization’s
exempt purposes. In addition, income derived from
property that is debt-financed generally is subject to
unrelated business income tax. The 2004 jobs creation
act created a special exclusion from unrelated business
taxable income of gain or loss from the sale or exchange
of certain qualifying brownfield properties. The exclusion
applies regardless of whether the property is debtfinanced.
The new provision adds considerable complexity
to the Internal Revenue Code and, because there
is no limit on the amount of tax-free gain, could exempt
from tax real estate development considerably beyond
mere environmental remediation. The proposal would
eliminate this special exclusion retroactive to January
1, 2005.
Apply an excise tax to amounts received under
certain life insurance contracts.—Under current
law, both death benefits and accrual of cash value
under a life insurance contract are treated favorably
for Federal income tax purposes. In many states, a
charity has an insurable interest in the life of a consenting
donor. The Department of Treasury has learned
of arrangements in which private investors join with
a charity to purchase life insurance on the lives of
the charity’s donors. The private investors have no relationship
to the insured individuals, however, except by
reason of the arrangement. These arrangements do
more to facilitate investment by private investors in
life insurance contracts than to further a charity’s exempt
purposes and may inappropriately afford benefits
to private investors that would not otherwise be available
without the charity’s involvement. The Administration
proposes to apply a nondeductible 25 percent excise
tax to death benefits, dividends, withdrawals, loans or
surrenders under a life insurance contract if: (1) a charity
has ever had a direct or indirect ownership interest
in the contract; and (2) a person other than a charity
has ever had a direct or indirect interest in the same
contract (including an interest in an entity holding an
interest in that contract). The excise tax would not
apply in enumerated situations that present a low risk
of abuse. The proposal would be effective with respect
to amounts received under life insurance contracts entered
into after February 7, 2005.
Limit related party interest deductions.—Current
law (section 163(j) of the Internal Revenue Code) denies
U.S. tax deductions for certain interest expenses paid
to a related party where (1) the corporation’s debt-toequity
ratio exceeds 1.5 to 1, and (2) net interest expenses
exceed 50 percent of the corporation’s adjusted
taxable income (computed by adding back net interest
expense, depreciation, amortization, depletion, and any
net operating loss deduction). If these thresholds are
exceeded, no deduction is allowed for interest in excess
of the 50-percent limit that is paid to a related party
or paid to an unrelated party but guaranteed by a
related party, and that is not subject to U.S. tax. Any
interest that is disallowed in a given year is carried
forward indefinitely and may be deductible in a subsequent
taxable year. A three-year carryforward for any
excess limitation (the amount by which interest expense
for a given year falls short of the 50-percent limit)
is also allowed. Because of the opportunities available
under current law to reduce inappropriately U.S. tax
on income earned on U.S. operations through the use
of foreign related-party debt, the Administration proposes
to tighten the interest disallowance rules of section
163(j) as follows: (1) The current law 1.5 to 1
debt-to-equity safe harbor would be eliminated; (2) the
adjusted taxable income threshold for the limitation
would be reduced from 50 percent to 25 percent of
adjusted taxable income with respect to disqualified interest
other than interest paid to unrelated parties on
debt that is subject to a related-party guarantee, which
generally would remain subject to the current law 50
percent threshold; and (3) the indefinite carryforward
for disallowed interest would be limited to ten years
and the three-year carryforward of excess limitation
would be eliminated. The Department of Treasury also
is conducting a study of these rules and the potential
for further modifications to ensure the prevention of
inappropriate income-reduction opportunities.
Clarify and simplify qualified tuition programs.—
Current law provides special tax treatment for
contributions to and distributions from qualified tuition
programs under Section 529. The purpose of these programs
is to encourage saving for the higher education
expenses of designated beneficiaries. However, current
law is unclear in certain situations with regard to the
transfer tax consequences of changing the designated
beneficiary of a qualified tuition program account. In
addition, current law creates opportunities for inappropriate
use of these accounts. The proposal would simplify
the tax consequences under these programs and
293 17. FEDERAL RECEIPTS
promote use of these accounts to save for higher education.
The most significant change made by this proposal
is the elimination of substantially all post-contribution
transfer taxes, thus permitting tax-free
changes of the designated beneficiary of an account,
without limitation as to the relationship or number of
generations between the current and former beneficiaries.
Any distribution used to pay the beneficiary’s
qualified higher education expenses would continue to
be tax-free. However, to eliminate the potential transfer
tax benefit of using an account for purposes not intended
by the statute, the principal portion of any distribution
that is not used for higher education expenses
generally would be subject to a new excise tax (payable
from the account) once the cumulative amount of these
distributions exceeds a stated amount per beneficiary.
Distributions from an account would be permitted to
be made only to or for the benefit of the designated
beneficiary. However, a contributor who sets up an account
would be permitted to withdraw funds from the
account during the contributor’s life, subject to income
tax on the income portion of the withdrawal. The income
portion of a withdrawal by the account’s contributor
generally also would be subject to an additional
tax to discourage individuals from using these accounts
to save for retirement. The proposal would be effective
for Section 529 accounts established after the date of
enactment, and no additional contributions would be
permitted to preexisting Section 529 savings accounts
unless those accounts elect to be governed by the new
rules.
TAX ADMINISTRATION, UNEMPLOYMENT
INSURANCE, AND OTHER
Improve Tax Administration
Implement IRS administrative reforms.—The proposed
modification to the IRS Restructuring and Reform
Act of 1998 is comprised of five parts. The first
part modifies employee infractions subject to mandatory
termination and permits a broader range of available
penalties. It strengthens taxpayer privacy while reducing
employee anxiety resulting from unduly harsh discipline
or unfounded allegations. The second part
adopts measures to curb frivolous submissions and filings
that are intended to impede or delay tax administration.
The third part allows the IRS to terminate
installment agreements when taxpayers fail to make
timely tax deposits and file tax returns on current liabilities.
The fourth part streamlines jurisdiction over
collection due process cases in the Tax Court, thereby
simplifying procedures and reducing the cycle time for
certain collection due process cases. The fifth part eliminates
the requirement that the IRS Chief Counsel provide
an opinion for any accepted offer-in-compromise
of unpaid tax (including interest and penalties) equal
to or exceeding $50,000. This proposal requires that
the Secretary of the Treasury establish standards to
determine when an opinion is appropriate.
Initiate IRS cost saving measures.—The Administration
has two proposals to improve IRS efficiency and
performance from current resources. The first proposal
modifies the way that Financial Management Services
(FMS) recovers its transaction fees for processing IRS
levies by permitting FMS to retain a portion of the
amount collected before transmitting the balance to the
IRS, thereby reducing government transaction costs.
The offset amount would be included as part of the
15-percent limit on levies against income and would
also be credited against the taxpayer’s liability. The
second proposal would encourage increased electronic
filing of income tax returns by extending the April filing
date for electronically filed income tax returns to April
30th, provided that any tax due is also paid electronically.
The proposal also would provide the IRS additional
authority to require electronic filing. This proposal
would allow the IRS to process more returns and
payments efficiently.
Allow IRS to access information in the National
Directory of New Hires for tax administration purposes.—
The National Directory of New Hires (NDNH),
an electronic database maintained by the Department
of Health and Human Services, contains timely, uniformly
compiled employment data from State agencies
across the country. Currently, the IRS may obtain data
from the NDNH, but only for limited purposes. Access
to NDNH data for tax administration purposes generally
would make the IRS more productive by reducing
the amount of resources it must dedicate to obtaining
and processing data. The Administration proposes to
amend the Social Security Act to allow the IRS access
to NDNH data for general tax administration purposes,
including data matching, verification of taxpayer claims
during return processing, preparation of substitute returns
for non-compliant taxpayers, and identification
of levy sources. Data obtained by the IRS from the
NDNH would be protected by existing taxpayer privacy
law, including civil and criminal sanctions. The proposal
would be effective on the date of enactment.
Extend IRS authority to fund undercover operations.—
Current law places the IRS on equal footing
with other Federal Law enforcement agencies by permitting
the IRS to fund certain necessary and reasonable
expenses of undercover operations. These undercover
operations include international and domestic
money laundering and narcotics operations. The Administration
proposes to extend this funding authority,
which will expire on December 31, 2005, through December
31, 2010.
Strengthen Financial Integrity of Unemployment
Insurance
Strengthen the financial integrity of the unemployment
insurance system by reducing improper
benefit payments and tax avoidance.—The Administration
has a five-part proposal to strengthen the financial
integrity of the unemployment insurance (UI) sys294
ANALYTICAL PERSPECTIVES
tem. The Administration’s proposal will boost States’
incentives to recover benefit overpayments by permitting
them to use a portion of recovered funds on fraud
and error reduction. The proposal would also require
States to impose a monetary penalty on UI fraud, which
would be used to reduce overpayments; permit more
active participation by private collection agencies in the
recovery of overpayments and delinquent employer
taxes; require States to charge employers when their
actions lead to overpayments; and collect delinquent
UI overpayments through garnishment of Federal tax
refunds. These efforts to strengthen the financial integrity
of the UI system will keep State UI taxes down
and improve the solvency of the State trust funds.
Other Proposals
Modify pesticide registration fee.—The Environmental
Protection Agency has the authority and has
promulgated a rule to collect fees for the registration
of new pesticides. The collection of this fee has been
blocked through appropriations acts since 1989. Most
recently, provisions in the 2004 Consolidated Appropriations
Act suspended this authority through 2010.
The Administration proposes to eliminate the prohibition
on the collection of the fee beginning in 2006 and
to reclassify the fee as offsetting receipts.
Increase Indian gaming activity fees.—The National
Indian Gaming Commission regulates and monitors
gaming operations conducted on Indian lands.
Since 1998, the Commission has been prohibited from
collecting more than $8 million in annual fees from
gaming operations to cover the costs of its oversight
responsibilities. The Administration proposes to amend
the current fee structure so that the Commission can
adjust its activities to the growth in the Indian gaming
industry.
REAUTHORIZE FUNDING FOR THE HIGHWAY
TRUST FUND
Extend excise taxes deposited in the Highway
Trust Fund.—Excise taxes imposed on nonaviation
gasoline, diesel fuel, kerosene, special motor fuels,
heavy highway vehicles, and tires for heavy highway
vehicles are generally deposited in the Highway Trust
Fund. Tax is imposed on nonaviation gasoline at a rate
of 18.4 cents per gallon, on diesel fuel and kerosene
at a rate of 24.4 cents per gallon, and on special motor
fuels at varying rates. The tax rates are scheduled to
fall, generally by 0.1 cent per gallon, on April 1, 2005
(reflecting the scheduled expiration of the LUST Trust
Fund tax) and to 4.3 cents per gallon (or comparable
rates in the case of special motor fuels) on October
1, 2005. A tax equal to 12 percent of the sales price
is imposed on the first retail sale of heavy highway
vehicles (generally, trucks with a gross weight greater
than 33,000 pounds, trailers with a gross weight greater
than 26,000 pounds, and highway tractors). In addition,
a highway use tax of up to $550 per year is imposed
on highway vehicles with a gross weight of at
least 55,000 pounds. A tax is also imposed on tires
with a rated load capacity exceeding 3,500 pounds, generally
at a rate of 0.945 cent per pound of excess. The
taxes on heavy highway vehicles and tires for heavy
highway vehicles are scheduled to expire on September
30, 2005. The Administration proposes to extend the
taxes on nonaviation gasoline, diesel fuel and kerosene,
and special motor fuels at their current rates, except
to the extent attributable to the LUST Trust Fund tax,
through September 30, 2011. The Administration also
proposes to extend the taxes on heavy highway vehicles
and tires for heavy highway vehicles at their current
rates through September 30, 2011.
Allow tax-exempt financing for private highway
projects and rail-truck transfer facilities.—Interest
on bonds issued by State and local governments to finance
activities carried out and paid for by private
persons (private activity bonds) is taxable unless the
activities are specified in the Internal Revenue Code.
The volume of certain tax-exempt private activity bonds
that State and local governments may issue in each
calendar year is limited by state-wide volume limits.
The Administration proposes to provide authority to
issue an aggregate of $15 billion of tax-exempt private
activity bonds beginning in 2005 for the development
of highway facilities and surface freight transfer facilities.
Highway facilities eligible for financing would consist
of any surface transportation project eligible for
Federal assistance under Title 13 of the United States
Code, or any project for an international bridge or tunnel
for which an international entity authorized under
Federal or State law is responsible. Surface freight
transfer facilities would consist of facilities for the
transfer of freight from truck to rail or rail to truck,
including any temporary storage facilities directly related
to those transfers. The Secretary of Transportation
would allocate the $15 billion, which would not
be subject to the aggregate annual state private activity
bond volume limit, among competing projects.
PROMOTE TRADE
Implement free trade agreements with Bahrain,
Panama, and the Dominican Republic.—Free trade
agreements are expected to be completed with Bahrain,
Panama, and the Dominican Republic in 2005, with
ten-year implementation to begin in fiscal year 2006.
These agreements will continue the Administration’s effort
to use free trade agreements to benefit U.S. consumers
and producers as well as strengthen the economies
of our partner countries.
EXTEND EXPIRING PROVISIONS
Extend permanently the research and experimentation
(R&E) tax credit.—The Administration
proposes to extend permanently the 20-percent tax
credit for qualified research and experimentation expenditures
above a base amount and the alternative
incremental credit, which are scheduled to expire on
December 31, 2005.
295 17. FEDERAL RECEIPTS
Extend and modify the work opportunity tax
credit and the welfare-to-work tax credit.—Under
present law, the work opportunity tax credit provides
incentives for hiring individuals from certain targeted
groups. The credit generally applies to the first $6,000
of wages paid to several categories of economically disadvantaged
or handicapped workers. The credit rate
is 25 percent of qualified wages for employment of at
least 120 hours but less than 400 hours and 40 percent
for employment of 400 or more hours. The credit is
available for a qualified individual who begins work
before January 1, 2006.
Under present law, the welfare-to-work tax credit
provides an incentive for hiring certain recipients of
long-term family assistance. The credit is 35 percent
of up to $10,000 of eligible wages in the first year
of employment and 50 percent of wages up to $10,000
in the second year of employment. Eligible wages include
cash wages plus the cash value of certain employer-
paid health, dependent care, and educational
fringe benefits. The minimum employment period that
employees must work before employers can claim the
credit is 400 hours. This credit is available for qualified
individuals who begin work before January 1, 2006.
The Administration proposes to simplify employment
incentives by combining the credits into one credit and
making the rules for computing the combined credit
simpler. The credits would be combined by creating
a new welfare-to-work targeted group under the work
opportunity tax credit. The minimum employment periods
and credit rates for the first year of employment
under the present work opportunity tax credit would
apply to welfare-to-work employees. The maximum
amount of eligible wages would continue to be $10,000
for welfare-to-work employees and $6,000 for other targeted
groups. In addition, the second year 50-percent
credit currently available under the welfare-to-work
credit would continue to be available for welfare-towork
employees under the modified work opportunity
tax credit. Qualified wages would be limited to cash
wages. The work opportunity tax credit would also be
simplified by eliminating the need to determine family
income for qualifying ex-felons (one of the present targeted
groups). The modified work opportunity tax credit
would apply to individuals who begin work after December
31, 2005 and before January 1, 2007.
Extend the first-time homebuyer credit for the
District of Columbia.—A one-time nonrefundable
$5,000 credit is available to purchasers of a principal
residence in the District of Columbia who have not
owned a residence in the District during the year preceding
the purchase. The credit phases out for taxpayers
with modified adjusted gross income between
$70,000 and $90,000 ($110,000 and $130,000 for joint
returns). The credit does not apply to purchases after
December 31, 2005. The Administration proposes to extend
the credit for one year, making the credit available
with respect to purchases after December 31, 2005 and
before January 1, 2007.
Extend authority to issue Qualified Zone Academy
Bonds.—Current law allows State and local governments
to issue ‘‘qualified zone academy bonds,’’ the
interest on which is effectively paid by the Federal
government in the form of an annual income tax credit.
The proceeds of the bonds have to be used for teacher
training, purchases of equipment, curriculum development,
or rehabilitation and repairs at certain public
school facilities. A nationwide total of $400 million of
qualified zone academy bonds were authorized to be
issued in each of calendar years 1998 through 2005.
In addition, unused authority arising in 1998 and 1999
can be carried forward for up to three years and unused
authority arising in 2000 through 2005 can be carried
forward for up to two years. The Administration proposes
to authorize the issuance of an additional $400
million of qualified zone academy bonds in calendar
years 2006; unused authority could be carried forward
for up to two years. Reporting of issuance would be
required.
Extend deduction for corporate donations of
computer technology.—The charitable contribution
deduction that may be claimed by corporations for donations
of inventory property generally is limited to
the lesser of fair market value or the corporation’s basis
in the property. However, corporations are provided
augmented deductions, not subject to this limitation,
for certain contributions. Under current law, an augmented
deduction is provided for contributions of computer
technology and equipment to public libraries and
to U.S. schools for educational purposes in grades K-
12. The Administration proposes to extend the deduction,
which expires with respect to donations made after
December 31, 2005, to apply to donations made before
January 1, 2007.
Extend provisions permitting disclosure of tax
return information relating to terrorist activity.—
Current law permits disclosure of tax return information
relating to terrorism in two situations. The first
is when an executive of a Federal law enforcement or
intelligence agency has reason to believe that the return
information is relevant to a terrorist incident,
threat or activity and submits a written request. The
second is when the IRS wishes to apprise a Federal
law enforcement agency of a terrorist incident, threat
or activity. The Administration proposes to extend this
disclosure authority, which will expire on December 31,
2005, through December 31, 2006.
Extend excise taxes deposited in the Leaking Underground
Storage Tank (LUST) Trust Fund.—An
excise tax is imposed, generally at a rate of 0.1 cents
per gallon, on gasoline and other liquid motor fuels
used on highways, in aviation, on inland waterways,
and in diesel-powered trains. The tax is deposited in
the LUST Trust Fund. The tax is scheduled to expire
on March 31, 2005. The Administration proposes to extend
the tax at the current rate through March 31,
2007.
296 ANALYTICAL PERSPECTIVES
Extend abandoned mine reclamation fees.—Collections
from abandoned mine reclamation fees are allocated
to States and Tribes for reclamation grants. Current
fees of 35 cents per ton for surface mined coal,
15 cents per ton for underground mined coal, and 10
cents per ton for lignite coal are scheduled to expire
on June 30, 2005. Abandoned mine land problems are
expected to exist in certain States after all the money
from the collection of fees under current law is expended.
The Administration proposes to extend these
fees. The Administration also proposes to modify the
authorization language to allocate more of the receipts
collected toward restoration of abandoned coal mine
land.
Extend excise tax on coal at current rates.—Excise
taxes levied on coal mined and sold for use in
the United States are deposited in the Black Lung Disability
Trust Fund. Amounts deposited in the Fund are
used to cover the cost of program administration and
compensation, medical, and survivor benefits to eligible
miners and their survivors, when mine employment terminated
prior to 1970 or when no mine operator can
be assigned liability. Current tax rates on coal sold
by a producer are $1.10 per ton of coal from underground
mines and $0.55 per ton of coal from surface
mines; however, these rates may not exceed 4.4 percent
of the price at which the coal is sold. Effective for
coal sold after December 31, 2013, the tax rates on
coal from underground mines and surface mines will
decline to $0.50 per ton and $0.25 per ton, respectively,
and will be capped at 2 percent of the price at which
the coal is sold. The Administration proposes to repeal
the reduction in these tax rates effective for sales after
December 31, 2013, and keep current rates in effect
until the Black Lung Disability Trust Fund debt is
repaid.
Table 17–3. EFFECT OF PROPOSALS ON RECEIPTS
(in millions of dollars)
2005 2006 2007 2008 2009 2010 2006–10 2006–15
Make Permanent Certain Tax Cuts Enacted in 2001 and 2003 (assumed
in the baseline):
Dividends tax rate structure .................................................................... 309 509 547 537 –16,725 –568 –15,700 –102,905
Capital gains tax rate structure ............................................................... ................ ................ ................ –5,268 –7,473 –5,076 –17,817 –59,016
Expensing for small business .................................................................. ................ ................ ................ –3,402 –5,417 –4,073 –12,892 –21,897
Marginal individual income tax rate reductions ...................................... ................ ................ ................ ................ ................ ................ ................ –502,228
Child tax credit 1 ....................................................................................... ................ ................ ................ ................ ................ ................ ................ –96,777
Marriage penalty relief 2 ........................................................................... ................ ................ ................ ................ ................ ................ ................ –36,029
Education incentives ................................................................................ ................ ................ ................ ................ ................ 3 3 –8,687
Repeal of estate and generation-skipping transfer taxes, and
modification of gift taxes ..................................................................... 4 –557 –910 –1,514 –1,847 –2,192 –7,020 –256,057
Modifications of pension plans ................................................................ ................ ................ ................ ................ ................ ................ ................ –2,323
Other incentives for families and children .............................................. ................ ................ ................ ................ ................ 5 5 –3,594
Total make permanent certain tax cuts enacted in
2001 and 2003 ............................................................................ 313 –48 –363 –9,647 –31,462 –11,901 –53,421 –1,089,513
Tax Incentives:
Simplify and encourage saving:
Expand tax-free savings opportunities .................................................... ................ 3,709 7,151 4,069 1,693 199 16,821 1,461
Consolidate employer-based savings accounts ...................................... ................ –224 –335 –357 –382 –411 –1,709 –14,816
Establish Individual Development Accounts (IDAs) ................................ ................ ................ –134 –286 –326 –300 –1,046 –1,763
Total simplify and encourage saving .............................................. ................ 3,485 6,682 3,426 985 –512 14,066 –15,118
Invest in health care:
Provide a refundable tax credit for the purchase of health
insurance 3 ........................................................................................... ................ –19 –1,435 –1,543 –1,370 –1,241 –5,608 –9,897
Provide an above-the-line deduction for high-deductible
insurance premiums ............................................................................ ................ –200 –2,029 –2,316 –2,636 –2,876 –10,057 –28,495
Provide a refundable tax credit for contributions of small
employers to employee HSAs 4 .......................................................... ................ –61 –304 –834 –1,545 –2,025 –4,769 –17,760
Improve the Health Coverage Tax Credit 5 ............................................ ................ ................ –3 –4 –5 –5 –17 –49
Allow the orphan drug tax credit for certain pre-designation
expenses .............................................................................................. ................ ................ ................ ................ ................ ................ –1 –3
Total invest in health care .............................................................. ................ –280 –3,771 –4,697 –5,556 –6,147 –20,452 –56,204
Provide incentives for charitable giving:
Permit tax-free withdrawals from IRAs for charitable
contributions ......................................................................................... –70 –335 –318 –318 –313 –304 –1,588 –3,095
Expand and increase the enhanced charitable deduction
for contributions of food inventory ...................................................... –42 –87 –96 –106 –116 –127 –532 –1,388
Reform excise tax based on investment income of private
foundations ........................................................................................... ................ –148 –98 –105 –111 –119 –581 –1,321
Modify tax on unrelated business taxable income of
charitable remainder trusts .................................................................. –6 –5 –6 –6 –6 –7 –30 –69
297 17. FEDERAL RECEIPTS
Table 17–3. EFFECT OF PROPOSALS ON RECEIPTS—Continued
(in millions of dollars)
2005 2006 2007 2008 2009 2010 2006–10 2006–15
Modify basis adjustment to stock of S corporations
contributing appreciated property ........................................................ –4 –20 –21 –25 –28 –32 –126 –354
Repeal the $150 million limitation on qualified
501(c)(3) bonds ................................................................................... –3 –6 –10 –11 –10 –10 –47 –92
Repeal certain restrictions on the use of qualified
501(c)(3) bonds for residential rental property ................................... ................ –2 –5 –9 –16 –24 –56 –278
Total provide incentives for charitable giving ................................. –125 –603 –554 –580 –600 –623 –2,960 –6,597
Strengthen education:
Extend, increase, and expand the above-the-line deduction
for qualified out-of-pocket classroom expenses ................................. ................ –27 –267 –279 –282 –285 –1,140 –2,630
Encourage telecommuting:
Exclude from income the value of employer-provided
computers, software, and peripherals ................................................. ................ –29 –50 –50 –55 –65 –249 –767
Provide assistance to distressed areas:
Establish Opportunity Zones ................................................................... ................ –433 –806 –853 –899 –912 –3,903 –9,594
Provide disaster relief:
Provide tax relief for FEMA hazard mitigation assistance
programs .............................................................................................. –20 –40 –40 –40 –40 –40 –200 –400
Increase housing opportunities:
Provide tax credit for developers of affordable single-family
housing ................................................................................................. ................ –7 –84 –342 –815 –1,425 –2,673 –17,370
Protect the environment:
Extend permanently expensing of brownfields remediation
costs ..................................................................................................... ................ –138 –215 –203 –195 –184 –935 –1,743
Exclude 50 percent of gains from the sale of property for
conservation purposes ......................................................................... ................ –47 –92 –105 –60 ................ –304 –304
Total protect the environment ......................................................... ................ –185 –307 –308 –255 –184 –1,239 –2,047
Increase energy production and promote energy
conservation:
Extend the tax credit for producing electricity from wind,
biomass, and landfill gas and modify the tax credit for
electricity from biomass ....................................................................... –48 –144 –321 –260 –160 –163 –1,048 –1,779
Provide tax credit for residential solar energy systems ......................... –5 –11 –19 –24 –34 –16 –104 –104
Modify treatment of nuclear decommissioning funds ............................. –47 –166 –162 –170 –177 –183 –858 –1,881
Provide tax credit for purchase of certain hybrid and fuel
cell vehicles 6 ....................................................................................... –13 –260 –447 –614 –680 –23 –2,024 –2,532
Provide tax credit for combined heat and power property .................... –17 –109 –84 –105 –114 –36 –448 –394
Total increase energy production and promote
energy conservation .................................................................... –130 –690 –1,033 –1,173 –1,165 –421 –4,482 –6,690
Restructure assistance to New York City:
Provide tax incentives for transportation infrastructure .......................... ................ –200 –200 –200 –200 –200 –1,000 –2,000
Repeal certain New York City Liberty Zone incentives ......................... ................ 200 200 200 200 200 1,000 2,000
Total restructure assistance to New York City .............................. ................ ................ ................ ................ ................ ................ ................ ....................
Total tax incentives ................................................................ –275 1,191 –230 –4,896 –8,682 –10,614 –23,232 –117,417
Simplify the Tax Laws for Families:
Simplify adoption tax benefits ...................................................................... ................ –4 –40 –42 –43 –45 –174 –426
Clarify eligibility of siblings and other family members for child
related tax benefits 7 ................................................................................ 11 51 78 77 60 40 306 536
Total simplify the tax laws for families ............................................... 11 47 38 35 17 –5 132 110
Strengthen the Employer-Based Pension System:
Ensure fair treatment of older workers in cash balance
conversions and protect defined benefit plans ....................................... ................ 57 62 78 92 104 393 1,096
Strengthen funding for single-employer pension plans .............................. ................ 151 1,432 –869 –2,699 –1,762 –3,747 –12,735
Reflect market interest rates in lump sum payments ................................. ................ ................ –3 –8 –15 –20 –46 –241
Total strengthen the employer-based pension system ...................... ................ 208 1,491 –799 –2,622 –1,678 –3,400 –11,880
Close Loopholes and Improve Tax Compliance:
Combat abusive foreign tax credit transactions .......................................... 1 2 2 2 2 3 11 26
Modify the active trade or business test ..................................................... 2 6 8 8 8 8 38 87
Impose penalties on charities that fail to enforce conservation
easements ................................................................................................ 3 8 8 8 9 9 42 96
298 ANALYTICAL PERSPECTIVES
Table 17–3. EFFECT OF PROPOSALS ON RECEIPTS—Continued
(in millions of dollars)
2005 2006 2007 2008 2009 2010 2006–10 2006–15
Eliminate the special exclusion from unrelated business taxable
income for gain or loss on the sale or exchange of certain
brownfields ............................................................................................... 1 4 12 23 37 49 125 242
Apply an excise tax to amounts received under certain life
insurance contracts .................................................................................. 2 7 12 17 23 28 87 323
Limit related party interest deductions ........................................................ 74 128 134 141 148 155 706 1,607
Clarify and simplify qualified tuition programs ............................................ ................ 4 12 13 14 20 63 222
Total close loopholes and improve tax compliance ........................... 83 159 188 212 241 272 1,072 2,603
Tax Administration, Unemployment Insurance, and Other:
Improve tax administration:
Implement IRS administrative reforms and initiate cost
saving measures 8 ............................................................................... ................ ................ ................ ................ ................ ................ ................ ....................
Strengthen financial integrity of unemployment
insurance:
Strengthen the financial integrity of the unemployment
insurance system by reducing improper benefit payments
and tax avoidance 6 ............................................................................. ................ ................ 6 –6 –129 –530 –659 –2,856
Other proposals:
Modify pesticide registration fee .............................................................. ................ ................ ................ ................ ................ ................ ................ –152
Increase Indian gaming activity fees ....................................................... ................ ................ 4 4 5 5 18 43
Total tax administration, unemployment insurance,
and other ......................................................................................... ................ ................ 10 –2 –124 –525 –641 –2,965
Reauthorize Funding for the Highway Trust Fund:
Extend excise taxes deposited in the Highway Trust Fund 6 .................... ................ 10 11 11 11 11 54 65
Allow tax-exempt financing for private highway projects and
rail-truck transfer facilities ........................................................................ –5 –22 –47 –75 –92 –97 –333 –601
Total reauthorize funding for the Highway Trust Fund ...................... –5 –12 –36 –64 –81 –86 –279 –536
Promote Trade:
Implement free trade agreements with Bahrain, Panama and
the Dominican Republic 6 .................................................................... ................ –56 –84 –91 –97 –102 –430 –976
Extend Expiring Provisions:
Research & Experimentation (R&E) tax credit ....................................... ................ –2,097 –4,601 –5,944 –6,889 –7,669 –27,200 –76,225
Combined work opportunity/welfare-to-work tax credit ........................... ................ –131 –166 –65 –16 –5 –383 –383
First-time homebuyer credit for DC ......................................................... ................ –1 –18 ................ ................ ................ –19 –19
Authority to issue Qualified Zone Academy Bonds ................................ ................ –3 –8 –13 –18 –20 –62 –162
Deduction for corporate donations of computer technology .................. ................ –73 –49 ................ ................ ................ –122 –122
Disclosure of tax return information related to terrorist
activity 8 ................................................................................................ ................ ................ ................ ................ ................ ................ ................ ....................
LUST Trust Fund taxes 6 ......................................................................... 74 152 77 ................ ................ ................ 229 229
Abandoned mine reclamation fees .......................................................... ................ 304 312 318 322 323 1,579 3,230
Excise tax on coal 6 ................................................................................. ................ ................ ................ ................ ................ ................ ................ 479
Total extend expiring provisions ..................................................... 74 –1,849 –4,453 –5,704 –6,601 –7,371 –25,978 –72,973
Total budget proposals, including proposals assumed in the baseline
........................................................................................................... 201 –360 –3,439 –20,956 –49,411 –32,010 –106,177 –1,293,547
Total budget proposals, excluding proposals assumed in the baseline
........................................................................................................... –112 –312 –3,076 –11,309 –17,949 –20,109 –52,756 –204,034
1 Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $37,319 million for 2006–2015.
2 Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $7,491 million for 2006–2015.
3 Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $78 million for 2006, $3,660 million for 2007, $5,514 million for 2008, $6,529 million
for 2009, $7,035 million for 2010, $22,816 million for 2006–2010 and $64,078 million for 2006–2015.
4 Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $18 million for 2006, $87 million for 2007, $237 million for 2008, $392 million for
2009, $589 million for 2010, $1,323 million for 2006–2010 and $4,930 million for 2006–2015.
5 Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is $3 million for 2006, $10 million for 2007, $11 million for 2008, $13 million for
2009, $14 million for 2010, $51 million for 2006–2010 and $130 million for 2006–2015.
6 Net of income offsets.
7 Affects both receipts and outlays. Only the receipt effect is shown here. The outlay effect is -$115 million for 2006, -$150 million for 2007, -$168 million for 2008, -$196 million
for 2009, -$258 million for 2010, -$887 million for 2006–2010 and -$2,239 million for 2006–2015.
8 No net budgetary impact.
299 17. FEDERAL RECEIPTS
Table 17–4. RECEIPTS BY SOURCE
(In millions of dollars)
Source 2004
Actual
Estimate
2005 2006 2007 2008 2009 2010
Individual income taxes (federal funds):
Existing law ............................................................................................................................ 808,959 893,698 964,283 1,069,364 1,177,249 1,280,242 1,370,919
Proposed Legislation ......................................................................................................... .................. 6 2,594 1,805 –10,076 –35,103 –17,644
Total individual income taxes ................................................................................................ 808,959 893,704 966,877 1,071,169 1,167,173 1,245,139 1,353,275
Corporation income taxes:
Federal funds:
Existing law ....................................................................................................................... 189,370 226,431 222,811 234,112 252,724 264,958 270,000
Proposed Legislation .................................................................................................... .................. 95 –2,553 –4,295 –9,307 –12,595 –12,367
Total Federal funds corporation income taxes ..................................................................... 189,370 226,526 220,258 229,817 243,417 252,363 257,633
Trust funds:
Hazardous substance superfund ...................................................................................... 1 .................. .................. .................. .................. .................. ..................
Total corporation income taxes ............................................................................................. 189,371 226,526 220,258 229,817 243,417 252,363 257,633
Social insurance and retirement receipts (trust funds):
Employment and general retirement:
Old-age and survivors insurance (Off-budget) ................................................................. 457,120 479,891 507,087 537,849 568,092 598,946 635,310
Disability insurance (Off-budget) ....................................................................................... 77,625 81,472 86,104 91,333 96,469 101,708 107,883
Hospital insurance ............................................................................................................. 150,589 161,360 172,135 182,412 193,079 204,007 216,710
Railroad retirement:
Social Security equivalent account .............................................................................. 1,729 1,726 1,760 1,778 1,819 1,853 1,891
Rail pension and supplemental annuity ....................................................................... 2,297 2,187 2,209 2,252 2,192 2,203 2,364
Total employment and general retirement ............................................................................ 689,360 726,636 769,295 815,624 861,651 908,717 964,158
On-budget .......................................................................................................................... 154,615 165,273 176,104 186,442 197,090 208,063 220,965
Off-budget .......................................................................................................................... 534,745 561,363 593,191 629,182 664,561 700,654 743,193
Unemployment insurance:
Deposits by States 1 ......................................................................................................... 32,605 35,371 37,513 38,870 39,620 40,399 42,420
Proposed Legislation .................................................................................................... .................. .................. .................. 7 –7 –162 –662
Federal unemployment receipts 1 .................................................................................... 6,718 7,009 7,357 7,181 6,011 5,798 6,124
Railroad unemployment receipts 1 ................................................................................... 130 96 86 101 124 132 121
Total unemployment insurance ............................................................................................. 39,453 42,476 44,956 46,159 45,748 46,167 48,003
Other retirement:
Federal employees’ retirement—employee share ............................................................ 4,543 4,574 4,540 4,400 4,301 4,153 4,038
Non-Federal employees retirement 2 ............................................................................... 51 45 43 39 36 33 30
Total other retirement ............................................................................................................ 4,594 4,619 4,583 4,439 4,337 4,186 4,068
Total social insurance and retirement receipts ................................................................... 733,407 773,731 818,834 866,222 911,736 959,070 1,016,229
On-budget .............................................................................................................................. 198,662 212,368 225,643 237,040 247,175 258,416 273,036
Off-budget .............................................................................................................................. 534,745 561,363 593,191 629,182 664,561 700,654 743,193
Excise taxes:
Federal funds:
Alcohol taxes ..................................................................................................................... 8,105 7,909 8,056 8,190 8,330 8,579 8,716
Proposed Legislation .................................................................................................... .................. .................. –56 –19 .................. .................. ..................
Tobacco taxes ................................................................................................................... 7,926 7,899 7,732 7,590 7,459 7,325 7,202
Transportation fuels tax .................................................................................................... 1,381 –526 –1,325 –1,417 –1,460 –1,481 –1,500
Proposed Legislation .................................................................................................... .................. .................. 12 13 13 13 14
Telephone and teletype services ...................................................................................... 5,997 6,485 6,881 7,292 7,717 8,158 8,619
Other Federal fund excise taxes ...................................................................................... 1,157 1,373 1,329 1,370 1,423 1,478 1,533
Proposed Legislation .................................................................................................... .................. –1,089 –1,206 –1,214 –1,268 –1,301 –1,333
Total Federal fund excise taxes ........................................................................................... 24,566 22,051 21,423 21,805 22,214 22,771 23,251
Trust funds:
Highway ............................................................................................................................. 34,711 37,792 39,119 39,908 40,630 41,315 41,989
Proposed Legislation .................................................................................................... .................. 1,089 1,107 1,119 1,137 1,151 1,160
300 ANALYTICAL PERSPECTIVES
Table 17–4. RECEIPTS BY SOURCE—Continued
(In millions of dollars)
Source 2004
Actual
Estimate
2005 2006 2007 2008 2009 2010
Airport and airway ............................................................................................................. 9,174 10,517 11,319 11,996 12,651 13,346 14,077
Aquatic resources .............................................................................................................. 416 424 426 439 451 466 479
Tobacco ............................................................................................................................. .................. 1,098 1,089 964 964 964 964
Black lung disability insurance ......................................................................................... 566 584 601 618 636 650 660
Inland waterway ................................................................................................................ 91 91 92 93 93 94 95
Vaccine injury compensation ............................................................................................ 142 170 188 192 194 196 199
Leaking underground storage tank ................................................................................... 189 97 .................. .................. .................. .................. ..................
Proposed Legislation .................................................................................................... .................. 100 202 103 .................. .................. ..................
Total trust funds excise taxes ............................................................................................... 45,289 51,962 54,143 55,432 56,756 58,182 59,623
Total excise taxes .................................................................................................................... 69,855 74,013 75,566 77,237 78,970 80,953 82,874
Estate and gift taxes:
Federal funds ......................................................................................................................... 24,831 23,754 26,810 24,628 25,973 27,625 21,509
Proposed Legislation ......................................................................................................... .................. .................. –689 –1,162 –1,649 –1,612 –1,371
Total estate and gift taxes ...................................................................................................... 24,831 23,754 26,121 23,466 24,324 26,013 20,138
Customs duties:
Federal funds ......................................................................................................................... 20,143 22,100 25,643 27,954 29,918 31,861 33,195
Proposed Legislation ......................................................................................................... .................. 1,608 1,540 1,512 734 736 739
Trust funds ............................................................................................................................. 940 966 1,073 1,170 1,246 1,295 1,345
Total customs duties ............................................................................................................... 21,083 24,674 28,256 30,636 31,898 33,892 35,279
MISCELLANEOUS RECEIPTS: 3
Miscellaneous taxes .............................................................................................................. 96 100 110 106 106 106 106
Proposed Legislation ......................................................................................................... .................. .................. .................. 4 4 5 5
United Mine Workers of America combined benefit fund .................................................... 127 96 119 128 125 122 119
Deposit of earnings, Federal Reserve System .................................................................... 19,652 24,102 28,528 32,197 36,076 39,441 42,239
Defense cooperation .............................................................................................................. 13 7 7 8 8 8 8
Confiscated Assets ................................................................................................................ 18 .................. .................. .................. .................. .................. ..................
Fees for permits and regulatory and judicial services ......................................................... 8,675 9,625 10,049 10,360 10,316 10,004 10,058
Proposed Legislation ......................................................................................................... .................. .................. 304 312 318 322 323
Fines, penalties, and forfeitures ............................................................................................ 3,902 4,252 4,276 4,265 3,551 3,592 3,633
Proposed Legislation ......................................................................................................... .................. –1,608 –1,615 –1,624 –855 –865 –874
Gifts and contributions .......................................................................................................... 153 195 188 187 188 190 192
Refunds and recoveries ........................................................................................................ –71 –326 –328 –336 –344 –352 –359
Total miscellaneous receipts ................................................................................................. 32,565 36,443 41,638 45,607 49,493 52,573 55,450
Total budget receipts .............................................................................................................. 1,880,071 2,052,845 2,177,550 2,344,154 2,507,011 2,650,003 2,820,878
On-budget .............................................................................................................................. 1,345,326 1,491,482 1,584,359 1,714,972 1,842,450 1,949,349 2,077,685
Off-budget .............................................................................................................................. 534,745 561,363 593,191 629,182 664,561 700,654 743,193
MEMORANDUM
Federal funds ......................................................................................................................... 1,100,875 1,228,758 1,307,760 1,423,134 1,539,578 1,633,820 1,746,109
Trust funds ............................................................................................................................. 495,410 545,688 637,748 665,392 694,810 727,810 765,078
Interfund transactions ............................................................................................................ –250,959 –282,964 –361,149 –373,554 –391,938 –412,281 –433,502
Total on-budget ........................................................................................................................ 1,345,326 1,491,482 1,584,359 1,714,972 1,842,450 1,949,349 2,077,685
Off-budget (trust funds) .......................................................................................................... 534,745 561,363 593,191 629,182 664,561 700,654 743,193
Total .......................................................................................................................................... 1,880,071 2,052,845 2,177,550 2,344,154 2,507,011 2,650,003 2,820,878
1 Deposits by States cover the benefit part of the program. Federal unemployment receipts cover administrative costs at both the Federal and State levels. Railroad unemployment
receipts cover both the benefits and adminstrative costs of the program for the railroads.
2 Represents employer and employee contributions to the civil service retirement and disability fund for covered employees of Government-sponsored, privately owned enterprises
and the District of Columbia municipal government.
3 Includes both Federal and trust funds.
