Excerpts Available of Analysis of Obama's Fiscal 2016 Budget

At the start of 2013, the American Taxpayer Relief Act of 2012 (ATRA) prevented income tax increases on the vast majority of taxpayers and provided greater certainty for the years ahead. However, sequestration cuts that took effect in March 2013 reduced Gross Domestic Product (GDP) and employment growth by 0.6 percentage points and 750,000 jobs, respectively, in calendar year 2013 according to estimates from the Congressional Budget Office (CBO). The government shutdown and debt limit standoff in October 2013 also took a toll on the economy. The Bureau of Economic Analysis estimated that the reduction in hours worked by federal employees during the October 2013 shutdown reduced real GDP growth in the fourth quarter of 2013 by 0.3 percentage points.

Over the past 14 months, the Administration and Congress have come together to enact bipartisan legislation mitigating the harmful austerity imposed by sequestration and providing greater certainty. In December 2013, the President signed into law the Bipartisan Budget Act (BBA), undoing a portion of sequestration for 2014 and 2015. Congress followed this action with the enactment of full year appropriations for 2014 in January of last year and full year appropriations for 2015 for almost all departments and agencies in December. In December 2013, the Council of Economic Advisers estimated that the relaxation of sequestration achieved through the BBA would add about 350,000 jobs (cumulative) over the two-year period ending in 2015.

Over the past 21 quarters, through the third quarter of 2014, real GDP has grown at an average annual rate of 2.3 percent, and since February 2010, 11.2 million jobs have been added in the private sector. Job growth accelerated during 2014, with the most jobs created in any calendar year since 1999. Meanwhile, the unemployment rate has fallen fairly steadily from its October 2009 peak of 10.0 percent to 5.6 percent in December.

The economy is projected to grow at a three percent pace in 2015 and in 2016 and at 2.7 percent in 2017. With healthy economic growth, the unemployment rate is expected to reach the level consistent with full employment by the end of 2015 and continue to decline to 4.8 percent by the end of 2017. The unemployment rate then stabilizes at 5.2 percent by 2020.

This chapter contains several sections:

• The first section reviews recent economic performance.

• The second section discusses the Administration's economic projections.

• The third section compares the Administration's assumptions with other forecasts and with the Administration's projection in last year's Budget.

• The fourth section describes how changes in assumptions about key economic variables result in changes in receipts, outlays, and the deficit.

• The fifth section presents information on past forecast errors for growth, inflation, and interest rates and how these forecast errors compare with those for forecasts made by the Congressional Budget Office (CBO) and the private sector Blue Chip Consensus.

• The sixth section shows a probabilistic range of budget outcomes based on past errors in projecting the deficit.

• The last section discusses the relationship between structural and cyclical deficits, showing how much of the actual deficit is related to the economic cycle (e.g., the recent recession) and how much would persist even if the economy were at full employment.

Accelerating Progress in the Labor Market. -- The unemployment rate peaked in 2009 at 10 percent, but has since declined to 5.6 percent. Private employment has grown for the past 58 straight months and December marked the eleventh consecutive month of job growth above 200,000. Moreover, the pace of job creation has jumped from about 195,000 per month in 2012-13 to 235,000 in 2014. However, the unemployment rate re mains somewhat above the level consistent with stable inflation, estimated at about 5.2 percent. The rate of long-term unemployment (those out of work for more than 6 months) remains higher than normal for this stage of a recovery, although it has declined 0.7 percentage points over the past year.

Domestic Energy Boom and Decline in Oil Prices -- In the last five years, there has been a dramatic increase in domestic energy production. The United States is now the world's largest producer of oil and gas. Over the past year, domestic production of crude oil exceeded imports of oil for the first time since 1995. This broad-based energy boom supports jobs directly in production and distribution, as well as indirectly by making the United States more attractive as a location for manufacturing by multinational firms in energy-intensive industries.

The increase in U.S. production, combined with a decline in worldwide oil consumption due to slow growth abroad, increased energy efficiency, and alternative fuel production, led to a dramatic decline in oil prices over the last few months of 2014. The price of West Texas Intermediate crude declined from $107 per barrel in late June to less than $60 per barrel in December. Retail gasoline prices tumbled from $3.78 per gallon to less than $2.50/gallon in December. Although the lower prices may reduce domestic oil production somewhat in the nearterm, the net effect on the economy is positive since the United States is still a net oil importer, and consumers and nonoil businesses will benefit from the price drop.

Housing Markets Show Further Strength. -- The housing market, a major cause of the financial crisis and recession, has shown clear signs of recovery. In 2006-2007, housing prices peaked and, from 2007 through 2008, housing prices fell sharply according to all available measures.³ During the downturn, as house prices fell, investment in housing plummeted, reducing the rate of real GDP growth by an average of 1 percentage point per year. Housing prices started to rise again in 2012 with a cumulative gain of 16 percent over the last seven quarters, according to the Case-Shiller index. Residential investment began to increase steadily in the second quarter of 2011 and rose at an annual rate of about 14% in 2012 with smaller net increases in 2013 and 2014.

In April 2009, housing starts fell to an annual rate of just 478,000 units, the lowest level on record for this series, which dates from 1959. Housing starts rose modestly over the next two years and increased to about one million units per year during 2014. Typically, about 1.65 million starts a year are needed to accommodate the needs of an expanding population with an increasing number of households and to replace older units, indicating potential for a substantial housing rebound. The Administration forecast assumes a continued recovery in housing activity that adds to real GDP growth over the forecast horizon, especially over the next three years.

Consumption Steady -- Between the first quarter of 2007 and the first quarter of 2009, the real net worth of American households declined by $15 trillion at 2009 prices (19 percent) -- the equivalent of one year's GDP. A precipitous decline in the stock market, along with falling house prices over this period, were the main reasons for the drop in household wealth. Since then, real household wealth, including financial assets, has risen substantially and now exceeds its previous peak. Most of this rebound is accounted for by the rise in equity prices. The turnaround in housing prices has raised residential wealth, although it remains well below its previous peak.⁴

In recent quarters, real consumption spending has increased at about a 2-1/2 to 3 percent rate, at or slightly above the long-run growth of the economy. The dramatic fall in oil prices in late 2014 will reduce nominal spending on gasoline and other petroleum products, boost real disposable income, and enable an increase in real spending on other consumer goods and services.

Rebound in Business Investment. -- Business fixed investment fell sharply during the 2008-2009 contraction. It rose rapidly in 2010 through 2014 and real investment at the end of 2013 exceeded its prerecession levels for the first time. Real nonresidential fixed investment in creased by almost 9 percent in the four quarters ending 2014-Q3 and should remain strong during the next stage of the recovery. The cost of capital is low and American corporations at the end of 2014 held substantial levels of cash reserves, which could provide funding for future investments as the economy continues to recover consumption remains relatively strong. Nevertheless, the pace of future growth could prove to be uneven, as investment tends to be volatile.

Fiscal Drag Has Peaked. -- Fiscal policy restraint substantially slowed the expansion in 2012-13, but was a much smaller factor in 2014 as the reduction in Federal Government expenditures slowed. In the four quarters ending 2014-Q3, real Federal spending fell by 0.6 percent and was offset by an increase in State and local spending of 0.9 percent. In the prior four quarters, Federal spending fell 7 percent while State and local outlays increased only 0.8 percent. In 2015 and going forward, real government purchases are expected to have a roughly neutral impact on economic growth.

Real GDP. -- Real GDP grew 2.7 percent during the four quarters ending 2014-Q3. The Administration projects the economic recovery that began in mid-2009 will continue with real GDP growing at an average annual rate of 2.8 percent over the next four years. Real GDP growth is projected to ease to 2.3 percent by 2019 and to remain at that rate for the final years of the forecast. The slower growth in the last few years is due to the exhaustion of the cyclical factors that are still present in the near term. Demographic factors also lower the labor force participation rate as the baby boom generation retires.

Recent recoveries have been somewhat weaker than average, but the last two expansions that began in 1991 and 2001 were preceded by mild recessions, leaving relatively little pent-up demand after conditions improved. Because of the depth of the most recent recession, there was much more room for a rebound in spending and production than was true either in 1991 or 2001. On the other hand, lingering impediments from the credit crisis and other special factors limited the pace of the recovery in the first stages of the expansion, while less favorable demographics also slowed growth relative to previous recoveries.

The U.S. economy has substantial room for growth, although there are factors that could continue to limit that growth in the years ahead. On the positive side, the unemployment rate has fallen substantially since the recession trough and further progress in the labor market is expected in 2015-16. Monetary policy likely will continue to support growth as inflation remains below the Federal Reserve's target. However, some European and Asian markets have been troubled by weak economic growth. The drag from a slowdown in foreign countries could hamper the growth of the U.S. economy.

Long-Term Growth. -- The Administration's forecast does not attempt to project cyclical developments beyond the next few years. The long-run projection for real economic growth and unemployment assumes that they will maintain trend values in the years following the return to full employment. Real GDP grows at a rate of 2.3 percent in the final years of the projection. That is markedly slower than the average growth rate of real GDP since 1947 of 3.2 percent per year. In the 21^st Century, real GDP growth in the United States is likely to be slower than it was in earlier eras because of a slowdown in labor force growth, initially due to the retirement of the post-World War II baby boom generation, and later due to a decline in the growth of the working-age population. As discussed below, these projections do not include the labor force effects of immigration reform, which has the potential to boost labor force growth.

Unemployment. -- In December 2014, the overall unemployment rate was 5.6 percent. In line with the increased growth in the economy projected after 2014, the unemployment rate is expected to decline to 4.8 percent by the end of 2017 and rebound modestly to 5.2 percent during the period of trend growth during the last few years of the forecast. The temporary reduction in the unemployment rate compared with the so-called 'natural rate' is a consequence of inflation running below the Federal Reserve target rate of 2 percent as measured by the price index for personal consumption expenditures; this leaves room for a further drop in unemployment without inflation exceeding the Federal Reserve target.

Inflation. -- The Consumer Price Index for all urban consumers (CPI-U) rose by 0.8 percent for the 12 months ending in December 2014, somewhat lower than in 2013. Excluding food and energy, "core" CPI inflation in 2014 was 1.6%, the same as in 2013. The lower rate of overall inflation as compared to the core index was due almost entirely to lower energy price inflation. By year's end gasoline prices had fallen to a multi-year low.

Weak demand, including from abroad, continues to hold down prices for many goods and services and continued elevated unemployment together with other measures of economic slack are expected to result in a relatively low inflation rate. As the economy recovers and the unemployment rate declines, the rate of inflation should remain near the Federal Reserve's target of around 2 percent per year. The Administration projects that the rate of change in the CPI-U will average 2.3 percent and that the GDP price index will increase at a 2.0 percent annual rate in the long run.

Interest Rates. -- Interest rates on Treasury securities fell sharply in late 2008 as both short-term and long-term rates declined to their lowest levels in decades. Since then, Treasury rates have fluctuated, but they have not returned to the levels observed before the financial crisis. During 2014, the 10-year rate fell by over 50 basis points to 2-1/4 percent, reversing most of the rise that occurred in 2013 after a temporary rise following the Federal Reserve's announcement of a phased reduction in its program of quantitative easing. In the Administration's projections, interest rates are expected to rise, but only gradually as financial concerns are alleviated and the economy continues to strengthen. The 91-day Treasury bill rate is projected to average about 0.4 percent in 2015, consistent with the Federal Reserve's announced intentions, and then to rise to 3.6 percent by 2023. The 10-year rate is expected to rise moderately in 2015 and reaches 4.5 percent by 2020. Consistent with the projections for GDP growth, the Administration forecast projects that interest rates will stabilize below their historical averages; both economic theory and historical data suggest that lower GDP growth is associated with lower interest rates.

 

Table 2-1. ECONOMIC ASSUMPTIONS

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , p. 7.]

 

 

Table 2-2. COMPARISON OF ECONOMIC ASSUMPTIONS IN THE 2015

 

AND 2016 BUDGETS

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , p. 8.]

 

`The Administration projections were completed in mid-November, meaning that they do not reflect new data, such as the revision in real GDP to 5.0 percent in the third quarter of 2014. The nearly three-month lag between that date and the Budget release is due to the long lead time required to complete the estimates for agency programs that are incorporated in the Budget. The Blue Chip Consensus for 2015-2025 in this table was the latest available, from early January for projections through 2016 and from October for long-term projections. The CBO forecast is from the August 2014 update, because the January 2015 Budget Outlook was not available as this volume went to print. The FOMC members' central tendencies of their forecasts date from December 2014.

 

Table 2-3. COMPARISON OF ECONOMIC ASSUMPTIONS

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , p. 9.]

 

The Administration projects that still-high levels of unemployment and low inflation imply a few years of higher-than-normal growth as employment increases, the unemployment rate falls temporarily below 5 percent, and real GDP makes up the lost ground. In the Blue Chip projections, real GDP growth exceeds its long-run average only briefly in the 11-year forecast period. CBO anticipates a stronger recovery than Blue Chip between 2015 and 2017 -- close to the Administration's projection -- but projects a sharper decline in growth in the later years than the Administration, Blue Chip, or the FOMC. CBO assumes slower growth in productivity and potential GDP in the long-term and also assumes that actual GDP will remain below potential after the economy has completed its cyclical recovery. The high end of the FOMC's projections is about the same as the Administration's.

All economic forecasts are subject to error, and looking back, past forecast errors are generally much larger than the forecast differences discussed above. As discussed in a section later in this chapter, past forecast errors among the Administration, CBO, and the Blue Chip have been roughly similar.

Unemployment, Inflation, and Interest Rates. -- The Administration projects unemployment falling steadily over the next few years to a level of 4.8 percent at the end of 2017 and returning to 5.2 percent by the end of the forecast. The other forecasts are slightly less optimistic about employment in the long run.

The Administration, CBO, and the Blue Chip Consensus anticipate a subdued rate of inflation over the next two years. In the medium term, inflation is projected to return to a rate of around two percent per year, which is consistent with the Federal Reserve's long-run policy goal. All forecasts have interest rates increasing substantially in the long run to similar levels.

Effects of policy on growth. -- The Administration's forecast assumes that the President's Budget proposals will be enacted. The 50 or so private forecasters in the Blue Chip Consensus make differing policy assumptions, but it is safe to assume that they do not generally assume full enactment of the Administration's budget proposals. CBO is required in making its projections to assume that current law will continue.

The Administration's Budget proposals provide important support for growth. They include:

• A major investment in infrastructure through a six-year surface transportation reauthorization proposal, as well as additional investments in infrastructure, education and research.

• Business tax reform that will boost the economy by moving to a more neutral tax system and improving the allocation of investment.

• Policies to boost labor supply, particularly among female workers, such as expansion of child care subsidies and the Child and Dependent Care Tax Credit, support for State paid leave programs, and creation of a second earner tax credit, as well as an expansion of the Earned Income Tax Credit for workers without children and noncustodial parents.

• Comprehensive immigration reform. The Budget includes an allowance for immigration reform that takes into account its effects on population and the labor force. Therefore, the economic projections do not include the effects of immigration reform on population and employment, to avoid double counting. However, the allowance does not incorporate immigration reform's significant positive effects on total factor productivity.

• Deficit reduction. The Budget would reduce deficits to sustainable levels and put debt on a declining path as a share of GDP, with positive effects on private investment and growth.

Both receipts and outlays are affected by changes in economic conditions. Budget receipts vary with individual and corporate incomes, which respond to real economic growth and inflation. At the same time, outlays for many Federal programs are directly linked to developments in the economy. For example, most retirement and other social insurance benefit payments are tied by law to consumer price indices. Medicare and Medicaid outlays are affected directly by the prices paid for medical services. Interest on the debt is linked to market interest rates and the size of the budget surplus or deficit, both of which in turn are influenced by economic conditions. Outlays for certain benefits such as unemployment compensation and the Supplemental Nutrition Assistance Program vary with the unemployment rate.

This sensitivity complicates budget planning because differences in economic assumptions lead to changes in the budget projections. Economic forecasting inherently entails uncertainty. It is therefore useful to examine the implications of changes in key economic assumptions. Many of the budgetary effects of such changes are fairly predictable and a set of general principles or "rules of thumb" embodying these relationships can aid in estimating how changes in the economic assumptions would alter outlays, receipts, and the surplus or deficit. These rules of thumb should be understood as suggesting orders of magnitude; they do not account for potential secondary effects.

The rules of thumb show how the changes in economic variables affect Administration estimates for receipts and outlays, holding other factors constant. They are not a prediction of how receipts or outlays would actually turn out if the economic changes actually materialized. The rules of thumb are based on a fixed budget policy which does not account for how policymakers might change taxes and spending should the economic outlook change substantially. For example, unexpected downturns in real economic growth, and attendant job losses, usually give rise to legislative actions to stimulate the economy with additional counter-cyclical policies. Also, the rules of thumb do not reflect certain "technical" changes that often accompany the economic changes. For example, changes in capital gains realizations often accompany changes in the economic outlook. On the spending side of the budget, the rules of thumb do not capture changes in deposit insurance outlays, even though bank failures are generally associated with weak economic growth and rising unemployment.

Economic variables that affect the budget do not always change independently of one another. Output and employment tend to move together in the short run: a high rate of real GDP growth is generally associated with a declining rate of unemployment, while slow or negative growth is usually accompanied by rising unemployment, a relationship known as Okun's Law. In the long run, however, the rate of growth of real GDP reflects mainly the rates of growth of productivity and the labor force because cyclical changes tend to offset each other over the longer term. Expected inflation and interest rates are also closely interrelated: a higher expected rate of inflation increases nominal interest rates, while lower expected inflation reduces them.

Changes in real GDP growth or inflation have a much greater cumulative effect on the budget if they are sustained for several years than if they last for only one year. However, even temporary changes can have lasting effects if they permanently raise or lower the level of the tax base or the level of Government spending. Moreover, temporary economic changes that affect the deficit or surplus change the level of the debt, affecting future interest payments. Highlights of the budgetary effects of these rules of thumb are shown in Table 2-4.

For real growth and employment:

• The first block shows the effect of a temporary reduction in real GDP growth by one percentage point sustained for one year, followed by a recovery of GDP to the base-case level (the Budget assumptions) over the ensuing two years. In this case, the unemployment rate is assumed to rise by one-half percentage point relative to the Budget assumptions by the end of the first year, then return to the base case rate over the ensuing two years. After real GDP and the unemployment rate have returned to their base case levels, most budget effects vanish except for persistent out-year interest costs associated with larger near-term deficits.

• The second block shows the effect of a reduction in real GDP growth by one percentage point sustained for one year, with no subsequent recoupment of the lost growth, accompanied by a permanent increase in the natural rate of unemployment (and of the actual unemployment rate) of one-half percentage point relative to the Budget assumptions. In this scenario, the level of GDP and taxable incomes are permanently lowered by the reduced growth rate in the first year. For that reason and because unemployment is permanently higher, the budget effects (including growing interest costs associated with larger deficits) continue to grow in each successive year.

• The budgetary effects are much larger if the growth rate of real GDP is permanently reduced by one percentage point even leaving the unemployment rate unchanged, as might result from a shock to productivity growth. These effects are shown in the third block. In this example, the cumulative increase in the budget deficit is many times larger than the effects in the first and second blocks.

• The fourth block shows the effect of a one percentage point higher rate of inflation and one percentage point higher nominal interest rates maintained for the first year only. In subsequent years, the price level and nominal GDP would both be one percentage point higher than in the base case, but interest rates and inflation rates are assumed to return to their base case levels. Receipts increase by somewhat more than outlays. This is partly due to the fact that outlays for annually appropriated spending are assumed to remain constant when projected inflation changes. Despite the apparent implication of these estimates, inflation cannot be relied upon to lower the budget deficit, mainly because policymakers have traditionally prevented inflation from permanently eroding the real value of spending.

• In the fifth block, the rate of inflation and the level of nominal interest rates are higher by one percentage point in all years. As a result, the price level and nominal GDP rise by a cumulatively growing percentage above their base levels. In this case, again the effect on receipts is more than the effect on outlays. As in the previous case, these results assume that annually appropriated spending remains fixed under the discretionary spending limits. Over the time period covered by the budget, leaving the discretionary limits unchanged would significantly erode the real value of this category of spending.

• The effects of a one percentage point increase in interest rates alone are shown in the sixth block. The outlay effect mainly reflects higher interest costs for Federal debt. The receipts portion of this rule-of-thumb is due to the Federal Reserve's deposit of earnings on its securities portfolio and the effect of interest rate changes on both individuals' income (and taxes) and financial corporations' profits (and taxes).

• The seventh block shows that a sustained one percentage point increase in inflation in the CPI and GDP price index decreases cumulative deficits substantially, due in part to the assumed erosion in the real value of appropriated spending. Note that the separate effects of higher inflation and higher interest rates shown in the sixth and seventh blocks do not sum to the effects for simultaneous changes in both shown in the fifth block. This is because the gains in budget receipts due to higher inflation result in higher debt service savings when interest rates are also assumed to be higher in the fifth block than when interest rates are assumed to be unchanged in the seventh block.

• The last entry in the table shows rules of thumb for the added interest cost associated with changes in the budget deficit, holding interest rates and other economic assumptions constant.

Table 2-4. SENSITIVITY OF THE BUDGET TO ECONOMIC ASSUMPTIONS

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , p. 12.]

 

 

Table 2-5. FORECAST ERRORS, JANUARY 1982-PRESENT

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , p. 13.]

 

Inflation, as measured by the GDP price index, was overestimated by all forecasters (with Blue Chip having the largest errors) for both the two-year and six-year projections, with larger errors for the six-year projections. This reflects the gradual disinflation over the 1980s and early 1990s, which was greater than most forecasters expected. Average errors for all three sets of forecasts since 1994 were close to zero (not shown).

The nominal interest rate on the 91-day Treasury bill was also overestimated by all three forecasters, with errors larger for the six-year time horizon. Again this reflects the secular decline in nominal interest rates over the past 30 years, reflecting lower inflation for most of the period as well as a decline in real interest rates since 2000 resulting from weakness in the economy and Federal Reserve policy. The average errors were somewhat less for the Administration than for CBO and the Blue Chip forecasts.

 

Table 2-6. DIFFERENCES BETWEEN ESTIMATED AND ACTUAL

 

SURPLUSES OR DEFICITS FOR FIVE-YEAR BUDGET ESTIMATES SINCE 1986

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , p. 14.]

 

 

Structural and Cyclical Deficits

 

An alternative measure of the budget deficit is the structural deficit. This measure provides a more useful perspective on the stance of fiscal policy than does the unadjusted budget deficit. The portion of the deficit traceable to the response of the automatic stabilizers to the effects of the business cycle is called the cyclical component. The remaining portion of the deficit is called the structural deficit. The structural deficit is a better gauge of the underlying stance of fiscal policy than the unadjusted deficit because it removes most of the effects of the business cycle. So, for example, the structural deficit would include fiscal policy changes such as the 2009 Recovery Act, but not the automatic changes in unemployment insurance or reduction in tax receipts that would have occurred without the Act.

 

Chart 2-1. Range of Uncertainty for the

 

Budget Deficit

 

 

 

 

Table 2-7. THE STRUCTURAL BALANCE

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , p. 15.]

 

Another factor that can affect the deficit and is related to the business cycle is labor force participation. Since the official unemployment rate does not include workers who have left the labor force, the conventional measures of potential GDP, incomes, and Government receipts understate the extent to which potential work hours are under-utilized because of a decline in labor force participation. The key unresolved question here is to what extent changes in labor force participation are cyclical and to what extent they are structural. By convention, in estimating the structural budget deficit, all changes in labor force participation are treated as structural, which probably understates the cyclical contribution to changes in deficits.

There are also lags in the collection of tax revenue that can delay the impact of cyclical effects beyond the year in which they occur. The result is that even after the unemployment rate has fallen, receipts may remain cyclically depressed for some time until these lagged effects have dissipated. The recent recession added substantially to the estimated cyclical component of the deficit, but for all the reasons stated above, the cyclical component is probably understated. As the economy recovers, the cyclical deficit is projected to decline and turns negative after unemployment falls below 5.2 percent, the level assumed to be consistent with stable inflation. During that period, the structural deficit exceeds the total deficit. The estimated cyclical component returns to zero in the out years as unemployment returns to 5.2 percent, leaving only the structural deficit.

Despite these limitations, the distinction between cyclical and structural deficits is helpful in understanding the path of fiscal policy. The large increase in the deficit in 2009 and 2010 is due to a combination of both components of the deficit. There was a large increase in the cyclical component because of the rise in unemployment. That is what would be expected considering the severity of the recent recession. In addition, there was a large increase in the structural deficit because of the policy measures taken to combat the recession. This reflects the Government's decision to make active use of fiscal policy to lessen the severity of the recession and to hasten economic recovery. The structural deficit shrank by seven percentage points between 2009 and 2014, reflecting the relatively sharp fiscal tightening measures taken during that period. Between 2015 and 2018, the cyclical component of the deficit is projected to decline sharply and falls below zero as the economy recovers at an above-trend rate of GDP growth and the unemployment rate declines temporarily to 4.8 percent.

² The dating of U.S. business cycles is done by the National Bureau of Economic Research, a private institution that has supported economic research on business cycles and other topics for many decades.

³ There are several measures of national housing prices. Two respected measures that attempt to correct for variations in housing quality are the S&P/Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) Purchase-Only House Price Index. The Case-Shiller index peaked in 2006, while the FHFA index peaked in 2007.

⁴ Real wealth is computed by deflating household net worth from the Flow-of-Funds Accounts by the Chained Price Index for Personal Consumption Expenditures. Data are available through 2014:Q3.

⁵ Two-year errors for real GDP and the GDP price index are the average annual errors in percentage points for year-over-year growth rates for the current year and budget year. For interest rates, the error is based on the average error for the level of the 91-day Treasury bill rate for the two-year and six-year period. Administration forecasts are from the budgets released starting in February 1982 (1983 Budget) and through February 2012 (2013 Budget), so that the last year included in the projections is 2013. The six-year forecasts are constructed similarly, but the last forecast used is from February 2008 (2009 Budget). CBO forecasts are from "The Budget and Economic Outlook" publications in January each year, and the Blue Chip forecasts are from their January projections.

As a result of both economic recovery and policy changes, deficits have since fallen rapidly. Last year's deficit (2.8 percent of GDP) was less than one third the size of the deficit the President inherited, reflecting the fastest sustained deficit reduction since just after World War II. Both the Administration and the Congressional Budget Office (CBO) now project that deficits over the next few years will remain around 3 percent of GDP (even without additional changes in policy), roughly the level consistent with a stable debt-to-GDP ratio.

In the wake of this progress in reducing near-term deficits, some observers have questioned whether there has been comparable progress in reducing medium- and, especially, long-term deficits. While the detailed estimates of receipts and outlays in the President's Budget extend only 10 years, this chapter reviews the longer-term budget outlook, both under a continuation of current policies and under the policies proposed in the Budget. The analysis finds:

• Legislation and other developments since 2010 have not only improved near-term projections, they have also substantially improved the medium- and long-term budget outlook.

• The most significant sources of progress are lower projected health spending (revised in light of the historically slow health care cost growth rates of the last several years), discretionary policy changes, and revenue increases enacted in the American Taxpayer Relief Act of 2012 (ATRA).

• Enacted policy changes, while significant, are insufficient to stabilize debt over the next 10 or 25 years. Additional changes of about 1.1 percent of GDP are needed to achieve fiscal sustainability over the 25-year horizon.

• The deficit reduction proposed in the President's Budget is sufficient to achieve fiscal sustainability. With the Budget's proposals for health, tax, and immigration reforms and other policy changes, debt as a share of GDP declines modestly over the next decade and stabilizes after that.

The chapter also discusses the status of the Social Security and Medicare Hospital Insurance trust funds, which are financed from dedicated revenue sources. The 2016 Budget would extend the life of both the Social Security and Medicare trust funds, through immigration reform and health savings proposals, respectively. Still, additional measures would be needed to achieve 75-year trust fund solvency.

In the case of discretionary spending, it is less clear how to implement a continuation of current policy in the absence of statutory caps, both the Administration's and CBO's 10-year baselines assume that discretionary funding levels generally grow slightly above the rate of inflation (about 2.5 percent per year). Long-run projections sometimes assume that discretionary funding remains constant as a share of the economy, implying long-run growth of a little over 4 percent per year. Meanwhile, discretionary funding has failed to even keep pace with inflation, falling by 11 percent in real terms over the past four years.

The projections here adopt an intermediate approach, assuming that real per-person discretionary funding remains constant over the long run, which implies an annual growth rate of about 3 percent. For the many discretionary programs that provide services to individuals, it is reasonable to define current policy as maintaining the same level of services for the same share of the population, which can be approximated by holding real per-person discretionary funding constant. In contrast, holding discretionary spending constant as a share of GDP effectively assumes large increases in per-person service levels over time, as well as large increases in real funding levels for national defense, research, infrastructure, and other public goods.

 

Chart 3-1, Publicly Held Debt Under Continuation of Current

 

Policies

 

 

 

 

Long-Run Projections Under

 

Continuation of Current Policies

 

The key drivers of that increase are an aging population, health care cost growth, and insufficient revenues to keep pace with these trends.

Aging population. -- Over the next 10 years, an aging population will put significant pressure on the budget. In 2008, when the oldest members of the baby boom generation became eligible for early retirement under Social Security, the ratio of workers to Social Security beneficiaries was 3.2. By the end of the 10-year budget window, that ratio will fall to 2.4, and it will reach about 2.1 in the early 2030s, at which point most of the baby boomers will have retired.

With fewer active workers paying taxes and more retired workers eligible for Social Security, Medicare, and Medicaid (including long-term care), budgetary pressures will increase. Social Security program costs will grow from 4.9 percent of GDP today to 5.9 percent of GDP by 2040, with about two thirds of that growth occurring within the 10-year budget window. Likewise, even if per-beneficiary health care costs grew at the same rate as GDP per capita, Medicare and Medicaid costs would still increase substantially as a share of GDP, due solely to the aging population.

Health costs. -- Health care costs per capita have risen much faster than percapita GDP growth for decades, leading both public and private spending on health care to increase as a share of the economy. However, the last few years have seen a sharp departure from long-term trends, with per-capita health costs growing in line with per-capita GDP, and per-beneficiary costs for Medicare growing more slowly than per-capita GDP. While some of the slowdown reflects the Great Recession and its aftermath, there is strong evidence that a portion of it is the result of structural changes. For example, since Medicare beneficiaries are typically retired or disabled, Medicare costs tend to be less sensitive to economic conditions than overall health spending. But Medicare cost growth has slowed in line with the overall slowdown in health care costs, suggesting that the recession was not the primary driver of the recent slowdown, particularly in public programs.

Based on projections of Medicare enrollment and expenditures included in the 2014 Medicare Trustees Report, the projections here assume that Medicare per-beneficiary spending growth will accelerate over the next few years, with the growth rate averaging about 0.8 percentage points above the growth rate of per-capita GDP over the next 25 years.² (This average growth rate is still below the historical average for the last 25 years.) Under these assumptions, Medicare and Medicaid costs increase by a total of 2.6 percentage points as a share of GDP by 2040.

 

Chart 3-2. Changes to Projected 2020 Deficit

 

Under Continuation of Current Policies

 

 

 

Other programs. -- Other mandatory programs are generally projected to decline relative to the size of the economy and to consume a smaller share of revenues over time. For example, spending on non-health safety net programs will decline as incomes grow. Likewise, pension benefits for Federal workers will shrink as a share of the economy as a result of reductions initiated in the 1980s. Overall, spending on mandatory programs outside of health care and Social Security equals 16.7 percent of revenues today, but is projected to equal 15.1 percent of revenues by 2040. Likewise, discretionary spending will consume a smaller share of revenues over time.

As Chart 3-2 shows, in the 2011 Mid-Session Review, published in July 2010, the Administration projected a 2020 deficit of $1230 billion, or 5.1 percent of GDP under continuation of current policies.³ The 2016 Budget projects a baseline deficit of $739 billion, or 3.3 percent of GDP in 2020, a reduction of 1.9 percentage points or $491 billion (40 percent). As shown in the chart, one major contributor to the improvement is lower than expected Federal health spending. Revisions to health spending forecasts based on the historically slow growth of the past several years (and based on the assumption that only a portion of the slowdown will continue) will save the Federal government $262 billion in 2020, accounting for about half of the net improvement in the deficit. Another important factor is the high-income revenue increases enacted in ATRA (about a fifth of the net improvement). Discretionary spending restraint has also played a large role, although the impact of sequestration is much less than the impact of the pre-sequestration Budget Control Act cuts and less than the savings from winding down wars.⁴

There has been a similar improvement in projected long-term deficits and debt. Chart 3-3 shows the projected path of debt as a share of GDP under current policies, as of the 2011 Budget (February 2010) projection of current policy, and as of today.⁵ A few years ago, debt in 2040 was projected to reach 149 percent of GDP. Today, it is projected to reach 103 percent of GDP. While it is difficult to precisely decompose the contributing factors over long periods, the major drivers behind the improvement are the same: lower projected health care costs, revenue increases from ATRA, and lower discretionary spending.

 

Chart 3-3. Comparison of Publicly Held Debt

 

 

 

 

The Fiscal Gap

 

Table 3-1 shows the 25-year fiscal gap under the base-line projections, under the President's policies, and as of 2010. Under the base case current policy projections, the 25-year fiscal gap is 1.1 percent of GDP. This means that policy adjustments of about 1.1 percent of GDP would be needed each year to put the Nation on a sustainable fiscal course for the next two-and-a-half decades. For context, this is equivalent to about half the legislated deficit reduction since 2010. In contrast, as of 2010, adjustments of 2.4 percent of GDP would have been needed to achieve the goal of stabilizing debt over 25 years. While the two values are not strictly comparable (due to the different 25-year time periods), the difference underscores the significant improvement in the fiscal outlook over the last few years.

 

Table 3-1. 25-YEAR FISCAL GAP (-)/SURPLUS (+)

 

UNDER BUDGET POLICIES

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , p. 19.]

 

Additional health reforms building on the ACA. -- As discussed above, the last few years have seen historically slow growth in health care spending in both Medicare and the private market. While the slowdown reflects a variety of factors, there is evidence that the reforms enacted in the Affordable Care Act are already contributing to this slowdown, as discussed below.

 

Chart 3-4. 2016 Budget Policies

 

 

 

As shown in Chart 3-4 and Table 3-1, these reforms have a large effect on the long-run budget outlook, reducing the fiscal gap by 0.3 percent of GDP.

Tax reform. -- The Budget's tax reform proposals increase revenues by about $640 billion over the first 10 years by curbing inefficient tax benefits for high-income households, as discussed in Chapter 12, "Governmental Receipts," of this volume. These tax reforms reduce the fiscal gap by an additional 0.3 percent of GDP.

Commonsense immigration reform. -- The 2016 Budget continues to propose commonsense, comprehensive immigration reform that would strengthen border security, modernize the legal immigration system, and provide a path to earned citizenship. By adding younger workers to the labor force, immigration reform would help balance an aging population as the baby boom generation retires. CBO estimates that the 2013 Senate-passed immigration bill would have reduced deficits by almost $1 trillion over 20 years. It would also boost economic growth and strengthen Social Security.

The Budget's 10-year projections include an allowance for deficit reduction from immigration reform based on the CBO estimate. The long-run projections are based on CBO's "second-decade" estimate extended as a constant share of GDP from 2035 to 2040. As shown in Chart 3-4 and Table 3-1, higher immigration has a positive effect on the budget, reducing the fiscal gap by an additional 0.1 percentage points.

Other 2016 Budget policies. -- The remaining policies in the 2016 Budget reduce the fiscal gap by 0.5 percentage points. The Budget obtains these additional savings from ending our combat mission in Afghanistan and from additional spending reductions and tax changes beyond those needed to pay for its investments in education, infrastructure, research, and other areas.

 

Table 3-2. 25-YEAR FISCAL GAP (-)/SURPLUS (+)

 

UNDER ALTERNATIVE BUDGET SCENARIOS

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , p. 19.]

 

 

Chart 3-5. Alternative Productivity and Interest Assumptions

 

 

 

 

Uncertainty and Alternative Assumptions

 

The longer budget projections are extended, the more the uncertainties increase. Table 3-2 gives a sense of the degree of uncertainty in the 25-year projections under continuation of current policies. Under plausible alternative assumptions, the 25-year fiscal gap ranges from a gap of 1.9 percent of GDP to a gap of 0.3 percent of GDP. Alternative assumptions considered include:

Productivity and interest rates. -- The rate of future productivity growth has a major effect on the long-run budget outlook (see Chart 3-5). Higher productivity growth improves the budget outlook, because it adds directly to the growth of the major tax bases while having a smaller effect on outlay growth. Meanwhile, productivity and interest rates tend to move together, but have opposite effects on the budget. Economic growth theory suggests that a 0.1 percentage point increase in productivity should be associated with a roughly equal increase in interest rates.

Productivity growth is also highly uncertain. For much of the last century, output per hour in nonfarm business grew at an average rate of around 2.2 percent per year, but there were long periods of sustained output growth at notably higher and lower rates than the long-term average. The base case long-run projections assume that real GDP per hour worked will grow at an average annual rate of 1.8 percent per year, slower than the historical average, and assumes interest rates on 10-year Treasury securities of 4.5 percent. The alternative scenarios highlight the effect of raising and lowering the projected productivity growth rate by 0.25 percentage point and changing interest rates commensurately. The 25-year fiscal gap ranges from a fiscal gap of 0.3 percent of GDP in the high productivity scenario to a gap of 1.1 percent of GDP in the base case and 1.9 percent of GDP in the low productivity scenario.

Health spending. -- Health care cost growth represents another large source of uncertainty in the long-term budget projections (see Chart 3-6). As noted above, the baseline projections follow the Medicare Trustees in assuming that Medicare per-beneficiary costs grow an average of about 0.8 percentage points faster than per-capita GDP growth over the next 25 years. But historically, especially prior to 1990, health care costs grew even more rapidly. Conversely, over the last few years, per-capita health care costs have grown roughly in line with GDP per-capita and even more slowly in Medicare and Medicaid.

As noted above, there is evidence that a significant portion of the recent decline in health care cost growth is structural (rather than related to the recession), and that the ACA is playing a contributing role, for example through Medicare provider payment reforms and incentives for hospitals to reduce readmissions. The ACA also enacted an array of more fundamental delivery system reforms that encourage efficient, high-quality care, including incentives for the creation of accountable care organizations and the launch of a wide variety of payment reform demonstrations. Though in their early stages, these reforms have generated promising early results and could have major effects on health care quality and cost going forward.

Table 3-2 shows the large impact that either slower or faster health care cost growth would have on the budget. If health care cost growth averaged 1.5 percentage points, instead of roughly 0.8 percentage points, faster than per-capita GDP growth, the current policy 25-year fiscal gap would increase from 1.1 to 1.8 percent of GDP. If health care costs grew with GDP per capita, the 25-year fiscal gap would be 0.5 percent of GDP.

 

Chart 3-6. Alternative Health Care Costs

 

 

 

In the base case projection, tax receipts rise gradually relative to GDP as real incomes rise, consistent with what would occur under current law. Chart 3-8 shows alternative receipts assumptions. Assuming that Congress will act to cut taxes to avoid the revenue increases associated with rising incomes would bring about higher deficits and publicly held debt. The 25-year fiscal gap rises from 1.1 percent of GDP in the base case to 1.3 percent of GDP in the alternative case.

Finally, Chart 3-9 shows how uncertainties magnify over a 75-year forecast horizon. As the chart shows, under the baseline projections, without policy changes, debt exceeds 100 percent of GDP by 2038 before starting a slow decline in the very long run. Alternatively, assuming a combination of slower productivity growth and higher health care cost growth results in a debt explosion, with debt-to-GDP reaching 460 percent by the end of the window. Meanwhile, assuming a combination of higher productivity growth and slower health care cost growth results in the debt being completely paid off by 2061.

 

Chart 3-7. Alternative Discretionary Projections

 

 

 

 

Chart 3-8. Alternative Revenue Projections

 

 

 

The Social Security and Medicare Trustees' reports feature the actuarial balance of the trust funds as a summary measure of their financial status. For each trust fund, the balance is calculated as the change in receipts or program benefits (expressed as a percentage of taxable payroll) that would be needed to preserve a small positive balance in the trust fund at the end of a specified time period. The estimates cover periods ranging in length from 25 to 75 years.

 

Chart 3-9. Long-Term Uncertainties

 

Publicly Held Debt as a Percent of GDP

 

 

 

 

Table 3-3. INTERMEDIATE ACTUARIAL PROJECTIONS

 

FOR OASDI AND HI

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , page 24.]

 

As a result of reforms legislated in 1983, Social Security had been running a cash surplus with taxes exceeding costs up until 2009. This surplus in the Social Security trust fund helped to hold down the unified budget deficit. The cash surplus ended in 2009, when the trust fund began using a portion of its interest earnings to cover benefit payments. The 2014 Social Security Trustees' report projects that the trust fund will not return to cash surplus, but the program will continue to experience an overall surplus for several more years because of the interest earnings. After that, however, Social Security will begin to draw on its trust fund balances to cover current expenditures. Over time, as the ratio of workers to retirees falls, costs are projected to rise further from 14.0 percent of Social Security covered payroll in 2013 to 14.3 percent of payroll in 2020, 16.6 percent of payroll in 2030 and 17.9 percent of payroll in 2080. Revenues excluding interest are projected to rise only slightly from 12.8 percent of payroll today to 13.3 percent in 2080. Thus the annual balance is projected to decline from -1.2 percent of payroll in 2013 to -1.4 percent of payroll in 2020, -3.5 percent of payroll in 2030, and -4.6 percent of payroll in 2080. On a 75-year basis, the actuarial deficit is projected to be -2.9 percent of payroll. In the process, the Social Security trust fund, which was built up since 1983, would be drawn down and eventually be exhausted in 2033. These projections assume that benefits would continue to be paid in full despite the projected exhaustion of the trust fund to show the long-run implications of current benefit formulas. Under current law, not all scheduled benefits would be paid after the trust funds are exhausted. However, benefits could still be partially funded from current revenues. The 2014 Trustees' report presents projections on this point. Beginning in 2033, 77 percent of projected Social Security scheduled benefits would be funded. This percentage would eventually decline to 72 percent by 2088.

The 2016 Budget would improve the condition of both trust funds. The health savings proposed in the Budget would extend the life of the HI trust fund by approximately five years, according to estimates by the Medicare Actuary. Meanwhile, the Social Security Actuary estimated the Senate-passed immigration bill would reduce the Social Security shortfall by 8 percent, extending the life of the trust fund by two years. Nonetheless, additional reforms will be needed to restore 75-year solvency in both programs.

Demographic and economic assumptions. -- For the years 2015-2025, the assumptions are drawn from the Administration's economic projections used for the 2016 Budget. The economic assumptions are extended beyond this interval by holding inflation, interest rates, and the unemployment rate constant at the levels assumed in the final year of the budget forecast. Population growth and labor force growth are extended using the intermediate assumptions from the 2014 Social Security Trustees' report. The projected rate of growth for real GDP is built up from the labor force assumptions and an assumed rate of productivity growth. Productivity growth, measured as real GDP per hour, is assumed to equal its average rate of growth in the Budget's economic assumptions -- 1.8 percent per year.

CPI inflation holds stable at 2.3 percent per year, the unemployment rate is constant at 5.2 percent, the yield on 10-year Treasury notes is steady at 4.5 percent, and the 91-day Treasury bill rate is 3.5 percent. Consistent with the demographic assumptions in the Trustees' reports, U.S. population growth slows from around 1 percent per year to about two-thirds that rate by 2030, and slower rates of growth beyond that point. By the end of the 75-year projection period total population growth is nearly as low as 0.4 percent per year. Real GDP growth is projected to be less than its historical average of around 3.4 percent per year because the slowdown in population growth and the increase in the population over age 65 reduce labor supply growth. In these projections, real GDP growth averages between 2.1 percent and 2.3 percent per year for the period following the end of the 10-year budget window.

The economic and demographic projections described above are set by assumption and do not automatically change in response to changes in the budget outlook. This makes it easier to interpret the comparisons of alternative policies and is a reasonable simplification given the large uncertainties surrounding the long-run outlook.

Budget projections. -- For the period through 2025, receipts and outlays in the baseline and policy projections follow the 2016 Budget's adjusted baseline and policy estimates respectively. After 2025, total tax receipts rise gradually relative to GDP as real incomes also rise. Discretionary spending grows at the rate of growth in inflation plus population afterwards. Long-run Social Security spending is projected by the Social Security actuaries using this chapter's long-run economic and demographic assumptions. Medicare benefits are projected based on a projection of beneficiary growth and excess health care cost growth from the 2014 Medicare Trustees' report projected baseline; for the policy projections, these assumptions are then also adjusted to account for the Budget's IPAB proposal. Medicaid outlays are based on the economic and demographic projections in the model, which assume excess cost growth of approximately 1.2 percentage points above growth in GDP per capita. Other entitlement programs are projected based on rules of thumb linking program spending to elements of the economic and demographic projections such as the poverty rate.

² For this year's report, the Trustees' changed their projections to reflect a projected baseline scenario, which assumes that the sharp physician payment reductions required under the current-law sustainable growth rate formula will be permanently overridden by lawmakers.

³ For comparability, all projections include continuation of the 2001 and 2003 tax cuts and Alternative Minimum Tax Relief and assume that the Medicare SGR reductions do not take effect.

⁴ To simplify the comparisons of projected health spending, these comparisons start from the 2011 Mid-Session Review, following the enactment of the Affordable Care Act. However, the ACA itself also reduced projected deficits. CBO estimated that the ACA would reduce the deficit by $25 billion in 2020 and by over $1 trillion in the decade starting in 2023. These direct, scored effects of the ACA are separate from any contributions to the broader health care cost growth slow-down, discussed below.

⁵ The "2010 projections" are based on 2010 data and Trustees assumptions but -- for comparability -- use the Administration's current methodology for long-term projections, in particular assuming that discretionary funding grows with inflation plus population growth. While the Administration did not produce a comparable long-term projection for the 2011 Mid-Session Review, the long-term projections from the 2011 Budget projection of current policy can be used to illustrate the fiscal improvements achieved since 2010; the comparison relative to the 2011 Mid-Session Review would be qualitatively similar.

⁶ The ACA established an Independent Payment Advisory Board (IPAB) that is required to propose changes in Medicare should Medicare per beneficiary cost growth exceed target growth rates specified in law; such IPAB-proposed changes would take effect automatically, unless overridden by the Congress. The Budget includes a proposal that would strengthen the IPAB mechanism by lowering the target growth rate applicable for 2020 onward from GDP +1.0 percentage points to GDP +0.5 percentage points.

The tax reform proposals outlined in this chapter address each of these challenges. The Budget would reform and simplify tax incentives that help families afford child care, pay for college, and save for retirement, while expanding tax benefits that support and reward work. It would pay for these changes by reforming the system of capital gains taxation and by imposing a new fee on large, heavily-leveraged financial firms, and it would raise revenue for deficit reduction by curbing high-income tax benefits and closing loopholes. Finally, the Budget includes proposals to broaden the business tax base, strengthen incentives for research and clean energy, grow and create innovative small businesses, and reform the international tax system, while devoting the transition revenue from international tax reform to major investments in infrastructure.

Going forward, the President is committed to working with the Congress and other stakeholders to build on the foundation laid by the Budget to create a tax system that is fair, simple, and efficient, one that is right for the 21st century American economy.

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 next Chapter.

Total governmental receipts (hereafter referred to as "receipts") are estimated to be $3,176.1 billion in 2015, an increase of $154.6 billion or 5.1 percent from 2014. The estimated increase in 2015 is attributable primarily to the growth in personal income and corporate profits as the economy continues to recover from the recession. These sources of income affect payroll taxes and individual and corporation income taxes, the three largest sources of receipts. Receipts in 2015 are estimated to be 17.7 percent of Gross Domestic Product (GDP), which is higher than in 2014, when receipts were 17.5 percent of GDP.

 

Table 12-1. RECEIPTS BY SOURCE -- SUMMARY

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , page 28.]

 

As a share of GDP, receipts are projected to increase from 17.7 percent in 2015 to 18.7 percent in 2016, and to rise to 19.7 percent in 2025.

Modify interest rate corridors for single-employer pension funding rules. -- For purposes of applying the minimum finding rules that apply to single-employer defined benefit plans, the Internal Revenue Code generally specifies the interest rates that must be used. Since 2012, the interest rates have been adjusted to fit within a specified percentage of the 25-year average of those rates. This Act modifies the specified percentage so that the narrowest range around the 25-year average applies for plan years beginning before 2017, which has the effect of raising the applicable interest rates and thereby reducing the minimum required contributions for these plans.

Modify treatment of expatriate health plans. -- The Affordable Care Act (ACA) imposes various requirements with respect to health plans, including market reform rules and an allocated fee assessed on certain insurers of U.S. health risks. As originally enacted, the ACA included no clear exclusion from these requirements for expatriate plans in which substantially all participants were non-resident persons temporarily working within the United States or U.S. citizens working abroad. This Act exempts expatriate plans from many provisions of the ACA, provided the plans meet certain criteria, including indicia of global operations, compliance with coverage thresholds, and substantial participation by qualified expatriates. In addition, this Act provides that an individual enrolled in an expatriate health plan is not a U.S. health risk for purposes of the insurer allocated fee. As applied to expatriate plans, this Act generally is effective for plans issued or renewed on or after July 1, 2015, except that the insurer fee paid by an expatriate plan issuer for the years 2014 and 2015 is reduced by a ratio reflecting the percentage of premiums that are for expatriate health plans.

Modify certain rules regarding multiemployer pension plans. -- This Act made a number of changes to the special rules for multiemployer plans in critical or endangered status. New provisions added by the Act permit the suspension of benefits for multiemployer plans that are in "critical and declining status" under certain circumstances. This Act also repealed the sunset of automatic approvals of certain changes in funding methods and certain extensions of amortizations periods.

Extend the travel promotion surcharge. -- Under the Travel Promotion Act of 2009, a $10 surcharge was added to the existing Electronic System for Travel Authorization user fee that travelers from visa waiver countries pay before arriving in the United States. This Act extended the authorization to collect the surcharge, which was scheduled to expire on September 31, 2015, through September 30, 2020.

Extend the ability to exclude discharges of indebtedness on principal residences from gross income. -- Up to $2 million (or up to $1 million per spouse for married taxpayers filing separate returns) of discharges of certain indebtedness on a principal residence may be excluded from gross income. This Act extended the exclusion for one year, to apply to indebtedness discharged after December 31, 2013, and before January 1, 2015.

Extend parity for exclusion from income for employer-provided mass transit and parking benefits. -- Qualified transportation fringe benefits provided by an employer through transit passes and vanpooling can be excluded from an employee's income up to a statutory maximum of $100 per month in combined transit pass and vanpool benefits and $175 per month in qualified parking benefits. Both statutory limits are adjusted annually for inflation and, for 2014, were $130 per month for combined transit pass and vanpool benefits and $250 per month for qualified parking benefits. Prior law temporarily provided parity in these benefits by increasing the monthly exclusion for combined employer-provided transit pass and vanpool benefits to the same level as the exclusion for employer-provided parking benefits. This Act extended that parity for one year, effective for benefits provided after December 31, 2013, and before January 1, 2015. Under this provision, the monthly limit on the exclusion for combined transit pass and vanpool benefits increased from $130 to $250 for 2014.

Extend deduction for mortgage insurance premiums. -- Certain premiums paid or accrued for qualified mortgage insurance by a taxpayer in connection with acquisition indebtedness on a qualified residence are deductible for income tax purposes. This Act extended the deduction for one year, to apply to amounts paid or accrued in 2014 that are not properly allocable to any period after December 31, 2014.

Extend optional deduction for State and local general sales taxes. -- A taxpayer is 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. This Act extended this deduction for one year, effective for taxable years beginning after December 31, 2013, and before January 1, 2015.

Extend increased limits on contributions of partial interest in real property for conservation purposes. -- Special rules for the deductibility of qualified conservation contributions were temporarily enhanced, applicable for qualified conservation contributions made in taxable years beginning after December 31, 2005, and before January 1, 2014. These enhancements: (1) increased the cap on deductions for qualified conservation contributions from 30 percent to 50 percent of the excess of the donor's contribution base over the amount of all other allowable charitable contributions; (2) increased the cap on deductions for qualified conservation contributions applicable to qualified ranchers and farmers to 100 percent of the excess of the donor's contribution base over the amount of all other allowable charitable contributions in the case of individuals and to 100 percent of the excess of taxable income over the amount of all other allowable charitable contributions in the case of corporations; and (3) increased the number of years qualified conservation contributions in excess of the 50- and 100-percent caps may be carried forward from five to 15 years. This Act extended these enhanced special rules for one year, applicable for qualified conservation contributions made in taxable years beginning after December 31, 2013, and before January 1, 2015.

Extend deduction for qualified tuition and related expenses. -- An above-the-line deduction of up to $4,000 is provided for qualified higher education expenses paid by a qualified taxpayer during the taxable year. For a given taxable year, the deduction may not be claimed: (1) if an education tax credit is claimed for the same student; (2) for amounts taken into account in determining the amount excludable from income due to a distribution from a Coverdell education savings account or the amount of interest excludable from income with respect to education savings bonds; and (3) for the amount of a distribution from a qualified tuition plan that is excludable from income, except that the deduction may be claimed for the amount not attributable to earnings. This Act extended the deduction for one year, to apply to expenses incurred in taxable years beginning after December 31, 2013, and before January 1, 2015.

Extend tax-free distributions from Individual Retirement Accounts (IRAs) for charitable contributions. -- An exclusion from gross income is provided for otherwise taxable distributions from a traditional or a Roth IRA made directly to a qualified charitable organization. The exclusion for these qualified charitable distributions may not exceed $100,000 per taxpayer per taxable year and is applicable only to distributions made on or after the date the IRA owner attains age 70 1/2. This Act extended the exclusion for one year, to apply to distributions made in taxable years beginning after December 31, 2013, and before January 1, 2015.

Extend temporary minimum Low-Income Housing tax credit (LIHTC) rate for non-Federally subsidized new buildings. -- The LIHTC is provided to owners of qualified low-income rental units. The credit may be claimed over a 10-year period for a portion of the cost of rental housing occupied by tenants having incomes below specified levels. Under prior law, a temporary minimum credit percentage of nine percent was provided for newly constructed non-Federally subsidized buildings that received an allocation of a housing credit dollar amount before January 1, 2014. This Act extended the nine-percent rate for one year, to apply to projects that have received an allocation before January 1, 2015.

Extend treatment of basic housing allowances for the purpose of LIHTC income eligibility rules. -- In general, to be eligible for the LIHTC, a qualified low-income housing project must satisfy one of two tests at the election of the taxpayer: (1) 20 percent or more of the residential units in the project are both rent-restricted, and occupied by individuals whose income is 50 percent or less of area median gross income; or (2) 40 percent or more of the residential units in the project are both rent-restricted, and occupied by individuals whose income is 60 percent or less of area median gross income. These income requirements are adjusted for family size. Effective for income determinations made after July 30, 2008, and before January 1, 2014, for buildings that are located in certain counties, the basic housing allowance (payments provided under section 403 of title 37, United States Code) provided to military personnel was not included in income for the purpose of LIHTC income eligibility rules. This Act extended the disregard of basic housing allowances for purposes of LIHTC income eligibility rules for one year, effective for income determinations made before January 1, 2015.

Extend tax incentives for employment on Indian reservations. -- This Act extended for one year, for taxable years beginning before January 1, 2015, the employment tax credit for qualified workers employed on 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.

Extend the New Markets tax credit (NMTC). -- The NMTC is a 39-percent credit for qualified equity investments made in qualified community development entities that are held for a period of at least seven years. This Act extended the NMTC, which expired at the end of 2013, for one year, to apply to 2014. Up to $3.5 billion in qualifying investment is allowed for 2014.

Extend railroad track maintenance credit. -- A 50-percent business tax credit is provided for qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer in taxable years beginning after December 31, 2004, and before January 1, 2014. The credit was limited to the product of $3,500 times the number of miles of railroad track owned or leased by, or assigned to, an eligible taxpayer as of the close of the taxable year. This Act extended the credit for one year, to apply to qualified expenses incurred in taxable years beginning after December 31, 2013, and before January 1, 2015.

Extend credit for mine rescue training. -- An eligible taxpayer may claim a general business tax credit with respect to each qualified mine rescue team employee equal to the lesser of: (1) 20 percent of the amount paid or incurred by the taxpayer during the taxable year with respect to the training program costs of the qualified mine rescue team employee; or (2) $10,000. This Act extended the credit for one year, to apply to costs incurred in taxable years beginning after December 31, 2013, and before January 1, 2015.

Extend employer wage credit for employees who are active duty members of the uniformed services. -- Some employers voluntarily pay their employees who are called to active duty in the armed forces of the United States the difference between the compensation that they would have paid the employee during the period of military service and the amount of pay received by the employee from the military. This payment by the employer is often referred to as "differential pay." Eligible small business employers are provided a tax credit equal to 20 percent of up to $20,000 in annual eligible differential wage payments made to each qualified employee. This Act extended the credit for one year, making it available for eligible differential wage payments made to a qualified employee after December 31, 2013, and before January 1, 2015.

Extend the work opportunity tax credit (WOTC). -- The WOTC provides incentives to employers for hiring individuals from one or more of nine targeted groups. This Act extended the credit for one year, to apply to wages paid to qualified individuals who begin work for the employer after December 31, 2013, and before January 1, 2015.

Extend the issuance of qualified zone academy bonds. -- This Act extended the qualified zone academy bond program for one year, authorizing the issuance of $400 million in such bonds in calendar year 2014.

Extend classification of certain race horses as three-year property. -- Under this Act, the three-year recovery period applicable to race horses placed in service after December 31, 2008, and before January 1, 2014, was extended for one year, to apply to race horses placed in service before January 1, 2015. This Act also extended the start date by one year whereby a three-year recovery period would apply to any race horse more than two years old at the time such horse is placed in service, effective for such horses placed in service after December 31, 2014.

Extend modified recovery period for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. -- This Act extended the 15-year recovery period for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property for one year, effective for such property placed in service after December 31, 2013, and before January 1, 2015.

Extend seven-year recovery period for motor-sports entertainment complexes. -- Under this Act, the seven-year recovery period applicable to motorsports entertainment complexes placed in service after October 22, 2004, and before January 1, 2014, was extended for one year, to apply to such facilities placed in service before January 1, 2015.

Extend accelerated depreciation for business property on Indian reservations. -- This Act extended for one year, through December 31, 2014, the accelerated depreciation rules for qualified property used in the active conduct of a trade or business within an Indian reservation. Property used to conduct or house certain gaming activities is not eligible for the accelerated depreciation rules.

Extend 50-percent first-year depreciation deduction for certain property. -- This Act extended for one year the additional first-year depreciation deduction equal to 50 percent of the adjusted basis of the property, to apply to qualifying property acquired and placed in service in calendar year 2014. The placed-in-service deadline was extended through 2015 for certain longer-lived property, transportation property, and certain aircraft, with respect to the property's adjusted basis attributable to production activity occurring before 2015. Corporations are allowed to claim additional alternative minimum tax (AMT) credits in lieu of claiming the additional first-year depreciation. For purposes of determining the percentage of completion under the long-term contract rules, the cost of certain property is determined as if the additional first-year depreciation deduction had not been allowed. The Act extended this provision by one year, for qualified property placed in service before January 1, 2015.

Extend 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 or, if less, the fair market value of the inventory. For certain contributions of inventory, C corporations may claim an enhanced deduction equal to the lesser of: (1) basis plus one-half of the item's appreciation; or (2) two times basis. However, any taxpayer (not just a C corporation) engaged in a trade or business is eligible to claim the enhanced deduction for donations of food inventory. To qualify for the enhanced deduction, the donated food inventory must meet certain quality and labeling standards and cannot exceed 10 percent of the taxpayer's net income from the related trade or business. This Act extended the enhanced charitable deduction for contributions of food inventory for one year, to apply to contributions made after December 31, 2013, and before January 1, 2015.

Extend increased expensing for small business. -- Business taxpayers are allowed to expense up to $500,000 in annual investment expenditures for qualifying property (including off-the-shelf computer software) placed in service in taxable years beginning after 2009 and before 2014. The maximum amount that can be expensed is reduced by the amount by which the taxpayer's cost of qualifying property exceeds $2,000,000. Effective for property placed in service after 2009 and before 2014, the definition of qualifying property is expanded to include certain real property, such as qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property; however, the maximum amount of such real property that can be expensed is $250,000. This Act extended for one year, effective for qualifying property placed in service in taxable years beginning in 2014 (including off-the-shelf computer software and certain real property), the annual expensing and investment limits that were in effect in 2010 through 2013.

Extend expensing of advanced mine safety equipment. -- Taxpayers are allowed to immediately expense 50 percent of the cost of underground mine safety equipment that is above and beyond existing safety equipment requirements. This Act extended this provision for one year, to apply to property placed in service after December 31, 2013, and before January 1, 2015.

Extend expensing for certain qualified film and television productions. -- Taxpayers could elect to deduct up to $15 million ($20 million for productions in certain areas) of the aggregate costs of any qualifying film and television production in the year in which the expenses were incurred, in lieu of capitalizing the cost and recovering it through depreciation allowances. This Act extended this provision for one year, to apply to qualified film and television productions commencing after December 31, 2013, and before January 1, 2015.

Extend the domestic production activities deduction for activities in Puerto Rico. -- A deduction is provided for a portion of a taxpayer's qualified production activities income. Qualified production activities income generally is equal to domestic production gross receipts reduced by the sum of the costs of goods sold and other expenses, losses, or deductions that are properly allocable to those receipts. Domestic production gross receipts generally only include receipts from activities performed within the United States, and do not include receipts from activities performed in Puerto Rico. For taxable years beginning after May 17, 2006, the amount of the deduction for a taxable year is limited to 50 percent of the wages paid by the taxpayer and properly allocable to domestic production gross receipts during the calendar year that ends in such taxable year. Wages paid to bona fide residents of Puerto Rico generally are not included in the wage limitation amounts. However, effective for the first eight taxable years of a taxpayer beginning after December 31, 2005, and before January 1, 2014, a taxpayer with gross receipts from sources within the Commonwealth of Puerto Rico can treat production activities performed in Puerto Rico as performed in the United States for purposes of determining qualified production activities income, and can take into account wages paid to bona fide residents of Puerto Rico for services performed in Puerto Rico in computing the 50-percent wage limitation, provided all of the taxpayer's gross receipts are subject to the Federal income tax. This Act extended this provision for one year, to apply to the first nine taxable years of a taxpayer beginning after December 31, 2005, and before January 1, 2015.

Extend special rule regarding tax treatment of certain payments to controlling exempt organizations. -- Interest, rents, royalties, and annuities generally are excluded from the tax on unrelated business income of tax-exempt organizations, unless such income is received from a taxable or tax-exempt subsidiary that is 50-per-cent controlled by the parent tax-exempt organization. However, such income received by a tax-exempt parent organization from a controlled subsidiary before January 1, 2014, is taxable only to the extent that it exceeds amounts that would have been received if such payments had been determined under the arm's length principles of section 482 of the Internal Revenue Code. This Act extended this provision for one year, to apply to such income received before January 1, 2015.

Extend special tax rules applicable to regulated investment companies (RICs). -- This Act extended for one year, through December 31, 2014, the following special tax rules applicable to RICs: (1) the exemption from U.S. withholding tax for certain interest-related dividends and short-term capital gain dividends paid by a RIC to a foreign shareholder; and (2) the treatment of RICs as "qualified investment entities" for purposes of the provisions regarding foreign investment in U.S. real property interests.

Extend subpart F "active financing" and "look-through" exceptions. -- Under the rules contained in sections 951 and 964 of the Internal Revenue Code (subpart F), U.S. shareholders of a controlled foreign corporation (CFC) are subject to U.S. tax currently on certain income earned by the CFC, whether or not such income is distributed. Exceptions from subpart F are provided for: (1) certain income derived in the active conduct of a banking, financing, insurance, or similar business (active financing exception); and (2) dividends, interest, rents, and royalties received by one CFC from a related CFC to the extent attributable or properly allocable to income of the related CFC that is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States (look-through exception). This Act extended both the subpart F active financing and look-through exceptions to apply to taxable years beginning after December 31, 2013, and before January 1, 2015.

Extend exclusion of 100 percent of gain on certain small business stock. -- Capital gains realized on the sale of certain small business stock held by an individual for more than five years are excluded from tax, effective for stock issued after September 27, 2010, and before January 1, 2014. This Act extended the 100-percent exclusion for one year, to apply to qualified small business stock issued after December 31, 2013, and before January 1, 2015.

Extend basis adjustment to stock of S corporations contributing appreciated property. -- Each shareholder of an S corporation must take into account his or her pro rata share of a charitable contribution by the S corporation in determining his or her income tax liability. For donations of property, this generally is the pro rata share of the property's fair market value; the shareholder's basis in the stock of the company is reduced by the amount of the charitable contribution that flows through to the shareholder. However, effective for charitable contributions made by an S corporation in taxable years beginning after December 31, 2005, and before January 1, 2014, shareholders are allowed to adjust their basis in the stock of the company by their pro rata share of the adjusted basis of the contributed property instead of by their pro rata share of the market value of the contributed property. This Act extended this provision for one year, to apply to charitable contributions made by an S corporation in taxable years beginning before January 1, 2015.

Extend reduction in recognition period for S corporation built-in gains tax. -- A "small business corporation" may elect to be treated as an S corporation. Unlike C corporations, S corporations generally pay no corporate-level tax; instead, items of income and loss of an S corporation pass through to its shareholders. A corporate level tax, at the highest marginal tax rate applicable to corporations (currently 35 percent), is imposed on the net recognized built-in gain of an S corporation that arose prior to the conversion of a C corporation to the S corporation and that is recognized by the S corporation during the "recognition period." The "recognition period" is the 10-year period beginning with the first day of the first taxable year for which the election to be treated as an S corporation is in effect; however, the "recognition period" was reduced to five years for dispositions of property in taxable years beginning in 2011, 2012, and 2013. This Act extended the five-year recognition period for one year, to apply to dispositions of property in taxable years beginning in 2014.

Extend tax incentives for empowerment zones. -- This Act extended the tax incentives (including employment credits and low-cost loans) that are provided to businesses located in the 40 federally-designated empowerment zones (30 in urban areas and 10 in rural areas) for one year, through December 31, 2014.

Extend temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands. -- A $13.50-per-proof-gallon excise tax is imposed on distilled spirits produced in or imported into the United States. Under current law, $10.50 per proof gallon of the tax imposed on rum imported into the United States is covered over (paid) to Puerto Rico and the Virgin Islands. A temporary increase in the amount covered over to Puerto Rico and the Virgin Islands to $13.25 per proof gallon expired with respect to rum imported into the United States after December 31, 2013. This Act extended the $13.25-per-proof-gallon cover over amount for one year, to apply to rum imported into the United States after December 31, 2013, and before January 1, 2015.

Extend the economic development credit for American Samoa. -- Under prior law, a domestic corporation that was an existing possession tax credit claimant with respect to American Samoa and elected the application of the tax credit for its last taxable year beginning before January 1, 2006, was allowed to claim a possession tax credit based on the economic activity-based limitation rules for the first eight taxable years beginning after December 31, 2005, and before January 1, 2014. A domestic corporation that was an existing possession tax credit claimant and did not elect the application of the tax credit for its last taxable year beginning before January 1, 2006, was allowed to claim a possession tax credit based on the economic activity-based limitation rules for the first two taxable years beginning after December 31, 2011, and before January 1, 2014. This Act extended the ability of domestic corporations to claim a possession tax credit based on the economic activity-based limitation rules for one year, to apply to taxable years beginning after December 31, 2013, and before January 1, 2015.

Extend second generation biofuel producer credit. -- An income tax credit (generally equal to $1.01 per gallon) is provided to producers of second generation biofuel. This Act extended the credit for one year, to apply to fuel produced after December 31, 2013, and before January 1, 2015.

Extend credits for renewable diesel and biodiesel fuels. -- An excise tax credit (or a payment) of $1.00 is provided for each gallon of biodiesel and agri-biodiesel used by a taxpayer in producing a biodiesel mixture for sale or use in a trade or business. An income tax credit for biodiesel fuels (the biodiesel fuels credit) is also provided. The biodiesel fuels income tax credit is the sum of three credits: (1) the biodiesel mixture credit, which is $1.00 for each gallon of biodiesel and agri-diesel used by the taxpayer in the production of a qualified biodiesel mixture; (2) the biodiesel credit, which is $1.00 for each gallon of biodiesel and agri-diesel that is not in a mixture with diesel when used as a fuel or sold at retail; and (3) the small agri-biodiesel producer credit, which is a 10-cents-per-gallon credit for up to 15 million gallons of agri-biodiesel produced by small producers. Renewable diesel is eligible for the excise tax credit (or payment) and the income tax credit provided to biodiesel fuels at a rate of $1.00 per gallon. This Act extended for one year, through December 31, 2014, these credits and payments for biodiesel and renewable diesel fuels.

Extend credit for the production of Indian coal. -- This Act extended for one year, through December 31, 2014, the credit for the production of coal from reserves owned by Indian tribes at facilities placed in service before January 1, 2009.

Extend tax credit with respect to facilities producing energy from certain renewable sources. -- Taxpayers are allowed a tax credit for electricity produced from wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower, and marine and hydrokinetic renewable energy at qualified facilities (the renewable electricity production credit). To qualify for the credit, electricity generally must be sold by the taxpayer to an unrelated person and must be produced at a qualified facility. For the production of electricity from solar energy and small irrigation power, a facility is qualified if it was placed in service before January 1, 2006, and October 3, 2008, respectively. For the production of electricity from wind, closed-loop biomass, open-loop biomass, geothermal energy, municipal solid waste, qualified hydropower, geothermal energy, and marine and hydrokinetic renewable energy, a facility is qualified if construction began before January 1, 2014. This Act extended for one year, through December 31, 2014, the date on which construction must commence for a facility that produces electricity from wind, closed-loop biomass, open-loop biomass, geothermal energy, municipal solid waste, qualified hydropower, and marine and hydrokinetic renewable energy to be a qualified facility. This Act also extended for one year, through December 31, 2014, the election to treat qualified facilities as energy property eligible for the 30-percent energy production credit, in lieu of the renewable electricity production credit.

Extend credit for the construction of energy-efficient new homes. -- An eligible contractor is provided a tax credit for each qualified new energy-efficient home that is constructed and acquired from the contractor by a person for use as a residence. This Act extended the credit for one year, to apply to homes purchased after December 31, 2013, and before January 1, 2015.

Extend special allowance for second generation biofuel plant property. -- This Act extended the additional first-year depreciation deduction, equal to 50 percent of the adjusted basis of qualified second generation biofuel plant property, for one year, to apply to such property placed in service before January 1, 2015.

Extend deduction for energy-efficient commercial building property. -- A deduction is provided for the cost of energy-efficient commercial building property placed in service before January 1, 2014. This Act extended the deduction for one year, to apply to such property placed in service after December 31, 2013, and before January 1, 2015.

Extend special rules for sales or dispositions to implement Federal Energy Regulatory Commission (FERC) or State electric restructuring rules for qualified electric utilities. -- Under a special provision of prior law, taxpayers were allowed to elect to recognize gain from the sale or disposition of qualifying electric transmission property ratably over an eight-year period beginning in the year of sale if the amount realized from such sale was used to purchase exempt utility property (reinvestment property) within the applicable period. Any gain realized in excess of the amount used to purchase the reinvestment property was recognized as income in the year of the qualifying electric transmission transaction. This Act extended this special rule for one year, to apply to the sale or disposition of qualifying electric transmission property after December 31, 2013, and before January 1, 2015.

Extend alternative fuels excise tax credits. -- Two per-gallon excise tax credits are available for the production of alternative fuel: the alternative fuel credit and the alternative fuel mixture credit. Alternative fuel means liquefied petroleum gas, P Series fuels, compressed or liquefied natural gas, liquefied hydrogen, liquid fuel derived from coal through the Fischer-Tropsch process, compressed or liquefied gas derived from biomass, or liquefied fuel derived from biomass. The alternative fuel credit is 50 cents per gallon of alternative fuel or gasoline gallon equivalents of nonliquid alternative fuel sold by the taxpayer for use as a motor fuel in a motor vehicle or motorboat, sold for use in aviation or so used by the taxpayer. The alternative fuel mixture credit is 50 cents per gallon of alternative fuel used in producing an alternative fuel mixture for sale or use in a trade or business of the taxpayer. A taxpayer is also allowed to file a claim for payment equal to the amount of the alternative fuel credit or the alternative fuel mixture credit. Under prior law, the credits and payments for non-hydrogen fuels expired with respect to fuel used or sold after December 31, 2013; the credits and payments with respect to liquefied hydrogen expired with respect to fuel used or sold after September 30, 2014. This Act extended the alternative fuel credit, the alternative fuel mixture credit, and related payments for non-hydrogen fuels for one year, to apply to fuel sold or used before January 1, 2015.

Extend credit for alternative fuel vehicle refueling property. -- A tax credit is provided for the cost of qualified clean-fuel vehicle refueling property to be used in a trade or business of the taxpayer or installed at the principal residence of the taxpayer. Under prior law, the credit is available for hydrogen refueling property placed in service before January 1, 2015, and for non-hydrogen refueling property placed in service before January 1, 2014. This Act extended the credit for non-hydrogen refueling property for one year, to apply to property placed in service after December 31, 2013, and before January 1, 2015.

Authorize certification of professional employer organization (PEOs) by the Internal Revenue Service (IRS) for the withholding and remittance of taxes with respect to the customer's employees. -- If a business contracts with a PEO to administer its payroll functions, the business customer remains responsible for the withholding and remittance of taxes with respect to its employees, and compliance with related reporting requirements. This Act authorizes the IRS to certify qualifying PEOs to become solely responsible for the withholding and remittance of taxes with respect to the customer's employees, as well as compliance with related reporting requirements. To be certified by the IRS, the PEO must satisfy various requirements, including posting a bond in case it fails to satisfy its tax withholding and remittance obligations. The PEO would also be subject to an annual certification fee not to exceed $1,000. The IRS is required to establish the PEO certification program by July 1, 2015, and the provision is generally effective for wages paid by a certified PEO for services performed by a customer's employees after 2015.

Exclude dividends from CFCs from the definition of personal holding company income for purposes of the personal holding company rules. -- In addition to the regular corporation income tax, a corporation that is a personal holding company (a company that is majority-owned by five or fewer individuals and more than 60 percent of its income consists of certain types of passive income) must pay an additional 20-percent tax on undistributed personal holding company income above a threshold amount. Personal holding company income includes dividends, interest, certain rents, and other generally passive investment income, including dividends derived from an active trade or business of a foreign subsidiary. Under this Act, dividends received by a 10-percent U.S. shareholder from a CFC are excluded from the definition of personal holding company income for purposes of the personal holding company tax, effective for taxable years ending on or after the date of enactment.

Index certain penalties under the Internal Revenue Code for inflation. -- Generally, the amount of a tax penalty that is a set dollar amount is established when the penalty is added to the Internal Revenue Code. Often significant time passes and the penalty amount is too low to continue serving as an effective deterrent. Under current practice, most penalties can only be increased by amendment to the Internal Revenue Code. Effective for returns required to be filed after December 31, 2014, this Act indexes annually for inflation (subject to specified rounding rules) select fixed-dollar civil tax penalties for: (1) the failure to file a tax return but only with respect to the $135 amount applicable in the case of a failure to file the return within 60 days of the date prescribed for filing (determined with regard to extensions); (2) the failure by exempt organizations and certain trusts to file certain returns; (3) the failure of a paid preparer to meet certain obligations; (4) the failure of a partnership or an S corporation to timely file a correct return; and (5) the failure to timely file correct information returns and payee statements.

Increase levy authority for payments to Medicare providers with delinquent tax debt. -- Through the Federal Payment Levy Program (FPLP), the Department of the Treasury deducts (levies) a portion of a Government payment to an individual or business to collect unpaid taxes. Pursuant to the Medicare Improvements for Patients and Providers Act of 2008, Medicare provider and supplier payments are included in the FPLP. Under prior law, the Department of the Treasury is authorized to continuously levy up to 15 percent of a payment to a Medicare provider to collect delinquent tax debt. This Act allows the Department of the Treasury to levy up to 30 percent of a payment to a Medicare provider to collect delinquent tax debt, effective for payments made more than 180 days after the date of enactment.

The adjusted baseline permanently continues the tax relief provided to individuals and families under ARRA that was extended only through taxable year 2017 under ATRA. A more general explanation of the adjusted baseline concept is provided in Chapter 25 of this volume, "Current Services Estimates."

Permanently extend increased refundability of the child tax credit. -- ARRA increased the refundability of the child tax credit by reducing the earnings threshold for refundability to $3,000 (unindexed) from $10,000 (indexed after 2001). The adjusted baseline permanently extends the $3,000 earnings threshold, effective for taxable years beginning after December 31, 2017.

Permanently extend EITC marriage penalty relief. -- ARRA provided tax relief to married couples filing a joint return (regardless of the number of qualifying children) by increasing the amount by which the income thresholds for the phaseout of the EITC exceed the thresholds for other taxpayers from $3,000 (indexed for inflation after 2008) to $5,000 (indexed for inflation after 2009). The adjusted baseline permanently extends the $5,000 increase in the thresholds for the phaseout of the EITC, effective for taxable years beginning after December 31, 2017.

Permanently extend EITC for larger families. -- Under ARRA, a fourth credit schedule was added providing a larger credit for families with three or more qualifying children. This fourth schedule is permanently extended under the adjusted baseline, effective for taxable years beginning after December 31, 2017.

Permanently extend AOTC. -- The AOTC, which was created under ARRA, provides taxpayers a credit of up to $2,500 per eligible student per year for qualified tuition and related expenses paid for each of the first four years of the student's post-secondary education in a degree or certification program. The student must be enrolled at least half-time to receive the credit, which is partially refundable and phased out above specified income thresholds. The adjusted baseline extends the credit permanently, effective for taxable years beginning after December 31, 2017.

 

Table 12-2. ADJUSTMENTS TO THE BALANCED BUDGET

 

AND EMERGENCY DEFICIT CONTROL ACT (BBEDCA)

 

BASELINE ESTIMATES OF GOVERNMENTAL RECEIPTS

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , page 37.]

 

 

RESERVE FOR BUSINESS TAX REFORM

 

THAT IS REVENUE NEUTRAL IN THE LONG RUN

 

Consistent with these goals, the Budget includes a detailed set of business proposals that close loopholes and provide incentives for growth in a fiscally responsible manner.

The Administration proposes that these policies be enacted as part of business tax reform that is revenue neutral over the long run. As a result, the net savings from these proposals, which are described below, are not reflected in the budget estimates of receipts and are generally not counted toward meeting the Administration's deficit reduction goals. However, as part of transitioning to a reformed international tax system, the President's plan would impose a one-time transition toll charge of 14 percent on the $1 to $2 trillion of untaxed foreign earnings that U.S. companies have accumulated overseas. The Budget proposes to use the one-time savings from this toll charge to pay for investment in transportation infrastructure.

Provide tax incentives for locating jobs and business activity in the United States and remove tax deductions for shipping jobs overseas. -- To provide a tax incentive for U.S. companies to move jobs into the United States from offshore, the Administration proposes to create a credit against income tax equal to 20 percent of the expenses paid or incurred in connection with insourcing a U.S. trade or business. In addition, to reduce incentives for U.S. companies to move jobs offshore, the proposal would disallow deductions for expenses paid or incurred in connection with outsourcing a U.S. trade or business. For this purpose, insourcing (outsourcing) a U.S. trade or business means reducing or eliminating a trade or business or line of business currently conducted outside (inside) the United States and starting up, expanding, or otherwise moving the same trade or business within (outside) the United States. Also for this purpose, expenses paid or incurred in connection with insourcing or outsourcing a U.S. trade or business are limited solely to expenses associated with the relocation of the trade or business and do not include capital expenditures, severance pay, or other assistance to displaced workers. The proposal would be effective for expenses paid or incurred after the date of enactment.

Repeal delay in the implementation of worldwide interest allocation. -- The rules for allocating and apportioning interest expense between U.S. and foreign source income are based on the theory that money is fungible and, therefore, interest expense is properly attributable to all investments of a taxpayer. Under current law, however, interest expense of the domestic members of a worldwide group of companies is allocated by treating only the domestic members as a single corporation. Consequently, U.S. members are required to allocate their U.S. interest expense to their U.S. and foreign investments without taking into account any third party interest expense incurred by foreign members of the group. Under current law, an election is available for taxable years beginning after December 31, 2020, to allow members of an affiliated group of U.S. corporations to allocate interest on a worldwide group basis under which interest expense incurred in the United States would be allocated against foreign-source income only to the extent that the debt-to-asset ratio is higher for U.S. than for foreign investments. Under the Administration's proposal, this election would be permitted for taxable years beginning after December 31, 2015.

Extend the exception under subpart F for active financing income. -- Under subpart F, U.S. shareholders of a CFC are subject to U.S. tax currently on certain passive and other highly mobile income (subpart F income) earned by the CFC, whether or not such income is distributed to the shareholders. For taxable years beginning before January 1, 2015, the active financing exception excludes certain income derived in the active conduct of a banking, financing, insurance or similar business from subpart F income. Under the Administration's proposal, this exception would be permanently extended.

Extend the look-through treatment of payments between related CFCs. -- For taxable years beginning before January 1, 2015, the look-through exception excludes from subpart F income interest, dividends, rents, and royalties received or accrued from a related CFC to the extent attributable or properly allocable to income of the CFC that is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States. Under the Administration's proposal, this exception would be permanently extended.

Impose a 19-percent minimum tax on foreign income. -- Subject to certain limited exceptions under subpart F, U.S. companies are able to defer paying U.S. tax on the profits earned by their CFCs until the profits are repatriated. This ability to defer U.S. tax creates an incentive for U.S. multinationals to locate production overseas and shift profits abroad, eroding the U.S. tax base. In addition, the current system discourages these companies from bringing low-taxed foreign earnings back to the United States. To address these problems, the Administration proposes to supplement the existing sub-part F regime with a per-country minimum tax on foreign earnings.

Under the Administration's proposal, foreign earnings, other than subpart F income, would be subject to current U.S. taxation at a rate of 19 percent less 85 percent of the per-country foreign effective tax rate. The tentative minimum tax base for each country would be the total earnings of all business units that are tax resident in that country under foreign law, net of dividends received. The tentative minimum tax base would be reduced by an allowance for corporate equity that would provide a risk-free return on equity invested in active assets. The minimum tax would be imposed on foreign earnings regardless of whether they are repatriated to the United States, and all foreign earnings of a CFC could be repatriated without further U.S. tax. Thus under the proposal, all CFC earnings would be subject to U.S. tax either immediately or not at all.

Foreign source royalty and interest payments paid to U.S. persons would be taxed at the U.S. statutory rate, but certain income attributable to a foreign branch or to the performance of services abroad would be eligible for taxation at the minimum tax rate. Interest expense allocated and apportioned to earnings for which the minimum tax is paid would be deductible at the U.S. minimum tax rate on those earnings. No deduction would be permitted for interest expense allocated and apportioned to foreign earnings for which no U.S. income tax is paid. While sub-part F generally would continue in effect as under current law, the rules regarding CFC investments in U.S. property and previously taxed earnings would be repealed, and the subpart F high-tax exception would be made mandatory. The proposal would be effective for taxable years beginning after December 31, 2015.

Impose a 14-percent one-time tax on previously untaxed foreign income. -- Under current law, U.S. multinational companies do not pay U.S. tax on the profits earned by their CFCs until those profits are repatriated, subject to a limited exception under subpart F for passive and other highly mobile income. Under the Administration's proposal for companies to pay a minimum tax on foreign income, no U.S. tax would be imposed on a CFC's payment of a dividend to a U.S. shareholder. Therefore, the Administration proposes to impose a one-time 14-percent tax on the accumulated earnings of CFCs that were not previously subject to U.S. tax. A credit would be allowed for the amount of foreign income taxes associated with such earnings, multiplied by the ratio of the one-time tax rate to the otherwise applicable U.S. corporate tax rate. The earnings subject to the one-time tax could then be repatriated without any further U.S. tax. The proposal pays for outlays associated with: (1) the Administration's surface transportation reauthorization proposal; and (2) shortfalls between surface transportation revenue and spending that exist under current law for the proposal period.

Limit shifting of income through intangible property transfers. -- Under current law, there is a lack of clarity regarding the scope of the definition of intangible property under section 936(h)(3)(B) of the Internal Revenue Code. This definition of intangible property applies for purposes of the special rules under section 367 of the Internal Revenue Code relating to transfers of intangible property by a U.S. person to a foreign corporation and the allocation of income and deductions among taxpayers under section 482 of the Internal Revenue Code to prevent inappropriate shifting of income outside the United States. The Administration's proposal would provide that the definition of intangible property under section 936(h)(3)(B) (and therefore for purposes of sections 367 and 482) also includes workforce in place, goodwill and going concern value, and any other item owned or controlled by a taxpayer that is not a tangible or financial asset and that has substantial value independent of the services of any individual. The proposal would be effective for taxable years beginning after December 31, 2015.

Disallow the deduction for excess non-taxed reinsurance premiums paid to affiliates. -- U.S affiliates of foreign insurance companies can avoid U.S. taxation of their profits from their U.S. insurance business by reinsuring that business with affiliated foreign insurance companies. Under the Administration's proposal, a U.S. insurance company would be denied a deduction for certain non-taxed reinsurance premiums paid to foreign affiliates, offset by an income exclusion for return premiums, ceding commissions, reinsurance recovered, or other amounts received from such affiliates. A foreign corporation that is paid premiums that would be affected by this provision could instead elect to treat those premiums and the associated investment income as income effectively connected with the conduct of a trade or business in the United States and attributable to a permanent establishment for tax treaty purposes. For foreign tax credit purposes, such effectively connected income would be treated as foreign source income and would be placed into a separate category for purposes of applying the credit limitation rules. The proposal would be effective for policies issued in taxable years beginning after December 31, 2015.

Modify tax rules for dual capacity taxpayers. -- The Administration proposes to tighten the foreign tax credit rules that apply to taxpayers that are subject to a foreign levy and that also receive (directly or indirectly) a specific economic benefit from the levying country (so-called "dual capacity" taxpayers). The proposal would be effective for taxable years beginning after December 31, 2015.

Tax gain from the sale of a partnership interest on look-through basis. -- Under the Administration's proposal, gain or loss from the sale of a partnership interest would be treated as effectively connected with the conduct of a trade or business in the United States and subject to U.S. income taxation to the extent attributable to the partner's share of the partnership's unrealized gain or loss from property used in a trade or business in the United States. The proposal would also require the purchaser of a partnership interest to withhold 10 percent of the purchase price to ensure the seller's compliance. The proposal would be effective for sales and exchanges after December 31, 2015.

Modify sections 338(h)(16) and 902 to limit credits when non-double taxation exists. -- The Administration proposes to modify the foreign tax credit rules to reduce the availability of foreign tax credits in circumstances where no double taxation would otherwise exist. Under section 338 of the Internal Revenue Code, taxpayers can elect to treat certain acquisitions of the stock of a corporation as an acquisition of the corporation's assets for U.S. tax purposes. Because this election does not alter the foreign tax consequences of the transaction, section 338(h)(16) limits the ability of taxpayers to claim additional foreign tax credits by generally requiring the seller to continue to treat the gain recognized on the transaction as gain from the sale of stock for foreign tax credit purposes. The Administration proposes to extend these rules to other similar transactions that are treated as asset acquisitions for U.S. tax purposes but as acquisitions of an equity interest in an entity for foreign tax purposes. In addition, under the Administration's proposal, foreign income taxes paid by a foreign corporation would be reduced for U.S. tax purposes if a redemption transaction results in the elimination of earnings and profits of the foreign corporation. The foreign income taxes reduced under the proposal would be the foreign income taxes that are associated with the eliminated earnings and profits. The proposals would be effective for transactions occurring after December 31, 2015.

Close loopholes under subpart F. -- Certain rules under subpart F rely on technical distinctions that may be manipulated or circumvented contrary to subpart F's policy of requiring current U.S. taxation of passive and other highly mobile income earned by CFCs. In order to close these loopholes, the Administration proposes to: (1) create a new category of subpart F income, foreign base company digital income, which generally would include income of a CFC from the lease or sale of a digital copyrighted article or from the provision of a digital service in cases where the CFC uses intangible property developed by a related party (including property developed under a cost sharing arrangement) to produce the income and the CFC does not, through its own employees, make a substantial contribution to the development of the property or services that give rise to the income; (2) expand the category of foreign base company sales income to include income of a CFC from the sale of property manufactured on behalf of the CFC by a related person, regardless of whether the CFC is characterized as obtaining the property through a purchase transaction or through a manufacturing service contract; (3) amend the ownership attribution rules of section 958(b) of the Internal Revenue Code so that certain stock directly owned by a foreign person is attributed to a related U.S. person for purposes of determining whether a foreign corporation is a CFC or a U.S. person is a U.S. shareholder; and (4) eliminate the requirement that a foreign corporation must be a CFC for an uninterrupted period of at least 30 days in order for a U.S. shareholder to have a subpart F income inclusion with respect to the corporation. The proposal would be effective for taxable years beginning after December 31, 2015.

Restrict the use of hybrid arrangements that create stateless income. -- Taxpayers currently use a variety of cross-border hybrid arrangements to claim deductions without corresponding inclusions in any jurisdiction or to claim multiple deductions for the same payment in different jurisdictions. The Administration proposes to deny deductions for interest and royalty payments paid to related parties when either: (1) as a result of a hybrid arrangement there is no corresponding inclusion to the recipient in the foreign jurisdiction; or (2) a hybrid arrangement would permit the taxpayer to claim an additional deduction for the same payment in more than one jurisdiction. Additionally, sections 954(c)(3) and 954(c) (6) of the Internal Revenue Code would not apply to payments made to a foreign reverse hybrid held directly by a U.S. owner when such amounts are treated as deductible payments by a foreign related person. Regulatory authority would be granted to the Department of the Treasury to issue any regulations necessary to carry out the purposes of this proposal, including regulations that would deny all or a portion of the deduction claimed with respect to an interest or royalty payment that, as a result of the hybrid arrangement, is subject to inclusion in the recipient's jurisdiction pursuant to a preferential regime that has the effect of reducing the generally applicable statutory rate by at least 25 percent. The proposal would be effective for taxable years beginning after December 31, 2015.

Limit the ability of domestic entities to expatriate. -- Section 7874 of the Internal Revenue Code applies to certain transactions (known as "inversion transactions") in which a U.S. corporation is replaced by a foreign corporation as the parent company of a worldwide affiliated group. Under current law, if an inversion transaction occurs, certain adverse tax consequences apply depending upon whether the continuing ownership of historical shareholders of the U.S. corporation in the foreign acquiring corporation is either 80 percent or more (in which case the foreign acquiring corporation is treated as a domestic corporation for all U.S. tax purposes) or at least 60 percent but less than 80 percent (in which case the foreign status of the acquiring corporation is respected but other penalties apply). The Administration proposes to broaden the definition of an inversion transaction by reducing the 80-percent shareholder continuity threshold to a greater-than-50-percent threshold, and by eliminating the 60-percent threshold. The Administration also proposes to provide that, regardless of the level of shareholder continuity, an inversion transaction will occur if the fair market value of the stock of the U.S. corporation is greater than the fair market value of the stock of the foreign acquiring corporation, and the affiliated group is primarily managed and controlled in the United States and does not conduct substantial business activities in the relevant foreign country. In addition, the proposal would provide the IRS with authority to share with authorized employees of other Federal agencies, upon request, information collected with respect to the identity of companies that are the subject of an inversion transaction. The proposal generally would be effective for transactions that are completed after December 31, 2015, except that, effective January 1, 2016, the proposal would provide the IRS with the authority to share with other Federal agencies the specified information without regard to when the inversion transaction occurred.

Expand simplified accounting for small business and establish a uniform definition of small business for accounting methods. -- Current law contains several small business exceptions from various accounting requirements based on a taxpayer's average annual gross receipts. Exception thresholds vary between $1 million and $25 million of gross receipts, depending on the specific accounting rule, and the legal status and business activity of the taxpayer. The Administration proposes to create a uniform small business threshold at $25 million in average annual gross receipts for allowing exceptions from certain accounting rules, effective for taxable years beginning after December 31, 2015. This threshold would be indexed for inflation with respect to taxable years beginning after December 31, 2016. Satisfaction of the gross receipts test would allow an entity to elect one or more of the following items: (1) use of the cash method of accounting in lieu of an accrual method (regardless of whether the entity holds inventories): (2) the non-application of the uniform capitalization (UNICAP) rules: and (3) the use of an inventory method of accounting that either conforms to the taxpayer's financial accounting method or is otherwise properly reflective of income. These rules would supersede the special cash method exceptions that apply to farm corporations, but current exceptions allowing the cash method by personal service corporations and by business entities that are not C corporations (other than partnerships with a C corporation partner) would continue. The exceptions from UNICAP not based on a gross receipts test would also continue.

Eliminate capital gains taxation on investments in small business stock. -- A 100-percent exclusion from tax is provided for capital gains realized on the sale of qualified small business stock issued after September 27, 2010, and before January 1, 2015, and held for more than five years. The amount of gain eligible for the exclusion is limited to the greater of $10 million or 10 times the taxpayer's basis in the stock. For stock acquired prior to September 28, 2010, a portion of the excluded gain is subject to the AMT. A taxpayer may elect to roll over capital gain from the sale of qualified small business stock held for more than six months if other qualified small business stock is purchased during the 60-day period beginning on the date of sale. The exclusion is limited to individual investments and not the investments of a corporation. The Administration proposes to permanently extend the 100-percent exclusion, extend the rollover period from 60 days to six months for stock held at least three years, and no longer treat the excluded gain as a preference that is subject to tax under the AMT. The proposal would clarify that small business stock can include stock acquired upon the exercise of warrants and options if such stock rights are acquired at original issue from the corporation, and that all relevant holding periods for such stock start on the date the stock is issued by the corporation to the taxpayer. Reporting requirements would be tightened to ensure compliance. These proposals would be effective for qualified small business stock issued after December 31, 2014.

Increase the limitations for deductible new business expenditures and consolidate provisions for start-up and organizational expenditures. -- A taxpayer generally is allowed to elect to deduct up to $5,000 of start-up expenditures in the taxable year in which an active trade or business begins. Similarly, a taxpayer may also elect to deduct up to $5,000 of organizational expenditures in the taxable year in which a corporation or partnership begins business. In each case, the $5,000 amount is reduced (but not below zero), by the amount by which such expenditures exceed $50,000. To lower the tax cost of investigating new business opportunities and investing in new business activities, as well as tax administration and business compliance costs, the Administration proposes to consolidate the Internal Revenue Code provisions relating to start-up expenditures and organizational expenditures and to double permanently, from $10,000 to $20,000, the combined amount of new business expenditures that a taxpayer may elect to deduct, effective for taxable years beginning after December 31, 2015. That amount would be reduced (but not below zero) by the amount by which the combined new business expenditures exceed $120,000. Start-up and organizational expenditures that are not deducted under these provisions would continue to be amortized over a 180-month period, beginning with the month in which the active trade or business begins.

Expand and simplify the tax credit provided to qualified small employers for non-elective contributions to employee health insurance. -- The ACA provides a tax credit to help small employers provide health insurance for employees and their families. To claim the credit, a qualified employer must have fewer than 25 full-time equivalent employees during the taxable year with annual full-time equivalent employee wages that average less than $50,000 and make non-elective uniform contributions of at least 50 percent of the premium. The credit is generally available only for health insurance purchased through an Affordable Insurance Exchange and only for a maximum coverage period of two consecutive taxable years. The maximum credit, which is a specified percentage of premiums the employer pays during the taxable year, is reduced on a sliding scale between 10 and 25 full-time equivalent employees as well as between average annual wages of $25,000 and $50,000. Because the reductions are additive, an employer with fewer than 25 full-time equivalent employees paying average wages of less than $50,000 might not be eligible for any tax credit. The qualified amount of the employer contribution is reduced if the premium for the coverage purchased exceeds the average premium for the small group market in the rating areas in which the employee enrolls for coverage.

The Administration proposes to expand the credit to employers with up to 50 (rather than 25) full-time equivalent employees and to begin the phaseout of the maximum credit at 20 full-time equivalent employees (the credit would be reduced on a sliding scale between 20 and 50, rather than between 10 and 25, full-time equivalent employees). In addition, there would be a change to the coordination of the phaseouts of the credit that apply as the number of employees and average wages increase (using a formula that is multiplicative rather than additive) so as to provide a more gradual combined phaseout and to ensure that employers with fewer than 50 employees and an average wage less than $50,000 may be eligible for the credit, even if they are nearing the end of both phaseouts. The Administration also proposes to reduce taxpayer complexity by eliminating the requirement that an employer make a uniform contribution on behalf of each employee (although applicable non-discrimination laws will still apply), and eliminating the reduction in the qualifying contribution for premiums that exceed the average premium in the rating area. The proposal would be effective for taxable years beginning after December 31, 2014.

In addition, the proposal would repeal the requirement that research and experimentation costs be amortized over 10 years when calculating individual AMT. This would apply to expenditures paid or incurred after December 31, 2015.

Extend and modify certain employment tax credits, including incentives for hiring veterans. -- The WOTC provides incentives to employers for hiring individuals from one or more of nine targeted groups and the Indian employment tax credit provides incentives to employers for hiring individuals who are members of an Indian tribe. The Indian employment tax credit applies to increases in qualified wages and health insurance costs over qualified wages and health insurance costs incurred in calendar year 1993 (the base year). The Administration proposes to permanently extend both credits, which include the Returning Heroes and Wounded Warrior credits enacted in 2011. In addition, beginning in 2016, the Administration proposes to: (1) expand the definition of disabled veterans eligible for the WOTC to include disabled veterans who use the GI bill to receive education or training starting within one year after discharge and who are hired within six months of leaving the program; and (2) modify the Indian employment tax credit by changing the base year wages and health insurance costs to the average of those costs in the two years prior to the year for which the credit is being claimed.

Modify and permanently extend renewable electricity production tax credit and investment tax credit. -- Current law provides production tax credits for renewable energy facilities, the construction of which began before the end of 2014. Qualified energy resources include wind, closed-loop biomass, open-loop biomass, geothermal energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy. Current law also provides an investment tax credit for renewable energy property. The investment tax credit is 30 percent of eligible basis for solar, fuel cell, and small wind property placed in service by December 31, 2016, and 10 percent for microturbine, combined heat and power system property, and geothermal property. For solar and non-heat pump geothermal property placed in service after 2016, a 10-percent credit is available The Administration proposes to extend the current law production tax credit for facilities on which construction begins before the end of 2015. For facilities on which construction begins after December 31, 2015, the proposal would permanently extend the production tax credit and make it refundable. The production tax credit would also be available to otherwise eligible renewable electricity consumed directly by the producer rather than sold to an unrelated third party, to the extent that its production can be independently verified. The production tax credit would also be available to individuals who install qualified energy property associated with a dwelling unit. In addition, the proposal would permanently extend the investment tax credit under the terms available in 2016. Specifically, the proposal would permanently extend the 30-percent investment tax credit for solar, fuel cell, and small wind property and the 10-percent credit for geothermal, microturbine, and combined heat and power property. The proposal would also make permanent the election to claim the investment tax credit in lieu of the production tax credit for qualified facilities eligible for the production tax credit.

Modify and permanently extend the deduction for energy-efficient commercial building property. -- The Administration proposes to extend the current deduction for energy-efficient building property for property placed in service before January 1, 2015. For property placed in service after calendar year 2015, the Administration proposes to offer fixed deductions for the installation of energy-efficient commercial building property that reach an energy savings target. In addition, the proposal would enable existing buildings to qualify for the deductions. The new deductions would be permanent.

Provide a carbon dioxide investment and sequestration tax credit. -- The Administration proposes to authorize $2 billion in refundable investment tax credits for property installed at a new or retrofitted electric generating unit that captures and permanently "sequesters" carbon dioxide. New plants must capture greater than 75 percent of their carbon dioxide emissions. Eligible investment for retrofitted units must capture greater than 75 percent of the carbon dioxide emissions. Retrofits must apply to existing plant units that have capacities greater than 250 megawatts and that capture and store more than 1 million metric tons of carbon dioxide annually. No more than 60 percent of the total credits may flow to either class of project. In addition, no more than 40 percent of the total credits may flow to any one of the following technology categories: (1) liquid solvents, (2) solid sorbents, (3) gas-separation membranes, (4) warm gas clean-up, (5) oxygen fired combustion systems, and (6) hybrid systems. A minimum of 70 percent of the credits must flow to projects fueled by greater than 75 percent coal. The Administration also proposes to provide a 20-year, refundable sequestration tax credit for facilities qualifying for the investment credit at a rate of $50 per metric ton for carbon dioxide permanently sequestered and not beneficially reused and $10 per metric ton for carbon dioxide that is permanently sequestered and beneficially reused or is associated with an industrial non-power source. Both credit rates would be indexed for inflation.

Provide additional tax credits for investment in qualified property used in a qualifying advanced energy manufacturing project. -- A 30-percent credit for investment in eligible property used in a qualifying advanced energy manufacturing project was provided under ARRA. A qualifying advanced energy manufacturing project re-equips, expands, or establishes a manufacturing facility for the production of: (1) property designed to be used to produce energy from the sun, wind, geothermal deposits, or other renewable resources; (2) fuel cells, microturbines, or an energy storage system for use with electric or hybrid-electric motor vehicles; (3) electric grids to support the transmission of intermittent sources of renewable energy, including the storage of such energy; (4) property designed to capture and sequester carbon dioxide; (5) property designed to refine or blend renewable fuels (excluding fossil fuels) or to produce energy conservation technologies; (6) new qualified plug-in electric drive motor vehicles or components that are designed specifically for use with such vehicles; or (7) other advanced energy property designed to reduce greenhouse gas emissions as may be determined by the Department of the Treasury. Eligible property must be depreciable (or amortizable) property used in a qualifying advanced energy project and does not include property designed to manufacture equipment for use in the refining or blending of any transportation fuel other than renewable fuels. The credit is available only for projects certified by the Department of the Treasury (in consultation with the Department of Energy). The Administration proposes to provide an additional $2.5 billion in credits, thereby increasing the amount of credits to $4.8 billion. In addition, the Administration proposes to allow up to $200 million of these credits to be allocated to the construction of infrastructure that contributes to networks of refueling stations that serve alternative fuel vehicles.

Provide new Manufacturing Communities tax credit. -- The Administration proposes to provide new tax credit authority to support qualified investments in communities affected by military base closures or mass layoffs, such as those arising from plant closures. This would provide about $2 billion in credits for qualified investments approved in each of the three years, 2016 through 2018.

Extend the tax credit for second generation biofuel production. -- The Administration proposes to retroactively extend the tax credit for blending cellulosic fuel, which expired on December 31, 2014, at $1.01 per gallon through December 31, 2020. The amount of the credit would then be reduced by 20.2 cents per gallon in each subsequent year, so that the credit would expire after December 31, 2024.

Reform and expand the Low-Income Housing tax credit (LIHTC). -- The LIHTC provides a tax incentive for affordable rental housing developments. The Administration proposes to make several changes to the rules governing LIHTCs. First, States would be empowered to convert some private-activity-bond volume cap into authority to allocate additional LIHTCs. Also, a building would be able to qualify for 30-percent-present-value LIHTCs without issuing bonds if the building receives an adequate allocation of tax-exempt volume cap. This proposal would provide States greater flexibility to address their affordable housing priorities, and would reduce transaction and financing costs. These changes would be effective for new volume cap received by States for calendar years beginning after the date of enactment, or for volume cap that is allocated to a building after that date.

Second, to provide incentives for creating mixed-income housing, projects would be allowed to comply with an income-average rule for LIHTC eligibility. Under this new rule, the average income for at least 40 percent of the units in a project could not exceed 60 percent of area median income (AMI). None of these units could be occupied by households with income greater than 80 percent of AMI. Buildings must meet this new average income threshold calculated both: (1) with all low-income units weighted equally; and (2) with each low-income unit weighted according to imputed LIHTC occupancy rules. For rehabilitation projects containing units that receive ongoing subsidies administered by the Department of Housing and Urban Development or the Department of Agriculture (e.g., rental assistance, operating subsidies, or interest subsidies), a special rule would permit certain non-income qualified tenants to remain in residence without impairing the LIHTCs earned by the project. This provision adds to the two income criteria currently available for LIHTC developments, and would apply to LIHTC elections that are made after the date of enactment.

Third, the formulas that produce the rates for the credits that are subject to the LIHTC allocation cap would be changed. The revised formulas would produce annual credit rates that are higher than those produced under current law, and would result in a more consistent benefit over the interest rate spectrum. This change would apply to allocations made on or after the date of enactment.

Fourth, preservation of federally-assisted affordable housing would be added to the selection criteria for LIHTC allocation. This factor would join the ten criteria that State housing agencies must include in the qualified action plans that they consider when awarding LIHTCs. This change would apply to allocations made in calendar years beginning after the date of enactment.

Fifth, the Administration proposes to allow the Department of Housing and Urban Development (HUD) to designate as a qualified census tract (QCT) any census tract that meets certain criteria for the prevalence of poverty or low-income households. A building in a QCT earns 30 percent more LIHTCs than it would in another location. The proposal would remove a current limit under which the aggregate population in census tracts designated as QCTs cannot exceed 20 percent of the metropolitan area's population. As a result of this limit, some census tracts with qualifying levels of poverty or low-income households may currently fail to be designated as QCTs because neighboring tracts also qualify. This change would apply to allocations made after the date of enactment.

Sixth, the proposal adds protection for victims of domestic violence as a mandatory provision of the long-term-use agreement required by the Internal Revenue Code between each LIHTC taxpayer and the State. To make the protection meaningful, victims of domestic violence would be given a right to enforce the agreement in State courts.

Allow current refundings of State and local governmental bonds. -- Current law provides Federal tax subsidies for lower borrowing costs on debt obligations issued by State and local governments for eligible purposes under various programs. These programs include traditional tax-exempt bonds and other temporary or targeted qualified tax credit bond programs (e.g., qualified school construction bonds) and direct borrowing subsidy payment programs (e.g., Build America Bonds). State and local bond programs have varied in the extent to which they expressly allow or treat refinancings (as distinguished from original financings to fund eligible program purposes). In a "current refunding" of State and local bonds, the refunded bonds are retired promptly within 90 days after issuance of the refinancing bonds. These refundings generally reduce borrowing costs for State and local governmental issuers, and they also reduce Federal revenue losses due to the Federal borrowing subsidies for State and local bonds. A general authorization for current refundings of State and local bonds not currently covered by specific refunding authority would promote greater uniformity, tax certainty, and borrowing cost savings. The Administration proposes to allow current refundings of these State and local bonds if: (1) the principal amount of the current refunding bonds is no greater than the outstanding principal amount of the refunded bonds, and (2) the weighted average maturity of the current refunding bonds is no longer than the remaining weighted average maturity of the refunded bonds. This proposal would be effective as of the date of enactment.

Repeal the $150 million non-hospital bond limitation on all qualified 501(c)(3) bonds. -- The Tax Reform Act of 1986 established a $150 million limit on the volume of outstanding non-hospital, tax-exempt bonds used for the benefit of a section 501(c)(3) organization. The provision was repealed in 1997 with respect to 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. The limitation continues to apply to bonds more than five percent of the net proceeds of which finance or refinance: (1) working capital expenditures, or (2) capital expenditures incurred on or before August 5, 1997. The Administration proposes to repeal in its entirety the $150 million limit on the volume of outstanding, non-hospital, tax-exempt bonds for the benefit of a section 501(c)(3) organization, effective for bonds issued after the date of enactment.

Increase national limitation amount for qualified highway or surface freight transfer facility bonds. -- Tax-exempt private activity bonds may be used to finance qualified highway or surface freight transfer facilities. A qualified highway or surface freight transfer facility is any surface transportation, international bridge, or tunnel project that receives Federal assistance under title 23 of the United States Code, or any facility for the transfer of freight from truck or rail to truck that receives Federal assistance under title 23 or title 49 of the United States Code. Tax-exempt bonds issued to finance qualified highway or surface freight transfer facilities are not subject to State volume cap limitations. Instead, the Secretary of Transportation is authorized to allocate a total of $15 billion of issuance authority to qualified highway or surface freight transfer facilities in such manner as the Secretary determines appropriate. The Administration proposes to increase the $15 billion aggregate amount permitted to be allocated by the Secretary of Transportation to $19 billion with the elimination of this category of bond and conversion to qualified public infrastructure bonds once these funds are allocated.

Provide a new category of qualified private activity bonds for infrastructure projects referred to as "qualified public infrastructure bonds" (QPIBs). -- Under the proposal, QPIBs, a new category of tax-exempt private activity bonds, would be available for the financing of newly constructed or substantially rehabilitated infrastructure facilities owned by governmental entities and available for general public use. Infrastructure facilities eligible for QPIB financing would include airports, docks and wharves, mass commuting facilities, facilities for the furnishing of water, sewage facilities, solid waste disposal facilities, and qualified highway or surface freight transfer facilities. Existing overlapping categories of qualified private activity bonds that can be financed with QPIBs generally would be eliminated. The existing category for qualified highway or surface freight transfer facilities would continue to be available for the existing $15 billion bond volume authorization and the proposed additional $4 billion authorization under the preceding Budget proposal. QPIBs would not be subject to volume cap and the interest would not be a preference that is subject to tax under the AMT. The proposal also expands the safe harbor rule for ownership by a governmental unit where such facilities are leased or subject to concession agreements or management contracts to QPIBs, which would open up use of tax-exempt financing for public-private partnerships. The proposal would be effective for bonds issued beginning in 2016.

Modify qualified private activity bonds for public education facilities. -- Current law permits tax-exempt private activity bond financing for different specified types of eligible exempt facilities and programs, including, among others, "qualified public educational facilities" that are part of public elementary or secondary schools. The current eligibility rules require that a private "corporation" own the public school facilities under a public-private partnership agreement with a public State or local educational agency and that the private corporation transfer the ownership of the school facilities to the public agency at the end of the term of the bonds for no additional consideration. The proposal would eliminate the private corporation ownership requirement and instead would allow any private person, including private entities organized in ways other than as corporations, either to own the public school facilities or to operate those school facilities through lease, concession, or other operating arrangements. Further, since private ownership would no longer be an eligibility condition, the proposal would remove the requirement to transfer the school facilities to a public agency at the end of the term of the bonds for no additional consideration. In addition, the proposal would remove the separate volume cap for qualified public educational facilities and instead would include these facilities under the unified annual State bond volume cap. The proposal would be effective for bonds issued after the date of enactment.

Modify treatment of banks investing in tax-exempt bonds. -- Under current law, financial institutions' interest deductions are generally reduced by 100 percent of the interest expense allocable to assets that produce tax-exempt interest income. Financial institutions, however, can generally deduct 80 percent of interest expense allocated to qualified small issuer bonds. Qualified small issuer bonds are certain tax-exempt bonds issued by States and localities that annually issue no more than $10 million of such bonds. The proposal would increase the size limit for the qualified small issuer bond exception from $10 million to $30 million. Moreover, under current law, if a bank has made the election to be taxed under subchapter S or if the bank is a qualified subchapter S subsidiary, the bank is exempt even from the 20-percent disallowance of interest expense allocable to qualified small issuer bonds. The proposal would make these banks subject to the 20-percent disallowance and thus would equalize the treatment of financial institutions. Finally, the proposal also would allow financial institutions to deduct up to 80 percent of interest expense allocable to any tax-exempt obligations (whether or not a qualified small issuer bond) subject to a cap that would limit the benefit of this rule to interest expense allocable to bonds representing no more than two percent of the basis of the institution's assets. This two-percent cap, however, would not apply to the qualified small issuer bond exception. The proposal would apply to bonds issued in calendar years beginning on or after January 1, 2016.

Repeal tax-exempt bond financing of professional sports facilities. -- Current law permits the use of tax-exempt governmental bond proceeds for private activities unless both of the following apply: (1) more than 10 percent of the payment of the debt service is from a private business source, and (2) more than 10 percent of the use of the facility is for a private business use. Thus, even if use by a professional sports team of a bond-financed stadium exceeds 10 percent of the total use of the facility, the financing will be tax-exempt if the debt service is paid from sources other than sports facility revenues or other private payments. The proposal would eliminate the private payment test for professional sports facilities such that bonds to finance professional sports facilities would be taxable private activity bonds if more than 10 percent of the use of the facility is for a private business purpose. By removing the private payment test, tax-exempt governmental bond financing of sports facilities for professional sports teams would be eliminated. The proposal would be effective for bonds issued after December 31, 2015.

Allow more flexible research arrangements for purposes of private business use limits. -- Under current law, the IRS provides safe harbors that allow certain basic research arrangements with private businesses at tax-exempt bond financed research facilities. The existing safe harbors impose certain constraints on setting the terms of use of patents or other products resulting from the research, based on specific legislative history. In particular, the terms of use of resulting products for both research sponsors and other users alike must be set only after the products become available for use even though research arrangements typically are made prior to discoveries. The Administration proposes to provide additional flexibility for bona fide arm's length arrangements relating to basic research that would allow setting the terms of use of resulting products in advance of when the products become available for use. The proposal would be effective for research arrangements entered into after the date of enactment.

Modify tax-exempt bonds for Indian tribal governments (ITGs). -- In general, current law limits ITGs in their use of tax-exempt bonds to the financing of certain "essential governmental function" activities that are customarily performed by State and local governments. ARRA provided a limited $2 billion authorization of "Tribal Economic Development Bonds," which gives ITGs more flexibility to use tax-exempt bonds under standards that are more comparable to those applied to State and local governments in their use of tax-exempt bonds (subject to certain express targeting restrictions that require financed projects to be located on Indian reservations and that prohibit the financing of certain gaming facilities). In December 2011, the Department of the Treasury submitted a required report to the Congress regarding its study of the Tribal Economic Development Bond provision and its recommendations for ITG tax-exempt bond financing. The Administration proposes to modify the standards for ITG tax-exempt bond financing to reflect the recommendations in this report. In particular, the Administration's proposal generally would adopt the State or local government standard for tax-exempt governmental bonds without a bond volume cap on such governmental bonds for purposes of ITG eligibility to issue tax-exempt governmental bonds. The proposal would repeal the existing essential governmental function standard for ITG tax-exempt bond financing. In addition, the proposal would allow ITGs to issue tax-exempt private activity bonds for the same types of projects and activities as are allowed for State and local governments, under a modified national bond volume cap to be administered by the Department of the Treasury. Further, the proposal generally would continue an existing targeting restriction that would require projects financed with ITG bonds to be located on Indian reservations, with some additional flexibility to finance projects that have a requisite nexus to Indian reservations and that serve resident populations of Indian reservations. Finally, the proposal would continue an existing targeting restriction that prohibits financing of certain gaming projects. This proposal would be effective as of the date of enactment.

Exempt foreign pension funds from the application of the Foreign Investment in Real Property Tax Act (FIRPTA). -- Under current law, gains of foreign investors from the disposition of U.S. real property interests are generally subject to U.S. tax under FIRPTA. Gains of U.S. pension funds from the disposition of U.S. real property interests are generally exempt from U.S. tax. The Administration proposes to exempt from U.S. tax under FIRPTA certain gains of foreign pension funds from the disposition of U.S. real property interests. The proposal would be effective for dispositions of U.S. real property interests occurring after December 31, 2015.

Modify rules that apply to sales of life insurance contracts. -- The seller of a life insurance contract generally must report as taxable income the difference between the amount received from the buyer and the adjusted basis of the contract. When death benefits are received under the contract, the buyer is taxed on the excess of those benefits over the amounts paid for the contract, unless an exception to this "transfer-for-value" rule applies. Among the exceptions are transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer. The Administration proposes to replace these excepted transfers with exceptions for transfers to the insured, or to a partnership or a corporation of which the insured owns at least 20 percent of the partnership or corporation. Furthermore, in response to the growth in the number and size of life settlement transactions, the Administration proposes to expand information reporting on the sale of life insurance contracts and the payment of death benefits on contracts that were sold. The proposal would apply to sales or assignments of interests in life insurance policies and payments of death benefits for taxable years beginning after December 31, 2015.

Modify proration rules for life insurance company general and separate accounts. -- Under current law, a life insurance company is required to "prorate" its net investment income between a company's share and the policyholders' share. The result of this proration calculation is used to limit the funding of tax-deductible reserve increases with tax-preferred income. However, the complexity of this proration regime has generated significant controversy between life insurance companies and the IRS. The Administration proposes to replace the current regime with one that is simpler and less controversial. Under the proposal, a company's share would be calculated for a life insurance company's general account and individually for each of its separate accounts. The company's share would equal one less the ratio of an account's mean reserves to its mean assets. The company's share would determine the portion of the non-affiliated corporate dividends received by the company that would be eligible for a dividends-received deduction. It would also determine the portion of interest earned on State and local bonds and the portion of increases for the taxable year in certain policy cash values of life insurance and annuity policies that would be exempt from tax. The proposal would be effective for taxable years beginning after December 31, 2015.

Expand pro rata interest expense disallowance for corporate-owned life insurance. -- The interest deductions of a business other than an insurance company are reduced to the extent the interest paid or accrued is allocable to unborrowed policy cash values on life insurance and annuity contracts. The purpose of this pro rata disallowance is to prevent the deduction of interest expense that is allocable to the inside buildup of insurance and annuity contracts that is either tax-deferred or not taxed at all. An exception to this rule applies under current law to contracts covering the lives of officers, directors, employees, and 20-percent owners of the taxpayer. The Administration proposes to repeal the exception for officers, directors, and employees unless those individuals are also 20-percent owners of the business that is the owner or beneficiary of the contracts. Thus, purchases of life insurance by small businesses and other taxpayers that depend heavily on the services of a 20-percent owner would be unaffected, but the funding of deductible interest expenses with tax-exempt or tax-deferred inside buildup would be curtailed. The proposal would apply to contracts issued after December 31, 2015, in taxable years ending after that date.

Conform net operating loss (NOL) rules of life insurance companies to those of other corporations. -- Current law generally allows businesses to carry back an NOL up to two taxable years preceding the taxable year of loss (loss year) and to carry forward an NOL up to 20 taxable years following the loss year. Life insurance companies, however, may carry a "loss from operations" (a life insurance company's NOL equivalent) back three taxable years preceding the loss year and forward 15 taxable years following the loss year. The proposal would establish operating loss conformity for life insurance companies by allowing a loss from operations to be carried back up to two taxable years prior to the loss year, and carried forward 20 taxable years following the loss year. The proposal would be effective for taxable years beginning after December 31, 2015.

Repeal lower-of-cost-or-market inventory accounting method. -- The Administration proposes to prohibit the use of the lower-of-cost-or-market and subnormal goods methods of inventory accounting, which currently allow certain taxpayers to take cost-of-goods-sold deductions on certain merchandise before the merchandise is sold. The proposed prohibition would be effective for taxable years beginning after December 31, 2015. Taxpayers would recognize any income resulting from the change in accounting method ratably over four years.

Modify like-kind exchange rules for real property and collectibles. -- Under section 1031 of the Internal Revenue Code, no gain or loss is recognized when business or investment property is exchanged for "like-kind" business or investment property. The Administration proposes to limit the amount of capital gain deferred under section 1031 from the exchange of real property to $1,000,000 (indexed for inflation) per taxpayer per taxable year. In addition, art and collectibles would no longer be eligible for like-kind exchanges. The proposal would be effective for like-kind exchanges completed after December 31, 2015.

Modify depreciation rules for purchases of general aviation passenger aircraft. -- Under current law, airplanes used in commercial and contract carrying of passengers and freight generally are depreciated over seven years. Airplanes not used in commercial or contract carrying of passengers or freight, such as corporate jets, generally are depreciated over five years. The Administration proposes to increase the depreciation recovery period for general aviation airplanes that carry passengers to seven years, effective for such airplanes placed in service after December 31, 2015.

Expand the definition of substantial built-in loss for purposes of partnership loss transfers. -- Upon a sale or exchange of a partnership interest, certain partnerships, including partnerships that have a substantial built-in loss in their assets, must adjust the basis of those assets. A substantial built-in loss is defined by reference to the partnership's adjusted basis -- that is, there is a substantial built-in loss if the partnership's adjusted basis in its assets exceeds by more than $250,000 the fair market value of such property. Although the provision prevents the duplication of losses where the partnership has a substantial built-in loss in its assets, it does not prevent the duplication of losses where the transferee partner would be allocated a loss in excess of $250,000 if the partnership sold all of its assets, but the partnership itself does not have a substantial built-in loss in its assets. Accordingly, the Administration proposes to measure a substantial built-in loss also by reference to whether the transferee would be allocated a loss in excess of $250,000 if the partnership sold all of its assets immediately after the sale or exchange. The proposal would apply to sales or exchanges after the date of enactment.

Extend partnership basis limitation rules to nondeductible expenditures. -- A partner's distributive share of loss is allowed as a deduction only to the extent of the partner's adjusted basis in its partnership interest at the end of the partnership year in which such loss occurred. Any excess is allowed as a deduction at the end of the partnership year in which the partner has sufficient basis in its partnership interest to take the deductions. This basis limitation does not apply to partnership expenditures that are not deductible in computing its taxable income and not properly chargeable to capital account. Thus, even though a partner's distributive share of nondeductible expenditures reduces the partner's basis in its partnership interest, such items are not subject to the basis limitation and the partner may deduct or credit them currently even if the partner's basis in its partnership interest is zero. The Administration proposes to allow a partner's distributive share of expenditures not deductible in computing the partnership's taxable income and not properly chargeable to capital account only to the extent of the partner's adjusted basis in its partnership interest at the end of the partnership year in which such expenditure occurred. The proposal would apply to a partnership's taxable year beginning on or after the date of enactment.

Limit the importation of losses under related party loss limitation rules. -- If a loss sustained by a transferor is disallowed under section 267(a)(1) or section 707(b)(1) of the Internal Revenue Code because the transferor and transferee are related, then the transferee may reduce any gain the transferee later recognizes on a disposition of the transferred asset by the amount of the loss disallowed to the transferor. This has the effect of shifting the benefit of the loss from the transferor to the transferee. Thus, losses can be imported where gain or loss with respect to the property is not subject to Federal income tax in the hands of the transferor immediately before the transfer but any gain or loss with respect to the property is subject to Federal income tax in the hands of the transferee immediately after the transfer. To prevent this, the Administration proposes to limit application of the gain reduction rule to the extent gain or loss with respect to the property is not subject to Federal income tax in the hands of the transferor immediately before the transfer but any gain or loss with respect to the property is subject to Federal income tax in the hands of the transferee immediately after the transfer. The proposal would apply to transfers made after the date of enactment.

Deny deduction for punitive damages. -- The Administration proposes to deny tax deductions for punitive damages paid or incurred by a taxpayer, whether upon a judgment or in settlement of a claim. Where the liability for punitive damages is covered by insurance, such damages paid or incurred by the insurer would be included in the gross income of the insured person. This proposal would apply to damages paid or incurred after December 31, 2015.

Conform corporate ownership standards. -- Tax-free treatment of corporate reorganizations, distributions, and incorporations generally turns on whether shareholders acquire or retain "control" of the relevant corporation. For this purpose, control is defined as the ownership of 80 percent of the corporation's voting stock and 80 percent of the number of shares of all other classes of stock of the corporation. In contrast, the ownership standard for corporate affiliation (required for filing consolidated returns, tax-free parent-subsidiary liquidations, and treating certain stock dispositions as asset sales) is the direct or indirect ownership by a parent corporation of at least 80 percent of the total voting power of another corporation's stock and at least 80 percent of the total value of that other corporation's stock. The control test for tax-free reorganizations, distributions, and incorporations is easily manipulated by allocating voting power among the shares of a corporation, and the absence of a value component allows shareholders to retain voting control of a corporation but to economically "sell" a significant amount of the value of the corporation. In addition, the existence of two ownership standards in the corporate tax area causes unnecessary complexity and traps for the unwary. The Administration proposes to substitute the ownership test for affiliation for the control test used in connection with tax-free incorporations, distributions, and reorganizations. The proposal would be effective for transactions occurring after December 31, 2015.

Tax corporate distributions as dividends. -- The Administration proposes to amend the Internal Revenue Code to ensure that a transfer of property by a corporation to its shareholder better reflects the corporation's dividend paying capacity. First, the Administration proposes to tax non-dividend "leveraged distributions" from a distributing corporation as a dividend distribution made by a related corporation directly to the distributing corporation's shareholder to the extent the related corporation funded the distribution with a principal purpose of not treating the distribution from the distributing corporation to its shareholder as a dividend. Second, the Administration proposes to repeal the "boot-within-gain" limitation under section 356(a) of the Internal Revenue Code in reorganization transactions in which the shareholder's exchange has the effect of the distribution of a dividend. For this purpose, the Administration also proposes to align the available pool of earnings and profits for such distributions with that for ordinary distributions. Third, the Administration proposes amending section 312(a)(3) of the Internal Revenue Code so that earnings and profits are reduced only by the distributing corporation's basis in any high-basis distributed stock, determined without regard to basis adjustments resulting from actual or deemed dividend equivalent redemptions, or any series of distributions or transactions undertaken with a view to create and distribute high-basis stock of any corporation. Fourth, the Administration proposes disregarding a subsidiary's purchase of "hook stock" issued by a controlling corporation in exchange for property so that the property used to purchase the hook stock gives rise to a deemed distribution from the purchasing subsidiary (through any intervening entities) to the issuing corporation. The hook stock would be treated as being contributed by the issuer (through any intervening entities) to the subsidiary. The proposal would grant the Secretary of the Treasury authority to prescribe regulations necessary to achieve the purposes of this proposal, including regulations to: (1) treat transactions as leveraged distributions; (2) treat purchases of interests in shareholder entities other than corporations as hook stock and provide rules related to hook stock within a consolidated group; and (3) treat a transaction as undertaken with a view to create and distribute high-basis stock of any corporation. The first, second and fourth proposals would be effective for transactions occurring after December 31, 2015. The third proposal would be effective upon enactment.

Repeal Federal Insurance Contribution Act (FICA) tip credit. -- Certain employers in food and beverage service industries may receive an income tax credit for FICA taxes they pay on employee tip income. The credit applies to Social Security and Medicare taxes paid on the portion of an employee's tip income that, when added to the employee's non-tip wages, exceeds $5.15 per hour. The Administration proposes to repeal the income tax credit for the FICA taxes an employer pays on tips, effective for taxable years beginning after December 31, 2015.

Repeal the excise tax credit for distilled spirits with flavor and wine additives. -- Distilled spirits are taxed at a rate of $13.50 per proof gallon. Some distilled spirits are flavored with wine or other additives. Current law allows a credit against the $13.50 per proof gallon excise tax on distilled spirits for flavor and wine additives. As a result of the credit, flavorings of up to 2.5 percent of the distilled spirit mixture are tax exempt, and wine in a distilled spirits mixture is taxed at the lower rate on wine. Thus, the credit reduces the effective excise tax rate paid on distilled spirits with such content. The proposal would repeal this credit effective for all spirits produced in or imported into the United States after December 31, 2015.

 

Table 12-3. RESERVE FOR BUSINESS TAX REFORM THAT IS

 

REVENUE NEUTRAL IN THE LONG RUN

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , pages 50-53.]

 

 

OTHER BUDGET PROPOSALS

 

Simplify and better target tax benefits for education. -- Because there are multiple tax benefits for the same higher education expenses, incomplete information reporting, and a lack of coordination between Federal grant and tax benefits, many middle- and lower-income families do not claim all the education-related tax benefits to which they are entitled. To simplify and better target these benefits, the Administration proposes to consolidate the lifetime learning credits into an expanded permanent AOTC, which would be available for five years instead of four. As under current law, the AOTC for students attending school at least half time would be 100 percent of the first $2,000 of expenses and 25 percent of the next $2,000 of expenses for a maximum annual credit of $2,500. In addition, less than half-time undergraduate students would be eligible for a part-time AOTC equal to 50 percent of the first $2,000 of eligible expenses plus 12.5 percent of the next $2,000 of eligible expenses for a maximum credit of $1,250. The Administration also proposes to increase the refundable portion of the AOTC from 40 percent of the otherwise allowable credit to the first $1,500 of AOTC (first $750 for students enrolled less than half time). The expense limits and the amount that is refundable would be indexed for inflation.

To further simplify education benefits for low-income students, the proposal would exclude all Pell grants from gross income and allow low-income students to claim an AOTC without reducing eligible expenses for claiming the AOTC by the amount of their Pell grant. In addition, the Administration proposes to require institutions of higher education to report amounts paid, not billed, on Form 1098-T and require any entity issuing a scholarship or grant in excess of $500 (indexed for inflation) that is not processed or administered by an institution of higher education to report the scholarship or grant on Form 1098-T.

In addition, the Administration proposes to repeal the deduction for student loan interest for new students. Not only would new students be able to reduce their borrowing due to the expanded AOTC, but all new borrowers would have access to Pay-As-You-Earn, a generous income-driven repayment option that limits payments to affordable levels and forgives remaining balances after a limited repayment period. The Administration further proposes to exclude the forgiven portion of the student loan from gross income and to exclude from gross income debt forgiven and certain scholarship amounts for participants in the Indian Health Service Health Professions Programs. The Administration would also allow the Department of Education to obtain from the IRS the addresses of borrowers who are delinquent in repaying their loans (in addition to allowing access to addresses of defaulted borrowers as under current law).

To help pay for the expanded benefits for low-income students and reduce tax benefits disproportionately claimed by high-income families, the Administration proposes to repeal Coverdell education savings accounts (ESAs) and reduce the Federal tax benefits allowed to qualified tuition programs, also known as section 529 ESAs. No new contributions would be allowed to Coverdell ESAs. Qualifying distributions of earnings on contributions to Coverdell and section 529 ESAs made prior to the date of enactment would continue to be excludable from gross income. Distributions of earnings on contributions to section 529 ESAs made after the date of enactment would no longer be excludable from gross income but would still benefit from being includable only in the gross income of the student beneficiary, not the gross income of the account holder.

The proposal would generally be effective for taxable years beginning after December 31, 2015.

Provide for automatic enrollment in IRAs, including a small employer tax credit, increase the tax credit for small employer plan start-up costs, and provide an additional tax credit for small employer plans newly offering auto-enrollment. -- The Administration proposes to encourage saving and increase participation in retirement savings arrangements by requiring employers that do not currently offer a retirement plan to their employees to provide automatic enrollment in an IRA. Employers with 10 or fewer employees and employers in existence for less than two years would be exempt. An employee not providing a written participation election would be enrolled at a default rate of three percent of the employee's compensation in a Roth IRA. Employees would always have the option of opting out, opting for a lower or higher contribution within the IRA limits, or opting for a traditional IRA. Contributions by employees to automatic payroll-deposit IRAs would qualify for the saver's credit (to the extent the contributor and the contributions otherwise qualified).

Small employers (those that have no more than 100 employees) that offer an automatic IRA arrangement (including those that are not required to do so) would be entitled to a temporary business tax credit for the employer's expenses associated with the arrangement up to $1,000 per year for three years. Furthermore, these employers would be entitled to an additional credit of $25 per participating employee up to a total of $250 per year for six years.

Under current law, small employers (those that have no more than 100 employees) that adopt a new qualified retirement plan, Simplified Employee Plan (SEP), or Savings Incentive Match Plan for Employees (SIMPLE plan) are entitled to a temporary business tax credit equal to 50 percent of the employer's expenses of establishing or administering the plan, including expenses of retirement-related employee education with respect to the plan and any employer contributions. The credit is limited to a maximum of $500 per year for three years. In conjunction with the automatic IRA proposal, the Administration proposes to encourage small employers not currently sponsoring a qualified retirement plan, SEP, or SIMPLE plan to do so by tripling this tax credit to a maximum of $1,500 per year for three years and extending it to four years (rather than three) for any small employer that adopts a new qualified retirement plan, SEP, or SIMPLE plan during the three years beginning when it first offers or first is required to offer an automatic IRA arrangement. In addition, small employers would be allowed a credit of $500 per year for up to three years, for new or existing defined contribution plans that add auto-enrollment. The proposal would be effective for taxable years beginning after December 31, 2016.

Expand penalty-free withdrawals for long-term unemployed. -- Under current law, a 10-percent additional tax applies to early withdrawals from a tax-qualified retirement plan or IRA, unless an exception applies. IRA account holders who have been unemployed for 12 weeks can withdraw funds during a two-year period to pay for health insurance without paying the 10-percent additional tax, but the unemployment exception does not extend to withdrawals used for any other purpose. There is no exception to the 10-percent additional tax for early withdrawals from a qualified plan due to unemployment. The Administration proposes to expand the exception from the 10-percent additional tax to withdrawals by long-term unemployed individuals from IRAs, 401(k) plans, or other tax-qualified defined contribution plans for any use. For this purpose, long-term unemployed individuals would be individuals who have been unemployed for at least 27 weeks (or, if less, the maximum period of unemployment benefits available under applicable state law). Under the proposal, the exception would not apply to IRA distributions that exceed 50 percent of the fair market value of all the individual's IRAs or a distribution from a retirement plan that exceeds 50 percent of the individual's vested accrued benefit in all tax-qualified retirement plans, and would be subject to an aggregate annual maximum of $50,000. The first $10,000 of distributions would not be subject to the 50-percent of the IRA or plan limitation. The proposal would be effective for distributions occurring after December 31, 2015.

Require retirement plans to allow long-term part-time workers to participate. -- Under current law, a qualified retirement plan sponsor generally is not required to extend eligibility for coverage to employees who are credited with fewer than 1,000 hours in a year (about half time). Similar to the 1,000-hour threshold for coverage eligibility, employees also are not required to be credited with a year of service for purposes of vesting in employer contributions unless they earn 1,000 hours of service in a year. To increase coverage and vesting for long-term part-time employees, the Administration proposes to require that employees be permitted to make contributions in lieu of salary if they have had at least 500 hours of service per year with the employer for at least three consecutive years. These plans would also be required to credit, for each year in which employees have at least 500 hours of service, a year of service for purposes of vesting in any employer contributions. With respect to employees newly covered under the proposed change, employers would receive nondiscrimination testing relief (similar to current-law relief for plans covering otherwise excludable employees), including permission to exclude these employees from top-heavy benefit requirements. The proposal would be effective for plan years beginning after December 31, 2015.

Facilitate annuity portability. -- Under current law, 401(k) and other defined contribution retirement plans may not permit distributions absent a distributable event. Distributable events for 401(k) plans include severance from employment and attainment of age 59 1/2. Sponsors of defined contribution plans that want to offer annuities (for example, qualified longevity annuity contracts (QLACs) and deferred annuities inside target date funds) may be discouraged from doing so if the sponsor has no clear way to allow employees to continue existing annuities if the annuity product is no longer supported by the plan at some point in the future (for example, because of a change in trustee or recordkeeper or a reassessment of the value of an annuity option in light of take-up or because the annuity product is no longer available on favorable terms). To facilitate the offering of annuities, the Administration proposes to allow defined contribution plans to let participants take a distribution -- through a direct rollover to an IRA or other retirement plan -- of an annuity in the event the annuity is no longer authorized to be held as an investment under the plan, without regard to whether a distributable event (such as severance from employment) has occurred. The proposal would be effective for plan years beginning after December 31, 2015.

Simplify minimum required distribution (MRD) rules. -- The MRD rules generally require that owners of IRAs and participants in tax-favored retirement plans commence distributions shortly after attaining age 70 1/2 and that these retirement assets be distributed to them (or their spouses or other beneficiaries) over a period based on the joint life expectancy of the owner or plan participant and the designated beneficiary. The penalty for failure to take a minimum required distribution by the applicable deadline is 50 percent of the amount not withdrawn. The Administration proposes to simplify tax compliance for retirees of modest means by exempting an individual from the MRD requirements if the aggregate value of the individual's IRA and tax-favored retirement plan accumulations does not exceed $100,000 on a measurement date. The MRD requirements would phase in for individuals with aggregate retirement balances between $100,000 and $110,000. The initial measurement date for the dollar threshold would be the beginning of the year in which the individual turns 70 1/2 or dies, with additional measurement dates only if the individual is subsequently credited with amounts (other than earnings) that were not previously taken into account. The Administration also proposes to harmonize the application of the MRD requirements for holders of designated Roth accounts and of Roth IRAs by generally treating Roth IRAs in the same manner as all other tax-favored retirement accounts, i.e., requiring distributions to begin shortly after age 70 1/2, without regard to whether amounts are held in designated Roth accounts or in Roth IRAs. Consistent with this change to the MRD rules for Roth IRAs, individuals also would not be permitted to make additional contributions to Roth IRAs after they reach age 70 1/2. The proposal would be effective for taxpayers attaining age 70 1/2 and taxpayers who die before age 70 1/2 after December 31, 2015.

Allow all inherited plan and IRA balances to be rolled over within 60 days. -- Generally, most amounts distributed from qualified plans or IRAs may be rolled over into another IRA or into an eligible retirement plan. However, the movement of assets from a plan or IRA account inherited by a non-spouse beneficiary cannot be accomplished by means of a 60-day rollover. This difference in treatment between plan and IRA accounts inherited by a non-spouse beneficiary and accounts of living participants serves little if any purpose, generates confusion among plan and IRA administrators, and creates a trap for unwary beneficiaries. The Administration proposes to permit rollovers of distributions to all designated beneficiaries of inherited IRA and plan accounts, subject to inherited IRA treatment, under the same rules that apply to other IRA accounts, beginning January 1, 2016.

Expand the EITC for workers without qualifying children. -- Low and moderate income workers may be eligible for a refundable EITC. The EITC generally equals a specified percentage of earned income, up to a maximum dollar amount, and is gradually phased out once income exceeds a specified threshold. Different credit schedules apply for taxpayers based on the number of qualifying children the taxpayer claims. Taxpayers with low wages who do not have a qualifying child and are at least 25 years old and less than 65 years old (or for whom, if filing jointly, the age of at least one spouse is within these limits) may be eligible to claim the small EITC for workers without qualifying children. The Administration proposes to increase the credit for workers without qualifying children. The phase in rate and the phaseout rate would be increased from 7.65 percent to 15.30 percent, which would double the size of the maximum credit from about $500 to about $1,000 in 2016. The income at which the credit would begin to phase out would be increased to $11,500 ($17,090 for joint filers) in 2016 and indexed thereafter. The Administration also proposes to expand eligibility to workers at least 21 years old and less than 67 years old. As under current law, taxpayers who may be claimed as a dependent or as the qualifying child of another taxpayer (e.g., taxpayers who are dependent students age 19 to age 23), may not claim the EITC for workers without children. This proposal would be effective for taxable years beginning after December 31, 2015.

Simplify the rules for claiming the EITC for workers without qualifying children. -- The EITC generally equals a specified percentage of earned income, up to a maximum dollar amount, that is reduced by the product of a specified phaseout rate and the amount of earned income or AGI, if greater, in excess of a specified income threshold. Different credit schedules apply for taxpayers based on the number of qualifying children the taxpayer claims. In general, taxpayers with low wages who do not have a qualifying child may be eligible to claim the small EITC for workers without qualifying children. However, if the taxpayer resides with a qualifying child whom the taxpayer does not claim (perhaps because that child is claimed by another individual within the household), the taxpayer is not eligible for any EITC. The Administration proposes to allow otherwise eligible taxpayers residing with qualifying children to claim the EITC for workers without qualifying children. This proposal would be effective for taxable years beginning after December 31, 2015.

Provide a second-earner tax credit. -- Married couples generally file jointly on their Federal individual income tax returns and cannot choose single or head of household filing status. Because tax rates rise with taxable income under a progressive tax system, the lower earner in a married couple may be discouraged to work when these second earners make their labor supply decisions conditional on the primary earners' decisions, effectively treating their earnings as taxed at the couples' highest marginal rates. In addition, low- and moderate-income married couples can face a high marginal tax rate due to the phaseout of tax credits and other benefits. To provide tax relief for working families and promote employment among secondary earners, the Administration proposes a second-earner tax credit. Two-earner married couples who file a joint Federal income tax return would be eligible for a nonrefundable tax credit equal to a percentage of the lower earner's earned income up to $10,000. The credit rate would be 5 percent and would phase down at a rate of one-half of one percentage point for every $10,000 of AGI over $120,000. Therefore, the credit would be fully phased out at AGI above $210,000. The maximum creditable earned income ($10,000) and the AGI at which the credit rate starts to phase down ($120,000) would be indexed for inflation. The proposal would be effective for taxable years beginning after December 31, 2015.

Extend exclusion from income for cancellation of certain home mortgage debt. -- The Administration proposes to extend the provision that excludes from gross income amounts that are realized from discharges of qualified principal residence indebtedness. This provision expired on December 31, 2014. The exclusion would be extended for three years, to apply to amounts that are discharged after December 31, 2014, and before January 1, 2018, or that are discharged pursuant to an arrangement entered into before January 1, 2018.

Reform the taxation of capital income. -- Capital gains are taxable only upon the sale or other disposition of an appreciated asset. Under current law, most capital gains are taxed at graduated rates, with 20 percent generally being the highest rate. In addition, higher-income taxpayers are subject to a tax of 3.8 percent of the lesser of net investment income, including capital gains, or modified AGI in excess of a threshold. When a donor gives an appreciated asset to a donee during life, the donee takes the donor's basis in the asset and there is no recognition of capital gains until the donee later disposes of that asset. When an appreciated asset is held by a decedent at death, the decedent's heir receives a basis in that asset equal to its fair market value at the date of decedent's death. As a result, the appreciation accruing during the decedent's life on assets that are still held by the decedent at death is never subjected to the capital gains tax.

Under this proposal, the 20-percent capital gains tax rate would be increased to 24.2 percent (for a total of 28 percent for gains also subject to the net investment income tax). This would also increase the tax rate on qualified dividends, which would be taxed at the same rate as capital gains. In addition, transfers at death or by gift would result in recognition of gain. In the case of a gift, the gain would be taxable on the donor's income tax return for the year in which the gift was made. In the case of death, the tax would be reported either on the decedent's final income tax return or on a new income tax return created for this purpose. The proposal would exempt gain on household furnishings and personal effects (excluding collectibles) and allow a $100,000 exclusion of other gains recognized at death (which would be indexed for inflation and would be portable to a surviving spouse resulting in a $200,000 per couple exclusion). In addition, the current law ($250,000 per person) exclusion of capital gains from a principal residence would apply to all residences at death. If any share of a personal residence is bequeathed to a spouse, the spouse would be allowed the use of the first spouse's exclusion of gain (that is, the $250,000 personal residence exclusion would be portable). The unlimited use of capital losses and carryforwards would be allowed against ordinary income on the decedent's final income tax return, and the capital gains tax imposed at death would be deductible on the decedent's estate tax return. Appreciated property given to charity would be exempt from the capital gains tax. Gifts or bequests to a spouse would carry the basis of the donor or decedent, and capital gain would not be realized until the spouse disposes of the asset or dies. The proposal would provide for the deferral of tax payment (with interest) on the appreciation of certain small family-owned businesses, until the business is sold or transferred to owners outside the family. The proposal would further allow a 15-year fixed-rate payment plan for the capital gains tax on assets other than liquid assets such as publicly traded financial assets transferred at death. This proposal would be effective for gifts, deaths, qualified dividends received, and other capital gains realizations in taxable years beginning after December 31, 2015.

Implement the Buffett Rule by imposing a new "Fair Share Tax". -- The Administration proposes a new minimum tax, called the Fair Share Tax (FST), for high-income taxpayers. The tentative FST equals 30 percent of AGI less a charitable credit. The charitable credit equals 28 percent of itemized charitable contributions allowed after the overall limitation on itemized deductions (Pease). The final FST is the excess, if any, of the tentative FST over the sum of the taxpayer's: (1) regular income tax (after certain credits) including the 3.8 percent net investment income tax, (2) the AMT, and (3) the employee portion of payroll taxes. The set of certain credits subtracted from regular income tax excludes the foreign tax credit, the credit for tax withheld on wages, and the credit for certain uses of gasoline and special fuels. The tax is phased in linearly starting at $1 million of AGI ($500,000 in the case of a married individual filing a separate return). The tax is fully phased in at $2 million of AGI ($1 million in the case of a married individual filing a separate return). The threshold is indexed for inflation beginning after 2016. The proposal would be effective for taxable years beginning after December 31, 2015.

Impose a financial fee. -- The Administration proposes to impose a fee on banks, both U.S. and foreign, and would also apply to bank holding companies and "nonbanks," such as insurance companies, savings and loan holding companies, exchanges, asset managers, broker-dealers, specialty finance corporations, and financial affiliates with assets in excess of $50 billion. Firms with worldwide consolidated assets of less than $50 billion would not be subject to the fee for the period when their assets are below this threshold. U.S. subsidiaries of international firms that fall into these categories with assets in excess of $50 billion would also be covered. The fee base is assets less equity (also known as liabilities) for banks and nonbanks based on audited financial statements with a deduction for separate account (primarily for insurance companies). The fee rate would be seven basis points and would be effective on January 1, 2016. The fee is intended to discourage excessive risk-taking by financial firms, who were key contributors to the recent financial crisis. The fee would also satisfy the statutory requirement for the President to propose a means to recoup the net costs of assistance provided through the Troubled Asset Relief Program.

Require that the cost basis of stock that is a covered security must be determined using an average cost basis method. -- Current regulations permit taxpayers to use "specific identification" when they sell or otherwise dispose of stock. Specific identification allows taxpayers who hold identical shares of stock that have different tax basis to select the amount of gain or loss to recognize on the disposition. The Administration's proposal would require the use of average cost basis for all identical shares of portfolio stock held by a taxpayer that have a long-term holding period. The proposal would apply to covered securities acquired after December 31, 2015.

Tax carried (profits) interests as ordinary income. -- A partnership does not pay Federal income tax; instead, an item of income or loss of the partnership and associated character flows through to the partners who must include such items on their income tax returns. Certain partners receive partnership interests, typically interests in future profits, in exchange for services (commonly referred to as "profits interests" or "carried interests"). Because the partners, including partners who provide services, reflect their share of partnership items on their tax return in accordance with the character of the income at the partnership level, long-term capital gains and qualifying dividends attributable to carried interests may be taxed at a maximum 20-percent rate (the maximum tax rate on capital gains) rather than at ordinary income tax rates. The Administration proposes to designate a carried interest in an investment partnership as an "investment services partnership interest" (ISPI) and to tax a partner's share of income from an ISPI that is not attributable to invested capital as ordinary income, regardless of the character of the income at the partnership level. In addition, the partner would be required to pay self-employment taxes on such income, and the gain recognized on the sale of an ISPI that is not attributable to invested capital would generally be taxed as ordinary income, not as capital gain. However, any allocation of income or gain attributable to invested capital on the part of the partner would be taxed as ordinary income or capital gain based on its character to the partnership and any gain realized on a sale of the interest attributable to such partner's invested capital would be treated as capital gain or ordinary income as provided under current law. The proposal would be effective for taxable years ending after December 31, 2015.

Require non-spouse beneficiaries of deceased IRA owners and retirement plan participants to take inherited distributions over no more than five years. -- Under current law, owners of IRAs and employees with tax-favored retirement plans generally must take distributions from those retirement accounts beginning at age 70 1/2. The minimum amount required to be distributed is based on the joint life expectancy of the owner or plan participant and the designated beneficiary, calculated at the end of each year. Minimum distribution rules also apply to balances remaining after a participant or IRA owner has died. Heirs who are designated as beneficiaries under IRAs and qualified retirement plans may receive distributions over their lifetimes, no matter what the age difference between the deceased IRA owner or plan participant and the beneficiary. The Administration proposes to require non-spouse beneficiaries of IRA owners and retirement plan participants to take inherited distributions over no more than five years. Exceptions would be provided for disabled beneficiaries and beneficiaries within 10 years of age of the deceased IRA owner or plan participant. Minor children would be allowed to receive payments up to five years after they attain the age of majority. This proposal would be effective for distributions with respect to participants or IRA owners who die after December 31, 2015.

Limit the total accrual of tax-favored retirement benefits. -- The Administration proposes to limit the deduction or exclusion for contributions to defined contribution plans, defined benefit plans, or IRAs for an individual who has total balances or accrued benefits under those plans that are sufficient to provide an annuity equal to the maximum allowable defined benefit plan benefit. This maximum, currently an annual benefit of $210,000 payable in the form of a joint and survivor benefit commencing at age 62, is indexed for inflation. The proposal would be effective for taxable years beginning after December 31, 2015.

Conform Self-Employment Contributions Act (SECA) taxes for professional service businesses. -- The self-employment tax system treats business owners differently according to the legal form of their ownership, rather than their operational roles in the business. In some cases the rules are outdated and do not reflect significant changes to State law business forms. As a result, many owners of pass-through entities avoid payroll tax on income that looks like self-employment earnings and that would be taxed as self-employment earnings (subject to employment taxes) if the business had a different legal structure. The Administration proposes to tax owners of pass-through businesses providing professional services consistently, regardless of the legal form of the organization. Owners who provide services and materially participate in a business that provides professional services would be subject to self-employment tax on their distributive shares of income, as currently applied to general partners and sole proprietors. Owners who do not materially participate would be subject to self-employment tax only on an amount equal to reasonable compensation for services provided. The proposal would be effective for taxable years beginning after December 31, 2015.

Limit Roth conversions to pre-tax dollars. -- Subject to certain restrictions, taxpayers can convert traditional IRA/401(k) balances to Roth IRA/Roth 401(k) balances by paying tax at ordinary rates on the amount of the conversion in excess of basis. No tax is paid on the portion of the conversion that is a return of basis. The limits on after-tax contributions to plans and nondeductible contributions to IRAs (which generate basis) are weaker than those on pre-tax and Roth contributions. Taxpayers may exploit those weaker limits by performing a Roth conversion immediately after making such a contribution and thereby obtain -- at no additional cost -- the full benefits of Roth treatment on a less-advantaged after-tax or nondeductible contribution. The proposal would limit Roth conversions to pre-tax dollars, which would reduce the scope for strategies of this nature by precluding Roth conversions of after tax or nondeductible contributions. The proposal would be effective for taxable years beginning after December 31, 2015.

Eliminate deduction for dividends on stock of publicly-traded corporations held in employee stock ownership plans (ESOPs). -- Generally, corporations do not receive a corporate income tax deduction for dividends paid to their shareholders. However, a deduction for dividends paid on employer securities is allowed under a special rule for ESOPs, including, for example, dividends paid on employer stock held in an "ESOP account" that is one of the investment options available to employees under a typical 401(k) plan. This special rule has been justified as encouraging employee ownership, which has been viewed as having a productivity incentive effect. However, ownership of stock of a publicly-traded corporation generally does not result in employees owning a significant percentage of the corporation and can result in an excessive concentration of assets intended for retirement security in a single investment. The Administration's proposal would repeal the deduction for dividends paid with respect to employer stock held by an ESOP that is sponsored by a publicly-traded corporation. This proposal would be effective with respect to dividends paid after the date of enactment.

Repeal exclusion of net unrealized appreciation (NUA) in employer securities. -- In general, distributions from retirement plans are taxed as ordinary income. However, for employer securities received as part of a lump-sum distribution, more favorable tax treatment generally is available under which the excess of the market value of the employer stock at the time of the distribution over the cost or other basis of that stock to the plan (the net unrealized appreciation) is excluded from gross income at the time of distribution. The net unrealized appreciation generally is taxed as a capital gain at the time the employer stock is sold by the recipient. The Administration proposes to repeal this special exclusion for employer stock for retirement plan participants who have not attained age 50 on or before December 31, 2015. The proposal would be effective for distributions occurring after December 31, 2015.

Disallow the deduction for charitable contributions that are a prerequisite for purchasing tickets to college sporting events. -- Under current law, donors who receive benefits in exchange for a charitable contribution must reduce the value of their charitable contribution deduction by the fair market value of the benefits they receive. Many colleges and universities give exclusive or priority purchasing privileges for sports ticket sales to donors, with the priority often dependent on the size of the gift. In contrast to the general rule for valuing donations in exchange for benefits, donors to colleges and universities who receive the right to purchase tickets for seating at an athletic event may deduct 80 percent of the contribution even when the value of the ability to purchase the tickets is far in excess of 20 percent of the contributed amount. The proposal would deny the deduction for contributions that entitle donors to a right to purchase tickets to sporting events. The proposal would be effective for contributions made in taxable years beginning after December 31, 2015.

Provide a tax credit for the production of advanced technology vehicles. -- Current law provides a tax credit for plug-in electric drive motor vehicles. The Administration proposes to replace this credit with a credit for advanced technology vehicles. The credit would be available for a vehicle that meets the following criteria: (1) the vehicle operates primarily on an alternative to petroleum; (2) as of January 1, 2014, there are few vehicles in operation in the United States using the same technology as such vehicle; and (3) the technology used by the vehicle substantially exceeds the foot-print-based target miles per gallon. In general, the credit would be scalable based on the vehicle's miles per gallon gasoline equivalent, but would be capped at $10,000 ($7,500 for vehicles with a manufacturer's suggested retail price above $45,000). The credit for a battery-powered vehicle would be determined under current law rules for the credit for plug-in electric drive motor vehicles if that computation results in a greater credit. The credit would be allowed for vehicles placed in service after December 31, 2015, and before January 1, 2023. The credit would be limited to 75 percent of the otherwise allowable amount for vehicles placed in service in 2020, to 50 percent of such amount for vehicles placed in service in 2021, and to 25 percent of such amount for vehicles placed in service in 2022. The credit would be allowed to the vehicle manufacturer and would be transferable.

Provide a tax credit for medium- and heavy-duty alternative-fuel commercial vehicles. -- Current law provides no tax incentive for alternative-fuel vehicles (other than fuel-cell vehicles) weighing more than 14,000 pounds. The Administration proposes to provide a tax credit for dedicated alternative-fuel commercial vehicles weighing more than 14,000 pounds. The credit would be $25,000 for vehicles weighing between 14,000 and 26,000 pounds and $40,000 for vehicles weighing more than 26,000 pounds. The credit would be allowed for vehicles placed in service after December 31, 2015, and before January 1, 2022. For vehicles placed in service in calendar year 2021, the credit would be limited to 50 percent of the otherwise allowable amount. The credit would be allowed to the manufacturer of the vehicle and would be transferable.

Modify and extend the tax credit for the construction of energy-efficient new homes. -- Under the Administration's proposal, the tax credit for energy-efficient new homes, which expired on December 31, 2014, would be extended through December 31, 2015. The Administration proposes replacing this credit with a two-tier credit starting in 2016. The first tier would provide a $1,000 tax credit to homebuilders for the construction of each qualified ENERGY STAR certified new home that meets guidelines for energy efficiency and construction set by the Environmental Protection Agency. The second tier would provide a $4,000 tax credit for the construction of each qualified Department of Energy (DOE) Zero Energy Ready Home certified to meet substantially higher standards for energy savings and construction set by the DOE. To ensure that a new home meets the ENERGY STAR or DOE Zero Energy Ready Home guidelines, verification by a qualified third party would be required. The new credits would apply to qualified new homes acquired from the homebuilder for use as a residence after December 31, 2015, and before January 1, 2026.

Reduce excise taxes on liquefied natural gas (LNG) to bring into parity with diesel. -- The Administration proposes to reduce the excise tax on LNG from 24.3 cents to 14.1 cents per gallon after December 31, 2015.

Enhance and modify the conservation easement deduction. -- A deduction is generally available for charitable contributions of cash and property. In general, no charitable deduction is allowed for a contribution of a partial interest in property. An exception to this rule allows a donor to deduct the value of a conservation easement (a partial interest) that is donated to a qualified charitable organization exclusively for conservation purposes, including the preservation of recreational outdoor spaces and certain certified historical structures. The value of the deduction for any contribution that produces a return benefit to the donor must be reduced by the value of the benefit received. Special rules for the deductibility of qualified conservation contributions were temporarily enhanced, applicable for qualified conservation contributions made in taxable years beginning after December 31, 2005, and before January 1, 2015. These enhancements, originally enacted in the Pension Protection Act of 2006, temporarily raised the percentage-of-income limitations for gifts of conservation easements made after December 31, 2005, allowing individuals to deduct up to 50 percent of their contribution base (generally, adjusted gross income computed without regard to the net operating loss carryback) and allowing qualified farmers and ranchers to deduct up to 100 percent of their contribution base. Certain corporate farmers and ranchers could deduct the value of contributions of property used in agriculture or livestock production (and restricted so as to remain available for such production) up to 100 percent of taxable income. Additionally, these donors could deduct any remaining value of the donated easement over the succeeding 15 years.

The Administration proposes the following enhancements and modifications to the conservation easement deduction, effective for contributions made after the date of enactment, unless otherwise stated. First, the Administration proposes to make permanent the temporary enhanced incentives for conservation easement contributions that expired on December 31, 2014. In addition, to address concerns regarding abusive uses of this deduction and to promote effective, high-value conservation efforts, the Administration proposes to strengthen standards for organizations to qualify to receive deductible contributions of conservation easements; modify the definition of eligible conservation purpose and require that, prior to taking a deduction, donors of conservation easements establish that the easement furthers a clearly delineated Federal conservation policy or an authorized State or tribal government policy and will yield a significant public benefit; require that organizations receiving deductible contributions of easements certify the Federal conservation purposes served and public benefits yielded by the easement and attest that the fair market value of the easement reported by the donor to the IRS is accurate; penalize organizations that attest to values that they know (or should know) are substantially overstated or for receiving contributions that do not serve a conservation purpose; and require additional reporting by organizations receiving deductible contributions of conservation easements, including information about the contributed easements and their fair market values.

Second, the Administration proposes to pilot a non-refundable credit for conservation easement contributions as an alternative to the current deduction. The credits of $100 million per year would be allocated by a Federal board to qualified charitable organizations and governmental entities that hold and enforce conservation easements. These conservation organizations would in turn allocate the credits to donors of conservation easements. Donors would receive up to a maximum of 50 percent of the fair market value of the contributed easement in credits and could use the credits to offset up to 100 percent of their income tax liability. Any unused credit amounts could be carried forward for up to 15 years. Under the proposal, donors would have enhanced incentives to contribute because the value of the credits is not limited to the donor's tax rate, and there would be fewer regulatory requirements and restrictions on taking the credit. Qualified conservation organizations would have flexibility to direct the credits toward easements with greatest conservation value and to utilize their credit allocation to maximize the conservation achieved in exchange for the tax benefits. Finally, the costs of tax administration could be reduced because conservation organizations, rather than donors, would determine the value of easements and be responsible for allocating the tax benefits to donors of valuable easements, eliminating much of the need for IRS enforcement activity to challenge over-valued easements deductions. Verification of donor compliance would be simplified as well, as regulatory requirements on donors necessary to support significant IRS examination activity of deductions would no longer be needed for the credit. The proposal also calls for a report to the Congress from the Department of the Treasury in collaboration with the Department of Agriculture and the Department of the Interior on the relative merits of the conservation credit and the deduction for conservation contributions, including an assessment of the conservation benefits and costs of conservation of both tax benefits.

Third, contributions of easements on golf courses have raised concerns that the deduction amounts claimed for such easements are excessive and that the conservation easement deduction is not narrowly tailored to promote only bona fide conservation activities, as opposed to the private interests of donors. The Administration proposes to amend the charitable contribution deduction provision to prohibit a deduction for any contribution of a partial interest in property that is, or is intended to be, used as a golf course.

Fourth, concerns have been raised that the deduction amounts claimed for contributions of conservation easements for historic preservation are excessive and may not appropriately take into account existing limitations on the property. The Administration proposes to disallow a deduction for any value associated with forgone upward development above an historic building. The Administration also proposes to require contributions of conservation easements on all historic buildings, including those listed in the National Register of Historic Places, to comply with a 2006 amendment that requires contributions of historic preservation easements on buildings in registered historic districts to comply with special rules relating to the preservation of the entire exterior of the building and the documentation of the easement contribution.

Require consistency in value for transfer and income tax purposes. -- Current law provides generally that the basis of property inherited from a decedent is the property's fair market value at the decedent's death, and of property received by gift is the donor's adjusted basis in the property, increased by the gift tax paid on the transfer. (A special limitation based on fair market value at the time of the gift applies if the property subsequently is sold by the donee at a loss.) Elsewhere in this Budget the Administration proposes to tax accrued capital gains (that is, fair market value in excess of the basis) when assets are transferred by death or gift. Although generally the same standards apply to determine the value subject to estate or gift tax as apply to computing basis under current law or to computing gain under the Administration's proposal, there is no explicit consistency rule that would require the recipient of the property to use for income tax purposes the value used for estate or gift tax purposes as the recipient's basis in that property when the basis is determined by reference to the fair market value on the date of death or gift. The Administration proposes to require that, for decedents dying and gifts made after enactment, the fair market value used for computing the recipient's basis or for computing capital gain generally must equal (but in no event may exceed) the value of the property as determined for estate or gift tax purposes, and a reporting requirement would be imposed on the decedent's executor or the donor to provide the necessary information to both the recipient and the IRS. The proposal also would grant regulatory authority for the development of rules to govern situations in which this general rule would not be appropriate. The proposal would be effective for transfers after the year of enactment.

Modify transfer tax rules for grantor retained annuity trusts (GRATs) and other grantor trusts. -- Current law provides that the value of the remainder interest in a GRAT for gift tax purposes is determined by deducting the present value of the annuity to be paid during the GRAT term from the fair market value of the property contributed to the GRAT. If the grantor of the GRAT dies during that term, the portion of the trust assets needed to produce the annuity is included in the grantor's gross estate for estate tax purposes. In practice, grantors commonly use brief GRAT terms (often of less than two years) and significant annuities to minimize both the risk of estate tax inclusion and the value of the remainder for gift tax purposes. The Administration proposes to add the following requirements for GRATs: (1) the GRAT must have a minimum term of 10 years and a maximum term of 10 years more than the annuitant's life expectancy, (2) the remainder interest must have a minimum value at the creation of the GRAT equal to the greater of 25 percent of the value of the property contributed to the GRAT or $500,000 (but not more than the value of the assets contributed), (3) no decrease in the annuity during the GRAT term is permitted, and (4) no tax-free exchange of any GRAT asset with the grantor is permitted.

This proposal also would address the sale of an asset to a grantor trust, specifically, a trust of which the seller is the deemed owner for income tax purposes. A grantor trust is ignored for income tax purposes, even though the trust may be irrevocable and the deemed owner may have no beneficial interest in the trust or its assets. The lack of coordination between the income tax and transfer tax rules applicable to a grantor trust creates opportunities to structure transactions between the trust and its deemed owner that are ignored for income tax purposes and can result in the transfer of significant wealth by the deemed owner without transfer tax consequences. The proposal would provide that a person who is a deemed owner of all or a portion of a trust engages in a transaction with that trust that constitutes a sale, exchange, or comparable transaction that is disregarded for income tax purposes by reason of the person's treatment as a deemed owner of the trust under the grantor trust rules, then the portion of the trust attributable to the property received by the trust in that transaction, net of the consideration received by the person in the transaction, will be: (1) subject to estate tax as part of the deemed owner's gross estate, (2) subject to gift tax at any time during the deemed owner's life when his or her treatment as a deemed owner of the trust is terminated, and (3) treated as a gift by the deemed owner to the extent any distribution is made to another (except in discharge of the deemed owner's obligation to the distributee) during the deemed owner's life. The transfer taxes would be payable from the trust. The proposal would be effective with regard to GRATs created after the date of enactment, and to other grantor trusts that engage in a described transaction on or after the date of enactment.

Limit duration of GST tax exemption. -- Current law provides that each person has a lifetime GST tax exemption ($5,430,000 in 2015) that may be allocated to the person's transfers to or for the benefit of transferees who are two or more generations younger than the transferor ("skip persons"). The allocation of a person's GST exemption to such a transfer made in trust exempts from the GST tax not only the amount of the transfer (up to the amount of exemption allocated), but also all future appreciation and income from that amount during the existence of the trust. At the time of the enactment of the GST tax provisions, the law of almost all States included a Rule Against Perpetuities (RAP) that required the termination of every trust after a certain period of time. Because many States now either have repealed or limited the application of their RAP laws, trusts subject to the laws of those States may continue in perpetuity. As a result of this change in State laws, the transfer tax shield provided by the GST exemption effectively has been expanded from trusts funded with $1 million and a maximum duration limited by the RAP, to trusts funded with $5,430,000 and continuing (and growing) in perpetuity. The Administration proposes to limit the duration of the benefit of the GST tax exemption by imposing a bright-line test, more clearly administrable than the common law RAP, which, in effect, would terminate the GST tax exclusion on the 90th anniversary of the creation of the trust. An exception would be made for trusts that are distributed to another trust for the sole benefit of one individual if the distributee trust will be includable in the individual's gross estate for Federal estate tax purposes to the extent it is not distributed to that individual during his or her life. The proposal would apply to trusts created after enactment, and to the portion of a pre-existing trust attributable to additions to such a trust made after that date.

Extend the lien on estate tax deferrals where estate consists largely of interest in closely held business. -- There is a lien on nearly all estate assets for the 10-year period immediately following a decedent's death to secure the full payment of the Federal estate tax. However, the estate tax payments on interests in certain closely held businesses are deferred for 14 years after the due date of the return (or nearly 15 years after the date of death). Thus, this lien expires approximately five years before the due date of the final payment of the deferred tax. Existing methods of protecting the Federal Government's interest in collecting the amounts due are expensive and may be harmful to businesses. The Administration proposes to extend the existing estate tax lien throughout the deferral period to eliminate the need for any additional security in most cases in a manner that is economical and efficient for both taxpayers and the Federal Government. The proposal would be effective for the estates of all decedents dying on or after the date of enactment, as well as for all estates of decedents dying before the date of enactment as to which the lien has not then expired.

Modify GST tax treatment of Health and Education Exclusion Trusts (HEETs). -- Payments made by a donor directly to the provider of medical care for another or directly to a school for another's tuition are exempt from gift tax. These direct transfers also are exempt from the GST tax. However, payments made to a trust, to be expended by the trust for the same purposes, are not exempt from the gift tax. Some contributors to HEETs interpret the GST tax exclusion to apply also to distributions made from the HEET in payment of medical expenses or tuition, and claim that those distributions are exempt from the GST tax. The Administration proposes to provide that the GST tax exclusion for transfers exempt from the gift tax is limited to outright transfers by the donor to the provider of the medical care or education and does not apply to distributions for those same purposes from a trust. The proposal would apply to trusts created after the introduction of the bill enacting this change and to transfers after that date made to pre-existing trusts.

Simplify gift tax exclusion for annual gifts. -- The annual per-donee gift tax exclusion (currently $14,000) is available only for gifts of "present interests," but generally a transfer can be converted into a present interest by granting the donee an immediate right to withdraw the property ("Crummey power"). In an effort to simplify tax compliance and administration, and to prevent the possible abuse of such withdrawal powers, the Administration proposes to eliminate the present interest requirement, define a new category of transfers that will not be affected by withdrawal or put rights, and impose an annual per-donor cap of $50,000 (indexed for inflation) on the total amount of gifts in that new category that can be exempted from gift tax by the annual per-donee exclusion. The new category would include transfers in trust (other than to a trust described in section 2642(c)(2) of the Internal Revenue Code), transfers of interests in pass-through entities, transfers of interests subject to a prohibition on sale, and other transfers of property that, without regard to withdrawal, put, or other such rights in the donee, cannot be immediately liquidated by the donee. The proposal would be effective for gifts made after the year of enactment.

Expand applicability of definition of executor. -- Under current law, the statutory definition of executor applies only for purposes of the estate tax; therefore, an executor of an estate does not have the authority to extend a statute of limitations, claim a refund, agree to a compromise or assessment, or pursue judicial relief for a tax liability that arose prior to the decedent's death. To empower an authorized party to act on behalf of the decedent in such matters (whether arising before, upon, or after death), the Administration proposes to make the statutory definition of executor applicable for all tax purposes, and to authorize such executor to do anything on behalf of the decedent in connection with the decedent's pre-death tax liabilities or obligations that the decedent could have done if still living. In addition, because this definition frequently results in multiple parties being an executor, the proposal would grant regulatory authority to adopt rules to resolve conflicts among multiple executors authorized by that definition. The proposal would be effective upon enactment, regardless of the decedent's date of death.

Reinstate Superfund taxes. -- The Administration proposes to reinstate the taxes that were deposited in the Hazardous Substance Superfund prior to their expiration on December 31, 1995. These taxes, which contributed to financing the cleanup of the Nation's highest risk hazardous waste sites, are proposed to be reinstated for periods (excise taxes) or taxable years (income tax) beginning after 2015, with expiration for periods and taxable years after 2025. The proposed taxes include the following: (1) an excise tax of 9.7 cents per barrel on crude oil and imported petroleum products; (2) an excise tax on specified hazardous chemicals at rates that vary from 22 cents to $4.87 per ton; (3) an excise tax on imported substances that use the specified hazardous chemicals as a feedstock (in an amount equivalent to the tax that would have been imposed on domestic production of the chemicals); and (4) a corporate environmental income tax imposed at a rate of 0.12 percent on the amount by which the modified AMT income of a corporation exceeds $2 million. Consistent with the Administration's proposal regarding taxes deposited in the Oil Spill Liability Trust Fund, the Superfund excise tax on crude oil and petroleum products would cover other sources of crudes such as those produced from bituminous deposits as well as kerogen-rich rock.

Increase tobacco taxes and index for inflation. -- Under current law, cigarettes are taxed at a rate of $50.33 per 1,000 cigarettes. This is equivalent to just under $1.01 per pack, or approximately $22.88 per pound of tobacco. Taxes on other tobacco products range from $0.5033 per pound for chewing tobacco to $24.78 per pound of roll-your-own tobacco. The Administration proposes to raise tobacco taxes and increase parity in tax rates among similar tobacco products. Cigarettes and small cigars would be taxed at $97.50 per 1,000 units, or about $1.95 per pack of cigarettes. Large cigars would be taxed at an approximately equivalent rate (using five per-unit rates that vary according to the cigar's weight. Pipe tobacco, and roll-your-own tobacco would be taxed at $44.23 per-pound, also roughly equivalent to the implied per-pound tax for cigarettes and cigars. Snuff and chewing tobacco would both be taxed at $10.00 per pound. The Administration also proposes to clarify that roll-your-own tobacco includes any processed tobacco that is removed for delivery to anyone other than a manufacturer of tobacco products or exporter. The new tax rates would be effective for articles held for sale or removed after December 31, 2015, and indexed for inflation after 2016.

Make unemployment insurance (UI) surtax permanent. -- The net Federal UI tax on employers dropped from 0.8 percent to 0.6 percent with respect to wages paid after June 30, 2011. The Administration proposes to permanently reinstate the 0.8 percent rate, effective with respect to wages paid on or after January 1, 2016.

Expand Federal Unemployment Tax Act (FUTA) base. -- Many States' UI systems are chronically underfunded and required Federal borrowing to cover benefits during the most recent downturn. The Administration proposes to improve system solvency by helping States rebuild their trust fund balances to repay their loans, cover current benefits, and create reserves so they are better prepared for the next downturn. Under this proposal, the FUTA taxable wage base would increase in 2017 to $40,000 (approximately average insured wages) and would be indexed thereafter. This wage base increase would be accompanied by a decrease in the tax rate to avoid a Federal tax increase in the first year.

Reform the UI extended benefits program. -- The UI program is a key stabilizer during economic downturns. The Administration proposes reforms to strengthen UI's economic stabilization function by creating a new permanent federally funded extended benefits program that would respond quickly when State unemployment rates rise and provide more robust Federal assistance. This new program would provide up to 52 weeks of additional federally funded benefits, with the greatest number of weeks in States with higher unemployment rates. The proposal would provide up to 13 weeks of additional benefits each time States hit certain unemployment rate triggers -- 6.5 percent, 7.5 percent, 8.5 percent, and 9.5 percent. Under the proposal, these threshold rates can be lower in States where unemployment is increasing especially rapidly. States that offer fewer than 26 weeks of regular benefits would only be reimbursed for 50 percent of extended benefits, requiring them to raise additional revenue to cover the benefit costs.

Modernize the UI program. -- The Administration proposes to modernize the UI system by improving its connection to jobs and making sure benefits are available to more workers who need them. To do this, the Budget includes a UI modernization fund that will provide incentive payments to States that adopt measures to expand both program eligibility and work-based learning opportunities and training for unemployed workers. A State can receive incentive payments if it adopts two measures that expand eligibility and two measures that improve connections to training and employment. States that maintain these changes for at least four years will also receive a bonus payment. States will need to raise additional revenue to cover the proposed benefit expansions.

Levy a fee on the production of hardrock minerals to restore abandoned mines. -- Until 1977, there were no Federal requirements to restore land after mining for coal, leaving nearly $4 billion worth of abandoned coal mine hazards remaining today. The Department of the Interior collects a fee on every ton of coal produced in the United States to finance the reclamation of these abandoned coal mines. Historic mining of hardrock minerals, such as gold and copper, also left numerous abandoned mine lands (AML); however, there is no similar source of Federal funding to reclaim these sites. Just as the coal industry is held responsible for past mining practices, the Administration proposes to hold the hardrock mining industry responsible for abandoned hardrock mines. The proposed fee on the production of hardrock minerals would be charged per volume of material displaced after December 31, 2016, and the receipts would be distributed through a set allocation between Federal and non-Federal lands. Funds would be used to restore the most hazardous hardrock AML sites, on both public and private lands. The receipts allocated to restoration of non-Federal lands would be distributed to States and Tribes based on need, with each State and Tribe selecting its own priority projects within certain national criteria.

Return fees on the production of coal to pre-2006 levels to restore abandoned mines. -- Since October 1, 1977, the Department of the Interior has collected fees on every ton of coal produced in the United States to finance the reclamation of abandoned coal mines. The fees levied on mine operators were originally $0.35 per ton for surfaced mined coal and $0.15 per ton for underground mined coal. The 2006 amendments to the Surface Mining Control and Reclamation Act instituted a phased reduction in these fees beginning in 2006. However, nearly $4 billion worth of abandoned coal mine hazards remain today. The Administration proposes to restore the fees to their original level, effective for coal mined after September 30, 2015, to provide additional resources to continue addressing the legacy of abandoned coal mines.

In addition, the Administration proposes to require life insurance companies to report to the IRS, for each contract whose cash value is partially or wholly invested in a private separate account for any portion of the taxable year and represents at least 10 percent of the value of the account, the policyholder's TIN, the policy number, the amount of accumulated untaxed income, the total contract account value, and the portion of that value that was invested in one or more private separate accounts. For this purpose, a private separate account would be defined as any account with respect to which a related group of persons owns policies whose cash values, in the aggregate, represent at least 10 percent of the value of the separate account. Whether a related group of persons owns policies whose cash values represent at least 10 percent of the value of the account would be determined quarterly, based on information reasonably within the issuer's possession.

The proposal would be effective for payments made to contractors after December 31, 2015, or private separate accounts maintained on or after December 31, 2015.

Provide an exception to the limitation on disclosing tax return information to expand TIN matching beyond forms where payments are subject to backup withholding. -- The IRS is prohibited from disclosing Federal tax returns and return information (FTI). There are certain very narrow exceptions. Even where disclosure is permitted, recipients of FTI must safeguard the information and cannot redisclose it unless permitted. The Secretary of the Treasury is required to notify information return filers in certain circumstances where backup withholding is required if the recipient's TIN is not correct. Filers are required to keep this information confidential and are prohibited from using the information for purposes other than backup withholding. The IRS has broad regulatory authority to implement backup withholding. Under this authority, the IRS has established a TIN matching program that allows the IRS to verify the TINs of payees submitted by filers in the case of payments subject to backup withholding. The proposal would provide an exception to the limitation on disclosing FTI to permit the IRS to do TIN matching even in cases where the filer is not making a payment that is subject to backup withholding. The proposal would be effective on the date of enactment.

Provide for reciprocal reporting of information in connection with the implementation of the Foreign Account Tax Compliance Act (FATCA). -- In many cases, foreign law would prevent foreign financial institutions from complying with the FATCA provisions of the Hiring Incentives to Restore Employment Act of 2010 by reporting to the IRS information about U.S. accounts. Such legal impediments can be addressed through intergovernmental agreements under which the foreign government agrees to provide the information required by FATCA to the IRS. Requiring U.S. financial institutions to report similar information to the IRS with respect to non-resident accounts would facilitate such intergovernmental cooperation by enabling the IRS to reciprocate in appropriate circumstances by exchanging similar information with cooperative foreign governments to support their efforts to address tax evasion by their residents. The proposal would require certain financial institutions to report the account balance for U.S. financial accounts held by foreign persons, expand the current reporting required with respect to U.S. source income paid to accounts held by foreign persons to include similar non-U.S. source payments, and provide the Secretary of the Treasury with authority to prescribe regulations that would require reporting of such other information that is necessary to enable the IRS to facilitate FATCA implementation by exchanging similar information with cooperative foreign governments in appropriate circumstances. The proposal would also require that this information, as well as information reported by foreign financial institutions to the IRS, be furnished to the account holders in order to encourage voluntary tax compliance. The proposal would be effective for returns required to be filed after December 31, 2016.

Improve mortgage interest deduction reporting. -- Under current law, if any person in a trade or business receives in any calendar year from any individual more than $600 of interest on a loan primarily secured by real property, that person is required to file an information return with the IRS and provide a copy to the borrower. The information contained in Form 1098 does not provide the IRS with all of the information that is needed to verify all of the requirements for claiming the mortgage interest deduction. To enhance IRS administration of the mortgage interest deduction and to improve administration of the deduction for real estate taxes, the Administration proposes requiring the information returns on mortgage interest to include the outstanding principal balance of the mortgage as of the beginning of the calendar year; the address of the property securing the mortgage; information on whether the mortgage is a refinancing of an existing mortgage during the calendar year; property taxes, if any, paid from escrow; and the loan origination date. Having this information reported also has the potential to improve taxpayer compliance. The proposal would be effective for calendar years beginning after December 31, 2015.

Require Form W-2 reporting for employer contributions to defined contribution plans. -- Employers are currently required to report on Form W-2 an employee's elective deferrals under a cash or deferred arrangement, such as a 401(k) plan. Employers, however, are not required to report amounts that they contribute to an employee's retirement plan accounts. The proposal would require employer contributions to a defined contribution plan to be reported on Form W-2, thus providing employees with a convenient annual statement of the amounts that are contributed on their behalf by their employers under defined contribution plans and facilitating compliance with overall contribution limits.

Increase information sharing to administer excise taxes. -- Current law allows the IRS and the Alcohol and Tobacco Tax and Trade Bureau to disclose specific items of tax return information to permit the effective administration of excise taxes. This disclosure provision is too narrow and prevents effective administration and enforcement of the excise tax rules. The Administration proposes to facilitate excise tax administration and increase collections by amending current law to permit disclosure of tax return information to Department of Homeland Security employees (customs officials) whose job responsibilities include tax administration. The proposal would be effective upon enactment.

Provide authority to readily share information about beneficial ownership information of U.S. companies with law enforcement. -- Illicit actors may abuse legal entities to commit financial crimes, including laundering criminal proceeds and financing terrorism through the international banking system. Knowledge of beneficial owners of an entity can help law enforcement officials identify and investigate criminals engaged in these activities.

For anti-money laundering and counter-terrorism financing (AML/CTF) purposes, the beneficial owner of a foreign private banking account is currently defined in Treasury regulations under Title 31 of the U.S. Code to mean an individual who has a level of control over, or entitlement to, the funds or assets in the account that, as a practical matter, enables the individual(s), directly or indirectly, to control, manage, or direct the account. For Federal tax purposes, most U.S. entities are required to obtain an employer identification number (EIN). A company applying for an EIN must provide the IRS with the name of a responsible party who will be the IRS contact for the company. Generally, for a company that is not publicly traded, the responsible party is the person who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual to directly or indirectly control, manage, or direct the entity and the disposition of its funds or assets. Because this definition is similar to the AML/CTF definition of beneficial owner, the responsible party of an entity for Federal tax purposes will generally be considered a beneficial owner of an account nominally owned by the entity for AML/CTF purposes. Although this responsible party information may be useful to law enforcement when investigating financial crimes, under current law it cannot be shared with law enforcement officials without a court order.

The proposal would allow the Secretary of the Treasury or his delegate to share responsible party information with law enforcement without a court order to combat money laundering, terrorist financing, and other financial crimes. Such sharing would advance criminal investigations and successful prosecution, and assist in identifying criminal proceeds and assets. In addition, the proposal would require all companies formed in the United States to obtain an EIN, which would provide a universal identifier for these companies and ensure that responsible party information is provided for every U.S. entity. Further, the proposal would provide the Secretary of the Treasury with the authority to impose AML/CTF obligations on persons in the business of forming companies. Finally, the proposal would establish standards that States would be encouraged to adopt to improve their regulation and oversight of the incorporation process.

Increase levy authority for payments to Medicare providers with delinquent tax debt. -- The Administration proposes a change to the Department of the Treasury's debt collection procedures that will increase the amount of delinquent taxes collected from Medicare providers. Under current law, the Department of the Treasury is authorized to continuously levy up to 30 percent of a payment to a Medicare provider to collect delinquent tax debt. The proposal would allow the Department of the Treasury to levy up to 100 percent of a payment to a Medicare provider to collect unpaid taxes, effective for payments made after the date of enactment.

Implement a program integrity statutory cap adjustment for tax administration. -- The Administration proposes an adjustment to the discretionary spending limits, as established in the BBEDCA, as amended, for IRS tax enforcement, compliance, and related activities, including tax administration activities at the Alcohol and Tobacco Tax and Trade Bureau (TTB). In general, such cap adjustments help protect increases above a base level for activities that generate benefits that exceed programmatic costs. The proposed 2016 cap adjustment for the IRS and TTB will fund $667 million in enforcement and compliance initiatives and investments above current levels of enforcement and compliance activity. Beyond 2016, the Administration proposes further increases in additional new tax enforcement initiatives each year from 2017 through 2020 and to sustain all of the new initiatives plus inflationary costs via adjustments through 2025. The total cost of starting and sustaining the new initiatives above current levels of enforcement and compliance activity would be $18.7 billion over the 10-year budget window, and is estimated to generate an additional $59.7 billion in revenue over that same period for a net savings of $41.0 billion. These resources will help the IRS and TTB continue to work on closing the tax gap, defined as the difference between taxes owed and those paid on time and estimated at $450 billion in 2006. Enforcement funds provided through the 2016 cap adjustment will continue to target international tax compliance and restore previously reduced enforcement levels.

Streamline audit and adjustment procedures for large partnerships. -- Under current law, large partnerships, other than electing large partnerships (ELPs), are subject to the unified audit rules established under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Since the enactment of the ELP regime, few large partnerships have elected into the ELP regime. Thus, the more complex and inefficient TEFRA partnership audit and adjustment procedures apply for most large partnerships. The Administration proposes to mandate new simplified partnership procedures for certain partnerships, including any partnership that has at least one partner that is another partnership, estate, trust, S corporation, nominee, or similar person ("pass-through partner") at any time during the taxable year. Direct partners that are pass-through partners are responsible for paying the tax on behalf of those owners. Pass-through partners would have 180 days to challenge the assessment. The proposal would apply to a partnership's taxable year ending on or after the date that is two years from the date of enactment.

Revise offer-in-compromise application rules. -- Current law provides that the IRS may compromise with a taxpayer to settle any civil or criminal case arising under the Internal Revenue Code prior to a referral to the Department of Justice for prosecution or defense. In 2006, a provision was enacted to require taxpayers to make certain nonrefundable payments with any initial offer-in-compromise of a tax case. Requiring nonrefundable payments with an offer-in-compromise may substantially reduce access to the offer-in-compromise program. Reducing access to the offer-in-compromise program makes it more difficult and costly for the IRS to obtain the collectable portion of existing tax liabilities. Accordingly, the Administration proposes eliminating the requirement that an initial offer-in-compromise include a nonrefundable payment of any portion of the taxpayer's offer. The proposal would be effective for offers-in-compromise submitted after the date of enactment.

Expand IRS access to information in the National Directory of New Hires (NDNH) for tax administration purposes. -- Employment data are useful to the IRS in administering a wide range of tax provisions, including verifying taxpayer claims and identifying levy sources. Currently, the IRS may obtain employment and unemployment data on a State-by-State basis, which is a costly and time-consuming process. The Administration proposes to amend the Social Security Act to expand IRS access to the 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 laws, including civil and criminal sanctions. The proposal would be effective upon enactment.

Make repeated willful failure to file a tax return a felony. -- Current law provides that willful failure to file a tax return is a misdemeanor punishable by a term of imprisonment for not more than one year, a fine of not more than $25,000 ($100,000 in the case of a corporation), or both. The Administration would modify this rule such that any person who willfully fails to file tax returns in any three years within any period of five consecutive years, if the aggregate tax liability for such period is at least $50,000, would be subject to a new aggravated failure to file criminal penalty. The proposal would classify such failure as a felony and, upon conviction, impose a term of imprisonment for not more than five years, a fine of not more than $250,000 ($500,000 in the case of a corporation), or both. The proposal would be effective for returns required to be filed after December 31, 2015.

Facilitate tax compliance with local jurisdictions. -- Although Federal tax returns and return information (FTI) generally are confidential, the IRS and Department of the Treasury may share FTI with States as well as certain local government entities that are treated as States for this purpose. IRS and Department of the Treasury compliance activity, especially with respect to alcohol, tobacco, and fuel excise taxes, may necessitate information sharing with Indian Tribal Governments (ITGs). The Administration's proposal would specify that ITGs that impose alcohol, tobacco, or fuel excise taxes, or income or wage taxes, would be treated as States for purposes of information sharing to the extent necessary for ITG tax administration. The ITG that receives FTI would be required to safeguard it according to prescribed protocols. The proposal would be effective for disclosures made after enactment.

Extend statute of limitations for assessment for overstated basis and State adjustments. -- In general, additional Federal tax liabilities in the form of tax, interest, penalties, and additions to tax must be assessed by the IRS within three years after the date a return is filed. The general three-year assessment period is increased to six years if the taxpayer omits an amount of gross income that is more than 25 percent of the gross income stated on the return and the omission is not disclosed. An overstatement of the adjusted basis of property, which results in an understatement of gain reported on a return, is not treated as an omission of gross income for purposes of determining whether there is a more than 25 percent omission of gross income stated on the return, even though the need for more time is the same regardless of whether there is an omission of gross income or an understatement of gain. The Administration therefore proposes to amend the rules for determining gross income for purposes of the six-year assessment period to provide that an understatement of gain is treated as an omission from gross income.

Pursuant to agreement, the IRS and State and local revenue agencies exchange reports of adjustments made through examination so that corresponding adjustments can be made by each taxing authority. The general statute of limitations for assessment of Federal tax liabilities serves as a barrier to the effective use by the IRS of State and local tax adjustment reports when the reports are provided by the State or local revenue agency to the IRS with little time remaining for assessments to be made at the Federal level. The Administration therefore proposes an additional exception to the general three-year statute of limitations for assessment of Federal tax liability resulting from adjustments to State or local tax liability. The statute of limitations would be extended to the later of: (1) one year from the date the taxpayer first files an amended tax return with the IRS reflecting adjustments to the State or local tax return; or (2) two years from the date the IRS first receives information from the State or local revenue agency under an information sharing agreement in place between the IRS and a State or local revenue agency. The statute of limitations would be extended only with respect to the increase in Federal tax attributable to the State or local tax adjustment. The statute of limitations would not be further extended if the taxpayer files additional amended returns for the same tax periods as the initial amended return or the IRS receives additional information from the State or local revenue agency under an information sharing agreement.

The proposal would be effective for returns required to be filed after December 31, 2015.

Improve investigative disclosure statute. -- Generally, tax return information is confidential, unless a specific exception in the Internal Revenue Code applies. In the case of tax administration, the Internal Revenue Code permits the Department of the Treasury and IRS officers and employees to disclose return information to the extent necessary to obtain information not otherwise reasonably available, in the course of an audit or investigation, as prescribed by regulation. Department of the Treasury regulations effective since 2003 state that the term "necessary" in this context does not mean essential or indispensable, but rather appropriate and helpful in obtaining the information sought. Determining if an investigative disclosure is "necessary" is inherently factual, leading to inconsistent opinions by the courts. Eliminating this uncertainty from the statute would facilitate investigations by IRS officers and employees, while setting forth clear guidance for taxpayers, thus enhancing compliance with the Internal Revenue Code. The Administration proposes to clarify the taxpayer privacy law by stating that it does not prohibit Department of the Treasury and IRS officers and employees from identifying themselves, their organizational affiliation, and the nature and subject of an investigation, when contacting third parties in connection with a civil or criminal tax investigation. The proposal would be effective for disclosures made after enactment.

Allow the IRS to absorb credit and debit card processing fees for certain tax payments. -- Taxpayers may make credit or debit card payments by phone through IRS-designated third-party service providers, who charge taxpayers a convenience fee for processing the payment over and above the taxes due. Under current law, if the IRS were to accept credit or debit card payments directly from taxpayers, the IRS would be prohibited from absorbing credit and debit card processing fees. The Administration recognizes that it is inefficient for both the IRS and taxpayers to require credit and debit card payments to be made through a third-party service provider, and that charging an additional convenience fee increases taxpayers' costs. The proposal would permit the IRS to accept credit and debit card payments directly from taxpayers and to absorb the credit and debit card processing fees, but only in situations authorized by regulations. The proposal would be effective for payments made after the date of enactment.

Provide the IRS with greater flexibility to address correctable errors. -- The IRS may correct certain mathematical or clerical errors made on tax returns to reflect the taxpayer's correct tax liability without following the regular deficiency procedures (this authority is generally referred to as "math error authority"). The Internal Revenue Code specifically identifies a list of circumstances where the IRS has math error authority. The Administration proposes to remove the existing specific grants of math error authority, and provide that "math error authority" will refer only to computational errors and the incorrect use of any table provided by the IRS. In addition, the proposal will add a new category of "correctable errors." Under this new category, the Department of the Treasury would have regulatory authority to permit the IRS to correct errors in cases where: (1) the information provided by the taxpayer does not match the information contained in government databases; (2) the taxpayer has exceeded the lifetime limit for claiming a deduction or credit; or (3) the taxpayer has failed to include with his or her return documentation that is required by statute. The proposal would increase efficiency by eliminating the need to enact legislation specifically extending math error authority to the IRS on a case-by-case basis, and would promote the efficient use of IRS and taxpayer resources. The proposal would be effective on the date of enactment. However, the IRS' current grant of math error authority would continue to apply until the Department of the Treasury and the IRS issue final regulations addressing correctable errors.

Enhance electronic filing of returns. -- Generally, regulations may require businesses and tax-exempt organizations that file at least 250 returns and information returns during the calendar year to file electronically (e-File). Partnerships with more than 100 partners are required to e-File, regardless of how many returns they file. A tax return preparer that expects to file more than 10 individual income tax returns (Forms 1040 and 1041) is generally required to e-File these tax returns. Certain pension plans are required to electronically file certain information with the Department of Labor, which shares the information with the IRS. However, certain tax-only information is not required to be e-filed to the IRS. The proposal would strengthen the requirements for entities to e-File, expand the preparer e-File mandate for individual returns to apply to entity returns, require scannable codes on paper returns prepared using software, expand regulatory authority related to information returns, and add a specific penalty for failure to e-File when required to do so. Regulatory authority would be expanded to allow reduction of the 250-return threshold for certain other information returns. The proposal would generally be effective for taxable years beginning after the date of enactment, with transition relief available for certain taxpayers.

Improve the whistleblower program. -- Under current law, the Internal Revenue Code does not protect whistleblowers from retaliatory actions; therefore, potential whistleblowers may be discouraged from filing claims with the IRS. The Administration proposes to amend the Internal Revenue Code to protect whistleblowers from retaliation, which should incentivize potential whistleblowers to file claims and increase the tax administration benefit of the whistleblower program. The IRS Whistleblower Office may disclose tax return information, which is generally confidential, to whistleblowers and their legal representatives as part of a whistleblower administrative proceeding. Although whistleblowers and their legal representatives must sign a confidentiality agreement before tax return information is shared, the statutory prohibitions on redisclosure of tax return information and safeguarding requirements do not apply. The Administration proposes to amend the whistleblower rules to explicitly protect whistleblowers from retaliatory actions, consistent with the protections currently available to whistleblowers under the False Claims Act. In addition, the Administration proposes to amend the taxpayer information protections to extend the safeguarding requirements and prohibition on redisclosure of tax return information to whistleblowers and their legal representatives. In addition, the Administration proposes to extend penalties for unauthorized redisclosure of tax return information to whistleblowers and their legal representatives. This proposal will improve the efficiency of the whistleblower award determination proceedings, while increasing the protection available to taxpayers. The proposal would be effective upon enactment.

Index all civil tax penalties for inflation. -- Currently, the amount of a tax penalty that is a set dollar amount is established when the penalty is added to the Internal Revenue Code and is only increased by amendments to the Internal Revenue Code. As a result, under current practices, the amount of the penalty is often not increased until significant time has passed and the penalty amount is too low to continue serving as an effective deterrent. The Administration proposes to index all penalties for inflation and round the indexed amount to the next hundred dollars. This proposal would increase the penalty regime's effectiveness in deterring negative behavior and would increase efficiency by eliminating the need to enact increases to individual penalties. While recent amendments to the Internal Revenue Code index select penalty provisions to inflation and resolve these issues for those few penalties, a more comprehensive approach is needed to achieve increased effectiveness and efficiency of tax penalties. The proposal would be effective upon enactment.

Extend IRS authority to require truncated Social Security numbers (SSNs) on Form W-2. -- Employers are required to file Form W-2 with the IRS, indicating the SSN, wages paid, taxes withheld and other information for each employee. Employers must also provide a copy of Form W-2 to each employee. If a copy of Form W-2 is lost or misdirected, the SSN may be used to steal the worker's identity. The proposal would allow IRS to require employers to show only the last four digits of the SSN on the employees' copies of Form W-2 to prevent identity theft. The proposal would be effective upon enactment.

Combat tax-related identity theft. -- Tax refund-related identity theft has expanded exponentially in recent years. The Aggravated Identity Theft Statute contains a list of felony violations that constitute predicate offenses for aggravated identity theft but the list does not currently include any tax offenses. The Administration proposes to add tax-related offenses to the list of predicate offenses contained in the Aggravated Identity Theft Statute. The Administration also proposes to impose a $5,000 civil penalty (indexed) in tax identity theft cases. The proposal would be effective upon enactment.

Allow States to send notices of intent to offset Federal tax refunds to collect State tax obligations by regular first-class mail instead of certified mail. -- Under current law, the Department of the Treasury, Bureau of Fiscal Service, may offset Federal tax refunds to collect delinquent State income tax obligations only after the State sends the delinquent debtor a notice by certified mail. With respect to all other types of debts, including Federal nontax, child support, and State unemployment insurance compensation debts, the statute is silent as to the notice delivery method. However, the regulations require that for all debts other than State income tax obligations, Federal and State creditor agencies send notices by regular first class mail. Similarly, notice requirements for other debt collection actions, including administrative wage garnishment, do not require delivery by certified mail. The Administration's proposal would remove the statutory requirement to use certified mail, thereby allowing States to send notices for delinquent State income tax obligations by first class mail, saving States certified mail costs and standardizing notice procedures across debt types. The proposal would be effective upon enactment.

Rationalize tax return filing due dates so they are staggered. -- The Administration's proposal would modify tax filing due dates so that the information statements of pass-through entities would be due before individual income tax returns and the income tax returns of non-pass-through entities. The proposal would also accelerate the due date for filing information returns with the IRS or Social Security Administration (SSA) and eliminate the extended due date for electronically filed information returns. Under the Administration's proposal, which would be effective for returns required to be filed after December 31, 2015: (1) the returns of partnerships (Forms 1065 and Schedules K-1) would be due by March 15 or the 15th day of the 3rd month following the close of the taxable year in the case of fiscal year filers; (2) the returns of corporations other than S corporations would be due by April 15 or the 15th day of the 4th month following the close of the taxable year in the case of fiscal year filers; and (3) the date for filing certain information returns with the IRS or SSA would be accelerated to January 31 in most cases. The due date for the return of S corporations would remain the same. The proposal would be effective for returns required to be filed after December 31, 2015.

Increase oversight and due diligence of tax return preparers. -- The proposal would explicitly provide that the Secretary of the Treasury has the authority to regulate all paid tax return preparers. This proposal would be effective on or after the date of enactment. The proposal would also increase the penalty rate on paid tax return preparers for understatements due to willful or reckless conduct to the greater of $5,000 or 75 percent (instead of the current 50 percent) of the income derived (or to be derived) by the preparer with respect to the return or claim for refund. In addition, the proposal would extend due diligence requirements similar to those for the EITC to the child tax credit. The existing checklist would be expanded and adapted to reflect the differences in requirements between the EITC and the child tax credit, while ensuring that the additional burden to preparers and filers is minimized. The increased return preparer penalty and the extension of the due diligence requirements would be effective for returns required to be filed after December 31, 2015.

Enhance administrability of the appraiser penalty. -- Current law imposes a penalty on preparers of appraisals that result in a substantial or gross valuation misstatement. There is an exception to the penalty if the value in the appraisal is "more likely than not" the proper value. Valuations of property are generally provided as a specific value or a range of values that are applicable, not as a value that is "more likely than not" the proper value. Further, there is no coordination between this penalty and the preparer understatement penalty in cases where the person providing the appraisal is also treated as a paid tax return preparer with respect to the position on the return or claim for refund relying on the valuation in the appraisal. The proposal would increase administrability of the appraiser penalty by replacing the existing "more likely than not" exception with a reasonable cause exception. In addition, under the proposal, an appraiser would not be subject to both penalties for the same conduct. The proposal would be effective for returns required to be filed after December 31, 2015.

Enhance UI program integrity. -- The Administration proposes to make investments in UI program integrity by increasing funding for in-person Reemployment and Eligibility Assessments, coupled with Reemployment Services, which are conducted by the States. These assessments and supplemental services help ensure that benefits go only to eligible claimants and that they get the services they need to return to work. In general, reduced outlays allow States to keep UI taxes lower, reducing overall receipts to the UI trust funds. The Administration proposes to expand State use of the Separation Information Data Exchange System (SIDES), which already improves program integrity. SIDES allows States and employers to exchange information on reasons for a claimant's separation from employment, which helps States determine UI eligibility; separation issues are the second largest cause of UI improper payments. In addition, the Administration proposes to require States to cross match claimants against the Prisoner Update Processing System (PUPS), which is currently used by some States. Mandating the use of PUPS will reduce or eliminate improper payments to prisoners by identifying claimants ineligible due to incarceration. Finally, the Administration proposes legislation to reduce an individual's Social Security Disability Insurance (DI) benefit in any month in which that person also receives a State or Federal UI benefit. This proposal would eliminate duplicative payments covering the same period a beneficiary is out of the workforce, while still providing a base level of income support. While the primary impact of this proposal will be to reduce DI benefits, UI benefit outlays will also be reduced, with resulting effects on the receipt of UI payroll taxes.

Repeal non-qualified preferred stock designation. -- In 1997, a provision was added to the Internal Revenue Code that treats as taxable "boot" the receipt of certain types of preferred stock known as non-qualified preferred stock (NQPS), where NQPS is issued in a corporate organization or reorganization exchange. Since enactment, taxpayers have often exploited the hybrid nature of NQPS, issuing NQPS in transactions that are inconsistent with the purpose of the 1997 provision. The Administration proposes to repeal the NQPS designation, and no longer treat the receipt of such stock as taxable boot. The proposal would be effective for stock issued after December 31, 2015.

Repeal preferential dividend rule for publicly traded and publicly offered REITs. -- REITs and RICs may claim a deduction for dividends paid. Historically, however, a dividends paid deduction was not available for a "preferential dividend." A dividend is "preferential" unless it is distributed pro rata to shareholders, with no preference to any share of stock as compared with other shares of the same class, and with no preference to one class compared with another except to the extent the class is entitled to such preference. There are no exceptions for de minimis or accidental violations. The preferential dividend rule has been repealed for most RICs. The Administration proposes to repeal the preferential dividend rule for publicly traded and publicly offered REITs as well. The Department of the Treasury would also be given explicit authority to provide for cures of inadvertent violations of the preferential dividend rule where it continues in effect and, where appropriate, to require consistent treatment of shareholders. The proposal would apply to distributions in taxable years beginning after the date of enactment.

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 simplify the tax laws and encourage increased charitable activity, 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 1.35 percent. The excise tax on private foundations not exempt from Federal income tax would be equal to the excess of the sum of the 1.35-percent 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. The proposed change would be effective for taxable years beginning after the date of enactment.

Remove bonding requirements for certain taxpayers subject to Federal excise taxes on distilled spirits, wine, and beer. -- The Administration proposes to exempt from current law bond requirements taxpayers subject to Federal excise taxes on alcoholic beverages (manufacturers, producers, and importers of distilled spirits, wine, and beer) with an expected tax liability for these taxes of not more than $50,000 in the current year, who had a tax liability for these taxes of not more than $50,000 in the prior year. The Administration also proposes to change the excise tax filing and payment period for these taxpayers to quarterly rather than semi-monthly. A substantial number of these taxpayers continue to file and pay their taxes semi-monthly even though they are currently eligible for quarterly filing and payment because quarterly filing raises their deferral bond amounts. Eliminating the bond requirement would make quarterly filing less burdensome for these taxpayers and would reduce the burden of processing tax returns and payments for the Alcohol and Tobacco Tax and Trade Bureau. The Administration also proposes to allow taxpayers subject to Federal excise taxes on alcoholic beverages with an expected tax liability for these taxes of not more than $1,000 in the current year to file and pay their taxes annually. The provision would be effective 90 days after the date of enactment.

Simplify arbitrage investment restrictions. -- Current law arbitrage investment restrictions imposed on investments of tax-exempt bond proceeds create unnecessary complexity and compliance burdens for State and local governments. These restrictions generally limit investment returns that exceed the effective interest rate on the tax-exempt bonds. One type of restriction, called "yield restriction," limits arbitrage earnings in the first instance, and the second type of restriction, called "rebate," requires repayment of arbitrage earnings to the Federal Government at periodic intervals. The two types of arbitrage restrictions are duplicative and overlapping and they address the same tax policy goal to limit arbitrage profit incentives for excess use of tax-exempt bonds. The Administration proposes to simplify the arbitrage investment restrictions on tax-exempt bonds in several respects. First, the Administration proposes to unify the arbitrage restrictions to rely primarily on the rebate requirement and to repeal yield restriction in most circumstances. Second, recognizing that limited arbitrage potential exists if issuers spend bond proceeds fairly promptly, the Administration proposes a streamlined broad three-year prompt spending exception to the arbitrage rebate requirement on tax-exempt bonds. Finally, recognizing the particular compliance burdens for small issuers, the Administration proposes to increase the small issuer exception to the arbitrage rebate requirement from $5 million to $10 million, index the size limit for inflation, and remove the general taxing power constraint on small issuer eligibility. The proposal would be effective for bonds issued after the date of enactment.

Simplify single-family housing mortgage bond targeting requirements. -- Current law allows use of tax-exempt private activity bonds to finance qualified mortgages for single-family residences, subject to a number of targeting requirements, including, among others: (1) a mortgagor income limitation (generally not more than 115 percent of applicable median family income, increased to 140 percent of such income for certain targeted areas, and also increased for certain high-cost areas); (2) a purchase price limitation (generally not more than 90 percent of average area purchase prices, increased to 110 percent in targeted areas); (3) a refinancing limitation (generally permitting only new mortgages for first-time homebuyers); and (4) a targeted area availability requirement. The Administration proposes to simplify the targeting requirements for tax-exempt qualified mortgage bonds by repealing the purchase price limitation and the refinancing limitation. This proposal would be effective for bonds issued after the date of enactment.

Streamline private business limits on governmental bonds. -- Tax-exempt bonds issued by State and local governments are treated as governmental bonds if the issuer limits private business use and other private involvement sufficiently to avoid treatment as "private activity bonds." Bonds generally are classified as private activity bonds under a two-part test if more than 10 percent of the bond proceeds are both: (1) used for private business use; and (2) payable or secured from property or payments derived from private business use. A subsidiary restriction further reduces the private business limits on governmental bonds to five percent in the case of private business use that is unrelated or disproportionate to governmental use. This unrelated or disproportionate use test introduces undue complexity associated with factual determinations of relatedness, a narrow disqualification trigger, and attendant compliance burdens for State and local governments. The general 10-percent private business limit represents a sufficient and workable boundary for private involvement for governmental bonds. The Administration proposes to streamline the private business limits on governmental bonds by repealing the five-percent unrelated or disproportionate private business limit. This proposal would be effective for bonds issued after the date of enactment.

Repeal technical terminations of partnerships. -- A partnership will terminate when 50 percent or more of the total interest in partnership capital and profits is sold or exchanged within a 12-month period. This is referred to as a "technical termination." This provision is a holdover that addressed the notion common under prior State laws that tied the identity of a partnership to its partners. As this view of partnerships has evolved, the utility of the provision has essentially been eliminated, and it is now primarily a trap for unwary taxpayers. The Administration proposes eliminating technical terminations effective for transfers after December 31, 2015.

Repeal anti-churning rules of section 197. -- Section 197 of the Internal Revenue Code was enacted in 1993 to allow amortization of certain intangibles (such as goodwill and going concern value) that had not been amortizable under prior law. Anti-churning rules were enacted at that time to prevent taxpayers from engaging in transactions with related parties soon after the enactment of section 197 solely to generate amortizable basis. Because it has been 20 years since the enactment of section 197, the anti-churning rules are no longer necessary, and the complexity of the provision outweighs the potential application. The Administration proposes eliminating the anti-churning rules effective for acquisitions after December 31, 2015.

Repeal special estimated tax payment provision for certain insurance companies. -- The deductible unpaid loss reserves of insurance companies are required to be computed on a discounted basis to reflect the time value of money. However, a taxpayer may elect to deduct an additional amount equal to the difference between discounted and undiscounted reserves, if it also makes a "special estimated tax payment" equal to the tax benefit attributable to the extra deduction. The special estimated tax payments are applied against the company's tax liability in future years as reserves are released. This provision requires complex record keeping yet, by design, is revenue neutral. The Administration proposes to repeal the provision effective for taxable years beginning after December 31, 2015.

Repeal the telephone excise tax. -- Current law imposes a three-percent excise tax on amounts paid for taxable communications services, which include local telephone service and toll telephone service. Local telephone service is defined as access to a local telephone system and the privilege of telephonic communication with substantially all persons having telephones in the local system. Taxpayers are no longer required to pay tax on similar services, such as plans that provide bundled local and long distance service for either a flat monthly fee or a charge that varies with the elapsed transmission time for which the service is used. As a result, the only communications services that remain subject to the tax are purely local telephone services, of which the poor and the elderly are the primary users. The Administration proposes to repeal the tax on these services. The proposal would be effective for amounts paid pursuant to bills first rendered more than 90 days after the date of enactment.

Increase the standard mileage rate for automobile use by volunteers. -- Under current law, volunteers may deduct the use of their car in the service of charitable organizations at a standard mileage rate of 14 cents per mile driven. This rate is set by statute and is not indexed for inflation; it was last increased in 1997. The Administration proposes to harmonize the standard mileage rate for the charitable contribution deduction with the rate for miles driven for purposes of the medical and moving expense deductions, which are set annually by the IRS to cover the estimated variable costs of operating an automobile. The proposal would be effective for taxable years beginning after December 31, 2015.

Consolidate contribution limitations for charitable deductions and extend the carryforward period for excess charitable contribution deduction amounts. -- The income tax system limits the amount of charitable contribution deductions a donor may claim to a share of the donor's contribution base (the taxpayer's adjusted gross income computed without regard to any net operating loss carryback for the taxable year). A taxpayer may generally deduct up to 50 percent of his contribution base for contributions of cash to public charities, and up to 30 percent for cash contributions to most private foundations. A taxpayer may generally deduct up to 30 percent of his contribution base for contributions of appreciated capital gain property to public charities, and up to 20 percent to most private foundations. Finally, a taxpayer may deduct up to 20 percent of his contribution base for contributions of capital gain property for the use of a charitable organization. Charitable contributions made to an organization exceeding these limits may generally be carried forward to be deducted in the subsequent five years. The proposal would simplify this complicated set of rules regarding deductions of charitable contributions. Under the proposal, the contribution base limits would remain at 50 percent for contributions of cash to public charities. For all other contributions, a single deduction limit of 30 percent of the taxpayer's contribution base would apply, irrespective of the type of property donated, the type of organization receiving the donation, and whether the contribution is to or for the use of the organization. In addition, the proposal would extend the carry-forward period for contributions in excess of these limitations from 5 to 15 years. The proposal would be effective for contributions made in taxable years beginning after December 31, 2015.

Exclude from gross income subsidies from public utilities for purchase of water runoff management. -- Under current law, subsidies for water conservation and stormwater management must be included by individuals in reported income. The Administration proposes to exclude from gross income for individuals the value of any subsidy provided by a public utility for the purchase of any water conservation measure or stormwater management measure. The term "water conservation measure" means any installation, modification, or water-use evaluation primarily designed to reduce consumption of water or to improve the management of water demand with respect to a dwelling unit. The term "stormwater management measure" means any installation or modification of property to offset or safely manage the amounts of stormwater runoff associated with a dwelling unit. The term "public utility" means an entity engaged in the sale of water to customers and includes the Federal government or a state or local government.

Provide relief for certain accidental dual citizens. -- Individuals who became at birth both a citizen of the United States and a citizen of another country may not have learned until recently that they are U.S. citizens subject to U.S. Federal income tax on their worldwide income, even though they may have had minimal contacts with the United States. Some of these individuals would like to relinquish their U.S. citizenship (i.e., "expatriate"), but doing so would require them to pay significant U.S. tax under current law. The Administration's proposal would provide relief from these U.S. tax obligations for certain individuals who relinquish their U.S. citizenship within two years after the later of January 1, 2016, the effective date of the proposal, or the date on which the individual learns that he or she is a U.S. citizen.

Reauthorize special assessment on domestic nuclear utilities. -- The Administration proposes to reauthorize the special assessment on domestic nuclear utilities, for deposit in the Uranium Enrichment Decontamination and Decommissioning Fund. Established in 1992, the Fund pays, subject to appropriations, the decontamination and decommissioning costs of the Department of Energy's gaseous diffusion plants in Tennessee, Ohio, and Kentucky. Additional resources from the proposed special assessment are required due to higher-than-expected cleanup costs.

Extend African Growth and Opportunity Act (AGOA). -- Through AGOA, the United States provides duty-free treatment to eligible textile and apparel products made in qualifying sub-Saharan African countries; thereby increasing exports, creating jobs, and increasing opportunities for Africans and Americans alike. The Administration proposes to extend AGOA, which is scheduled to expire on September 30, 2015, through September 30, 2030.

Create State option to provide 12-month continuous Medicaid eligibility for adults. -- The Administration proposes to create a new continuous eligibility State plan option that would allow all adult Medicaid beneficiaries, or at State option, only those who qualify on the basis of modified adjusted gross income (MAGI), to maintain Medicaid eligibility during a 12-month continuous coverage period, regardless of changes to income or other eligibility criteria. The expanded Medicaid eligibility will result in fewer individuals being enrolled in a qualified Marketplace health plan, which will increase tax revenues and reduce outlays associated with the premium tax credit. The proposal would be effective January 1, 2016.

Allow offset of Federal income tax refunds to collect delinquent State income taxes for out-of-state residents. -- Under current law, Federal tax refunds may be offset to collect delinquent State income tax obligations, but only if the delinquent taxpayer resides in the State collecting the tax. The Administration proposes to allow Federal tax refunds to be offset to collect delinquent State tax obligations regardless of where the debtor resides. The proposal would be effective on the date of enactment.

Authorize the limited sharing of business tax return information to improve the accuracy of important measures of the economy. -- Synchronization of business lists among the Bureau of Economic Analysis (BEA), the Bureau of Labor Statistics (BLS), and the Bureau of the Census (Census Bureau) would significantly improve the consistency and quality of sensitive economic statistics including productivity, payroll, employment, and average hourly earnings. The availability of accurate economic statistics is crucial to policy makers. Current law authorizes IRS disclosure of certain Federal tax information (FTI) for governmental statistical use. Business FTI may be disclosed to officers and employees of the Census Bureau for all businesses. Similarly, business FTI may be disclosed to BEA officers and employees, but only for corporate businesses. Currently, BLS is not authorized to receive FTI. The Census Bureau's Business Register is constructed using both FTI and non-tax business data derived from the Economic Census and current economic surveys, so that under current law it is not possible for the Census Bureau to share data with BEA and BLS in any meaningful way, making synchronizing of their business lists impossible. In addition, given the growth of non-corporate businesses, especially in the service sector, the current limitation on BEA's access to corporate FTI impedes the measurement of income and international transactions in the National Accounts. The Administration proposes to give officers and employees of BEA and BLS access to certain FTI of corporate and non-corporate businesses. Additionally, for the purpose of synchronizing BLS and Census Bureau business lists, the proposal would permit employees of State agencies to receive certain business FTI from BLS. No BEA, BLS, or State agency contractor would have access to FTI. Additionally, the Census Bureau, BEA, BLS, and the State agencies would be subject to the confidentiality safeguard procedures in the Confidential Information Protection and Statistical Efficiency Act, as well as taxpayer privacy law and related safeguards and penalties. The proposal would be effective upon enactment.

Eliminate certain reviews conducted by the U.S. Treasury Inspector General for Tax Administration (TIGTA). -- Under current law, TIGTA conducts reviews to comply with reporting requirements. The Administration proposes to eliminate TIGTA's obligation to report information regarding any administrative or civil actions related to Fair Tax Collection Practices violations in one of TIGTA's Semiannual Reports, review and certify annually that the IRS is complying with the requirements of section 6103(e)(8) of the Internal Revenue Code regarding information on joint filers, and annually report on the IRS's compliance with requirements that IRS employees stop a taxpayer interview whenever a taxpayer requests to consult with a representative and to obtain their immediate supervisor's approval to contact the taxpayer instead of the representative if the representative has unreasonably delayed the completion of an examination or investigation. The proposal would revise the annual reporting requirement for all remaining provisions in the IRS Restructuring and Reform Act of 1998 to a biennial reporting requirement. The proposal would be effective after December 31, 2015.

Modify indexing to prevent deflationary adjustments. -- Many parameters of the tax system -- including the size of personal exemptions and standard deductions, the width of income tax rate brackets, the amount of other deductions and credits, and the maximum amount of various saving and retirement deductions -- may be adjusted annually for the effects of inflation, based on annual changes in the Consumer Price Index. Under current law, if price levels decline, most (but not all) of the inflation adjustment provisions would permit tax parameters to become smaller, so long as they do not decline to less than their base period values. The Administration proposes to modify inflation adjustment provisions to prevent the size of any indexed tax parameters from decreasing from the previous year's levels if the underlying price index falls. Subsequent inflation-related increases in the price index relevant for adjusting the particular tax parameter would be taken into account only to the extent that the index exceeds its highest previous level. The proposal would be effective as of the date of enactment.

Extend reserve depletion date for Social Security's Disability Insurance program. -- The Social Security Administration's (SSA's) Disability Insurance (SSDI) Trust Fund provides modest benefits to 8.9 million workers with disabilities, providing a critical lifeline that helps workers and their families. The Social Security Trustees project that under current law SSDI will be unable to pay full benefits during 2016 and in subsequent years. The Administration proposes a temporary five-year reallocation of payroll taxes from the Old-Age and Survivors Insurance (OASI) Trust Fund to SSDI, effective for calendar years 2016 through 2020.

 

Table 12-4. OTHER BUDGET PROPOSALS

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , pgs. 76-80.]

 

 

Table 12-5. RECEIPTS BY SOURCE

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , pgs. 81-83.]

 

 

FOOTNOTE TO CHAPTER 12

 

Identification and measurement of tax expenditures depends crucially on the baseline tax system against which the actual tax system is compared. The tax expenditure estimates presented in this document are patterned on a comprehensive income tax, which defines income as the sum of consumption and the change in net wealth in a given period of time.

An important assumption underlying each tax expenditure estimate reported below is that other parts of the Tax Code remain unchanged. The estimates would be different if tax expenditures were changed simultaneously because of potential interactions among provisions. For that reason, this document does not present a grand total for the estimated tax expenditures.

Tax expenditures relating to the individual and corporate income taxes are estimated for fiscal years 2014-2024 using two methods of accounting: current revenue effects and present value effects. The present value approach provides estimates of the revenue effects for tax expenditures that generally involve deferrals of tax payments into the future.

A discussion of performance measures and economic effects related to the assessment of the effect of tax expenditures on the achievement of program performance goals is presented in Appendix A. This section is a complement to the Government-wide performance plan required by the Government Performance and Results Act of 1992.

The total revenue effects for tax expenditures for fiscal years 2014-2024 are displayed according to the Budget's functional categories in Table 1. Descriptions of the specific tax expenditure provisions follow the discussion of general features of the tax expenditure concept.

Two baseline concepts -- the normal tax baseline and the reference tax law baseline -- are used to identify and estimate tax expenditures.¹ For the most part, the two concepts coincide. However, items treated as tax expenditures under the normal tax baseline, but not the reference tax law baseline, are indicated by the designation "normal tax method" in the tables. The revenue effects for these items are zero using the reference tax rules. The alternative baseline concepts are discussed in detail below.

Tables 2A and 2B report separately the respective portions of the total revenue effects that arise under the individual and corporate income taxes. The location of the estimates under the individual and corporate headings does not imply that these categories of filers benefit from the special tax provisions in proportion to the respective tax expenditure amounts shown. Rather, these breakdowns show the form of tax liability that the various provisions affect. The ultimate beneficiaries of corporate tax expenditures could be shareholders, employees, customers, or other providers of capital, depending on economic forces.

Table 3 ranks the major tax expenditures by the size of their 2015-2024 revenue effect. The first column provides the number of the provision in order to cross reference this table to Tables 1, 2A, and 2B, as well as to the descriptions below.

First, eliminating a tax expenditure may have incentive effects that alter economic behavior. These incentives can affect the resulting magnitudes of the activity or of other tax provisions or Government programs. For example, if capital gains were taxed at ordinary rates, capital gain realizations would be expected to decline, resulting in lower tax receipts. Such behavioral effects are not reflected in the estimates.

Second, tax expenditures are interdependent even without incentive effects. Repeal of a tax expenditure provision can increase or decrease the tax revenues associated with other provisions. For example, even if behavior does not change, repeal of an itemized deduction could increase the revenue costs from other deductions because some taxpayers would be moved into higher tax brackets. Alternatively, repeal of an itemized deduction could lower the revenue cost from other deductions if taxpayers are led to claim the standard deduction instead of itemizing. Similarly, if two provisions were repealed simultaneously, the increase in tax liability could be greater or less than the sum of the two separate tax expenditures, because each is estimated assuming that the other remains in force. In addition, the estimates reported in Table 1 are the totals of individual and corporate income tax revenue effects reported in Tables 2A and 2B, and do not reflect any possible interactions between individual and corporate income tax receipts. For this reason, the estimates in Table 1 should be regarded as approximations.

Discounted present-value estimates of revenue effects are presented in Table 4 for certain provisions that involve tax deferrals or other long-term revenue effects. These estimates complement the cash-based tax expenditure estimates presented in the other tables.

The present-value estimates represent the revenue effects, net of future tax payments, that follow from activities undertaken during calendar year 2014 which cause the deferrals or other long-term revenue effects. For instance, a pension contribution in 2014 would cause a deferral of tax payments on wages in 2014 and on pension fund earnings on this contribution (e.g., interest) in later years. In some future year, however, the 2014 pension contribution and accrued earnings will be paid out and taxes will be due; these receipts are included in the present-value estimate. In general, this conceptual approach is similar to the one used for reporting the budgetary effects of credit programs, where direct loans and guarantees in a given year affect future cash flows.

The normal tax baseline is patterned on a practical variant of a comprehensive income tax, which defines income as the sum of consumption and the change in net wealth in a given period of time. The normal tax baseline allows personal exemptions, a standard deduction, and deduction of expenses incurred in earning income. It is not limited to a particular structure of tax rates, or by a specific definition of the taxpaying unit.

The reference tax law baseline is also patterned on a comprehensive income tax, but it is closer to existing law. Reference law tax expenditures are limited to special exceptions from a generally provided tax rule that serve programmatic functions in a way that is analogous to spending programs. Provisions under the reference law baseline are generally tax expenditures under the normal tax baseline, but the reverse is not always true.

Both the normal and reference tax baselines allow several major departures from a pure comprehensive income tax. For example, under the normal and reference tax baselines:

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

• There is a separate corporate income tax.

• Tax rates on noncorporate business income vary by level of income.

• Individual tax rates, including brackets, standard deduction, and personal exemptions, are allowed to vary with marital status.

• Values of assets and debt are not generally adjusted for inflation. A comprehensive income tax would adjust the cost basis of capital assets and debt for changes in the general price level. Thus, under a comprehensive income tax baseline, the failure to take account of inflation in measuring depreciation, capital gains, and interest income would be regarded as a negative tax expenditure (i.e., a tax penalty), and failure to take account of inflation in measuring interest costs would be regarded as a positive tax expenditure (i.e., a tax subsidy).

Tax rates. The separate schedules applying to the various taxpaying units are included in the reference law baseline. Thus, corporate tax rates below the maximum statutory rate do not give rise to a tax expenditure. The normal tax baseline is similar, except that, by convention, it specifies the current maximum rate as the baseline for the corporate income tax. The lower tax rates applied to the first $10 million of corporate income are thus regarded as a tax expenditure under the normal tax. By convention, the Alternative Minimum Tax is treated as part of the baseline rate structure under both the reference and normal tax methods.

Income subject to the tax. Income subject to tax is defined as gross income less the costs of earning that income. Under the reference tax rules, gross income does not include gifts defined as receipts of money or property that are not consideration in an exchange nor does gross income include most transfer payments from the Government.² The normal tax baseline also excludes gifts between individuals from gross income. Under the normal tax baseline, however, all cash transfer payments from the Government to private individuals are counted in gross income, and exemptions of such transfers from tax are identified as tax expenditures. The costs of earning income are generally deductible in determining taxable income under both the reference and normal tax baselines.³

Capital recovery. Under the reference tax law baseline no tax expenditures arise from accelerated depreciation. Under the normal tax baseline, the depreciation allowance for property is computed using estimates of economic depreciation.

Treatment of foreign income. Both the normal and reference tax baselines allow a tax credit for foreign income taxes paid (up to the amount of U.S. income taxes that would otherwise be due), which prevents double taxation of income earned abroad. Under the normal tax method, however, controlled foreign corporations (CFCs) are not regarded as entities separate from their controlling U.S. shareholders. Thus, the deferral of tax on income received by CFCs is regarded as a tax expenditure under this method. In contrast, except for tax haven activities, the reference law baseline follows current law in treating CFCs as separate taxable entities whose income is not subject to U.S. tax until distributed to U.S. taxpayers.

Under this baseline, deferral of tax on CFC income is not a tax expenditure because U.S. taxpayers generally are not taxed on accrued, but unrealized, income.

2. Exclusion of income earned abroad by U.S. citizens. -- Under the baseline tax system, all compensation received by U.S. citizens and residents is properly included in their taxable income. It makes no difference whether the compensation is a result of working abroad or whether it is labeled as a housing allowance. In contrast to this treatment, U.S. tax law allows U.S. citizens and residents who live abroad, work in the private sector, and satisfy a foreign residency requirement to exclude up to $80,000, plus adjustments for inflation since 2004 ($99,200 in 2014), in foreign earned income from U.S. taxes. In addition, if these taxpayers are provided housing by their employers, then they may also exclude the cost of such housing from their income to the extent that it exceeds 16 percent of the earned income exclusion limit. This housing exclusion is capped at 30 percent of the earned income exclusion limit, with geographical adjustments. If taxpayers do not receive a specific allowance for housing expenses, they may deduct housing expenses up to the amount by which foreign earned income exceeds their foreign earned income exclusion.

3. Exclusion of certain allowances for Federal employees abroad. -- In general, all compensation received by U.S. citizens and residents is properly included in their taxable income. It makes no difference whether the compensation is a result of working abroad or whether it is labeled as an allowance for the high cost of living abroad. In contrast to this treatment, U.S. Federal civilian employees and Peace Corps members who work outside the continental United States are allowed to exclude from U.S. taxable income certain special allowances they receive to compensate them for the relatively high costs associated with living overseas. The allowances supplement wage income and cover expenses such as rent, education, and the cost of travel to and from the United States.

 

Table 14-1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES

 

FOR FISCAL YEARS 2014-2024

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , pgs. 87-92.]

 

 

Table 14-2A. ESTIMATES OF TOTAL CORPORATE INCOME TAX EXPENDITURES

 

FOR FISCAL YEARS 2014-2024

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , pgs. 93-98.]

 

 

Table 14-2B. ESTIMATES OF TOTAL INDIVIDUAL INCOME TAX

 

EXPENDITURES FOR FISCAL YEARS 2014-2024

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , pgs. 99-104.]

 

 

Table 14-3. INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR

 

2015-2024 PROJECTED REVENUE EFFECT

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , pgs. 105-107.]

 

 

Table 14-4. PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR

 

ACTIVITY IN CALENDAR YEAR 2014

 

 

[ Editor's Note: To view the table,

 

see Doc 2015-2506 , p. 108.]

 

5. Deferral of income from controlled foreign corporations (normal tax method). -- Under the baseline tax system, the United States generally taxes the worldwide income of U.S. persons and business entities. In contrast, certain active income of foreign corporations controlled by U.S. shareholders is not subject to U.S. taxation when it is earned. The income becomes taxable only when the controlling U.S. shareholders receive dividends or other distributions from their foreign stockholding. The reference law tax baseline reflects this tax treatment where only realized income is taxed. Under the normal tax method, however, the currently attributable foreign source pre-tax income from such a controlling interest is considered to be subject to U.S. taxation, whether or not distributed. Thus, the normal tax method considers the amount of controlled foreign corporation income not yet distributed to a U.S. shareholder as tax-deferred income.

6. Deferred taxes for financial firms on certain income earned overseas. -- The United States generally taxes the worldwide income of U.S. persons and business entities. The baseline tax system would not allow the deferral of tax or other relief targeted at particular industries or activities. In contrast, the Tax Code allowed financial firms to defer taxes on income earned overseas in an active business. This provision expired at the end of 2013.

8. Credit for increasing research activities. -- The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. In contrast, the Tax Code allowed an R&E credit of up to 20 percent of qualified research expenditures in excess of a base amount. The base amount of the credit was generally determined by multiplying a "fixed-base percentage" by the average amount of the company's gross receipts for the prior four years. The taxpayer's fixed base percentage generally was the ratio of its research expenses to gross receipts for 1984 through 1988. Taxpayers could elect the alternative simplified credit regime, which equaled 14 percent of qualified research expenses that exceeded 50 percent of the average qualified research expenses for the three preceding taxable years. The credit does not apply to expenses paid or incurred after December 31, 2013.

In contrast to this treatment, current law allows intangible drilling costs for successful investments in domestic oil and gas wells (such as wages, the cost of using machinery for grading and drilling, and the cost of unsalvageable materials used in constructing wells) to be deducted immediately, i.e., expensed. Because it allows recovery of costs sooner, expensing is more generous for the taxpayer than would be amortization. Integrated oil companies may deduct only 70 percent of such costs and must amortize the remaining 30 percent over five years. Non-integrated oil companies may expense all such costs. The same rule applies to the exploration and development costs of surface stripping and the construction of shafts and tunnels for other fuel minerals.

10. Excess of percentage over cost depletion. -- The baseline tax system would allow recovery of the costs of developing certain oil and mineral properties using cost depletion. Cost depletion is similar in concept to depreciation, in that the costs of developing or acquiring the asset are capitalized and then gradually reduced over an estimate of the asset's economic life, as is appropriate for measuring net income.

In contrast, the Tax Code generally allows independent fuel and mineral producers and royalty owners to take percentage depletion deductions rather than cost depletion on limited quantities of output. Under percentage depletion, taxpayers deduct a percentage of gross income from mineral production. In certain cases the deduction is limited to a fraction of the asset's net income. Over the life of an investment, percentage depletion deductions can exceed the cost of the investment. Consequently, percentage depletion offers more generous tax treatment than would cost depletion, which would limit deductions to an investment's cost.

11. Alternative fuel production credit. -- The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code provided a credit of $3 per oil-equivalent barrel of production (in 2004 dollars) for coke or coke gas during a four-year period for qualified facilities. Qualifying facilities producing coke and coke gas must have been placed in service by December 31, 2009.

12. Exception from passive loss limitation for working interests in oil and gas properties. -- The baseline tax system accepts current law's general rule limiting taxpayers' ability to deduct losses from passive activities against nonpassive income (e.g., wages, interest, and dividends). Passive activities generally are defined as those in which the taxpayer does not materially participate, and there are numerous additional considerations brought to bear on the determination of which activities are passive for a given taxpayer. Losses are limited in an attempt to limit tax sheltering activities. Passive losses that are unused may be carried forward and applied against future passive income.

An exception from the passive loss limitation is provided for a working interest in an oil or gas property that the taxpayer holds directly or through an entity that does not limit the liability of the taxpayer with respect to the interest. Thus, taxpayers can deduct losses from such working interests against nonpassive income without regard to whether they materially participate in the activity.

13. Capital gains treatment of royalties on coal. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low tax rates to apply to certain types or sources of income. For individuals in 2014, tax rates on regular income vary from 10 percent to 39.6 percent, depending on the taxpayer's income. In contrast, current law allows capital gains realized by individuals to be taxed at a preferentially low rate that is no higher than 20 percent. Certain sales of coal under royalty contracts qualify for taxation as capital gains rather than ordinary income, and so benefit from the preferentially low 20 percent maximum tax rate on capital gains.

14. Exclusion of interest on energy facility bonds. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allows interest earned on State and local bonds used to finance construction of certain energy facilities to be exempt from tax. These bonds are generally subject to the State private-activity-bond annual volume cap.

15. Energy production credit. -- The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code provides a credit for certain electricity produced from wind energy, biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, or qualified hydropower and sold to an unrelated party. Qualified facilities must have begun construction before January 1, 2014. In addition to the electricity production credit, an income tax credit is allowed for the production of refined coal for facilities placed in service before January 1, 2012. The Tax Code also provided an income tax credit for Indian coal facilities placed in service before January 1, 2009. The Indian coal facilities credit expired on December 31, 2013.

16. Energy investment credit. -- The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. However, the Tax Code provides credits for investments in solar and geothermal energy property, qualified fuel cell power plants, stationary microturbine power plants, geothermal heat pumps, small wind property and combined heat and power property. A temporary credit of up to 30 percent is available for qualified property placed in service before January 1, 2017. A permanent 10 percent credit is available for qualified solar and geothermal property placed in service after this date. Owners of renewable power facilities that qualify for the energy production credit may instead elect to take an energy investment credit.

17. Alcohol fuel credits. -- The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code provided an income tax credit for qualified cellulosic biofuel production which was renamed the Second generation biofuel producer credit. This provision expired on December 31, 2013.

18. Bio-Diesel and small agri-biodiesel producer tax credits. -- The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. However, the Tax Code allowed an income tax credit for bio-diesel and for bio-diesel derived from virgin sources. In lieu of the bio-diesel credit, the taxpayer could claim a refundable excise tax credit. In addition, small agri-biodiesel producers were eligible for a separate income tax credit for biodiesel production and a separate credit was available for qualified renewable diesel fuel mixtures. This provision expired on December 31, 2013.

19. Tax credits for clean-fuel burning vehicles and refueling property. -- The baseline tax system would not allow credits or deductions for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code allows a number of credits for certain types of vehicles and property. These are available for hydrogen vehicle refueling property, fuel cell vehicles, and plug-in electric-drive motor vehicles. Credits for two- and three-wheeled plug-in electric vehicles and non-hydrogen alternative fuel vehicle refueling property expired on December 31, 2013.

20. Exclusion of utility conservation subsidies. -- The baseline tax system generally takes a comprehensive view of taxable income that includes a wide variety of (measurable) accretions to wealth. In certain circumstances, public utilities offer rate subsidies to non-business customers who invest in energy conservation measures. These rate subsidies are equivalent to payments from the utility to its customer, and so represent accretions to wealth, income that would be taxable to the customer under the baseline tax system. In contrast, the Tax Code exempts these subsidies from the non-business customer's gross income.

21. Credit for holding clean renewable energy bonds. -- The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. In contrast, the Tax Code provides for the issuance of Clean Renewable Energy Bonds which entitles the bond holder to a Federal income tax credit in lieu of interest. The limit on the volume authorized in 2009-2010 is $2.4 billion. As of March 2010, issuers of the unused authorization of such bonds could opt to receive direct payment with the yield becoming fully taxable.

22. Deferral of gain from dispositions of transmission property to implement FERC restructuring policy. -- The baseline tax system generally would tax gains from sale of property when realized. It would not allow an exception for particular activities or individuals. However, the Tax Code allowed electric utilities to defer gains from the sale of their transmission assets to a FERC-approved independent transmission company. The sale of property must have been made prior to January 1, 2014.

23. Credit for investment in clean coal facilities. -- The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. In contrast, the Tax Code provides investment tax credits for clean coal facilities producing electricity and for industrial gasification combined cycle projects.

24. Temporary 50 percent expensing for equipment used in the refining of liquid fuels. -- The baseline tax system allows the taxpayer to deduct the decline in the economic value of an investment over its economic life. However, the Tax Code provided for an accelerated recovery of the cost of certain investments in refineries by allowing partial expensing of the cost, thereby giving such investments a tax advantage. Qualified refinery property must have been placed in service before January 1, 2014.

25. Natural gas distribution pipelines treated as 15-year property. -- The baseline tax system allows taxpayers to deduct the decline in the economic value of an investment over its economic life. However, the Tax Code allows depreciation of natural gas distribution pipelines (placed in service between 2005 and 2011) over a 15 year period. These deductions are accelerated relative to deductions based on economic depreciation.

26. Amortize all geological and geophysical expenditures over two years. -- The baseline tax system allows taxpayers to deduct the decline in the economic value of an investment over its economic life. However, the Tax Code allows geological and geophysical expenditures incurred in connection with oil and gas exploration in the United States to be amortized over two years for non-integrated oil companies, a span of time that is generally shorter than the economic life of the assets.

27. Allowance of deduction for certain energy efficient commercial building property. -- The baseline tax system would not allow deductions in addition to normal depreciation allowances for particular investments in particular industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code allowed a deduction, per square foot, for certain energy efficient commercial buildings. This provision expired on December 31, 2013.

28. Credit for construction of new energy efficient homes. -- The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. However, the Tax Code allowed contractors a tax credit of $2,000 for the construction of a qualified new energy-efficient home that had an annual level of heating and cooling energy consumption at least 50 percent below the annual consumption under the 2006 International Energy Conservation Code. The credit equaled $1,000 in the case of a new manufactured home that met a 30 percent standard or requirements for EPA's Energy Star homes. This provision expired on December 31, 2013.

29. Credit for energy efficiency improvements to existing homes. -- The baseline tax system would not allow credits for particular activities, investments, or industries. However, the Tax Code provided an investment tax credit for expenditures made on insulation, exterior windows, and doors that improved the energy efficiency of homes and met certain standards. The Tax Code also provided a credit for purchases of advanced main air circulating fans, natural gas, propane, or oil furnaces or hot water boilers, and other qualified energy efficient property. This provision expired on December 31, 2013.

30. Credit for energy efficient appliances. -- The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code provided tax credits for the manufacture of efficient dishwashers, clothes washers, and refrigerators. The size of the credit depended on the efficiency of the appliance. This provision expired on December 31, 2013.

31. Credit for residential energy efficient property. -- The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. However, the Tax Code provides a credit for the purchase of a qualified photovoltaic property and solar water heating property, as well as for fuel cell power plants, geothermal heat pumps and small wind property.

32. Credit for qualified energy conservation bonds. -- The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. However, the Tax Code provides for the issuance of energy conservation bonds which entitle the bond holder to a Federal income tax credit in lieu of interest. The limit on the volume issued in 2009-2010 is $3.2 billion. As of March 2010, issuers of the unused authorization of such bonds could opt to receive direct payment with the yield becoming fully taxable.

33. Advanced energy property credit. -- The baseline tax system would not allow credits for particular activities, investments, or industries. However, the Tax Code provides a 30 percent investment credit for property used in a qualified advanced energy manufacturing project. The Treasury Department may award up to $2.3 billion in tax credits for qualified investments.

34. Advanced nuclear power facilities production credit. -- The baseline tax system would not allow credits or deductions for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code allows a tax credit equal to 1.8 cents times the number of kilowatt hours of electricity produced at a qualifying advanced nuclear power facility. A taxpayer may claim no more than $125 million per 1,000 megawatts of capacity. The Treasury Department may allocate up to 6,000 megawatts of credit-eligible capacity.

36. Excess of percentage over cost depletion. -- The baseline tax system allows the taxpayer to deduct the decline in the economic value of an investment over time. Under current law, however, most nonfuel mineral extractors may use percentage depletion (whereby the deduction is fixed as a percentage of revenue) rather than cost depletion, with percentage depletion rates ranging from 22 percent for sulfur to 5 percent for sand and gravel. Over the life of an investment, percentage depletion deductions can exceed the cost of the investment. Consequently, percentage depletion offers more generous tax treatment than would cost depletion, which would limit deductions to an investment's cost.

37. Exclusion of interest on bonds for water, sewage, and hazardous waste facilities. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allows interest earned on State and local bonds used to finance construction of sewage, water, or hazardous waste facilities to be exempt from tax. These bonds are generally subject to the State private-activity-bond annual volume cap.

38. Capital gains treatment of certain timber. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low tax rates to apply to certain types or sources of income. However, under current law certain timber sales can be treated as a capital gain rather than ordinary income and therefore subject to the lower capital-gains tax rate. For individuals in 2014, tax rates on regular income vary from 10 percent to 39.6 percent, depending on the taxpayer's income. In contrast, current law allows capital gains to be taxed at a preferentially low rate that is no higher than 20 percent.

39. Expensing of multi-period timber growing costs. -- The baseline tax system requires the taxpayer to capitalize costs associated with investment property. However, most of the production costs of growing timber may be expensed under current law rather than capitalized and deducted when the timber is sold, thereby accelerating cost recovery.

40. Tax incentives for preservation of historic structures. -- The baseline tax system would not allow credits for particular activities, investments, or industries. However, expenditures to preserve and restore certified historic structures qualify for an investment tax credit of 20 percent under current law for certified rehabilitation activities. The taxpayer's recoverable basis must be reduced by the amount of the credit.

41. Industrial CO₂ capture and sequestration tax credit. -- The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. In contrast, the Tax Code allows a credit of $20 per metric ton for qualified carbon dioxide captured at a qualified facility and disposed of in secure geological storage. In addition, the provision allows a credit of $10 per metric ton of qualified carbon dioxide that is captured at a qualified facility and used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project.

42. Deduction for endangered species recovery expenditures. -- The baseline tax system would not allow deductions in addition to normal depreciation allowances for particular investments in particular industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, under current law farmers can deduct up to 25 percent of their gross income for expenses incurred as a result of site and habitat improvement activities that will benefit endangered species on their farm land, in accordance with site specific management actions included in species recovery plans approved pursuant to the Endangered Species Act of 1973.

44. Expensing of certain multiperiod production costs. -- The baseline tax system requires the taxpayer to capitalize costs associated with an investment over time. However, the production of livestock and crops with a production period greater than two years (e.g., establishing orchards or constructing barns) is exempt from the uniform cost capitalization rules, thereby accelerating cost recovery.

45. Treatment of loans forgiven for solvent farmers. -- Because loan forgiveness increases a debtors net worth the baseline tax system requires debtors to include the amount of loan forgiveness as income or else reduce their recoverable basis in the property related to the loan. If the amount of forgiveness exceeds the basis, the excess forgiveness is taxable if the taxpayer is not insolvent. For bankrupt debtors, the amount of loan forgiveness reduces carryover losses, unused credits, and then basis, with the remainder of the forgiven debt excluded from taxation. Qualified farm debt that is forgiven, however, is excluded from income even when the taxpayer is solvent.

46. Capital gains treatment of certain income. -- For individuals in 2014, tax rates on regular income vary from 10 percent to 39.6 percent, depending on the taxpayer's income. The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low tax rates to apply to certain types or sources of income. In contrast, current law allows capital gains to be taxed at a preferentially low rate that is no higher than 20 percent. Certain agricultural income, such as unharvested crops, qualify for taxation as capital gains rather than ordinary income, and so benefit from the preferentially low 20 percent maximum tax rate on capital gains.

47. Income averaging for farmers. -- The baseline tax system generally taxes all earned income each year at the rate determined by the income tax. However, taxpayers may average their taxable income from farming and fishing over the previous three years.

48. Deferral of gain on sales of farm refiners. -- The baseline tax system generally subjects capital gains to taxes the year that they are realized. However, the Tax Code allows a taxpayer who sells stock in a farm refiner to a farmers' cooperative to defer recognition of the gain if the proceeds are re-invested in a qualified replacement property.

49. Expensing of reforestation expenditures. -- The baseline tax system requires the taxpayer to capitalize costs associated with an investment over time. In contrast, the Tax Code provides for the expensing of the first $10,000 in reforestation expenditures with 7-year amortization of the remaining expenses.

50. Exemption of credit union income. -- Under the baseline tax system, corporations pay taxes on their profits under the regular tax rate schedule. However, in the Tax Code the earnings of credit unions not distributed to members as interest or dividends are exempt from the income tax.

51. Exclusion of interest on life insurance savings. -- Under the baseline tax system, individuals and corporations pay taxes on their income when it is (actually or constructively) received or accrued, depending on their method of accounting. Nevertheless, the Tax Code provides favorable tax treatment for investment income earned within qualified life insurance and annuity contracts. In general, investment income earned on qualified life insurance contracts held until death is permanently exempt from income tax. Investment income distributed prior to the death of the insured is tax-exempt to the extent that investment in the contract is overstated (because premiums paid for the cost of life insurance protection are credited to investment in the contract), while the remaining distributed amounts are tax-deferred because income is not taxed on a current basis, but is recognized only when distributed from the contract. Investment income earned on annuities benefits from tax deferral.

52. Special alternative tax on small property and casualty insurance companies. -- Under the baseline tax system, corporations pay taxes on their profits under the regular tax rate schedule. The baseline tax system would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. Under current law, however, stock non-life insurance companies are generally exempt from tax if their gross receipts for the taxable year do not exceed $600,000 and more than 50 percent of such gross receipts consist of premiums. Mutual non-life insurance companies are generally tax-exempt if their annual gross receipts do not exceed $150,000 and more than 35 percent of gross receipts consist of premiums. Also, non-life insurance companies with no more than $1.2 million of annual net premiums may elect to pay tax only on their taxable investment income.

53. Tax exemption of certain insurance companies owned by tax-exempt organizations. -- Under the baseline tax system, corporations pay taxes on their profits under the regular tax rate schedule. The baseline tax system would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. Generally the income generated by life and property and casualty insurance companies is subject to tax, albeit by special rules. Insurance operations conducted by such exempt organizations as fraternal societies, voluntary employee benefit associations, and others, however, are exempt from tax.

54. Small life insurance company deduction. -- Under the baseline tax system, corporations pay taxes on their profits under the regular tax rate schedule. The baseline tax system would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. However, under current law small life insurance companies (with gross assets of less than $500 million) can deduct 60 percent of the first $3 million of otherwise taxable income. The deduction phases out for otherwise taxable income between $3 million and $15 million.

55. Exclusion of interest spread of financial institutions. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. Consumers and non-profit organizations pay for some deposit-linked services, such as check cashing, by accepting a below-market interest rate on their demand deposits. If they received a market rate of interest on those deposits and paid explicit fees for the associated services, they would pay taxes on the full market rate and (unlike businesses) could not deduct the fees. The Government thus foregoes tax on the difference between the risk-free market interest rate and below-market interest rates on demand deposits, which under competitive conditions should equal the value added of deposit services.

56. Exclusion of interest on owner-occupied mortgage subsidy bonds. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allows interest earned on State and local bonds used to finance homes purchased by first-time, low-to-moderate-income buyers to be exempt from tax. These bonds are generally subject to the State private-activity-bond annual volume cap.

57. Exclusion of interest on rental housing bonds. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allows interest earned on State and local government bonds used to finance multi-family rental housing projects to be tax-exempt.

58. Mortgage interest expense on owner-occupied residences. -- Under the baseline tax system, expenses incurred in earning income would be deductible. However, such expenses would not be deductible when the income or the return on an investment is not taxed. In contrast, the Tax Code allows an exclusion from a taxpayer's taxable income for the value of owner-occupied housing services and also allows the owner-occupant to deduct mortgage interest paid on his or her primary residence and one secondary residence as an itemized non-business deduction. In general, the mortgage interest deduction is limited to interest on debt no greater than the owner's basis in the residence, and is also limited to interest on debt of no more than $1 million. Interest on up to $100,000 of other debt secured by a lien on a principal or second residence is also deductible, irrespective of the purpose of borrowing, provided the total debt does not exceed the fair market value of the residence. As an alternative to the deduction, holders of qualified Mortgage Credit Certificates issued by State or local governmental units or agencies may claim a tax credit equal to a proportion of their interest expense.

59. Deduction for property taxes on real property. -- Under the baseline tax system, expenses incurred in earning income would be deductible. However, such expenses would not be deductible when the income or the return on an investment is not taxed. In contrast, the Tax Code allows an exclusion from a taxpayer's taxable income for the value of owner-occupied housing services and also allows the owner-occupant to deduct property taxes paid on real property.

60. Deferral of income from installment sales. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates, or deferral of tax, to apply to certain types or sources of income. Dealers in real and personal property (i.e., sellers who regularly hold property for sale or resale) cannot defer taxable income from installment sales until the receipt of the loan repayment. Nondealers (i.e., sellers of real property used in their business) are required to pay interest on deferred taxes attributable to their total installment obligations in excess of $5 million. Only properties with sales prices exceeding $150,000 are includable in the total. The payment of a market rate of interest eliminates the benefit of the tax deferral. The tax exemption for nondealers with total installment obligations of less than $5 million is, therefore, a tax expenditure.

61. Capital gains exclusion on home sales. -- The baseline tax system would not allow deductions and exemptions for certain types of income. In contrast, the Tax Code allows homeowners to exclude from gross income up to $250,000 ($500,000 in the case of a married couple filing a joint return) of the capital gains from the sale of a principal residence. To qualify, the taxpayer must have owned and used the property as the taxpayer's principal residence for a total of at least two of the five years preceding the date of sale. In addition, the exclusion may not be used more than once every two years.

62. Exclusion of net imputed rental income. -- Under the baseline tax system, the taxable income of a taxpayer who is an owner-occupant would include the implicit value of gross rental income on housing services earned on the investment in owner-occupied housing and would allow a deduction for expenses, such as interest, depreciation, property taxes, and other costs, associated with earning such rental income. In contrast, the Tax Code allows an exclusion from taxable income for the implicit gross rental income on housing services, while in certain circumstances allows a deduction for some costs associated with such income, such as for mortgage interest and property taxes.

63. Exception from passive loss rules for $25,000 of rental loss. -- The baseline tax system accepts current law's general rule limiting taxpayers' ability to deduct losses from passive activities against nonpassive income (e.g., wages, interest, and dividends). Passive activities generally are defined as those in which the taxpayer does not materially participate and there are numerous additional considerations brought to bear on the determination of which activities are passive for a given taxpayer. Losses are limited in an attempt to limit tax sheltering activities. Passive losses that are unused may be carried forward and applied against future passive income. In contrast to the general restrictions on passive losses, the Tax Code exempts owners of rental real estate activities from "passive income" limitations. The exemption is limited to $25,000 in losses and phases out for taxpayers with income between $100,000 and $150,000.

64. Credit for low-income housing investments. -- The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. However, under current law taxpayers who invest in certain low-income housing are eligible for a tax credit. The credit rate is set so that the present value of the credit is equal to 70 percent for new construction and 30 percent for (1) housing receiving other Federal benefits (such as tax-exempt bond financing), or (2) substantially rehabilitated existing housing. The credit can exceed these levels in certain statutorily defined and State designated areas where project development costs are higher. The credit is allowed in equal amounts over 10 years and is generally subject to a volume cap.

65. Accelerated depreciation on rental housing. -- Under an economic income tax, the costs of acquiring a building are capitalized and depreciated over time in accordance with the decline in the property's economic value due to wear and tear or obsolescence. This insures that the net income from the rental property is measured appropriately each year. Current law allows depreciation that is accelerated relative to economic depreciation. However, the depreciation provisions of the Tax Code are part of the reference law rules, and thus do not give rise to tax expenditures under reference law. Under normal law, in contrast, depreciation allowances reflect estimates of economic depreciation.

66. Discharge of mortgage indebtedness. -- Under the baseline tax system, all income would generally be taxed under the regular tax rate schedule. The baseline tax system would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allowed an exclusion from a taxpayer's taxable income for any discharge of indebtedness of up to $2 million ($1 million in the case of a married individual filing a separate return) from a qualified principal residence. The provision applied to debt discharged after January 1, 2007, and before January 1, 2014.

67. Discharge of business indebtedness. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allows an exclusion from a taxpayer's taxable income for any discharge of qualified real property business indebtedness by taxpayers other than a C corporation. If the canceled debt is not reported as current income, however, the basis of the underlying property must be reduced by the amount canceled.

68. Exceptions from imputed interest rules. -- Under the baseline tax system, holders (issuers) of debt instruments are generally required to report interest earned (paid) in the period it accrues, not when received. In addition, the amount of interest accrued is determined by the actual price paid, not by the stated principal and interest stipulated in the instrument. But under current law, any debt associated with the sale of property worth less than $250,000 is exempted from the general interest accounting rules. This general $250,000 exception is not a tax expenditure under reference law but is under normal law. Current law also includes exceptions for certain property worth more than $250,000. These are tax expenditure under reference law and normal law. These exceptions include, sales of personal residences worth more than $250,000, and sales of farms and small businesses worth between $250,000 and $1 million.

69. Treatment of qualified dividends. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low tax rates to apply to certain types or sources of income. For individuals in 2014, tax rates on regular income vary from 10 percent to 39.6 percent, depending on the taxpayer's income. In contrast, under current law, qualified dividends are taxed at a preferentially low rate that is no higher than 20 percent.

70. Capital gains (except agriculture, timber, iron ore, and coal). -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low tax rates to apply to certain types or sources of income. For individuals in 2014, tax rates on regular income vary from 10 percent to 39.6 percent, depending on the taxpayer's income. In contrast, under current law, capital gains on assets held for more than one year are taxed at a preferentially low rate that is no higher than 20 percent.

71. Capital gains exclusion of small corporation stock. -- The baseline tax system would not allow deductions and exemptions, or provide preferential treatment of certain sources of income or types of activities. In contrast, the Tax Code provided an exclusion of 50 percent, applied to ordinary rates with a maximum of a 28 percent tax rate, for capital gains from qualified small business stock held by individuals for more than 5 years; 75 percent for stock issued after February 17, 2009 and before September 28, 2010; and 100 percent for stock issued after September 27, 2010 and before January 1, 2014. A qualified small business is a corporation whose gross assets do not exceed $50 million as of the date of issuance of the stock.

72. Step-up basis of capital gains at death. -- Under the baseline tax system, unrealized capital gains would be taxed when assets are transferred at death. It would not allow for exempting gains upon transfer of the underlying assets to the heirs. In contrast, capital gains on assets held at the owner's death are not subject to capital gains tax under current law. The cost basis of the appreciated assets is adjusted to the market value at the owner's date of death which becomes the basis for the heirs.

73. Carryover basis of capital gains on gifts. -- Under the baseline tax system, unrealized capital gains would be taxed when assets are transferred by gift. In contrast, when a gift of appreciated asset is made under current law, the donor's basis in the transferred property (the cost that was incurred when the transferred property was first acquired) carries over to the donee. The carryover of the donor's basis allows a continued deferral of unrealized capital gains.

74. Ordinary income treatment of loss from small business corporation stock sale. -- The baseline tax system limits to $3,000 the write-off of losses from capital assets, with carryover of the excess to future years. In contrast, the Tax Code allows up to $100,000 in losses from the sale of small business corporate stock (capitalization less than $1 million) to be treated as ordinary losses and fully deducted.

75. Accelerated depreciation of buildings other than rental housing. -- Under an economic income tax, the costs of acquiring a building are capitalized and depreciated over time in accordance with the decline in the property's economic value due to wear and tear or obsolescence. This insures that the net income from the property is measured appropriately each year. Current law allows depreciation deductions that are accelerated relative to economic depreciation. However, the depreciation provisions of the Tax Code are part of the reference law rules, and thus do not give rise to tax expenditures under reference law. Under normal law, in contrast, depreciation allowances reflect estimates of economic depreciation.

76. Accelerated depreciation of machinery and equipment. -- Under an economic income tax, the costs of acquiring machinery and equipment are capitalized and depreciated over time in accordance with the decline in the property's economic value due to wear and tear or obsolescence. This insures that the net income from the property is measured appropriately each year. Current law allows depreciation deductions that are accelerated relative to economic depreciation. However, the depreciation provisions of the Tax Code are part of the reference law rules, and thus do not give rise to tax expenditures under reference law. Under normal law, in contrast depreciation allowances reflect estimates of economic depreciation.

77. Expensing of certain small investments. -- Under the reference law baseline, the costs of acquiring tangible property and computer software would be depreciated using the Tax Code's depreciation provisions. Under the normal tax baseline, depreciation allowances are estimates of economic depreciation. However, the Tax Code allows qualifying investments by small businesses in tangible property and certain computer software to be expensed rather than depreciated over time.

78. Graduated corporation income tax rate. -- Because the corporate rate schedule is part of reference tax law, it is not considered a tax expenditure under the reference method. A flat corporation income tax rate is taken as the baseline under the normal tax method; therefore the lower rate is considered a tax expenditure under this concept.

79. Exclusion of interest on small issue bonds. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allows interest earned on small issue industrial development bonds (IDBs) issued by State and local governments to finance manufacturing facilities to be tax exempt. Depreciable property financed with small issue IDBs must be depreciated, however, using the straight-line method. The annual volume of small issue IDBs is subject to the unified volume cap discussed in the mortgage housing bond section above.

80. Deduction for U.S. production activities. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allows for a deduction equal to a portion of taxable income attributable to domestic production.

81. Special rules for certain film and TV production. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow deductions and exemptions or preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allowed taxpayers to deduct up to $15 million per production ($20 million in certain distressed areas) in non-capital expenditures incurred during the year. This provision expired at the end of 2013.

83. Deferral of tax on shipping companies. -- The baseline tax system generally would tax all profits and income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allows certain companies that operate U.S. flag vessels to defer income taxes on that portion of their income used for shipping purposes (e.g., primarily construction, modernization and major repairs to ships, and repayment of loans to finance these investments).

84. Exclusion of reimbursed employee parking expenses. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, would be included in taxable income. Dedicated payments and in-kind benefits represent accretions to wealth that do not differ materially from cash wages. In contrast, the Tax Code allows an exclusion from taxable income for employee parking expenses that are paid for by the employer or that are received by the employee in lieu of wages. In 2014, the maximum amount of the parking exclusion is $250 per month. The tax expenditure estimate does not include any subsidy provided through employer-owned parking facilities.

85. Exclusion for employer-provided transit passes. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, would be included in taxable income. Dedicated payments and in-kind benefits represent accretions to wealth that do not differ materially from cash wages. In contrast, the Tax Code allows an exclusion from a taxpayer's taxable income for passes, tokens, fare cards, and vanpool expenses that are paid for by an employer or that are received by the employee in lieu of wages to defray an employee's commuting costs. The maximum amount of the transit exclusion is $130 (indexed) per month in 2014. (There had been a parity provision that had temporary resulted in a higher maximum equal to those for parking passes for several years, but it expired on December 31, 2013).

86. Tax credit for certain expenditures for maintaining railroad tracks. -- The baseline tax system would not allow credits for particular activities, investments, or industries. However, the Tax Code allowed eligible taxpayers to claim a credit equal to the lesser of 50 percent of maintenance expenditures and the product of $3,500 and the number of miles of track owned or leased. This provision expired at the end of 2013.

87. Exclusion of interest on bonds for Highway Projects and rail-truck transfer facilities. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code provides for $15 billion of tax-exempt bond authority to finance qualified highway or surface freight transfer facilities. The authority to issue these bonds expires on December 31, 2015.

89. Exclusion of interest for airport, dock, and similar bonds. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allows interest earned on State and local bonds issued to finance high-speed rail facilities and Government-owned airports, docks, wharves, and sport and convention facilities to be tax-exempt. These bonds are not subject to a volume cap.

90. Exemption of certain mutuals' and cooperatives' income. -- Under the baseline tax system, corporations pay taxes on their profits under the regular tax rate schedule. In contrast, the Tax Code provides for the incomes of mutual and cooperative telephone and electric companies to be exempt from tax if at least 85 percent of their revenues are derived from patron service charges.

91. Empowerment zones. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low tax rates to apply to certain types or sources of income, tax credits, and write-offs faster than economic depreciation. In contrast, the Tax Code allowed qualifying businesses in designated economically depressed areas to receive tax benefits such as an employment credit, increased expensing of investment in equipment, special tax-exempt financing, and certain capital gains incentives. A taxpayer's ability to accrue new tax benefits for empowerment zones expired on December 31, 2013.

92. New markets tax credit. -- The baseline tax system would not allow credits for particular activities, investments, or industries. However, the Tax Code allowed taxpayers who made qualified equity investments in a community development entity (CDE), which then made qualified investments in low-income communities, to be eligible for a tax credit that is received over 7 years. The total equity investment available for the credit across all CDEs was $3.5 billion for 2013, the last year for which credit allocations could be made.

93. Expensing of environmental remediation costs. -- Under the baseline tax system, the costs would be amortized (or depreciated) over an estimate of the useful life of the building. This insures that the net income from the buildings is measured appropriately each year. However, the Tax Code allowed taxpayers who cleaned up certain hazardous substances at a qualified site to expense the clean-up costs, even though the expenses would generally increase the value of the property significantly or appreciably prolong the life of the property. This provision expired on December 31, 2011.

94. Credit to holders of Gulf and Midwest Tax Credit Bonds. -- The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, under current law taxpayers that own Gulf and Midwest Tax Credit bonds receive a non-refundable tax credit rather than interest. The credit is included in gross income.

95. Recovery Zone Bonds. -- The baseline tax system would not allow credits for particular activities, investments, or industries. In addition, it would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allowed local governments to issue up $10 billion in taxable Recovery Zone Economic Development Bonds in 2009 and 2010 and receive a direct payment from Treasury equal to 45 percent of interest expenses. In addition, local governments could issue up to $15 billion in tax exempt Recovery Zone Facility Bonds. These bonds financed certain kinds of business development in areas of economic distress.

96. Tribal Economic Development Bonds. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code was modified in 2009 to allow Indian tribal governments to issue tax exempt "tribal economic development bonds." There is a national bond limitation of $2 billion on such bonds.

98. HOPE tax credit. -- The baseline tax system would not allow credits for particular activities, investments, or industries. Under current law, however, the non-refundable HOPE tax credit allows a credit for 100 percent of an eligible student's first $1,200 of tuition and fees and 50 percent of the next $1,200 of tuition and fees (2014 levels, indexed). The credit only covers tuition and fees paid during the first two years of a student's post-secondary education. In 2014, the credit is phased out ratably for taxpayers with modified AGI between $108,000 and $128,000 if married filing jointly ($54,000 and $64,000 for other taxpayers), indexed.

99. Lifetime Learning tax credit. -- The baseline tax system would not allow credits for particular activities, investments, or industries. Under current law, however, the non-refundable Lifetime Learning tax credit allows a credit for 20 percent of an eligible student's tuition and fees, up to a maximum credit per return of $2,000. In 2014, the credit is phased out ratably for taxpayers with modified AGI between $108,000 and $128,000 if married filing jointly ($54,000 and $64,000 for other taxpayers), indexed. The credit applies to both undergraduate and graduate students.

100. American Opportunity Tax Credit. -- The baseline tax system would not allow credits for particular activities, investments, or industries. Under current law in 2014, however, the American Opportunity Tax Credit allows a partially refundable credit of up to $2,500 per eligible student for qualified tuition and related expenses paid during each of the first four years of the student's post-secondary education. The credit is phased out for taxpayers with modified adjusted gross income between $80,000 and $90,000 ($160,000 and $180,000 for married taxpayers filing a joint return). The credit expires at the end of 2017.

101. Education Individual Retirement Accounts (IRA). -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. While contributions to an education IRA are not tax-deductible under current law, investment income earned by education IRAs is not taxed when earned, and investment income from an education IRA is tax-exempt when withdrawn to pay for a student's education expenses. The maximum contribution to an education IRA in 2014 is $2,000 per beneficiary. In 2014, the maximum contribution is phased down ratably for taxpayers with modified AGI between $190,000 and $220,000 if married filing jointly ($95,000 and $110,000 for other taxpayers).

102. Deductibility of student-loan interest. -- The baseline tax system accepts current law's general rule limiting taxpayers' ability to deduct non-business interest expenses. In contrast, taxpayers may claim an above-the-line deduction of up to $2,500 on interest paid on an education loan. In 2014, the maximum deduction is phased down ratably for taxpayers with modified AGI between $130,000 and $160,000 if married filing jointly ($65,000 and $80,000 for other taxpayers).

103. Deduction for higher education expenses. -- The baseline tax system would not allow a deduction for personal expenditures. In contrast, the Tax Code provided a maximum annual deduction of $4,000 for qualified higher education expenses for taxpayers with adjusted gross income up to $130,000 on a joint return ($65,000 for other taxpayers). Taxpayers with adjusted gross income up to $160,000 on a joint return ($80,000 for other taxpayers) could deduct up to $2,000. This provision expired on December 31, 2013.

104. Qualified tuition programs. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. Some States have adopted prepaid tuition plans, prepaid room and board plans, and college savings plans, which allow persons to pay in advance or save for college expenses for designated beneficiaries. Under current law, investment income, or the return on prepayments, is not taxed when earned, and is tax-exempt when withdrawn to pay for qualified expenses.

105. Exclusion of interest on student-loan bonds. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, interest earned on State and local bonds issued to finance student loans is tax-exempt under current law. The volume of all such private activity bonds that each State may issue annually is limited.

106. Exclusion of interest on bonds for private nonprofit educational facilities. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, under current law interest earned on State and local Government bonds issued to finance the construction of facilities used by private nonprofit educational institutions is not taxed.

107. Credit for holders of zone academy bonds. -- The baseline tax system would not allow credits for particular activities, investments, or industries. Under current law, however, financial institutions that own zone academy bonds receive a non-refundable tax credit rather than interest. The credit is included in gross income. Proceeds from zone academy bonds may only be used to renovate, but not construct, qualifying schools and for certain other school purposes. The total amount of zone academy bonds that may be issued was limited to $1.4 billion in 2009 and 2010. As of March 2010, issuers of the unused authorization of such bonds could opt to receive direct payment with the yield becoming fully taxable. An additional $0.4 billion of these bonds with a tax credit was authorized to be issued before January 1, 2014.

108. Exclusion of interest on savings bonds redeemed to finance educational expenses. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. Under current law, however, interest earned on U.S. savings bonds issued after December 31, 1989 is tax-exempt if the bonds are transferred to an educational institution to pay for educational expenses. The tax exemption is phased out for taxpayers with AGI between $113,950 and $143,950 if married filing jointly ($76,000 and $91,000 for other taxpayers) in 2014.

109. Parental personal exemption for students age 19 or over. -- Under the baseline tax system, a personal exemption would be allowed for the taxpayer, as well as for the taxpayer's spouse and dependents who do not claim a personal exemption on their own tax returns. To be considered a dependent, a child would have to be under age 19. In contrast, the Tax Code allows taxpayers to claim personal exemptions for children aged 19 to 23, as long as the children are full-time students and reside with the taxpayer for over half the year (with exceptions for temporary absences from home, such as for school attendance).

110. Charitable contributions to educational institutions. -- The baseline tax system would not allow a deduction for personal expenditures. In contrast, the Tax Code provides taxpayers a deduction for contributions to nonprofit educational institutions that are similar to personal expenditures. Moreover, taxpayers who donate capital assets to educational institutions can deduct the asset's current value without being taxed on any appreciation in value. An individual's total charitable contribution generally may not exceed 50 percent of adjusted gross income; a corporation's total charitable contributions generally may not exceed 10 percent of pre-tax income.

111. Exclusion of employer-provided educational assistance. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income because they represent accretions to wealth that do not materially differ from cash wages. Under current law, however, employer-provided educational assistance is excluded from an employee's gross income, even though the employer's costs for this assistance are a deductible business expense. The maximum exclusion is $5,250 per taxpayer.

112. Special deduction for teacher expenses. -- The baseline tax system would not allow a deduction for personal expenditures. In contrast, the Tax Code allowed educators in both public and private elementary and secondary schools, who worked at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide, to subtract up to $250 of qualified expenses when determining their adjusted gross income (AGI). This provision expired on December 31, 2013.

113. Discharge of student loan indebtedness. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income. In contrast, the Tax Code allows certain professionals who perform in underserved areas or specific fields, and as a consequence have their student loans discharged, not to recognize such discharge as income.

114. Qualified school construction bonds. -- The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code was modified in 2009 to provide a tax credit in lieu of interest to holders of qualified school construction bonds. The national volume limit is $22.4 billion over 2009 and 2010. As of March 2010, issuers of such bonds could opt to receive direct payment with the yield becoming fully taxable.

115. Work opportunity tax credit (WOTC). -- The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code provides employers with a tax credit for qualified wages paid to individuals. The credit applies to employees who began work on or before December 31, 2013 and who are certified as members of various targeted groups. The amount of the credit that can be claimed is 25 percent of qualified wages for employment less than 400 hours and 40 percent for employment of 400 hours or more. Generally, the maximum credit per employee is $2,400 and can only be claimed on the first year of wages an individual earns from an employer. However, the credit for long-term welfare recipients can be claimed on second year wages as well and has a $9,000 maximum. Also, certain categories of veterans are eligible for a higher maximum credit of up to $9,600. Employers must reduce their deduction for wages paid by the amount of the credit claimed.

116. Employer-provided child care exclusion. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income. In contrast, under current law up to $5,000 of employer-provided child care is excluded from an employee's gross income even though the employer's costs for the child care are a deductible business expense.

117. Employer-provided child care credit. -- The baseline tax system would not allow credits for particular activities, investments, or industries. In contrast, current law provides a credit equal to 25 percent of qualified expenses for employee child care and 10 percent of qualified expenses for child care resource and referral services. Employer deductions for such expenses are reduced by the amount of the credit. The maximum total credit is limited to $150,000 per taxable year.

118. Assistance for adopted foster children. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income. Taxpayers who adopt eligible children from the public foster care system can receive monthly payments for the children's significant and varied needs and a reimbursement of up to $2,000 for nonrecurring adoption expenses; special needs adoptions receive the maximum benefit even if that amount is not spent. These payments are excluded from gross income under current law.

119. Adoption credit and exclusion. -- The baseline tax system would not allow credits for particular activities. In contrast, taxpayers can receive a tax credit for qualified adoption expenses under current law. Taxpayers may also exclude qualified adoption expenses provided or reimbursed by an employer from income, subject to the same maximum amounts and phase-out as the credit. The same expenses cannot qualify for tax benefits under both programs; however, a taxpayer may use the benefits of the exclusion and the tax credit for different expenses.

120. Exclusion of employee meals and lodging. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income. In contrast, under current law employer-provided meals and lodging are excluded from an employee's gross income even though the employer's costs for these items are a deductible business expense.

121. Child credit. -- The baseline tax system would not allow credits for particular activities or targeted at specific groups. Under current law, however, taxpayers with children under age 17 can qualify for a $1,000 partially refundable per child credit. Any unclaimed credit due to insufficient tax liability may be refundable -- taxpayers may claim a refund for 15 percent of earnings in excess of a $3,000 floor, up to the amount of unused credit. Alternatively, taxpayers with three or more children may claim a refund of the amount of payroll taxes paid in excess of EITC received (up to the amount of unused credit) if this results in a larger refund. The credit is phased out for taxpayers at the rate of $50 per $1,000 of modified AGI above $110,000 ($75,000 for single or head of household filers and $55,000 for married taxpayers filing separately). After 2017 refundability is based on earnings in excess of $10,000 indexed from 2001, rather than from $3,000 (unindexed); taxpayers with three or more children may continue to use the alternative calculation.

122. Credit for child and dependent care expenses. -- The baseline tax system would not allow credits for particular activities or targeted at specific groups. In contrast, the Tax Code provides parents who work or attend school and who have child and dependent care expenses a tax credit. Expenditures up to a maximum $3,000 for one dependent and $6,000 for two or more dependents are eligible for the credit. The credit is equal to 35 percent of qualified expenditures for taxpayers with incomes of up to $15,000. The credit is reduced to a minimum of 20 percent by one percentage point for each $2,000 of income in excess of $15,000.

123. Credit for disabled access expenditures. -- The baseline tax system would not allow credits for particular activities, investments, or industries. In contrast, the Tax Code provides small businesses (less than $1 million in gross receipts or fewer than 31 full-time employees) a 50-percent credit for expenditures in excess of $250 to remove access barriers for disabled persons. The credit is limited to $5,000.

124. Deductibility of charitable contributions, other than education and health. -- The baseline tax system would not allow a deduction for personal expenditures including charitable contributions. In contrast, the Tax Code provides taxpayers a deduction for contributions to charitable, religious, and certain other nonprofit organizations. Taxpayers who donate capital assets to charitable organizations can deduct the assets' current value without being taxed on any appreciation in value. An individual's total charitable contribution generally may not exceed 50 percent of adjusted gross income; a corporation's total charitable contributions generally may not exceed 10 percent of pre-tax income.

125. Exclusion of certain foster care payments. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. Foster parents provide a home and care for children who are wards of the State, under contract with the State. Under current law, compensation received for this service is excluded from the gross incomes of foster parents; the expenses they incur are nondeductible.

126. Exclusion of parsonage allowances. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, would be included in taxable income. Dedicated payments and in-kind benefits represent accretions to wealth that do not differ materially from cash wages. In contrast, the Tax Code allows an exclusion from a clergyman's taxable income for the value of the clergyman's housing allowance or the rental value of the clergyman's parsonage.

127. Indian employment credit. -- The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code provided employers with a tax credit for qualified wages paid to employees who were enrolled members of Indian tribes. The amount of the credit that could be claimed was 20 percent of the excess of qualified wages and health insurance costs paid by the employer in the current tax year over the amount of such wages and costs paid by the employer in 1993. Qualified wages and health insurance costs with respect to any employee for the taxable year could not exceed $20,000. Employees had to live on or near the reservation where he or she worked to be eligible for the credit. Employers had to reduce their deduction for wages paid by the amount of the credit claimed. The credit does not apply to taxable years beginning after December 31, 2013.

129. Self-employed medical insurance premiums. -- Under the baseline tax system, all compensation and remuneration, including dedicated payments and in-kind benefits, should be included in taxable income. In contrast, under current law self-employed taxpayers may deduct their family health insurance premiums. Taxpayers without self-employment income are not eligible for this special deduction. The deduction is not available for any month in which the self-employed individual is eligible to participate in an employer-subsidized health plan and the deduction may not exceed the self-employed individual's earned income from self-employment.

130. Medical Savings Accounts/Health Savings Accounts. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income. Also, the baseline tax system would not allow a deduction for personal expenditures and generally would tax investment earnings. In contrast, individual contributions to Archer Medical Savings Accounts (Archer MSAs) and Health Savings Accounts (HSAs) are allowed as a deduction in determining adjusted gross income whether or not the individual itemizes deductions. Employer contributions to Archer MSAs and HSAs are excluded from income and employment taxes. Archer MSAs and HSAs require that the individual have coverage by a qualifying high deductible health plan. Earnings from the accounts are excluded from taxable income. Distributions from the accounts used for medical expenses are not taxable. The rules for HSAs are generally more flexible than for Archer MSAs and the deductible contribution amounts are greater (in 2014, $3,300 for taxpayers with individual coverage and $6,550 for taxpayers with family coverage). Thus, HSAs have largely replaced MSAs.

131. Deductibility of medical expenses. -- The baseline tax system would not allow a deduction for personal expenditures. In contrast, under current law personal expenditures for medical care (including the costs of prescription drugs) exceeding 7.5 percent of the taxpayer's adjusted gross income are deductible. For tax years beginning after 2012, only medical expenditures exceeding 10 percent of the taxpayer's adjusted gross income are deductible. However, for the years 2013, 2014, 2015 and 2016, if either the taxpayer or the taxpayer's spouse turns 65 before the end of the taxable year, the threshold remains at 7.5 percent of adjusted income. Beginning in 2017, the 10-percent threshold will apply to all taxpayers, including those over 65.

132. Exclusion of interest on hospital construction bonds. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, under current law interest earned on State and local government debt issued to finance hospital construction is excluded from income subject to tax.

133. Refundable Premium Assistance Tax Credit. -- The baseline tax system would not allow credits for particular activities or targeted at specific groups. In contrast, for taxable years ending after 2013, the Tax Code provides a premium assistance credit to any eligible taxpayer for any qualified health insurance purchased through a Health Insurance Exchange. In general, an eligible taxpayer is a taxpayer with annual household income between 100% and 400% of the federal poverty level for a family of the taxpayer's size and that does not have access to affordable minimum essential health care coverage. The amount of the credit equals the lesser of (1) the actual premiums paid by the taxpayer for such coverage or (2) the difference between the cost of a statutorily-identified benchmark plan offered on the exchange and a required payment by the taxpayer that increases with income.

134. Credit for employee health insurance expenses of small business. -- The baseline tax system would not allow credits for particular activities or targeted at specific groups. In contrast, the Tax Code provides a tax credit to qualified small employers that make a certain level of non-elective contributions towards the purchase of certain health insurance coverage for its employees. To receive a credit, an employer must have fewer than 25 full-time-equivalent employees whose average annual full-time-equivalent wages from the employer are less than $50,000 (indexed for taxable years after 2013). However, to receive a full credit, an employer must have no more than 10 full-time employees, and the average wage paid to these employees must be no more than $25,000 (indexed for taxable years after 2013). A qualifying employer may claim the credit for any taxable year beginning in 2010, 2011, 2012, and 2013 and for up to two years for insurance purchased through a Health Insurance Exchange thereafter. For taxable years beginning in 2010, 2011, 2012, and 2013, the maximum credit is 35 percent of premiums paid by qualified taxable employers and 25 percent of premiums paid by qualified tax-exempt organizations. For taxable years beginning in 2014 and later years, the maximum tax credit increases to 50 percent of premiums paid by qualified taxable employers and 35 percent of premiums paid by qualified tax-exempt organizations.

135. Deductibility of charitable contributions to health institutions. -- The baseline tax system would not allow a deduction for personal expenditures including charitable contributions. In contrast, the Tax Code provides individuals and corporations a deduction for contributions to nonprofit health institutions. Tax expenditures resulting from the deductibility of contributions to other charitable institutions are listed under the education, training, employment, and social services function.

136. Tax credit for orphan drug research. -- The baseline tax system would not allow credits for particular activities, investments, or industries. In contrast, under current law drug firms can claim a tax credit of 50 percent of the costs for clinical testing required by the Food and Drug Administration for drugs that treat rare physical conditions or rare diseases.

137. Special Blue Cross/Blue Shield deduction. -- The baseline tax system generally would tax all profits under the regular tax rate schedule using broadly applicable measures of baseline income. It would not allow preferentially low tax rates to apply to certain types or sources of income. In contrast, Blue Cross and Blue Shield health insurance providers in existence on August 16, 1986 and certain other nonprofit health insurers are provided exceptions from otherwise applicable insurance company income tax accounting rules that substantially reduce their tax liabilities, provided that their percentage of total premium revenue expended on reimbursement for clinical services provided to enrollees is not less than 85 percent for the taxable year.

138. Tax credit for health insurance purchased by certain displaced and retired individuals. -- The baseline tax system would not allow credits for particular activities, investments, or industries. In contrast, the Tax Code provided a refundable tax credit of 72.5 percent for the purchase of health insurance coverage by individuals eligible for Trade Adjustment Assistance and certain Pension Benefit Guarantee Corporation pension recipients. This provision expired on December 31, 2013.

139. Distributions from retirement plans for premiums for health and long-term care insurance. -- Under the baseline tax system, all compensation, including dedicated and deferred payments, should be included in taxable income. In contrast, the Tax Code provides for tax-free distributions of up to $3,000 from governmental retirement plans for premiums for health and long term care premiums of public safety officers.

141. Exclusion of workers' compensation benefits. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income. However, workers compensation is not subject to the income tax under current law.

142. Exclusion of public assistance benefits. -- Under the reference law baseline tax system, gifts and transfers are not treated as income to the recipients. In contrast, the normal tax method considers cash transfers from the Government as part of the recipients' income, and thus, treats the exclusion for public assistance benefits under current law as a tax expenditure.

143. Exclusion of special benefits for disabled coal miners. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income. However, disability payments to former coal miners out of the Black Lung Trust Fund, although income to the recipient, are not subject to the income tax.

144. Exclusion of military disability pensions. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income. In contrast, most of the military disability pension income received by current disabled military retirees is excluded from their income subject to tax.

145. Defined benefit employer plans. -- Under the baseline tax system, all compensation, including deferred and dedicated payments, should be included in taxable income. In addition, investment income would be taxed as earned. In contrast, under current law certain contributions to defined benefit pension plans are excluded from an employee's gross income even though employers can deduct their contributions. In addition, the tax on the investment income earned by defined benefit pension plans is deferred until the money is withdrawn.

146. Defined contribution employer plans. -- Under the baseline tax system, all compensation, including deferred and dedicated payments, should be included in taxable income. In addition, investment income would be taxed as earned. In contrast, under current law individual taxpayers and employers can make tax-preferred contributions to employer-provided 401(k) and similar plans (e.g. 403(b) plans and the Federal Government's Thrift Savings Plan). In 2014, an employee could exclude up to $17,500 (indexed) of wages from AGI under a qualified arrangement with an employer's 401(k) plan. Employees age 50 or over could exclude up to $23,000 in contributions (indexed). The defined contribution plan limit, including both employee and employer contributions, is $52,000 in 2014 (indexed). The tax on contributions made by both employees and employers and the investment income earned by these plans is deferred until withdrawn.

147. Individual Retirement Accounts (IRAs). -- Under the baseline tax system, all compensation, including deferred and dedicated payments, should be included in taxable income. In addition, investment income would be taxed as earned. In contrast, under current law individual taxpayers can take advantage of traditional and Roth IRAs to defer or otherwise reduce the tax on the return to their retirement savings. The IRA contribution limit is $5,500 in 2014 (indexed); taxpayers age 50 or over are allowed to make additional "catch-up" contributions of $1,000. Contributions to a traditional IRA are generally deductible but the deduction is phased out for workers with incomes above certain levels who, or whose spouses, are active participants in an employer-provided retirement plan. Contributions and account earnings are includible in income when withdrawn from traditional IRAs. Roth IRA contributions are not deductible, but earnings and withdrawals are exempt from taxation. Income limits also apply to Roth IRA contributions.

148. Low and moderate-income savers' credit. -- The baseline tax system would not allow credits for particular activities or targeted at specific groups. In contrast, the Tax Code provides an additional incentive for lower-income taxpayers to save through a nonrefundable credit of up to 50 percent on IRA and other retirement contributions of up to $2,000. This credit is in addition to any deduction or exclusion. The credit is completely phased out by $60,000 for joint filers, $45,000 for head of household filers, and $30,000 for other filers in 2014.

149. Self-Employed plans. -- Under the baseline tax system, all compensation, including deferred and dedicated payments, should be included in taxable income. In addition, investment income would be taxed as earned. In contrast, under current law self-employed individuals can make deductible contributions to their own retirement plans equal to 25 percent of their income, up to a maximum of $52,000 in 2014. Total plan contributions are limited to 25 percent of a firm's total wages. The tax on the investment income earned by self-employed SEP, SIMPLE, and qualified plans is deferred until withdrawn.

150. Premiums on group term life insurance. -- Under the baseline tax system, all compensation, including deferred and dedicated payments, should be included in taxable income. In contrast, under current law employer-provided life insurance benefits are excluded from an employee's gross income (to the extent that the employer's share of the total costs does not exceed the cost of $50,000 of such insurance) even though the employer's costs for the insurance are a deductible business expense.

151. Premiums on accident and disability insurance. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income. In contrast, under current law employer-provided accident and disability benefits are excluded from an employee's gross income even though the employer's costs for the benefits are a deductible business expense.

152. Income of trusts to finance supplementary unemployment benefits. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income. In addition, investment income would be taxed as earned. Under current law, employers may establish trusts to pay supplemental unemployment benefits to employees separated from employment. Investment income earned by such trusts is exempt from taxation.

153. Special ESOP rules. -- ESOPs are a special type of tax-exempt employee benefit plan. Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income. In addition, investment income would be taxed as earned. In contrast, employer-paid contributions (the value of stock issued to the ESOP) are deductible by the employer as part of employee compensation costs. They are not included in the employees' gross income for tax purposes, however, until they are paid out as benefits. In addition, the following special income tax provisions for ESOPs are intended to increase ownership of corporations by their employees: (1) annual employer contributions are subject to less restrictive limitations than other qualified retirement plans; (2) ESOPs may borrow to purchase employer stock, guaranteed by their agreement with the employer that the debt will be serviced by his payment (deductible by him) of a portion of wages (excludable by the employees) to service the loan; (3) employees who sell appreciated company stock to the ESOP may defer any taxes due until they withdraw benefits; (4) dividends paid to ESOP-held stock are deductible by the employer; and (5) earnings are not taxed as they accrue.

154. Additional deduction for the blind. -- Under the baseline tax system, the standard deduction is allowed. An additional standard deduction for a targeted group within a given filing status would not be allowed. In contrast, the Tax Code allows taxpayers who are blind to claim an additional $1,550 standard deduction if single, or $1,200 if married in 2014.

155. Additional deduction for the elderly. -- Under the baseline tax system, the standard deduction is allowed. An additional standard deduction for a targeted group within a given filing status would not be allowed. In contrast, the Tax Code allows taxpayers who are 65 years or older to claim an additional $1,550 standard deduction if single, or $1,200 if married in 2014.

156. Tax credit for the elderly and disabled. -- Under the baseline tax system, a credit targeted at a specific group within a given filing status or for particular activities would not be allowed. In contrast, the Tax Code allows taxpayers who are 65 years of age or older, or who are permanently disabled, to claim a non-refundable tax credit equal to 15 percent of the sum of their earned and retirement income. The amount to which the 15-percent rate is applied is limited to no more than $5,000 for single individuals or married couples filing a joint return where only one spouse is 65 years of age or older or disabled, and up to $7,500 for joint returns where both spouses are 65 years of age or older or disabled. These limits are reduced by one-half of the taxpayer's adjusted gross income over $7,500 for single individuals and $10,000 for married couples filing a joint return.

157. Deductibility of casualty losses. -- Under the baseline tax system, neither the purchase of property nor insurance premiums to protect the property's value are deductible as costs of earning income. Therefore, reimbursement for insured loss of such property is not included as a part of gross income, and uninsured losses are not deductible. In contrast, the Tax Code provides a deduction for uninsured casualty and theft losses of more than $100 each, to the extent that total losses during the year exceed 10 percent of the taxpayer's adjusted gross income.

158. Earned income tax credit (EITC). -- The baseline tax system would not allow credits for particular activities or targeted at specific groups. In contrast, the Tax Code provides an EITC to low-income workers at a maximum rate of 45 percent of income. For a family with one qualifying child, the credit is 34 percent of the first $9,720 of earned income in 2014. The credit is 40 percent of the first $13,650 of income for a family with two qualifying children, and it is 45 percent of the first $13,650 of income for a family with three or more qualifying children. Low-income workers with no qualifying children are eligible for a 7.65-percent credit on the first $6,480 of earned income. The credit is phased out at income levels and rates which depend upon how many qualifying children are eligible and marital status. In 2014, the phasedown for married filers begins at incomes $5,430 greater than for otherwise similar unmarried filers. Earned income tax credits in excess of tax liabilities owed through the individual income tax system are refundable to individuals. After 2017, the additional benefit for families with three or more children will be eliminated and the marriage penalty relief will be reduced to $3,000 (indexed from 2008).

160. Social Security benefits for disabled workers. -- Under the baseline tax system, insurance benefits would be taxed to the extent that premiums were paid out of pre-tax income. Under current law, however, benefit payments from the Social Security Trust Fund for disability are fully or partially excluded from a beneficiary's gross income in excess of any exclusion justified by contributions made from pre-tax income.

161. Social Security benefits for spouses, dependents and survivors. -- Under the baseline tax system, Social Security benefits would be taxed to the extent they exceed contributions out of after-tax income. Under current law, however, benefit payments from the Social Security Trust Fund for spouses, dependents and survivors are fully or partially excluded from a beneficiary's gross income.

163. Exclusion of veterans pensions. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income because they represent accretions to wealth that do not materially differ from cash wages. Under current law, however, pension payments made by the Veterans Administration are excluded from gross income.

164. Exclusion of GI bill benefits. -- Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income because they represent accretions to wealth that do not materially differ from cash wages. Under current law, however, G.I. Bill benefits paid by the Veterans Administration are excluded from gross income.

165. Exclusion of interest on veterans housing bonds. -- The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, under current law, interest earned on general obligation bonds issued by State and local governments to finance housing for veterans is excluded from taxable income.

167. Build America Bonds. -- The baseline tax system would not allow credits for particular activities or targeted at specific group. In contrast, the Tax Code in 2009 allowed State and local governments to issue taxable bonds through 2010 and receive a direct payment from Treasury equal to 35 percent of interest expenses. Alternatively, State and local governments could issue taxable bonds and the private lenders receive the 35-percent credit which is included in taxable income.

168. Deductibility of nonbusiness State and local taxes other than on owner-occupied homes. -- Under the baseline tax system, a deduction for personal consumption expenditures would not be allowed. In contrast, the Tax Code allows taxpayers who itemize their deductions to claim a deduction for State and local income taxes (or, at the taxpayer's election, State and local sales taxes) and property taxes, even though these taxes primarily pay for services that, if purchased directly by taxpayers, would not be deductible. The ability for taxpayers to elect to deduct State and local sales taxes in lieu of State and local income taxes applied to taxable years beginning after December 31, 2003 and before January 1, 2014. (The estimates for this tax expenditure do not include the estimates for the deductibility of State and local property tax on owner-occupied homes. See item 59.)

Tax expenditures by definition work through the tax system and, particularly, the income tax. Thus, they may be relatively advantageous policy approaches when the benefit or incentive is related to income and is intended to be widely available. Because there is an existing public administrative and private compliance structure for the tax system, income-based programs that require little oversight might be efficiently run through the tax system. In addition, some tax expenditures actually simplify the operation of the tax system (for example, the exclusion for up to $500,000 of capital gains on home sales). Tax expenditures also implicitly subsidize certain activities in a manner similar to direct expenditures. For example, exempting employer-sponsored health insurance from income taxation is equivalent to a direct spending subsidy equal to the forgone tax obligations for this type of compensation. Spending, regulatory or tax-disincentive policies can also modify behavior, but may have different economic effects. Finally, a variety of tax expenditure tools can be used, e.g., deductions; credits; exemptions; deferrals; floors; ceilings; phase-ins; phase-outs; and these can be dependent on income, expenses, or demographic characteristics (age, number of family members, etc.). This wide range of policy instruments means that tax expenditures can be flexible and can have very different economic effects.

Tax expenditures also have limitations. In many cases they add to the complexity of the tax system, which raises both administrative and compliance costs. For example, personal exemptions, deductions, credits, and phase-outs can complicate filing and decision-making. The income tax system may have little or no contact with persons who have no or very low incomes, and does not require information on certain characteristics of individuals used in some spending programs, such as wealth or duration of employment. These features may reduce the effectiveness of tax expenditures for addressing socioeconomic disparities. Tax expenditures also generally do not enable the same degree of agency discretion as an outlay program. For example, grant or direct Federal service delivery programs can prioritize activities to be addressed with specific resources in a way that is difficult to emulate with tax expenditures.

Outlay programs have advantages where the direct provision of government services is particularly warranted, such as equipping and maintaining the armed forces or administering the system of justice. Outlay programs may also be specifically designed to meet the needs of low-income families who would not otherwise be subject to income taxes or need to file a tax return. Outlay programs may also receive more year-to-year oversight and fine tuning through the legislative and executive budget process. In addition, many different types of spending programs include direct Government provision; credit programs; and payments to State and local governments, the private sector, or individuals in the form of grants or contracts provide flexibility for policy design. On the other hand, certain outlay programs may rely less directly on economic incentives and private-market provision than tax incentives, thereby reducing the relative efficiency of spending programs for some goals. Finally, spending programs, particularly on the discretionary side, may respond less rapidly to changing activity levels and economic conditions than tax expenditures.

Regulations may have more direct and immediate effects than outlay and tax-expenditure programs because regulations apply directly and immediately to the regulated party (i.e., the intended actor), generally in the private sector. Regulations can also be fine-tuned more quickly than tax expenditures because they can often be changed as needed by the Executive Branch without legislation. Like tax expenditures, regulations often rely largely on voluntary compliance, rather than detailed inspections and policing. As such, the public administrative costs tend to be modest relative to the private resource costs associated with modifying activities. Historically, regulations have tended to rely on proscriptive measures, as opposed to economic incentives. This reliance can diminish their economic efficiency, although this feature can also promote full compliance where (as in certain safety-related cases) policymakers believe that trade-offs with economic considerations are not of paramount importance. Also, regulations generally do not directly affect Federal outlays or receipts. Thus, like tax expenditures, they may escape the degree of scrutiny that outlay programs receive. Some policy objectives are achieved using multiple approaches. For example, minimum wage legislation, the earned income tax credit, and the food stamp program (SNAP) are regulatory, tax expenditure, and direct outlay programs, respectively, all having the objective of improving the economic welfare of low-wage workers and families.

As described above, tax expenditures, like spending and regulatory programs, have a variety of objectives and economic effects. These include: encouraging certain types of activities (e.g., saving for retirement or investing in certain sectors); increasing certain types of after-tax income (e.g., favorable tax treatment of Social Security income); and reducing private compliance costs and Government administrative costs (e.g., the exclusion for up to $500,000 of capital gains on home sales). Some of these objectives are well suited to quantitative measurement and evaluation, while others are less well suited.

Performance measurement is generally concerned with inputs, outputs, and outcomes. In the case of tax expenditures, the principal input is usually the revenue effect. Outputs are quantitative or qualitative measures of goods and services, or changes in income and investment, directly produced by these inputs. Outcomes, in turn, represent the changes in the economy, society, or environment that are the ultimate goals of programs. Evaluations assess whether programs are meeting intended goals, but may also encompass analyzing whether initiatives are superior to other policy alternatives.

The Administration is working towards examining the objectives and effects of the wide range of tax expenditures in our budget, despite challenges related to data availability, measurement, and analysis. Evaluations include an assessment of whether tax expenditures are achieving intended policy results in an efficient manner, with minimal burdens on individual taxpayers, consumers, and firms; and an examination of possible unintended effects and their consequences.

As an illustration of how evaluations can inform budgetary decisions, consider education, and research investment credits.

Education. There are millions of individuals taking advantage of tax credits designed to help pay for educational expenses. There are a number of different credits available as well as other important forms of Federal support for higher education such as subsidized loans and grants. An evaluation would explore the possible relationships between use of the credits and the use of loans and grants, seeking to answer, for example, whether the use of credits reduce or increase the likelihood of the students applying for loans. Such an evaluation would allow stakeholders to determine the most effective program -- whether it is a tax credit, a subsidized loan, or a grant.

Investment. A series of tax expenditures reduce the cost of investment, both in specific activities such as research and experimentation, extractive industries, and certain financial activities and more generally throughout the economy, through accelerated depreciation for plant and equipment. These provisions can be evaluated along a number of dimensions. For example, it is useful to consider the strength of the incentives by measuring their effects on the cost of capital (the return which investments must yield to cover their costs) and effective tax rates. The impact of these provisions on the amounts of corresponding forms of investment (e.g., research spending, exploration activity, equipment) might also be estimated. In some cases, such as research, there is evidence that the investment can provide significant positive externalities -- that is, economic benefits that are not reflected in the market transactions between private parties. It could be useful to quantify these externalities and compare them with the size of tax expenditures. Measures could also indicate the effects on production from these investments such as numbers or values of patents, energy production and reserves, and industrial production. Issues to be considered include the extent to which the preferences increase production (as opposed to benefiting existing output) and their cost-effectiveness relative to other policies. Analysis could also consider objectives that are more difficult to measure but still are ultimate goals, such as promoting the Nation's technological base, energy security, environmental quality, or economic growth. Such an assessment is likely to involve tax analysis as well as consideration of non-tax matters such as market structure, scientific, and other information (such as the effects of increased domestic fuel production on imports from various regions, or the effects of various energy sources on the environment).

The tax proposals subject to these analyses include items that indirectly affect the estimated value of tax expenditures (such as changes in income tax rates), proposals that make reforms to improve tax compliance and administration, as well as proposals which would change, add, or delete tax expenditures.

Barriers to Evaluation. Developing a framework that is sufficiently comprehensive, accurate, and flexible is a significant challenge. Evaluations are constrained by the availability of appropriate data and challenges in economic modeling:

• Data availability. Data may not exist, or may not exist in an analytically appropriate form, to conduct rigorous evaluations of certain types of expenditures. For example, measuring the effects of tax expenditures designed to achieve tax neutrality for individuals and firms earning income abroad, and foreign firms could require data from foreign governments or firms which are not readily available.

• Analytical constraints. Evaluations of tax expenditures face analytical constraints even when data are available. For example, individuals might have access to several tax expenditures and programs aimed at improving the same outcome. Isolating the effect of a single tax credit is challenging absent a well-specified research design.

• Resources. Tax expenditure analyses are seriously constrained by staffing considerations. Evaluations typically require expert analysts who are often engaged in other more competing areas of work related to the budget.

The current Budget includes many proposals that would change existing tax expenditures to raise revenue, eliminate ineffective or counterproductive tax expenditures, and enhance effective tax expenditures. The tax expenditure proposals in the budget further the Administration's goals of clean and secure energy, a world-class education for all Americans, and fairness in the tax code. Some of these proposals are highlighted below.

Reduce the value of certain tax expenditures. The Administration proposes to limit the tax rate at which upper-income taxpayers can use itemized deductions and other tax preferences to reduce tax liability to a maximum of 28 percent, a limitation that would affect only the highest-income households. The limit would apply to all itemized deductions, tax-exempt interest, employer-sponsored health insurance, deductions and income exclusions for employee retirement contributions, and certain above-the-line deductions, effective for taxable years beginning after December 31, 2015. These are among the largest tax expenditures. This proposal would make the tax code more equitable because the value of the tax expenditure as a percentage of the deduction is proportional to one's tax bracket, so it is less valuable to those in lower brackets.

Enhance and make permanent the Research and Experimentation (R&E) credit and modify and make permanent the Renewable Energy Production Tax Credit. The extension of the R&E credit every year creates uncertainty reducing firms' incentive to expand their research activities. For this reason, and more generally to achieve the President's R&D goals, the Budget proposes making the R&E credit permanent, while also simplifying it by creating a single formula for calculating the credit. For similar reasons, the Budget also proposes to permanently extend and enhance the production tax credit for renewable energy property.

Consolidate and simplify education tax benefits. A significant portion of federal spending on higher education occurs through the tax code, but current higher education tax benefits are complicated and do not provide enough help for low and middle income families that struggle to afford college. Building on bipartisan Congressional proposals, the Budget proposes to simplify, consolidate, and better target higher education tax benefits. It would repeal or let expire duplicative and less effective provisions, including the Lifetime Learning Credit, the tuition and fees deduction, the student loan interest deduction (for new borrowers), Coverdell accounts (for new contributions), and certain subsidies for 529 savings plans (for new contributions). Meanwhile, it would make the $2,500 American Opportunity Tax Credit permanent, index the maximum credit for inflation, make the credit available for a fifth year, provide a partial credit to part-time students, and increase the amount of the credit available to low-income students without income tax liability.

Eliminate a range of tax expenditures in the context of business tax reform. The President's framework for business tax reform calls for eliminating dozens of tax loopholes and subsidies and reinvesting the revenue to lower the corporate tax rate to 28 percent. Consistent with the framework, the Budget includes a number of proposals to eliminate inefficient business tax expenditures. For example, current law provides a number of credits and deductions that are targeted towards certain oil, gas, and coal activities. In accordance with the President's agreement at the G-20 Summit in Pittsburgh to phase out inefficient subsidies for fossil fuels so that the Nation can transition to a 21st century energy economy, the Administration proposes to repeal a number of tax preferences available for fossil fuels.

² Gross income does, however, include transfer payments associated with past employment, such as Social Security benefits.

³ In the case of individuals who hold "passive" equity interests in businesses, the pro-rata shares of sales and expense deductions reportable in a year are limited. A passive business activity is defined generally to be one in which the holder of the interest, usually a partnership interest, does not actively perform managerial or other participatory functions. The taxpayer may generally report no larger deductions for a year than will reduce taxable income from such activities to zero. Deductions in excess of the limitation may be taken in subsequent years, or when the interest is liquidated. In addition, costs of earning income may be limited under the Alternative Minimum Tax.