Full text of Budget of the United States Government : Fiscal Year 1992 : Part Three. Receipts

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

X.

RECEIPTS, USER FEES, AND OTHER COLLECTIONS


http://fraser.stlouisfed.org/
2 8 0 - 0 0 0 0 - 9 1 - 1 (PART 3 )
Federal Reserve Bank of St. Louis

Part Three-1




X. RECEIPTS, USER FEES, AND OTHER COLLECTIONS
GOVERNMENTAL RECEIPTS
Receipts (budget and off-budget) are taxes and other
collections from the public that result from the exercise

of the Government's sovereign or governmental powers,
The difference between receipts and outlays determines
the surplus or deficit.

Table X-1. RECEIPTS BY SOURCE
(In billions of dollars)

Cm irpo
OUUll/C

Estimate

1QQO
1 v/9U actual
dllUai
1991

Individual income taxes
Corporation income taxes
Social insurance taxes and contributions
On-budget
Off-budget
Excise taxes
Estate and gift taxes
Customs duties and fees
Miscellaneous receipts
Total receipts
On-budget
Off-budget

1992

1993

1994

1995

1996

466.9
93.5
380.0
(98.4)
(281.7)
35.3
11.5
16.7
27.3

492.6
95.9
402.0
(103.7)
(298.3)
44.8
12.2
17.7
26.2

529.5
101.9
429.4
(114.1)
(315.3)
47.8
13.3
19.3
23.9

572.0
109.0
463.8
(125.1)
(338.7)
50.1
14.1
20.8
22.8

632.9
120.6
501.0
(135.5)
(365.5)
52.0
13.7
22.0
23.2

688.9
130.0
534.1
(144.2)
(389.8)
53.6
14.6
22.7
23.5

742.1
138.3
568.5
(151.3)
(417.2)
47.8
15.7
23.9
24.5

1,031.3
(749.7)
(281.7)

1,091.4
(793.2)
(298.3)

1,165.0
(849.8)
(315.3)

1,252.7
(914.0)
(338.7)

1,365.3
(999.8)
(365.5)

1,467.3
(1,077.5)
(389.8)

1,560.7
(1,143.5)
(417.2)

Growth in receipts.—Total receipts in 1992 are estimated to be $1,165.0 billion, an increase of $73.6 billion
or 6.7 percent from the $1,091.4 billion estimated for
1991. Receipts are projected to grow at a much higher
average annual rate of 7.6 percent between 1992 and
1996, to $1,560.7 billion. Because the rate of growth
of receipts in 1992 exceeds the rate of growth of GNP,
the receipts share of GNP is projected to rise from

19.4 percent in 1991 to 19.5 percent in 1992. The rate
of growth of receipts exceeds the rate of growth of GNP
in subsequent years, causing the receipts share of GNP
to rise to 20.0 percent in 1996. This is well above the
average receipts shares of GNP of 18.3 percent and
19.0 percent realized in the 1970s and 1980s, respectively.

Table X-2. CHANGES IN RECEIPTS
(In billions of dollars)
1992

Receipts under tax rates and structure in effect January 1,1990 1
Enacted legislative changes:
Omnibus Budget Reconciliation Act of 1990 2
Social security (OASDI) taxable earnings base increases:
$51,300 to $53,400 on Jan. 1, 1991
$53,400 to $55,500 on Jan. 1, 1992
$55,500 to $57,900 on Jan. 1, 1993
$57,900 to $61,800 on Jan. 1, 1994
$61,800 to $65,400 on Jan. 1, 1995
$65,400 to $69,000 on Jan. 1, 1996
Medicare (HI) taxable earnings base increases:
$51,300 to $125,000 on Jan. 1, 1991
$125,000 to $130,200 on Jan. 1, 1992
$130,200 to $135,900 on Jan. 1, 1993
$135,900 to $145,200 on Jan. 1, 1994
$145,200 to $153,900 on Jan. 1, 1994
$153,900 to $162,600 on Jan. 1, 1996
Proposed legislation and administrative action
Total, receipts under existing and proposed legislation and administrative action 3

1994

1995

1,064.9

1,117.8

1,206.3

1,309.5

1,403.0

1,499.7

23.2

35.0

31.9

36.5

37.4

28.8

0.7

2.2
0.8

2.6
2.3
1.0

3.1
2.8
2.9
1.6

3.6
3.3
3.3
4.7
1.4

4.2
3.8
3.9
5.5
4.3
1.4

2.3

6.5
0.1

7.7
0.2
0.1

9.1
0.2
0.2
0.1

10.5
0.2
0.2
0.4
0.1

0.4
1,091.4

2.7
1,165.0

0.6
1,252.7

-0.7
1,365.3

-0.9
1,467.3

12.2
0.3
0.3
0.4
0.3
0.1
-4.3
1,560.7

1 These

estimates assume a social security taxable earnings base of $51,300 through 1996.
Excludes the effect of medicare (HI) base changes shown below.
3 These estimates include both the direct and indirect effects of administrative and legislative changes.
2




Part Three-3

Part Three-4
Composition of receipts.—The Federal tax system
will rely predominantly on income and payroll taxes
in 1992, with these sources accounting for 82.2 percent
of receipts. The Federal tax system will continue to
rely predominantly on these sources of receipts in 1996,
when their combined share will rise to 83.7 percent.
ENACTED LEGISLATION
The Omnibus Budget Reconciliation Act of
1990.—This Act, which is the largest deficit reduction
package in history, is an important measure for ensuring America's long-term economic growth. It was the
result of long, hard work by the Administration and
the Congress. Less than 30 percent of its deficit reductions were achieved through revenue increases. The
major revenue provisions of the Act are described
below:
Individual Income Tax Provisions
Modify individual income tax rates.—Two statutory
tax brackets and tax rates—15 percent and 28 percent—were in effect under prior law. However, the benefit of the 15 percent bracket was phased out for taxpayers with taxable income exceeding specified levels,
implicitly creating a marginal tax rate of 33 percent
in the affected income range. Effective January 1, 1991,
the phaseout of the benefit of the 15 percent bracket
is repealed and a third statutory tax rate of 31 percent
is imposed on taxable income greater than or equal
to the level at which the phaseout of prior law began.
Limit itemized deductions.—Effective January 1,
1991, otherwise allowable deductions (with the exception of medical expenses, casualty and theft losses, and
investment interest), are reduced for taxpayers with
adjusted gross income in excess of $100,000. The reduction is equal to three percent of the taxpayer's adjusted
gross income in excess of $100,000; however, a taxpayer's deductions may not be reduced by more than
80 percent.
Phase out personal exemptions.—The deduction for
personal exemptions is phased out as the taxpayer's
adjusted gross income exceeds threshold amounts. For
1991, the threshold amounts are $150,000 for taxpayers
filing a joint return, $125,000 for a head of household,
$100,000 for a single taxpayer, and $75,000 for a married taxpayer filing a separate return; these amounts
are indexed for inflation beginning in 1992. Each otherwise allowable exemption is reduced by two percent
for each $2,500 (or fraction thereof) that the taxpayer's
adjusted gross income exceeds the threshold amount.
Earned Income Tax Credit
Modify and expand earned income tax credit
(EITC).—Certain individuals who maintain a home for
one or more children are allowed an advance refundable
tax credit based on the taxpayer's earned income.
Under prior law, the earned income tax credit (EITC)
for 1990 was equal to 14 percent of the first $6,810
of earned income, for a maximum credit of $953. The
credit was phased out at a rate of 10 percent of the
amount by which adjusted gross income in 1990 exceeded $10,730. Effective for taxable years beginning




THE BUDGET FOR FISCAL YEAR 1992

after December 31, 1990, the rate of the credit is increased, an adjustment is provided for family size, and
the phaseout rates are modified as follows:
Credit
percentage

1991:
1 qualifying child
2 or more qualifying
1992:
1 qualifying child
2 or more qualifying
1993:
1 qualifying child
2 or more qualifying
1994 and thereafter:
1 qualifying child
2 or more qualifying

Phaseout
percentage

children

16.7
17.3

11.93
12.36

children

17.6
18.4

12.57
13.14

children

18.5
19.5

13.21
13.93

children

23.0
25.0

16.43
17.86

The prior law dollar thresholds, indexed for inflation,
are retained. In addition, the eligibility rules are modified.
Establish supplemental credit for young children.—
An additional credit is provided for qualifying children
under the age of 1, as of the close of the taxable year
of the taxpayer. The maximum credit for 1991 is $355.
Establish supplemental credit for certain health insurance premium expenses.—Effective for taxable years beginning after December 31, 1990, a credit is available
to taxpayers for qualified health insurance expenses
that include coverage for a qualifying child. The eligibility criteria, income and phaseout requirements are
the same as those for the EITC. However, the credit
percentage is 6.0 percent of earned income and the
phaseout rate is 4.285 percent. For 1991, the maximum
credit is $428.
Excise Tax Provisions
Increase excise taxes on distilled spirits, beer and
wine.—Excise taxes on distilled spirits are increased
by $1.00 to $13.50 per proof gallon effective January
1, 1991. Excise taxes on beer generally are doubled
on that date from $9.00 to $18.00 per barrel. Wine,
which generally had been taxed at rates ranging from
$0.17 to $2.40 per wine gallon prior to January 1, 1991,
is now taxed at rates ranging from $1.07 to $3.30 per
wine gallon.
Increase tobacco excise taxes.—Excise taxes on all tobacco products, including cigarettes, cigars, chewing tobacco, snuff, and pipe tobacco, are increased by 50 percent relative to prior law. The first increase, equal to
25 percent of prior law, is effective January 1, 1991.
The second increase, equal in dollar amount to the first
increase, will be effective January 1, 1993. Specifically,
the excise tax on small cigarettes is increased from
$.16 per pack to $.20 per pack on January 1, 1991
and will be increased to $.24 per pack on January 1,
1993.
Expand excise tax on ozone depleting chemicals.—The
prior law fee imposed on certain ozone-depleting chemicals is expanded to apply to additional chemicals including carbon tetrachloride and methyl chloroform effective
January 1, 1991. The amount of the fee is determined
by multiplying a base fee amount by a factor—ranging

X.

RECEIPTS, USER FEES, AND OTHER COLLECTIONS

from 0.1 to 10.0—that represents the ozone-depleting
potential of the chemical. The base fee per pound applicable to chemicals taxed under prior law is $1.37 for
calendar year 1991, $1.67 for calendar year 1992, and
$2.65 for calendar years 1993 and 1994. Thereafter,
the base fee increases by $.45 per pound per year.
The base fee per pound is phased in for newly taxed
chemicals, equaling $1.37 for 1991 and 1992, $1.67 for
1993, $3.00 for 1994, and $3.10 for 1995. Thereafter,
the base fee increases by $0.45 per pound as it does
for chemicals taxed under prior law.
Increase highway and motor boat fuels excise taxes.—
The prior law excise taxes imposed on gasoline and
special motor fuels used in highway transportation and
motor boats are increased from $.09 per gallon to $.14
per gallon effective December 1, 1990. On that date
the prior law excise tax on diesel fuel used in highway
transportation is increased by $.05 per gallon to $.20
per gallon and a $.025 per gallon tax is imposed on
fuels used in rail transportation. The Act specifies that
one-half of the increases in highway fuels taxes and
motor boat fuels taxes be deposited in the Highway
Trust Fund and the Aquatic Resources Trust Fund,
respectively; the remaining half of the increases are
to be deposited in the General Fund of the Treasury.
The tax imposed on fuels used in rail transportation
is also to be deposited in the General Fund.
Increase Airport and Airway Trust Fund taxes.—Excise taxes deposited in the airport and airway trust
fund were scheduled to expire after December 31, 1990
under prior law. This Act extends these taxes through
December 31, 1995, but also increases the tax on air
passengers from 8 percent to 10 percent, increases the
tax on airfreight from 5 percent to 6.25 percent, increases the tax on noncommercial aviation gasoline
from $.12 per gallon to $.15 per gallon, and increases
the tax on noncommercial aviation jet fuel from $.14
per gallon to $.175 per gallon. In addition, the Act
specifies that all revenue from the increases in aviation
gasoline and fuel excise taxes relative to prior law rates
go to the General Fund of the Treasury through 1992,
and to the Airport and Airway Trust Fund for
1993-1995.
Increase ad valorem fee on shippers.—The prior law
ad valorem fee on shippers is increased from 0.04 percent of cargo value to 0.125 percent of cargo value effective January 1, 1991.
Reauthorize Leaking Underground Storage Tank
(LUST) Trust Fund tax.—Prior to September 1, 1990,
a tax of $.001 per gallon was imposed on gasoline,
diesel fuel, special motor fuels, aviation fuel and fuels
used on inland waterways, and deposited in the LUST
Trust Fund. This tax terminated on August 31, 1990
after the Fund reached a statutory ceiling of $500 million of net revenue. This Act reimposes the tax through
December 31, 1995.
Reauthorize Hazardous Substance Superfund Trust
Fund taxes.—The taxes authorized to be deposited in
the Hazardous Substance Superfund were scheduled to
expire on December 31, 1991 under prior law. This
Act extends these taxes through December 31, 1995.




Part Three-5
Superfund financing is derived from a tax of $.082 per
barrel on domestic crude oil and $.117 per barrel on
imported petroleum products, a tax on domestic feedstock chemicals and imported chemical derivatives, and
an environmental tax on corporate taxable income.
Increase gas guzzler excise tax.—The prior law tax
imposed on the manufacturer or importer of automobiles that do not meet statutory standards for fuel
economy is doubled effective January 1, 1991. The Act
repeals the prior law exemption provided for stretch
limousines, as well as the special rules permitting the
Secretary of the Treasury to set the rate of tax for
small manufacturers.
Extend and modify collection of telephone excise tax.—
The 3 percent excise tax imposed on local and toll telephone service, and on teletypewriter exchange service,
which was scheduled to expire after December 31, 1990,
is permanently extended. In addition, the collection period of telephone excise taxes is modified, effective for
taxes considered collected for semi-monthly periods beginning after December 31, 1990.
Impose excise tax on certain luxury goods.—Effective
January 1, 1991 through December 31, 1999, an excise
tax, equal to 10 percent of the retail price in excess
of specified thresholds, is levied on the following items:
automobiles above $30,000, boats and yachts above
$100,000, aircraft above $250,000, and furs and jewelry
above $10,000. Boats, yachts, aircraft, and passenger
cars used exclusively in a trade or business or for the
purpose of transporting persons or property for compensation or hire generally are exempt from the tax.
Expiring Tax Provisions
Extend research and experimentation (R&E) allocation rules.—The rules for allocating R&E expenses to
U.S. or foreign source income are extended for an additional 15 months so that they apply to taxable years
beginning on or before August 1, 1991.
Extend research and experimentation (R&E) tax credit.—The tax credit provided for certain incremental research and experimentation expenditures, which was
scheduled to expire on December 31, 1990, is extended
for 1 year. In addition, the special rule to prorate research expenditures incurred during 1990 is repealed.
Extend exclusion for employer-provided educational
assistance.—The exclusion for employer-provided educational assistance is extended to apply to amounts
paid by an employer on or before December 31, 1991.
In addition, the restriction on graduate level courses
is repealed, effective for taxable years beginning after
December 31, 1990.
Extend low-income housing tax credit.—The low income housing tax credit, which was scheduled to expire
after December 31, 1990, is extended for one year
through December 31, 1991, with several modifications.
Extend abandoned mine reclamation fees.—The abandoned mine reclamation fees, which were scheduled to
expire in August 1992, are extended through September
30, 1995.
Extend IRS user fee.—The prior law fee on each request for a letter ruling, determination letter, opinion

Part Three-6
letter, or other similar ruling or determination filed
after January 31, 1988 and before October 1, 1990,
is extended through September 30, 1995.
Tax Incentive Provisions
Initiate energy incentives.—The Act includes several
incentives to encourage the finding of new oil and gas
fields and the reclaiming of old fields. These incentives
include the following: a 2 year extension of the
nonconventional fuels tax credit and an expansion of
the definition of qualifying gas produced from a tight
sands formation; the initiation of a new income tax
credit for ethanol production, modification of existing
credits for ethanol fuels and ethanol fuels mixtures,
and modification of the tariff on ethanol; initiation of
a new income tax credit for qualified enhanced oil recovery costs; modification of percentage depletion rules;
and the provision of alternative minimum tax relief
for oil and gas operations.
Initiate small business incentives.—Several incentives
designed to assist small business are provided in the
Act. These incentives include the following: a revision
of estate freeze rules, generally effective for transfers
made and agreements entered into after October 8,
1990; and modification of the treatment of certain expenditures incurred to make businesses accessible to
disabled individuals.

THE BUDGET FOR FISCAL YEAR 1992

claim the salvage values as assets for statutory purposes. The Act requires insurance companies to include
salvage values in their calculations of loss incurred,
regardless of how States treat salvage values. As a
transition rule, salvage values are to be included in
the calculation of the deduction for losses incurred as
if these values had been included in such calculations
in all prior tax years.

Employment Tax Provisions
Increase dollar limitation on amount of wages and
self-employment income subject to the medicare (HI) hospital insurance payroll tax.—Effective January 1, 1991,
the cap on wages and self-employment income considered in calculating HI tax liability is increased to
$125,000. This cap is indexed annually thereafter to
changes in the average wage.
Extend social security (OASDI) and medicare (HI)
coverage to State and local government employees not
participating in a public employee retirement system.—
Mandatory social security and medicare coverage is extended to all State and local government employees
not participating in a public employee retirement system in conjunction with their current State and local
employment. Coverage applies with respect to all wages
earned with respect to services performed on or after
June 30, 1991.
Insurance Company Provisions
Extend Federal Unemployment Act (FUTA) surtax.—
Amortize policy acquisition expenses of insurance comThe
temporary unemployment surtax of 0.2 percent impanies.—Under prior law, insurance companies generally were allowed to deduct life insurance policy ac- posed on employers, which was scheduled to expire with
quisition expenses (commissions and other selling ex- respect to wages paid after December 31, 1990, is expenses) in the year in which they were incurred. In tended for 5 years through December 31, 1995.
the case of reinsurance, however, the reinsuring comStabilize payroll tax law.—Effective for deposits made
pany was required to capitalize commissions and to after July 31, 1990, employers holding withheld liability
amortize them over the useful life of the asset rather greater than or equal to $100,000 were required to
than permitting a current deduction for such an ex- deposit that amount by the close of the "applicable
pense. Effective after September 30, 1990, insurance banking day" following the day on which the withheld
companies are required to amortize life insurance policy amount reached $100,000. For calendar years 1990,
acquisition expenses on a straight-line basis over a pe- 1993 and 1994 the applicable banking day was the
riod of 120 months beginning with the first month in first, for calendar year 1991 it was the second, and
the second half of the taxable year. For any given tax- for calendar year 1992 it was the third. Under this
able year, policy acquisition expenses required to be Act, effective for calendar year 1991 and succeeding
capitalized and amortized are determined to be a spe- years, deposits equal to or greater than $100,000 must
cific percentage of the net premiums, depending on the be made by the close of the next banking day.
type of insurance contract. Three separate categories
of insurance contracts, and, therefore, three separate
Internal Revenue Service (IRS) Initiatives
percentages, are identified. A special rule is provided
Increase IRS enforcement funding and initiate manfor certain reinsurance transactions. In addition, the
tax treatment of acquisition expenses incurred on prop- agement reforms.—To close the gap between taxes owed
erty and casualty insurance policies sold by life insur- and taxes paid, additional funding is provided to IRS.
ance companies now conforms with the tax treatment These funds are to be used to collect delinquent tax
of these expenses for property and casualty insurance debt, enhance tax document matching to detect
underreporting of income and improper dependent
companies.
Include salvage values in calculation of loss deduc- claims, audit mortgage interest deductions, and intions by insurance companies.—Under prior law a prop- crease the audit workforce. In addition, improvements
erty and casualty insurance company could deduct in the management of tax law enforcement resources
losses incurred during a year, but need not include will increase revenue yields without requiring addisalvage values of losses paid in its calculation of deduc- tional expenditures. These initiatives are expected to
tions for losses incurred. The salvage values need not increase receipts $10.2 billion over the 1991-1995 pebe included if a State did not allow the company to riod.




X.

Part Three-7

RECEIPTS, USER FEES, AND OTHER COLLECTIONS

tax is applicable to reversions occurring after SeptemMiscellaneous Provisions
Modify rules relating to interest paid by corporations ber 30, 1990.
to the IRS on tax obligations.—Under prior law, the
RECEIPTS PROPOSALS
interest rate charged corporations on the underpayment
Enhance long-term investment.—Long-term investof tax was equal to the short-term Federal rate plus ment would be enhanced through expansion of a capital
3 percentage points. Effective for purposes of determin- gains differential. Specifically, when fully phased in in
ing interest for periods after December 31, 1990, re- 1993, gains from all capital assets held by individuals
gardless of the taxable period to which the underlying (other than collectibles) would qualify for an exclusion
tax may relate, the rate is increased to the Federal of 30 percent if held for more than 3 years, 20 percent
rate plus 5 percentage points.
if held for more than 2 years, and 10 percent if held
Extend statute of limitations for collection of taxes.— for more than 1 year. During the balance of 1991, such
Under prior law, the IRS was required to institute col- assets held for more than 1 year would qualify for
lection proceedings within 6 years after an assessment an exclusion of 30 percent; during 1992, such assets
of tax had been made. This Act extends the statute would qualify for an exclusion of 30 percent if held
of limitations to 10 years.
for more than 2 years and 20 percent if held for more
Increase the maximum allowable civil penalties for than 1 year. Where such exclusions apply, the capital
violations of labor laws.—In an effort to provide effec- gains rate otherwise applicable will apply to the gain
tive civil penalties, the maximum allowable civil pen- reduced by the exclusion. For example, gains eligible
alties for violations of the Occupational Safety and for a 30 percent exclusion of a taxpayer subject to a
Health Act are increased seven fold. These fines had 28 percent capital gains rate will in effect be taxed
not been increased since they were enacted in 1970. at a rate of 19.6 percent. The alternative minimum
The maximum allowable civil penalties for violations tax would be applicable to the excluded amounts and
of the Federal Mine Safety Act, which had not been assets would be subject to depreciation recapture at
increased in 21 years, are increased five fold. In addi- ordinary rates. The proposal to enhance long-term intion, the Fair Labor Standards Act is amended to create vestment is shown in Table X-4 and in tables in Part
a civil penalty ceiling of $10,000 for each violation of Five as estimated by the Treasury Department's Office
of Tax Analysis (OTA). Because the methodological difsome of the provisions relating to child labor.
Permit limited use of excess pension funds to pay cur- ferences among OTA, Congressional estimators, and
rent retiree health benefits and modify treatment of em- outside experts have not yet been resolved, totals are
ployer reversions.—The transfer of excess pension plan presented with the Administration's estimate and with
assets to pay current retiree health benefits is allowed, a zero (neutral) entry for this proposal.
effective for transfers occurring in taxable years beginExtend medicare hospital insurance (HI) coverage to
ning after December 31, 1990 and before January 1, all State and local government employees.—A minority
1996. The prior law excise tax on any assets that revert of the State and local government employees who were
to the employer upon plan termination is increased hired prior to April 1, 1986 may not be assured of
from 15 percent to 20 percent if the employer estab- medicare coverage. Because of eligibility through their
lishes a qualified replacement plan, or to 50 percent spouse or short periods of work in covered employment,
if no replacement plan is established. The higher excise as many as four out of five State and local employees
Table X-3. EFFECT OF MAJOR LEGISLATION ENACTED IN 1990 ON RECEIPTS1
(In billions of dollars)
1992

1991

1993

1994

1995

1996

Omnibus Budget Reconciliation Act of 1990
Individual income taxes
Corporation income taxes
Social insurance taxes and contributions
On-budget
Off-budget
Excise taxes
Estate and gift taxes
Customs duties and fees
Miscellaneous receipts

4.6
3.8
4.6
(4.1)
(0.5)
12.5

10.2
2.4
10.5
(8.4)
(2.2)
17.1

9.9
2.5
11.1
(8.6)
(2-5)
19.3
-0.3
0.5
0.7

10.1
2.3
11.7
(9.1)
(2.7)
20.0
-0.4
0.5
0.8

5.3
2.8
11.3
(8.4)
(2.9)
17.1
-0.7
0.5
0.4

0.3
0.2

0.4
0.4

7.8
2.7
8.8
(6.5)
(2.3)
18.2
-0.1
0.5
0.7

Total, Omnibus Budget Reconciliation Act of 1990
On-budget
Off-budget

26.0
(25.5)
(0.5)

40.9
(38.8)
(2.2)

38.5
(36.2)
(2.3)

43.7
(41.3)
(2-5)

45.0
(42.3)
(2-7)

36.8
(33.9)
(2-9)

Total, Omnibus Budget Reconciliation Act of 1990, net of income tax offsets
On-budget
Off-budget

22.5
(22.7)
(-0.1)

35.2
(33.9)
(1.3)

32.7
(31.3)
(1.4)

37.5
(36.0)
(1-5)

38.6
(36.9)
(1.7)

31.0
(28.9)
(2-0)

*

- *

* $50 million or less.
1 These estimates are based on the direct effect only of legislative changes at a given level of economic activity. Indirect effects on the economy are taken into account in forecasting incomes,
however, and in this way affect the receipts estimates by major source and in total.




Part Three-8
who contribute nothing to medicare in their current
employment are entitled to the full range of medicare
benefits. Coverage of these employees, who are the only
major group of employees not assured medicare coverage, would correct an inequity in coverage and eliminate this drain on the medicare trust fund. The change
is proposed to be effective January 1, 1992.
Improve retail compliance with alcohol special occupational taxes.—To increase compliance rates and revenues, distributors of alcoholic beverages would be required to verify retail compliance with the tax prior
to sale.
Increase IRS enforcement funding.—The Administration proposes to increase compliance with the tax code
by providing additional funding to IRS. These funds
would be used to collect delinquent tax debt and increase the audit workforce.
Extend tax deadlines for Desert Shield participants.—
This proposal would extend the time period for filing
Federal tax returns, paying Federal tax and taking
other actions until 180 days after an individual's participation in the Desert Shield operation comes to an
end.
Extend railroad unemployment insurance (UI) reimbursable status.—To prevent public subsidies from
being diverted to pay for the high unemployment costs
of the private sector railroads, public commuter railroads and Amtrak were exempt from the full railroad
unemployment tax rate in 1989 and 1990. Instead, they
were required to reimburse the railroad unemployment
insurance fund for the actual costs of their employees.
Under this proposal the exemption would be extended
beyond its current law expiration date.
Increase Department of Housing and Urban Development (HUD) interstate land sales fee.—The Interstate
Land Sales Full Disclosure Act gives HUD the responsibility of registering certain subdivisions that are sold
or leased across State lines. A fee is charged when
a developer files a statement of record about the subdivision with HUD. The fee charged cannot exceed
$1,000 for any one developer. Under the current structure, the fees collected cover only a portion of the costs
associated with the administration of the program. The
Administration's proposal would remove the $1,000 fee
limitation to help offset fully the direct administrative
costs of the program.
Extend abandoned mine reclamation fees.—The abandoned mine reclamation fees, which are scheduled to
expire on September 30, 1995, would be extended. Collections from the existing fees of 35-cents per ton for
surface mined coal and 15-cents per ton for underground mined coal are allocated to States for reclamation grants. Abandoned land problems are expected to exist in certain States after all the money
from the collection of fees under current law is expended.
Extend research and experimentation (R&E) tax credit.—The 20 percent tax credit provided for certain incremental research and experimentation expenditures,
which was scheduled to expire on December 31, 1990,
was extended for 1 year under the Omnibus Budget




THE BUDGET FOR FISCAL YEAR 1992

Reconciliation Act of 1990. The Administration proposes
permanent extension of the R&E credit.
Extend research and experimentation (R&E) allocation rules.—Companies with foreign operations are allowed to allocate 64 percent of domestic R&E expenditures to their domestic operations and 64 percent of
foreign R&E expenditures to their foreign operations.
The remaining expenses are to be allocated on the basis
of gross sales or (subject to a limitation) gross income.
Under the Omnibus Budget Reconciliation Act of 1990,
these rules are extended to apply to taxable years beginning on or before August 1, 1991. The Administration proposes a 1 year extension of these rules.
Establish family savings accounts.—Americans would
be encouraged to increase personal savings by being
permitted to establish Family Savings Accounts with
contributions of up to $2,500 per year (with a limit
of two such accounts per family). Contributions would
not be deductible but earnings would be excluded from
income while in the account and would be permanently
excluded if the contribution to which they relate remains in the account for more than 7 years. Earnings
on withdrawals within 3 years of contribution would
be subject to a 10 percent excise tax. Available investments would be the same as for current Individual
Retirement Accounts. Accounts would not be available
to single individuals with income exceeding $60,000 or
to families with income exceeding $120,000.
Extend health insurance deduction for self-employed.—Under the Omnibus Budget Reconciliation Act
of 1990, the 25 percent deduction provided to self-employed individuals for the cost of health insurance expenses was extended through December 31, 1991. The
Administration proposes to extend the deduction for 1
year through December 31, 1992.
Extend low-income housing tax credit.—This credit
was extended through December 31, 1991 under the
Omnibus Budget Reconciliation Act of 1990. A 1-year
extension of this credit is proposed.
Extend targeted jobs tax credit.—The Administration
proposes to extend the targeted jobs tax credit for 1
year. This credit, which is generally equal to 40 percent
of the first $6,000 of qualified first year wages (40
percent of up to $3,000 of wages to any disadvantaged
summer youth employees), was extended through December 31, 1991 under the Omnibus Budget Reconciliation Act of 1990.
Establish enterprise zones.—The Administration proposes to provide tax incentives to promote entrepreneurship and job creation in up to 50 economically distressed urban and rural communities. Beginning in
1992, the proposal provides for elimination of the capital gains tax with respect to tangible investments located in a zone, expensing of investments in certain
corporate stock issued by zone businesses, and refundable tax credits for low-income zone employees. This
proposal is discussed more fully in Chapters V.A. and
VT.A.
Waive excise tax for certain early withdrawals from
Individual Retirement Accounts (IRAs).—Under current
law, early withdrawals from a fully-deductible IRA are

X.

Part Three-9

RECEIPTS, USER FEES, AND OTHER COLLECTIONS

subject to a 10 percent excise tax (penalty), and included as ordinary income on an individual's tax return.
The Administration proposes to waive the 10 percent
excise tax for early withdrawals effective January 1,
1991, if the money is used for a first-time home purchase and the home costs no more than 110 percent
of the median price of homes. The maximum amount
that could be withdrawn without penalty for a firsttime home purchase would be $10,000.
Extend business energy tax credits.—The Administration proposes to extend business energy tax credits for
solar and geothermal properties for 1 year. These credits are sheduled to expire on December 31, 1991 under
current law.

Double and restore adoption deduction.—The Administration proposes to restore and double to $3,000 the
special needs adoption deduction, effective January 1,
1992.
Extend taxes to finance the Highway Trust Fund.—
The budget contains the Administration's proposal for
new 5-year highway and transit programs financed
from the Highway Trust Fund. Legislation to enact and
finance this program will be transmitted to the Congress. The legislation will be financed by extending the
$.09 gasoline tax, the $.15 diesel tax, and other excise
taxes dedicated to the Trust Fund that were enacted
in 1987 to support the current highway program.

Table X-4. EFFECT OF PROPOSED LEGISLATION AND ADMINISTRATIVE ACTION ON RECEIPTS1
(In billions of dollars)
1992

1991

Enhance long-term investment2
Extend HI coverage to State and local employees3
Improve retail compliance with alcohol special occupational taxes3
Increase IRS enforcement funding
Extend tax deadlines for Desert Shield participants
Extend railroad Ul reimbursable status3
Increase HUD land sales fee
Extend abandoned mine reclamation fees
Extend R&E credit
Extend R&E allocation rules
Establish family savings accounts
Extend health insurance deduction for self-employed
Extend low-income housing tax credit
Extend targeted jobs tax credit
Establish enterprise zones
Waive excise tax for certain early withdrawals from IRAs
Extend business energy tax credits
Double and restore adoption deduction
Extend Highway Trust Fund taxes3
Total effect on receipts
Total effect on receipts with enhance long-term investment at zero

0.4

1993

3.0
1.1

-0.5
-0.3
-0.3
-0.1
-0.1
-0.1

1994

1.7
1.5

0.9
1.5

1.8
1.5

1.7
1.5

0.1

0.2

0.2

0.2

-1.0

-1.3

-1.6

-1.8

-0.8
-0.2
-0.2
-0.1
-0.2
-0.1

-1.3

-1.8

-2.3

-0.3

-0.3

-0.3

-0.3

-0.5

-0.1

-0.1

-0.8
- 0 . 1*

0.3

-0.3

-0.1

-2.7
0.4

0.6

-0.7

-1.1

-1.6

2.3
-0.9
1.2

-1.2

-1.2
-1.2

1.7

1.7

0.1

0.1

2.7
-0.7

0.6

-0.7

-1.7

-2.1

2.7
-0.3

-0.9
-2.7

-4.3

-0.9
-1.7
1.7

-0.9
-1.9
1.7

-6.0

ADDENDUM
Effect of proposals on receipts by source:
Individual income taxes
Corporation income taxes
Employment taxes and contributions
Unemployment insurance
Excise taxes
Miscellaneous receipts
Total effect on receipts
Individual income taxes with enhance long-term investment at zero ,

0.4

-3.5
0.3
-0.9
-2.7

-4.3
-2.6

A $50 million or less.
1 These estimates are based on the direct effect only of legislative changes at a given level of economic activity. Induced effects on the economy are taken into account in
forecasting incomes, however, and in this way affect the receipts estimates by major source and in total.
2 The proposal to enhance long-term investment is shown in Table X - 4 and in tables in Part Five as estimated by the Treasury Department's Office of Tax Analysis (OTA).
Because the methodological differences among OTA, Congressional estimators, and outside experts have not yet been resolved, totals are presented with the Administration's
estimate and with a zero (neutral) entry for this proposal.
3 Net of income tax offsets.




Part Three-10

THE BUDGET FOR FISCAL YEAR 1992

USER FEES AND OTHER COLLECTIONS
The budget includes all Federal cash flows. Under
existing budget concepts, all income to the Government
arising from the exercise of its sovereign powers (mainly, but not exclusively, taxes) is classified as governmental receipts and included in the receipt totals. In
contrast, any income from the public that results from
voluntary business-like transactions is classified as offsetting collections, which offset outlays rather than
being included with the governmental receipts.
The preceding pages covered governmental receipts,
including compulsory charges. This discussion covers
offsetting collections, particularly the Administration's
user fee proposals. As shown in Table X-5, total offsetting collections from the public, including those proposed by the Administration but excluding the collections of the off-budget Postal Service, are estimated
to be $187.4 billion in 1992.
The budget contains a variety of user fee and other
offsetting collections proposals that would yield $2.3
billion in 1992 and $12.0 billion over the years 1992
through 1996. Administration proposals establish or increase fees in order to recover more of the costs of
providing Government services. Descriptions of these
proposals, which are listed in Table X-6, are presented
below.
Table X-6 splits the proposals between discretionary
and mandatory, indicating which of the Budget Enforcement Act (BEA) requirements apply.
Discretionary.—The discretionary proposals create
savings under the BEA's domestic discretionary spending limits.
• Medicare and medicaid survey and certification.—
Establish fees for survey and certification activities required by the Social Security Act. Providers
and suppliers would be charged fees, which would

be set annually to cover all programmatic and
administrative costar.
• Food and Drug Administration (FDA).—Establish
fees for FDA review of new product applications,
including new and generic drugs, medical devices,
biologies, and food and color additives. A portion
of these fees would finance expanded FDA activities in these areas. The proposal also includes fees
for the registration and inspection of seafood processors.
• Veterans medical care.—Permanently authorize
the copayment expansion that is scheduled to expire September 30, 1991, enacted in the Omnibus
Budget Reconciliation Act of 1990 (OBRA 1990).
Establish copayments, subject to means testing,
for treatment of non-service-connected illnesses of
veterans with service-connected disabilities rated
40 percent or lower.
• Small Business Administration (SBA).—Increase
guarantee fees on most general business loans
from 2 percent to 5 percent, on regular small business investment companies from 1.2 percent to
5 percent, and on development finance companies
from 0.5 percent to 1 percent. Savings reflect a
reduction in SBA's credit subsidy outlays, rather
than increased collections.
• Hard rock mining claim holding fee.—Establish
an annual holding fee which would require holders
of mining claims on Federal lands to pay $100
per claim. This fee would replace the existing requirement that claimants spend $100 per year developing each claim. This change would eliminate
activities that result in surface disturbance of land
solely to maintain a claim. A portion of the fee
would support the Bureau of Land Management's

Table X-5. TOTAL OFFSETTING COLLECTIONS
(In millions of dollars)

Collections deposited in receipt accounts:
Medicare premiums and other charges
Military assistance trust fund property sales
Outer Continental Shelf payments, naval petroleum reserve lease, power administration asset
sales, and other undistributed offsetting receipts
Sale of property and services, interest income, and all other collections deposited in receipt acSubtotal, collections deposited in receipt accounts
Collections credited to appropriation accounts:
Postal Service stamp sales and other collections
Depository insurance funds
Tennessee Valley Authority and power administration collections
Commodity Credit Corporation loan repayments and other collections
Other loan repayments
Loan guaranty and other insurance premiums, interest income, and all other collections credited
to appropriation accounts




1990

1991

1992

11,245
10,293

11,844
10,300

13,002
10,000

3,006

3,729

3,963

14,831

14,808

15,839

39,376

40,681

42,804

32,202
32,818
8,487
10,719
11,437

43,150
57,146
8,922
8,476
12,580

46,088
67,949
9,278
8,544
9,459

42,536

45,500

49,347

144,199

175,773

190,665

Total offsetting collections

183,575

216,454

233,469

Total offsetting collections excluding off-budget Postal Service collections

151,373

173,304

187,381

Subtotal, collections credited to appropriation accounts

X.

Part Three-11

RECEIPTS, USER FEES, AND OTHER COLLECTIONS
Table X-6. PROPOSED USER FEES AND OTHER OFFSETTING COLLECTIONS
(in millions of dollars)
1992

Discretionary:
Medicare and medicaid survey and certification (net)
FDA product review and seafood inspections
Veterans medical care copayments
SBA loan guarantee1
Hard rock mining claim holding
SEC registration
FCC licensing and service
CFTC contract trading
FEMA regulation of emergency plans
FCC spectrum auction
Subtotal, discretionary
Mandatory:
Elk Hills naval petroleum reserve lease
Veterans loan origination1
Corps of Engineers recreation site
Agricultural Marketing Service
Federal Grain Inspection Service
Forest Service recreation site
Pesticide reregistration
Arctic National Wildlife Refuge leasing
Subtotal, mandatory
Total
1

1993

264
198
125
86
80
68
65
48
10

246
205
131
96
80
71
65
51
10

—

—

943
1,191
122
20
13
8
8
3
—

1994

1995

1996

246
212
138
96
80
73
65
55
10
800

249
212
145
96
80
76
65
59
10
1,200

254
212
152
96
80
79
65
63
10
500

955

1,775

2,192

1,512

-139
106
20
16
8
8
3
1,901

-120
101
20
16
8
8
3
1

-113
101
20
17
8
8
3
1,201

-95
98
20
18
8
8
3
1

1,364

1,922

36

1,244

59

2,306

2,876

1,811

3,436

1,571

Savings from credit fees reflect a reduction in subsidy outlays, rather than increased collections.

mining law administration program and finance
the collection of the fee itself.
• Securities and Exchange Commission.—Increase
the registration fee from M>o to V32 of 1 percent
of the dollar value of the offering.
• Federal Communications Commission (FCC).—Increase existing licensing and service fees from
commercial users. A portion of this increase would
be dedicated to the expansion of FCC services.
• Commodities Futures Trading Commission.—Establish a transaction fee of 13 cents per contract
traded on commodity futures and options exchanges.
• Federal
Emergency
Management
Agency
(FEMA).—Establish fees to cover costs incurred
by FEMA (acting as the Nuclear Regulatory Commission's agent) in regulating the evacuation and
emergency preparedness plans of nuclear power
plants.
• FCC spectrum auction.—Approximately 30 megahertz of radio spectrum which the Government
currently uses or has reserved would be freed up
for private users, whom the FCC will reassign
from other frequencies. The spectrum vacated by
those private users would be reassigned through
auctions beginning in 1994.
Mandatory.—The following mandatory user fee and
other offsetting collection proposals create savings for
purposes of pay-as-you-go enforcement.
• Elk Hills naval petroleum reserve.—The Administration proposes to lease this oil field which is
presently operated by the Department of Energy.
Bonus payments of $1.0 billion in 1992 and $0.4
billion annually from 1993 through 1996 plus an-




nual royalty payments would more than offset the
loss of annual receipts for oil sales that would
otherwise be collected by the Government. Under
this leasing proposal, discretionary funds that
would otherwise have to be appropriated for this
program would not be needed.
• Veterans loan origination.—Make permanent the
.625 percent loan origination fee increase that was
enacted as part of OBRA 1990 and is scheduled
to expire September 30, 1991. OBRA 1990 effectively raised the origination fee for a no-downpayment loan from 1.25 percent to 1.875 percent. In
addition, non-active duty military personnel who
use the program more than once would pay a 2.5
percent fee for each additional loan. Savings reflect a reduction in the VA credit subsidy outlays,
rather than increased collections.
• Corps of Engineers.—Expand the types of user fees
collected to include those for day use of developed
recreational sites and for all overnight camping
sites.
• Forest Service.—Expand the types of facilities and
services for which fees may be charged at national
forest recreation sites. Collections would be dedicated to increased rehabilitation and reconstruction of existing trails and facilities.
• Agricultural Marketing Service.—Establish fees
paid by local market committees for administrative support provided by the Government for marketing agreements and orders which help stabilize
commodities markets. Additionally, establish user
fees for tobacco news reports, for the development
and assistance of grading standards, and for the

Part Three-12

THE BUDGET FOR FISCAL YEAR 1992

statistical and economic analysis of commodity
markets.
• Federal Grain Inspection Service.—Establish user
fees for standardization and quality assurance activities that support the fee-funded weighing and
grain inspection services.
• Environmental Protection Agency.—Remove the
cap on the amount that may be collected from

Detailed Receipts Tables.—A detailed report of governmental receipts by source is presented in Table X-7.
Offsetting receipts by type are detailed in Table X-8.

Table X-7. RECEIPTS BY SOURCE

Table X-7. RECEIPTS BY SOURCE-Continued

(In millions of dollars)

(In millions of dollars)

Source

Individual income taxes:
Federal funds:
Withheld
Other
Refunds
Proposed legislation

1990 actual

1991 estimate

1992 estimate

415,710
155,925
-79,362
363

443,146
168,327
-84,242
2,288

Total Federal funds net individual income taxes

467,411

492,635

529,518

Trust funds (Catastrophic health insurance)

-527

Total net individual income taxes
Corporation income taxes:
Federal funds:
Existing law
Refunds
Proposed legislation
Total Federal funds net corporation income taxes
Trust funds:
Existing law (Hazardous substance
superfund)
Refunds
Total Trust funds net corporation income taxes
Total net corporation income
taxes
Social insurance taxes and
contributions (trust funds):
Employment taxes and contributions:
Old-age and survivors insurance
(Off-budget)
Disability insurance (Off-budget)
Hospital insurance
Proposed legislation
Railroad retirement:
Social Security equivalent accout
Rail pension fund
Total employment taxes and
contributions
On-budget
Off-budget
Unemployment insurance:
State taxes deposited in Treasury1 .
Federal unemployment tax receipts1
Railroad unemployment tax receipts1

Source

1990 actual

Proposed legislation
Railroad debt repayment1
390,473
149,189
-72,251




any one registrant under the existing user fees
for pesticide reregistration.
• Arctic National Wildlife Refuge leasing.—Certain
of these lands would be made available for oil
and gas leasing. Receipts from the first lease sale
would be in 1993 and the second in 1995.

466,884

—

492,635

—

529,518

109,556
-16,510

113,638
-18,092

122,122
-19,737
-866

93,046

95,546

101,519

461

320

394

461

320

394

93,507

95,866

101,913

255,031
26,625
68,556

269,477
28,810
74,037

284,865
30,389
81,474
1,234

1,387
2,292

1,450
2,400

1,485
2,426

353,891
(72,235)
(281,656)

376,175
(77,888)
08,287)

401,873
(86,619)
(315,254)

15,967
5,356

15,603
5,297

17,186
5,427

199

196

139

Total unemployment insurance

1992 estimate

112

109

2
109

21,635

21,194

22,863

4,405

4,469

4,511

117

117

116

4,522

4,586

4,627

380,047
(98,392)
(281,656)

401,955
(103,668)
(298,287)

429,363
(114,109)
(315,254)

3,807
1,680
267

4,177
1,909
1,408

4,324
2,012
1,894

131

131

—

—

-11

Other retirement contributions:
Federal employees' retirement—employee contributions
Contributions for non-Federal employees2
Total other
tributions

1991 estimate

retirement con-

Total social insurance taxes
and contributions
On-budget
Off-budget
Excise taxes:
Federal funds:
Alcohol taxes:
Distilled spirits
Beer
Wines
Special taxes in connection with
liquor occupations
Proposed legislation
Refunds

-190

-188

131
57
-185

Total alcohol taxes

5,695

7,437

8,233

Tobacco taxes:
Cigarettes
Cigars
Cigarette papers and tubes
Smokeless tobacco
Other
Refunds

4,014
40
2
24
8
-7

4,556
40
2
24
8
-7

4,718
35
2
24
8
-7

Total tobacco taxes

4,081

4,623

4,780

98
41
13
90
1
-11

100
44
14
175
110
-33

103
46
15
198
132
-33

232

410

461

2,995

3,251

3,174

9

10

10

Manufacturers' excise taxes:
Firearms, shells, and cartridges ..
Pistols and revolvers
Bows and arrows
Gas guzzler
Motor boat
Refunds
Total manufacturers'
taxes

excise

Miscellaneous excise taxes:
General and toll telephone and
teletype service
Wagering taxes, including occupational taxes

X.

Part Three-13

RECEIPTS, USER FEES, AND OTHER COLLECTIONS
Table X-7. RECEIPTS BY SOURCE-Continued

Table X-7. RECEIPTS BY SOURCE-Continued

(In millions of dollars)

(In millions of dollars)

Source

Employee pension plans
Tax on foundations
Foreign insurance policies
Ship departure tax
Ozone depletion tax
Luxury tax
Refunds
Total miscellaneous
taxes

1992 estimate

-25

184
189
98
9
1,250
252
-20

184
198
100
11
1,136
403
-10

3,827

5,223

5,206

1,756

3,224

3,525

200
180
103
5
360
—

excise

Undistributed Federal tax deposits
and unapplied collections
Total Federal
taxes

1991 estimate

1990 actual

fund

excise
15,591

20,918

22,206

Trust funds:
Highway:
Gasoline
Trucks, buses, and trailers
Tires, innertubes, and tread rubber
Diesel fuel used on highways
Use-tax on certain vehicles
Fines
Refunds

9,371
1,112

11,778
1,049

12,234
1,379

255
3,240
584
7
-701

315
3,631
580
4
-540

328
3,822
598
4
-589

Total highway trust fund

13,867

16,817

17,776

Airport and airway:
Transportation of persons
Waybill tax
Tax on fuels
International departure tax
Refunds

3,219
181
140
178
-18

4,359
236
139
254
-24

4,932
262
149
273
-31

3,700

4,964

5,585

218

150

154

665
63

627
60

649
70

818
143
-1
159

816
243
-12
118

815
240

Total airport and airway trust
fund
Aquatic resources trust fund
Black lung disability insurance trust
fund
Inland waterway trust fund
Hazardous substance superfund
trust fund
Oil spill liability trust fund
Post-closure liability trust fund
Vaccine injury compensation fund ...
Leaking underground storage tank
trust fund

122

109

149

Total trust fund excise taxes ...

19,754

23,892

25,562

35,345

44,810

47,768

Estate and gift taxes

11,500

12,241

13,265

Customs duties and fees:
Federal funds

16,497

17,142

18,614

(PART 3 )

Trust funds
Total customs duties and
fees
Miscellaneous receipts:3
Miscellaneous taxes
Deposit of earnings, Federal Reserve
System
Fees for permits and regulatory and
judicial services:
Immigration, passport, and consular
fees
Patent and copyright fees
Registration and filing fees
Coal mining reclamation fees
Miscellaneous fees for permits, licenses, etc
Miscellaneous fees for regulatory
and judicial services
Fees for legal and judicial services
Total fees for permits and regulatory and judicial services
Fines, penalties, and forfeitures
Restitutions, reparations, and recoveries under military occupation
Gifts and contributions
Refunds and recoveries
Total miscellaneous receipts

1990 actual

1991 estimate

1992 estimate

210

556

681

16,707

17,698

19,295

117

152

158

24,319

23,384

20,741

282
1
472
242

305

373

*

*

517
241

524
248

3

21

41

148
107

213
42

292
42

1,254

1,340

1,520

1,492

1,217

1,353

13
123
-2

2
91
50

2
82
50

27,316

26,236

23,907

1,031,308
(749,652)
(281,656)

1,091,440
(793,153)
(298,287)

1,165,029
(849,775)
(315,254)

On-budget:
Federal funds
Trust funds
Interfund transactions

634,107
255,182
-139,638

667,924
273,050
-147,821

712,365
293,446
-156,036

Total on-budget
Off-budget (trust funds)

749,652
281,656

793,153
298,287

849,775
315,254

1,031,308

1,091,440

1,165,029

Total budget receipts
On-budget
Off-budget
MEMORANDUM

—

124

Total excise taxes


280-000 0 - 9 1 - 2


Source

Total

*$500 thousand or less.
1 Deposits by States are State payroll taxes that cover the benefit part of the program. Federal
unemployment tax receipts cover administrative costs at both the Federal and State level. Railroad
unemployment tax receipts cover both the benefits and administrative costs of the program for the
railroads.
Represents employer and employee contributions to the civil service retirement and disability
fund for covered employees of Government-sponsored, privately owned enterprises and the District
of Columbia municipal government.
includes both Federal and trust funds. Trust fund amounts in miscellaneous receipts are:
1990, $233 million; 1991, $242 million; and 1992, $242 million.

Part Three-14

THE BUDGET FOR FISCAL YEAR 1992

Table X-8. OFFSETTING RECEIPTS BY TYPE

Table X-8. OFFSETTING RECEIPTS BY TYPE-Continued

(In millions of dollars)

(In millions of dollars)

Type

1990 actual

1992
estimate

1991
estimate

Type

INTRAGOVERNMENTAL TRANSACTIONS
Intrabudgetary transactions:
Federal intrafund transactions:
Distributed by agency:
Interest from the Federal Financing Bank
Interest on Government capital in enterprises
Other
Total Federal intrafunds
Trust intrafund transactions:
Distributed by agency
Total intrafund transactions
Interfund transactions:
Distributed by agency:
Federal fund payments to trust funds:
Contributions to insurance programs:
Military retirement fund
Supplementary medical insurance ..
Hospital insurance
Railroad social security equivalent
fund
Rail industry pension fund
Civilian supplementary retirement
contributions
Unemployment insurance
Other
Miscellaneous payments:
Other
Subtotal
Trust fund payments to Federal funds:
Repayment of loans or advances to
trust funds
Charges for services to trust funds
Other
Subtotal
Total interfunds distributed by agency

13,731

16,137

18,552

4,061
107

4,211
1,774

3,470
974

17,899

22,123

22,995

65

1

1

17,964

22,124

22,996

10,596
33,210
798

10,782
34,730
601

11,402
37,724
748

2,568
181

2,804
97

2,932
196

17,989
317
138

18,830
327
417

19,724
427
441

309

1,040

225

66,107

69,628

73,819

2,577
145
257

2,594
210
644

2,774
208
598

2,979

3,448

3,579

69,086

73,076

77,398

5,953

6,409

6,897

1,780
16,324
79

1,821
16,254
80

1,926
16,161
178

Total employer share, employee retirement (on-budget)

24,135

24,565

25,163

Interest received by on-budget trust
funds

46,416

50,179

53,476

70,552

74,745

78,638

Total interfund transactions

139,638

147,821

156,036

Total intrabudgetary transactions

157,602

169,944

179,032




Payments by on-budget accounts to offbudget accounts:
Interfund transactions:
Distributed by agency:
Federal fund payments to trust funds:
Old-age, survivors, and disability insurance
Undistributed by agency:
Employer share, employee retirement
(off-budget)
Interest received by off-budget trust
funds
Total payments by on-budget accounts to off-budget accounts
Payments by off-budget accounts to onbudget accounts:
Intrafund transactions from off-budget
accounts:
Distributed by agency:
Payments to railroad retirement2
Total Intrafund transactions from offbudget accounts
Interfund transactions from off-budget
accounts:
Distributed by agency:
Interest payments to the Treasury
Undistributed by agency:
Employer contributions to FHI
Retirement contributions
Total payments by off-budget accounts to on-budget accounts

1991
estimate

4,707

5,527

5,567

5,827

15,991

20,164

26,266

31,518

3,049

3,583

3,049

3,583

1,082

400

373
3,536

388
4,584

8,040

8,955

191,908

210,417

346

301

868

931

1,362
336

1,380
270

2,912

2,882

Intratrust transactions between off-budget
accounts:
Distributed by agency:
Total
intragovernmental
actions

trans-

PROPRIETARY RECEIPTS FROM THE PUBLIC

Undistributed by agency:
Employer share, employee retirement
(on-budget):
Civil service retirement and disability
insurance
Hospital insurance (contribution as
employer)1
Military retirement fund
Other Federal employees retirement ..

Total interfund transactions undistributed by agency

1990 actual

Distributed by agency:
Interest:
Interest on loans, Foreign Assistance Act ...
Other interest on foreign loans and deferred foreign collections
Interest on deposits in tax and loan accounts
Other interest (domestic—civil)3
Total interest
Rents:
Rent and bonuses from land leases, etc ....
Rent of land and other real property
Rent of equipment and other personal
property
Total rents
Royalties

42
47
14
57

103

883

1,089

X.

Part Three-15

RECEIPTS, USER FEES, AND OTHER COLLECTIONS
Table X-8. OFFSETTING RECEIPTS BY TYPE-Continued

Table X-8. OFFSETTING RECEIPTS BY TYPE-Continued

(In millions of dollars)

(In millions of dollars)
1990 actual

Type

Sale of products:
Sale of timber and other natural land products
Sale of minerals and mineral products
Sale of power and other utilities
Sale of other products3
Recovery of mint manufacturing expense ...
Total sale of products
Fees and other charges for services and
special benefits:
Medicare premiums and other charges
(trust funds)
Nuclear waste disposal revenues
Veterans life insurance (trust funds)
Other
Total fees and other charges
Sale of Government property:
Sale of land and other real property3
Sale of equipment and other personal
property:
Military assistance program sales (trust
funds)
Sale of scrap and salvage material
Total sale of Government property
Realization upon loans and investments:
Dollar repayments of loans, Agency for
International Development
Foreign military credit sales
Negative loan subsidies
Dollar conversion of foreign currency
Repayment of loans to United Kingdom
Other3
Total realization
invesments




upon loans and

1991
estimate

1992
estimate

Type

Recoveries and refunds3
1,288
524
987

Miscellaneous receipt accounts3

1990 actual

1991
estimate

1992
estimate

510

930

1,105

1,373

1,853

2,000

35,031

36,952

38,841

712
2,292

1,102
2,627

468
2,219
85
1,191

1,349
576
775
4
52

1,296
654
799
141

61

2,756

2,890

2,860

11,245
576
398
2,848

11,834
563
402
2,937

12,984
564
371
3,303

15,068

15,735

17,222

Total proprietary receipts from the
public undistributed by agency

3,006

3,729

3,963

Total proprietary receipts from the
public4

38,038

40,681

42,804

Total proprietary receipts from the
public distributed by agency

*

*

92

109

109

10,293
90

10,300
83

10,000

10,474

10,492

10,109

Undistributed by agency:
Other interest: Interest received from Outer
Continental Shelf escrow account
Rents and royalties on the Outer Continental
Shelf:
Rents and bonuses
Royalties
Sale of major assets
Other undistributed offsetting receipts

2

OFFSETTING GOVERNMENTAL RECEIPTS
Defense cooperation

—

Total offsetting receipts
1 1ncludes

430
231

—

—

26
94
193

26
96
195

449
384
376
26
98
199

997

977

1,532

229,945

266,098

266,409

* $ 5 0 0 thousand or less.
2

452
232

15,000

provision for covered Federal civilian employees and military personnel.

Interchange receipts between the social security and railroad retirement funds place the social

security funds in the same position they would have been if there were no separate railroad
retirement system.
3

Includes both Federal funds and trust funds.

4

Consists of:

Federal funds
Trust funds
Off-budget

1990 actual

1991 estimate

1992 estimate

14,545
23,493
*

16,824
23,857
—

17,892
24,914
—







XI.

TAX EXPENDITURES

Part Three-17




XI. TAX EXPENDITURES
The Congressional Budget Act of 1974 (Public Law
93-344) requires that a list of tax expenditures be included in the budget. This Act identifies tax expenditures as "revenue losses attributable to provisions of
the Federal tax laws which allow a special exclusion,
exemption, or deduction from gross income or which
provide a special credit, a preferential rate of tax, or
a deferral of liability."
Tax expenditures are one means by which the Federal Government pursues public policy objectives and,
in many cases, can be regarded as alternative means
of achieving the same objectives pursued by other Government policy instruments such as direct expenditures
and regulations. There are numerous examples of the
similarity in objective between tax expenditures and
direct outlays. For instance, the cost of medical care
is reduced both by direct Government expenditures for
the medicare and medicaid programs and by the exclusion from individual taxpayer income of the medical
insurance premiums that employers pay for their employees. State and local governments benefit both from
direct grants and from the ability to borrow funds at
tax-exempt rates. Individuals benefits both from social
security payments and from the exemption of most of
these payments from tax.
Tax expenditures ordinarily result from enacted legislation. They therefore are not submitted to Congress
each year and do not routinely receive a formal and
systematic annual review. In this sense, they share a
legislative status with entitlement programs that do
not require annual appropriations (such as social security). Tax expenditures, however, are generally reviewed whenever significant policy decisions are made
about the overall level of tax receipts.
The Omnibus Budget Reconciliation Act of 1990
(OBRA) has affected some of the tax expenditures in
this year's budget. While the top statutory rate on ordinary income is 31 percent, the rates on capital gains
are limited to 28 percent. The earned income tax credit
was expanded and included a new credit for child
health insurance. A new tax credit for access expenditures for the disabled was introduced. Other relevant
changes were revisions of the income tax rates and
minor modifications to and extensions of other tax preferences.
Alternative Tax Expenditure Estimates
A tax expenditure is defined as an exception to the
baseline provisions of the tax structure. The Act does
not, however, specify the baseline provisions of the tax
law. Deciding whether provisions are special or preferential exceptions therefore, is a matter of judgement.
One baseline is the "normal" tax measure, used by the
Joint Committee on Taxation. The other baseline is
the "reference" tax law, which has been used since




1983. As in prior years, this year's tax expenditure
estimates will be presented using both baselines.
Normal Tax Baseline.—The normal tax structure
is patterned on a comprehensive income tax. Such a
tax defines income as the sum of consumption, taxes,
and the change in net wealth in a given period of time.
The normal tax is not limited to a particular structure
of tax rates, or by a specific definition of the taxpaying
unit. It not only allows personal exemptions and a
standard deduction, but also allows deduction from
gross income of the expenses incurred in earning it.
The normal tax structure, however, does make several
major departures from a pure comprehensive income
tax. For example:
• Under a comprehensive income tax, income is taxable as it accrues; under the normal tax, income
is taxable when realized in exchange. Thus, with
a normal tax baseline, the deferral of tax on unrealized capital gains, as under present law, is not
regarded as a tax expenditure.
• Under a comprehensive income tax, all income is
subject to tax whether it is self-produced and
consumed or produced for exchange with others.
The normal tax baseline includes only income realized in exchange with others. Thus, the exclusions
from tax of the rental value of owner-occupied
housing and farmers' consumption of their own
produce, as under present law, are not regarded
as tax expenditures when the normal tax is the
baseline.
• Under a comprehensive income tax, there is no
separate corporation income tax; corporate equity
income is taxed only once—to shareholders whether or not distributed in the form of dividends.
But the normal tax baseline includes a separate
corporation income tax, levied at a flat rate equal
to the highest statutory corporate income tax rate.
Thus, with a normal tax baseline, rather than considering the corporate tax a "negative tax expenditure" or tax penalty, the lower rates on the first
$75,000 of corporate income give rise to a tax expenditure.
• Under a comprehensive income tax, the income
measure would adjust the cost basis of capital assets and debt for changes in the price level during
the time assets are held. Consequently, the failure
to take account of inflation in measuring depreciation, capital gains, and interest income would be
regarded as a negative tax expenditure, and failure to take account of inflation in measuring interest costs would be regarded as a positive tax expenditure. Under the normal tax baseline, however, these inflation adjustments are not made.
Part Three-19

Part Three-20

THE BUDGET FOR FISCAL YEAR 1992

Notwithstanding these exceptions, the normal tax
concept can be thought of as a practical compromise
with the ideal of a comprehensive income tax, one that
avoids certain complexities while preserving the general
idea.

Comparison of Reference Tax Rules and the Normal Tax Standard.—The differences between the reference tax rules and the normal tax baseline include:
1. Definition of the taxpaying unit. The taxpaying
units are the same in the normal and reference tax
structures, with one major exception.1 In the normal
Reference Law Baseline.—Beginning with the 1983 tax, controlled foreign corporations are not regarded
budget, the Administration has used the "reference law" as entities separate from their controlling U.S. sharebaseline to identify tax expenditure provisions.
holders. Therefore, the deferral of tax on income reReference law is the set of generally applicable, statu- ceived by controlled foreign corporations is regarded
tory income tax accounting rules, i.e., rules for measur- as a tax expenditure. In contrast, except for tax haven
ing income subject to tax. Like the normal tax baseline, activities, the reference tax rules follow the current tax
the reference law accepts realization accounting prin- system in treating controlled foreign corporations as
ciples, the existence of a separate corporation income separate taxable entities whose income is not subject
tax, and the absence of inflation adjustments in the to U.S. tax until distributed to U.S. taxpayers. Under
measurement of capital income as part of the baseline.
that definition of the tax unit, deferral of tax on conUnlike the normal tax baseline, however, the ref- trolled foreign corporation income is not a tax expendierence law baseline includes the statutory schedule of ture because U.S. taxpayers generally are not taxed
corporation income tax rates, the "capital gain'7"ordi- on accrued, but unrealized, income.
nary income" distinction, and several capital cost recov2. Tax rate schedules. Separate schedules apply to
ery allowances. Thus, under the reference law baseline the various taxpaying units. These schedules are inthere are:
cluded in the reference tax system. The normal tax
• No tax expenditures for corporation income tax system is similar, except that it specifies a single rate
rates below the maximum statutory rate.
(the current maximum rate) on corporate income. The
• No general capital gain tax expenditures; only the lower tax rates applied to the first $75,000 of corporate
statutory definition of otherwise "ordinary income" income are thus regarded as a tax expenditure.
events, such as timber cutting, coal and iron ore
Since 1987, an alternative minimum tax (AMT) has
royalties. Also, the sale of certain agricultural been in effect. This tax, levied at a flat rate on a tax
products occasion a tax expenditure entry when base derived by specific tax accounting rules, is payable
capital gains tax rates are preferentially lower.
whenever the AMT exceeds the regular income tax li• No "accelerated depreciation" tax expenditures; ability, as determined by regular applicable income tax
only specified exceptions to otherwise applicable accounting rules.
depreciation and mineral cost recovery schedules
3. General accounting rules for determining income
give rise to tax expenditures.
subject to the tax. Income subject to tax is defined
Under the reference tax law baseline, entries in the as gross income less the costs of earning that income.
tax expenditure budget closely conform to budget cat- The Federal income tax has always defined gross inegories. Reference law tax expenditures measure "taxes come to include: (1) consideration received, both within
otherwise due" the Government were it not for special the United States and abroad, in the exchange of goods
exceptions in the tax code. These special exceptions and services, including labor services or property; and
have the characteristic that they serve programmatic (2) the taxpayer's share of gross or net income earned
functions, just as direct outlays for national defense, and/or reported by another entity.2 Under the reference
health care, or farm subsidies do. These tax expendi- tax rules, therefore, gross income does not include gifts,
tures, therefore, are the equivalents of direct outlays defined as receipts of money or property that are not
from the standpoint of the budget. It is generally the consideration in an exchange, or most transfer paycase that while tax expenditures under the normal tax ments, which can be thought of as gifts from the Govbaseline are also considered tax expenditures under the ernment. Gross income does, however, include transfer
reference law baseline, the reverse is not true. Hence, payments associated with past employment, such as
not all departures from the normal tax base are finan- social security benefits. The normal tax baseline also
cially equivalent to direct outlays.
excludes from gross income gifts between individuals.
Adopting the reference law as the baseline for tax Under the normal tax baseline, however, all cash transexpenditure measurement does not imply the reference fer payments from Government to private individuals
law to be "ideal." Whether the generally applicable ref- are counted in gross income, and exemptions of such
erence law rules for measuring the tax base and the transfers from tax are identified as tax expenditures.
schedules of personal, corporate, and capital gains tax
The Internal Revenue Code identifies as taxpaying units individuals (single, married,
rates are in accord with economic income measurement
head of household), corporations (except those electing subchapter S treatment), cooperatives,
and allocative efficiency, and whether they fairly dis- real estate investment trusts, and other financial organizations that attribute their income
members in whose hands it is taxable, as well as trusts and estates (to the extent
tribute the burden of taxation are matters of tax policy to
income is not distributed to beneficiaries). Certain otherwise taxable corporations and assoto be dealt with as such in the process of improving ciations whose activities and ownership meet the requirements of section 501 are exempt
income tax, as are Government-owned enterprises encompassed by section 115.
the efficiency and fairness of the tax system, and are fromSuch
income included interest, dividends, rents, royalties, and the taxpayer's share of
the
profits
of partnerships, subchapter S corporations, and cooperatives.
not "expenditure policies."




ir

2

XI. TAX EXPENDITURES

The costs of earning income are deductible in determining taxable income under the reference and normal
tax rules. These costs include: (1) expenses incurred
in earning income from personal service (not including
expenditures on goods and services for personal use);
(2) costs of earning income incurred by a taxpayer's
trade or business, including costs of goods sold3 and
an allowance for physical capital used up;4 and (3) interest paid creditors who have advanced funds to help
finance the ownership and use of assets by the trade
or business.
In the cases 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 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.
With one exception, both the reference and normal
tax law standards have incorporated the general statutory provisions governing allowable deductions. The exception is the rule for determining tax depreciation allowances. Under the reference tax law standard, the
accelerated cost recovery system (ACRS) allowances for
property placed in service before January 1, 1987, serve
as the baseline. The system of depreciation allowances
provided by the Tax Reform Act of 1986 is the reference
tax law baseline for investments placed in service beginning with January 1, 1987. Thus, under the reference tax law standard, there are no tax expenditures
from accelerated depreciation.
Under the normal tax baseline, however, the depreciation allowance for personal property is determined
by using statutory accelerated methods5 over tax lives
equal to mid-values of the asset depreciation range.6
The baseline for real property is computed using 40year straight-line depreciation. Consequently, from
1981 through 1986, the ACRS depreciation provisions
generated tax expenditures under the normal tax baseline. The Tax Reform Act of 1986 provided depreciation
allowances approximately equal to those in the normal
tax baseline for machinery and equipment. Post-1986
investment, therefore, will no longer generate tax expenditures under either standard for investments of
this type.
The baseline income tax system also stipulates rules
for valuing the exchange of goods and services and
specifies when gross income is reportable and when
deductions may be taken. On these matters, both the
reference and normal tax law standards embody the
provisions of enacted law including: (1) valuation is determined at the time transactions occur (realization as
3 Cost of goods sold includes the compensation of employees and payments for goods
and services purchased from other firms, and royalties paid, to the extent the inputs used
are allocated to the goods sold.
"These costs include depreciation in the case of machinery, equipment, and structures,
and depletion in the case of mineral deposits.
5 Declining balance at double the straight-line rate or sum-of-years digits.
6 An elective depreciation system in effect from 1971 through 1980.




Part Three-21
opposed to accrual accounting); (2) the market value
of services from owner-occupied housing and other durable goods or self-produced income, such as do-it-yourself repairs and maintenance, is excluded; (3) historical
costs determine allowable deductions for capital cost
recovery and the gain on the sale of an asset (no inflation adjustments); (4) current expenses are deductible
from gross income in the period when the transaction
is completed, while capital expenditures are recovered
by depreciation or depletion deductions over the asset's
productive life; and (5) the accounting period used to
determine income subject to tax, computing tax due
and payable, and the dates when tax must be paid,
are those specified under current law.
Both the reference and normal tax law standards
accept, without classifying it as a tax expenditure, a
tax credit for foreign income taxes paid up to the
amount of U.S. income taxes that would otherwise be
due. This credit prevents the double taxation of income
earned abroad.
Tax Expenditures as Substitutes for Budget
Outlays
Under both the normal and reference tax baselines,
some tax expenditure provisions can be thought of as
substitutes for budget outlays. For example:
• Current law excludes some forms of employee
compensation, such as certain military housing
and food allowances or employer-paid fringe benefits, from employees' gross income although they
are clearly part of an employee's total compensation and are properly deductible from the
gross income of the trade or business of employers
who are taxable entities. Defense Department outlays for military personnel are lower because part
of military compensation takes the form of taxfree housing and food allowances. Excluding this
compensation from tax substitutes for the higher
direct outlays that would otherwise be required
to maintain an equivalent level of compensation.
Compensation in this form, if received from another employer, would be subject to tax.
• The interest payments on State and local tax-exempt government are no less income than interest,
dividends, rents, and royalties received from other
sources, but they are not included in the bondholder's gross income. The tax exclusion for interest paid by State and local governments enables
them to obtain funds at lower rates. This exclusion
is, therefore, equivalent to an interest subsidy or
capital grant to State and local governments on
the outlay side of the budget.
• The dividend and interest receipts of pension
funds are not included as they accrue in the gross
income of the taxable beneficiaries who ultimately
receive them; they are reported only when they
are paid out as retirement benefits after
compounding, in some cases, for many years, at
pre-tax interest rates.
The tax exclusion of employer-paid pension, health,
and other insurance premiums and the preferred treatment of pension trust income are equivalent to direct

Part Three-22
Federal Government subsidies that would partly pay
for private retirement, health, and insurance plans.
The tax laws also permit many deductions from gross
income in the derivation of taxable income that have
no direct relation to the cost of earning the reported
gross income, as the general rule would require. For
example:
• Individuals may deduct contributions to charitable, educational, scientific, or religious organizations. Matching grants to qualified organizations
based on contributors' support could replace the
charitable deductions.
• Some oil, gas, and mineral producers may deduct
a percentage depletion allowance that is not limited to recovery of the cost of acquiring the deposit. In addition, some investments in this type
of property may be deducted in the year incurred,
rather than capitalized and recovered as production ensues. These special rules permit investment
costs to be recovered more rapidly than the reference tax rules generally allow. They, in fact,
often permit more than the full investment to be
recovered tax-free. Direct subsidies paid to mineral producers could replace the preferential treatment of oil and mineral investments.
• Individuals are allowed to deduct mortgage interest from their pre-tax incomes, although they need
not report the (imputed) gross income they receive
from the housing that the mortgages finance. Expanded Federal mortgage interest subsidy programs could substitute for the deductibility of
mortgage interest.
Finally, there are special exceptions to the general
rules for determining net income tax due and payable.
After a taxpayer has determined his income, taking
into account all exclusions and deductions, and has applied the appropriate tax rate schedule, there are still
other factors that determine the amount to be paid.
For example, the taxpayer may take as credits against
tax otherwise due and payable certain amounts determined by expenditures during the tax year on:
• Child and dependent care.
• Newly constructed or substantially rehabilitated
low-income housing.
• Incremental research and experimentation.
• Rehabilitation of old and historic structures.
It is not difficult to imagine equivalent outlay programs that would subsidize these activities directly.
The major tax expenditures defined according to the
normal tax baseline that are not tax expenditures according to the reference tax rules are: deferral of income of controlled foreign corporations, expensing of
research and development expenditures, progressive
corporation income tax rates, the difference between
statutory depreciation rules (ACRS) for investments
made between 1981 and 1986, exclusion of public assistance benefits and of scholarship and fellowship income,
and the preferential treatment of capital gains.
Outlay Equivalents
Beginning with the 1983 budget, the Administration
introduced the concept of "outlay equivalents" as a sub-




THE BUDGET FOR FISCAL YEAR 1992

stitute for "revenue losses" as measures of the budget
impact of tax expenditure programs. This was done to
harmonize the tax expenditure budget with the implicit
purposes of the budget format as the Federal Government's sources and uses statement. The outlay equivalent measure is calculated to be the amount of outlay
that would be required to provide to the taxpayer the
same after-tax income that would be received when
using the revenue loss measure. This measure allows
a comparison of the cost of the tax expenditure with
that of a direct Federal Government expenditure.
In many cases, the outlay equivalent tax expenditure
estimate differs from the revenue loss estimate for the
same tax subsidy. This difference arises when the tax
subsidy functions as a Government payment for service
and, when this is the case, the outlay equivalent estimate is always larger than the revenue loss estimate.
Revenue loss estimates are lower in these situations,
because such payments for services are treated as a
reduction in a tax that increases the taxpayer's aftertax income. Under either a normal or reference income
tax law standard, such payments would instead enter
the taxpayer's pre-tax income as Government payments
for services.
For some tax expenditures, however, the revenue loss
is equivalent to a direct Government outlay. The accelerated cost recovery deductions, for example, result in
tax deferrals, the amount of which are the principal
of interest-free loans. They also entail consumption expenditures, the tax benefits of which function as price
reductions. Since neither the loan principal nor a price
reduction enters taxpayers' pre-tax income, the issue
of tax exemption does not arise.
Measuring Tax Expenditures
Presenting budget outlays along functional lines is
a way of showing how the Federal Government influences the allocation of resources. The functions may
be broadly categorized as: (1) the provision of public
goods and services; (2) the provision of subsidies; and
(3) the payment of transfers. The budget outlays for
public goods, such as national defense, are used to acquire the labor and capital services needed to produce
such goods. Subsidies, such as those for school lunches,
are used to reduce the effective price of the subsidized
item. Transfers, such as aid to families with dependent
children, are intended to provide a level of income to
recipients they would not otherwise achieve.
Functional budget outlay figures measure the resource cost to the Federal Government of accomplishing
the program objectives. When functional budget outlay
figures are used to evaluate the costs of specific programs, these costs should reflect the pre-tax price of
the resources. The market value of the goods and services included in GNP covers indirect taxes (sales and
property taxes) as well as before tax incomes of wage
earners and property owners.7 Consistency requires
that all budget outlay measures also be stated in pretax magnitudes. Outlays for the purchase of goods and
7 The income of property owners is usually received in the form of rent, interest and
profit.

XI. TAX EXPENDITURES

services are generally gross of taxes.8 Similarly, subsidy
outlays in the budget generally enter the gross incomes
of sellers of subsidized goods. In some instances, Government purchases (outlays) or subsidies are exempted
from tax by a special tax provision. When this occurs,
the outlay figure understates the resource cost of the
program and is, therefore, not comparable with other
outlay amounts. For example, as noted above, the outlays for certain military personnel allowances are not
taxed. If this form of compensation were treated as
income taxable to the employee, the Defense Department would have to make larger cash payments to its
military personnel to leave them as well off after tax
as they are now. The tax subsidy must be added to
the tax-exempt budget outlay to make this element of
national defense expenditures comparable with other
outlays.
The Treasury Department prepared all tax expenditure estimates based upon income tax law enacted as
of December 31, 1990. In estimating tax expenditures,
it is assumed that the existing tax structure is unchanged. The estimates of tax expenditures conform to
the functional budget classification for outlays.
In table XI-1 are shown, side-by-side, the outlay
equivalent and the revenue loss estimates of each special tax provision by fiscal year. The revenue loss estimates are displayed separately for corporations and individuals. The outlay equivalent estimates are comparable to the taxable outlay figures in the budget.
These entries represent amounts that could be added
to the other functional budget outlays while, at the
same time, being added to budget receipts to provide
a more consistent and comprehensive display of the
resource reallocations produced by Federal fiscal measures. The revenue loss estimates are not consistent with
direct budget outlays because they do not adjust for
the implicit tax liability on certain items, as was noted
above.
The tax expenditure estimates are similar to outlays
and should not be interpreted as estimates of the increase in Federal receipts or the reductions in budget
deficits that would accompany the repeal of the special
provisions. There are four reasons why such an interpretation is not possible.
First, the assumed deletion of a tax expenditure may
have incentive effects that alter the behavior of individuals, households and firms. These may be either "cross"
or "own" effects. Many tax expenditures are not independent of each other. If one subsidy program is repealed or severely curtailed, it is frequently the case
that the demand for, and cost of, other Federal subsidy
programs will be increased. For example, if the exclusion of employer-paid medical insurance from the gross
income of employees were repealed, other tax-exempt
forms of compensation, such as employer paid pensions,
would probably expand. Consequently, the net effect
on the budget of repealing the exclusion of employerpaid medical insurance would not equal the estimated
cost of that tax expenditure, but would be smaller after
8 The payments to vendors and Government employees are gross income to the sellers
out of which taxes will be paid as determined by the reference tax law in effect.




Part Three-23
subtracting some increase in tax expenditures for pensions or other fringes. If deductibility of charitable contributions or mortgage interest were severely limited,
some taxpayers would contribute less to charitable
donees or hold smaller mortgages, with a concomitantly
smaller effect on the budget than if no such limits
were in force.
Second, tax expenditures are all cleared through individual and corporation tax accounts and, for this reason, their values become interdependent. For example,
excluding interest received from State and local governments lowers a taxpayer's taxable income and, in a
tax system with progressive tax rates, this can reduce
the value of other tax deductions, such as charitable
contributions. If the interest exclusion alone were repealed, some taxpayers could be thrust into higher tax
brackets, automatically increasing the value of charitable contributions and their budget cost even if taxpayers did not make larger contributions. On the other
hand, if both the interest exclusion and the charitable
deduction were repealed simultaneously, the increase
in tax liability would be greater than the sum of the
two separate tax expenditures since each is estimated
assuming that the other remains in force.
Third, the annual value of tax expenditures for tax
deferrals, like the outlay figures for government lending
programs, is largely prepared on a strict cash receipts
and disbursement basis. For example, the annual budget cost of tax deferrals due to the exclusion from employees' gross income of employers' contributions to employee pension plans is the sum of two items: the employers' current year pension plan contributions and
the current year pension fund asset earnings. Both accrue to the current benefit of employees, but are not
currently included in their gross incomes. If the tax
expenditure composed of these two exclusions were repealed, the immediate budget impact would be to tax
only the employees on the employers' current-year contributions and the current-year pension fund asset
earnings. Only as the existing population of covered
employees retired and received their annuities, thereby
depleting the stock of asset reserves previously accumulated with untaxed dollars, would the remaining deficitreducing impact of repealing this tax expenditure be
fully registered in the budget.
Finally, repeal of some provisions could affect overall
levels of income and rates of economic growth. Consequently, large changes in tax expenditures could be
expected to alter projected growth rates for aggregate
national income and product and, thus, the tax base
over the forecast period. All receipts and expenditures
in the budget are based, however, on projections of
income and growth that assume all existing laws will
continue (except as amended by proposals made in the
budget).
Tax Expenditures By Function
The 1990-92 outlay equivalent and revenue loss estimates of tax expenditures are displayed by the budget's
functional categories in table XI-1. In the appendix
table, the major tax expenditures are ranked by the

Part Three-24
fiscal year 1992 total revenue loss estimates. Tax expenditures that are divided into functional categories
in table XI-1 are merged in the appendix table, e.g.,
instead of the three separate entrees for charitable contributions found in XI-1, the table contains one merged
entry.
Listing revenue loss estimates under the corporation
and individual 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 principally show the
specific tax accounts through which the cost of the program is cleared because the sources of data for estimating tax expenditures are largely corporation and individual income tax returns. Corporations, as such, neither pay tax nor receive Government payments. They
are the institutional conduit through which their employees, creditors and stockholders engage in exchanges
with customers and the Government. Thus, the exemption from Federal income tax of interest paid by State
and local governments provides a subsidy to those governments in the form of lower borrowing rates. Individual and corporate holders of such debt only benefit
from the tax exemption to the extent their marginal
tax rates exceed the percentage spread between taxable
and nontaxable interest rates.
With these caveats in mind, a review follows of the
tax expenditure estimates by functional category, as
shown in table XI-1, that are departures from both
the reference and normal tax law unless otherwise specifically identified. Whenever an item is identified as
a tax expenditure under the normal tax rules, but not
the reference tax rules, it is indicated by the designation, "Normal tax" in the table. In these cases,
a line also appears, designated as "Reference tax,"
showing that tax expenditures for this item would be
zero using the reference tax rules.

THE BUDGET FOR FISCAL YEAR 1992

corporations. These provisions conform to the General
Agreement on Tariffs and Trade.
Income of U.S.-controlled foreign corporations.—
The income of foreign corporations controlled by U.S.
shareholders is not subject to U.S. taxation because,
under the reference tax rules, corporations chartered
and operating in foreign countries are not subject to
U.S. income reporting and taxation. The income becomes taxable only when the controlling U.S. shareholders receive dividends or other distributions from their
foreign stockholding.
Under the normal tax accounting rules, the currently
attributable foreign source pre-tax income from such
a controlling interest is subject to U.S. taxation, whether or not distributed. Thus, when the normal tax rule
is taken as a baseline, the excess of controlled foreign
corporation income over the amount distributed to a
U.S. shareholder gives rise to a tax expenditure in the
form of a tax deferral, that is, an interest-free loan.
Source rule exceptions.—The worldwide income of
U.S. persons is taxable by the United States and a
credit for foreign taxes paid is allowed. The amount
of foreign taxes that can be credited is limited to the
pre-credit U.S. tax on the foreign source income. There
are two exceptions. The first is an exception for sales
of inventory property that reduces the U.S. tax of exporters. The second exception is for financial institutions and certain financing operations of nonfinancial
enterprises from the rules that require allocation of
interest expenses between domestic and foreign activities of a U.S. taxpayer.
GENERAL SCIENCE, SPACE, AND TECHNOLOGY

Expensing R&E expenditures.—Research and experimentation (R&E) expenditures are commonly referred to as investments because their benefits continue
NATIONAL DEFENSE
to accrue for several years, when they are successful.
Benefits and allowances to armed forces person- The characteristics of R&E, however, are such that it
nel.—The housing and meals provided military person- is difficult to identify completed, discrete R&E projects
nel, either in cash or in kind, are excluded from income to determine whether the completed project is successsubject to tax.
ful and, if it is successful, what its expected life will
be. For these reasons, the statutory provision that these
INTERNATIONAL AFFAIRS
expenditures may be currently deducted (expensed) is
Income earned abrocul.—A U.S. citizen or resident considered part of the reference law. Under the normal
alien who resides in a foreign country or who stays tax standard, the expensing of R&E expenditures is
in one or more foreign countries for a minimum of viewed, however, as the source of a tax expenditure.
11 out of the past 12 months may exclude $70,000 To measure the tax deferral under the pre-1983 methper year of foreign-earned income. Eligible taxpayers od, the "norm" assumed is that all R&E expenditures
also may exclude or deduct reasonable housing costs are successful and have an expected life of eight years.
in excess of one-sixth of the salary of a civil servant
R&E credit.—The tax credit is 20 percent of the
at grade GS-14, step 1. These provisions do not apply
qualified
expenditures in excess of each year's base
to Federal employees working abroad; however, the tax
expenditure estimate does reflect certain allowances amount. This threshold is the product of multiplying
a "fixed-base percentage", limited to a maximum of .16
that are excluded from their taxable income.
for existing companies, by the average amount of the
Income of Foreign Sales Corporations (FSC).— company's gross receipts for the four preceding years.
The Foreign Sales Corporation (FSC) provisions exempt The "fixed-base percentage" is the ratio of R&E exfrom tax a portion of U.S. exporters' foreign trading penses to gross receipts for the 1984 to 1988 period.
income to reflect the FSC's sales functions as foreign Start-up companies that did not both incur qualified




Part Three-25

XI. TAX EXPENDITURES

expenses and have gross receipts in at least three of
the base years are assigned a "fixed-base percentage"
of .03. A similar credit with its own separate threshold
is provided for taxpayers' basic research grants to universities. Beginning in 1989, the otherwise deductible
qualified R&E expenditures were reduced by the
amount of the credit. Both R&E credits have been extended to the end of 1991.
Allocation of R&E expenditures.—Regulations issued in 1977 were designed to achieve a reasonable
allocation of R&E expenses between corporations' domestic and foreign activities, but successive legislative
actions suspended this requirement. Currently, 64 percent of both U.S.- and foreign-based R&E expenses are
allocated to their respective income sources. The remaining R&E expenses must then be allocated on the
basis of gross sales or gross income. These rules are
effective through August 1, 1991.
ENERGY

Exploration and development costs.—In the case
of successful investments in domestic oil and gas wells,
intangible drilling costs, such as wages, the costs of
using machinery for grading and drilling, and the cost
of unsalvageable materials used in constructing wells,
may be expensed rather than capitalized or amortized
over the productive life of the property.
Integrated oil companies may currently deduct only
70 percent of such costs and amortize the remaining
30 percent over five years. The same rule applies to
the exploration and development costs of surface stripping and the construction of shafts and tunnels for
other fuel minerals.
Percentage depletion.—Independent fuel mineral
producers and royalty owners are generally allowed to
take percentage depletion deductions rather than cost
depletion on limited quantities of output. Under cost
depletion, outlays not recovered immediately through
expensing are deducted over the productive life of the
property. Unlike depreciation or cost depletion allowances, percentage depletion deductions are not limited
to the cost of the investment. Taxpayers, instead, deduct a percentage of gross income from mineral production at rates of 22 percent for uranium, 15 percent
for oil, gas and oil shale, and 10 percent for coal. The
deduction, however, is limited to 50 percent of net income from the property. OBRA increased the allowable
deduction for oil and gas from 50 percent to 100 percent
of net property income, and also reduced the excess
depletion amount subject to the alternative minimum
tax. Production from geothermal deposits is eligible for
percentage depletion at 65 percent of net income, but
with no limit on output and no limitation with respect
to qualified producers.
Capital gains treatment of royalties on coal.—
While the top statutory rate on ordinary income is 31
percent, the rates on capital gains are limited to 28
percent.




Tax-exempt bonds for energy facilities.—Tax-exempt bond financing for small scale hydroelectric generating facilities expired at the end of 1985. Tax-exempt
financing for steam generating or alcohol production
facilities was repealed by the Tax Reform Act of 1986.
The budget cost of this type of tax-exempt financing
will continue, however, until the bonds are retired.
Conservation and new technology credits.—A variety of tax incentives have been available to stimulate
energy conservation and encourage conversion to alternative energy sources. All but two of these programs
have expired. (The two surviving investment credits
will expire after December 31, 1991. They provide a
10 percent credit for investment in solar and geothermal energy facilities.) Notwithstanding expiration,
some of these incentive programs continue to have a
budget effect. They are carried forward because qualified projects not constructed before the cut-off date, but
subject to binding construction contracts, may be placed
in service, or credits that were earned, but not taken
due to insufficient tax liabilities, may be taken after
the expiration dates.
Alternative fuel production credit.—A nontaxable
$3 per barrel of oil-equivalent production credit is provided for several forms of alternative fuels for facilities
placed in service before December 31, 1992. OBRA extended the credit to additional alternative fuels. As a
general rule, it is available as long as the price of
011 stays below $29.50 (in 1979 dollars).
Alcohol fuel credit.—Gasohol9 is exempt from 5.4
of the 14 cents per gallon Federal excise tax on gasoline. There is a corresponding income tax credit for
alcohol used as a fuel in applications where the excise
tax is not assessed. This credit, equal to a subsidy
of 54 cents per gallon for alcohol used as a motor fuel,
is intended to encourage substitution of alcohol for petroleum-based gasoline.
Gas and oil exception to passive loss limitation.—Although owners of working interests in oil and
gas properties are subject to the alternative minimum
tax, they are exempted from the "passive income" limitations. This means that the working interest-holder,
who manages on behalf of himself and all other owners
the development of wells and incurs all the costs of
their operation, may aggregate negative taxable income
from such interests with his income from all other
sources. Thus, he will be relieved of the minimum tax
rules limit on tax deferrals.
NATURAL RESOURCES AND ENVIRONMENT

Exploration and development costs.—As is true
for fuel minerals, certain capital outlays associated with
exploration and development of nonfuel minerals may
be expensed rather than depreciated over the life of
the asset.
'A motor fuel composed of at least 10 percent alcohol.

Part Three-26

THE BUDGET FOR FISCAL YEAR 1992

Percentage depletion.—Most nonfuel mineral extractors also make use of percentage depletion rather
than cost depletion, with percentage depletion rates
ranging from 22 percent for sulphur down to 5 percent
for sand and gravel.

constructing farm facilities for their own use, or producing any goods for sale with a production period of two
years or more may elect not to capitalize costs. If they
do, they must apply straight-line depreciation to all
depreciable property they use in farming.

Capital gains treatment of iron ore and of certain timber income.—While the top statutory rate on
ordinary income is 31 percent, the rates on capital
gains are limited to 28 percent.

Loans "forgiven" solvent farmers.—In 1986, farmers were granted special tax treatment by being forgiven the tax liability on certain forgiven debt.10 Normally, the amount of loan forgiveness is accounted for
as a gain (income) of the debtor and he must either
report the gain, or reduce his recoverable basis in the
property to which the loan relates. If the debtor elects
to reduce basis and the amount of forgiveness exceeds
his basis in the property, the excess forgiveness is taxable. However, in the case of insolvent (bankrupt) debtors, the amount of loan forgiveness never results in
an income tax liability.11 Farmers with forgiven debt
will be considered insolvent for tax purposes, and thus
qualify for income tax forgiveness.

Tax-exempt bonds for pollution control and
waste disposal.—Interest on State and local government debt issued to finance private pollution control
and waste disposal facilities was excludable from income subject to tax. This authorization was repealed
for pollution control equipment and a cap placed on
the amount of debt that could be issued for waste disposal facilities by the Tax Reform Act of 1986.
Historic preservation.—Expenditures to preserve
and restore historic structures qualify for a 20 percent
investment credit, but the depreciable basis must be
reduced by the full amount of the credit taken.
Expensing multiperiod timber growing costs.—
Generally, costs must be capitalized when goods are
produced for inventory used in one's own trade or business, or under contract to another party. Timber production, however, was specifically exempted from these
multiperiod cost capitalization rules, creating a special
benefit derived from this deferral of taxable income.
Credit and seven-year amortization for reforestation.—A special 10 percent investment tax credit is
allowed for up to $10,000 invested annually in clearing
land and planting trees for the ultimate production of
timber. The same amount of forestation investment as
is eligible for the investment credit also may be amortized over a seven-year period. Without this preference,
the amount would have to be capitalized and could
be recovered (deducted) only when the trees were sold
or harvested 20 or more years later. Moreover, the
amount of forestation investment that is amortizable
need not be reduced by any of the investment credit
that is allowed.
AGRICULTURE

Expensing certain capital outlays.—Farmers, except for certain agricultural corporations and partnerships, are allowed to deduct certain expenditures for
feed and fertilizer, as well as for soil and water conservation measures. Expensing is allowed, even though
these expenditures are for inventories held at the end
of the year, or for capital improvements that would
otherwise be capitalized.
Expensing multiperiod livestock and crop production costs.—Farmers are exempted from application of the uniform cost capitalization rules to the production of livestock and crops with a production period
of less than two years. Farmers establishing orchards,




Capital gains treatment of certain income.—
While the top statutory rate on ordinary income is 31
percent, the rates on capital gains are limited to 28
percent.
Drought-related relief payments.—Government
payments to farmers are part of their taxable incomes
in the year received. In 1988, a special exception was
provided, allowing the reporting of drought relief payments received in one year to be deferred until the
following year.
COMMERCE AND HOUSING CREDIT

This category includes a number of tax expenditure
provisions that also affect economic activity in other
functional categories. In general, provisions related to
investment, such as accelerated depreciation, could as
well have been classified under the natural resources
and environment, energy, agriculture, or transportation
categories.
Credit union income.—The earnings of credit
unions not distributed to members as interest or dividends are exempt from income tax.
Bad debt reserves.—Only commercial banks with
less than $500 million in assets, mutual savings banks,
and savings and loan associations are permitted to deduct additions to bad debt reserves in excess of actually
experienced losses. The deduction for additions to loss
reserves allowed qualifying mutual savings banks and
savings and loan associations is 8 percent of otherwise
taxable income. To qualify, the thrift institutions must
maintain a specified fraction of their assets in the form
of mortgages, primarily residential.
Special merger rules for financial institutions.—
When a corporation becomes insolvent, it may reorga10 Settlement

of a debt for an amount less than the principal of a loan.
11 The insolvent taxpayer's carryover losses and unused credits are extinguished first,
and then his basis in assets reduced to no less than amounts still owed creditors. Finally,
the remainder of taxable income is itself forgiven.

XI. TAX EXPENDITURES

nize under special bankruptcy rules. One of the results
is that the previous tax accounts of the bankrupt corporation are canceled. This includes previous claims to
tax refunds with respect to excesses of allowable tax
deductions over gross income, called net operating
losses (NOLs).
A special exception to this rule was provided to aid
in the reorganization of troubled (insolvent) savings and
loan (or thrift) institutions whose deposits were insured
by the Federal Savings and Loan Insurance Corporation
(FSLIC). An acquisition of an insolvent bank, if certified
by FSLIC, could be treated as a tax-free reorganization.
The normal requirement of continuity of ownership in
the merged organization was waived to make possible
the future claim of tax refunds with respect to the
acquired insolvent bank's NOLs. The value of preserving these claims to tax refunds reduced the cost FSLIC
would otherwise have had to bear as insurer of the
insolvent bank's deposits. This provision was repealed
in August 1989 with the enactment of the savings and
loan rescue and reform legislation.

Part Three-27
Small issue industrial development bonds.—The
interest on small issue industrial development bonds
(IDBs) issued by State and local governments to finance
private business property is excluded from income subject to tax. Depreciable property financed with small
issue IDBs must be depreciated, however, using the
straight-line method. The tax exemption of small issue
bonds expired in 1986, except for small issue IDBs exclusively issued to finance manufacturing facilities for
which the tax exemption is scheduled to expire in December 31, 1991. The budget cost of these bonds continues as long as they are outstanding.

Mortgage housing bonds.—Interest on all mortgage
revenue bonds issued before January 1, 1992 by State
and local governments is exempt from taxation. Proceeds are used to finance homes purchased by firsttime buyers—with low to moderate incomes—of dwellings with prices under 90 percent of the average area
purchase price. The annual volume of mortgage revenue
bonds is restricted to State-by-State ceilings under a
unified volume cap which also covers student loan
Interest on life insurance savings.—Savings in the bonds and IDBs.
States have been authorized to issue mortgage credit
form of policyholder reserves are accumulated from premium payments and interest is earned on the reserves. certificates (MCCs) in lieu of qualified mortgage reveSuch interest income is not taxed as it accrues nor nue bonds because the bonds are relatively inefficient
when received by beneficiaries upon the death of the subsidies to first-time home buyers. MCCs entitle home
buyers to income tax credits for a specified percentage
insured.
of interest on qualified mortgage loans. In this way,
Small property and casualty insurance compa- the entire amount of the subsidy flows directly to the
nies.— Insurance companies that have annual net pre- home buyer without being partly diverted to financial
mium incomes of less than $350,000 are exempted from middlemen or bondholders. A State may not issue an
tax; those with $350,000 to $2,100,000 of net premium aggregate annual amount of MCCs greater than 25 perincomes may elect to pay tax only on the income earned cent of its annual ceiling for qualified mortgage bonds.
Because of the relationship between MCCs and qualiby their investment portfolio.
fied mortgage bonds, their estimates are presented as
Insurance companies owned by exempt organiza- one line item in the tables.
tions.—Generally, the income generated by life and
property and casualty insurance companies is subject
Rental housing bonds.—State and local government
to tax, albeit by special rules. Insurance operations con- issues of IDBs are restricted to multifamily rental housducted by such exempt organizations as fraternal soci- ing projects in which 20 percent (15 percent in targeted
eties and voluntary employee benefit associations, how- areas) of the units are reserved for families whose income does not exceed 50 percent of the area's median
ever, are exempted from tax.
income; or 40 percent for families with incomes of no
Mutual funds (RIC) expenses.—Individuals may more than 60 percent of the area median income. Other
deduct miscellaneous expenses only to the extent that tax-exempt bonds for multifamily rental projects are
they exceed 2 percent of their adjusted gross income. generally issued with the requirement that all tenants
Many of the costs incurred by individuals in managing must be low or moderate income families.
their personal securities portfolios are among the miscellaneous deductions allowed taxpayers who itemize
Limits on private activity tax-exempt bonds.—
deductions. Mutual funds perform these portfolio man- There are limits imposed on the amount of tax-exempt
agement functions for their shareholders and pay out State and local government bonds that can be issued
their portfolio incomes net of these expenses. The share- to fund private activity. The volume cap for singleholders are permitted to report their fund income net family mortgage revenue bonds and multifamily rental
of management expense. They are thereby able to de- housing bonds is combined with the cap for student
duct fully portfolio management expenses without re- loans and IDBs. The cap was set at $50 per capita
gard to the miscellaneous deduction limitation.
or a minimum of $150 million for each State.
Interest on consumer debt.—Deductions allowed inInterest and taxes on owner-occupied homes.—
dividuals for interest paid on consumer credit are being Owner-occupants of homes may deduct mortgage interphased out. Only 10 percent is deductible in 1990, and est and property taxes on their primary and secondary
none in 1991 and thereafter.
residences as itemized nonbusiness deductions. The




Part Three-28
mortgage interest deduction is limited to interest on
debt no greater than the owner's basis in the residence
and, for debt incurred after October 13, 1987, it is
limited to no more than $1 million. Interest on up to
$100,000 of other debt secured by a lien on a principal
or second residence is also deductible, irrespective of
the purpose of borrowing, provided the debt does not
exceed the fair market value of the residence. Mortgage
interest deductions on personal residences are tax expenditures because the taxpayers are not required to
report the value of owner-occupied housing services as
gross income.
Real property installment sales.—Dealers in real
and personal property, i.e., sellers that regularly hold
property for sale or resale, cannot defer taxable income
from installment sales until the receipt of the loan repayment. Nondealers, defined as sellers of real property
used in their business, are required to pay interest
to the Federal Government 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 $5,000,000 is,
therefore, a tax expenditure.

THE BUDGET FOR FISCAL YEAR 1992

home is not purchased and occupied within two years
after the sale. The adjusted sales price is the amount
realized (gross proceeds less selling expenses) minus
qualified fixing up expenses. If a new house is constructed, it must be occupied within two years after
the sale of the previous residence. The deferral of tax
with respect to these gains on owner-occupied dwellings
is a tax expenditure.
Capital gains on sales by owners aged 55 or
older.—A taxpayer who is 55 years of age or older
at the time of the sale of his residence may elect to
exclude from tax up to $125,000 of the gain from its
sale. This is a once-in-a-lifetime election. In effect, this
provision converts some prior deferrals of tax into forgiveness of tax.
Step-up in basis of capital gains at death.—Capital gains on assets held at the owner's death are not
subject to capital gains taxes. The cost basis of the
appreciated assets is adjusted upward to the market
value at the owner's date of death. The step-up in the
heir's cost basis means that, in effect, the capital gain
is forgiven.

Capital gains (other than agriculture, timber,
iron ore and coal).—While the top statutory rate on
ordinary income is 31 percent, the rates on capital
gains are limited to 28 percent.

Carryover basis of capital gains on gifts.—When
a gift is made, the transferred property carries to the
donee the donor's basis—the cost that was incurred
when the property was first acquired. The carryover
of the donor's basis allows a continued deferral of unrealized capital gains. This creates a tax preference because it is an exception to the reference tax law.

Deferral of gains from sale of broadcasting facility to minority owned business.—The voluntary
sale of appreciated assets generally requires the seller
to pay tax on the gain that has accrued over the period
of ownership. However, in the case of an involuntary
sale, as when an owner's property must be sold in a
condemnation preceding, or to implement a change in
a government's regulatory policy, the owner is permitted to defer payment of tax, provided the proceeds
are reinvested in similar property within a specified
period. In 1979, the Federal Communications Commission instituted a policy of encouraging minority group
ownership of broadcast licenses it issues or has issued.
Since that time, the tax laws have been interpreted
to permit voluntary sellers of licensed broadcasting facilities to defer payment of capital gains tax when the
buyer has been certified as a "minority business," in
effect treating the sale as "involuntary."

Investment credit on machinery and equipment.—Although the 10 percent investment tax credit
for investment in machinery and equipment was repealed as of the end of 1986, it continues to exert a
budget impact for two reasons. First, such credits as
had been earned by pre-repeal investments, but which
could not be taken because the taxpayer had insufficient tax liability, can be carried forward for 15 years.
Second, qualified investments that were subject to a
binding contract prior to the repeal date may earn investment credits when they are subsequently delivered
and/or placed in service. In both instances, the amount
of the credit that may be taken after 1986 is 65 percent
of the amount of the pre-repeal credit and, moreover,
the credit is fully taxable. The taxpayer must now reduce his recoverable basis in the qualified assets by
the full amount of the credit, rather than half, as before
repeal.

Ordinary income treatment of losses from sale
of small business corporate stock shares.—Up to
$100,000 in losses from the sale of such stock may
be treated as ordinary losses, and therefore not be subject to the $3,000 annual capital loss write-off limit
if the corporation's capitalization is less than $1 million.

Accelerated depreciation of real property, machinery and equipment.—As previously noted,12 the
tax depreciation allowance provisions are part of the
reference law standard, and thus not a source of tax
expenditure entries under the reference method. Under
the pre-1983 normal tax standard, however, a 40-year
tax life for depreciable real property is the norm, so
the statutory depreciation periods in effect since 1987

Capital gains on home sales.—These gains are recognized and taxed only to the extent that the adjusted
sales price exceeds the cost of a new home or the new




12 See the discussion of general accounting rules of the section on the reference tax rules
and the comparison to the normal tax standard.

Part Three-29

XI. TAX EXPENDITURES

for residential and nonresidential properties of 27.5 and
31.5 years, respectively, give rise to tax expenditures.
Moreover, the tax expenditure estimates based on the
normal method include not only the continuing budget
effects of more accelerated pre-1987 tax allowances for
real property, but also those for machinery and equipment.
Safe harbor leasing.—When highly accelerated tax
depreciation allowances and enhanced investment tax
credits were enacted in 1981, a safe harbor leasing
provision was also introduced. Under this provision, a
corporation, otherwise unable to utilize the accelerated
depreciation allowances and investment credit, might
sell to, and then lease from, another corporation assets
acquired after December 31, 1981. The terms of such
leaseback agreements, absent the safe harbor leasing
provision, would not qualify the lessor corporation as
the owner of the assets and allow it to utilize the investment incentives for tax purposes. The selling corporation could gain at least part of the financial advantage provided by the investment tax incentives by successfully negotiating leaseback agreements below market costs. Although the provision was repealed in 1982,
its budget effects persist for the duration of the safe
harbor leases entered into in 1981.
Business start-up costs.—When an individual or
corporation acquires or otherwise enters into a new
business, certain start-up expenses, such as the costs
of investigating opportunities and legal services, are
normally incurred. The taxpayer may elect to amortize
these outlays over 60 months although they are similar
to other payments he makes for nondepreciable intangible assets that are not recoverable until the business
is sold.
Graduated corporation income tax rate schedule.—The schedule is graduated, with rates of 15 percent on the first $50,000 of taxable income, 25 percent
on the next $25,000, and a rate of 34 percent on income
over $75,000. As compared with a flat 34 percent tax
rate, the lower rates provide a $11,750 reduction in
tax liability for corporations with taxable incomes of
$75,000. This benefit is recaptured in the cases of corporations with taxable incomes exceeding $100,000.
This is accomplished by a 5 percent additional tax on
corporate incomes in excess of $100,000, but less than
$335,000. At this point the $11,750 is fully recaptured.
Since this rate schedule is part of the reference tax
law, it does not give rise to a tax expenditure under
the reference method. A flat corporation income tax
rate is taken as the norm under the normal method,
however, and therefore the lower rates do yield a tax
expenditure under this concept.
Passive loss real estate exemption.—The Tax Reform Act of 1986 disallowed the offset of passive losses
against income from other sources. Losses up to $25,000




attributable to certain rental real estate activity, however, were exempted from this rule.13
Treatment of Alaskan Native Corporations
losses.—Tax law restricts the ability of profitable corporations to reduce their tax liabilities by merging or
buying corporations with accumulated net operating
losses (NOLs) and as yet unrefunded claims to investment credits. Alaska Native Corporations have a limited exemption14 from these restrictions that includes
NOLs and credits claimable prior to April 26, 1988.
Imputed interest rules.—Under reference tax law
rules commonly referred to as original issue discount
(OID), both the holder and seller of a financial contract
are generally required to report interest earned in the
period it accrues, not when the contract payments are
made. Moreover, the amount of interest accruable is
determined by the actual price paid for the contract,
not by the stated or nominal principal and interest
stipulated in the contract.15
Exceptions to the general rules for accounting for
interest expense or income include the following: (a)
permission for the mortgagor of his personal residence
to treat the discount from the nominal principal of his
mortgage loan, commonly called "points," as prepaid
interest which is deductible in the year paid, not the
year accrued; and (b) sellers of farms and small businesses worth less than $1 million, in exchange for the
purchaser's debt obligation, are exempted from the OID
rules. This is $750,000 more than the $250,000 exemption that the reference tax law generally allows for
such transactions.
TRANSPORTATION

Shipping companies that are U.S. flag carriers.—Certain companies that operate U.S. flag vessels receive a deferral of income taxes on that portion
of their income used for shipping purposes, primarily
construction, modernization and major repairs to ships,
and repayment of loans to finance these qualified investments. Once indefinite, the deferral has been limited to 25 years since January 1, 1987.
Tax-exempt bonds for mass commuting vehicles.—Until expiration on December 31, 1984, State
and local governments were allowed to issue tax-exempt
obligations to finance the purchase of mass transit commuting vehicles for lease to government transit agencies. There will be continued budget effects as long
as such bonds are outstanding.
13 A more detailed discussion is provided under the general accounting rules of the section
on the reference tax rules and the comparison to the normal tax standard.
14 Fifteen years after the NOL or credit claim was first experienced.
15 Thus, when a borrower on December 31, 1988, issues a promise to pay $1,000 plus
interest at 10 percent on December 30, 1989, for a total repayment of $1,100, and accepts
$900 from a lender in exchange for the contract, the rules require that both parties: (a)
recognize that $900 is the amount lent, so that the effective loan interest rate is not
the nominal 10 percent rate but is 22.2 percent; and (b) both report $200 as interest
paid or received in 1989, as the case may be.

Part Three-30
COMMUNITY AND REGIONAL DEVELOPMENT

Five-year amortization of housing rehabilitation.—Until it expired on December 31, 1986, taxpayers could elect under certain conditions to amortize
rehabilitation expenditures for low and moderate income rental housing over a five-year period in lieu of
ACRS depreciation. There will be a continued budget
effect from qualified expenditures for which the fiveyear amortization period had been selected.
Low-income housing investment.—Through 1989,
a tax credit for investment in low income housing16
was structured to have a present value of 70 percent
of construction or rehabilitation costs incurred and was
allowed over 10 years. For Federally subsidized projects
and those involving unrehabilitated existing low income
housing, the credit was structured to have a present
value of 30 percent. Beginning on January 1, 1990 and
continuing through December 31, 1991, the credit is
extended at a present value of 70 percent, including
projects financed with other Federal subsidies, but only
if substantial rehabilitation is done. Notwithstanding
the capital grant character of this subsidy, the investor's recoverable basis is not reduced by the substantial
credit allowed.
Rehabilitation of structures.—A 10 percent investment tax credit is available for the rehabilitation of
buildings that are used for business or productive activities and that were erected before 1936 for other
than residential purposes. A full reduction by the
amount of the credit is required in the taxpayer's recoverable basis.
Tax-exempt bonds for airports and similar facilities.—Until repealed, the interest on IDBs issued
by State and local governments to finance airports,
docks, wharves, and sports and convention facilities was
exempt from tax. Government-owned airports, docks
and wharves, as well as high-speed rail facilities that
need not be government-owned, may continue to be financed with tax-exempt bond issues. These bonds are
not covered by a volume cap. There will be continued
budget effects as long as bonds that had been issued
for private purposes are outstanding.
Exemption of certain mutuals9 and cooperatives9
income.—The incomes of mutual and cooperative telephone and electric companies are exempted from tax
if at least 85 percent of their revenues are derived
from patron service charges.
EDUCATION, TRAINING, EMPLOYMENT, AND SOCIAL
SERVICES

Scholarship and fellowship income.—Scholarships and fellowships are not excluded from taxable
income to the extent they exceed tuition and courserelated expenses of the grantee. From a strictly eco16 New, substantially rehabilitated, and certain unrehabilitated, existing low income housing can qualify for the credit.




THE BUDGET FOR FISCAL YEAR 1992

nomic point of view, scholarships and fellowships are
either gifts not conditioned on the performance of services, or they are rebates of educational costs. Thus,
under the reference budget method, the exclusion is
not a tax expenditure because the reference tax law
does not include either gifts or price reductions in a
taxpayer's gross income. However, under the normal
budget method, the exclusion is considered a tax expenditure. Under the normal tax standard, gift-like
transfers of government funds—and many scholarships
are derived directly or indirectly from government funding—are included in gross income.
Tax-exempt bonds for educational purposes.—Interest on State and local government debt issued to
finance student loans or the construction of facilities
used by private nonprofit educational institutions is excluded from income subject to tax. The aggregate volume of such private activity bonds that each State may
issue during any calendar year is limited.
U.S. savings bonds for education.—Interest on
U.S. savings bonds, issued after December 31, 1989,
may be excluded from tax if the bonds, plus accrued
interest, are transferred to an educational institution
as payment for educational expenses. The exclusion
from tax is phased out for joint returns with adjusted
gross incomes of $60,000 to $90,000 and $40,000 to
$50,000 for single and head of household returns.
Dependent students age 19 or older.—Taxpayers
can claim personal exemptions for dependent children
age 19 or over who receive parental support payments
of $1,000 or more per year, are full-time students, and
do not claim a personal exemption on their own tax
returns. This preferential arrangement usually generates tax savings because the students' marginal tax
rates are more often than not lower than their parents'
marginal tax rates.
Charitable contributions.—Contributions to charitable, religious, and certain other nonprofit organizations are allowed as an itemized deduction for individuals, generally up to 50 percent of adjusted gross income. Taxpayers whose contributions to charitable or
educational organizations take the form of capital assets can claim their current value as a. deduction without the taxation of any appreciation in value. Corporations could also deduct charitable contributions up
to 10 percent of their pre-tax income. OBRA excluded
from the alternative minimum tax base of individuals
the untaxed appreciation of contributed personal property. Tax expenditures resulting from the deductibility
of contributions are shown separately for educational
and other institutions. Contributions to health institutions are reported under the health function.
Employer provided benefits.—Many employers provide employee benefits that are not counted in employee
income. The employers' costs for these benefits are deductible business expenses. The exclusion from an employee's income of the value of child care, meals and

Part Three-31

XI. TAX EXPENDITURES

lodging provided by an employer for his own convenience is a tax expenditure, as are the exclusion of
housing allowances and the rental value of parsonages
from the taxable income of ministers.
Until December 31, 1991, an employer may pay for
his employees' tuition, fees, books, and supplies; the
amounts received under the program are excluded from
an employee's gross income. Employer contributions to
prepaid legal services plans and the value of legal services received under such plans are also excluded from
employee income through December 31, 1991.

and recovered by subsequent depreciation allowances,
as is generally required.
Foster care payments.—Foster parents provide a
home and care for children who are wards of the State,
under contract with the State. Compensation received
for this service is explicitly excluded from the gross
incomes of foster parents, making the expenses they
incur nondeductible. This activity, is, in effect, tax-exempt.
HEALTH

Employer Stock Ownership Plan (ESOP) credEmployer paid medical insurance and exit.—Before the provision expired in 1986, a corporation penses.—Employee compensation, in the form of paycould claim a limited tax credit if an equivalent amount ments by employers for health insurance premiums and
of its common stock was set aside in an ESOP plan. other .medical expenses, is deducted as a business exThe effective subsidy rate for this form of employee pense by employers, but it is not included in employee
compensation exceeds 100 percent. The employer is gross income.
fully reimbursed for the stock he transfers, and the
benefited employees are not required to include this
Child health insurance.—OBRA, in expanding the
compensation in their current year gross income. This earned income tax credit, provided for a credit equal
provision will be carried as a tax expenditure until to 6 percent for certain health insurance expenses for
the as yet unrefunded claims to the tax credits have certain policies that cover children. The maximum credbeen satisfied.
it will be $428 in 1991 and is phased out at a rate
of 4.285 percent through $21,248 of adjusted gross inChild and dependent care expenses.—A tax credit come.
may be claimed by married couples for child and dependent care expenses incurred when one spouse works
Untaxed medicare benefits.—The employer's payfull time and the other works at least part time or ment of 1.45 percent of employees' wages (up to
goes to school. The credit may also be claimed by di- $125,000 in 1991) into the Hospitalization Trust Fund,
vorced or separated parents who have custody of chil- which finances medicare benefits, is not included in
dren, and by single parents. Expenditures up to a maxi- employees' reportable compensation.
mum $2,400 for one dependent and $4,800 for two or
more dependents are eligible for the credit. The credit
Medical care expenses.—Personal expenditures for
is equal to 30 percent of qualified expenditures for tax- medical care (including the costs of prescription drugs
payers with incomes of $10,000 or less. The credit is and insulin) exceeding 7.5 percent of the taxpayer's adreduced to a minimum of 20 percent by one percentage justed gross income are deductible.
point for each $2,000 of income between $10,000 and
Tax-exempt bonds for hospital construction.—In$28,000.
terest earned on State and local government debt isDisabled access expenditures.—OBRA provided for sued to finance hospital construction is excluded from
a credit of 50 percent of eligible disabled access expend- income subject to tax.
itures expenditures in excess of $250. The credit is
Charitable contributions to health institulimited to $5,000.
tions.—Contributions to nonprofit health institutions
Targeted jobs credit.—Employers may claim a tax are allowed as a deduction for individuals and corcredit for qualified wages paid to individuals who begin porations. Tax expenditures resulting from the deductwork before January 1, 1992, and who are certified ibility of contributions to other charitable institutions
as members of various targeted groups. The amount are listed under the education, training, employment,
of the credit that may be claimed is 40 percent of the and social services function.
first $3,000 paid during the first year of employment.
Orphan drugs.—To encourage the development of
The 40 percent credit also applies to the summer employment wages paid 16 and 17 year old youths who drugs for the treatment of rare diseases or physical
are members of low income families. Employers must conditions, a tax credit is granted equal to 50 percent
reduce their deduction for wages paid by the amount of the costs for clinical testing that must be completed
before manufacture and distribution are approved by
of the credit claimed.
the Food and Drug Administration. Because the drug
Costs of removing architectural barriers to the firm is not required to reduce its deduction for testing
handicapped.—The investment cost of making any expenses (an R&D expenditure) by the amount of this
business accessible to persons suffering physical or credit, the private cost of clinically testing orphan drugs
mental disabilities may be deducted, rather than cap- is reduced to little more than 24 cents per $1 expended.
italized as part of the taxpayer's basis in such property This tax expenditure expires after 1991.




Part Three-32

THE BUDGET FOR FISCAL YEAR 1992

Blue Cross and Blue Shield.—Although these organizations are not qualified as exempt, they are provided
exceptions from otherwise applicable insurance company income tax accounting rules that effectively eliminate their tax liabilities.
INCOME SECURITY

Railroad retirement benefits.—These benefits are
not generally subject to the income tax unless the recipient's gross income reaches a certain threshold discussed more fully under the social security function.
Workmen's compensation benefits.—Workmen's
compensation provides payments to disabled workers.
These benefits, although income to the recipients, are
a tax preference because they are not subject to the
income tax.
Public assistance benefits.—The exclusion from
taxable income of public assistance benefits received
by individuals is listed as a tax expenditure under the
normal budget method because, under the normal tax
rules, cash transfers from government are included in
gross income. In contrast, gifts not conditioned on the
performance of services, including transfers from government, are not taxable under the reference tax baseline. Therefore, under the reference budget method, the
tax exclusion for public assistance benefits is not shown
as a tax expenditure.
Special benefits for disabled coal miners.—Disability payments to former coal miners out of the Black
Lung Trust Fund, although income to the recipient,
are not subject to the income tax.
Military disability pensions.—Most of the military
pension income received by current disabled retired veterans is excluded from their income subject to tax.
Pension contributions and earnings.—Certain
employer contributions to pension plans, along with
amounts set aside by the self-employed and individual
contributions to individual retirement accounts (IRAs),
are excluded from adjusted gross income in the year
of contribution. Self-employed persons can make deductible contributions to their own retirement (defined contribution) plans equal to 25 percent of their income,
up to a maximum of $30,000 per year.
Employees may deduct annual contributions to an
IRA of $2,000 (or 100 percent of compensation, if less),
or $2,250 on a joint return with only one spouse earning income, if: (a) neither the individual or spouse is
an active participant in an employer-provided retirement plan; or (b) their adjusted gross income falls below
$40,000 ($25,000 for a single taxpayer). The allowable
IRA deduction is phased out between $40,000 and
$50,000 for a joint return and $25,000 and $35,000
for a single return. Beyond these income limits, nondeductible contributions to IRAs are available to taxpayers who are active participants in employer-provided
retirement plans.




Limited amounts ($8,522 in 1991) can be excluded
from an employee's adjusted gross income under a
qualified cash or deferred arrangement with the employer (401(k) plan). An employee's own contribution
of no more than $9,500 or the 401(k) limitation (whichever is greater) may be excluded annually from an employee's adjusted gross income when placed in a taxsheltered annuity (403(b) plan). The investment income
earned by pension funds and other qualifying retirement plans is not taxable when earned, and this exemption is, therefore, also a tax expenditure.
Income earned by voluntary employee beneficiary associations.—Generally, the income generated by businesses is subject to income tax. However,
the income from business operations conducted by exempt organizations, such as fraternal societies and voluntary employee benefit associations, is exempt from
tax.
Employer provided benefits.—Many employers
cover part or all the cost of premiums or payments
for: (a) employees' life insurance benefits; (b) accident
and disability benefits; (c) death benefits; and (d) supplementary unemployment benefits. The amounts are
deductible by the employers and are excluded as well
from employees' gross incomes for tax purposes.
Employer Stock Ownership Plan (ESOP) provisions.—A special type of employee benefit plan, organized as a trust, is tax-exempt. Employer-paid contributions (the value of stock issued to the ESOP) are
deductible by the employer as part of employee compensation costs. They are not included in the employees'
gross income for tax purposes, however, until they are
paid out as benefits. The following five special income
tax provisions for ESOPs are intended to increase employee ownership of the corporations in which they are
employed: (1) annual employer contributions are subject
to less restrictive limitations (percentages of employees'
cash compensation); (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) ESOPs'
lenders may exclude half the interest from their gross
income; (4) employees who sell appreciated company
stock to the ESOP may defer any taxes due until they
withdraw benefits; and (5) dividends paid to ESOPheld stock are deductible by the employer.
Support of the aged and the blind,—Taxpayers
who are blind or 65 years of age or older may take
an additional $850 standard deduction if single, or $650
if married. In addition, individuals who are 65 years
of age or older, or who are permanently disabled, can
take a tax credit equal to 15 percent of the sum of
their earned and retirement income. Qualified income
is limited to no more than $2,500 for single individuals
or married couples filing a joint return where only one
spouse is 65 years of age or older, and up to $3,750
for joint returns where both spouses are 65 years of

Part Three-33

XI. TAX EXPENDITURES

age or older. These limits are reduced by one-half of
the taxpayer's adjusted gross income over $7,500 for
single individuals and $10,000 for married couples filing a joint return.

railroad retirement benefits is included in income subject to tax, whichever is less. This limits the tax expenditure to the portion of the benefit which is still
excluded.

Casualty losses.—Neither the purchase of property
nor insurance premiums to protect its value are deductible as costs of earning income; therefore, reimbursement for insured loss of such property is not reportable
as a part of gross income. However, a special provision
permits relief for taxpayers suffering an uninsured loss.
They may deduct casualty and theft losses of more than
$100 each, but only to the extent that total losses during the year exceed 10 percent of adjusted gross income.

Social Security benefits for the disabled9 dependents and survivors.—Benefit payments from the Social Security Trust Fund, for disability and for dependents and survivors, are excluded from the beneficiaries'
gross incomes, and thus give rise to tax expenditures.

Earned income credit.—This credit may be claimed
by low-income workers with minor dependents. For
1991, the credit is 16.7 percent (17.3 percent if two
or more minors are present) of the first $7,140 of
earned income. When the taxpayer's income exceeds
$11,250, the credit is phased out at the rate of 11.93
percent (12.36 percent if two or more minors are
present) and is completely phased out at $21,242 of
adjusted gross income. The credit is increased by a
"supplemental young child" credit of 5 percent. The supplemental credit is phased out at a rate of 5 percent
of the first $7,140 of earned income and is completely
phased out at $21,244 of adjusted gross income. The
maximum amount of income on which the credit may
be taken is adjusted for inflation, as is the income
level at which the phase-out begins.
In any tax year, the amount of the credit must be
reduced by the minimum tax liability of the taxpayer.
As refundable credits, earned income tax credits in excess of tax liabilities are paid by the Federal Government to individuals. This portion of the credit is included in outlays, while the amount that offsets tax
liabilities is shown as a tax expenditure.
SOCIAL SECURITY

OASI benefits for retired workers.—Social security
benefits that exceed the beneficiary's contributions out
of taxed income are deferred employee compensation
and the deferral of tax on that compensation is a tax
expenditure. These additional retirement benefits are
paid for partly by employers' contributions that were
not included in employees' taxable compensation. Up
to one-half of any recipient's social security benefits
and tier 1 railroad retirement benefits are included in
the income tax base if a recipient's "modified adjusted
gross income" plus one-half of his or her social security
and railroad retirement benefits exceed a certain base
amount: $32,000 for those filing joint tax returns;
$25,000 for single persons; and zero for those married
filing separately if they did not live apart from their
spouse for the entire year. Modified AGI is equal to
AGI plus foreign or U.S. possession income and taxexempt interest, both excluded from AGI. If the modified AGI exceeds the specified base amount, either onehalf of the excess or one-half of the social security or




VETERANS BENEFITS AND SERVICES

Veterans benefits.—All compensation due to death
or disability and pensions paid by the Veterans Administration are excluded from taxable income. In addition,
benefits under the GI bill, as well as other veterans'
readjustment and education benefits, are excluded from
taxable income.
Tax-exempt mortgage bonds for veterans.—Interest earned on general obligation bonds issued by State
and local governments to finance housing for veterans
is excluded from taxable income. The issuance of such
bonds is limited, however, to five preexisting State programs and jto amounts based upon previous volume levels for the period January 1, 1979 to June 22, 1984.
Furthermore, future issues are limited to veterans who
served on active duty before 1977.
GENERAL GOVERNMENT

Public purpose State and local debt.—Interest on
State and local government debt, issued to finance government activities, is excluded from Federal taxation.
State and local governments, therefore, can sell debt
obligations at a lower interest cost than would be possible if such interest were subject to tax. Only the excluded interest on bonds for public purposes, such as
schools, roads, and sewers, is included here.
Nonbusiness State and local taxes excluding
home-owner property taxes.—The deductibility of
nonbusiness State and local taxes gives indirect assistance to these governments by reducing the costs of
the services they provide and, thus, the burden on their
taxpayers. Although general sales taxes may no longer
be deducted, State and local income taxes still may
be deducted.
Business income earned in U.S. possessions.—
Under certain conditions, U.S. corporations receiving
income from an active trade or business, or from investments located in a U.S. possession, can claim a special
credit against U.S. tax otherwise due.
INTEREST

U.S. savings bonds.—The interest on U.S. savings
bonds is not taxable until the bonds are redeemed,
thereby deferring tax liability. The deferral is equivalent to an interest-free loan and, therefore, it is a tax
expenditure.

Part Three-34

THE BUDGET FOR FISCAL YEAR 1992
Table XI-1. ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX
(In millions of dollars)
Outlay Equivalents

Revenue Loss

Description

Corporations
1991

National defense:
Exclusion of benefits and allowances to armed forces personnel
International affairs:
Exclusion of income earned abroad by United States citizens
Exclusion of income of foreign sales corporations
Inventory property sales source rules exception
Certain nonfinancial institutions operations interest allocation rules exception
Deferral of income from controlled foreign corporations:
Normal tax method
Reference tax method
Total (after interactions)
General science, space, and technology:
Expensing of research and development expenditures:
Normal tax method
Reference tax method
Credit for increasing research activities
Suspension of the allocation of research and experimentation expenditures
Total (after interactions)
Energy:
Expensing of exploration and development costs:
Oil and gas
Other fuels
Excess of percentage over cost depletion:
Oil and gas
Other fuels
Capital Gains treatment of royalties on coal
Exclusion of interest on State and local industrial development bonds
for energy facilities
Alternative, conservation and new technology credits:
Supply incentives
Conservation incentives
Alternative fuel production credit
Alcohol fuel credit1
Special rules for mining reclamation reserves
Exception from passive loss limitation for working interests in oil and
gas properties
Total (after interactions)
Natural resources and environment:
Expensing of exploration and development costs, nonfuel minerals
Excess of percentage over cost depletion, nonfuel minerals
Exclusion of interest on State and local IDBs for pollution control and
sewage and waste disposal facilities
Tax incentives for preservation of historic structures
Capital gains treatment of iron ore
Capital gains treatment of certain timber income
Expensing of multiperiod timber growing costs
Investment credit and seven-year amortization for reforestation expenditures
Total (after interactions)
Agriculture:
Expensing of certain capital outlays
Expensing of certain multiperiod production costs
Treatment of loans forgiven solvent farmers as if insolvent
Capital gains treatment of certain income
Deferral of 1988 drought-relief payments
Total (after interactions)
Commerce and housing credit:
Exemption of credit union income
Excess bad debt reserves of financial institutions
Special merger rules for financial institutions
Exclusion of interest on life insurance savings
Special alternative tax on small property and casualty insurance companies
Tax exemption of certain insurance companies
Small life insurance company deduction




1992

2,280

2,340

2,400

1,590
1,315
3,780

1,655
1,470
4,295

1,670
1,655
4,845

895
3,780

4,295

1,125
4,845

130

135

145

85

90

95

300

320

350

300

320

350

7,115

"A875

8,665

1,750

1,800

1,895

1,720

1,770

1,865

30

1,625

1,680

1,220

1,115

1,155

835

25

340
4,050

925
4,750

370
3,795

230

630

250

-500
45

-280

50

-15
50

-425
40

-230
45

-5
45

-75
5

860
220

895
235
10

925
255
10

110
135

115
145

120
155

540
10

315

300

285

255

240

230

110

105

35

75

70

25*

15

200
210
50

10

50

60
80
50

35
80
45

100
210
45

245
970

280
1,265

310
1,645

40
415

45
460

45
515

35
300

40
330

40
365

5
20

1,715
145

1,615
145

1,510
145

1,425
50

1,330
50

1,240
50

95

360

10
400

15
430

205

225

240

155

215
2,830

225
2,840

235
2,840

40

40

40

170

495
180
10

320
155
15

-125
530

450
160
15
65
-10
640

605
155
5,635
7,925

635
130
5,720
8,560

665
145
4,005
8,585

430
155
3,885
55

450
130
3,945
85

470
145
2,760
115

25
110

25
115

30
135

15
80

20
85

20
100

1,955

45

1,205
1,000

5

180

435
120
10

100

-125
555

7,265

Part Three-35

XI. TAX EXPENDITURES
Table XI-1. ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX-Continued
(In millions of dollars)
Outlay Equivalents

Revenue Loss

Description
1990

1991

Corporations

1992

1991

Exemption of RIC expenses from the 2% floor miscellaneous itemized
deduction
Deductibility of interest on consumer credit
Exclusion of interest on small issue industrial development bonds
Exclusion of interest on owner-occupied mortgage bonds subsidy bonds
Exclusion of interest on State and local debt for rental housing
Deductibility of mortgage interest on owner-occupied homes
Deductibility of State and Local property tax on owner-occupied homes
Deferral of income from post 1987 installment sales
Capital gains (other than agriculture,timber, iron ore, and coal):
Normal tax method
Reference tax method
Deferral of gains from sale of broadcasting facilities to minority owned
business
Ordinary income treatment of loss from small business corp. stock sale
Deferral of capital gains on home sales
Exclusion of capital gains on home sales for persons age 55 and over
Step-up basis of capital gains at death
Carryover basis of capital gains on gifts
Investment credit, other than ESOP's, rehabilitation of structures, energy
property, and reforestation expenditures
Accelerated depreciation on rental housing:
Normal tax method
Reference tax method
Accelerated depreciation of buildings other than rental housing:
Normal tax method
Reference tax method
Accelerated depreciation of machinery and equipment:
Normal tax method
Reference tax method
Safe harbor leasing rules
Amortization of start-up costs
Reduced rates on the first $100,000 of corporate income:
Normal tax method
Reference tax method
Exception from passive loss rules for $25,000 of rental loss
Treatment of Alaska Native Corporations
Permanent exceptions from imputed interest rules
Total (after interactions)
Transportation:
Deferral of tax on shipping companies
Exclusion of interest on State and local government bonds for mass
commuting vehicles
Total (after interactions)
Community and Regional Development
Five-year amortization for housing rehabilitation
Credit for low-income housing investments
Investment credit for rehabilitation of structures (other than historic)
Exclusion of interest on IDBs for airports, docks and sports and convention facilities
Exemption of certain mutuals' and cooperatives' income
Total (after interactions)
Education, training, employment, and social services:
Exclusion of scholarship and fellowship income:
Normal tax method
Reference tax method
Exclusion of interest on State and local student loan bonds
Exclusion of interest on State and local debt for private nonprofit educational facilities
Exclusion of interest on savings bonds transferred to educational institutions
Parental personal exemption for students age 19 or over
Deductibility of charitable contributions (education)
Exclusion of employer provided educational assistance
Total education (after interactions)
Exclusion of employer provided child care
Exclusion of employee meals and lodging (other than military)




440
1,525
2,555
2,020
1,315
37,580
9,520
735

755

635
605
2,345
1,980
1,225
39,575
10,490
775

2,115
1,870
1,150
40,545
11,575
815

3,050

4,660

230
20
12,635
4,255
29,770
125

230
20
13,265
4,280
32,750
135

260
-20
13,925
4,395
36,020
145

230

3,570

2,410

1,205

2,750

1,855

930

1,610

1,495

1,405

1,075

1,000

5,975

5,905

5,885

4,305

23,320

18,245

18,810

-710
170

-715

-720
190

4,670

5,065

5,670

9,050
235
125
145,810

10,020
170
135
149,830

10,645
120
145
157,465

235

170

125

135

145

125

135

145

160

35

25
160

20
165

15

10

10

10
115
550

-5
105
865

5
70
110

-5
65
170

-10

920
1,065
2,645

1,120

2,995

940
1,175
3,315

750
760

745
800

745
840

730

770

285

2,185

1,995

1,795

l"()60

980

915

185

195

320
1,525

470
605

1,755

1,705

1,600

37,580
9,520
550

39,575
10,490
580

40,545
11,575
610

2,205

3,370

205

230

*
20

20
12,635
3,230
22,150
125

20
13,265
3,250
24,365
135

13,925
3,340
26,800
145

940

535

495

465

4,250

4,240

1,670

1,655

1,645

18,655

14,765

15,565

4,665

3,480

3,245

-710
35

-715
35

-720
35

135

145

155

3,080

3,345

6,555

7,260

7,715

125

135

145

5
45
435

40
685

810

665

700

735

275

270

275

255

245

340

355

365

305

315

320

460
1,695
275
3,830
320
830

5
480
1,805
340
4,075
380
865

10
490
1,920
100
4,010
440
865

*

410
1,195
225

5
430
1,280
280

10
440
1,370
80

240
750

290
780

335
780

180

930

-20

95
1,155

260

500

525

3,755
120

60
230

550

Part Three-36

THE BUDGET FOR FISCAL YEAR 1992
Table XI-1. ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX-Continued
(In millions of dollars)
Outlay Equivalents

Revenue Loss

Description

Corporations

Individuals

1991
1991

Exclusion of contributions to prepaid legal services plans
Investment credit for ESOPs
Credit for child and dependent care expenses
Credit for disabled acess expenditures
Targeted jobs credit
Total training and employment (after interactions)
Expensing of costs of removing certain architectural barriers to the
handicapped
Deductibility of charitable contributions, other than education and health
Exclusion of certain foster care payments
Exclusion of parsonage allowances
Total social services (after interactions)
Grand total (after interactions)
Health:
Exclusion of employer contributions for medical insurance premiums
and medical care
Credit for child medical insurance premiums2
Exclusion of untaxed Medicare benefits
Deductibility of medical expenses
Exclusion of interest on State and local debt for private nonprofit health
facilities
Deductibility of charitable contributions (health)
Tax credit for orphan drug research
Special Blue Cross/Blue Shield deduction
Total (after interactions)
Income security:
Exclusion of railroad retirement system benefits
Exclusion of workmen's compensation benefits
Exclusion of public assistance benefits:
Normal tax method
Reference tax method
Exclusion of special benefits for disabled coal miners
Exclusion of military disability pensions
Net exclusion of pension contributions and earnings:
Employer plans
Individual Retirement Accounts
Keogh plans
Extending tax exempt organization status to voluntary employee beneficiary and other associations
Exclusion of employer provided death benefits
Exclusion of other employee benefits:
Premiums on group term life insurance
Premiums on accident and disability insurance
Income of trusts to finance supplementary unemployment benefits ....
Special ESOP rules (other than investment credit)
Additional deduction for the blind
Additional deduction for the elderly
Tax credit for the elderly and disabled
Deductibility of casualty losses
Earned income credit3
Total (after interactions)
Social Security:
Exclusion of social security benefits:
OASI benefits for retired workers
Disability insurance benefits
Benefits for dependents and survivors
Total (after interactions)
Veterans benefits and services:
Exclusion of veterans disability compensation
Exclusion of veterans pensions
Exclusion of Gl bill benefits
Exclusion of interest on state and local debt for veterans housing
Total (after interactions)
GENERAL PURPOSE FISCAL ASSISTANCE
Exclusion of interest on public purpose State and local debt
Deductibility of nonbusiness State and local taxes other than on owneroccupied homes




220
6,865

85
35
5,505
85
230
7,290

30
15
5,810
175
205
7,650

20
11,490
25
240
11,675
22,370

25
12,285
25
265
12,485
23,850

20
13,135
35
295
13,340
25,000

32,205
7,290
2,860

36,260
10
7,515
3,025

41,010
160
8,190
3,170

3,065
1,530
10
85
46,960

3,185
1,635
10
160
51,640

3,295
1,745
10
185
57,580

305
2,735

310
3,010

375

85
100
5,210

1992

1990

70

70

3^895
35

4,165
10
40

5
10,870
20
195

5
11,630
20
215

26,360
5,965
2,860

29,640
5
6,145
3,025

2,765
1,225

2,830
1,310

310
3,310

305
2,735

310
3,010

400

425

375

400

105
100

105
110

105
120

105
100

105
110

60,505
8,710
1,900

64,040
9,085
2,095

68,175
9,560
2,310

45,385
6,620
1,460

48,035
6,905
1,615

445
25

485
25

530
30

380
20

415
20

3,455
170
30
2,645
45

3,790
180
30
2,935
45
1,970
90
320
2,985
92,400

2,640
125
30

2,770
130
30

85
385
2,120
81,705

3,620
175
30
2,850
45
1,910
90
310
2,445
86,525

35
1,565
70
310
1,800

35
1,595
70
250
2,075

16,040
1,210
2,995
20,245

17,015
1,300
3,190
21,505

18,000
1,400
3,405
22,805

16,040
2,995

17,015
1,300
3,190

1,580
80
45
320
2,025

1,655
80
45
315
2,095

1,705
80
50
315
2,150

1,580
80
45
270

1,655
80
45
265

14,935

15,885

16,700

10,455

10,970

18,875

19,375

20,405

18,875

19,375

1,880

85

30

10

185

50
190

100
175

15
620

20
655

15
690

305
5
65

1,855

325
5
120

1,995

345
5
140

2,055

1,210

2,360

2,445

2,520

Part Three-37

XI. TAX EXPENDITURES
Table XI-1. ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX-Continued
(In millions of dollars)
Revenue Loss

Outlay Equivalents
Corporations

Description

1990

Tax credit for corporations receiving income from doing business in
United States possessions
Total (after interactions)
Interest:
Deferral of interest on savings bonds
Addendum—Aid to State and local governments:
Deductibility of:
Property taxes on owner-occupied homes
Nonbusiness State and local taxes other than on owner-occupied
homes
Exclusion of interest on:
Public purpose State and local debt
IDBs for certain energy facilities
IDBs for pollution control and sewage and waste disposal facilities ....
Small-issue IDBs
Owner-occupied mortgage revenue bonds
State and local debt for rental housing
Mass commuting vehicle IDBs
IDBs for airports, docks, and sports and convention facilities
State and local student loan bonds
State and local debt for private nonprofit educational facilities
State and local debt for private nonprofit health facilities
State and local debt for veterans housing
Total (after interactions)

1,945

1991

1991

2,125

2,860
36,670

3,125
38,385

3,420
40,525

965

1,040

1,125

965

1,040

9,520

10,490

11,575

9,520

10,490

18,875

19,375

20,405

18,875

19,375

14,935
315
1,715
2,555
2,020
1,315
35
920
285
340
3,065
320
53,405

15,885
300
1,615
2,345
1,980
1,225
25
930
275
355
3,185
315
55,385

16,700
285
1,510
2,115
1,870
1,150
20
940
270
365
3,295
315
57,775

10,455

10,970

1,755

1,705

275
305
2,765
270

255
315
2,830
265

2,325

2,360
255
1,425
2,185

2,445
240
1,330
1,995

2,520
230
1,240
1,795

1,060
15
750

9,080
10
745

915
10
745

* $2.5 million or less. All estimates have been rounded to the nearest $5 million.
' In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise tax receipts of $445 million in 1990; $390 million in 1991; and $355 million in 1992.
2 The figures in the table indicate the effect of the child medical insurance premium credit on receipts. The effect on outlays in 1992 is $550 million.
3 The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on outlays is: 1990, $4,355 million; 1991, $4,855 million; 1992, $6,770 million.

Tax Expenditures in the Federal Unified
Transfer Tax
The Federal unified transfer tax replaced the former
separate gift and estate taxes in 1977. Exceptions to
the general terms of the tax favor particular transferees
or dispositions of transferors, similar to Federal direct
expenditure or loan programs. The transfer tax provisions identified as tax expenditures satisfy the reference law criteria for inclusion in the tax expenditure
budget that were described above. No additional listings
based on departures of the unified transfer tax from
a normal tax structure, as discussed earlier for the
income tax, are included because of the lack of a generally accepted normative tax structure for transfer
taxes.
UNIFIED TRANSFER TAX REFERENCE RULES

The reference tax rules for the unified transfer tax
from which departures represent expenditure-like government programs include:
1. Definition of the taxpaying unit. The payment of
the tax is the liability of the transferor whether the
transfer of cash or property was made by gift or bequest.
2. Definition of the tax base and rules of its measurement. The base for the tax is the transferor's cumulative, taxable lifetime gifts made plus the net estate
at death.
Gifts that are counted as part of the tax base are
all annual transfers in excess of $10,000 to any donee




except the donor's spouse. Excluded are, however, payments on behalf of family members' educational and
medical expenses, as well as the cost of ceremonial
gatherings and celebrations that are not in honor of
the donor.
Although the value of gifts may be split by spouses
for tax-reporting purposes, individuals are presumed to
maintain their own separate, cumulative transfer tax
records. Any gift taxes paid by decedents during their
lifetime are added to the amounts of taxable gifts.
These, plus the value of the final net estate, are the
comprehensive pre-tax measure of the transferred aggregate wealth and thus determine the final transfer
tax liability.
In general, property is valued at its fair market value
at the time it is transferred. This is not necessarily
the case in the valuation of property for transfer tax
purposes. Executors of estates are provided the option
to value assets at the time of the testator's death or
up to six months later.
3. Tax rate schedule. A single graduated tax rate
schedule applies to all taxable transfers. This is reflected in the name of the "unified transfer tax" that
has replaced the former separate gift and estate taxes.
The tax rates vary from 18 percent on the first $10,000
of aggregate taxable transfers, to 55 percent on
amounts exceeding $3 million.
A $192,800 lifetime credit is provided against the
tax in determining the final amount of transfer taxes
that are due and payable. This allows each taxpayer

Part Three-38

THE BUDGET FOR FISCAL YEAR 1992

to make a $600,000 tax-free transfer of assets that otherwise would be liable to the unified transfer tax.
An additional tax, at a flat rate of 55 percent, is
imposed on lifetime, generation-skipping transfers in
excess of $1 million. It is considered a generation-skipping transfer whenever the transferee is at least two
generations younger than the transferor, as it would
be in the case of transfers to grandchildren or greatgrandchildren. The liability of this tax is on the recipients of the transfer. The transferor must advise them
as to what part of the gift or bequest is in excess
of the transferor's generation-skipping exemption.
4. Time when tax is due and payable. Donors are
required to pay the tax annually as gifts are made.
The amount due and payable is the difference between
the end-of-year transfer tax liability on the cumulated
taxable transfers and the total amount of tax that had
been paid previously.
The generation-skipping transfer tax is payable by
the donees whenever they accede to the gift. The net
estate tax liability is due and payable within nine
months after the decedent's death. The Internal Revenue Service may grant an extension of up to 10 years
for a reasonable cause. Once an extension has been
granted, the tax liability may be paid no less rapidly
than it would have been due without the extension.
Interest is charged on the unpaid tax liability at a
rate equal to the cost of Federal short-term borrowing,
plus three percentage points.
TAX EXPENDITURES BY FUNCTION

The 1990-92 estimates of tax expenditures in the
Federal unified transfer tax are displayed by functional
category in table XI-2. Outlay equivalent estimates are
similar to revenue loss estimates for transfer tax expenditures and, therefore, are not shown separately.

NATURAL RESOURCES AND ENVIRONMENT

Donations of conservation easements.—Bequests
for conservation are excluded from taxable estates. A
conservation bequest is the value of property and easements (in perpetuity) to such property the use of which
is restricted to any one or more of the following: (a)
the public for outdoor recreation; (b) protection of the
natural habitats of fish, wildlife, plants, etc.; (c) scenic
enjoyment of the public; and (d) preservation of historic
land areas and structures. Similar conservation gifts
are excluded from the gift tax base and, in addition,
are deductible from the donor's otherwise taxable income in the year of the gift.
AGRICULTURE

Special use valuation of farms.—Farmland owned
and operated by a decedent and/or a member of the
family may be valued for estate tax purposes on the
basis of its "continued use" as a farm if: (a) the farmland is at least 25 percent of the decedent's gross estate; (b) the entire value of all farm property is at
least 50 percent of the gross estate; and (c) family heirs
to the farm agree to continue to operate the property
as a farm for at least 10 years. Since continued use
valuation of farmland is frequently substantially less
than the fair market value, the resulting reduction in
tax liability serves as a subsidy to the continued operation of family farms.
Tax deferral of closely held farms.—Decedents' estates may use a preferential, extended installment payment period of five to 15 years to discharge estate tax
liabilities if the value of the farm properties exceed
35 percent of the net estates. The interest charged is
only 4 percent for the first five years, rather than the
standard Federal short-term borrowing rate plus three
percentage points, which applies during the last 10
years of the repayment period.

Table XI—2. ESTTMATES FOR TAX EXPENDITURES IN THE FEDERAL UNIFIED TRANSFER TAX
(In millions of dollars)

Description

Natural Resources and Environment:
Deductions for donations of conservation easements
Agriculture:
Special use valuation of farm real property
Tax deferral of closely held farms
Commerce:
Special use valuation of real property used in closely held businesses .
Tax deferral of closely held business
Education, training, employment, and social services:
ESOP deduction
Tax deferral for payments made by ESOP's
Deduction for charitable contributions (education)
Deduction for charitable contributions (other than education and health)
Health:
Deduction for charitable contributions (health)
General government:
Credit for State death taxes
Grand Total (after interactions)
* L e s s t h a n $ million.




65
55

70
55

20
10

20
10

65
10
390
1,160

65
10
440
1,305

355

400

1,920

2,150

3,850

4,300

Part Three-39

XI. TAX EXPENDITURES
COMMERCE AND HOUSING CREDIT

Special use valuation of closely held businesses.—The two estate tax incentives to family farming are also available to the estates of owners of nonfarm family businesses. If the same three conditions
previously described are met, the real property in their
estates is eligible for continued use valuation.
Tax deferral of closely held businesses.—Nonfarm
family businesses that satisfy the net estate requirements qualify for preferential 15 year deferred estate
tax payment. Also, the redemption of stock, required
to pay funeral and administrative expenses and estate
and gift taxes, may be characterized as a sale of stock.
This applies in those cases where the family business
is incorporated and only the closely held corporation
stock, rather than the business assets, appear in the
decedent's estate. This subjects to tax only the appreciation in the value of the stock whereas, under reference
tax law rules, all of the proceeds generally would be
taxed as a dividend. To be eligible for this special provision, the value of stock in closely held corporations
must exceed 35 percent of the decedent's gross estate,
less debt and funeral expenses.
EDUCATION, TRAINING, EMPLOYMENT, AND SOCIAL
SERVICES

Employee Stock Ownership Plan (ESOP) deduction.—Until December 19, 1989, one-half of the proceeds from the sale of employer securities could be excluded from a taxable estate when it was sold by the
executor to an ESOP. Employer securities are securities
issued by corporations of which the ESOP members
are employees. Disposing certain estate assets in this
way reduced the cost of settling estates and also increased the supply of employer securities to ESOPs.




Tax deferral for Employee Stock Ownership Plan
(ESOP).—Through July 12, 1989, an ESOP to which
a decedent had bequeathed employer securities could
avail itself of the preferential 15-year deferred tax payment plan previously described. The ESOP had to
agree, however, to pay a pro-rata share of the estate
tax for which it can be reimbursed by the estate.
Bequests to tax-exempt organizations.—These bequests are deductible from decedent's otherwise taxable
lifetime transfers.
HEALTH

Bequests to health providers.—Such bequests, that
are exempt from the income tax, are deductible from
otherwise taxable lifetime transfers of decedents. This
tax preference is similar to preferences provided
through the income tax.
GENERAL GOVERNMENT

State and local death taxes.—A credit is allowed
for state death taxes against any Federal estate tax
that otherwise would be due. The amount of the state
death tax credit is determined by a rate schedule that
reaches a limit of 16 percent of the taxable estate in
excess of $60,000. This provision is intended to restrain
states from competing for wealthy individuals' official
domicile.
Proposed Changes in Tax Expenditures
The Administration proposes a number of tax revisions that would affect the tax expenditure budget. The
receipts effects and a discussion of each proposal are
found in Part III, Chapter X.

Part Three-40




THE BUDGET FOR FISCAL YEAR 1992

Appendix
ESTIMATES FOR MAJOR TAX EXPENDITURES IN THE INCOME TAX RANKED BY REVENUE LOSS
(In millions of dollars)
Description

Net exclusion of employer plans pension contributions and earnings
Deductibility of . mortgage interest oa owner-occupied homes
Exclusion of employer contributions for medical insurance premiums and medical care
Step-up basis of capital gains at death
Accelerated depreciation (Normal tax method)
Deductibility of nonbusiness State and local taxes other than on owner-occupied homes
Exclusion of OASI benefits for retired workers
Deductibility of charitable contributions
Exclusion of interest on public purpose State and local debt
Deferral of capital gains on home sales
Deductibility of State and Local property tax on owner-occupied homes
Exclusion of interest on life insurance savings
Exception from passive loss rules for $25,000 of rental loss
Net exclusion of IRA pension contributions and earnings
Exclusion of untaxed Medicare benefits
Inventory property sales source rules exception
Credit for child and dependent care expenses
Exclusion of interest on industrial development bonds
Reduced rates on first $100,000 of corporate income (Normal tax method)
Preferential treatment of capital gains (Normal tax method)
Exclusion of social security benefits for dependents and survivors
Exclusion of capital gains on home sales for persons age 55 and over
Exclusion of workmen's compensation benefits
Deductibility of medical expenses
Exclusion of premiums on group life insurance
Exclusion of interest on State and local debt for private nonprofit health facilities
Special merger rules for financial institutions
Earned income credit1
Expensing (Normal tax method)
Tax credit for corporations receiving income from doing business in United States possessions
Exclusion of benefits and allowances to armed forces personnel
Special ESOP rules (other than investment credit)
Exclusion of Keogh pension contributions and earnings
Exclusion of veterans disability compensation
Additional deduction for the elderly
Exclusion of disability insurance benefits
Exclusion of income earned abroad by United States citizens
Excess percentage over cost depletion, fuel and nonfuel minerals
Investment credit for rehabilitation of structures (other than historic)
Deferral of interest on savings bonds
Exclusion of income of foreign sales corporations
Investment credit, other than ESOP's, rehabilitation of structures, energy property, and reforestation exExclusion of interest on State and local debt for rental housing
Credit for increasing research activities
Exemption of certain mutuals and cooperative income
Deferral of income from post 1987 installment sales
Exclusion of employee meals and lodging (other than military)
Exclusion of scholarship and fellowship and fellowship income (Normal tax method)
Exemption of RIC expenses from the 2% floor miscellaneous itemized deduction
Exemption of credit union income
Extending tax exempt organization status to voluntary employee beneficiary and other associations
Parental personal exemption for students age 19 or over
Exclusion of public assistance benefits (Normal tax method)
Deferral of income from controlled foreign corporations (Normal tax method)
Exclusion of empoyer provided child care
Exclusion of interest on State and local debt for private nonprofit educational facilities
Exclusion of railroad retirement system benefits
Exclusion of interest on state and local debt for veterans housing
Deductibility of casualty losses
Deferral of gains from sale of broadcasting facilities to minority owned businesses
Suspension of the allocation of research and experimentation expenditures
Exclusion of interest on State and local student loan bonds
Exclusion of parsonage allowances
Exclusion of interest on State and local industrial development bonds for certain energy facilities
Investment credit and seven-year amortization for reforestation expenditures
Exception from passive loss limitation for working
Alcohol fuel credit2

1992

51,170
40,545
33,470
26,800
26,100
20,405
18,000
16,800
13,950
13,925
11,575
7,960
7,715
7,265
6,700
4,845
4,395
4,020
3,755
3,460
3,405
3,340
3,310
3,170
2,900
2,895
2,760
2,540
2,470
2,325
2,060
2,055
1,780
1,705
1,615
1,400
1,305
1,250
1,145
1,125
1,125
930
915
850
840
815
780
735
560
470
450
440
425
350
335
320
310
265
260
260
250
245
240
230
225
225
210

Part Three-41

XI. TAX EXPENDITURES
ESTIMATES FOR MAJOR TAX EXPENDITURES IN THE INCOME TAX RANKED BY REVENUE L O S S Continued
(In millions of dollars)
Description

Targeted jobs credit
Amortization of start-up costs
Exclusion of interest on owner-occupied mortgage bonds subsidy bonds
Expensing of certain multiperiod production costs
Carryover basis of capital gains on gifts
Permanent exceptions from imputed interest rules
Tax incentives for preservation of historic structures
Excess bad debt reserves of financial institutions
Deferral of tax on shipping companies
Special Blue Cross/Blue Shield deduction
Premiums on accident and disability insurance
Credit for child medical insurance premiums3
Alternative fuel production credit
Credit for disabled acess expenditures
Treatment of Alaska Native Corporations
Exclusion of military disability pensions
Exclusion of special benefits for disabled coal miners
Small life insurance company deduction
Credit for low-income housing investments
Certain nonfinancial institutions operations interest allocation rules exception
Exclusion of employer provided educational assistance
Exclusion of veterans pensions
Tax credit for the elderly and disabled
Special rules for mining reclamation reserves
Exclusion of Gl bill benefits

1992

205
190
160
155
145
145
145
145
145
140
135
135
135
125
120
120
105
100
95
95
80
80
70
50
50

1 The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on outlays is: 1990, $4,355 million;
1991, $4,855 million; 1992, $6,770 million.
2 In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise tax receipts of $445 million in 1990;
$390 million in 1991; and $355 million in 1992.
3 The figures in the table indicate the effect of the child medical insurance premium credit on receipts. The effect on outlays in 1992 is $550
million.