State and local debt for rental housing 1,505 1,490 1,475 1,025 1,015 1,005
Mass commuting vehicle IDBs 5 5 5 5 5 5
IDBs for airports, docks, and sports and convention facilities 935 1,030 1,115 635 700 760
State and local student loan bonds 360 375 405 290 300 325
State and local debt for private nonprofit educational facilities 690 725 765 555 580 615
State and local debt for private nonprofit health facilities 1,650 1,730 1,830 1,320 1,385 1,465
State and local debt for veterans housing 210 200 195 170 160 155
Total (after interactions) 55,290 58,210 61,590
$2.5 million or less. All estimates are rounded to the nearest $5 million.
1\ In addition, the partial exemption from the excise tax for alcohol fuels
results in a reduction in excise tax receipts of $465 million in 1991; $460
million in 1992; and $460 million in 1993.
2\ The figures in the table indicate the effect of the child medical insurance premium credit on receipts. The effect on outlays is: 1992, $505 million; 1993, $580 million.
3\ The figures in the table indicate the effect of the earned income tax
credit on receipts. The effect on outlays is: 1991, $4,885 million; 1992,
$7,170 million; 1993, $7,895 million.
#ENDCARD
#CARD
National Defense
Benefits and allowances to armed forces personnel.The housing and meals
provided military personnel, either in cash or in kind, are excluded from
income subject to tax.
International Affairs
Income earned abroad.A U.S. citizen or resident alien who resides in a
foreign country or who stays in one or more foreign countries for a minimum
of 11 out of the past 12 months may exclude $70,000 per year of
foreign-earned income. Eligible taxpayers also may exclude or deduct
reasonable housing costs in excess of one-sixth of the salary of a civil
servant at grade GS 14, step 1. These provisions do not apply to Federal
employees working abroad; however, the tax expenditure estimate does
reflect certain allowances that are excluded from their taxable income.
Income of Foreign Sales Corporations.The Foreign Sales Corporation (FSC)
provisions exempt from tax a portion of U.S. exporters' foreign trading
income to reflect the FSC's sales functions as foreign 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. The income becomes taxable only when the controlling U.S.
shareholders receive dividends or other distributions from their foreign
stockholding. Under the normal tax method, the currently attributable
foreign source pre-tax income from such a controlling interest is subject
to U.S. taxation, whether or not distributed. Thus, under the normal tax
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.
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. Two exceptions give rise to tax
expenditures: sales of inventory property that reduces the U.S. tax of
exporters; and, for financial institutions and certain financing operations
of nonfinancial enterprises, an exception 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) projects can
be viewed as investments because their benefits accrue for several years
when they are successful. It is difficult, however, to identify whether a
specific R&E project is completed and successful and, if it is successful,
what its expected life will be. For these reasons, the statutory provision
that these expenditures may be expensed is considered part of the reference
law. Under the normal tax method, however, the expensing of R&E
expenditures is viewed as a tax expenditure. The baseline assumed for the
normal tax method is that all R&E expenditures are successful and have an
expected life of eight years.
R&E credit.The tax credit is 20 percent of the qualified expenditures in
excess of each year's base amount. This threshold is determined by
multiplying a ``fixed-base percentage'' (limited to a maximum of .16 for
existing companies) by the average amount of the company's gross receipts
for the four preceding years. The ``fixed-base percentage'' is the ratio
of R&E expenses to gross receipts for the 1984 to 1988 period. Start-up
companies that did not both incur qualified 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 June
30, 1992.
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 June 30,
1992.
#ENDCARD
#CARD
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 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 are deducted over the productive life of the property based on the
fraction of the resource extracted. Under percentage depletion taxpayers
deduct a percentage of gross income from mineral production at rates of 22
percent for uranium, 15 percent for oil, gas and oil shale, and 10 percent
for coal. The deduction is limited to 50 percent of net income from the
property, except for oil and gas where the deduction can be 100 percent of
net property income. Production from geothermal deposits is eligible for
percentage depletion at 65 percent of net income, but with no limit on
output and no limitation with respect to qualified producers. Unlike
depreciation or cost depletion, percentage depletion deductions can exceed
the cost of the investment.
Capital gains treatment of royalties on coal.Sales of certain coal under
royalty contracts can be treated as capital gains. 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.Certain energy facilities, such as
municipal electric and gas utilities, may benefit from tax-exempt
financing.
New technology credits.A credit of 10 percent is available for investment
in solar and geothermal energy facilities. The credit for these two
investments will expire after June 30, 1992.
Alternative fuel production credit.A nontaxable credit of $3 per barrel (in
1979 dollars) of oil-equivalent production is provided for several forms of
alternative fuels. It is generally available as long as the price of oil
stays below $29.50 (in 1979 dollars).
Alcohol fuel credit.Gasohol, a motor fuel composed of at least 10 percent
alcohol, 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.
#ENDCARD
#CARD
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.
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.
Capital gains treatment of iron ore and of certain timber income.Iron ore
and certain timber sold under a royalty contract can be treated as capital
gains.
Mining reclamation reserves.Taxpayers are allowed to establish reserves to
cover certain costs of mine reclamation and of closing solid waste disposal
properties. Net increases in reserves may be taken as a deduction against
taxable income.
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 may also 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 is not reduced by any of the investment
credit that is allowed.
#ENDCARD
#CARD
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 beyond the end of the year, or for capital improvements
that would otherwise be capitalized.
Expensing multiperiod livestock and crop production costs.The production of
livestock and crops with a production period of less than two years is
exempted from the uniform cost capitalization rules. Farmers establishing
orchards, constructing farm facilities for their own use, or producing any
goods for sale with a production period of two years or more may elect not
to capitalize costs. If they do, they must apply straight-line
depreciation to all depreciable property they use in farming.
Loans forgiven solvent farmers.In 1986, farmers were granted special tax
treatment by being forgiven the tax liability on certain forgiven debt.
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.\4\ Farmers with forgiven debt are considered
insolvent for tax purposes, and thus qualify for income tax forgiveness.
4\ 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 the forgiven debt
is excluded from tax.
Capital gains treatment of certain income.Certain agricultural income, such
as unharvested crops, can be treated as capital gains.
#ENDCARD
#CARD
Commerce and Housing Credit
This category includes a number of tax expenditure provisions that also
affect economic activity in other functional categories. For example,
provisions related to investment, such as accelerated depreciation, could
also have been classified under the energy, natural resources and
environment, 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.
Interest on life insurance savings.Savings in the form of policyholder
reserves are accumulated from premium payments and interest is earned on
the reserves. Such interest income is not taxed as it accrues nor when
received by beneficiaries upon the death of the insured.
Small property and casualty insurance companies. Insurance companies that
have annual net premium incomes of less than $350,000 are exempted from
tax; those with $350,000 to $2,100,000 of net premium incomes may elect to
pay tax only on the income earned by their investment portfolio.
Insurance companies owned by exempt organizations.Generally, the income
generated by life and property and casualty insurance companies is subject
to tax, albeit by special rules. Insurance operations conducted by such
exempt organizations as fraternal societies and voluntary employee benefit
associations, however, are exempted from tax.
Mutual funds (RIC) expenses.Individuals may deduct miscellaneous expenses
only to the extent that they exceed 2 percent of their adjusted gross
income. Certain costs incurred by individuals in managing their personal
securities portfolios are among the miscellaneous deductions allowed
taxpayers who itemize deductions. Mutual funds (or regulated investment
companies) perform these portfolio management functions for their
shareholders and pay out their portfolio incomes net of these expenses.
Shareholders are permitted to report their fund income net of management
expenses; thus, they are thereby able to deduct portfolio management
expenses without regard to the miscellaneous deduction limitation.
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 June 30, 1992. The budget cost of these bonds
continues as long as they are outstanding.
There are limits imposed on the amount of tax-exempt State and local
government bonds that can be issued to fund private activity. The volume
cap for single-family mortgage revenue bonds and multifamily rental housing
bonds is combined with the cap for student loans and IDBs. The cap is set
at $50 per capita or a minimum of $150 million for each State.
Mortgage housing bonds.Interest on all mortgage revenue bonds issued
through June 30, 1992 by State and local governments is exempt from
taxation. Proceeds are used to finance homes purchased by first-time
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 the unified volume cap discussed in the
small issue IDB section above.
States have been authorized to issue mortgage credit certificates (MCCs) in
lieu of qualified mortgage revenue bonds because the bonds are relatively
inefficient subsidies to first-time home buyers. MCCs entitle home buyers
to income tax credits for a specified percentage of interest on qualified
mortgage loans. In this way, the entire amount of the subsidy flows
directly to the home buyer without being partly diverted to financial
middlemen or bondholders. A State may not issue an aggregate annual amount
of MCCs greater than 25 percent of its annual ceiling for qualified
mortgage bonds. Because of the relationship between MCCs and qualified
mortgage bonds, their estimates are presented as one line item in the tables.
Rental housing bonds.State and local government issues of IDBs are
restricted to multifamily rental housing projects in which 20 percent (15
percent in targeted areas) of the units are reserved for families whose
income does not exceed 50 percent of the area's median income; or 40
percent for families with incomes of no more than 60 percent of the area
median income. Other tax-exempt bonds for multifamily rental projects are
generally issued with the requirement that all tenants must be low or
moderate income families. Rental housing bonds are subject to the volume
cap discussed in the small issue IDB section above.
Interest and taxes on owner-occupied homes.Owner-occupants of homes may
deduct mortgage interest and property taxes on their primary and secondary
residences as itemized nonbusiness deductions. The mortgage interest
deduction is limited to interest on debt no greater than the owner's basis
in the residence and, for debt incurred after October 13, 1987, it is
limited to no more than $1 million. Interest on up to $100,000 of other
debt secured by a lien on a principal or second residence is also
deductible, irrespective of the purpose of borrowing, provided the debt
does not exceed the fair market value of the residence. Mortgage interest
deductions on personal residences are tax expenditures because the
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.
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. This treatment is considered a tax
expenditure under the normal tax method but not under the reference law method.
Deferral of gains from sale of broadcasting facility to minority owned
business.The voluntary sale of 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. 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.''
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.
Capital gains on home sales.When a primary residence is sold, the homeowner
can defer paying a capital gains tax on the proceeds by purchasing or
constructing a home of value at least equal to that of the prior home (net
of sales and qualified fix-up expenses) within two years. This deferral 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.
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.
Accelerated depreciation of real property, machinery and equipment.As
previously noted, the tax depreciation allowance provisions are part of the
reference law rules, and thus do not cause tax expenditures under the
reference method. Under the normal tax method, however, a 40-year tax life
for depreciable real property is the norm, so the statutory depreciation
periods in effect since 1987 for residential and nonresidential properties
of 27.5 and 31.5 years, respectively, give rise to tax expenditures.
Statutory depreciation of machinery and equipment also is somewhat
accelerated relative to the normal tax baseline. In addition, tax
expenditures arise from pre-1987 tax allowances for real and personal property.
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 baseline under the normal tax method; 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.
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 exemption (fifteen years after the NOL or
credit claim was first experienced) from these restrictions that includes
NOLs and credits claimable prior to April 26, 1988.
Imputed interest rules.Under reference 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.\5\
5\ Thus, when a borrower on December 31, 1991, issues a promise to pay
$1,000 plus interest at 10 percent on December 30, 1992, 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 1992, as the case may be.
Exceptions to the general rules for accounting for interest expense or
income include the following: (a) permission for the mortgagor of his
+++++++ Continued on the next Card +++++
#ENDCARD
#CARD
+++++++ Continued from the previous Card +++++
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.
Community and Regional Development
Low-income housing investment.Through 1989, a tax credit for investment in
new, substantially rehabilitated, and certain unrehabilitated low-income
housing 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 June 30, 1992, 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.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.
Exemption of certain mutuals' and cooperatives' 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.
#ENDCARD
#CARD
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
course-related expenses of the grantee. From an economic point of view,
scholarships and fellowships are either gifts not conditioned on the
performance of services, or they are rebates of educational costs. Thus,
under the reference law method, the exclusion is not a tax expenditure
because this method does not include either gifts or price reductions in a
taxpayer's gross income. Under the normal tax method, however, the
exclusion is considered a tax expenditure because under this method
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, l989, 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 $66,200 to $90,000 and $44,150 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 who donate capital assets to charitable or educational
organizations can deduct the assets' current value without the taxation of
any appreciation in value. Corporations can also deduct charitable
contributions up to 10 percent of their pre-tax income. 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 educational assistance, child care, meals
and lodging, legal service plans, as well as ministers' housing allowances
and the rental value of parsonages are tax expenditures. The exclusions
for educational assistance and legal services are in effect through June
30, 1992. Health and other insurance benefits are reported under the
health and income security functions.
Child and dependent care expenses.A tax credit may be claimed by married
couples for child and dependent care expenses incurred when one spouse
works full time and the other works at least part time or goes to school.
The credit may also be claimed by divorced or separated parents who have
custody of children, and by single parents. Expenditures up to a maximum
$2,400 for one dependent and $4,800 for two or more dependents are eligible
for the credit. The credit is equal to 30 percent of qualified
expenditures for taxpayers with incomes of $10,000 or less. The credit is
reduced to a minimum of 20 percent by one percentage point for each $2,000
of income between $10,000 and $28,000.
Disabled access expenditures.OBRA provided for a credit of 50 percent of
eligible disabled access expenditures in excess of $250. The credit is
limited to $5,000.
Targeted jobs credit.Employers may claim a tax credit for qualified wages
paid to individuals who begin work through June 30, 1992, and who are
certified as members of various targeted groups. The amount of the credit
that may be claimed is 40 percent of the first $3,000 paid during the first
year of employment. The 40 percent credit also applies to the summer
employment wages paid 16 and 17 year old youths who are members of low
income families. Employers must reduce their deduction for wages paid by
the amount of the credit claimed.
Costs of removing architectural barriers to the handicapped.The investment
cost of making any business accessible to persons suffering physical or
mental disabilities may be deducted, rather than capitalized as part of the
taxpayer's basis in such property 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.
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Health
Employer paid medical insurance and expenses.Employee compensation, in the
form of payments by employers for health insurance premiums and other
medical expenses, is deducted as a business expense by employers, but it is
not included in employee gross income.
Child health insurance.The earned income tax credit provides for a credit
equal to 6 percent for certain health insurance expenses for certain
policies that cover children. The maximum credit will be $451 in 1992 and
is phased out at a rate of 4.285 percent through $22,370 of adjusted gross income.
Untaxed medicare benefits.The employer's payment of 1.45 percent of
employees' wages (up to $130,200 in 1992) into the Hospitalization Trust
Fund, which finances medicare benefits, is not included in employees'
reportable compensation.
Medical care expenses.Personal expenditures for medical care (including the
costs of prescription drugs) exceeding 7.5 percent of the taxpayer's
adjusted gross income are deductible.
Tax-exempt bonds for hospital construction.Interest earned on State and
local government debt issued to finance hospital construction is excluded
from income subject to tax.
Charitable contributions to health institutions.Contributions to nonprofit
health institutions are allowed as a deduction for individuals and
corporations. Tax expenditures resulting from the deductibility of
contributions to other charitable institutions are listed under the
education, training, employment, and social services function.
Orphan drugs.To encourage the development of drugs for the treatment of
rare diseases or physical conditions, a tax credit is granted equal to 50
percent of the costs for clinical testing that must be completed before
manufacture and distribution are approved by the Food and Drug
Administration. Because the drug firm is not required to reduce its
deduction for testing expenses (an R&D expenditure) by the amount of this
credit, the private cost of clinically testing orphan drugs is reduced to
little more than 24 cents per $1 expended. This tax expenditure expires
after June 30, 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.
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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 tax method because, under this method, 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 law. Therefore, under the
reference tax 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 individual contributions to individual retirement
accounts (IRAs) and amounts set aside by the self-employed, are excluded
from adjusted gross income in the year of contribution. The investment
income earned by pension funds and other qualifying retirement plans is not
taxable when earned, and this deferral is, therefore, also a tax
expenditure.
Limited amounts (about $8,555 in 1992) 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
tax-sheltered annuity (403(b) plan).
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. Self-employed persons can make deductible contributions to their
own retirement (Keogh) plans equal to 25 percent of their income, up to a
maximum of $30,000 per year.
Employer provided insurance 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 special income tax provisions for ESOPs are
intended to increase ownership of corporations by their employees: (1)
annual employer contributions are subject to less restrictive limitations
(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 ESOP-held
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 $900 standard deduction if single, or
$700 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 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.
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.
Earned income credit.This credit may be claimed by low-income workers with
minor dependents. For 1992, the credit is 17.6 percent (18.4 percent if
two or more minors are present) of the first $7,520 of earned income. When
the taxpayer's income exceeds $11,840, the credit is phased out at the rate
of 12.57 percent (13.14 percent if two or more minors are present) and is
completely phased out at $22,370 of adjusted gross income. The credit is
increased by a ``supplemental young child'' credit of 5 percent of the
first $7,520 of earned income which is phased out at a rate of 3.57
percent. The supplemental credit is also completely phased out at $22,370
of adjusted gross income. The maximum amount of income on which the earned
income 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.
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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 tax-exempt interest, both
excluded from AGI. If the modified AGI exceeds the specified base amount,
either one-half of the excess or one-half of the social security or
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.
Social Security benefits for the disabled, 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.
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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 to amounts
based upon previous volume levels for the period January 1, 1979 to June
22, 1984. Furthermore, future issues are limited to veterans who served on
active duty before 1977.
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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.
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TAX EXPENDITURES IN THE UNIFIED TRANSFER TAX
Exceptions to the general terms of the Federal unified transfer 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. There
is no generally accepted normal tax baseline for transfer taxes.
Unified Transfer Tax Reference Rules
The reference tax rules for the unified transfer tax from which departures
represent tax expenditures include:
f 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.
f Definition of the tax base. The base for the tax is the transferor's
cumulative, taxable lifetime gifts made plus the net estate at death.
Gifts in 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.
f Property valuation. 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.
f 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 to
make a $600,000 tax-free transfer of assets that otherwise would be liable
to the unified transfer tax.\6\
6\ 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 great-grandchildren. The liability of this
tax is on the recipients of the transfer.
f Time when tax is due and payable. Donors are required to pay the tax
annually as gifts are made. 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. 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 1991 93 estimates of tax expenditures in the Federal unified transfer
tax are displayed by functional category in table 24 2. Outlay equivalent
estimates are similar to revenue loss estimates for transfer tax
expenditures and, therefore, are not shown separately. A description of the provisions follows.
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Table 24 2. ESTIMATES FOR TAX EXPENDITURES IN THE FEDERAL UNIFIED TRANSFER TAX
(In millions of dollars)
Description Fiscal Yea
1991 1992 1993
---------- ---------- ----------
Natural Resources and Environment:
Deductions for donations of conservation easements * * *
Agriculture:
Special use valuation of farm real property 65 70 75
Tax deferral of closely held farms 55 55 55
Commerce:
Special use valuation of real property used in closely held businesses 20 20 25
Tax deferral of closely held business 10 10 10
Education, training, employment, and social services:
Deduction for charitable contributions (education) 440 465 500
Deduction for charitable contributions (other than education and health) 1,305 1,380 1,490
Health:
Deduction for charitable contributions (health) 400 425 460
Exclusion of premiums on group life insurance 3,080
Credit for child and dependent care expenses 2,955
Exclusion of Keogh pension contributions and earnings 2,880
Earned income credit \1\ 2,710
Tax credit for corporations receiving income from doing business in United States possessions 2,670
Special ESOP rules (other than investment credit) 2,230
Exclusion of interest on owner-occupied mortgage subsidy bonds 2,140
Exclusion of benefits and allowances to armed forces personnel 2,110
Expensing of research and development expenditures (Normal tax method) 1,995
Exclusion of income earned abroad by United States citizens 1,895
Exclusion of veterans disability compensation 1,760
Additional deduction for the elderly 1,665
Exclusion of disability insurance benefits 1,555
Exclusion of interest on State and local debt for private nonprofit health facilities 1,465
Exclusion of income of foreign sales corporations 1,310
Credit for low-income housing investments 1,160
Excess percentage over cost depletion, fuel and nonfuel minerals 1,065
Exclusion of interest on State and local debt for rental housing 1,005
Deferral of interest on savings bonds 960
Deferral of income from post 1987 installment sales 820
Exclusion of scholarship and fellowship income (Normal tax method) 785
Exclusion of employee meals and lodging (other than military) 780
Alternative fuel production credit 660
Exclusion of employer provided child care 635
Exclusion of interest on State and local debt for private nonprofit educational facilities 615
Exemption of RIC expenses from the 2% floor miscellaneous itemized deduction 545
Exclusion of public assistance benefits (Normal tax method) 490
Expensing of multiperiod timber growing costs 455
Parental personal exemption for students age 19 or over 450
Expensing of certain agricultural capital and multiperiod production costs 325
Exclusion of interest on State and local student loan bonds 325
Exemption of credit union income 320
Exclusion of railroad retirement system benefits 315
Exclusion of parsonage allowances 265
Deductibility of casualty losses 265
Deferral of gains from sale of broadcasting facilities to minority owned businesses 260
Alcohol fuel credit \2\ 210
Amortization of start-up costs 205
Deferral of tax on shipping companies 160
Credit for child medical insurance premiums \3\ 155
Exclusion of interest on state and local debt for veterans housing 155
Credit for disabled access expenditures 150
Carryover basis of capital gains on gifts 145
Permanent exceptions from imputed interest rules 140
Exclusion of employer-provided premiums on accident and disability insurance 135
Tax incentives for preservation of historic structures 135
Expensing of exploration and development costs, fuels and nonfuel minerals 130
Exclusion of military disability pensions 130
Small life insurance company deduction 120
Targeted jobs credit 105
Interest allocation rules exception for certain financial operations 100
Exclusion of special benefits for disabled coal miners 100
Exemption of certain mutuals and cooperative income 95
Investment credit for rehabilitation of structures (other than historic) 90
Treatment of Alaska Native Corporations 85
Exception from passive loss limitation for working interests in oil and gas properties 80
Exclusion of veterans pensions 80
Tax credit for the elderly and disabled 70
Special rules for mining reclamation reserves 50
Exclusion of GI bill benefits 50
ote: All estimates are rounded to the nearest $5 million.
1\ The figures in the table indicate the effect of the earned income tax credit on receipts. The increase in 1993 outlays is $7,895 million.
2\ In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in 1993 excise tax receipts of $460 million.
3\ The figures in the table indicate the effect of the child medical insurance premium credit on receipts. The increase in 1993 outlays is $580 million.
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THE BUDGET FOR FISCAL YEAR 1993
25. INTRODUCTION TO ALTERNATIVE BUDGET PRESENTATIONS
The budget presentation and concepts used in most of this document are the
traditional ones used in presenting a President's budget. In many
respects, the concepts and presentation are legally required and are
effective tools for Federal budgeting.
There is, however, no single ``right'' way of looking at Federal receipts
and outlays and therefore no single ``right'' structure for the Federal
budget.
f The dividing line between the Federal Government and the private sector
cannot be delineated unequivocally.
f Some Federal activities may not be quantifiable or at least not
quantifiable in a way that is commensurate with budget receipts and
expenditures.
f Federal finances may be presented according to alternative conceptual
structures for specialized purposes other than budgeting.
f Budget data may be organized in alternative ways to view spending or
receipts from complementary perspectives.
f As the Government, the economy, the political process, and the technical
capability of budgeting change over time, the appropriate scope and
organization of the budget may also change.
The form of the budget is therefore continually being adjusted to the needs
of the President and the Congress for establishing priorities and
controlling Federal receipts, expenditures, and borrowing; the needs of the
Federal agencies for a workable system of effective program management
based on legal requirements and policy guidelines; and the needs of the
public, including the press and independent researchers, for information
with which to judge Federal operations. The change in budgeting for credit
that is effective this year, and the change in budgeting for insurance that
is proposed in the present budget, are major examples of such development.
The current budget concept, known as the ``unified budget'' or
``consolidated budget,'' was developed in conformance with the
recommendations of the President's Commission on Budget Concepts (1967).
While various adaptations have occurred over the years, the Commission's
report continues to provide the basic framework for Federal budget concepts
and presentations. The consolidated budget is intended to be
comprehensive, encompassing the full scope of Federal programs. It includes
a diverse array of activities most unique to government and others similar
to business operations and must accommodate extensive and sometimes
inconsistent legal requirements. It is based primarily on the Government's
cash receipts and outlays.
The Comptroller General and some Members of Congress, accountants,
economists, corporate leaders, and others have criticized the current
budget presentation. Some, notably the General Accounting Office, believe
the budget's primary focus on obligation controls and cash flows distorts
decisionmaking, prejudicing investment and understating liabilities.
Others decry the artificiality, even gimmickry, of certain distinctions
between on-budget and off-budget, and the practice of classifying certain
Federal entities (such as REFCORP) as non-budgetary Government-sponsored
enterprises. On the other hand, some argue that the budget should be more
like State budgets that separate activities financed by general funds from
those financed by earmarked funds; some argue that the current practice of
including business-type income as an offset to outlays should be replaced
by including such income in receipts and showing outlays on a gross basis;
and others argue that the retirement trust funds and the debt and interest
portions of the budget should be separately displayed.
There is no dispute that receipts and spending should be viewed in more
than one way. Some standard alternatives have been used longer than the
consolidated budget and were taken for granted or strongly endorsed by the
President's Commission on Budget Concepts. And there is a degree of merit
in many of the criticisms of the present budget. Accordingly, this part of
the budget document provides a selection of alternative budget
presentations in order to view Federal finances in different ways, display
alternatives to those who have not previously considered them, allow those
who criticize the conventional approach to examine the effects of
alternatives, and encourage further discussion.
The alternative budget presentations are considered in the next seven
chapters. The first of these chapters discusses generational accounts,
which is a new method being developed by academic economists to compare the
fiscal treatment of different generations over the very long-term. It is
still being developed, and a number of the assumptions used to estimate the
accounts are controversial. This chapter explains the concept and presents
some illustrative results.
The second chapter in this part describes the Federal sector as measured in
the national income and product accounts, which are an integrated set of
measures of aggregate economic activity, including the gross domestic
product, prepared for many years by the Department of Commerce. The
following two chapters present longstanding alternative ways of dividing up
the budget totals that complement the normal presentation. One divides the
budget between trust funds and Federal funds; the other focuses on physical capital.
The final three chapters in this part of the budget document show
alternative presentations that could replace the consolidated budget,
rather than complement it. These presentations and the consolidated budget
all contain similar information but are arranged differently. The
principal difference is in their focus that which is highlighted for
decision makers and the public. The focus, in turn, may affect the
incentive to make one budgetary decision rather than another. The
alternative presentations are not exact but rather are approximations of
each approach that illustrate the general concepts and some of the key
considerations. These three presentations are:
f The proposal made by the General Accounting Office, which focuses
separately on operating and capital uses, on Federal, trust, and enterprise
funds, and on aggregate totals.
f A budget cast in the form of the State of California's budget, which,
like most State budgets, focuses on individual funds rather than
consolidated totals.
f A budget divided threefold among an operating fund, a retirement fund,
and a debt and interest fund.
The three presentations are compared with each other and the consolidated
budget at the end of the chapter discussing the last of these
presentations, Chapter 32.
The chapters in this part of the document do not reflect the proposed
Defense savings to the adjusted Defense baseline or the proposed extension
of unemployment benefits. Furthermore, the details of the President's
Comprehensive Health Reform Plan which will meet the pay-as-you-go
requirements of the Budget Enforcement Act are not included in this
document and therefore also are not reflected in these chapters. Detailed
tables showing the budgetary effects of both proposals will be provided in
February 1992.
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THE BUDGET FOR FISCAL YEAR 1993
26. GENERATIONAL ACCOUNTS PRESENTATION
Government deficits and the composition of government receipts and
expenditures affect the distribution of income and wealth among different
generations. Generational accounting is a new method for comparing the
fiscal treatment of different generations.\1\It is still being developed,
and a number of the assumptions used to estimate the accounts are
controversial. This chapter explains the concept and presents some
illustrative results, which should encourage further development of
generational accounting and other analyses of the intergenerational effects
of the budget.
1\ Generational accounting was developed by Alan J. Auerbach, Jagadeesh
Gokhale, and Laurence J. Kotlikoff. See Auerbach, Gokhale,and Kotlikoff,
``Generational Accounts: A Meaningful Alternative to Deficit Accounting,''
in David Bradford, ed., Tax Policy and the Economy, vol. 5 (MIT Press for
the National Bureau of Economic Research, 1991), pp. 55 110, and Laurence
J. Kotlikoff, Generational Accounting Knowing Who Pays, and When, for What
We Spend (New York: The Free Press, forthcoming March 1992).
f Future generations are estimated to pay 79 percent more in taxes, net of
social security and other transfers they receive, than the generation of
people who have just been born. This result is the combined effect of
Federal, State, and local government budgets, not the Federal budget alone.
f The Omnibus Budget Reconciliation Act of 1990 (OBRA) significantly
reduced the imbalance between generations. If OBRA had not been enacted,
future generations would be estimated to pay an additional 18 percent more
in taxes, net of the transfers they receive, than the generation of people
just born.
f The effect of OBRA depends crucially on whether it permanently affects
budget outlays and receipts, as the above comparison assumes. If taxes and
expenditures return to their previous path after 1995, future generations
would be estimated to pay an additional 14 percent more in taxes net of
transfers than the generation of people just born almost as much as if OBRA
had never been enacted.
f Returning to pay-as-you-go finance of social security would significantly
increase the fiscal burden on children, people just born, and future
generations compared to those who are now adults and earning income.
f A large part of the heavy net tax payment by future generations, compared
to those just born, is because medicare and medicaid transfers are
projected to grow faster than the economy well beyond the turn of the
century. Suppose, instead, that this health care spending was stabilized
as a percentage of GNP after the year 2000 (except for the effects of
demographic change). The payment of taxes (net of transfers) by future
generations, compared to those just born, would fall from 79 percent to 41
percent.
The Nature of Generational Accounts
The budget normally measures receipts and outlays for one year at a time.
It usually shows these estimates for only a few years into the future, and
even the long-range projections displayed in Chapter 2 extend only to 2001.
The standard budget presentation, moreover, while it divides up receipts
and outlays in a number of complementary classifications, does not organize
the results in a way that compares the effects of policy on different
generations.
Generational accounts, in contrast, are forward looking over a period of
many years; and they classify taxes paid and transfers received social
security, medicare, food stamps, and so forth according to the generation
that pays or receives the money. For an existing generation, they estimate
the taxes and transfers year-by-year over its entire remaining lifespan;
and they summarize these amounts for a generation in terms of one number,
the present value of its entire annual series of average future payments
and receipts.\2\For future generations, generational accounts estimate the
net payments based on the proposition that the government's bills will have
to be paid either by people who are now alive or by future generations.
They calculate how much future generations will have to pay to the
government, above the amounts they will receive in transfers, if the
government's total spending is not reduced from the projected path and if
the people now alive do not pay more than projected.
2\ The ``present value'' is the value to someone at the present time of
amounts of money that he will pay or receive in the future. The value of
$1.00 to be paid or received today is simply $1.00. Future amounts,
however, are discounted for the fact that they are not yet available. The
disadvantage of not having money available until the future is the loss of
interest that could otherwise be earned on the money in the meanwhile.
Therefore, the discounted value is based on the interest rate. The
discounted value is smaller for years farther into the future, because the
loss of interest earnings is greater as interest is lost for more years.
Defined more precisely, generational accounts measure, as of a particular
base year, the present value of the future taxes that the average member of
each given generation is estimated to pay to the government minus the
present value of the future transfers that the average member is estimated
to receive. This difference is called the ``net payment'' in the following
discussion. A generation is defined as all the males or all the females
who are born in one given year.
Generational accounts can be used to make two types of comparison. First,
they can be used to compare the net payment by future generations and the
generation of people just born. These groups are comparable because their
generational accounts cover all the taxes they will pay and all the
transfers they will receive during their entire lifetimes.
The net payments of generations born in past years, however, cannot be
compared at the present stage of development of the accounts. This is
because their future taxes and transfers are only part of the taxes and
transfers over their entire lifetimes. The portion remaining in the future
differs depending on whether a generation is 10, 40, or 80 years old.
Generational accounts therefore cannot be used to judge whether the
government is treating a generation born in the past well or poorly
compared to any other existing generation or future generations.
Comparison of the lifetime net payment of existing generations is a goal
for future research.
Secondly, generational accounts can be used to compare the effects of
actual or proposed policy changes. These effects can be compared for all
generations, including those born in past years, because the changes in
lifetime taxes and transfers will all be in the future and thus are
included in the comparison. This comparison can be made equally well for
policies that change the totals of receipts or expenditures and those that
change the composition of the budget without affecting the deficit.
When using generational accounts, their scope needs to be kept in mind.
These accounts, unlike almost every other table in this budget, include the
taxes and transfers of all levels of government alike Federal, State, and
local. The baseline generational accounts thus do not show the separate
effect of the Federal budget as a whole. Since the difference in
generational accounts due to a policy change can be confined to the Federal
Government alone, this limitation does not affect the ability to use
generational accounts in assessing the effects of a change in Federal
policy.
Generational accounts reflect only taxes paid to the government and
transfers received. They do not impute to particular generations the value
of the government purchases of goods and services made to provide them with
education, highways, national defense, and other services. Therefore, they
do not show the full net benefit or burden that any generation receives
from government policy as a whole, although they can show a generation's
net benefit or burden from a particular policy change that affects only
taxes and transfers. Imputations appear feasible for certain types of
government purchases, such as for primary school education, and they could
be included in future improvements of generational accounts.
Generational accounting also does not, as yet, incorporate any feedback
effects of policy on the economy's growth and interest rates. Feedback
effects can be significant, but they generally occur slowly, so their
impact on the discounted values used in the generational accounts may be
small. Moreover, there is reason to believe they would reinforce the
conclusions derived here. For example, policies that decrease the net
payment by current generations and increase the net payment by future
generations are likely to reduce investment over time. This, in turn, will
lower real wage growth and raise real interest rates, which on balance will
harm future generations in absolute terms.
Even within the scope of generational accounts as now constructed, the
results in this chapter should be viewed as illustrative. They are
necessarily based on a number of simplifying assumptions, about which
reasonable people may disagree, concerning the pattern of future taxes and
transfers, the interest rate used to discount future taxes and transfers to
form present values, mortality rates, birth rates, and so forth. The
absolute amounts of the generational accounts are sensitive to these
assumptions. However, the generational accounts can be illuminating when
considered in the light of their assumptions, as has been the case for the
75-year projections made every year by the social security trustees.
Moreover, the most fundamental result holds for a wide range of reasonable
changes in the assumptions: the net payment by future generations is
relatively much larger than the net payment by the generation just born.
The following sections illustrate the results of generational accounting.
An appendix explains the concepts, calculations, and other assumptions more
fully.
The Remaining Net Payments by Existing Generations
Tables 26 1 and 26 2 show the generational accounts as of calendar year
1990 for every fifth generation of males and females alive in that year.
The first column, ``net payment,'' is the difference between the present
value of taxes that an average member of each generation will pay over his
remaining life and the present value of the transfers he will receive. The
other columns show the average present values of the different taxes and
transfers. All Federal, State, and local taxes and transfers are included
in these calculations. Because of the time needed to prepare these
estimates, Federal spending and receipts are based on the baseline in the
Mid-Session Review of the 1992 Budget rather than the policy in the present
budget.
#ENDCARD
#CARD
Table 26 1. GENERATIONAL ACCOUNTS FOR MALES: PRESENT VALUE OF TAXES AND TRANSFERS AS OF 1990
(In thousands of dollars)
Generation's age in 1990 Net payme Taxes pai Transfers
Labor inc Capital i Payroll t Excise ta Social se Health Welfare
The rescission proposal is being requested because the program has
fulfilled the purpose for which it was created. Local Rail Freight
Assistance was initiated in 1973 to provide financial support to States to
ensure continuation of rail freight service on light density lines. Partial
deregulation achieved by the Staggers Rail Act in 1980 has stimulated the
industry and the abandonment of light density rail lines that was prevalent
during the industry's financial crisis of the 1970's is no longer a
problem. Therefore, there is no need for Federal assistance in preserving
light density lines.
#ENDCARD
#CARD
THE BUDGET FOR FISCAL YEAR 1993 SUPPLEMENT
AMENDMENTS TO THE PRESIDENT'S BUDGET REQUESTS
This section transmits amendments to the request for 1993 appropriations
that were transmitted to the Congress on January 29, 1992. The presentation
includes the original request, the amendment, the revised request, and
narrative explanation.
#ENDCARD
#CARD
Department of Agriculture
FARMERS HOME ADMINISTRATION
1993 Budget Request Pending
1993 Proposed Amendment
1993 Revised
One 308
Agricultural credit insurance program account
$87,508,000 Language $87,508,000
(In the appropriations language under the above heading, delete the period
after ``$240,606,000'' and substitute the following:)
: Provided further, That the
last sentence under the heading
``Agricultural Credit Insurance
Program Account'' in Public Law
102 142 is hereby repealed.
This language would restore the mandatory nature of loan levels specified
in the Omnibus Budget Reconciliation Act of 1990 (OBRA) through 1995 for
this program. OBRA's reductions in direct loans and shifts to guarantees
provided a significant portion of the savings in agricultural programs,
which were agreed to by Congress and the Administration.
#ENDCARD
#CARD
RURAL ELECTRIFICATION ADMINISTRATION
1993 Budget Appendix Page
1993 Budget Request Pending
1993 Proposed A
1993 Revised Request
One 329
Rural electrification and telephone loans program account
$46,166,000
Language
$46,166,000
(In the appropriations language under the above heading delete the period
after the last sentence and substitute the following:)
: Provided further, That the
last sentence under the heading
``Rural Electrification and
Telephone Loans Program
Account'' in Public Law 102 142
is hereby repealed.
This language would restore the mandatory nature of loan levels specified
in the Omnibus Budget Reconciliation Act of 1990 (OBRA) through 1995 for
this program. OBRA's reductions in direct loans and shifts to guarantees
provided a significant portion of the savings in agricultural programs,
which were agreed to by Congress and the Administration.
#ENDCARD
#CARD
COMMODITY CREDIT CORPORATION
1993 Budget Appendix Page
1993 Budget Request Pending
1993 Proposed A
1993 Revised Request
One 342
Commodity Credit Corporation Export Loans Program Account
(Reestimate of indefinite appropriation from $158,460,000 to $388, 170,000)
This proposal reflects a technical reestimate of subsidies for export
guarantees.
#ENDCARD
#CARD
Department of the Interior
MINERALS MANAGEMENT SERVICE
1993 Budget Appendix Page
1993 Budget Request Pending
1993 Proposed A
1993 Revised Request
One 583
Leasing and Royalty Management (In the appropriations language under the
above heading delete ``$122,777,400'' and substitute $155,275,000.)
$197,812
Language
$197,812
This reduction reflects technical adjustments to the administrative cost
estimates used in determining mineral leasing and associated payments.
One 585
Oil spill research $5,000,000 + $377,000 = $5,377,000
This addition reflects assumption of the oil spill financial responsibility
function assigned to the Department of the Interior by Executive Order
12777.
#ENDCARD
#CARD
Department of Treasury
TITLE V GENERAL PROVISIONS
1993 Budget Appendix Page
1993 Budget Request Pending
1993 Proposed A
1993 Revised Request
One 816
Title V General Provisions Language
(Insert the following language after ``Sec. 511''.)
Sec. 512. Limitation of subsidies for reduced-rate mail matter.
(a) Commercial Advertising.
Section 3626(j)(1) of title 39,
United States Code, is amended
by striking out ``or'' at the
end of subparagraph (B), by
striking out the period and
inserting a semicolon at the
end of the subparagraph (C),
and by adding at the end the
following subparagraph:
``(D) any other article or
product, unless substantially
all of the labor of producing
or assembling the article or
product has been performed by
members of an organization
authorized to mail at the rates
for mail under former section
4452(b) or 4452(c) of this
title, or by persons for whose
benefit that organization was
established;
``(E) any other service, unless
the service is provided by
members of an organization
authorized to mail at the rates
for mail under former section
4452(b) or 4452(c) of this
title, or by persons for whose
benefit that organization was
established; or
``(F) any gift or premium offer
unless the gift or premium may
be kept by the addressee
whether or not a contribution
or other payment is made.''.
(b) Political Advocacy.
Section 3626 of title 39,
United States Code, is amended
by redesignating the final
subsection thereof as
subsection ``(1)'', and by
adding at the end of the
following:
``(m) In the administration of
this section, the rates for
mail under former section
4452(b) or 4452(c) of this
title shall not apply to mail
sent by an organization if any
substantial part of the purpose
of such organization is to
carry on propaganda, or
otherwise to attempt to
influence legisla
tion, or to influence,
participate in, or intervene in
(including the publication or
distribution of statements),
any political campaign on
behalf of (or in opposition to)
any candidate for public
office.''.
(c)
Educational Organizations.
Section 3626 of title 39,
United States Code, is amended
by adding at the end the
following:
``(n) In the administration of this section, an organization or association
shall be considered to qualify as `educational' within the terms of former
sections 4358(j)(2), 4452(d), and 4554(b)(1)(B) of this title only if it has
been granted an exemption from Federal income tax under section 501
(c)(3) of title 26, United
States Code, and its primary
purpose is to administer a
course or courses of
instruction involving personal
classroom contact between
students and the instructor.''.
(d) Advertising in Publications. Section 3626 of title 39, United States
Code, is amended by adding at the end of the following:
``(o) In the administration of this section, the rates for mail under former
section 4358(d) of this title shall not apply to any issue of a publication
the advertising portion of which exceeds 10 percent of such issue.''.
(e) Mailings by Publishers and Distributors. Section 3683 of title 39,
United States Code, is amended by striking out ``(a)'' in the first
subsection, and by striking out all of subsection (b).
(f) Conforming Amendment. Section 2401(c) of title 39, United States Code,
is amended by striking out ``3626 (a) (h) and (j) (k)'' and inserting ``3626
(a) (h) and (j) (o)''.
This amendment would not alter the President's $122 million Revenue Forgone
request. However, it does specify the reforms to reduce abuses and achieve
$95 million in savings. The budget proposes many reforms made by the Postal
Rate Commission in its June 1986 Preferred Rate Study. The proposed reforms
would discontinue abuses of the reduced postage rate subsidy by tightening
eligibility requirements. Preferred rate status would be terminated or
restricted for the following categories: (a) second-class nonprofit mail
whose content includes more than 10 percent advertising; (b) third-class
nonprofit mail containing commercial advertising or sent by an organization
which carries on political advocacy; (c) any preferred rate mail sent by an
``educational'' organization other than a school; and (d) fourth-class
library rates for commercial publishers.
#ENDCARD
#CARD
Other Independent Agencies
FEDERAL COMMUNICATION COMMISSION
5 Proposed Amendment 1993
Revised Request
One 956 Salaries and expenses (In the appropriation language under the above heading delete the material starting with ``: Provided'' and ending with ``these Commission Services''.) $153,336,000 Language $153,336,000
This language change would provide a technical change to the classification
of proposed receipts resulting from the agency's regulatory activities.
