105th Congress S. PRT. 2d Session COMMITTEE PRINT 105±70 " ! TAX EXPENDITURES Compendium of Background Material on Individual Provisions COMMITTEE ON THE BUDGET UNITED STATES SENATE DECEMBER 1998 PREPARED BY THE CONGRESSIONAL RESEARCH SERVICE Prepared for the use of the Committee on the Budget by the Congres- sional Research Service. This document has not been officially approved by the Committee and may not reflect the views of its members. 1 VerDate 23-MAR-99 13:45 Apr 13, 1999 Jkt 005300 PO 00000 Frm 00001 Fmt 6012 Sfmt 6012 E:\PICKUP\J52-491C 52491c PsN: 52491c 1 105th Congress S. PRT. 2d Session COMMITTEE PRINT 105±70 " ! TAX EXPENDITURES Compendium of Background Material on Individual Provisions COMMITTEE ON THE BUDGET UNITED STATES SENATE DECEMBER 1998 PREPARED BY THE CONGRESSIONAL RESEARCH SERVICE Prepared for the use of the Committee on the Budget by the Congres- sional Research Service. This document has not been officially approved by the Committee and may not reflect the views of its members. U.S. GOVERNMENT PRINTING OFFICE 52-491 WASHINGTON : 1998 For sale by the U.S. Government Printing Office Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 VerDate 23-MAR-99 13:45 Apr 13, 1999 Jkt 005300 PO 00000 Frm 00002 Fmt 5012 Sfmt 6012 E:\PICKUP\J52-491C 52491c PsN: 52491c COMMITTEE ON THE BUDGET PETE V. DOMENICI, New Mexico, Chairman CHARLES E. GRASSLEY, Iowa FRANK R. LAUTENBERG, New Jersey DON NICKLES, Oklahoma ERNEST F. HOLLINGS, South Carolina PHIL GRAMM, Texas KENT CONRAD, North Dakota CHRISTOPHER S. BOND, Missouri PAUL S. SARBANES, Maryland SLADE GORTON, Washington BARBARA BOXER, California JUDD GREGG, New Hampshire PATTY MURRAY, Washington OLYMPIA J. SNOWE, Maine RON WYDEN, Oregon SPENCER ABRAHAM, Michigan RUSSELL D. FEINGOLD, Wisconsin BILL FRIST, Tennessee TIM JOHNSON, South Dakota ROD GRAMS, Minnesota RICHARD J. DURBIN, Illinois GORDON SMITH, Oregon G. WILLIAM HOAGLAND, Staff Director BRUCE KING, Staff Director for the Minority ii VerDate 23-MAR-99 13:45 Apr 13, 1999 Jkt 005300 PO 00000 Frm 00003 Fmt 0486 Sfmt 0486 E:\PICKUP\J52-491C 52491c PsN: 52491c 1 TAX EXPENDITURESÐCompendium of Background Material on Individual Provisions VerDate 23-MAR-99 13:45 Apr 13, 1999 Jkt 005300 PO 00000 Frm 00004 Fmt 6019 Sfmt 6019 E:\PICKUP\J52-491C 52491c PsN: 52491c LETTER OF TRANSMITTAL December 22, 1998 UNITED STATES SENATE COMMITTEE ON THE BUDGET WASHINGTON, DC To the Members of the Committee on the Budget: The Congressional Budget and Impoundment and Control Act of 1974 (as amended) requires the Budget Committees to examine tax expenditures as they develop the Congressional Budget Resolution. There are over 120 separate tax expenditures in current law. Section 3(3) of the Budget Act of 1974 defines tax expenditures as those revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or provide a special credit, a preferential rate of tax, or a deferral of tax liability. Tax expenditures are becoming increasingly important when considering the budget. They are often enacted as permanent legislation and can be compared to direct spending on entitlement programs. Both tax expenditures and entitlement spending have received, as they should in the current budget environment, increased scrutiny. This print was prepared by the Congressional Research Service (CRS) and was coördinated by Cheri Reidy of the Senate Budget Committee staff. All tax code changes through the end of the 105th Congress are included. The CRS has produced an extraordinarily useful document which incorporates not only a description of each provision and an estimate of its revenue cost, but also a discussion of its impact, a review of its underlying rationale, an assessment which addresses the arguments for and against the provision, and a set of bibliographic references. Nothing in this print should be interpreted as representing the views or recommendations of the Senate Budget Committee or any of its members. Pete V. Domenici Chairman (III) LETTER OF SUBMITTAL CONGRESSIONAL RESEARCH SERVICE THE LIBRARY OF CONGRESS Washington, D.C., December 15, 1998 Honorable Pete V. Domenici Chairman, Committee on the Budget U.S. Senate Washington, DC 20510. Dear Mr. Chairman: I am pleased to submit a revision of the December 1996 Committee Print on Tax Expenditures. As in earlier versions, each entry includes an estimate of the revenue cost, the legal authorization, a description, the impact of the provision, the rationale at the time of adoption, an assessment, and bibliographic citations. The impact section includes quantitative data on the distribution of tax expenditures across income classes where relevant and where data are available. The rationale section contains some detail about the historical development of each provision. The assessment section summarizes the issues surrounding each tax expenditure. The revision was written under the general direction of Jane G. Gravelle, Senior Specialist in Economic Policy. Contributors of individual entries include James M. Bickley, David L. Brumbaugh, Gregg A. Esenwein, Jane G. Gravelle, Donald W. Kiefer, Salvatore Lazzari, Linda Levine, Nonna A. Noto, Louis A. Talley, Jack H. Taylor, and Dennis Zimmerman of the Economics Division; and Velma W. Burke, Geoffrey C. Kollman, Robert F. Lyke, Joseph I. Richardson, and James R. Storey of the Education and Public Welfare Division. Thomas A. Holbrook provided editorial assistance and prepared the document for publication. DANIEL P. MULHOLLAN, Director (V) CONTENTS Letter of Transmittal .................................... III Letter of Submittal ...................................... V Introduction ............................................ 1 National Defense Exclusion of Benefits and Allowances to Armed Forces Personnel ........................ 11 Exclusion of Military Disability Benefits .................. 15 International Affairs Exclusion of Income Earned Abroad by U.S. Citizens ........ 19 Exclusion of Certain Allowances for Federal Employees Abroad ..................... 23 Exclusion of Income of Foreign Sales Corporations (FSCs) .... 27 Deferral of Income of Controlled Foreign Corporations ....... 31 Inventory Property Sales Source Rule Exception ............ 35 Deferral of Income of Controlled Foreign Corporations ....... 39 General Science, Space, and Technology Tax Credit for Qualified Research Expenditures ............. 43 Expensing of Research and Experimental Expenditures ....... 49 Energy Expensing of Exploration and Development Costs: Oil, Gas, and Other Fuels ......................... 53 Excess of Percentage over Cost Depletion: Oil, Gas, and Other Fuels ......................... 59 Credit for Enhanced Oil Recovery Costs .................. 65 Tax Credit for Production of Non-Conventional Fuels ........ 69 Tax Credits for Alcohol Fuels .......................... 75 Exclusion of Interest on State and Local Government Industrial Development Bonds for Energy Production Facilities ..... 81 Exclusion of Energy Conservation Subsidies Provided by Public Utilities ....................... 85 Tax Credit for Investments in Solar and Geothermal Energy Facilities ....................... 89 Tax Credits for Electricity Production from Wind and Biomass ................................... 93 Natural Resources and Environment Excess of Percentage Over Cost Depletion: Nonfuel Minerals ............................... 97 Expensing of Multiperiod Timber-Growing Costs .......... 103 VII VIII Exclusion of Interest on State and Local Government Sewage, Water, and Hazardous Waste Facility Bonds ... 107 Tax Credit for Rehabilitation of Historic Structures ......... 111 Special Rules for Mining Reclamation Reserves ............ 115 Exclusion of Contributions in Aid of Construction for Water and Sewer Utilities ..................... 119 Agriculture Exclusion of Cost-Sharing Payments .................... 123 Exclusion of Cancellation of Indebtedness Income of Farmers ................................... 125 Cash Accounting for Agriculture ....................... 129 Income Averaging for Farmers ......................... 133 Five-Year Carryback for Farm Net Operating Losses ........ 137 Commerce and Housing Exemption of Credit Union Income ..................... 139 Exclusion of Investment Income on Life Insurance and Annuity Contracts ........................... 143 Small Life Insurance Company Taxable Income Adjustment .. 147 Special Treatment of Life Insurance Company Reserves ...... 151 Deduction of Unpaid Loss Reserves for Property and Casualty Insurance Companies .......... 155 Special Deduction for Blue Cross and Blue Shield Companies .......................... 159 Deduction for Mortgage Interest on Owner-Occupied Residences ...................... 163 Deduction for Property Taxes on Owner-Occupied Residences ...................... 169 Exclusion of Capital Gains on Sales of Principal Residences .. 175 Exclusion of Interest on State and Local Government Bonds for Owner-Occupied Housing ...... 179 Exclusion of Interest on State and Local Government Bonds for Rental Housing .............. 183 Depreciation of Rental Housing in Excess of Alternative Depreciation System ................... 187 Tax Credit for Low-Income Housing .................... 193 Tax Credit for First Time Homebuyers in the District of Columbia ......................... 197 Reduced Rates of Tax on Long-Term Capital Gains ......... 199 Depreciation of Buildings Other than Rental Housing in Excess of Alternative