JCT Estimates Federal Tax Expenditures for Fiscal 2023-2027

ESTIMATES OF FEDERAL TAX EXPENDITURES FOR FISCAL YEARS 2023-2027

Prepared for the
HOUSE COMMITTEE ON WAYS AND MEANS
and the
SENATE COMMITTEE ON FINANCE
By the Staff
of the
JOINT COMMITTEE ON TAXATION

December 7, 2023
JCX-59-23

---

CONTENTS

INTRODUCTION

I. THE CONCEPT OF TAX EXPENDITURES

II. MEASUREMENT OF TAX EXPENDITURES

III. TAX EXPENDITURE ESTIMATES

---

INTRODUCTION

Tax expenditure analysis can help policymakers and the public understand the ways in which government revenues are spent, and the tax and economic policy consequences that follow from the implicit or explicit choices made in fashioning legislation. This report¹ on tax expenditures for fiscal years 2023-2027 is prepared by the staff of the Joint Committee on Taxation (“Joint Committee staff”) for the House Committee on Ways and Means and the Senate Committee on Finance. The report also is submitted to the House and Senate Committees on the Budget.

As in the case of earlier reports,² the estimates of tax expenditures in this report were prepared in consultation with the staff of the Office of Tax Analysis in the Department of the Treasury (the “Treasury”). The Treasury most recently updated its estimates of tax expenditures for fiscal years 2022-2032 on March 6, 2023.³ The lists of tax expenditures in this Joint Committee staff report and the Administration's budgetary statement overlap considerably; the differences are discussed in Part I of this report under the heading “Comparisons with Treasury.”

The Joint Committee staff has made its estimates (as shown in Table 1) based on the provisions in Federal tax law enacted through August 31, 2023. In general, expired or repealed provisions are not listed unless they have continuing revenue effects that are associated with ongoing taxpayer activity. Proposed extensions or modifications of expiring provisions are not included until they have been enacted into law. The tax expenditure calculations in this report are based on the February 2023 Congressional Budget Office (“CBO”) revenue baseline and Joint Committee staff projections of the gross income, deductions, and expenditures of individuals and corporations for calendar years 2023-2027.

Part I of this report contains a discussion of the concept of tax expenditures; Part II is a discussion of the measurement of tax expenditures; and Part III contains various estimates. Estimates of tax expenditures for fiscal years 2023-2027 are presented in Table 1. Table 2 shows the distribution of tax returns by income class, and Table 3 shows distributions of selected individual tax expenditures by income class.

I. THE CONCEPT OF TAX EXPENDITURES

Overview

Tax expenditures are defined under the Congressional Budget and Impoundment Control Act of 1974 (the “Budget Act”) as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”⁴ Thus, tax expenditures include any reductions in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers.

Special income tax provisions are referred to as tax expenditures because they may be analogous to direct outlay programs and may be considered alternative means of accomplishing similar budget policy objectives. Tax expenditures are like direct spending programs that function as entitlements to those who meet the established statutory criteria.

Estimates of tax expenditures are prepared for use in budget analysis. They are a measure of the economic benefits that are provided through the tax laws to various groups of taxpayers and sectors of the economy. The estimates also may be useful in determining the relative merits of achieving specific public goals through tax benefits or direct outlays. It is appropriate to evaluate tax expenditures with respect to cost, distributional consequences, alternative means of provision, and economic effects and to allow policymakers to evaluate the tradeoffs among these and other potentially competing policy goals.

The legislative history of the Budget Act indicates that tax expenditures are to be defined with reference to a normal income tax. The determination of whether a provision is a tax expenditure is made based on a broad concept of income that is larger in scope than “income” as defined under Federal income tax principles. The Joint Committee staff uses its judgment in distinguishing between those income tax provisions (and regulations) that can be viewed as a part of a normal income tax and those special provisions that result in tax expenditures. Normal income tax concepts for individual and business income taxation are further described below. A provision traditionally has been listed as a tax expenditure by the Joint Committee staff if there is a reasonable basis for such classification and the provision results in more than a de minimis revenue loss, which solely for this purpose means a total revenue loss of less than $250 million over the five fiscal years 2023-2027⁵. The Joint Committee staff emphasizes, however, that in the process of listing tax expenditures, no judgment is made, nor any implication intended, about the desirability of any special tax provision as a matter of public policy.

The Budget Act uses the term “tax expenditure” to refer to Federal income tax provisions that provide more favorable treatment than a normal income tax.⁶ Other Federal taxes such as excise taxes, employment taxes, and estate and gift taxes may also have exceptions, exclusions, and credits, but those special tax provisions are not included in this report because they are not part of the income tax.⁷ Thus, for example, the income tax exclusion for employer-paid health insurance is included, but the Federal Insurance Contributions Act (“FICA”) tax exclusion for employer-paid health insurance is not treated as a tax expenditure in this report.

Provisions in the Internal Revenue Code (the “Code”) that provide less favorable treatment than a normal income tax and are not related directly to progressivity are called negative tax expenditures.⁸ Examples of such provisions include (1) the denial of deductions for certain business interest expenses, (2) the denial of deductions for certain executive compensation, and (3) the denial of deductions for unreimbursed employee expenses (in the case of taxable years 2018-2025). Special provisions of the law the principal purpose of which is to enforce general tax rules, or to prevent the violation of other laws, are not treated as negative tax expenditures even though they may increase the tax burden for certain taxpayers. Examples of these compliance and enforcement provisions include (1) the limitation on net operating loss carryforwards and certain other losses following ownership changes (sec. 382), (2) the wash sale rules (sec. 1091), (3) the denial of capital gain treatment for gains on certain obligations not in registered form (sec. 1287), and (4) the disallowance of a deduction for fines and penalties (sec. 162(f)).

Provisions that are not themselves tax expenditures are also considered in tax expenditure estimates if they affect the magnitude of tax expenditures. Examples of these provisions include limitations on deductions or alternative minimum taxes that reduce the favorable treatment of certain deductions or credits.

Individual income tax

Under the Joint Committee staff's methods, the normal structure of the individual income tax includes the following major components: one personal exemption for each taxpayer and one for each dependent, the standard deduction, the existing tax rate schedule, and deductions for investment and employee business expenses. Most other tax benefits for individual taxpayers are classified as exceptions to a normal income tax.

The Joint Committee staff views the standard deduction and the personal exemptions as defining the zero-rate bracket that is a part of normal tax law.⁹ An itemized deduction that is not definitely related to the generation of income is classified as a tax expenditure, but only to the extent that taxpayer's total amount of itemized deductions exceeds the standard deduction. While some features of the tax law, such as the child tax credit and the credit for nonchild dependents, provide what may be considered adjustments for family size that have the objective of achieving a similar policy as personal exemptions, they do not do so in a way that defines a zero-rate bracket. For example, the size of the zero-rate bracket for taxpayers with similar household composition would vary based on other tax attributes of the household. The Joint Committee staff considers these credits to be tax expenditures.

An exclusion from gross income applies generally to amounts received under a life insurance contract that are paid by reason of the death of the insured. This exclusion is also classified as a tax expenditure.

All employee compensation is subject to tax unless the Code contains a specific exclusion for the income. Specific exclusions for employer-provided benefits include: coverage under accident and health plans,¹⁰ accident and disability insurance, group term life insurance, educational assistance, tuition reduction benefits, transportation benefits (parking, van pools, and transit passes), dependent care assistance, adoption assistance, meals and lodging furnished for the convenience of the employer, employee awards, and other miscellaneous fringe benefits (e.g., working condition fringes, employee discounts, services provided to employees at no additional cost to employers, and de minimis fringe benefits). Each of these exclusions is classified as a tax expenditure in this report.

Under a normal income tax, employer contributions to pension plans and income earned on pension assets generally would be taxable to employees as the contributions are made and as the income is earned, and employees would not receive any deduction or exclusion for their pension contributions. Under present law, employer contributions to qualified pension plans and, generally, employee contributions made at the election of the employee through salary reduction are not taxed until distributed to the employee, and income earned on pension assets is not taxed until distributed. The tax expenditure for “net exclusion of pension contributions and earnings” is computed as the income taxes forgone on current tax-excluded pension contributions and earnings less the income taxes paid on current pension distributions (including the 10-percent additional tax paid on early withdrawals from pension plans).

Under present law, Social Security and tier 1 railroad retirement benefits are partially excluded or fully excluded from gross income.¹¹ This exclusion of Social Security and railroad retirement benefits is classified as a tax expenditure.

Public assistance benefits are excluded from gross income by statute or by Treasury regulations. Table 1 contains tax expenditure calculations for workers' compensation benefits.

Gross income does not include the imputed income that individuals receive from the services provided by owner-occupied housing and durable goods.¹² However, the Joint Committee staff does not classify this exclusion as a tax expenditure.¹³ The measurement of imputed income for income tax purposes presents administrative problems and its exclusion from taxable income may be regarded as an administrative necessity.¹⁴ Under a normal income tax, individuals are allowed to deduct only the interest on indebtedness incurred in connection with a trade or business or for the production of income. Thus, the deduction for mortgage interest on a principal or second residence is classified as a tax expenditure.

The Joint Committee staff assumes that, for administrative feasibility, a normal income tax would tax capital gains in full in the year the gains are realized through sale, exchange, gift, or transfer at death. Thus, the deferral of tax until realization is not classified as a tax expenditure. However, reduced rates of tax,¹⁵ further deferrals of tax (beyond the year of sale, exchange, gift, or transfer at death), and exclusions of certain capital gains are classified as tax expenditures. Because of the practical need for administrative feasibility, the Joint Committee staff assumes that a normal income tax does not provide for any indexing of the basis of capital assets for changes in the general price level. Thus, under a normal income tax (as under present law), the income tax is levied on nominal gains as opposed to real gains in asset values.

There are many types of State and local government bonds and qualified private activity bonds the interest on which is exempt from Federal income taxation or for which a tax credit is available.¹⁶ Table 1 contains a separate tax expenditure listing for each type of bond.

Under the Joint Committee staff view of a normal income tax, compensatory stock options generally are subject to regular income tax at the time the options are exercised and employers receive a corresponding tax deduction.¹⁷ The employee's income is equal to the difference between the purchase price of the stock and the market price on the day the option is exercised. Present law provides for special tax treatment for incentive stock options and options acquired under employee stock purchase plans. When certain requirements are satisfied, then: (1) the income of the employee with respect to the option at the time of exercise is excluded for purposes of the regular income tax but, in the case of an incentive stock option, is included for purposes of the alternative minimum tax (“AMT”); (2) the gain from any subsequent sale of the stock is taxed as a capital gain; and (3) the employer does not receive a tax deduction with respect to the option. The special tax treatment provided to the employee is viewed as a tax expenditure by the Joint Committee staff, and an estimate of this tax expenditure is contained in Table 1. However, the revenue loss from the special tax treatment provided to the employee is accompanied by a significant revenue gain from the denial of the deduction to the employer. The negative tax expenditure created by the denial of the deduction for employers is incorporated in the calculation of the tax expenditure.

The individual AMT and certain rules that limit the deductibility of losses and expenses are not viewed by the Joint Committee staff as a part of a normal income tax. Instead, they are viewed as provisions that reduce the magnitude of the tax expenditures to which they apply. For example, the AMT reduces the value of the deduction for State and local income taxes (for those taxpayers subject to the AMT) by not allowing the deductions to be claimed in the calculation of AMT liability. Similarly, the passive loss rules, excess business loss rules, at-risk rules, and miscellaneous itemized deductions defer or disallow otherwise allowable deductions and credits. Exceptions to the individual AMT and the passive loss rules are not classified as tax expenditures by the Joint Committee staff because the effects of the exceptions already are incorporated in the estimates of related tax expenditures. In two cases the restrictive effects of the AMT are presented separately because there are no underlying positive tax expenditures reflecting these effects: the negative tax expenditures for the AMT's disallowance of the standard deduction; and the net AMT attributable to the net operating loss limitation.

Business income taxation

Regardless of the legal form of organization (sole proprietorship, partnership, or S or C corporation), the same general principles are used in the computation of taxable business income – that is, gross income decreased by expenses incurred in earning the income. Thus, certain business tax expenditures apply equally to incorporated and unincorporated businesses.

One of the most difficult issues in defining tax expenditures for business income relates to the tax treatment of capital costs. Under present law, capital costs may be recovered under a variety of alternative methods, depending on the nature of the costs and the status of the taxpayer. For example, investments in equipment and structures may qualify for tax credits, expensing, accelerated depreciation, or straight-line depreciation. The Joint Committee staff generally classifies as tax expenditures cost recovery allowances that are more favorable than those provided under the alternative depreciation system (sec. 168(g)), which provides for straight-line recovery over tax lives that are longer than those permitted under the accelerated system.

Some economists assert that ratable (“straight-line”) cost recovery over a defined period does not correspond with economic depreciation. In particular, some economists have found that economic depreciation follows a geometric pattern, as opposed to a straight-line pattern, because data suggest that a geometric pattern more closely matches the actual pattern of price declines for most asset types. The Bureau of Economic Analysis (“BEA”) of the Department of Commerce introduced in 1997 a new methodology for calculating economic depreciation for purposes of the National Income and Product Accounts (“NIPA”) that relies on constant (geometric) rates of depreciation rather than the straight-line method used previously and embodied in the alternative depreciation system. Unlike the tax depreciation rules, this analysis is based on separate lives and depreciation rates for each of dozens of types of assets.¹⁸ A somewhat similar result could be reproduced mathematically using the straight-line method and adjusting the recovery period. The straight-line method could be used over a shorter or longer recovery period to provide for a present value of tax depreciation greater than, equal to, or less than the present value of economic depreciation.¹⁹

The Joint Committee staff estimates another tax expenditure for depreciation in those specific cases where the tax treatment of a certain type of asset deviates from the overall treatment of other similar types of assets. In Table 1, these items are reflected in the various tax expenditure estimates for depreciation. As indicated above, the Joint Committee staff assumes that normal income tax law does not provide for any indexing of the basis of capital assets (nor, for that matter, any indexing with respect to expenses associated with these assets). Thus, normal income tax law does not take into account the effects of inflation on tax depreciation.

The Joint Committee staff uses several accounting standards in evaluating the provisions in the Code that govern the recognition of business receipts and expenses. The Joint Committee staff assumes a normal income tax requires the accrual method of accounting (except where its application is deemed infeasible) and the standard of the “all events test” (used in the Code to determine whether an item of gross income is included in gross income or a liability is incurred) over an annual accounting period. For example, in the case of a liability, the all events test is met when all events have occurred which determine the fact of the liability, the amount of such liability can be determined with reasonable accuracy, and economic performance with respect to such liability has occurred during the taxable year.

In general, tax provisions that deviate from these standards are viewed as tax expenditures. For example, the deduction for estimated mine reclamation and closing costs is viewed as a tax expenditure because such costs do not satisfy the economic performance standard. (Adherence to the standard would require that the taxpayer incur the actual mine reclamation and closing costs, rather than reserving for reasonably estimated future mine reclamation and closing costs.) As another example, the one-year deferral of income from certain advance payments is viewed as a tax expenditure because the deferral is an exception to the all events test. (Adherence to the standard would require that the taxpayer recognize the revenue in the year of receipt.)²⁰

The Joint Committee staff assumes that a normal income tax provides for the carryback and carryforward of net operating losses. The staff also assumes that the general limits on the number of years that such losses may be carried back or forward were chosen for reasons of administrative convenience and compliance concerns, and so may be assumed to represent a normal income tax. Exceptions to the general limits on carrybacks and carryforwards are viewed as tax expenditures. Limitations on the use of net operating losses to a percentage of taxable income is viewed as a negative tax expenditure.

Corporate income tax

The income of corporations (other than S corporations) generally is subject to a 21-percent corporate income tax.

The corporate alternative minimum tax is viewed as a provision that reduces the magnitude of certain tax expenditures that are disregarded for purposes of the corporate alternative minimum tax.

Passthrough entities are not subject to the corporate income tax. The income of sole proprietorships, S corporations, and most partnerships is taxed only at the owner level. Certain passthrough entities formally treated as corporations (such as regulated investment companies, real estate investment trusts, and cooperatives) are in some circumstances allowed a dividends-paid deduction, which generally results in their paying little to no corporate tax.

Certain organizations that satisfy the requirements of section 501 also generally are not subject to the corporate income tax. The tax exemption for noncharitable organizations that have a direct business analogue or compete with for-profit organizations organized for similar purposes is a tax expenditure.²¹ The tax exemption for certain nonprofit cooperative business organizations, such as trade associations, is not treated as a tax expenditure just as the treatment of for-profit passthrough business entities is not treated as a tax expenditure. With respect to other nonprofit organizations, such as charities, tax-exempt status is not classified as a tax expenditure because the nonbusiness activities of such organizations generally must predominate and their unrelated business income is subject to tax.²² However, there are numerous exceptions that allow for otherwise unrelated business income to escape taxation,²³ and these exceptions are treated as tax expenditures. In general, the imputed income derived from nonbusiness activities conducted by individuals or collectively by certain nonprofit organizations is outside the normal income tax base. However, the ability of donors to such nonprofit organizations to claim a charitable contribution deduction is a tax expenditure, as is the exclusion of income granted to holders of tax-exempt financing issued by charities.

Recent legislation

The Consolidated Appropriations Act, 2023, enacted on December 23, 2022 (Pub. L. No. 117-328), creates several new tax expenditures.

• A new nonrefundable credit is created for eligible small employers with respect to each individual who is married to a member of the uniformed services serving on active duty and who self-certifies as such (referred to as a military spouse), who is an employee of the employer, who participates in an eligible defined contribution plan of the employer, and who is not a highly compensated employee as defined under section 414(q).²⁴

• An exclusion from gross income is created for qualified first responder retirement payments for any taxable year to the extent such payments do not exceed an annualized excludable disability amount.²⁵

The Consolidated Appropriations Act, 2023 also modifies several existing tax expenditures.

• Newly established section 401(k) plans and section 403(b) plans with salary reduction agreements are generally required to provide for automatic enrollment.

• Two new types of retirement plans are established: a new type of section 401(k) plan, a “starter 401(k) deferral-only arrangement,” and a new type of 403(b) plan, a "safe harbor deferral-only 403(b) plan."²⁶

• Certain retirement plans are permitted to include a new “pension-linked emergency savings account.”

• A new provision, the "Saver's match," is added under which an eligible individual is allowed a matching contribution of up to $1,000, equal to a percentage of qualified retirement savings contributions made by the individual to a retirement account (the "Saver's matching contribution").²⁷ The Saver's matching contribution is generally allowable as a credit and is payable as a contribution to the eligible individual's applicable retirement savings vehicle.

• The credit for small employer pension plan start-up costs is increased.

• Section 403(b) plans may be established and maintained as multiple employer plans.

• The age at which an Individual Retirement Accounts (“IRA”) owner must begin required minimum distributions is increased to 73 in the case of an individual who attains age 72 after December 31, 2022, and age 73 before January 1, 2033. The age at which an IRA owner must begin required minimum distributions is increased to 75 in the case of an individual who attains age 74 after December 31, 2032.

• The $1,000 amount that may be contributed as a catch-up contribution to an IRA by individuals who attain age 50 by the end of the taxable year is increased for cost-of-living adjustments.

• The limit on catch-up contributions to certain types of employer-sponsored retirement plans is increased for individuals who would attain age 60, 61, 62, or 63 (but who are not older than age 63) by the end of the taxable year.

• The definition of matching contribution for purposes of section 401(k) plans is modified to include employer contributions made to the plan on behalf of an employee on account of a qualified student loan payment.

• The rule applicable to section 401(k) plans that prohibits the conditioning of benefits (other than matching contributions) on an employee's election to defer is modified to exempt a de minimis financial incentive provided to employees who elect to make elective deferrals under the plan. Similarly, in the case of a section 403(b) plan, a plan does not fail to satisfy the universal availability requirement solely by reason of offering a de minimis financial incentive to employees who elect to have the employer make contributions pursuant to a salary reduction agreement.

• The rule that permits the deferral of tax on the sale of C corporation stock to an employee stock ownership plan ("ESOP") is amended to include the sale of S corporation stock (with a 10 percent limit on the amount of gain that may be deferred).

• An exception is created to the 10-percent early withdrawal tax from an applicable eligible retirement plan in the case of withdrawals from applicable eligible retirement plans for emergency personal expenses.

• The types of contributions that may be made to a Savings Incentive Match Plan for Employees (“SIMPLE”) IRA plan or a SIMPLE 401(k) plan are expanded by also permitting the employer to make nonelective contributions of a uniform percentage of up to 10 percent of compensation, but not to exceed $5,000 for the year.

• The limit on the amount of elective deferrals that an employee may contribute to a SIMPLE IRA or SIMPLE 401(k) plan is increased in the case of small employers and certain electing employers.

• An employee who is a participant in an eligible rural electric cooperative's defined benefit plan is exempt from the rule limiting the maximum annual benefit payable to 100 percent of compensation for the participant's three highest years if he or she is not a highly compensated employee as defined by section 414(q).

• A new prohibited transaction exemption is added for any receipt of fees and compensation by an automatic portability provider for services provided in connection with an automatically portability transaction.

• The prohibited transaction rules are modified to clarify that if an individual's IRA is disqualified due to involvement in a prohibited transaction, such disqualification does not affect the individual's other IRAs (if any).

• The special diversification rules that apply to certain defined contribution plans are modified to expand the types of employer securities in an ESOP that are treated as readily tradable on an established securities market.

• The definition of eligible individual for purposes of a qualified Achieving a Better Life Experience (“ABLE”) program is modified to include an individual who is entitled to benefits based on blindness or disability occurring before age 46, rather than age 26.

• The rules that apply to long-time part-time employees are modified to reduce the service requirement for such employees from three years to two years, and to apply to section 403(b) plans as well as section 401(k) plans.

• An exclusion from gross income is added for a distribution from a qualified tuition program that is paid in a direct trustee-to-trustee transfer to a Roth IRA maintained for the benefit of the designated beneficiary of the qualified tuition program.

• Contributions to a section 403(b) plan that are held in a custodial account are treated as contributions to an annuity contract if the assets are to be held in that custodial account and invested in regulated investment company stock or a group trust.

• The minimum required distribution rules under qualified retirement plans are amended to permit commercial annuities that are issued in connection with any eligible retirement plan to provide certain type of payments on or after the annuity starting date.

• The Secretary of the Treasury is directed to amend the minimum required distribution regulation which applies to qualifying longevity annuity contracts ("QLACs").

• The Secretary of the Treasury is directed to amend the regulations setting forth diversification requirements with respect to variable contracts under section 817(h) to facilitate the use of exchange-traded funds ("ETFs") under variable contracts. In particular, the look-through rule requirements in the regulations are required to be amended so that satisfaction of those requirements with respect to an ETF is not prevented by reason of beneficial interests in an investment fund being held by one or more authorized participants or market makers.

• The Secretary of the Treasury is directed to amend the required minimum distribution rules for defined contribution plans so that partial annuity payments can be taken into account for purposes of satisfying the required minimum distribution rules for those plans.

• A retirement plan will not fail to be treated as a qualified plan, section 403(a) annuity, section 403(b) tax sheltered annuity or a governmental plan (and will not fail to be treated as satisfying the requirements of section 401 or 403) merely because (1) the plan fails to obtain payment from any participant, beneficiary, employer, plan sponsor, fiduciary, or other party on account of any inadvertent benefit overpayment made by the plan or (2) the plan sponsor amends the plan to increase past, or decrease future, benefit payments to affected participants and beneficiaries in order to adjust for prior inadvertent benefit overpayments.

• The limit for a mandatory distribution from a qualified retirement plan is increased from $5,000 to $7,000.

• The annual $100,000 exclusion limit for qualified charitable distributions is indexed for inflation for taxable years beginning after 2023. Furthermore, a taxpayer is allowed to elect for a taxable year to treat certain distributions from an IRA to a split-interest entity as if the contributions were made directly to a qualifying charity for purposes of the exclusion from gross income for qualified charitable distributions.

• The age 50 exception for qualified public safety employees in governmental plans is amended so that the exception also apples to distributions from certain non-governmental plans that are made to employees who provide firefighting services.

• The top-heavy minimum contribution requirements are adjusted such that employees who do not meet the minimum age or service requirements under the Code may be excluded from consideration in determining whether any plan of the employer satisfies the top-heavy minimum contribution requirement.

• A recontribution of any portion of a qualified birth or adoption distribution, may, at any time during the three-year period beginning on the day after the date on which the distribution was received, be recontributed to an applicable eligible retirement plan to which a rollover can be made.

• In determining whether a distribution is due to an employee hardship, the plan administrator of a section 401(k) plan or a section 403(b) plan may rely on the employee's written certification that the distribution is on account of a financial need of a type that is deemed in Treasury regulations to be an immediate and heavy financial need, that it doesn't exceed the amount necessary, and that the employee has no alternative means of satisfying the need. Similar rules apply to unforeseeable emergencies in a governmental section 457(b) plan.

• The 10-percent early withdrawal tax is modified by allowing an exception that applies in the case of an eligible distribution to a domestic abuse victim.

• The 10-percent early withdrawal tax is modified so that, if a series of substantially equal periodic payments are being made from a qualified retirement plan, the transfer or a rollover from a qualified retirement plan of the taxpayer's benefit under the plan that is made to a subsequent qualified plan may not be subject to the early withdrawal tax provided that the transfer or rollover results in distributions that also satisfy the series of substantially equal period payment exception.

• The aggregation rules for employees of employers (including corporations and other entities) that are members of a group under common control are modified to address family attribution between divorced spouses who share a minor child and to disregard community property laws in determining employees of a controlled group of corporations for purposes of certain qualified plan rules.

• In the case of a designated Roth account, an exception is added such that the pre-death minimum distribution rules and the incidental death benefit requirements do not apply to a designated Roth account under a qualified Roth contribution program.

• The 10-percent early withdrawal tax is modified by allowing an exception in the case of a distribution made to an employee who is a terminally ill individual on or after the date on which such employee has been certified by a physician as having a terminal illness.

• A spouse of an employee may elect to be treated as the employee for purposes of determining the distribution period in the case of an employee who dies before the distribution of required minimum distributions has begun under an employer-sponsored retirement plan, provided that the employee designated the spouse as sole beneficiary.

• The exclusion for distributions to qualified public safety officers used to pay for qualified health insurance premiums is modified so that it applies to a distribution without regard to whether payment of the premiums is made directly to the provider of the accident or health plan or qualified long-term care insurance contract by deduction from a distribution from the eligible retirement plan or is made to the employee.

• The exception from the 10-percent early withdrawal tax for distributions made to a qualified public safety employee after separation from service after age 50 is modified to also apply if the employee separates after 25 years of service under the plan regardless of age.

• The definition of qualified public safety employee, for purposes of the exceptions to the 10-percent early withdrawal tax, is modified to also include any employee of a State or political subdivision of a State who provides services as a corrections officer or as a forensic security employee providing for the care, custody, and control of forensic patients.

• The 10-percent early withdrawal tax is modified by allowing an exception for a qualified disaster recovery distribution from a qualified retirement plan, a section 403(b) plan, or an IRA.

• An employer is permitted to elect (in such form and manner as the Secretary of the Treasury may provide) at any time during a year, to terminate a SIMPLE IRA plan and replace it with a section 401(k) safe harbor plan, provided certain requirements are met.

• The 10-percent early withdrawal tax is modified by allowing an exception for distribution amounts attributable to income on excess contributions to an IRA if those contribution amounts are distributed with the amount of attributable income by the due date for the taxpayer's return for the year (including extensions), provided the taxpayer does not claim a deduction for the amount of the distributed contribution.

• The distribution rules applicable to retirement plans are modified such that a defined contribution plan may allow qualified long-term care distributions.

• The Secretary of the Treasury is required to amend previous regulations such that for valuation dates occurring during or after 2024, mortality improvement rates must not assume, for years beyond the valuation date, future mortality improvements at any age which are greater than 0.78 percent.

• The rules that apply to an applicable remainder multi-beneficiary trust are modified such that a beneficiary of such trust that is a qualified charity is treated as a designated beneficiary for purposes of the requirements that apply to applicable multi-beneficiary trusts.

• In the case of a cash balance plan which provides variable interest crediting rates (as the market rate of return), the interest crediting rate that is treated as in effect and as the projected interest crediting rate must be a reasonable projection of such variable interest crediting rate, subject to a maximum of six percent.

• The rules for calculating the Pension Benefit Guaranty Corporation variable rate premium are replaced with a flat $52 for each $1,000 of unfunded vested benefits for plan years beginning after calendar year 2023, thereby effectively terminating indexing of the variable rate premium.

• Simplified Employee Pension (“SEP”) plans and SIMPLE IRAs are permitted to be designated as Roth IRAs; thus, contributions to a SEP or SIMPLE IRA that is a designated Roth IRA are not excludable from gross income, and qualified distributions from such Roth IRAs are excludable from gross income.

• The hardship distribution rules for section 403(b) plans are modified to conform to those of section 401(k) plans.

• The catch-up contribution requirements are modified to require such contributions to be made on a Roth basis for individuals who earned more than $145,000 (adjusted for inflation) from the employer in the prior year.

• A section 401(a) qualified plan, a section 403(b) plan, or a governmental 457(b) plan may permit an employee to designate matching contributions and nonelective contributions as designated Roth contributions.

• Certain charitable contributions made by a partnership (whether directly or as a distributive share of a contribution of another partnership) in a conservation easement transaction are not treated as qualified conservation contributions.

• The expiration date of a qualified transfer of excess pension assets of a defined benefit plan is extended to December 31, 2032.

• A United States Tax Court judge who is covered by the Federal Employees Retirement System (“FERS”) is permitted to receive agency contributions to the Thrift Savings Plan, similar to other employees covered by FERS.

• A new retirement plan is created under which a special trial judge may elect to receive retired pay under rules similar to those applicable to the regular judges of the United States Tax Court.

• For high-deductible health plans that may be pared with a health savings account, the exemption from the rule prohibiting pre-deductible coverage for telehealth services is extended to include plan years beginning after December 31, 2022, and before January 1, 2025.

Comparisons with Treasury

The Joint Committee staff and Treasury lists of tax expenditures differ in at least six respects. First, the Joint Committee staff and the Treasury use differing methodologies for the estimation of tax expenditures. Thus, the estimates in Table 1 are not necessarily comparable with the estimates prepared by the Treasury. Under the Joint Committee staff methodology, each tax expenditure is measured by the difference between tax liability under present law and the tax liability that would result if the tax expenditure provision were repealed and taxpayers were allowed to take advantage of any of the remaining tax expenditure provisions that apply to the income or the expenses associated with the repealed tax expenditure.

For example, the tax expenditure provision for the exclusion of employer-paid health insurance is measured by the difference between tax liability under present law and the tax liability that would result if the exclusion were repealed and taxpayers were allowed to claim the next best tax treatment for the previously excluded employer-paid health insurance. This next best tax treatment could be the inclusion of the employer-paid health insurance as an itemized medical deduction on Schedule A (Form 1040).²⁸

Under the Treasury methodology, each tax expenditure is measured by the difference between tax liability under present law and the tax liability that would result if the tax expenditure provision were repealed and taxpayers were prohibited from taking advantage of any of the remaining tax expenditure provisions that apply to the income or the expenses associated with the repealed tax expenditure. For example, the tax expenditure provision for the exclusion for employer-paid health insurance is measured by the difference between tax liability under present law and the tax liability that would result if the exclusion were repealed and taxpayers were required to include all of the employer-paid health insurance in income, with no offsetting deductions (i.e., no deductibility on Schedule A (Form 1040)).

Second, the Treasury uses a different classification of those provisions that can be considered a part of a normal income tax under both the individual and business income taxes. In general, the Joint Committee staff methodology involves a broader definition of the normal income tax base. In addition, the Joint Committee list of tax expenditures includes some provisions that are not contained in the Treasury list. The cash method of accounting by certain businesses provides an example. The Treasury considers the cash accounting option for certain businesses to be a part of a normal income tax, but the Joint Committee staff methodology treats it as a departure from a normal income tax that constitutes a tax expenditure.

Third, the Joint Committee staff and the Treasury estimates of tax expenditures may also differ as a result of differing data sources and differences in baseline projections of incomes and expenses. The Treasury's tax expenditure calculations are based on the Administration's economic forecast. The Joint Committee staff calculations are based on the economic forecast prepared by the CBO.

Fourth, the Joint Committee staff and the Treasury estimates of tax expenditures span different sets of years. The Treasury's estimates cover an 11-year period: the last fiscal year, the current fiscal year when the President's budget is submitted, and the next nine fiscal years, i.e., fiscal years 2022-2032. The Joint Committee staff estimates cover a five-year period from 2023-2027.

Fifth, the Joint Committee staff list excludes those provisions that are estimated to result in revenue losses below the de minimis amount, i.e., less than $250 million over the five fiscal years 2023 through 2027. The Treasury rounds all yearly estimates to the nearest $10 million and excludes those provisions with estimates that round to zero in each year, i.e., provisions that result in less than $5 million in revenue loss in each of the years 2022 through 2032.

Finally, the Joint Committee staff list formally integrates negative tax expenditures into its standard presentation.

In some cases, two or more of the tax expenditure items in the Treasury list have been combined into a single item in the Joint Committee staff list, and vice versa. The Table 1 descriptions of some tax expenditures also may vary from the descriptions used by the Treasury.

There are some tax expenditure provisions that are contained in the Treasury list but are not contained in the Joint Committee staff list. Two of these provisions involve exceptions to the passive loss rules: the exception for working interests in oil and gas properties, and the exception for up to $25,000 of rental losses. The Joint Committee staff does not classify these two provisions as tax expenditures; the effects of the passive loss rules (and exceptions to the rules) are included in the estimates of the tax expenditure provisions that are affected by the rules.²⁹

II. MEASUREMENT OF TAX EXPENDITURES

Tax expenditure calculations generally

A tax expenditure is measured as the difference between tax liability under present law and the tax liability that would result from a redetermination of tax without benefit of the tax expenditure provision.³⁰ Taxpayer behavior is assumed to remain unchanged for tax expenditure estimate purposes.³¹ This assumption is made to simplify the calculation and conform to the presentation of government outlays. This approach to tax expenditure measurement is in contrast to the approach taken in revenue estimating; all Joint Committee staff revenue estimates reflect anticipated taxpayer behavior.

The tax expenditure calculations in this report are based on the February 2023 CBO revenue baseline and Joint Committee staff projections of the gross income, deductions, and expenditures of individuals and corporations for calendar years 2023-2027. These projections are used to compute tax liabilities for the present-law revenue baseline and tax liabilities for the alternative baseline that assumes that the tax expenditure provision does not exist.

Internal Revenue Service (“IRS”) statistics from recent tax returns are used to develop projections of the tax credits, deductions, and exclusions that will be claimed (or that will be denied in the case of negative tax expenditures) under the present-law baseline.³² These IRS statistics show the actual usage of the various tax expenditure provisions. In the case of some tax expenditures, such as the earned income credit, there is evidence that some taxpayers are not claiming all the benefits to which they are entitled, while others are filing claims that exceed their entitlements. The tax expenditure calculations in this report are based on projections of actual claims under the various tax provisions, not the potential tax benefits to which taxpayers are entitled.

Some tax expenditure calculations are partly based on statistics for income, deductions, and expenses for prior years. Accelerated depreciation is an example. Estimates for this tax expenditure are based on the difference between tax depreciation deductions under present law and the deductions that would have been claimed in the current year if investments in the current year and all prior years had been depreciated using the alternative (normal income tax law) depreciation system.

Each tax expenditure is calculated separately, under the assumption that all other tax expenditures remain in the Code. If two or more tax expenditures were estimated simultaneously, the total change in tax liability could be smaller or larger than the sum of the amounts shown for each item separately as a result of interactions among the tax expenditure provisions.³³

Year-to-year differences in the calculations for each tax expenditure reflect changes in tax law, including phaseouts of tax expenditure provisions and changes that alter the definition of the normal income tax structure, such as the tax rate schedule and the amount of the standard deduction. For example, the dollar level of tax expenditures tends to increase and decrease as tax rates increase and decrease, respectively, without any other changes in law. Some of the calculations for this tax expenditure report may differ from estimates made in previous years because of changes in law and economic conditions, the availability of better data, and improved measurement techniques.

If a tax expenditure provision were eliminated, Congress might choose to continue financial assistance through other means rather than terminate all Federal assistance for the activity. If a replacement spending program were enacted, the higher revenues received as a result of the elimination of a tax expenditure might not represent a net budget gain. A replacement program could involve direct expenditures, direct loans or loan guarantees, regulatory activity, a mandate, a different form of tax expenditure, or a general reduction in tax rates. Joint Committee staff estimates of tax expenditures do not anticipate such policy responses.

Tax expenditures versus revenue estimates

A tax expenditure calculation is not the same as a revenue estimate for the repeal of the tax expenditure provision for three reasons. First, unlike revenue estimates, tax expenditure calculations do not incorporate the effects of the behavioral changes that are anticipated to occur in response to the repeal of a tax expenditure provision. Second, some of the tax provisions that provide an exclusion from income also apply to the Federal Insurance Contributions Act (“FICA”) tax base, and the repeal of the income tax provision would automatically increase FICA tax revenues as well as income tax revenues. This FICA effect would be reflected in revenue estimates but is not considered in tax expenditure calculations. There may also be interactions between income tax provisions and other Federal taxes such as excise taxes and the estate and gift tax.

Third, tax expenditure calculations are concerned with changes in the reported tax liabilities of taxpayers. ³⁴ Because tax expenditure analysis focuses on tax liabilities as opposed to Federal government tax receipts, there is no concern for the short-term timing of tax payments. Revenue estimates are concerned with changes in Federal tax receipts that are affected by the timing of all tax payments. If a tax expenditure were repealed, it is likely that the repeal would be made effective for taxable years beginning after a certain date. Because most individual taxpayers have taxable years that coincide with the calendar year, the repeal of a provision affecting the individual income tax most likely would be effective for taxable years beginning after December 31 of a certain year. However, the Federal government's fiscal year begins October 1. Thus, the revenue estimate for repeal of a provision would show a smaller revenue gain in the first fiscal year than in subsequent fiscal years, because the repeal would be effective a few months after the start of the Federal government's fiscal year. The revenue estimate might also reflect some delay in the timing of the revenue gains as a result of the taxpayer tendency to postpone or forgo changes in tax withholding and estimated tax payments, and very often repeal or modification of a tax provision includes transition relief that would not be captured in a tax expenditure calculation.

Quantitatively de minimis tax expenditures

The following tax provisions are viewed as tax expenditures by the Joint Committee staff but are not listed in Table 1 because the estimated revenue losses, or in the case of negative tax expenditures gains, for fiscal years 2023 through 2027 are below the de minimis amount ($250 million). A provision that is a negative tax expenditure is indicated by an “ * ”.

International affairs

• Miscellaneous nonresident individual income tax exclusions (certain gambling winnings (sec. 871(j)), ship or aircraft operation income, certain exchange or training programs compensation, bond income of residents of the Ryukyu Islands, certain wagering income (sec. 872(b)))

• Miscellaneous foreign corporate income tax exclusions (ship or aircraft operation income, foreign railroad rolling stock earnings, certain communication satellite earnings (sec. 883))

Energy

• Credit for fuel cell vehicles (sec. 30B)

• Credits for other alternative fuel vehicles (sec. 30B)

• Credit for electric motor vehicles (sec. 30D)

• Credit for second-generation biofuel production (sec. 40(a)(4))

• Credit for biodiesel and renewable diesel fuel (sec. 40A)³⁵

• Credit for enhanced oil recovery costs (sec. 43)

• Credits for electricity production from renewable resources (sec. 45):

  • Small irrigation power (sec. 45(c)(1)(F)

  • Qualified hydropower (sec. 45(c)(1)(H))

• Coal production credits (sec. 45):

  • Refined coal (sec. 45(c)(7))

  • Indian coal (sec. 45(c)(9))

• Credit for electricity production from closed-loop biomass facilities (sec. 45(d)(2))

• Credit for producing oil and gas from marginal wells (sec. 45I)

• Credit for production of electricity from qualifying advanced nuclear power facilities (sec. 45J)

• Energy credit (sec. 48):

  • Geothermal (sec. 48(a)(3)(iii))

  • Microturbines (sec. 48(a)(3)(iv))

  • Combined heat and power (sec. 48(a)(3)(v))

  • Small wind (sec. 48(a)(3)(vi))

  • Geothermal heat pump systems (sec. 48(a)(3)(vii))

• Credit for investment in advanced energy property (sec. 48C)

• Credit for holders of clean renewable energy bonds (secs. 54 and 54C)

• Credit for holders of qualified energy conservation bonds (sec. 54D)

• Exclusion of energy conservation subsidies provided by public utilities (sec. 136)

• Exclusion of interest on State and local government qualified private activity bonds for energy production facilities (secs. 142(a)(8), 142(a)(9), and 142(a)(12))

• Exclusion of interest on State and local government qualified private activity bonds for green buildings and sustainable design projects (sec. 142(a)(14))

• Seven-year MACRS for any Alaska natural gas pipeline (sec. 168(e)(3)(C))

• Energy efficient commercial buildings deduction (sec. 179D)

• Expensing of tertiary injectants (sec. 193)

• Expensing of exploration and development costs, other fuels (secs. 616 and 617)

Natural resources and environment

• Special depreciation allowance for certain reuse and recycling property (sec. 168(m))

• Special rules for mining reclamation reserves (sec. 468)

• Special tax rate for nuclear decommissioning reserve funds (sec. 468A)

• Exclusion of earnings of certain environmental settlement funds (sec. 468B(g))

• Excess of percentage over cost depletion, nonfuel minerals (sec. 613)

• Expensing of exploration and development costs, nonfuel minerals (secs. 616 and 617)

Agriculture

• Exclusion of cancellation of indebtedness income of farmers (sec. 108(a)(1)(C))

• Exclusion of cost-sharing payments of farmers (sec. 126)

• Cash accounting for agriculture (sec. 446)

• Expensing of costs of raising dairy and breeding cattle (sec. 1231(b)(3))

Commerce and housing

• Exclusion of investment income from structured settlement arrangements (secs. 72(u)(3)(C) and 130)

• Inclusion of income arising from business indebtedness discharged by the reacquisition of a debt instrument (sec. 108(i))

• Alaska Native Corporation trusts (secs. 139G, 247, and 646)

• Seven-year MACRS for motorsports entertainment complexes (sec. 168(i)(15)) —Special rules for magazine, paperback book, and record returns (sec. 458)

• Inventory methods and valuation: specific identification for homogeneous products (sec. 471)

• Exclusion from unrelated business taxable income (“UBTI”) of certain payments to controlling exempt organizations (sec. 512)

• Bad debt reserves of financial institutions (sec. 585)

• Deferral of gain on sales of property to comply with conflict-of-interest requirements (sec. 1043)

• Reduced rates of tax on gains from the sale of self-created musical works (sec. 1221(b)(3))

• Exclusion of gain or loss on sale or exchange of brownfield property (sec. 512(b)(19)) —Credit for the cost of carrying tax-paid distilled spirits in wholesale inventories (sec. 5011)

Transportation

• Exclusion of interest on State and local government qualified private activity bonds for high-speed intercity rail facilities (sec. 142(a)(11))

Community and regional development

• Exclusion of Indian general welfare benefits (sec. 139E)

• Accelerated depreciation for business property on an Indian reservation (sec. 168(j))

• Issuance of tribal economic development bonds (sec. 7871(f))

Education, training, employment, and social services

• Credit for disabled access expenditures (sec. 44)

• Credit for employer-provided dependent care (sec. 45F)

• Exclusion of Olympic and Paralympic medals and prizes (sec. 74(d))

• Exclusion of interest on educational savings bonds (sec. 135)

• Exclusion of restitution payments received by victims of the Nazi regime and the victims' heirs and estates (sec. 803 of Pub. L. No. 107-16)

Health

• Archer medical savings accounts (sec. 220)

Income security

• Credit for the elderly and disabled (sec. 22)

• Credit for new retirement plan expenses of small businesses (sec. 45E)

• Exclusion of survivor annuities paid to families of public safety officers killed in the line of duty (sec. 101(h))

• Exclusion of special benefits for disabled coal miners (sec. 501(c)(21))

• ABLE accounts (sec. 529A)

Veterans' benefits and services

• Burial expenses for veterans (sec. 134 and 38 U.S.C. 5301)

• Exclusion of interest on State and local government qualified private activity bonds for veterans' housing (sec. 141(e)(1)(C))

Administration of justice

• Exclusion of certain amounts received by wrongfully incarcerated individuals (sec. 139F)

• Denial of deduction for payments related to sexual harassment and sexual abuse subject to nondisclosure agreements (sec. 162(q))*

General government

• American Samoa economic development credit (sec. 119 of Pub. L. No. 109-432)

Interest

• Exclusion of interest received in action to recover property seized by the Internal Revenue Service based on structuring transaction (sec. 139H)

Tax expenditures for which quantification is not available

The following tax provisions are viewed as tax expenditures by the Joint Committee staff but are not listed in Table 1 because the projected revenue changes are unavailable (a provision that is a negative tax expenditure is indicated by an “ * ”):

International affairs

• Deduction for U.S. employment tax paid under section 3121(l) agreements for employees of foreign affiliates

• Doubling of tax rates on citizens and corporations of certain foreign countries*

Energy

• Accelerated deductions for nuclear decommissioning costs (sec. 468A)

• Fossil fuel capital gains treatment (sec. 631(c))

Natural resources and environment

• Exception to partial interest rule for qualified conservation contribution (sec. 170(h))

• Exclusion of interest on State and local government private activity bonds for qualified carbon dioxide capture facilities (sec. 142(a)(17))

Agriculture

• 10-year MACRS for single purpose agricultural or horticultural structures (sec. 168(e)(3), (i)(13))

• Exceptions from dealer disposition definition for installment sales (sec. 453(l)(2)(A))

• Exception from interest calculation on installment sales for small dispositions (sec. 453A(b)(3))

Commerce and housing credit

• Unrecaptured section 1250 gain rate (section 1(h)), which applies to depreciation taken on real property

• Disallowance of deduction for unreimbursed expenses attributable to trade or business of the performance of services as an employee* (sec. 62(a)(1))

• Treatment of loans under life insurance and annuity contracts and401(k) plans (secs. 72(e), 72(p), and 7702)

• Denial of deduction for investment expenses* (sec. 212)

• Amortization of organizational expenditures (sec. 248)

• Deferral of prepaid subscription income (sec. 455)

• Deferral of prepaid dues income of certain membership organizations (sec. 456)

• Exemption for cemetery companies (sec. 501(c)(13))

• Certain exceptions to the UBTI rules (secs. 512-514)

  • Passive income gains

  • Income from certain research

  • Trade shows and fairs

  • Bingo games

  • Pole rentals

  • Sponsorship payments

  • Real estate exception to the debt-financed income rules

• Amortization of partnership organization and syndication fees (sec. 709)

• Nonrecognition of in-kind distributions by regulated investment companies in redemption of their stock (sec. 852(b)(6))

• Specific identification of sold equities (sec. 1012 and Treas. Reg. sec. 1012-1)

• Losses on small business stock (secs. 1242-1244)

• Special discount rate rule for certain debt instruments where stated principal amount is $2.8 million or less (sec. 1274A)

• Tax treatment of convertible bonds (Treas. Reg. sec. 1.1275-4; Rev. Rul. 2002-31)

• Nondeductibility of excise taxes imposed on employers whose employees receive premium assistance credits* (secs. 275(a)(6) and 4980H(c)(7))

• Nondeductibility of annual fees imposed on certain drug manufacturers or importers* (sec. 275(a)(6); sec. 9008(f)(2) of Pub. L. No. 111-148)

General government

• Exclusion of Guam, American Samoa, and Northern Mariana Islands income (sec. 931)³⁶

• Exclusion of U.S. Virgin Islands income (sec. 932(c)(4))

• Exclusion of Puerto Rico income (sec. 933)

III. TAX EXPENDITURE ESTIMATES

Tax expenditures are grouped in Table 1 in the same functional categories as outlays in the Federal budget. Within each budget function, tax expenditures are ordered by the Code section that provides for the special treatment. Estimates are shown separately for individuals and corporations. Those tax expenditures that do not fit clearly into any single budget category have been placed in the most appropriate category. Totals for each tax expenditure are presented for the five-year period covering fiscal years 2023-2027, respectively.

Several of the tax expenditure items involve small amounts of revenue, and those estimates are indicated in Table 1 by footnote 3. For each of these items, the footnote means that the tax expenditure is less than $250 million in the fiscal year.

Table 2 presents distributional projections of tax return data for each of nine income classes including: (1) the number of all returns (including filing and nonfiling units), (2) the number of taxable returns, (3) the number of returns with itemized deductions, and (4) the amount of tax liability.

Table 3 provides distributional estimates by income class for some of the tax expenditures that affect individual taxpayers. Not all tax expenditures that affect individuals are shown in this table because of the difficulty in making reliable estimates of the income distribution of items that do not appear on tax returns under present law.