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105th Congress                                                  S. Prt. 
1st Session                 COMMITTEE PRINT                     105-18
_______________________________________________________________________

                                     

 
                    PROGRAM DESCRIPTIONS AND GENERAL
                         BUDGET INFORMATION FOR

                            FISCAL YEAR 1998


                      Prepared by the Staff of the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                     William V. Roth, Jr., Chairman

                                     

                                     
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13

                                     
                               APRIL 1997

            Printed for the use of the Committee on Finance


                   U.S. GOVERNMENT PRINTING OFFICE
38-606--CC                WASHINGTON : 1997

            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402




                          COMMITTEE ON FINANCE

                     WILLIAM V. ROTH, JR., Chairman

JOHN H. CHAFEE, Rhode Island         DANIEL PATRICK MOYNIHAN, New York
CHARLES E. GRASSLEY, Iowa            MAX BAUCUS, Montana
ORRIN G. HATCH, Utah                 JOHN D. ROCKEFELLER IV, West 
ALFONSE M. D'AMATO, New York         Virginia
FRANK H. MURKOWSKI, Alaska           JOHN BREAUX, Louisiana
DON NICKLES, Oklahoma                KENT CONRAD, North Dakota
PHIL GRAMM, Texas                    BOB GRAHAM, Florida
TRENT LOTT, Mississippi              CAROL MOSELEY-BRAUN, Illinois
JAMES M. JEFFORDS, Vermont           RICHARD H. BRYAN, Nevada
CONNIE MACK, Florida                 J. ROBERT KERREY, Nebraska

            Lindy L. Paull, Staff Director and Chief Counsel

      Mark A. Patterson, Minority Staff Director and Chief Counsel




                                PREFACE

    This document contains data and information that will be 
needed by the Committee on Finance for meeting its FY1998 
budget reconciliation instructions. Included are descriptions 
of the budget process and constraints, followed by descriptions 
of each of President Clinton's FY1998 budget proposals that 
falls within the jurisdiction of the Committee on Finance. A 
description of present law precedes the description of each 
proposal. At the end of each section are tables showing the 
estimated budgetary effects of the proposals prepared both by 
the Joint Committee on Taxation (revenues) or the Congressional 
Budget Office (spending), and estimates prepared by the Office 
of Management and Budget are also included.
    The Committee would like to thank the staffs of the Joint 
Committee on Taxation, the Congressional Research Service, and 
the Congressional Budget Office for their assistance in 
preparing this document.


                                     




                            C O N T E N T S

                              ----------                              

                     BUDGET PROCESS AND CONSTRAINTS

                                                                   Page
A. Budget Enforcement Procedures.................................     1

B. The Line-Item Veto............................................     2

                           REVENUE PROVISIONS

Introduction.....................................................     5

  I.  TAX CUT SUNSET..................................................7

 II.  MIDDLE CLASS TAX RELIEF.........................................9

        A. Tax Credit For Families With Children Under Age 13....     9
        B. Tax Incentives For Education and Training.............    10
            1. HOPE scholarship tuition tax credit...............    10
            2. Education and job training tax deduction..........    14
            3. Tax incentives for expansion of student loan 
                forgiveness......................................    19
            4. Extension of exclusion for employer-provided 
                educational assistance...........................    20
            5. Small business tax credit for employer-provided 
                educational assistance...........................    20
        C. Provisions Relating to Individual Retirement Plans....    21
        D. Exclusion of Capital Gains on Sale of Principal 
            Residence............................................    25

III.  DISTRESSED AREAS INITIATIVES...................................27

        A. Expand Empowerment Zones and Enterprise Communities...    27
        B. Expensing of Environmental Remediation Costs 
            (``Brownfields'')....................................    32
        C. Tax Credit For Equity Investments in Community 
            Development Financial Institutions...................    35

 IV.  WELFARE-TO-WORK TAX CREDIT.....................................37

  V.  EXPANSION OF ESTATE TAX EXTENSION PROVISIONS FOR CLOSELY HELD 
      BUSINESSES.....................................................39

 VI.  OTHER TAX INCENTIVES...........................................41

        A. Equitable Tolling of the Statute of Limitations Period 
            For Claiming Tax Refunds for Incapacitated Taxpayers.    41
        B. Extend and Modify Puerto Rico Tax Credit..............    41
        C. Extend Foreign Sales Corporation Benefits to Licenses 
            of Computer Software For Reproduction Abroad.........    42
        D. District of Columbia Tax Incentives...................    43

VII.  EXTENSIONS OF EXPIRING TAX PROVISIONS..........................44

        A. Research Tax Credit...................................    44
        B. Contributions of Stock to Private Foundations.........    47
        C. Work Opportunity tax Credit...........................    48
        D. Orphan Drug Tax Credit................................    51

VIII. CORPORATE REFORMS AND OTHER TAX PROVISIONS.....................52


        A. Provisions Relating to Financial Products.............    52
            1. Deny interest deduction on certain debt 
                instruments......................................    52
            2. Defer interest deduction on certain convertible 
                debt.............................................    53


            3. Limit dividends-received deduction................    54
               a. Reduce dividends-received deduction to 50 
                  percent........................................    54
               b. Modify holding period for dividends-received 
                  deduction......................................    55
               c. Deny dividends-received deduction for preferred 
                  stock with certain nonstock characteristics....    55
            4. Disallowance of interest on indebtedness allocable 
                to tax-exempt obligations........................    56
            5. Basis of substantially identical securities 
                determined on an average basis...................    58
            6. Require recognition of gain on certain appreciated 
                positions in personal property...................    59
            7. Gains and losses from certain terminations with 
                respect to property..............................    62
            8. Determination of original issue discount where 
                pooled debt obligations subject to acceleration..    63
        B. Corporate Tax Provisions..............................    64
            1. Require gain recognition for certain extraordinary 
                dividends........................................    64
            2. Repeal percentage depletion for nonfuel minerals 
                mined on certain Federal lands...................    66
            3. Modify net operating loss carryback and 
                carryforward rules...............................    67
            4. Treat certain preferred stock as ``boot''.........    68
            5. Conversion of large corporations into S 
                corporations treated as complete liquidations....    69
            6. Require gain recognition on certain distributions 
                of controlled corporation stock..................    71
            7. Reform tax treatment of certain corporate stock 
                transfers........................................    72
            8. Modify the extension of section 29 credit for 
                biomass and coal facilities......................    73
        C. Foreign Provisions....................................    74
            1. Expand subpart F provisions regarding income from 
                notional principal contracts and stock lending 
                transactions.....................................    74
            2. Taxation of certain captive insurance companies 
                and their shareholders...........................    75
            3. Modify foreign tax credit carryover rules.........    78
            4. Reform treatment of foreign oil and gas income and 
                dual-capacity taxpayers..........................    78
            5. Replace sales source rules with activity-based 
                rule.............................................    80
        D. Accounting Provisions.................................    81
            1. Termination of suspense accounts for family farm 
                corporations required to use accrual method of 
                accounting.......................................    81
            2. Repeal lower of cost or market inventory 
                accounting method................................    82
            3. Repeal components of cost inventory accounting 
                method...........................................    83
        E. Gain Deferral Provisions..............................    85
            1. Expansion of requirement that involuntarily 
                converted property be replaced with property from 
                an unrelated person..............................    85
            2. Further restrict like-kind exchanges involving 
                foreign personal property........................    85
        F. Administrative Provisions.............................    86
            1. Registration of confidential corporate tax 
                shelters.........................................    86
            2. Information reporting on persons receiving 
                contract payments from certain Federal agencies..    88
            3. Increased information reporting penalties.........    89
            4. Disclosure of tax return information for 
                administration of certain veterans' programs.....    90
            5. Extension of withholding to certain gambling 
                winnings.........................................    91
            6. Reporting of certain payments made to attorneys...    91
            7. Modify the substantial understatement penalty.....    93
            8. Establish IRS continuous levy and improve debt 
                collection.......................................    93
               a. Continuous levy................................    93
               b. Modifications of levy exemptions...............    94
        G. Employment Taxes......................................    95
            1. Extension of Federal unemployment tax.............    95
            2. Deposit requirement for Federal unemployment taxes    95


        H. Excise Taxes..........................................    96
            1. Reinstate Airport and Airway Trust Fund excise 
                taxes............................................    96
            2. Reinstate Leaking Underground Storage Tank Trust 
                Fund excise tax..................................    97
            3. Reinstate Superfund excise taxes and corporate 
                environmental income tax.........................    98
            4. Reinstate Oil Spill Liability Trust Fund excise 
                tax..............................................    98
            5. Kerosene taxed as diesel fuel.....................    98
            6. Exempt Federal vaccine purchases from vaccine 
                excise tax for one year..........................   100

REVENUE TABLES...................................................   101

  Explanation of Estimates.......................................   102
  Estimated Budget Effects of the Revenue Provisions Contained in 
    the President's Fiscal Year 1998 Budget Proposal (Includes 
    Sunset of Certain Provisions)................................   104
  Hypothethical Estimate of the Budget Effects of the Revenue 
    Provisions Contained in the President's Fiscal Year 1998 
    Budget Proposal as if Certain Tax Reduction Provisions 
    Subject to Sunset on December 31, 2000, are Enacted on a 
    Permanent Basis..............................................   110
  Federal Receipts and Collections: Effect of Proposals on 
    Receipts.....................................................   116

                                MEDICARE

Introduction.....................................................   119

PART A...........................................................   121

  Hospitals......................................................   121
    Annual Hospital Payment Updates..............................   121
    Hospital-Capital Payments....................................   121
    Definition of Hospital ``Transfer''..........................   122
    Rural Health Provisions......................................   122
    Graduate Medical Education Payments..........................   122
    Disproportionate Share Hospital (DSH) Payments...............   123
    Payment to Teaching and Disproportionate Share Hospitals From 
      Managed Care Rates.........................................   123
    Other Hospital Proposals.....................................   124
  Skilled Nursing Facilities (SNFs)..............................   124
    Payment Reform...............................................   124
  Part A Premiums................................................   125
    Enrollment...................................................   125
    Working Disabled.............................................   125

PART B...........................................................   126

  Physicians and Other Suppliers.................................   126
    Establish Single Conversion Factor and Reform Method for 
      Updating Physician Fees....................................   126
    Make Single Payment for Surgery..............................   127
    Create Incentives to Control High-Volume Physician Services..   127
    Direct Payment to Physician Assistants, Nurse Practitioners, 
      and Clinical Nurse Specialists.............................   127
    Payment of Acquisition Costs for Drugs.......................   128
    Chiropractic Services........................................   128
  Hospital Outpatient Departments (OPDs).........................   128
    Payment for Hospital Outpatient Departments (OPDs)...........   128
    Formula Driven Overpayment for Hospital Outpatient Department 
      Care.......................................................   129
    Beneficiary Coinsurance for Hospital Outpatient Department 
      Care.......................................................   129
  Other Providers................................................   130
    Ambulatory Surgical Centers (ASCs)...........................   130
    Competitive Bidding for Laboratories, Durable Medical 
      Equipment and Other Items..................................   130
    Payment for Automated Laboratory Tests.......................   130
    Payment for Ambulance Services...............................   131
  Premiums.......................................................   131
    Part B Premiums..............................................   131
    Part B Enrollment and Penalties for Delayed Enrollment.......   131


  Benefits.......................................................   132
    Mammography Services.........................................   132
    Colorectal Screening.........................................   132
    Preventive Injections........................................   132
    Diabetes Self-Management Benefit.............................   133
    Respite Benefit..............................................   133

PARTS A AND B....................................................   133

  Home Health Services...........................................   133
    Payment Reform...............................................   133
    Extend Savings from Home Health Cost Limits Freeze...........   134
    Clarification of the Definition of ``Homebound''.............   135
    Provide Secretarial Authority to Make Payment Denials Based 
      on Normative Service Standards.............................   135
  Reallocate Financing of Part of the Home Health Benefit to Part 
    B............................................................   136
  Medigap........................................................   136
    Medigap Enrollment...........................................   136
  Purchasing Initiatives.........................................   137
    Centers of Excellence........................................   137
    Other Purchasing Initiatives.................................   138
  Coordination of Benefits, Program Integrity and Other
      Management Initiatives.....................................   138
    Medicare Secondary Payer.....................................   138
    Consolidated Billing for SNF Services........................   139
    Home Health Payments Based on Location of Service............   139
    Periodic Interim Payments for Home Health....................   139
    Survey and Certification.....................................   139
  Fraud and Abuse................................................   140
    Advisory Opinions............................................   140
    Managed Care Exception in Anti-Kickback Statute..............   140
    Reasonable Diligence.........................................   141

MEDICARE MANAGED CARE............................................   141

  Payments and Plan Choice.......................................   141
    Payment Changes..............................................   141
    Increased Plan Choice and Consumer Information...............   144
  Additional Proposals...........................................   146
    Permit Enrollment of ESRD Beneficiaries......................   146
    Limits on Charges for Out-of-Network Services................   147
    Coverage of Out-of-Area Dialysis Services....................   147
    Clarification of Coverage for Emergency Services.............   147
    Permit States with Programs Approved by the Secretary to Have 
      Primary Oversight Responsibility...........................   147
    Modify Termination and Sanction Authority....................   148
    Deem Privately Accredited Plans to Meet Internal Quality 
      Assurance Standards........................................   148
    Replace 50/50 Rule with Quality Measurement System...........   148

Tables:
  CBO Estimate of President's Budget Plan for Medicare...........   152
  OMB Estimate of President's Budget Plan for Medicare...........   156

                                MEDICAID

Introduction.....................................................   159

Federal Payments.................................................   161

  Limitations on per capita rate of growth in Federal financial 
    participation................................................   161

Entitlement to Benefits Are Mantained............................   162

  Reduction of disproportionate share payments...................   162
  Medicaid eligibility quality control (MEQC) requirements.......   163
  Nursing home survey and certification..........................   163

Eligibility......................................................   164

  Disabled children who lose SSI benefits........................   164
  State option to permit workers with disabilities to buy into 
    medicaid.....................................................   164
  Extension of coverage to additional individuals................   165


  Elimination of authority for new statewide eligibility 
    expansion demonstrations.....................................   165
  Continuous eligibility for children............................   165
  Upper income limit on ``less restrictive'' eligibility 
    methodologies................................................   166

Managed Care.....................................................   166

Benefits.........................................................   168

  Home and community-based services..............................   168
  Elimination of requirement to pay for private insurance........   168
  Individuals covered during transition to work..................   168
  Copayments in health maintenance organizations.................   169

Provider Participation and Payment Rates.........................   169

  Methods for establishing provider payment rates................   169
  Physician qualification requirements...........................   170
  Elimination of obstetrical and pediatric payment rate 
    requirements.................................................   170
  Program for all-inclusive care for the elderly (PACE)..........   170

State Plan Administration........................................   170

  Elimination of personnel requirements..........................   170
  Elimination of duplicative inspection of care requirements for 
    ICFs/MR and mental hospitals.................................   171
  Public process for developing state plan amendments............   171
  Alternative sanctions for non-compliant ICFs/MR................   171
  Modification of MMIS requirements..............................   172
  Nurse aide training and competency evaluation programs.........   172
  Elimination of repayment requirement for States imposing 
    alternative remedies on non-compliant nursing facilities.....   172

Miscellaneous Provisions.........................................   173

  Commission on Medicaid.........................................   173
  Effective date.................................................   173
  Increase Federal payment cap for Puerto Rico...................   174
  Increase Federal payment to the District of Columbia...........   174
  Medicaid eligibility for non-citizens..........................   174

Tables:
  CBO Estimates of the Final FY 1998 President's Budget Medicaid 
    Proposals....................................................   178
  OMB Estimates of the FY 1998 President's Budget Medicaid 
    Proposals....................................................   180

                            HEALTH INSURANCE

Introduction.....................................................   181

Initiative To Maintain and Expand Workers' Coverage..............   183

  Temporary premium assistance for families between jobs.........   183

Voluntary Purchasing Cooperatives................................   184

Children's Health Initiative.....................................   185

  Grants to the States...........................................   185
  Investments to expand Medicaid coverage........................   186

Table.--OMB and CBO Estimated Costs of the Health Insurance 
  Provisions in the President's FY1998 Budget....................   188

                  INCOME SECURITY AND SOCIAL SECURITY

Introduction.....................................................   189

A. SSI and Medicaid Benefits for Legal Immigrants................   191

    1. SSI eligibility for legal immigrants......................   191
    2. Medicaid eligibility for legal immigrants.................   191

B. Medicaid Eligibility for Disabled Children....................   192

C. Welfare-to-Work Measures......................................   192

    1. Welfare-to-work jobs challenge............................   192
    2. Work Opportunity Tax Credit...............................   193
    3. Transportation to jobs and other supportive services......   194


D. Unspecified Welfare Reform ``Technical Corrections''..........   194

E. Vocational Rehabilitation Services for SSDI/SSI Beneficiaries.   195

F. Railroad Retirement Benefits..................................   195

G. Unemployment Compensation.....................................   195

    1. Extension of the FUTA Surtax..............................   195

    2. Monthly Payment of Unemployment Taxes.....................   196

Table.--President's Legislative Proposals--Income Security and 
  Social Security................................................   197

                                 TRADE

Introduction.....................................................   199

Administration Proposals.........................................   201

  Generalized System of Preferences..............................   201
  Caribbean Basin Initiative.....................................   201
  OECD Shipbuilding Subsidies Agreement..........................   202
Table.--CBO Reestimate of the Trade Proposals in the 1998 
  President's Budget.............................................   203

                      NET INTEREST AND DEBT LIMIT

Net Interest.....................................................   207

  CBO Baseline Projections of Interest Costs.....................   207
Debt Limit.......................................................   208

  CBO Baseline Projections of Federal Debt.......................   209



                     BUDGET PROCESS AND CONSTRAINTS

                    A. Budget Enforcement Procedures

    The Balanced Budget and Emergency Deficit Control Act of 
1985 (popularly known as Gramm-Rudman-Hollings) set annual 
deficit targets that were intended to lead to a balanced budget 
in 1991. It also established a procedure--known as 
sequestration--to make those goals binding. Under 
sequestration, an across-the-board reduction in spending 
(excepting numerous entitlement programs) would automatically 
occur if the projected deficit exceeded its goal. The deficit 
targets were revised in 1987, and lawmakers designated 1993 as 
the year in which the deficit would be eliminated. Although the 
deficit declined in the fiscal year following enactment of 
Gramm-Rudman-Hollings (and remained virtually at the same level 
for the next 2 years) the fixed deficit target approach failed 
to achieve the desired reductions. (For 1990, the last year for 
which the procedures were fully in effect, the actual deficit 
exceeded the revised target deficit by $121 billion and the 
original target by $185 billion.) Moreover, that approach led 
to rosy economic projections, the use of questionable budgetary 
saving such as timing shifts, and a perception that the process 
put an unfair burden on discretionary appropriations. 
Consequently, the law was amended by the Budget Enforcement Act 
of 1990 (BEA).
    In place of fixed deficit targets, the BEA established 
annual caps on discretionary budget authority and outlays 
provided in appropriation acts. It also instituted a pay-as-
you-go requirement for mandatory spending and revenue 
legislation. Under the BEA, discretionary appropriations in 
excess of the caps trigger a sequestration of only 
discretionary spending. Furthermore, a sequestration of 
mandatory spending is imposed if the net effect of all 
legislation affecting mandatory spending or revenues is to 
increase the deficit. The BEA kept those rules in place through 
fiscal year 1995. The Omnibus Budget Reconciliation Act of 1993 
extended them through fiscal year 1998, with essentially no 
change.
    In general, the BEA procedures have been successful in 
preventing new legislation from increasing the deficit. One 
indication that the pay-as-you-go procedure has been effective 
is that since 1990 proponents of legislation that would 
increase mandatory spending or cut taxes have almost always 
been greeted with, ``How are you going to pay for it?'' That 
may seem an obvious question, but it was one that proponents of 
legislation did not generally have to answer before 1990. In 
addition, there have been no pay-as-you-go sequestrations. 
Since the enactment of the BEA, only two small discretionary 
sequestrations have been ordered. In one case, the 
sequestration offset an overage that the Office of Management 
and Budget estimated at $2.4 million (the Congressional Budget 
Office estimated that appropriations did not exceed the cap), 
which resulted in a sequester reducing each discretionary 
spending account by .0013 percent. In the other instance, 
enacted appropriations exceeded the cap by $395 million because 
of a drafting mistake in an appropriation bill enacted just 
before the Congress adjourned for the year. When the Congress 
reconvened, it enacted legislation that corrected the mistake 
and canceled the sequestration.
    Although the BEA procedures have been successful in 
constraining new budgetary legislation, many Members of 
Congress have expressed concern that those constraints do not 
limit increases in mandatory spending that can occur without 
changes in law and do not require the elimination of deficits. 
With the expiration of the BEA procedures looming, the Congress 
must decide whether to extend those constraints (either in 
essentially the same form or with modifications).

                         B. The Line-Item Veto

    The Line Item Veto Act was enacted last year and went into 
effect on January 1, 1997. The act, which as indicated below 
was subsequently declared unconstitutional by a Federal 
District Court, represents a different kind of constraint on 
the budgetary decisions of the Congress by granting the 
President the authority to cancel certain new spending or tax 
benefits signed into law after that date. The act was to have 
remained in effect for 8 years. Since a final adjudication of 
the act's constitutionality may not be rendered until later in 
1997 or in 1998, a description of the act's provisions follow.
    The Line Item Veto Act is intended to allow the President--
as part of a broader effort to reduce the deficit--to eliminate 
new spending and tax breaks that he deems wasteful or 
unnecessary. Although there is disagreement over whether the 
new law will reduce the deficit, most observers agree that it 
is a significant change in the Federal budget process that is 
likely to shift budgetary power from the Congress to the 
President.
    Under the act, the President may cancel ``any dollar amount 
of discretionary budget authority, any item of new direct 
spending, or any limited tax benefit'' that he signs into law. 
The President must notify the Congress of any cancellations by 
special message and he must do so within 5 days of signing the 
law from which cancellations have been made. Cancellations go 
into effect only when the Congress receives the special 
message.
    A cancellation may only be overturned by the enactment of a 
subsequent law. For each special message, the Congress may 
consider a ``disapproval bill'' under fast-track legislative 
procedures during a 30-day review period (that could extend 
well beyond 30 calendar days because of recesses and 
adjournments). The President may not use his cancellation 
authority on a disapproval bill. Of course, the Congress may 
include provisions overturning cancellations as part of a 
measure that is not a disapproval bill, but such a measure 
would not come under fast-track procedures or be protected from 
the President's cancellation authority.
    Before the Line Item Veto Act, the President could propose 
to cancel amounts of budget authority provided by law, but any 
such rescission that he proposed had to be enacted into law to 
go into effect permanently. Under the act, the President may 
unilaterally cancel certain spending and tax benefits that he 
has signed into law, and any cancellations can only be reversed 
by the enactment of a subsequent law. Because the President 
seems likely to veto any disapproval bill, such a measure will 
probably require the support of two-thirds of the Congress--the 
margin needed to override a veto--to ensure its enactment.
    In certain respects the act is broader, and in others more 
restrictive, than some earlier proposals to expand the 
President's impoundment authority. For example, earlier 
proposals generally would have applied only to discretionary 
appropriations provided in annual appropriations acts. The act 
permits the President to cancel such amounts as well as certain 
new, direct (mandatory) spending and tax benefits. In the case 
of discretionary appropriations, however, the President may 
only cancel entire dollar amounts specified in appropriations 
acts, governing committee reports, or related statutes. He may 
not cancel a portion of such amounts, which would have been 
allowed under some earlier proposals.
    Budget enforcement procedures in effect since 1990 have 
worked to prevent new spending and revenue laws from increasing 
the deficit. It is unclear whether, if sustained by the Supreme 
Court, the President's new authority will lead to further 
reductions in the deficit or will simply empower him to 
substitute his own budgetary priorities for those of the 
Congress. In any event, the act does not address the leading 
cause of recent and projected deficits; namely, mandatory 
spending increases under existing law. To control such 
spending, whether as part of a plan to balance the budget or 
for other purposes, the Congress must enact legislation 
modifying existing laws.
    On January 2, 1997, a lawsuit was filed in the U.S. 
District Court for the District of Columbia challenging the 
constitutionality of the act. The plaintiffs, six Members of 
Congress, including Senators Byrd, Hatfield, Levin, and 
Moynihan, contended that the act violated Art. I, Sec. 7 of the 
Constitution, which requires that any bill making or changing 
Federal law must be passed by both houses of Congress and then 
presented to the President in toto, in which form he must sign 
it (or allow it to become law by the passage of 10 days, 
Sundays excepted) or veto it. The defendants in the case, which 
was captioned Sen. Robert C. Byrd, et al. v. Franklin Raines, 
et al., were the Director of the Office of Management and 
Budget and the Secretary of the Treasury.
    The District Court heard oral argument in Byrd v. Raines on 
March 21, 1997, and on April 10, 1997, the court ordered that 
the Line Item Veto Act was adjudged and declared 
unconstitutional. In an opinion by Judge Thomas Penfield 
Jackson, the court held that the act was unconstitutional 
because it effectively permitted the President to repeal duly 
enacted provisions of Federal law, which is a function reserved 
to the Congress under the Constitution.
    At the time of this writing, it is expected that the 
defendants will appeal the District Court's decision directly 
to the U.S. Supreme Court pursuant to Section 3 of the Line 
Item Veto Act, which provides for expedited judicial review.
      

=======================================================================


                           REVENUE PROVISIONS

This section,<SUP>1</SUP> prepared by the staff of the Joint 
Committee on Taxation, provides a description of the revenue 
provisions contained in the President's fiscal year 1998 budget 
proposal, as submitted to the Congress on February 6 
1997.<SUP>2</SUP>
---------------------------------------------------------------------------
    \1\ This section may be cited as follows: Joint Committee on 
Taxation, Description of Revenue Provisions Contained in the 
President's Fiscal Year 1998 Budget Proposal (JCX-6-97R), February 10, 
1996.
    \2\ See Department of the Treasury, General Explanations of the 
Administration's Revenue Proposals, February 1997. Also, Office of 
Management and Budget, Budget of the United States Government, Fiscal 
Year 1998: Analytical Perspectives, pp. 45-60.

This section does not include a description of certain user 
fees and other proposals contained in the President's fiscal 
year 1998 budget proposal that may or may not be considered to 
be in the jurisdiction of the House Committee on Ways and Means 
or the Senate Committee on Finance.<SUP>3</SUP>
---------------------------------------------------------------------------
    \3\ See Office of Management and Budget, Budget of the United 
States Government, Fiscal Year 1998: Analytical Perspectives, pp. 61-
69.

This section contains only a description of present law and 
each of the tax revenue proposals contained in the President's 
budget. The document does not provide any analysis of the 
policy issues raised by the proposals. The Joint Committee 
staff anticipates providing such policy analysis at a later 
date (e.g., in connection with Senate Finance or Ways and Means 
---------------------------------------------------------------------------
Committee hearings on the proposals).

=======================================================================

                           I. TAX CUT SUNSET

    The President's budget proposal states that a mechanism 
will apply to ensure that the budget is balanced in 2002 under 
both Office of Management and Budget (``OMB'') and 
Congressional Budget Office (``CBO'') economic assumptions. 
Specifically, the President's budget states the following:

        ``The Administration is confident that its own 
        assumptions will continue to prove the more accurate.

        ``Nevertheless, the budget includes a mechanism to 
        ensure that the President's plan reaches balance in 
        2002 under OMB or CBO assumptions. If OMB's assumptions 
        prove correct, as we expect, then the mechanism would 
        not take effect. If, however, CBO proves correct--and 
        the President and Congress cannot agree on how to close 
        the gap through expedited procedures--then most of the 
        President's tax cuts would sunset, and discretionary 
        budget authority and identified entitlement programs 
        would face an across-the-board limit.'' <SUP>4</SUP>

    \4\ Office of Management and Budget, Budget of the United States 
Government, Fiscal Year 1998.
---------------------------------------------------------------------------
    The budget proposal documents published by the 
Administration contain no additional detail with respect to the 
sunset mechanism as relates to the President's tax proposals. A 
draft document provided by OMB to the staff of the Joint 
Committee on Taxation specifies in detail the application of 
the mechanism to spending provisions. However, with respect to 
the tax reduction provisions in the President's budget, the OMB 
document merely states that specified tax cuts sunset at the 
end of calendar year 2000.
    The Treasury Department has indicated in a draft document 
provided to the staff of the Joint Committee on Taxation that 
the sunset mechanism would apply to the following provisions: 
(1) the tax credit for families with young children, (2) the 
HOPE scholarship tuition tax credit, (3) the education and job 
training deduction, (4) the expanded Individual Retirement 
Arrangement (``IRA'') provisions, (5) the expanded empowerment 
zone and enterprise communities provision, and (6) the 
deduction for environmental remediation expenses 
(``Brownfields''). The Treasury Department provided specific 
detail with respect to how the IRA provisions would be sunset 
under the mechanism, but did not provide details with respect 
to the application of the sunset to the other specified tax cut 
provisions.
    Until additional information is known regarding the 
application of the sunset mechanism, the staff of the Joint 
Committee on Taxation is not able to provide an analysis of the 
sunset mechanism nor can the budget effects of the 
Administration's tax proposals be finally estimated. In order 
to provide such analysis and revenue estimates, the following 
information is required: (1) a description of how the sunset 
date identified by the OMB would apply to the specified tax cut 
provisions, other than IRAs, (2) statutory language detailing 
the application of the sunset mechanism, and (3) a CBO analysis 
of the budget proposal and the sunset mechanism. The 
President's budget documents and the OMB description of the 
sunset mechanism appear to assume that CBO economic assumptions 
will trigger the application of the tax cut sunset mechanism. 
However, the estimated budget receipts shown in the President's 
budget proposal do not incorporate the effects of the sunset 
mechanism.
                      II. MIDDLE CLASS TAX RELIEF

         A. Tax Credit for Families with Children Under Age 13

                              Present Law

In general

     Present law does not provide any tax credit specific based 
solely on the taxpayer's number of dependent children. 
Taxpayers with dependent children, however, generally are able 
to claim a personal exemption for each of these dependents. The 
total amount for personal exemptions is subtracted (along with 
certain other items) from adjusted gross income (AGI) in 
arriving at taxable income. The amount of each personal 
exemption is $2,650 for 1997, and is adjusted annually for 
inflation. In 1997, the amount of the personal exemption is 
phased out for taxpayers with AGI in excess of $121,200 for 
single taxpayers, $151,500 for heads of household, and $181,800 
for married couples filing joint returns. These phaseout 
thresholds are adjusted annually for inflation.
     In addition, under present law, taxpayers with children 
may be entitled to (1) a tax credit for child care expenses and 
(2) an exclusion from income for employer-provided dependent 
care assistance. Further, the amount of earned income credit 
(EIC) to which a taxpayer is entitled may be increased 
depending upon the taxpayer's family size.

                        Description of Proposal

    The proposal would provide taxpayers with a nonrefundable 
tax credit of $300 for each qualifying child under the age of 
13 (as of the close of the calendar year in which the 
taxpayer's taxable year begins) for taxable years 1997, 1998 
and 1999. The credit would be calculated before the application 
of the earned income credit (in a manner similar to the 
provision contained in the Balanced Budget Act of 1995 as 
passed by the Congress). The amount of the credit would be 
increased to $500 for each qualifying child for taxable years 
beginning after December 31, 1999.
    The credit would be phased out ratably for taxpayers with 
AGI over $60,000 and would be fully phased out at AGI of 
$75,000. In the case of a taxable year beginning after calendar 
year 2000, the maximum credit and the beginning point of the 
phaseout range would be indexed annually for inflation.

                             Effective Date

    The proposal would be effective for taxable years beginning 
after December 31, 1996. The President's budget proposal 
contains a tax cut sunset provision that, if triggered, would 
sunset the child credit for calendar years after 2000. See the 
description of this sunset mechanism in Part I., above.

              B. Tax Incentives for Education and Training

1. HOPE scholarship tuition tax credit

                              Present Law

    Taxpayers generally may not deduct education and training 
expenses. However, a deduction for education expenses generally 
is allowed under section 162 if the education or training (1) 
maintains or improves a skill required in a trade or business 
currently engaged in by the taxpayer, or (2) meets the express 
requirements of the taxpayer's employer, or requirements of 
applicable law or regulations, imposed as a condition of 
continued employment (Treas. Reg. sec. 1.162-5). Education 
expenses are not deductible if they relate to certain minimum 
educational requirements or to education or training that 
enables a taxpayer to begin working in a new trade or business. 
In the case of an employee, education expenses (if not 
reimbursed by the employer) may be claimed as an itemized 
deduction only if such expenses relate to the employee's 
current job and only to the extent that the expenses, along 
with other miscellaneous deductions, exceed 2 percent of the 
taxpayer's adjusted gross income (AGI).
    Education expenses that are reimbursed by the employer are 
excludable from the employee's gross income as a working 
condition fringe benefit (sec. 132(d)) if the education 
qualifies as work related under section 162. A special rule 
allows an employee to exclude from gross income for income tax 
purposes and from wages for employment tax purposes up to 
$5,250 paid by his or her employer for educational assistance, 
regardless of whether the education maintains or improves a 
skill required by the employee's current position (sec. 127). 
This special rule for employer-provided educational assistance 
expires with respect to courses beginning after June 30, 1997 
<SUP>5</SUP> (and does not apply to graduate level courses 
beginning after June 30, 1996).
---------------------------------------------------------------------------
    \5\ The legislative history of the Small Business Job Protection 
Act of 1996 indicated Congressional intent to extend the exclusion for 
employer-provided educational assistance through May 31, 1997. The 
statute, however, extended the exclusion through June 30, 1997.
---------------------------------------------------------------------------
    Another special rule (sec. 135) provides that interest 
earned on a qualified U.S. Series EE savings bond issued after 
1989 is excludable from gross income if the proceeds of the 
bond upon redemption do not exceed qualified higher education 
expenses paid by the taxpayer during the taxable 
year.<SUP>6</SUP> ``Qualified higher education expenses'' 
include tuition and fees (but not room and board expenses) 
required for the enrollment or attendance of the taxpayer, the 
taxpayer's spouse, or a dependent of the taxpayer at certain 
colleges, universities, or vocational schools. The exclusion 
provided by section 135 is phased out for certain higher-income 
taxpayers, determined by the taxpayer's modified AGI during the 
year the bond is redeemed. For 1996, the exclusion was phased 
out for taxpayers with modified AGI between $49,450 and $64,450 
($74,200 and $104,200 for joint returns). To prevent taxpayers 
from effectively avoiding the income phaseout limitation 
through issuance of bonds directly in the child's name, section 
135(c)(1)(B) provides that the interest exclusion is available 
only with respect to U.S. Series EE savings bonds issued to 
taxpayers who are at least 24 years old.
---------------------------------------------------------------------------
    \6\ If the aggregate redemption amount (i.e., principal plus 
interest) of all Series EE bonds redeemed by the taxpayer during the 
taxable year exceeds the qualified education expenses incurred, then 
the excludable portion of interest income is based on the ratio that 
the education expenses bears to the aggregate redemption amount (sec. 
135(b)).
---------------------------------------------------------------------------
    Section 117 excludes from gross income amounts received as 
a qualified scholarship by an individual who is a candidate for 
a degree and used for tuition and fees required for the 
enrollment or attendance (or for fees, books, supplies, and 
equipment required for courses of instruction) at a primary, 
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to 
scholarship amounts covering regular living expenses, such as 
room and board. There is, however, no dollar limitation for the 
section 117 exclusion, provided that the scholarship funds are 
used to pay for tuition and required fees. In addition to the 
exclusion for qualified scholarships, section 117 provides an 
exclusion from gross income for qualified tuition reductions 
for education below the graduate level provided to employees of 
certain educational organizations.
    In the case of an individual, section 108(f) provides that 
gross income subject to Federal income tax does not include any 
amount from the forgiveness (in whole or in part) of certain 
student loans, provided that the forgiveness is contingent on 
the student's working for a certain period of time in certain 
professions for any of a broad class of employers (e.g., 
providing health care services to a nonprofit organization). 
Student loans eligible for this special rule must be made to an 
individual to assist the individual in attending an education 
institution that normally maintains a regular faculty and 
curriculum and normally has a regularly enrolled body of 
students in attendance at the place where its education 
activities are regularly carried on. Loan proceeds may be used 
not only for tuition and required fees, but also to cover room 
and board expenses (in contrast to tax-free scholarships under 
section 117, which are limited to tuition and required fees). 
In addition, the loan must be made by (1) the United States (or 
an instrumentality or agency thereof), (2) a State (or any 
political subdivision thereof), (3) certain tax-exempt public 
benefit corporations that control a State, county, or municipal 
hospital and whose employees have been deemed to be public 
employees under State law, or (4) an educational organization 
that originally received the funds from which the loan was made 
from the United States, a State, or a tax-exempt public benefit 
corporation. As with section 117, there is no dollar limitation 
for the section 108(f) exclusion.
    Section 529 (enacted as part of the Small Business Job 
Protection Act of 1996) provides tax-exempt status to 
``qualified State tuition programs,'' meaning certain programs 
established and maintained by a State (or agency or 
instrumentality thereof) under which persons may (1) purchase 
tuition credits or certificates on behalf of a designated 
beneficiary that entitle the beneficiary to a waiver or payment 
of qualified higher education expenses of the beneficiary, or 
(2) make contributions to an account that is established for 
the purpose of meeting qualified higher education expenses of 
the designated beneficiary of the account. ``Qualified higher 
education expenses'' are defined as tuition, fees, books, 
supplies, and equipment required for the enrollment or 
attendance at a college or university (or certain vocational 
schools). Qualified higher education expenses do not include 
room and board expenses. Section 529 also provides that no 
amount shall be included in the gross income of a contributor 
to, or beneficiary of, a qualified State tuition program with 
respect to any distribution from, or earnings under, such 
program, except that (1) amounts distributed or educational 
benefits provided to a beneficiary (e.g., when the beneficiary 
attends college) will be included in the beneficiary's gross 
income (unless excludable under another Code section) to the 
extent such amount or the value of the educational benefits 
exceeds contributions made on behalf of the beneficiary, and 
(2) amounts distributed to a contributor (e.g., when a parent 
receives a refund) will be included in the contributor's gross 
income to the extent such amounts exceeds contributions made by 
that person.

                        Description of Proposal

    Individual taxpayers would be allowed to claim a non-
refundable credit against Federal income taxes up to $1,500 per 
student per year for tuition and required fees (but not room 
and board expenses) for the first two years of the student's 
post-secondary education in a degree or certificate program. 
The education expenses must be incurred on behalf of the 
taxpayer, the taxpayer's spouse, or a dependent. The credit 
would be available with respect to an individual student for 
two taxable years, provided that the student has not completed 
the first two years of post-secondary education. With respect 
to each student, a taxpayer may claim either the credit or the 
proposed above-the-line deduction (described below). If, for 
any taxable year, a taxpayer chooses to claim a credit with 
respect to a particular student, then the proposed above-the-
line deduction will not be available with respect to that 
particular student for that year (although the proposed 
deduction may be available with respect to that student for 
other taxable years, such as after the student completes two 
years of college and no longer is eligible for the credit). For 
one taxable year, a taxpayer may claim the proposed above-the 
line deduction for education expenses with respect to one 
student and also claim the credit with respect to other 
students. An eligible student would not be entitled to claim a 
credit under the proposal if that student is claimed as a 
dependent for tax purposes by another taxpayer. If a parent 
claims a student as a dependent, any education expenses paid by 
the student would be treated as paid by the parent for purposes 
of the proposal.
    With respect to each individual student, a taxpayer is 
limited to a tuition tax credit of the lesser of the qualified 
education expenses incurred during the taxable year with 
respect to that student or the maximum credit amount. The 
maximum credit amount for a taxable year would be $1,500, 
reduced by any Federal educational grants, such as Pell Grants, 
awarded to the student for that year (or for education 
beginning in the first three months of the next year, if 
credits are claimed based on payments for that education). 
Beginning in 1998, the maximum credit amount would be indexed 
for inflation, rounded down to the closest multiple of $50.
    The maximum credit amount would be phased out ratably for 
taxpayers with modified AGI between $50,000 and $70,000 
($80,000 and $100,000 for joint returns). Modified AGI would 
include taxable Social Security benefits and amounts otherwise 
excluded with respect to income earned abroad (or income from 
Puerto Rico or U.S. possessions). Modified AGI for purposes of 
the credit would be determined without regard to the proposed 
above-the-line deduction for higher education expenses 
(described below) in cases where the credit is claimed with 
respect to one student and the deduction is claimed with 
respect to another student in the same taxable year. Beginning 
in 2001, the income phase-out ranges would be indexed for 
inflation, rounded down to the closest multiple of $5,000.
    The credit would be available for ``qualified higher 
education expenses,'' meaning tuition and fees required for the 
enrollment or attendance of an eligible student (e.g., 
registration fees, laboratory fees, and extra charges for 
particular courses) at an eligible institution. Charges and 
fees associated with meals, lodging, student activities, 
athletics, insurance, transportation, books, and similar 
personal, living or family expenses would not be included. The 
expenses of education involving sports, games, or hobbies would 
not be qualified higher education expenses unless this 
education is part of a degree program.
    An eligible student would be one who is enrolled or 
accepted for enrollment in a degree, certificate, or other 
program (including a program of study abroad approved for 
credit by the institution at which such student is enrolled) 
leading to a recognized educational credential at an eligible 
institution of higher education. The student must pursue a 
course of study on at least a half-time basis. In addition, for 
a student's qualified higher education expenses to be eligible 
for the credit, the student must not have been convicted of a 
Federal or State felony consisting of the possession or 
distribution of certain drugs, and generally cannot be a 
nonresident alien. Furthermore, a taxpayer would be entitled to 
the credit for a student in a second taxable year only if the 
student obtained a qualifying grade point average for all 
previous post-secondary education. Generally, this would be an 
average of at least 2.75 on a 4-point scale, or a substantially 
similar measure of achievement.<SUP>7</SUP>
---------------------------------------------------------------------------
    \7\ Institutions that do not use a 4-point grading scale would be 
allowed to retain their own system while still allowing their students 
to qualify for the credit; these institutions will determine what 
measure under the system they use reasonably approximates a B-GPA.
---------------------------------------------------------------------------
    Eligible institutions would be defined by reference to 
section 481 of the Higher Education Act of 1965. Such 
institutions generally would be accredited post-secondary 
educational institutions offering credit toward a bachelor's 
degree, an associate's degree, or another recognized post-
secondary credential. Certain proprietary institutions and 
post-secondary vocational institutions also would be eligible 
institutions. The institution must be eligible to participate 
in Department of Education student aid programs.
    Qualified education expenses generally would include only 
out-of-pocket tuition and fees. Qualified education expenses 
would not include expenses covered by educational assistance 
that is not required to be included in the gross income of 
either the student or the taxpayer claiming the credit. Thus, 
total tuition and required fees would be reduced by scholarship 
or fellowship grants excludable from gross income under 
present-law section 117 and any tax-free veteran's educational 
benefits. In addition, qualified education expenses would be 
reduced by the interest from U.S. savings bonds that is 
excludable from gross income under section 135 for the taxable 
year. However, no reduction of qualified education expenses 
would be required for a gift, bequest, devise, or inheritance 
within the meaning of section 102(a). If a student's education 
expenses for a taxable year are deducted under any section of 
the Code (including the proposed above-the-line deduction for 
education expenses), then no credit would be available for such 
expenses.
    The credit would be available in the taxable year the 
expenses are paid, subject to the requirement that the 
education commence or continue during that year or during the 
first three months of the next year. Qualified higher education 
expenses paid with the proceeds of a loan generally would be 
eligible for the credit (rather than repayment of the loan 
itself). The credit would be recaptured in cases where the 
student or taxpayer receives a refund (or reimbursement through 
insurance) of tuition and fees for which a credit has been 
claimed in a prior year.
    The Secretary of the Treasury (in consultation with the 
Secretary of Education) would have authority to issue 
regulations to implement the proposal, including regulations 
providing appropriate rules for recordkeeping and information 
reporting. These regulations would address the information 
reports that educational institutions would file to assist 
students and the IRS in determining whether a student meets the 
eligibility requirements for the credit and calculating the 
amount of the credit potentially available. Where certain terms 
are defined by reference to the Higher Education Act of 1965, 
the Secretary of Education would have authority to issue 
regulations, as well as authority to define other education 
terms as necessary.

                             Effective Date

    The proposal would be effective for payments made on or 
after January 1, 1997, for education commencing on or after 
July 1, 1997. The President's budget proposal contains a tax 
cut sunset provision that, if triggered, would sunset the HOPE 
scholarship tuition tax credit for calendar years after 2000. 
See the description of this sunset mechanism in Part I., above.

2. Education and job training tax deduction

                              Present Law

    Taxpayers generally may not deduct education and training 
expenses. However, a deduction for education expenses generally 
is allowed under section 162 if the education or training (1) 
maintains or improves a skill required in a trade or business 
currently engaged in by the taxpayer, or (2) meets the express 
requirements of the taxpayer's employer, or requirements of 
applicable law or regulations, imposed as a condition of 
continued employment (Treas. Reg. sec. 1.162-5). Education 
expenses are not deductible if they relate to certain minimum 
educational requirements or to education or training that 
enables a taxpayer to begin working in a new trade or business. 
In the case of an employee, education expenses (if not 
reimbursed by the employer) may be claimed as an itemized 
deduction only if such expenses relate to the employee's 
current job and only to the extent that the expenses, along 
with other miscellaneous deductions, exceed 2 percent of the 
taxpayer's adjusted gross income (AGI).
    Education expenses that are reimbursed by the employer are 
excludable from the employee's gross income as a working 
condition fringe benefit (sec. 132(d)) if the education 
qualifies as work related under section 162. A special rule 
allows an employee to exclude from gross income for income tax 
purposes and from wages for employment tax purposes up to 
$5,250 paid by his or her employer for educational assistance, 
regardless of whether the education maintains or improves a 
skill required by the employee's current position (sec. 127). 
This special rule for employer-provided educational assistance 
expires with respect to courses beginning after June 30, 1997 
<SUP>8</SUP> (and does not apply to graduate level courses 
beginning after June 30, 1996).
---------------------------------------------------------------------------
    \8\ The legislative history of the Small Business Job Protection 
Act of 1996 indicated Congressional intent to extend the exclusion for 
employer-provided educational assistance through May 31, 1997. The 
statute, however, extended the exclusion through June 30, 1997.
---------------------------------------------------------------------------
    Another special rule (sec. 135) provides that interest 
earned on a qualified U.S. Series EE savings bond issued after 
1989 is excludable from gross income if the proceeds of the 
bond upon redemption do not exceed qualified higher education 
expenses paid by the taxpayer during the taxable 
year.<SUP>9</SUP> ``Qualified higher education expenses'' 
include tuition and fees (but not room and board expenses) 
required for the enrollment or attendance of the taxpayer, the 
taxpayer's spouse, or a dependent of the taxpayer at certain 
colleges, universities, or vocational schools. The exclusion 
provided by section 135 is phased out for certain higher-income 
taxpayers, determined by the taxpayer's modified AGI during the 
year the bond is redeemed. For 1996, the exclusion was phased 
out for taxpayers with modified AGI between $49,450 and $64,450 
($74,200 and $104,200 for joint returns). To prevent taxpayers 
from effectively avoiding the income phaseout limitation 
through issuance of bonds directly in the child's name, section 
135(c)(1)(B) provides that the interest exclusion is available 
only with respect to U.S. Series EE savings bonds issued to 
taxpayers who are at least 24 years old.
---------------------------------------------------------------------------
    \9\ If the aggregate redemption amount (i.e., principal plus 
interest) of all Series EE bonds redeemed by the taxpayer during the 
taxable year exceeds the qualified education expenses incurred, then 
the excludable portion of interest income is based on the ratio that 
the education expenses bears to the aggregate redemption amount (sec. 
135(b)).
---------------------------------------------------------------------------
    Section 117 excludes from gross income amounts received as 
a qualified scholarship by an individual who is a candidate for 
a degree and used for tuition and fees required for the 
enrollment or attendance (or for fees, books, supplies, and 
equipment required for courses of instruction) at a primary, 
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to 
scholarship amounts covering regular living expenses, such as 
room and board. There is, however, no dollar limitation for the 
section 117 exclusion, provided that the scholarship funds are 
used to pay for tuition and required fees. In addition to the 
exclusion for qualified scholarships, section 117 provides an 
exclusion from gross income for qualified tuition reductions 
for education below the graduate level provided to employees of 
certain educational organizations.
    In the case of an individual, section 108(f) provides that 
gross income subject to Federal income tax does not include any 
amount from the forgiveness (in whole or in part) of certain 
student loans, provided that the forgiveness is contingent on 
the student's working for a certain period of time in certain 
professions for any of a broad class of employers (e.g., 
providing health care services to a nonprofit organization). 
Student loans eligible for this special rule must be made to an 
individual to assist the individual in attending an education 
institution that normally maintains a regular faculty and 
curriculum and normally has a regularly enrolled body of 
students in attendance at the place where its education 
activities are regularly carried on. Loan proceeds may be used 
not only for tuition and required fees, but also to cover room 
and board expenses (in contrast to tax-free scholarships under 
section 117, which are limited to tuition and required fees). 
In addition, the loan must be made by (1) the United States (or 
an instrumentality or agency thereof), (2) a State (or any 
political subdivision thereof), (3) certain tax-exempt public 
benefit corporations that control a State, county, or municipal 
hospital and whose employees have been deemed to be public 
employees under State law, or (4) an educational organization 
that originally received the funds from which the loan was made 
from the United States, a State, or a tax-exempt public benefit 
corporation. As with section 117, there is no dollar limitation 
for the section 108(f) exclusion.
    Section 529 (enacted as part of the Small Business Job 
Protection Act of 1996) provides tax-exempt status to 
``qualified State tuition programs,'' meaning certain programs 
established and maintained by a State (or agency or 
instrumentality thereof) under which persons may (1) purchase 
tuition credits or certificates on behalf of a designated 
beneficiary that entitle the beneficiary to a waiver or payment 
of qualified higher education expenses of the beneficiary, or 
(2) make contributions to an account that is established for 
the purpose of meeting qualified higher education expenses of 
the designated beneficiary of the account. ``Qualified higher 
education expenses'' are defined as tuition, fees, books, 
supplies, and equipment required for the enrollment or 
attendance at a college or university (or certain vocational 
schools). Qualified higher education expenses do not include 
room and board expenses. Section 529 also provides that no 
amount shall be included in the gross income of a contributor 
to, or beneficiary of, a qualified State tuition program with 
respect to any distribution from, or earnings under, such 
program, except that (1) amounts distributed or educational 
benefits provided to a beneficiary (e.g., when the beneficiary 
attends college) will be included in the beneficiary's gross 
income (unless excludable under another Code section) to the 
extent such amount or the value of the educational benefits 
exceeds contributions made on behalf of the beneficiary, and 
(2) amounts distributed to a contributor (e.g., when a parent 
receives a refund) will be included in the contributor's gross 
income to the extent such amounts exceeds contributions made by 
that person.

                        Description of Proposal

    Individual taxpayers would be allowed an above-the-line 
deduction for qualified higher education expenses paid during 
the taxable year for the education or training of the taxpayer, 
the taxpayer's spouse, or the taxpayer's dependents at an 
institution of higher education. The deduction would be allowed 
in computing a taxpayer's AGI and could be claimed regardless 
of whether the taxpayer itemizes deductions. In 1997 and 1998, 
the maximum deduction allowed per taxpayer return would be 
$5,000. After 1998, the maximum deduction would increase to 
$10,000. The maximum deduction would not vary with the number 
of students in a taxpayer's family. A taxpayer may claim the 
deduction for a taxable year with respect to one or more 
students, even though the taxpayer also claims a proposed Hope 
Scholarship tuition tax credit (discussed previously) for that 
same year with respect to other students. With respect to each 
student, a taxpayer must choose between claiming the proposed 
credit or the deduction. If, for any taxable year, a taxpayer 
chooses to claim the proposed credit with respect to a 
particular student, then the deduction will not be available 
with respect to that particular student for that year (although 
the deduction may be available with respect to that student for 
other taxable years, such as after the student completes two 
years of college and no longer is eligible for the credit). A 
student would not be eligible to claim a deduction under the 
proposal if that student is claimed as a dependent for tax 
purposes by another taxpayer. If a parent claims a student as a 
dependent, any education expenses paid by the student would be 
treated as paid by the parent for purposes of the proposal. In 
contrast to the proposed Hope Scholarship tuition tax credit, 
there would be no limit on the number of taxable years for 
which the proposed deduction for qualified higher education 
expenses could be claimed with respect to a particular student.
    The maximum deduction would be phased out ratably for 
taxpayers with modified AGI between $50,000 and $70,000 
($80,000 and $100,000 for joint returns). Modified AGI would 
include taxable Social Security benefits and amounts otherwise 
excluded with respect to income earned abroad (or income from 
Puerto Rico or U.S. possessions) and would be determined 
without regard to the deduction allowed by the proposal. 
Beginning in 2001, the income phase-out ranges would be indexed 
for inflation, rounded down to the closest multiple of $5,000.
    The deduction would be available for ``qualified higher 
education expenses,'' meaning tuition and fees required for the 
enrollment or attendance of an eligible student (e.g., 
registration fees, laboratory fees, and extra charges for 
particular courses) at an eligible institution. Charges and 
fees associated with meals, lodging, student activities, 
athletics, insurance, transportation, books, and similar 
personal, living or family expenses would not be deductible. 
The expenses of education involving sports, games, or hobbies 
would not be qualified higher education expenses unless this 
education is part of a degree program (or lead to improvement 
or acquisition of job skills).
    An ``eligible student'' generally would be one who is 
enrolled or accepted for enrollment in a degree, certificate, 
or other program (including a program of study abroad approved 
for credit by the institution at which such student is 
enrolled) leading to a recognized educational credential at an 
institution of higher education. The student must pursue a 
course of study on at least a half-time basis. However, a 
student taking a course to improve or acquire job skills also 
would be an eligible student for purposes of the deduction. In 
contrast to the proposed Hope Scholarship tuition tax credit 
(described previously), there are no requirements for purposes 
of the deduction that the student maintain any grade point 
average or be free of felony drug convictions. An eligible 
student generally could not be a nonresident alien.
    Eligible institutions would be defined by reference to 
section 481 of the Higher Education Act of 1965. Such 
institutions generally would be accredited post-secondary 
educational institutions offering credit toward a bachelor's 
degree, an associate's degree, or another recognized post-
secondary credential. Certain proprietary institutions and 
post-secondary vocational institutions also would be eligible 
institutions. The institution must be eligible to participate 
in Department of Education student aid programs.
    Qualified education expenses generally would include only 
out-of-pocket tuition and fees. Qualified education expenses 
would not include expenses covered by educational assistance 
that is not required to be included in the gross income of 
either the student or the taxpayer claiming the deduction. 
Thus, total tuition and required fees would be reduced (prior 
to the application of the $5,000 or $10,000 deduction 
limitation) by scholarship or fellowship grants excludable from 
gross income under present-law section 117 and any tax-free 
veteran's educational benefits.<SUP>10</SUP> In addition, 
qualified education expenses would be reduced by the interest 
from U.S. savings bonds that is excludable from gross income 
under section 135 for the taxable year. However, no reduction 
of qualified education expenses would be required for a gift, 
bequest, devise, or inheritance within the meaning of section 
102(a). If a student's education expenses for a taxable year 
are deducted under any other section of the Code, then such 
expenses would not be deductible under the proposal.
---------------------------------------------------------------------------
    \10\ For example, if during a taxable year, a taxpayer pays $8,500 
for college tuition, but receives a $4,000 tax-free scholarship to 
cover some of those same tuition expenses, then the taxpayer would be 
deemed to have paid $4,500 of qualified higher education expenses under 
the proposal.
---------------------------------------------------------------------------
    The deduction would be available in the taxable year the 
expenses are paid, subject to the requirement that the 
education commence or continue during that year or during the 
first three months of the next year. Qualified higher education 
expenses paid with the proceeds of a loan generally would be 
eligible for the deductible (rather than repayment of the loan 
itself). Normal tax benefit rules would apply to refunds (and 
reimbursement through insurance) of previously deducted tuition 
and fees, making such refunds includable in income in the year 
received.
    The Secretary of the Treasury would be granted authority to 
issue regulations to implement the proposal, including rules 
requiring record keeping and information reporting.

                             Effective Date

    The proposal would be effective for payments made on or 
after January 1, 1997, for education commencing on or after 
July 1, 1997. The President's budget proposal contains a tax 
cut sunset provision that, if triggered, would sunset the 
education and job training tax deduction for calendar years 
after 2000. See the description of this sunset mechanism in 
Part I., above.

3. Tax incentives for expansion of student loan forgiveness

                               Present Law

    In the case of an individual, gross income subject to 
Federal income tax does not include any amount from the 
forgiveness (in whole or in part) of certain student loans, 
provided that the forgiveness is contingent on the student's 
working for a certain period of time in certain professions for 
any of a broad class of employers (sec. 108(f)).
    Student loans eligible for this special rule must be made 
to an individual to assist the individual in attending an 
educational institution that normally maintains a regular 
faculty and curriculum and normally has a regularly enrolled 
body of students in attendance at the place where its education 
activities are regularly carried on. Loan proceeds may be used 
not only for tuition and required fees, but also to cover room 
and board expenses (in contrast to tax free scholarships under 
section 117, which are limited to tuition and required fees). 
In addition, the loan must be made by (1) the United States (or 
an instrumentality or agency thereof), (2) a State (or any 
political subdivision thereof), (3) certain tax-exempt public 
benefit corporations that control a State, county, or municipal 
hospital and whose employees have been deemed to be public 
employees under State law, or (4) an educational organization 
that originally received the funds from which the loan was made 
from the United States, a State, or a tax-exempt public benefit 
corporation. Thus, loans made with private, nongovernmental 
funds are not qualifying student loans for purposes of the 
section 108(f) exclusion.

                        Description of Proposal

    The proposal would expand section 108(f) so that an 
individual's gross income does not include forgiveness of loans 
made by tax-exempt charitable organizations (e.g., educational 
organizations or private foundations) if the proceeds of such 
loans are used to pay costs of attendance at an educational 
institution or to refinance outstanding student loans and the 
student is not employed by the lender organization. As under 
present law, the section 108(f) exclusion would apply only if 
the forgiveness is contingent on the student's working for a 
certain period of time in certain professions for any of a 
broad class of employers.
    The exclusion would also be expanded to cover forgiveness 
of direct student loans made through the William D. Ford 
Federal Direct Loan Program where loan repayment and 
forgiveness are contingent on the borrower's income level.

                             Effective Date

    The proposal would be effective with respect to amounts 
otherwise includible in income after the date of enactment.

4. Extension of exclusion for employer-provided educational assistance

                               Present Law

    Under present law, an employee's gross income and wages do 
not include amounts paid or incurred by the employer for 
educational assistance provided to the employee if such amounts 
were paid or incurred pursuant to an educational assistance 
program that meets certain requirements. The exclusion is 
limited to $5,250 of educational assistance with respect to an 
individual during a calendar year. The exclusion applies 
whether or not the education is job related. Under present law, 
in the absence of this exclusion, educational assistance is 
excludable from income only if it is related to an employee's 
current job.
    The exclusion for employer-provided educational assistance 
expires with respect to courses beginning after June 30, 
1997.<SUP>11</SUP> The exclusion is not available for graduate 
level courses beginning after June 30, 1996. Graduate courses 
are defined as any graduate level course of a kind normally 
taken by an individual pursuing a program leading to a law, 
business, marketing or other advanced academic or professional 
degree.
---------------------------------------------------------------------------
    \11\ The legislative history of the Small Business Job Protection 
Act of 1996 indicated Congressional intent to extend the exclusion for 
employer-provided educational assistance through May 31, 1997. The 
statute, however, extended the exclusion through June 30, 1997.
---------------------------------------------------------------------------

                        Description of Proposal

    Under the proposal, the exclusion for employer-provided 
educational assistance would be extended through December 31, 
2000, and the provision limiting the exclusion to undergraduate 
courses would be retroactively repealed.

                             Effective Date

    The extension of the exclusion would be effective for 
taxable years beginning after December 31, 1996. The repeal of 
the limitation on the exclusion to undergraduate education 
would be effective for graduate level courses beginning after 
June 30, 1996.

5. Small business tax credit for employer-provided educational 
        assistance

                               Present Law

    Under present law, an employer may deduct certain job-
related training and education expenses, as well as amounts 
paid or incurred for educational assistance provided to 
employees pursuant to an educational assistance program that 
meets certain requirements. Employer payments for job-related 
training and amounts paid under a qualified educational 
assistance program up to $5,250 annually are excluded from the 
gross income and wages of the employee. The exclusion for 
employer-provided educational assistance expires after June 
30,1997.<SUP>12</SUP> Under present law, not more than 5 
percent of the amounts paid or incurred by the employer during 
the year for educational assistance under a qualified 
educational assistance program can be provided for the class of 
individuals consisting of more than 5-percent owners of the 
employer and the spouses or dependents of such more than 5-
percent owners.
---------------------------------------------------------------------------
    \12\ The legislative history of the Small Business Job Protection 
Act of 1996 indicated Congressional intent to extend the exclusion for 
employer-provided educational assistance through May 31, 1997. The 
statute, however, extended the exclusion through June 30, 1997.
---------------------------------------------------------------------------

                        Description of Proposal

    The proposal would provide a temporary 10-percent income 
tax credit for small businesses with respect to expenses 
incurred for education of employees by third parties under a 
qualified employer-provided educational assistance program. The 
credit would be available to employers (including self-employed 
individuals) where the business has average annual gross 
receipts of $10 million or less for the prior three years.

                             Effective Date

    The proposal would be effective for payments made in 
taxable years beginning after December 31, 1997 and before 
January 1, 2001 with respect to expenses incurred during those 
years.

         C. Provisions Relating to Individual Retirement Plans

                               Present Law

In general

    Under certain circumstances, an individual is allowed a 
deduction for contributions to an individual retirement account 
or an individual retirement annuity (an ``IRA''). An individual 
generally is not subject to income tax on amounts held in an 
IRA, including earnings on contributions, until the amounts are 
withdrawn from the IRA. No deduction is permitted with respect 
to contributions made to an IRA for a taxable year after the 
IRA owner attains age 70\1/2\.
    Under present law, the maximum deductible contribution that 
can be made to an IRA generally is the lesser of $2,000 or 100 
percent of an individual's compensation (earned income in the 
case of self-employed individuals). A married taxpayer filing a 
joint return is permitted to make the maximum deductible IRA 
contribution of up to $2,000 for each spouse (including, for 
example, a homemaker who does not work outside the home) if the 
combined compensation of both spouses is at least equal to the 
contributed amount. A single taxpayer is permitted to make the 
maximum deductible IRA contribution for a year if the 
individual is not an active participant in an employer-
sponsored retirement plan for the year or the individual has 
adjusted gross income (``AGI'') of less than $25,000. A married 
taxpayer filing a joint return is permitted to make the maximum 
deductible IRA contribution for a year if neither spouse is an 
active participant in an employer-sponsored plan or the couple 
has combined AGI of less than $40,000.
    If a single taxpayer or either spouse (in the case of a 
married couple) is an active participant in an employer-
sponsored retirement plan, the maximum IRA deduction is phased 
out over certain AGI levels. For single taxpayers, the maximum 
IRA deduction is phased out between $25,000 and $35,000 of AGI. 
For married taxpayers, the maximum deduction is phased out 
between $40,000 and $50,000 of AGI.

Nondeductible IRA contributions

    Individuals may make nondeductible IRA contributions to the 
extent deductible contributions are not allowed because of the 
AGI phaseout and active participant rules. A taxpayer may also 
elect to make nondeductible contributions in lieu of deductible 
contributions. Thus, any individual may make nondeductible 
contributions up to the excess of (1) the lesser of $2,000 or 
100 percent of compensation over (2) the IRA deduction claimed 
by the individual. As is the case with earnings on deductible 
IRA contributions, earnings on nondeductible contributions are 
not subject to income tax until withdrawn.

Taxation of withdrawals

    Amounts withdrawn from IRAs (other than amounts that 
represent a return of nondeductible contributions) are 
includible in income when withdrawn.
    In addition, a 10-percent additional tax applies to 
withdrawals from IRAs made before age 59\1/2\, unless the 
withdrawal is made (1) on account of a death or disability, (2) 
in the form of annuity payments, (3) for medical expenses that 
exceed 7.5 percent of adjusted gross income (``AGI'') or (4) 
for medical insurance (without regard to the 7.5 percent of AGI 
floor) if the individual has received unemployment compensation 
for at least 12 weeks, and the withdrawal is made in the year 
such unemployment compensation is received or the following 
year. If a self-employed individual is not eligible for 
unemployment compensation under applicable law, then, to the 
extent provided in regulations, a self-employed individual is 
treated as having received unemployment compensation for at 
least 12 weeks if the individual would have received 
unemployment compensation but for the fact that the individual 
was self-employed. The exception to the additional tax ceases 
to apply if the individual has been reemployed for at least 60 
days.

Elective deferrals

    Under a qualified cash or deferred arrangement, an 
individual can elect to have compensation paid in cash or 
contributed to a tax-qualified retirement plan. Amounts 
contributed at the election of the employee are referred to as 
elective deferrals. Elective deferrals are not includible in 
income until withdrawn from the plan. Qualified cash or 
deferred arrangements are subject to the same rules applicable 
to qualified plans generally, and are also subject to 
additional requirements. One of these additional requirements 
is that the maximum amount of elective deferrals that can be 
made in a year by an individual is limited to $9,500 in 1997. 
This dollar limit is indexed for inflation in $500 increments. 
A similar limit applies to elective deferrals under similar 
arrangements (e.g., tax-sheltered annuities).

                        Description of Proposal

In general

    In general, the proposal would (1) increase the present-law 
income limits (in two steps) on deductible IRA contributions 
and increase the income phase-out range to $20,000 (so that, 
for married taxpayers in 1997, 1998, and 1999, the income 
phase-out range would be $70,000 to $90,000 of AGI, and $80,000 
to $100,000 thereafter; and for single taxpayers in 1997, 1998, 
and 1999, the income phase-out range would be $45,000 to 
$65,000 of AGI, and $50,000 to $70,000 thereafter); (2) index 
the $2,000 IRA contribution limit and the income limits; (3) 
coordinate the IRA contribution limit with the elective 
deferral limit; (4) create nondeductible tax-free IRAs called 
``Special IRAs;'' and (5) provide an exception from the 10-
percent early withdrawal tax for IRA distributions used for 
higher education expenses, first-time home buyer expenses, 
medical expenses (in excess of 7.5 percent of AGI) of the 
individual's child, grandchild, parent or grandparent, and 
distributions to individuals who have been receiving 
unemployment compensation for at least 12 weeks. The proposal 
would also provide that IRA assets can be invested in qualified 
State tuition program instruments.

Deductible IRA contributions

    The proposal would increase the income limits at which the 
maximum IRA deduction is phased out for active participants in 
employer-sponsored retirement plans in two steps. For married 
taxpayers in 1997, 1998, and 1999, the income phase-out range 
would be $70,000 to $90,000 of AGI, and $80,000 to $100,000 
thereafter. For single taxpayers in 1997, 1998, and 1999, the 
income phase-out range would be $45,000 to $65,000 of AGI, and 
$50,000 to $70,000 thereafter. The income thresholds would be 
indexed for inflation, beginning after 2000.
    The IRA deduction limit would be coordinated with the limit 
on elective deferrals so that the maximum allowable IRA 
deduction for a year could not exceed the excess of the 
elective deferral limit over the amount of elective deferrals 
made by the individual.
    The proposal would provide that the exception to the early 
withdrawal tax for distributions after age 59\1/2\ does not 
apply to amounts that have been held in an IRA for less than 5 
years.

Inflation adjustment for IRA contribution limit

    The $2,000 IRA deduction limit would be indexed for 
inflation for taxable years beginning after 1997.

Nondeductible tax-free IRAs

    Under the proposal, individuals who are eligible to make 
deductible IRA contributions also would be eligible to make 
nondeductible contributions to a Special IRA. Special IRAs 
generally would be treated the same as IRAs, but also would be 
subject to special rules. The IRA deduction limit and the limit 
on contributions to Special IRAs would be coordinated. Thus, 
the maximum contribution that could be made in a year to a 
Special IRA would be the excess of the IRA deduction limit 
applicable to the individual over the amount of the 
individual's deductible IRA contributions. Distributions from 
Special IRAs would not be includible in income to the extent 
attributable to contributions that had been in the Special IRA 
for at least five years. Withdrawals of earnings from Special 
IRAs during the 5-year period after contribution would be 
subject to income tax, and also would be subject to the 10-
percent tax on early withdrawals unless used for one of the 
special purposes described below (or unless a present-law 
exception to the tax, other than the exception for 
distributions after age 59\1/2\, applies).
    An individual whose AGI for a year does not exceed $100,000 
for married taxpayers and $70,000 for single taxpayers could 
convert an existing IRA into a Special IRA without being 
subject to the 10-percent tax on early withdrawals. The amount 
transferred from the deductible IRA to the Special IRA 
generally would be includible in the individual's income in the 
year of the transfer.<SUP>13</SUP> However, if a transfer is 
made before 1999, the amount to be included in the individual's 
income with respect to the transfer would be spread evenly over 
four taxable years.<SUP>14</SUP>
---------------------------------------------------------------------------
    \13\ The amount transferred would not be included in the taxpayer's 
AGI for purposes of applying the income limits on IRA contributions to 
the taxpayer for the year of transfer.
    \14\ In the case of such a transfer before 1999, the amount of such 
transfer would also be taken into account for purposes of the 15-
percent excise tax on excess distributions ratably over a four-year 
period.
---------------------------------------------------------------------------

Special purpose withdrawals

    The proposal would provide exceptions to the 10-percent 
early withdrawal tax for distributions from IRAs or Special 
IRAs used for certain special purposes. Penalty-free 
withdrawals would be withdrawals (1) for qualified higher 
education expenses of the taxpayer, the taxpayer's spouse, or 
the taxpayer's child or grandchild (whether or not a 
dependent), (2) for acquisition of a principal residence for a 
first-time home buyer who is the taxpayer, the taxpayer's 
spouse, or the taxpayer's child or grandchild, (3) for medical 
expenses (in excess of 7.5 percent of AGI) of the individual's 
child, grandchild, parent or grandparent, whether or not that 
person otherwise qualifies as the individual's dependent, and 
(4) made by individuals who have been receiving unemployment 
compensation for at least 12 consecutive weeks.

Investment in qualified State prepaid tuition program instruments

    The proposal would provide that any IRA assets can be 
invested in qualified State tuition program instruments. To the 
extent the instrument is converted into tuition and fees, the 
account holder would be treated as receiving a distribution 
equal to the cost of such tuition and fees as of the time of 
the conversion. Further, such a deemed distribution would be 
treated as a special purpose withdrawal for qualified higher 
education expenses, and thus would not be subject to the 10-
percent additional tax on early withdrawals. The tax treatment 
of the deemed distribution would depend on whether the 
instrument is held by an IRA or a Special IRA.

                             Effective Date

    The proposal would generally be effective on January 1, 
1997. The President's budget proposal contains a tax cut sunset 
provision that, if triggered, would sunset some of the expanded 
IRA provisions for calendar years after 2000. See the 
description of this sunset mechanism in Part I., above. A 
document provided by the Treasury Department indicates that the 
sunset would apply to (1) the increased income limits, (2) the 
increased IRA deduction limit, (3) contributions to Special 
IRAs, and (4) rollovers from deductible IRAs to Special IRAs.

      D. Exclusion of Capital Gains on Sale of Principal Residence

                               Present Law

Rollover of gain

    No gain is recognized on the sale of a principal residence 
if a new residence at least equal in cost to the sales price of 
the old residence is purchased and used by the taxpayer as his 
or her principal residence within a specified period of time 
(sec. 1034). This replacement period generally begins two years 
before and ends two years after the date of sale of the old 
residence. The basis of the replacement residence is reduced by 
the amount of any gain not recognized on the sale of the old 
residence by reason of this gain rollover rule.

One-time exclusion

    In general, an individual, on a one-time basis, may exclude 
from gross income up to $125,000 of gain from the sale or 
exchange of a principal residence if the taxpayer (1) has 
attained age 55 before the sale, and (2) has owned the property 
and used it as a principal residence for three or more of the 
five years preceding the sale (sec. 121).

                        Description of Proposal

    A taxpayer generally would be able to exclude up to 
$250,000 ($500,000 if married filing a joint return) of capital 
gain realized on the sale or exchange of a principal residence. 
The exclusion would be allowed each time a taxpayer selling or 
exchanging a principal residence meets the eligibility 
requirements, but generally no more frequently than once every 
two years. The proposal provides that gain would be recognized 
to the extent of any depreciation allowable with respect to the 
rental or business use of such principal residence for periods 
after December 31, 1996.
    To be eligible for the exclusion, a taxpayer must have 
owned a residence and occupied it as a principal residence for 
at least two of the five years prior to the sale or exchange of 
the residence. A taxpayer who is forced to sell without meeting 
these requirements (e.g., because of a change of place of 
employment or medical reasons) would be able to exclude the 
fraction of the $250,000 ($500,000 if married filing a joint 
return) equal to the fraction of two years that these 
requirements are met.
    In the case of joint filers not sharing a principal 
residence, an exclusion of $250,000 would be available on a 
qualifying sale or exchange of the principal residence of one 
of the spouses. Similarly, if a single taxpayer who is 
otherwise eligible for an exclusion marries someone who has 
used the exclusion within the two years prior to the marriage, 
the proposal would allow the newly married taxpayer a maximum 
exclusion of $250,000. Once both spouses satisfy the 
eligibility rules and two years have passed since the last 
exclusion was allowed to either of them, the taxpayers may 
exclude $500,000 of gain on their joint return.

                             Effective Date

    The proposal would be available for all sales or exchanges 
of a principal residence occurring on or after January 1, 1997, 
and would replace the present-law rollover and one-time 
exclusion provisions applicable to principal residences. In the 
case of sales or exchanges occurring between January 1, 1997 
and the date of enactment, taxpayers could elect whether to 
apply the new exclusion or prior law. For a taxpayer who 
acquired his or her current principal residence in a rollover 
transaction within the five years prior to the date of 
enactment, the residency requirement of the proposal would be 
applied by taking into account the period of the taxpayer's 
residence in the previous principal residence.
                   III. DISTRESSED AREAS INITIATIVES

         A. Expand Empowerment Zones and Enterprise Communities

                               Present Law

In general

    Pursuant to the Omnibus Budget Reconciliation Act of 1993 
(OBRA 1993), the Secretaries of the Department of Housing and 
Urban Development (HUD) and the Department of Agriculture 
designated a total of nine empowerment zones and 95 enterprise 
communities on December 21, 1994. As required by law, six 
empowerment zones are located in urban areas (with aggregate 
population for the six designated urban empowerment zones 
limited to 750,000) and three empowerment zones are located in 
rural areas.<SUP>15</SUP> Of the enterprise communities, 65 are 
located in urban areas and 30 are located in rural areas (sec. 
1391). Designated empowerment zones and enterprise communities 
were required to satisfy certain eligibility criteria, 
including specified poverty rates and population and geographic 
size limitations (sec. 1392).
---------------------------------------------------------------------------
    \15\ The six designated urban empowerment zones are located in New 
York City, Chicago, Atlanta, Detroit, Baltimore, and Philadelphia-
Camden (New Jersey). The three designated rural empowerment zones are 
located in Kentucky Highlands (Clinton, Jackson, and Wayne counties, 
Kentucky), Mid-Delta Mississippi (Bolivar, Holmes, Humphreys, Leflore 
counties, Mississippi), and Rio Grande Valley Texas (Cameron, Hidalgo, 
Starr, and Willacy counties, Texas).
---------------------------------------------------------------------------
    The following tax incentives are available for certain 
businesses located in empowerment zones: (1) a 20-percent wage 
credit for the first $15,000 of wages paid to a zone resident 
who works in the zone; (2) an additional $20,000 of section 179 
expensing for ``qualified zone property'' placed in service by 
an ``enterprise zone business'' (accordingly, certain 
businesses operating in empowerment zones are allowed up to 
$38,000 of expensing for 1997); and (3) special tax-exempt 
financing for certain zone facilities (described in more detail 
below).
    The 95 enterprise communities are eligible for the special 
tax-exempt financing benefits but not the other tax incentives 
available in the nine empowerment zones. In addition to these 
tax incentives, OBRA 1993 provided that Federal grants would be 
made to designated empowerment zones and enterprise 
communities.
    The tax incentives for empowerment zones and enterprise 
communities generally will be available during the period that 
the designation remains in effect, i.e., a 10-year period.

Definition of ``qualified zone property''

    Present-law section 1397C defines ``qualified zone 
property'' as depreciable tangible property (including 
buildings), provided that: (1) the property is acquired by the 
taxpayer (from an unrelated party) after the zone or community 
designation took effect; (2) the original use of the property 
in the zone or community commences with the taxpayer; and (3) 
substantially all of the use of the property is in the zone or 
community in the active conduct of a trade or business by the 
taxpayer in the zone or community. In the case of property 
which is substantially renovated by the taxpayer, however, the 
property need not be acquired by the taxpayer after zone or 
community designation or originally used by the taxpayer within 
the zone or community if, during any 24-month period after zone 
or community designation, the additions to the taxpayer's basis 
in the property exceed 100 percent of the taxpayer's basis in 
the property at the beginning of the period, or $5,000 
(whichever is greater).

Definition of ``enterprise zone business''

    Present-law section 1397B defines the term ``enterprise 
zone business'' as a corporation or partnership (or 
proprietorship) if for the taxable year: (1) the sole trade or 
business of the corporation or partnership is the active 
conduct of a qualified business within an empowerment zone or 
enterprise community; (2) at least 80 percent of the total 
gross income is derived from the active conduct of a 
``qualified business'' within a zone or community; (3) 
substantially all of the business's tangible property is used 
within a zone or community; (4) substantially all of the 
business's intangible property is used in, and exclusively 
related to, the active conduct of such business; (5) 
substantially all of the services performed by employees are 
performed within a zone or community; (6) at least 35 percent 
of the employees are residents of the zone or community; and 
(7) no more than 5 percent of the average of the aggregate 
unadjusted bases of the property owned by the business is 
attributable to (a) certain financial property, or (b) 
collectibles not held primarily for sale to customers in the 
ordinary course of an active trade or business.
    A ``qualified business'' is defined as any trade or 
business other than a trade or business that consists 
predominantly of the development or holding of intangibles for 
sale or license.<SUP>16</SUP>In addition, the leasing of real 
property that is located within the empowerment zone or 
community to others is treated as a qualified business only if 
(1) the leased property is not residential property, and (2) at 
least 50 percent of the gross rental income from the real 
property is from enterprise zone businesses. The rental of 
tangible personal property to others is not a qualified 
business unless substantially all of the rental of such 
property is by enterprise zone businesses or by residents of an 
empowerment zone or enterprise community.
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    \16\ Also, a qualified business does not include certain facilities 
described in section 144(c)(6)(B)(e.g., massage parlor, hot tub 
facility, or liquor store) or certain large farms.
---------------------------------------------------------------------------

Tax-exempt financing rules

    Tax-exempt private activity bonds may be issued to finance 
certain facilities in empowerment zones and enterprise 
communities. These bonds, along with most private activity 
bonds, are subject to an annual private activity bond State 
volume cap equal to $50 per resident of each State, or (if 
greater) $150 million per State.
    Qualified enterprise zone facility bonds are bonds 95 
percent or more of the net proceeds of which are used to 
finance (1) ``qualified zone property'' (as defined above) the 
principal user of which is an ``enterprise zone business'' 
(also defined above <SUP>17</SUP>), or (2) functionally related 
and subordinate land located in the empowerment zone or 
enterprise community. These bonds may only be issued while an 
empowerment zone or enterprise community designation is in 
effect.
---------------------------------------------------------------------------
    \17\ For purposes of the tax-exempt financing rules, an 
``enterprise zone business'' also includes a business located in a zone 
or community which would qualify as an enterprise zone business if it 
were separately incorporated.
---------------------------------------------------------------------------
    The aggregate face amount of all qualified enterprise zone 
bonds for each qualified enterprise zone business may not 
exceed $3 million per zone or community. In addition, total 
qualified enterprise zone bond financing for each principal 
user of these bonds may not exceed $20 million for all zones 
and communities.

                        Description of Proposal

To amend the Internal Revenue Code of 1986 Two additional empowerment 
        zones with same tax incentives as previously designated 
        empowerment zones

    The Secretary of HUD would be authorized to designate two 
additional empowerment zones located in urban areas (thereby 
increasing to eight the total number of empowerment zones 
located in urban areas) with respect to which would apply the 
same tax incentives (i.e., the wage credit, additional 
expensing, and special tax-exempt financing) as are available 
within the empowerment zones authorized by OBRA 1993. The two 
additional empowerment zones would be subject to the same 
eligibility criteria under present-law section 1392 that 
applied to the original six urban empowerment zones. In order 
to permit designation of these two additional empowerment 
zones, the proposal would increase the present-law 750,000 
aggregate population cap applicable to empowerment zones 
located in urban areas to a cap of one million aggregate 
population for the eight urban empowerment zones. No additional 
Federal grants would be authorized.
    The two empowerment zones would be required to be 
designated within 180 days after enactment, and the 
designations generally would remain in effect for 10 years.

Designation of additional empowerment zones and enterprise communities

    In addition, the proposal would authorize the Secretaries 
of HUD and Agriculture to designate an additional 20 
empowerment zones (no more than 15 in urban areas and no more 
than five in rural areas) and an additional 80 enterprise 
communities (no more than 50 in urban areas and no more than 30 
in rural areas).<SUP>18</SUP> With respect to these additional 
empowerment zones and enterprise communities, the present-law 
eligibility criteria would be expanded slightly. First, the 
square mileage limitations of present law (i.e., 20 square 
miles for urban areas and 1,000 for rural areas) would be 
expanded to allow the empowerment zones to include an 
additional 2,000 acres and enterprise communities to include an 
additional 1,000 acres. This additional acreage, which could be 
developed for commercial or industrial purposes, would not be 
subject to the poverty rate criteria and could be divided among 
up to three noncontiguous parcels. In addition, the present-law 
requirement that at least half of the nominated area consist of 
census tracts with poverty rates of 35 percent or more would 
not be applicable. Thus, under present-law section 1392(a)(4), 
at least 90 percent of the census tracts within a nominated 
area must have a poverty rate of 25 percent or more, and the 
remaining census tracts must have a poverty rate of 20 percent 
or more.<SUP>19</SUP> For this purpose, census tracts with 
populations under 2,000 would be treated as satisfying the 25-
percent poverty rate criteria if (1) at least 75 percent of the 
tract was zoned for commercial or industrial use and (2) the 
tract was contiguous to one or more other tracts that actually 
have a poverty rate of 25 percent or more.
---------------------------------------------------------------------------
    \18\ Under the proposal, areas located within Indian reservations 
would be eligible for designation as empowerment zones or enterprise 
communities.
    \19\ In lieu of the poverty criteria, outmigration may be taken 
into account in designating one rural empowerment zone and up to five 
rural enterprise communities.
---------------------------------------------------------------------------
    Within the 20 additional empowerment zones, qualified 
``enterprise zone businesses'' would be eligible to receive up 
to $20,000 of additional section 179 expensing <SUP>20</SUP> 
and to utilize special tax-exempt financing benefits. The 
Administration's proposed ``brownfields'' tax incentive 
(described elsewhere) also would be available within all 
designated empowerment zones. Businesses within the 20 
additional empowerment zones would not, however, be eligible to 
receive the present-law wage credit available within the 11 
other designated empowerment zones (i.e., the wage credit would 
be available only in the nine present-law zones and two urban 
zones designated under the first part of the proposal).
---------------------------------------------------------------------------
    \20\ However, the additional section 179 expensing would not be 
available within the additional 2,000 acres allowed to be included 
under the proposal within an empowerment zone.
---------------------------------------------------------------------------
    Within the 80 additional enterprise communities, qualified 
``enterprise zone businesses'' would (as within the present-law 
enterprise communities) be eligible to utilize special tax-
exempt financing benefits, as well as the ``brownfields'' tax 
incentives that applies to all designated zones and 
communities.
    The 20 additional empowerment zones and 80 additional 
enterprise communities would be required to be designated 
before 1999, and the designations generally would remain in 
effect for 10 years.

Modification of definition of enterprise zone business

    The proposal would modify the present-law requirement of 
section 1397B that an entity may qualify as an ``enterprise 
zone business'' only if (in addition to the other present-law 
criteria) at least 80 percent of the total gross income of such 
entity is derived from the active conduct of a qualified 
business within an empowerment zone or enterprise community. 
The proposal would liberalize this present-law requirement by 
reducing the percentage threshold so that an entity could 
qualify as an enterprise zone business if at least 50 percent 
of the total gross income of such entity is derived from the 
active conduct of a qualified business within an empowerment 
zone or enterprise community (assuming that the other criteria 
of section 1397B are satisfied).
    In addition, section 1397B would be modified so that rather 
than requiring that ``substantially all'' tangible and 
intangible property (and employee services) of an enterprise 
zone business be used (and performed) within a designated zone 
or community, a ``substantial portion'' of tangible and 
intangible property (and employee services) of an enterprise 
zone business would be required to be used (and performed)) 
within a designated zone or community. Moreover, the proposal 
would further amend the section 1397B rule governing intangible 
assets so that a substantial portion of an entity's intangible 
property must be used in the active conduct of a qualified 
business within a zone or community, but there will be no need 
(as under present law) to determine whether the use of such 
assets is ``exclusively related to'' such business. However, 
the present-law rule of section 1397B(d)(4) would continue to 
apply, such that a ``qualified business'' would not include any 
trade or business consisting predominantly of the development 
or holding or intangibles for sale or license. The proposal 
also would clarify that an enterprise zone business that leases 
to others commercial property within a zone or community may 
rely on a lessee's certification that the lessee is an 
enterprise zone business. Finally, the proposal would provide 
that the rental to others of tangible personal property shall 
be treated as a qualified business if and only if at least 50 
percent of the rental of such property is by enterprise zone 
businesses or by residents of a zone or community (rather than 
the present-law requirement that ``substantially all'' tangible 
personal property rentals of an enterprise zone business 
satisfy this test).
    This modified ``enterprise zone business'' definition would 
apply to all previously designated and newly designated 
empowerment zones and enterprise communities.

Tax-exempt financing rules

    Exceptions to volume cap

    The proposal would allow ``new empowerment zone facility 
bonds'' to be issued for qualified enterprise zone businesses 
in the 20 additional empowerment zones authorized to be 
designated under the proposal. These bonds would not be subject 
to the State private activity bond volume caps or the special 
limits on issue size applicable to qualified enterprise zone 
facility bonds under present law. The maximum amount of these 
bonds that could be issued would be limited to $60 million per 
rural zone, $130 million per urban zone with a population of 
less than 100,000, and $230 million per urban zone with a 
population of 100,000 or more.

    Changes to certain rules applicable to both empowerment zone 
        facility bonds and qualified enterprise community facility 
        bonds

    Qualified enterprise zone businesses located in newly 
designated empowerment zones and enterprise communities, as 
well as those located in previously designated empowerment 
zones and enterprise communities, would be eligible for special 
tax-exempt bond financing under present-law rules, subject to 
the modifications described below (and the exception to the 
volume cap described above for newly designated empowerment 
zones).
    The proposal would waive until the end of a ``startup 
period'' the requirement that 95 percent or more of the 
proceeds of bond issue be used by a qualified enterprise zone 
business. With respect to each property the startup period 
would end at the beginning of the first taxable year beginning 
more than two years after the later of (1) the date of the bond 
issue financing such property, or (2) the date the property was 
placed in service (but in no event more than three years after 
the date of bond issuance). This waiver would only be available 
if at the beginning of the startup period there is a reasonable 
expectation that the use by a qualified enterprise zone 
business would be satisfied at the end of the startup period 
and the business makes bona fide efforts to satisfy the 
enterprise zone business definition.
    The proposal also would waive the requirements of an 
enterprise zone business (other than the requirement that at 
least 35 percent of the business' employees be residents of the 
zone or community) for all years after a prescribed testing 
period equal to first three taxable years after the startup 
period.
    Finally, the proposal would relax the rehabilitation 
requirement for financing existing property with qualified 
enterprise zone facility bonds. In the case of property which 
is substantially renovated by the taxpayer, the property would 
not need to be acquired by the taxpayer after zone or community 
designation or originally used by the taxpayer within the zone 
if, during any 24-month period after zone or community 
designation, the additions to the taxpayer's basis in the 
property exceeded 15 percent of the taxpayer's basis at the 
beginning of the period, or $5,000 (whichever is greater).

                             Effective Date

    The proposed two additional urban empowerment zones (within 
which would be available the same tax incentives as are 
available in the empowerment zones designated pursuant to OBRA 
1993) would be designated within 180 days after enactment. The 
proposed 20 additional empowerment zones (within which the wage 
credit would not be available) and the 80 additional enterprise 
communities would be designated after enactment but prior to 
January 1, 1999. For purposes of the additional section 179 
expensing available within empowerment zones, the modifications 
to the definition of ``enterprise zone business'' would be 
effective for taxable years beginning on or after the date of 
enactment.
    The proposed changes to the tax-exempt financing rules 
would be effective for qualified enterprise zone facility bonds 
and the new empowerment zone facility bonds issued after the 
date of enactment. The President's budget proposal contains a 
tax cut sunset provision that, if triggered, would sunset the 
expanded empowerment zones and enterprise communities for 
calendar years after 2000. See the description of this sunset 
mechanism in Part I., above.

   B. Expensing of Environmental Remediation Costs (``Brownfields'')

                               Present Law

    Code section 162 allows a deduction for ordinary and 
necessary expenses paid or incurred in carrying on any trade or 
business. Treasury Regulations provide that the cost of 
incidental repairs which neither materially add to the value of 
property nor appreciably prolong its life, but keep it in an 
ordinarily efficient operating condition, may be deducted 
currently as a business expense. Section 263(a)(1) limits the 
scope of section 162 by prohibiting a current deduction for 
certain capital expenditures. Treasury Regulations define 
``capital expenditures'' as amounts paid or incurred to 
materially add to the value, or substantially prolong the 
useful life, of property owned by the taxpayer, or to adapt 
property to a new or different use. Amounts paid for repairs 
and maintenance do not constitute capital expenditures. The 
determination of whether an expense is deductible or 
capitalizable is based on the facts and circumstances of each 
case.
    Treasury regulations provide that capital expenditures 
include the costs of acquiring or substantially improving 
buildings, machinery, equipment, furniture, fixtures and 
similar property having a useful life substantially beyond the 
current year. In INDOPCO, Inc. v. Commissioner, 112 S. Ct. 1039 
(1992), the Supreme Court required the capitalization of legal 
fees incurred by a taxpayer in connection with a friendly 
takeover by one of its customers on the grounds that the merger 
would produce significant economic benefits to the taxpayer 
extending beyond the current year; capitalization of the costs 
thus would match the expenditures with the income produced. 
Similarly, the amount paid for the construction of a filtration 
plant, with a life extending beyond the year of completion, and 
as a permanent addition to the taxpayer's mill property, was a 
capital expenditure rather than an ordinary and necessary 
current business expense. Woolrich Woolen Mills v. United 
States, 289 F.2d 444 (3d Cir. 1961) .
    Although Treasury regulations provide that expenditures 
that materially increase the value of property must be 
capitalized, they do not set forth a method of determining how 
and when value has been increased. In Plainfield-Union Water 
Co. v. Commissioner, 39 T.C. 333 (1962), nonacq., 1964-2 C.B. 
8, the U.S. Tax Court held that increased value was determined 
by comparing the value of an asset after the expenditure with 
its value before the condition necessitating the expenditure. 
The Tax Court stated that ``an expenditure which returns 
property to the State it was in before the situation prompting 
the expenditure arose, and which does not make the relevant 
property more valuable, more useful, or longer-lived, is 
usually deemed a deductible repair.''
    In several Technical Advice Memoranda (TAM), the Internal 
Revenue Service (IRS) declined to apply the Plainfield Union 
valuation analysis, indicating that the analysis represents 
just one of several alternative methods of determining 
increases in the value of an asset. In TAM 9240004 (June 29, 
1992), the IRS required certain asbestos removal costs to be 
capitalized rather than expensed. In that instance, the 
taxpayer owned equipment that was manufactured with insulation 
containing asbestos; the taxpayer replaced the asbestos 
insulation with less thermally efficient, non-asbestos 
insulation. The IRS concluded that the expenditures resulted in 
a material increase in the value of the equipment because the 
asbestos removal eliminated human health risks, reduced the 
risk of liability to employees resulting from the 
contamination, and made the property more marketable. 
Similarly, in TAM 9411002 (November 19, 1993), the IRS required 
the capitalization of expenditures to remove and replace 
asbestos in connection with the conversion of a boiler room to 
garage and office space. However, the IRS permitted deduction 
of costs of encapsulating exposed asbestos in an adjacent 
warehouse.
    In 1994, the IRS issued Rev. Rul. 94-38, 1994-1 C.B. 35, 
holding that soil remediation expenditures and ongoing water 
treatment expenditures incurred to clean up land and water that 
a taxpayer contaminated with hazardous waste are deductible. In 
this ruling, the IRS explicitly accepted the Plainfield Union 
valuation analysis.<SUP>21</SUP> However, the IRS also held 
that costs allocable to constructing a groundwater treatment 
facility are capital expenditures.
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    \21\ Rev. Rul. 94-38 generally rendered moot the holding in TAM 
9315004 (December 17, 1992) requiring a taxpayer to capitalize certain 
costs associated with the remediation of soil contaminated with 
polychlorinated biphenyls (PCBs).
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    In 1995, the IRS issued TAM 9541005 (October 13, 1995) 
requiring a taxpayer to capitalize certain environmental study 
costs, as well as associated consulting and legal fees. The 
taxpayer acquired the land and conducted activities causing 
hazardous waste contamination. After the contamination, but 
before it was discovered, the company donated the land to the 
county to be developed into a recreational park. After the 
county discovered the contamination, it reconveyed the land to 
the company for $1. The company incurred the costs in 
developing a remediation strategy. The IRS held that the costs 
were not deductible under section 162 because the company 
acquired the land in a contaminated state when it purchased the 
land from the county. In January, 1996, the IRS revoked and 
superseded TAM 9541005 (PLR 9627002). Noting that the company's 
contamination of the land and liability for remediation were 
unchanged during the break in ownership by the county, the IRS 
concluded that the break in ownership should not, in and of 
itself, operate to disallow a deduction under section 162.

                        Description of Proposal

    The proposal would provide that taxpayers could elect to 
treat certain environmental remediation expenditures that would 
otherwise be chargeable to capital account as deductible in the 
year paid or incurred. The deduction would apply for both 
regular and alternative minimum tax purposes. The expenditure 
must be incurred in connection with the abatement or control of 
hazardous substances at a qualified contaminated site. In 
general, any expenditure for the acquisition of depreciable 
property used in connection with the abatement or control of 
hazardous substances at a qualified contaminated site would not 
constitute a qualified environmental remediation expenditure. 
However, depreciation deductions allowable for such property 
which would otherwise be allocated to the site under the 
principles set forth in Comm'r v. Idaho Power Co.<SUP>22</SUP> 
and section 263A would be treated as qualified environmental 
remediation expenditures.
---------------------------------------------------------------------------
    \22\ Comm'r v. Idaho Power Co., 418 U.S. 1 (1974) (holding that 
equipment depreciation allocable to the taxpayer's construction of 
capital facilities must be capitalized under section 263(a)(1)).
---------------------------------------------------------------------------
    A ``qualified contaminated site'' generally would be any 
property that (1) is held for use in a trade or business, for 
the production of income, or as inventory; (2) is certified by 
the appropriate State environmental agency to be located within 
a targeted area; and (3) contains (or potentially contains) a 
hazardous substance (so-called ``brownfields''). Targeted areas 
generally would include (1) empowerment zones and enterprise 
communities (as designated under present law and to be 
designated under the proposal); (2) sites announced before 
February, 1997, as being subject to one of the 76 Environmental 
Protection Agency (EPA) Brownfields Pilots; (3) any population 
census tract with a poverty rate of 20 percent or more; and (4) 
certain industrial and commercial areas that are adjacent to 
tracts described in (3) above.
    Both urban and rural sites would qualify. However, sites 
that are identified on the national priorities list under the 
Comprehensive Environmental Response, Compensation, and 
Liability Act of 1980 (CERCLA) could not be targeted areas. 
Appropriate State environmental agencies would be designated by 
the EPA; if no State agency is designated, the EPA would be 
responsible for providing the certification. Hazardous 
substances generally would be defined by reference to sections 
101(14) and 102 of CERCLA, subject to additional limitations 
applicable to asbestos and similar substances within buildings, 
certain naturally occurring substances such as radon, and 
certain other substances released into drinking water supplies 
due to deterioration through ordinary use.
    The proposal further would provide that, in the case of 
property to which a qualified environmental remediation 
expenditure otherwise would have be capitalized, any deduction 
allowed under the proposal would be treated as a depreciation 
deduction and the property would be treated as subject to 
section 1245. Thus, deductions for qualified environmental 
remediation expenditures would be subject to recapture as 
ordinary income upon sale or other disposition of the property.

                             Effective Date

    The proposal would apply to eligible expenditures incurred 
after the date of enactment. The President's budget proposal 
contains a tax cut sunset provision that, if triggered, would 
sunset the expensing of environmental remediation costs for 
calendar years after 2000. See the description of this sunset 
mechanism in Part I., above.

C. Tax Credit for Equity Investments in Community Development Financial 
                              Institutions

                               Present Law

    The Community Development Financial Institutions Fund (the 
``CDFI Fund'') was created by the Community Development Banking 
and Financial Institutions Act of 1994. Administered by the 
Department of the Treasury, the CDFI Fund provides equity 
investments, grants, loans, and technical assistance to 
qualifying community development financial institutions 
(``CDFIs''). Qualifying CDFIs are organizations that have 
community development as their primary mission and that develop 
a range of programs and methods to accomplish that mission. 
CDFIs and their investors are not eligible for any special tax 
incentives under present law.

                        Description of Proposal

    The proposal would provide $100 million in nonrefundable 
general business tax credits for qualifying equity investments 
in CDFIs between 1997 and 2006. The credits would be allocated 
among equity investors by the CDFI Fund through a competitive 
bidding process. The maximum credit allocable to a particular 
investment would be 25 percent of the amount invested, although 
the CDFI Fund could negotiate a lower percentage.
    The credit would be available in the taxable year in which 
the qualifying investment is made. Unused credits could be 
carried forward for 15 years and back three