Data and materials for the fiscal year 1977 Finance Committee report under the Congressional budget act

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Data and materials for the fiscal year 1977 Finance Committee report under the Congressional budget act
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94th Congress COMMITTEE PRINT
2d Session I


Data and Materials for the

Fiscal Year 1977

Finance Committee Report

Under the

Congressional Budget Act
Prepared by the Staff for the Use of the
COMMITTEE ON FINANCE


UNITED
RUSSELL


STATES


SENATE


B. LONG, Chairman


FEBRUARY 23, 197


Printed for the use of the Committee on Finance

U.S. GOVERNMENT PRINTING OFFICE


WASHINGTON : 1976


66-407




































COMMITTEE ON FINANCE
RUSSELL B. LONG, Louisiana, Chairmian


HERMAN E. TALMADGE, Georgia
VANCE HARTKE, Indiana
ABRAHAM RIBICOFF, Connecticut
HARRY F. BYRD, JR., Virginia
GAYLORD NELSON, Wisconsin
WALTER F. MONDALE, Minnesota
MIKE GRAVEL, Alaska
LLOYD BENTSEN, Texas
WILLIAM D. HATHAWAY, Maine
FLOYD K. HASKELL, Colorado


CARL T. CURTIS, Nebraska
PAUL J. FANNIN, Arizona
CLIFFORD P. HANSEN, Wyoming
ROBERT DOLE, Kansas
BOB PACKWOOD, Oregon
WILLIAM V. ROTH, JR., Delaware
BILL BROCK, Tennessee


MICHAEL STERN, Staff Director
DONALD V. MOOREHEAD, Chief Minority Counsel
(n)








CONTENTS


Page
Summary: Impact of Congressional Budget Act on Finance Committee---- 1
Congressional Budget and Impoundment Control Act of 1974 (Public Law
93-344) ---------------------------------------------------------- 3
1. Overall view ------------------------------------------------- 3
Outline of congressional budget process under Public Law
930-344 --------
93-44---------------------------------------------a
Waiver of rules regarding budget procedure -------------------3
2. Impact of Public Law 93-344 on Finance Committee --------------- 4
Legislation which results in additional Federal spending ------- 4
Legislation relating to revenues and debt limit ---------------6
Charts and description:
1-March 15 report to Budget Committee ---------------------------Il
2-Economic assumptions ----------------------------------------13
3-Major expenditure programs under Finance Committee jurisdic-
tion ------------------------------------------------------15
4-Social security cash benefits: Existing law ---------------------- 17
5-Social security cash benefit trust funds -------------------------- 19
6-Social Security Administration cash benefit programs: Federal
funds -----------------------------------------------------21
7-Social security cash benefit programs Income under proposed
legislation -------------------------------------------------23
8-Social security cash benefit programs: Proposed legislation ------ 25
9-Welfare programs for families: Present law --------------------- 29
10-Welfare programs for families: Proposed legislation ---------- 33
11-Social services ---------------------------------------------- 37
12-Unemployment compensation ---------------------------------- 39
13-Unemployment trust fund -------------------------------------43
14-Health programs: Existing law -------------------------------45
15-Medicare trust funds under present law ---------------------- 49
16-Health programs: Proposed changes -----------------------51
17-Revenue sharing, Sugar Act, interest on public debt ----------- 55
18-Revenues: Present law ----------------------------------- 5
19-Revenue estimates: Proposed changes ----------------------59
20-Expiring tax reduction provisions --------------------------- 61
21-Other tax revision proposals- ---------------------------- 67
22-Other tax revision proposal-2----------------------------- i-5
2 -Other tax revision prop(sals-3----------------------------
24-)ther tax revision proposals ---------------------------- 7
231-Energy tax proposals ----------------------------------------93
20-Tax expenditures: Present la-------------------------------- 97
27-Debt limit ------------------------------------------------ 1
Appendix A-Committee on Finance 1975 report to the Budget Committee- 105
Appendix B-Excerpt from Public Law 93-344-The Congressional Budget
and Iii1poullIment Control Act of 1974 ------------------------------ 15
Appendix C-Tax expenditures by function-Excerpt from the Special
Analyses of the Budget of the Ulnited States -------------------------- 19
Appendix D--Revenue impa(t of prior tax reform bills ------------------ 125
Appendix E-Excerpt from Public Law 94-164-The Revenue Adjustment
Act of 1975-129
till)


















Digitized by the Internet Ar(
in 2013


http://archive.org/detaiIs/datam00unit










SUMMARY: IMPACT OF CONGRESSIONAL BUDGET ACT
ON FINANCE COMMITTEE
The Congressional Budget Act of 1974 (titles I-IX of Public Law
93-344), provides the mechanisms and procedures for Congress to es-
tablish its own annual Federal budget and to consider spending, rev-
enue, and debt limit legislation in the context of that budget. The pro-
visions of the Act have a number of effects on the consideration
of legislation handled by the Committee on Finance.
The major provisions affecting the Finance Committee are the
following:
1. Beginning October 1, 1976, the fiscal year will begin October 1
instead of July 1.
2. By March 15 of each year, the Finance Committee must submit a
report to the Budget Committee estimating the effect that Finance
Committee legislation will have on expenditures, revenues, and the
debt limit during the next fiscal year, and presenting the Committee's
views and estimates with respect to revenues and the debt limit. (Last
year's report appears in Appendix A of this pamphlet.)
3. Certain kinds of legislation have to be handled before specific
dates. Revenue and debt limit legislation for the upcoming fiscal year,
and legislation increasing expenditures in such areas as social security
and welfare, cannot be considered by the Senate before May 15. How-
ever, procedures are provided for waiving these restrictions, ordinarily
by obtaining Budget Committee approval of a resolution permitting
immediate Senate consideration.
4. If the Finance Committee reports legislation affecting welfare,
medicaid, social services, and other non-trust-fund entitlement pro-
grams, and it exceeds the amount budgeted in the most recent concur-
rent budget resolution, the legislation is to be referred to the Appropri-
ations Committee for 15 days.
5. In September of each year, the Congress debates and adopts a
concurrent resolution setting appropriate spending, revenue, and debt
limit levels for the coming fiscal year. The resolution can direct the
Finance Committee to report legislation raising taxes or cutting back
on spending programs within the Committee's jurisdiction.
(1)












CONGRESSIONAL BUDGET AND IMPOUNDMENT
CONTROL ACT OF 1974 (PUBLIC LAW 93-344)
1. Overall View
OUTLINE OF CONGRESSIONAL BUDGET PROCESS UNDER
PUBLIC LAW 93-344
On April 15 of each year, the Budget Committees of the Hotise
:and Senate report to their respective Htouses a concurrent resolution
which is, in effect, a Congressional budget document setting forth ap-
propriate levels for spending, revenues and public debt for the coming
fiscal year. The spending levels are broken down into functional cate-
gories (such as "health," "income security," "national defense"). The
recommendations in the resolution reported by the Budget Committee
are subject to debate and amendment. When agreed to by House and
Senate (by May 15), the resolution represents Congressional judg-
ment of the appropriate fiscal situation for the coming year, although
the amounts set forth in it are not otherwise binding.
After the May 15 adoption of the concurrent resolution, action on
spending and revenue bills proceeds through early September. In the
first half of September, a second concurrent resolution on the budget
is considered by the Congress, which revises or reaffirms the earlier
resolution and which can direct the appropriate Committees to report
legislation changing spending, revenue, or debt limit levels (or any
combination of the three). Upon adoption of the resolution, Com-
mittees directed to do so are to report the legislation called for by
the resolution, and this legislation is then debated by Congress as
part of a "reconciliation bill." Public Law 93-344 calls for action on
this reconciliation bill to be completed by September 25, 5 days before
the start of the new Federal fiscal year which will run from October 1
to September 30.
WAIVER OF RULES REGARDING BUDGET PROCEDURE
All the rules applicable to Senate procedures under the Congres-
sional Budget Act can be suspended by a majority vote of the Senate.
In addition, the Act includes a special waiver procedure in connection
with the provisions requiring that authorization bills not be acted on
after May 15 and that revenue, debt limit, and spending bills (incluid-
ing social security, welfare. etc.) not be acted on before May 15. If a


(3)







Committee wished to have such legislation considered outside of the
prescribed time, it would report out a resolution providing for waiver
of the rule. This resolution would be referred to the Budget Commit-
tee which would have 10 days in which to consider and make its mc-
ommendations with respect to the waiver. Once the resolution is ap-
p)roved by the Budget Committee (or after 10 days in any ), the
resolution of waiver would be voted upon by the Senate, and, if it is
approved, the Senate could proceed to consider the legislation.

2. Impact of Public Law 93-344 on Finance Committee
LEGISLATION WHICH RESULTS IN ADDITIONAL FEDERAL
Anual report to Budget Comittee.-Each year, prior to the con-
sideration of the first concurrent resolution on the budget, each Com-
mittee is required to make a report to the Budget Committee esti-
mating the amount of additional Federal spending during the coming
fiscal year which will result from legislation under the Committee's
jurisdiction. This report is due no later than March 15.
Report after adoption of concurrent budget resolution.-After a
budget resolution has been approved by Congress, the Committee is
required, after consultation with the appropriate counterpart commit-
tees in the House of Representatives, to issue a report subdividing any
new budget authority within its jurisdiction contained in the budget
resolution among programs. This requirement applies mainly to the
Appropriations Committees but would have some applicability to the-
Committee on Finance to the extent that the budget resolution provides
for new budget authority in areas such as social security and unemploy-
ment insurance which derive their budget authority from legislation
under this Committee's jurisdiction rather than from annual appro-
priation acts.
Limitation on consideration of spending bills.-The Congressional
Budget Act provides that bills involving entitlement programs (such
as welfare or medicaid) and bills directly increasing budget authority
(such as social security or unemployment insurance) may not be con-
sidered in the Senate prior to the May 15 adoption of the first concur-
rent budget resolution. This requirement may be waived under the
special waiver procedure or by a majority vote of the Senate to sus-
pend this rule. The Act also requires that action on legislation of this
type be completed by the seventh day after Labor Day. In addition,,
entitlement legislation reported after January 1 of any year may not
have an effective date prior to October 1 of that year.







Deadline for repo 'tiiag authorizing legislation.-Legislation which
authorizes appropriations (but does not necessarily require them)
has to be reported by May 15 preceding the fiscal year for
which the appropriations are authorized. (The Act includes a pro-
cedure under which this deadline may be waived by Senate resolu-
tion; the rule may also be suspended by a majority vote of the
Senate.) The Committee on Finance has jurisdiction over some pro-
grams which fall in this category, such as grants to States for child
welfare services and for maternal and child health. However, if such
-authorizations are included in entitlement or trust fund bills (which
may not be reported prior to May 15) this provision does not apply.
Impact of concurrent budget resolutions on legislation.-The first
,concurrent resolution, which is to be passed about May 15, sets
targets for spending in various areas, but is not mandatory.
A second concurrent resolution, however, is to be passed in mid-Sep-
'tember, and this resolution not only sets appropriate spending
levels but may direct the Committees having jurisdiction over spend-
ing legislation to report measures to rescind previously enacted
spending authority so as to bring spending for the coming fiscal
year within the levels determined to be appropriate. In the case of the
Committee on Finance, this may include a requirement that the Com-
mittee report legislation to defer or reduce benefits under
entitlement programs including both trust fund programs (such as
unemployment insurance or social security) and non-trust-fund pro-
grams (such as welfare, social services or medicaid).
After the beginning of a fiscal year, new spending measures for that
fiscal year would be subject to a point of order if they would cause the
spendmig limits in the concurrent resolution passed just before the be-
.ginning of that year to be exceeded. In the case of the Committee on
Finance, this limitation would apply to entitlement legislation dealing
with both trust fund and non-trust-fund programs. (A new concur-
rent resolution could, however, be passed to authorize such additional
spending, or the rule could be suspended by a majority vote of the
Senate )
Appropriatimns Committee review of entitlement bills.-Legisla-
tion in such areas as supplemental security income, welfare, social
services, or medicaid creates an entitlement to payments on the part
'of individuals or State or local Governments even though these pro-
grams are funded through appropriation acts. The Congressional
Budget Act requires that any future legislation which would create







new entitlement programs or increase existing ones must be rferrd
to the Appropriations Committee for a period of 15 days after it is
reported by the substantive committee, if its enactment would exceed
the amount provided for in the first budget resolution. The Appro-
priations Committee could not recommend any substantive clia in
the legislation (e.g., lower individual benefit amounts), but it culd
recommend an amendment to limit the total amount of funding avail
able for the legislation. If such amendment is approved by the Sen
ate, the substantive committee might have to propose a further amend-
ment to conform the legislation to that funding limit.
The requirement of referral to the Appropriations Committee would
not apply to legislation affecting existing Social Security Act trust
fund programs or other trust fund programs substantially funded
through earmarked revenues. It would also not apply to legislation
amending the general revenue sharing program to the extent that such
legislation included an exemption from that requirement.
Report on specfldng legislation.-The Congressional Budget Act
requires the Committee, in reporting legislation involving inc
Spending, to include in the report information showing how that
spending compares with the amount of spending provided for in
the most recent concurrent budget resolution and showing the extent
to which the legislation provides financial aid to States and localities.
In addition, the report is required, to the extent practicable, to provide
a projection for five fiscal years of the spending which will result
from the legislation.
LEGISLATION RELATING TO REVENUES AND DEBT LIMIT
Annual report to the Budget Committee.-The March 15 annual re-
port to the Budget Committee which is described above would, in the
case of the Finance Committee, also have to present views and esti-
mates of the Committee with regard to revenues and the debt limit.
No revenue legislation prior to May 15.-Under the new law, debt
limit or revenue legislation for the upcoming fiscal year would not be
in order for consideration by the Senate (or House) prior to the adop-
tion of the first concurrent resolution on the budget (about May 15).
This rule would not prevent action on revenue changes to be effective
in years after the upcoming fiscal year. (A procedure for waiving this
limitation is provided for; the rule could also be suspended by a ma-
jority vote of the Senate.)







Impact of budget resolution.-As with spending measures, the first
concurrent resolution adopted in mid-May would set targets with re-
spect to revenue and debt limit legislation, and the second concurrent
resolution in September could direct the Committee on Finance to re-
port legislation to achieve the changes in aggregate revenues or in the
debt limit which the Congress determined to be appropriate. Such
legislation would have to be reported in time to be included in the rec-
onciliation bill which would be acted upon before the October 1 start
of the fiscal year.
Reqdred report on tax expenditures.-The Congressional Budget
Act defines the term "tax expenditures" to include any revenue losses
attributable to tax provisions such as income exclusions, tax credits or
deferrals, or preferential tax rates. The law requires that the Com-
mittee report accompanying legislation to provide new or increased
tax expenditures include information as to how such legislation will
affect the level of tax expenditures under existing law. The report will
also have to include (to the extent practicable) a projection of the tax
expenditures resulting from the legislation over a period of five fiscal
years.


















































CHARTS AND DESCRIPTION


I -




JO


Chart 1


March 1 Report


to


Budget Committee
*Views and estimates of Finance
Committee on*P
Expenditures
Revenues
Tax expenditures
Public debt
ORelating both to existing
law and proposals to
change existing law









Chart 1


March 15 Report to Budget Committee
Under the Congressional Budget Act of 1974, the Committee on
the Budget is required by April 15 of each year to report to the Sen-
ate a concurrent resolution on the budget which is, in effect, a pro-
posed Congressional budget document setting forth appropriate levels
of Federal expenditure and revenue, surplus or deficit, and related
matters. To assist the Budget Committee in making the judgments
necessary to develop such a Congressional budget, the Act also man-
dates that each Committee send to the Budget Committee its views and
estimates on those aspects of the budget which fall within its juris-
diction. This report is due by March 15 of each year.
In the case of the Committee on Finance, the March 15 report to
the Budget Committee must cover the expenditure programs under
Finance Committee jurisdiction which are listed on chart 3, Federal
revenues, tax expenditures, and the public debt. With respect to
each of these matters, the Committee is required to provide its views
and estimates as to the levels anticipated under existing law or under
any changes to existing law which the Committee expects. The period
to be covered by the report to the Budget Committee includes the three
month transition quarter (July, August, September, 1976) as well as
fiscal year 1977 (October 1976 to September 1977).
The text of that part of the Congressional Budget Act which deals
with the March 15 report to the Budget Committee is reprinted at the
end of this pamphlet as Appendix B.


(11)




12


Chart 2
Economic Assumptions
(dollars in bllions)


1975 1976 is
k lrl I Staff
, $
*1t9 ,8 t8 19


GNP


Increase owr
lglsinthe
inflation rate
Personl iwm


62%


OWN
$96


605%


$f,386138


,salaries


802


Ebportewf 118


Unemploy
rate


85%


892
156
7.77.


891 1,001


155


.7*%


181


6.9%


iao:0


wveso










Chart 2


Economic Assumptions
The Ma, 'cih 15 report to the Budget Committee which is required
by the Congressional Budget Act of 1974 represents the Finance Com-
mittee's views as to revenues, expenditures and other budgetary mat-
ters for the coming fiscal year both under existing law and under
any anticipated changes. The level of these items, however, is affected
not only by legislation but also by various economic factors about
which there can reasonably be differences of opinion. These differences
can reflect divergent viewpoints as to how the economy will operate
and also divergent viewpoints as to the type of legislation which may
be enacted to affect the operations of the economy. Different programs
are particularly sensitive to different aspects of the economy. For ex-
ample, expenditures under social security are sensitive to the con-
sumer price index since that program includes an automatic cost-of-
living increase provision. The unemployment insurance program does
not incorporate such a provision but is, of course, particularly sensitive
to the unemployment rate. Revenues, similarly, are heavily affected by
personal income and by corporate profits and, in the case of payroll tax
revenues, by wages and salaries.
This chart presents a selection of the most significant economic in-
dicators as estimated in the President's budget and as estimated by
the staff of the Joint Committee on Internal Revenue Taxation.
(13)


66-407-76----2




14


Chart 3
Major Expenditure Programs und
Finance Cmmittee Jurisdfctior
Social security cash benefits
Supplemental security income for
theaged, blind, and disabled
Welfare programs for families:
Aid to families with dependent
children
Work incentive program
Child support
*Social services
Unemployment compensation
*Health programs:
Medicare
Medicaid
Maternal and child health
Revenue sharing
Sugar Act
Interest on the public debt










Chart 3


Major Expenditure Programs Under Finance Committee
Jurisdiction
This chart lists the major programs involving an expenditure of
Federal funds which come within the legislative jurisdiction of the
Committee on Finance. Each of these programs is covered in more
detail in the following charts. Interest on the public debt is included
as an expenditure program since it does constitute a significant part
of the Federal expenditures budget even though the level of expendi-
ture in this category is not subject to legislative control by the Com-
mittee in the same sense as expenditures under the other programs
listed.
(15)




16


Chart 4

Social Security sh Bene
Existin law
(dolars in billion )


F-Y. 47
Income
outgo
Decrease
End-of-year assets
July to Sept. 1976
Income
OUtgo.
Decrease
End-of-period assets
F.Y. 1977
Income
Outgo
Decrease
End-of -year assets


0"0.8
73.8
-3.0
45.2


18.9
19.9
-1.1
441


81.3
84.9
-3.6
405


18.8
2Q
-1.1
44.1


80.7
852
-4.5
39.6


MO.
"Mi&nfs
bu4&t
MWOMM" 4W MENOW










Chart 4


Social Security Cash Benefits: Existing Law
The President's budget estimates that the outflow in benefits and re-
lated expenditures from the old-age, survivors, and disability insur-
ance trust funds will be $73.8 billion in fiscal 1976 rising to $84.9 billion
in 1977. These estimates reflect projected benefit increases, under the
automatic cost-of-living provisions, of 6.7 percent effective with the
July 1976 checks and 5.9 percent effective with the July 1977 checks.
Expenditures under social security are highly sensitive to inflation
since benefits are automatically increased as the Consumer Price Index
rises. Thus under the staff alternative economic assumptions (shown on
chart 2), rising price levels would generate benefit increases of 6.8 per-
cent in June 1976 and 6.8 percent in June 1977 (compared with 6.7 per-
cent in 1976 and 5.9 percent in 1977 under the President's budget as-
sumptions). As a result, under the staff assumptions, outgo from the
trust funds would be higher than is indicated in the President's budget
by $0.1 billion in the transition quarter and by $0.3 billion in fiscal
1977.
The staff economic assumptions on page 2 also project slower wage
growth, particularly in 1977, than the President's budget. In the transi-
tion quarter, the staff assumptions would produce income to the trust
funds $0.1 billion lower than that produced under the President's
budget assumptions. In fiscal year 1977 the staff assumptions would
produce income $0.6 billion lower than would be received if the
assumptions in the President's budget prove correct. Thus the trust
fund deficit for fiscal 1977 would be $0.9 billion greater under the
alternative assumptions.
(17)




18


Chart 5
So lSewriy Csh Benefit Trust Run

M1e) Y977 erY17 FYUM F~19O!F


Incm
Present law
PesidenVs
propoa
"0
Present law
president's
proposal


Increase or
decrease
resent law
Presidents
proposal
Start-of-ywar
assets asa3
P of otgo
Present law
PResidents
proposal


$81.3 $90.4 $1009 $1115 $1
8.960107.7 119.7 14


84.9 94.4 104.0 114.1 1'
84.1 92.9 1022 111.9 1S
-3.2 -2.


-3.6 -4.1


+Q7



52%
5;2%/


+3.1



43%


-a2
+5.5



35%/


0-2.6
+7.7



29%


487. 477. 48% 50%










Chart 5


Social Security Cash Benefit Trust Funds
FISCAL YEARS 1977-81
Present law.-For each of the next 5 fiscal years, the combined cash
benefit trust funds (old-age and survivors insurance trust fund and
disability insurance trust fund) are projected to show a deficit. While
the amount of the deficit declines after 1978, the relative position of
the fund balances (measured against outgo) worsens throughout the
period. At the start of fiscal year 1977, trust fund assets cover more
than 50 percent of anticipated outgo for the year. By the start of 1981,
assets are down to 25 percent of outgo for the year.
The chart does not show separately the situation in the disability
insurance trust fund, which is now projected to become exhausted
during 1980. Legislation would be required to shift funds from the
old-age and survivors fund to cover that shortfall in the disability
fund.
President's budget.-The President's budget proposes to deal with
the short term decline in the social security cash benefits trust funds
by raising the combined tax rate by 0.6 percent effective January 1,
1977, and by eliminating certain types of benefits (see charts 7 and 8).
Under these proposals, the cash benefit funds would show a surplus
each year and start of year assets over the next 5 years would remain
at about 50 percent of outgo for the coming year.


(19)




20


Chart 6

Social Security Administration Cash I
Programs Federa I Funds (40I1ars in bil


-Present laW:0
Federal fund psymwt
toI wufund4
Supplemental security
income (SSI)
Propsed I aisation:
Require States to
along Fral SSr
increases
flovide speciaI SSI
housing allowance
Extend SSI to Puerto
Rico, Guam, Virgin I.


FY1976

$005

5.02



WN.


Juy to
16


$1.4


NOW


N..


&#a


%Im than$ 0,o billion








Chart 6


Social Security Administration Cash Benefit Programs-Federal
Funds
Present law.-The social security programs of old-age, survivonr-,
and disability insurance are supported almost entirely by payroll de-
ductions applicable to employers, employees, and self-employed per-
sons. Certain transitional provisions enacted in 1966, however, provide
relatively small benefits to persons over age 72 who did not have the
opportunity to become insured for regular benefits. The cost of these
benefits is reimbursed to the trust fund from general revenues. Simi-
larly, a general fund payment is made into the trust funds to cover
the cost of certain additional credits granted to military personnel.
These payments will amount to $515 million in fiscal year 1976 and to
$717 million in fiscal 1977.
Since January 1974, the Social Security Administration has been
responsible for administering a basic income support program for
needy aged. blind, and disabled persons called Supplemental Security
Income (SSI). This program is funded entirely from general funds.
Its costs are estimated at $5.235 billion in fiscal year 1976, $1.406 bil-
lion in the transition quarter, and $5.910 billion in fiscal year 1977.
Proposed legslatio.-ln 1975, the Subcco ni tte- on Public Assist-
ance of the Ways and Means Committee approved a number of SSI
amendments which, if enacted, would increase the cost of the program.
One amendment would require States having State benefits supple-
menting the Federal SST payments to pass through any increases in
SSI by raising the level of State supplementation. This would increase
State costs but, because it amends a saving clause in the law, would
also have an impact on Federal expenditures. If made effective for
the increases in benefits which will take place in Julv 1976, this pro-
vision would require additional Federal funding of $0.2 billion in
fiscal year 1977.
Another provision in the subcommittee bill would add a special ad-
justment to SSI benefits of people having housing costs in excess of
3' of their income. The estimated cost of this proposal (if effective
January 1977) would be $0.6 billion in fiscal 1977. The full year co-t
would be $0.8 billion.
A third provision in the bill extends the SSI program (with some
limitations) to Guam, Puerto Rico. and the Virgin Islands. If effec-
tive January 1977, this provision would have a fiscal year 1977 cost
of $0.1 billion and a full year cost of $0.2 billion. (A current Federal
court case seeks to accomplish this objective by judicial mandate. If
successful, this suit could increase costs by $0.4 billion on a full-year
basis.)
(21)




22


Chart 7


Income Under Propo e
(dollars in billions)
FY11
Presidents Budget.
Increase tax rate 0.6% 4e

Other Pro posaIs
Increase taxable wages to $24,000 +2
Set self-employment tax rate at C
1'!2 times employee rate
Provide general revenue ontibution





Chart 7


Social Security Cash Benefit Programs: Income Under Proposed
Legislation
President's budget.-Under current law the social security cash
benefit trust funds are expected to show deficits in each of the next
several years with the disability insurance fund becoming exhausted
sometime in 1980. To partially deal with this short-run financing prob-
lem the President's budget proposes legislation to increase the com-
bined payroll tax rate by 0.6 percent starting in 1977 and the self-
employed tax rate by 0.9 percent also starting in 1977. This change
would increase revenues to the funds by $3.5 billion in fiscal year 1977.
By 1981 the additional revenue would be $9.7 billion for the year.
Other proposals.-Under current law, only the first $15,300 of an
indlividtal's earnings from employment or self-employment in a year
is subject to social security tax. This amount will increase, under
automatic provisions of law, to $16.500 in 1977. As an alternative to a
tax rate increase, this taxable base could be raised. If it were in-
creased to $24,000 effective with 1977 it would result in increased in-
come of $2.3 billion in fiscal 1977.
When self-employed individuals were first covered under the social
security program in 1950 the rate of self-employment tax was set. at
1.5 times the tax rate applicable to employees (or 75 percent of the
combined employer-employee tax). Subsequently legislation was en-
acted limiting the maximum self-employment social security tax for
cash benefits to no more than 7 percent, the current rate. If the
President's proposal for increasing all social security tax rates (in-
cluding an increase in the self-employment rate to slightly more than
the original limit of 1.5 times the employee rate) is not adopted, con-
sideration might be given to restoring the self-employment rate to
the original relationship to employee rates. This would raise the self-
employment tax rate for cash benefits to 7.43 percent effective for tax-
able year 1976 (tax returns filed in 1977). For fiscal 1977, this would
increase social security income by $0.2 billion.
Another alternative means for providing added funding to the
social security program would be legislation appropriating general
revenues into the trust funds. If, for example, the additional funding
provided for under the President's proposal were determined to be
appropriate, provision could be made for transferring to the trust
funds from general revenues an amount equal to 0.6 percent of social
security tax collections in addition to the amounts actually collected.
Another approach to general revenue funding which could be con-
sidered would be to transfer some of the payroll tax funding now
applicable to hospital insurance to the cash benefits funds while sub-
sidizing the hospital insurance system from general revenues.


(23)




24


Chart 8


SocialI Security Cash B3enefit F~o
Proposed Lislation (dollars'n k

Presidents Budet: F1977 F
Brcertain retroactive paymtT-10
Apply earnings limit on annaI
basis only
Phase out student benefits -03
Modify cost-of-living frmua -
Other rpoals:
El iminafr dependency test for +03
husbands and widowers
For persons entted t both oial -0.3
security andecvilI servie-
Limit dependent benefits 0.3
Reduce hi hy weht benet -0.4
Reduced benefit atage 60 +1.5
Eliminate earnings limit +1.8
Rie meaning lmit to$4, +02
Liberalize benefit for blind +04
persons
OCupational definition of +04
disabIi ty older workers
3-imont6 ractwe limit -0.4
cotOAfo9ias for persor
within reduced ben.ef its
End be wen 11 03
chil ren are over 15
Benef bas on av.r*
earninro ro ~ u *S


-Q


"l


-nV


-Q43
-0O6
+2,0
+29
+O-6


O.*8
40,8

-0.4


* less an $0.05 billion








Chart 8


Social Security Cash Benefit Programs: Proposed Legislation
President's budget.-The President's budget includes a proposal
for legislation to end the practice of allowing social security appli-
cants to elect to get benefits for up to a year prior to the date of appli-
cation if these benefits would be reduced because they are taken before
age 65. This proposal, which assumes a SeIpteniber 1, 1976 effective
date, would reduce outgo by $390 million iii fiscal year 1977. The
budget also recommends legislation to eiin ate a provision under
which an individual who has less than $230 a month in income now
gets his full benefit for the month even if Iis annual income sub-
stantially exceeds the $2,760 annual earnings test .,amount. This pro-
posal, assuming a September 1, 1976 effective dale, would reduce
outgo in fiscal 1977 by $155 million. A third Adnhnist 'ation proposal
to reduce outgo would repeal a provision enacted in .1(35 which allows
children over age 18 and up to age 22 to continue to qualify for
dependent's or survivor's benefits under social security if they are
full-time students. This would be effective under the proposal in
July 1976 and would reduce fiscal 1977 outgo by $283 million. Since
it would not apply to children already eligible for child-student bene-
fits as of June 1976, the savings would be more in later years, reaching
a level of $1.8 billion by 1981. (An alternative approach which is in-
cluded in the bill S. 2622 would continue child-student benefits but
fund them from general revenues.)
The President's budget also includes a proposal to modify the cost-
of-living increase provisions of current law. This proposal is intended
to help deal with the long-range financial problems of the program.
In the short-range, however, its effect would be a cost increase because
of the need for a savings clause to minimize the impact on those retir-
ing in the next few years. The budget contains no added funding
for fiscal 1977 on the assumption that the proposal will not be effec-
tire until after the end of that year. The first full year cost will depend
upon the specifics of the proposal (which has not yet been sent to
Congress) ; however, a reasonable first year cost appears to be in the
neighborhood of $0.2 billion.
Other proposals.-The chart also shows the cost impact of a number
of other proposals. Except as noted, proposals are assumed to become
effective in January 1977.
Social security benefits for wives and widows are payable without
proof of dependency on the assumption that most women who do not
(25)







have a social security benefit of their own were, in fact, depended
upon their husbands. The same assumption is not made by the b
in the case of husband's and widower's benefits, for which prof
dependency is required. A Federal district court in New York I
held this dependency test for men invalid. If this ruling is up
and made applicable to the entire country, program costs will be i
creased by $0.4 billion in the first year.
The impact of such a court decision could he offset by legislati
requiring proof of dependency from both men and won altliou
this would significantly complicate progrll administration. Al
natively, since most beneficiaries of the decision would be men w
aie also eligible for retirement benefits under State or Federal ci
service systems, legislation could be adopted providing certain offsi
for persons entitled under both programs. With respect to dependeli
benefits, one proposal would reduce dependents' benefits nder soc
security by the amount of any governmental pension also payable
the dependent (in the same way that dependents' social security be
fits are now reduced if the dependent is also entitled to his own soc
security benefit). This proposal would reduce fiscal year 1977 out
by $0.3 billion if made fully effective as of January 1977.
A related proposal would eliminate some of the windfall whi
occurs when persons whose main lifetime employment is under Stf
or Federal civil service retirement systems also obtain social secure
coverage on the basis of minimal earnings in covered employee:
Such individuals and their dependents qualify for benefits which
turn much more than the individual actually paid in in taxes sii
social security benefits are weighted in order to provide more a
quately for those with low earnings levels. Under the proposal, soc
security benefits would be reduced by one dollar for eN-ery two dolb
in civil service benefits but not below a point where the basic ben(
equals 100 percent of the average monthly wages on which it is ba
This proposal would reduce outgo in fiscal 1977 by $0.4 billion;
iscal 1981 the annual savings would be $1.2 billion.
Another proposal (passed in previous years by the Senate) wot
allow individuals to begin to get social security benefits at age
rather than age 62. This proposal has no long-range impact on p,
gram financing since the benefits would be permanently reduced on
actuarial basis. It would, however, increase costs in the short ran,
The fiscal 1977 cost would be $1.5 billion.
Social s"urity benefits for persons under age 72 are reduced by
for every $2 of annual earnings above $2,760 (above $3,000 sta
1977). If this earnings limit were repealed for persons age 65 a
over, the fiscal year 1977 cost would be $1.8 billion. If the 1977 amor
exempt from this limitation were raised from $.,000 to $3,600 the fis
year V977 cost would be $0.2 billion.





27


In 1973 (and in prior years) the Senate passed legislation to ease
Social Security eligibility requirements for blind persons and to give
the blind more favorable computation of benefit amounts. Adoption
of such legislation effective January 1977 would increase program
costs by $0.4 billion in fiscal 1977 and by $0.6 billion in the first full
year.
A proposal made by the 1974 Social Security Advisory Council
would ease the disability definition for workers over age 55 by allow-
ing them benefits if they are unable to do their previous type of wot-:
rather than any type of work. This proposal would increase outgo by
$0.4 billion in fiscal year 1977.
Social security benefits are available for up to 12 months prior to
the month in which an individual files a claim for benefits if he was
eligible in all of those prior months. If this period of retroactivity
were reduced to three months, the cost of the program would be
reduced by $0.4 billion in fiscal 1977.
Social security benefits are automatically increased as the cost of
living rises by the percentage increase which has taken place in tho
Consumer Price Index. Through a technicality, persons who retire
before age 65 with reduced benefits receive a benefit increase which
is slightly more than the CPI percentage increase. Modifying the law
to provide only the cost-of-living percentage in such cases would
reduce outgo by less than $0.05 billion in fiscal 1977. By fiscal 1981,
the reduction in outgo would be $0.3 billion.
Benefits for children of deceased, disabled, or retired workers under
social security are provided until the child reaches age 18 or age 22
if he is in school. Benefits are also provided for the mothers of such
children until the youngest child reaches age 18 so that the mother
can remain home to care for the child. Consideration could be given
to amendment of the law to provide that these benefits for the mothers
of young children would be available only until the youngest child
reaches age 15. Such a change would reduce outgo by $0.3 billion in
fiscal 1977. By fiscal 1981, the cost reduction on an annual basis would
be $0.6 billion.
In theory, social security benefits are based on an individual's
average earnings over his lifetime of employment in work covered by
social security. Until 1972, the number of years used to average earn-
ings was three more for men than it was for women, and legislation
was enacted to phase out this difference by reducing the number of
years over which earnings of men are averaged. Consideration could
be given to a proposal which would make the treatment of men and
women comparable by increasing the number of years used for women
instead of reducing the number of years used by men. Such a proposal,
if phased in over a three-year period, would have no savings in fiscal
1977; by fiscal 1981, however, it would reduce outgo by $0.3 billion,




28


Chart 9

Welfare FIograms for Families Resent [
(dollars in billions)


Presidents budget:
Aid tofamilie With
depndent children
Work Incetive Program

for C=mite

quality control
regulations


FY1976

$6.O


0.4


~1.6


0.1










Chart 9


Welfare Programs For Families: Present Law
The President's budget estimates that the cost of the aid to families
with dependent children program and certain other related programs
will be $6.0 billion in fiscal year 1976, $1.6 billion in July to Septem-
ber 1976, and $6.3 billion in fiscal year 1977. These figures include the
cost of administering family welfare and child support programs as
well as AFDC benefit payments (less child support collections). Also
included are: State and local training costs ($53 million in fiscal year
19761 $15 million in July to September 1976 and $60 million in fiscal
year 1977) ; child welfare services ($46 million in each fiscal year
and $12 million in July to September 1976) ; research costs ($9 million
in each fiscal year and $2 million in July to September 1976); and
emergency assistance ($55 million in 1976, $20 million in July to
September 1976 and $60 million in 1977). It should be noted that the
estimated AFDC cost for fiscal 1977 in the President's budget is based
on an assumed reduction of 200,000 in the average monthly number
of recipients as compared with fiscal year 1977. In most prior years
the number of recipients has increased from year to year.
Closely related to the AFDC program is the new child support en-
forcement program (title IV-I) of the Social Security Act) which is
aimed at helping children in securing their rights to obtain support
from their parents and to have their paternity ascertained in a fair
and efficient manner. The staffing of Federal positions to provide for
the planning, development, management and coordination of the child
support enforcement programs and activities was not funded until
January 1976, almost six months after the effective date of the public
law. The AFDC budget estimates reflect the cost of administering
the child support program as well as savings resulting from child sup-
port collections. (The net Federal share of these administrative costs.
$107 million in fiscal 1976, $34 million for July to September 1976.
and $151.7 million for fiscal 1977 are included in the AFDC State and
local administrative costs. The net Federal share of child support col-
lections, $97 million for fiscal 1976, $34 million for July to September
1976, and $150 million for fiscal 1977 are reflected as a reduction in t!c
AFDC benefit payments.)
(29)


66-407-76-3





30


Also closely related to the AFDC program is the work incen
(WIN) program which is aimed at enabling AFDC families to
come self-supporting through employment. The President's bU(
recommends funding for this program at a level of $350 million
fiscal 1976, $80 million for July-September 1976, and $315 million
fiscal 1977.
In its AFDC estimates for fiscal year 1977 the President's but
assumes a s.ils of $220 million as a result of its quality control 1
gram. Under this program, States will lose Federal matching
erroneous AFDC payments to the extent that these payments (u
teriined by sample surveys) exceed a tolerance level of 3 percent
ineligibility and 5 percent for overpayments. The validity of the H
action has been challenmed in the courts; if HEW loses the
budget will have to be increased by $220 million unless legislation
enacted authorizing a reduction in Federal funds as proposed by
Department.
The work incentive proram was significantly amended at the
of 1971 by the Committee with a view toward improving its op
tions. In fiscal year 1975, the 1971 amendments apparently bega
take hold to the extent that the requirements of the program for
first time exceeded the amount that could be met under the approj
tion. The funding level of this program for fiscal 1976 was more
by $70 million above the amount requested last year in the Presid
budget.







32


Chart 10

Welfare Rzgrar for Families:
Proposed Legislation
(dollars in billions)


Presidents Bu t -
Modify earedincom
dsreard
Reduce Federal meitching
in 7Stat
Include Stp~ren income
Modify Work Incntive
Pwgram
Repeal seprate autho-ity
'for trining funds
Other Iposas-
Disregards not applicable
to unreparme income
Mandatory appl ication for
other types f bnefrt
Cbordintion with
unemployment nefI
Require unemployed fatr
to apply for unemployment
benits
Permit concurrent rI'cept
of AFDCand unemployment
bnefits

*less, then $O.0O billion


julyto
FY WM F
-W


- ~


Ww-
- WAW
00~


d F


- &a#


WWI


weo


we&


WN-










Chart 10


Welfare Programs for Families: Proposed Legislation
PRESIDENT'S BUDGET
The Administration has announced its intention of submitting legis-
lative proposals which would reduce expenditures under the AFID(
program in a number of ways. This ehart presents the estimated
budgetary impact of these changes. It should be noted that the fiscal
year 1917 savings are predicated by the Adminjstration on an effective
date of October 1. 1976.
Icomne disi'egaed.-One Administration proposal would reduce the
amount of income that can be disregarded in deteinimng the amoult
of payments for which an AFDC family is eligible. Current law allows
earned income equal to $30 per month plus one-third of earnings alove
$30 to be disregarded in addition to deducting child care and other
work expenses. The proposal would instead disregard a flat $60 per
month plus child care expenses and one-third of additional earnings
above this level. A proposal somewhat similar to this Administration
recommendation has been passed by the Senate on two occasions in the
past. The President's budget estimates savings from such legislation
of $149 million in fiscal 1977.
Reduced match hg.-Under existing law, States lave the option of
using the matching formula in the AFDC title of the law which is
based on the first $32 average monthly payment or of having the en-
tire AFDC expenditures matched according to the same percentage
as applied for determining the Federal share of their medicaid ex-
penditures. Seven States (Alabama, Georgia, Mississippi, Missouri,
South Carolina, Tennessee, and Texas) presently use the regular
AFDC formula rather than the medicaid matching rate. The Adlnin-
istration's proposal would eliminate the regular AFDC formula, thus
requiring those 7 States to use the medicaid matching rate. The Presi-
dent's budget estimates that such legislation would reduce Federal
payments to these States by $70 million in fiscal 1977.
Stepparent's income.-A third Administration proposal would re-
quire a stepparent to assume financial responsibility for all children
in the family by requiring the States to consider the income of the
stepparent in determining eligibility. The President's budget estimates
savings of $37 million in fiscal 1977 from such legislation.
(33)





34


Work incentive program .-Another Administration proposal w4
make several modifications in the work incentive (WIN) program.
WIN registrants would be required to undertake job searh acti
with most eligible participants being exposed to the labor market
selected individuals receiving intensive employment services.
and training activities would no longer be f unded through this acti
but WIN registrants would be referred to such activities funded ui
the Comprehensive Employment and Training Act. WIN would
tinue to provide child care and supportive services but these W4
be provided for not more than 30 days after job placement. A ri
ment that one-third of WIN funding be used for public serice
ployment and on-the-job training would be repealed. The Presid4
budget estimates savings of $55 million for this proposal in fiscal 1
The Committee last year reported legislation (S. 2804) which wi
require employment search for mandatory registrants. The Cor
tee bill has an estimated cost in fiscal 1977 of $75 million offset b
estimated savings in welfare costs of $150 million.
Social work treining.-The Social Security Act provides 75 per
Federal matching for State welfare agency training costs. In the I
States have used this authority to underwrite graduate and un
graduate college programs of social work education. At the em
1974, Congress enacted legislation specifically authorizing this
of the training cost provision, thus blocking an HEW propo.
disallow matching for institutional training. The Administration
announced that it will propose legislation to combine State and I
training activities with other activities under title XX of the S
Security Act into a block grant to States. The President's budget
mates that such legislation would save $60 million in fiscal year I

OTHER PROPOSALS
In addition to the Administration's proposals, a number of o
proposals to reduce welfare expenditures could be considered.
Treatment of unreported earnings.-Under existing law the &
gard of earnings provided for in legislation enacted in 1967 mu,
applied even in determining the amount of an overpayment due f
an individual who is found to have been concealing those earning
the law were amended to eliminate that requirement with respe
unreported earnings, it is estimated that savings in fiscal 1977 wi
total $159 million.
Requirement to apply for other beneflts.-In enacting the sur
mental security income program in 1972 the Congress included a
cific requirement that applicants for benefits under that programT





35

simultaneously seek any other benefits for which they might be eligible
and which would reduce the necessary outlays under that program. If
a similar requirement were made applicable to the AFDC program,
savings of $60 million in fiscal year 1977 are estimated.
Relationship to unemployment cornpensation.-Existing law pro-
hibits unemployed fathers from being simultanously entitled to AFDC
benefits and unemployment compensation benefits. A recent court rul-
ing holds that the present statute allows men eligible under both pro-
grams to take their choice of the most advantageous. If the law were
amended to provide that such individuals would be ineligible for
AFDC so long as they are eligible for benefits under an unemployment
program, Federal AFDC costs would be reduced by $456 million in
fiscal 1977. Alternatively, the law could be amended to permit (at State
option) simultaneous receipt of AFDC and unemployment compensa-
tion. This would reduce Federal AFDC costs by $80 million in fiscal
year 1977. These amounts do not represent net Federal budget savings
since they would be at least partially offset by increased unemployment
benefits.




I30


Chart 11


Social


Services


(dollars in billions)


$,.6 q


FY1976


Present Law
Presidents budget
Proposed Le --tion
President' budget
convert to blockgnt
Child care standard


$2.3


+0.1


.0.1










Chart 11


Social Services
Under title XX of the Social Security Act, States providing social
services such as child care, family planning, and homemaker services
to welfare recipients and other low-income persons are entitled to
claim Federal matching grants for such expenditures. For most serv-
ices $3 in Federal funding under this program is available to
match each $1 of non-Federal funding; however, Federal fmid-
ing is subject to an overall annual limit of $2.5 billion allocated
on a population basis. Under present law, States are expected to use
$2.3 billion of this funding in fiscal year 1976 and $2.4 billion in fiscal
year 1977. The President's budget includes a proposal to eliminate the
State matching requirement in this program and to restructure it as
a block grant program. Under this approach it is estimated that States
would receive the full $2.5 billion.
The social services program under current law includes certain
Federal requirements including strict standards with respect to child
care provided under the program. In January, the Senate passed the
bill H.R. 9803 to provide additional funding under the program in
recognition of the added costs attributable to these child care stand-
ards. If enacted as passed by the Senate, H.R. 9803 would increase the
$2.5 billion social services limit to $2.75 billion annually. It is esti-
mated that this bill would increase the program's costs by a net
amount of $99 million in fiscal year 1976, $55 million in the period
July to September 1976, and $217 million in fiscal year 19A.
(37)




38


Chart 12


Unem ployment Compention
(dollars in blo ) FY107
Present Law.-Jul" to Pros
P"ent L.^w:wn FY96 -6bde. SwVf


Income
Outgo
Net decrease
End-of* year
Net


16.6
18.3
-1.8
5.6


-0.3

5,3


5.1


fui~.FY1976
Federal -nds.
Advances to trust fu nds 8.5
Trade adjustment Q 0.1


Proposed lis aton:
"rust fund -ncome
* Increase taxable wages to
46,00 Jan. 197; incn!ss
taN rMe 0.15% Jam.1977
(Presidentis budget)
*Increase tawb~e vwes to
#8,00 Jan.1977; increase
ax rate 0 I Jan.1976
(Waand Mwas bill)
*Same but with effective
dates delayed one year
Trust fund outdo:0
*Broaden coverage

%les than 40.05 billin


a*.


+0.2



a uw
Oslo


I


$15.8 $16.6
16.0 18.6
-0.2 -2.0


3,3


$1.t


&Ndr


+0.1




dool


nnl I I: lJ .. ..


I
I










Chart 12


Unemployment Compensation
The unemployment insurance trust fund covers regular State un-
employment insurance benefits (paid for through taxes collected by
States but deposited into the Federal trust fund), the extended bene-
fits program, which provides an additional 13 weeks of benefits which
are 50 percent .federally funded, and the emergency unemployment
compensation program, which (depending on State insured unem-
ployment rates) can provide up to 26 further weeks of benefits with
100 percent Federal funding.' Federal funds in the trust fund come
partially from the Federal share of the unemployment payroll tax and
partially from repayable general revenue advances to cover any inade-
quacies in the payroll tax. The unemployment trust fund also covers
State and Federal administrative costs.
The President's budget estimates that the outgo from the trust fund
will amount to $18.3 billion in fiscal 1976 and will decline to $16.0 bil-
lion in fiscal 1977. Income is estimated to be $16.6 billion in fiscal 1976
and $15.8 billion in fiscal 1977. These estimates assume that the unem-
ployment rate will decline from 7.7 percent in calendar 1976 to 6.9
percent in calendar 1977. Under the staff alternative assumptions, the
unemployment rate would decrease only to 7.3 percent in 1977. This
would result in $2.6 billion in additional benefits in fiscal 1977. Of this
amount, $1.8 billion would come from a further reduction in the assets
of the trust fund and $0.8 billion would come from additional general
fund advances to the trust fund (bringing the total of general
fund advances to $6.5 billion for fiscal 1977).
The President's budget recommends an increase in the taxable wage
base for unemployment tax purposes from $4,200 to $6,000 and an
0.15 percent increase in the net Federal tax. This would increase Fed-
eral tax revenues by $1 billion and State tax revenues by $1.1 billion in
fiscal 1977. The bill H.R. 10210, as reported by the Ways and Means
Committee, would increase the base to $8,000 and the net Federal tax
rate by 0.2 percent. Under the House bill the rate increase would be
effective as of January 1, 1976 and the base increase as of January
1, 1977.
'The unemployment trust fund also includes the railroad unemployment program
which Is not within the jurisdiction of the Finance Committee. This chart does not include
funding data for that program.
(39)





40


The President's budget asumnes the termination during f
of the Emergency Unemployment Compensation Act of 19,
pI)ovided by law and includes no proposal for extending ti
provision in that act requires a report on matters related to
gram by the Secretary of Labor, to be made by January 1
htumber of proposals with respect to unemployment insurai
might l e considered in connection with the legislation exp
sent from the ho1ise later this year and which could have s
impact on expenditures do not appear in this chart since the
necessary for implementing them effectively preclude budg
pact in fiscal year 1977. Sucli proposals include Federal
benefit standards, rules with respect to the treatment of
standards for State account financing, and modifications in di
ing provisions for federally funded benefits.
The President's budget estimates that the trade adjusi
sistance program enacted in 1974 will involve costs of $30 i
the transition quarter and $120 million in fiscal year 19
amounts are well below the original projected costs of this
however, as of January 31, 1976 only 57,000 workers had b4
eligible for this program. There are, however, currently pen
tions involving over 200,000 additional workers.













Chart 13
Unemployment Trust Fund
(dollars in billions)


FY1977


FY78


FY197VP


FYIPSO0


Present law:0
Stfte and Fmmil
tand
Outgo
Deficit or surplus
Wrsand Means
State ad Federal
tax receipts
Deficit or surplus

Administration
proposal:
Suate and Federal
t" reupts
Deficit or surplus


$9.8
16.0
-62


13.3
16.3
0



11.9
16.3
-4.4


$10.7
14.3
-3.6


14.6
15.1
-W05



13.7
16.1
-2.4


$J0's
123
-1.5


154
!0
.2.4



14.8
13.8
+1.0


(Note: deficits will be met primarily through
genem! fund advances)


$11.1
11.2
-0.1


16.1

+43


152

+Z7


42










Chart 13


Unemployment Trust Fund-Fiscal Years 1977 Through 1981
This chart shows the expected status of the unemployment trust
fund under present law for the next five fiscal years. The data in this
chart are based on the assumptions in the President's budget under
which unemployment rates would decline from 7.7 percent in 1976 to
6.9 percent in 1977, reaching a level of 4.9 percent by calendar year
1981.
Income under the bill reported by the House Committee on Ways
and Means last year is based on the effective dates in that bill which
provide for a tax rate increase effective January 1976 and a tax base
increase effective January 1977. (Chart 12 shows alternative fiscal
1977 estimates assuming later effective dates.)
Outgo under both the Ways and Means bill and the Administration
proposal is affected by extensions of coverage and a modification in
the extended benefit trigger. The Administration proposal shows
somewhat greater outgo for fiscal 1978 and after since the Adminis-
tration proposal includes a requirement that State benefits be at least
equal to 50 percent of the unemployed worker's prior wage level up
to a maximum of at least two-thirds of the statewide average weekly
wage.
The deficits shown on this chart would have to be met primarily
from general revenues since trust fund assets have already been
reduced as of the start of fiscal year 1977, to about $5 billion.


(43)




44


Chart 14
Health Pr0rams: Existing Law
(dollars in billions)


Presidents; Bud eta
ed i ca re trust fuhds:
Hospital insumnrce
Income
outgo
Net increase
Supp. medical insumnce
Income
outgo
Net chwe
Federal fund ato
Medicare funds
Medicaid
MI and child health

Changes for Commiftee
coideraton:
Maternal and child health


FY1976


$13,6
145
+1.1
4.9
52
-0.3
3.6


83
0.3


6 $
3.4 1
+02
1.4
1.5
-0.1 +
0.9


0.1


dOWO










Chart 14


Health Programs: Existing Law
MEDICARE
Benefit and administrative outlays under iiedicare are estimated for
fiscal year 1977 at $21.9 billion. Of this amount, benefit payments
account for $21.0 billion. This represents an increase of some 19 per-
cent over the fiscal year 1976 benefit payments. The primary factor
accounting for the increase is inflation in medical care costs.
Hospital insurance expenditures generally account for about 70
percent of the medicare benefit payments. In fiscal year 1977, $15.4
billion in benefit outlays are estimated under part A (hospital in-
surance). Part B, the supplemental medical insurance program, ac-
counts for $6.5 billion.
Income to the trust funds in fiscal year 1977 is estimated at $23.0
billion, an excess over outlays of $1.1 billion. Federal fund payments to
the trust funds for fiscal year 1977 are $6.0 billion.
MEDICAID
Total Federal-State medicaid costs for fiscal year 1977 are projected
under present law to be ,16.6 billion, of which the Federal share
is $9.3 billion. Of the Federal amount. $8.9 billion represents pay-
ments for benefits, with the remaining $0.4 billion going for adminis-
trative costs. This represents a total increase over fiscal year 1976
costs of slightly over 11 percent.
States match Federal expenditures under the medicaid program,
with total State expenditures accounting for approximately 45 per-
cent of total program costs. In fiscal year 1977, State medicaid costs
are estimated to be $7.3 billion.
MATERNAL AND CHILD HEALTH
The President's budget includes $211 million for the maternal and
child health program in fiscal year 1977. Of this amount, $194 million
is for formula grants to the States, with the remainder supporting
research and training related to maternal and child health. This re-
quest represents a 35 percent reduction from the fiscal year 1976
appropriated amount of $322 million (of which $296 million was
allocated to formula grants), one of the largest reductions proposed
in the health budget.
(45)


6 -407-7 6 4





46


The Administration has requested a reduction of $98 mill
the fiscal year 1976 budget, in order to reduce the fiscal y(
funding level to $224 million. The reciion would reduce the
for formula gants to $205 million.
CHANGES FOR COMMITTEE CONSIDERATION
The cuts in the maternal and child health program propose
Administration would result in expenditures below the fls
1976 level. In view of the previous cong onal action to mci
MCH appropriation by some $100 million over the budget
the committee may wish to allow sufficient funds to permit
action in the 1977 appropriation.







48


Chart 15


Medicare Trust Funds
Under Present Law


(dollars In billions) FY977
HOSPITAL INSURANCE
Income t15.7


outgo
Net increase
End-of-year
assef


15A
0.3
11.5


FY1.978

l&O


MY979
$23a6
2039


+ZO +Z7


43*5


162


M960OFY
$262 $
24.1 A
+2.t


182


SUPPLEMENTARY MEDICAL INSURANCE
Income 73 7.s 9.0 10.4


Outgo
Net increase
End-of-yer


75


-08 +0.3


1.8


z2


&6
+04
Z6


9.9
+Q05
so


65










Chart 15

Medicare Trust Funds-Under Present Law
This chart shows the status of the two medicare trust funds in
each of the next 5 fiscal years. The data in this chart are based on
current law and use the economic assumptions in the President's
budget. Under these assumptions, prices (which are a major factor
in the outgo from the medicare trust funds) are projected to decline
to an annual rate of 4 percent by 1981 from the projected 1977 rate of
6 percent.
(49)




50


Chart 16

HeaIth Programs: Proposed
(dollars in billions)


President Budet : FY1976
Medicare*
Limitations on -.
reimbursement rates
Increase in benefiP ry -
Limitxamon on berwficiary
cost-sharin fl
(Revised cost estimate)


Medicaid and maternal
and child health replace
with block health grant
ter items for Committee
consideration:


Major expansion in
Federal health role:
start-up csts


.ulyt.
Jef


-02


-aS


Ar


less than 0.05 billion










Chart 16


Health Programs: Proposed Changes
PRESIDENT'S BUDGET
Medicare.-The Administration is submitting two legislative pro-
posals which would on an overall basis reduce medicare outlays. One
of the proposals would modify medicare's icost-sharing structure by
requiring the beneficiary to pay coinsurance equal to 10 percent of
hospital charges above the deductible amount, and an increase in the
supplementary medical insurance (part B) deductible-presently
$60-to $77 in 1977; thereafter, the deductible would be increased by
the same percentage as social security cash benefit increases. A maxi-
mum cost-sharing liability of $500 per calendar year under hospital
insurance and $250 per calendar year under supplementary medical
insurance would also be instituted.
Under the Administration proposals, virtually all users of medicare
would find their cost-sharing obligations had increased.
The Administration estimates a reduction in outlays of $315 million
in fiscal year 1976 and $2.2 billion in fiscal year 1977. However, a
February 9 White House press release stated that in fiscal year 1977
an additional $590 to $890 million in increased outlays would have
to be added to the initial estimate of $500 million as a result of
"refinements". The new estimates explicitly take account of the costs
of removing all day limits on hospital and skilled nursing home
benefits.
The second legislative proposal would limit the yearly increases in
hospital per diem costs and practitioner's charges recognized as rea-
sonable by the medicare program.
The limits for fiscal year 1977 would be 7 percent and 4 percent
respectively; the limits on increases in future years would be set by
regulation. Any costs or charges in excess of the limits would not be
reimbursed. This proposal is estimated to reduce outlays by $900 mil-
lion in fiscal 1977.
Medicaid and maternal and child health.-The changes in medicare
cost-sharing and reasonable cost calculators described above would
have the effect of increasing medicaid costs by an estimated $75 mil-
lion, since medicaid pays the medicare deductible and coinsurance
amounts for aged and disabled persons covered under both programs,
and generally follows the medicare reasonable cost formula. Without


(51)





52


the enactment of these medicate changes, this cost increase
not occur.
The President proposes to further limit Federal expendita
consolidating 16 categorical health service and planning prc
including medicaid and maternal and child health, into a $10
block grant to the States. An increase of $500 million in the aut
t ion level is proposed for each of the three subsequent year, I
The block grant funds would be distributed among the Sb
(ording to a formula based primarily on the size of the Stat4
income population with consideration also given to its per
income and fiscal effort.
OTHER ITEMS FOR COMMITEE CONSIDERATION
In keeping with the Congressional Budget Act, the Con
should include in its submission to the Budget Committee the
t lal cost impact of any significant legislation which might 1
sidered and acted upon in the health area. Consideration m
given to placing ceilings on the beneficiary's cost-sharing i
Consideration might also be given to proposals made by the j
inst ration subsequent to submitting its budget that would
limits on the days of benefits available in a benefit period uni
hospital insurance program. The initial increased cost of the
posals vould exceed $1 billion. Similarly, although it seems u
that any significant benefits would be paid under any major ]
health financing programs (such as catastrophic health inst
before fiscal year 1978, the Committee may wish to recommer
cation of funds for planning and startup functions and nomii
tial benefit costs related to preparation for an expanded program
maximum amount of such costs are estimated as not in excess
million.







54


Chart 17

(dollars in billions)
July to
FY1 19 F
Revenue Sharing
Present law extended $6.3 $1.6
Proposed legiation increment:
rvps rde ss budt.. ---
Other proposals vw AII


Sugr Act
resent law
Chan es for Committee
consideration


Interest on the
Public Debt
President' budget
(Cornmittee etimate
depends on decision on
deficit and debt limit)


"4WAW


37.7


10.4










Chart 17


Revenue Sharing; Sugar Act; Interest on the Public Debt

REVENUE SHARING
The general revenue sharing program provides for outlays in fiscal
years 1976 and 1977 of $6.3 billion and $6.55 billion, respectively, with
one-third going to State and two-thirds going to local governments.
The present program provides for the payment of funds to State and
local governments through December 31, 1976. Over the 5-year au-
thorized life of the program, $30.2 billion of Federal funds will have
been distributed. (This chart assumes continuation of the present pro-
gram, including the effect of an annual $150 million increment.)
The Administration has proposed that the general revenue sharing
program be extended through 1982. The proposed legislation would
continue the authorization and appropriation of specific annual
amounts; increasing $150 million annually to $7.2 billion for 1982.
The total cost for the 5-year and 9-month proposed extension would
be approximately $40 billion. An alternative proposal which has been
put forward (S. 11) would make this a permanent program and would
fix the annual entitlement for State and local governments at seven-
tenths of 1 percent of Federal adjusted gross income. This would
result in an outlay of an addition $1.4 billion for fiscal year 1977 above
an extension of present law.
SUGAR ACT
The Sugar Act expired on December 31, 1974. In fiscal year 1975, the
last fiscal year the program was in effect, $86 million was appropriated
to cover Sugar Act program payments for the 1974 crop year. If the
Committee expects to act on the sugar program this year, an estimate
of the necessary appropriation should be included in the Committee's
budget recommendation.

INTEREST ON THE PUBLIC DEBT
Budget outlays for interest on public debt are estimated in the Pres-
ident's budget to rise from $37.7 billion in fiscal year 1976 to a level of
$45.0 billion in fiscal year 1977. These projected increases result from
the financing of budget deficits for each of these years. When the Com-
mittee has completed its decisions on revenues, expenditures, and the
budget deficit, the appropriate interest figures can be calculated.


(55)




56


Chart 18


Revenues: Present Law
(dollars in billions)
FY $976 JuIIIII.. tW.
Pree-
F- -


Individual
income tax


$1296'129.4


'44.6 44.3'17


Corporation
income tax
Social insurance
taxes
Excise taxes
Estate and gift
taxes
Curtoms duties
Other revenues


40.1
92.6


402
92.6


92
252


92
25.1


16.9 16.8 4.4 4.4 17.8


5.1
3.8
6.6


52
3.8
6.6


1.4
1.0
1.5


1.5


1.0 4.3
1.5 6.8


TOTAL:
Pres. budget 2947
Stwf


873


94.6


870










Chart 18


Revenues: Present Law
Federal revenues are in large part composed of receipts from in-
come and payroll taxes. The President's budget estimates that in fiscal
year 1977, these revenues are projected to yield a total of '173.8 billion
under present law.
Income taxes paid by individuals are estimated to amount to $I75..
billion. Revenues from this source, which account for the largest single
source of Federal revenues, will amount to 47.1 percent of total Fed-
eral revenues.
Income taxes paid by corporations are estimated at $55.6 billion.
Social insurance taxes and contributions, composed of social se-
curity and other payroll taxes, unemployment insurance taxes and
deposits, Federal employee retirement contributions, and premium
payments for supplementary medical insurance are expected to total
$107.6 billion. Receipts from these sources will account for approxi-
mately 28.8 percent of total Federal revenues.
Excise taxes imposed on selected commodities, services, and activi-
ties are expected to provide $17.8 billion during fiscal year 197.
Estate and gift taxes imposed on the value of property held at death
and inter vivos transfers of property are projected to produce $5.8
billion.
Customs duties, levied on imports are anticipated to raise $4.3
billion.
Other taxes and miscellaneous receipts are expected to total $6.8
billion.
The columns showing revenues under the staff projections corre-
spond to the economic assumptions of the staff of the Joint Committee
on Internal Revenue Taxation, shown in Chart 2.


(57)




58


Chart 19

Revenue Estimates:
Pro posed Changes
Expiring tax reduction proviso
AMditional'general t x reductii
*Tax revision proposals
* Energy tax proposals










Chart 19


Revenue Estimates: Proposed Changes
The charts which follow group the various tax proposals under
these headings: expiring tax reduction provisions and additional gen-
eral tax reductions (chart 20), other tax revision proposals (charts 21
through 24), and energy tax proposals (chart 23).
The revenue estimates with respect to the various proposals for
change discussed subsequently are static in the sense that they do not
take into account any potential offsetting increases in revenues that
result from events subsequent to enactment of a particular proposal.
Despite the utility of recognizing this potential for offsetting revenues,
the Budget Committees for their purposes need the estimates without
this effect. (They make their own overall estimates of the effect of the
budget on the economy.) In addition, there is the difficulty of estimat-
ing the income effect of the various proposals as well as the fact that
most of this effect will occur after the fiscal year 197 7. For ease of ref-
erence, Appendix D contains a summary of the revenue effect (on a
static basis) of past tax legislation enacted by the Congress.


(59)







Chart 20

En1 Reduction Pro
(dollars in bi Ilions) t4


Individual xe: to
Standard deduction increase
Taxable income credit ($35 or
;Z% of taxable income)
Earned income credit
Business txes:
Lower rate and larrexemption
for small busnz
Continuation of 10% investment
tax credit
Sundry expired provisions
Additional General Tax R
Individual taxe:
Administration proposs:C.
Flat dollarstWndrd dedion
Iesnl exemption incrwe to$OOO
Reduction in raes
Indexing:s rd deductions )
persoml exemptions
tax rates
BaSin- taxation on fmily unit
Taxi all aduts separ
20% ndard adeudion up t000"
plus ddtIon fo I le
Business t)
Reduce Ite to 46%
Make smJn esines cuts rmanent
Make 10% inubit craJep enet
In induction cr
co~n,,, e top rate. 6
Series of reductions frsull business
*lm than $0.05 billion


-$0.7
-1.7


-0.3


luct


60










Chart 20


Expiring General Tax Reductions; Additional General Tax
Reductions

Expiring General Tax Reductions
INDIVIDUAL TAXES
The Tax Reduction Act of 1975 (Public Law 94-12) included four
individual income tax reductions that applied only to calendar year
1975. These were an increase in the standard deduction, a tax credit
of $30 for each taxpayer or dependent, a refundable earned income
credit, and a tax credit for home purchases. The aggregate tax reduc-
tions for individuals resulting from these provisions (other than the
tax credit for home purchases) were continued for the 6-month period
ending June 30, 1976 by the Revenue Adjustment Act of 1975 (Public
Law 94-164).
Technically, the continuation for 6 months of the 1975 individual
income tax reductions described above was accomplished in the Reve-
nue Adjustment Act of 1975 by continuing the increase in the standard
deduction and the earned income credit and by a tax credit equal to
the greater of 2 percent of the taxpayer's taxable income to $9,000 (up
to a maximum credit of $180) or $35 for the taxpayer and each de-
pendent. Continuation of this level of individual income tax reduc-
tions through calendar year 1977 would reduce receipts for the transi-
tional quarter by $3.2 billion and for fiscal year 1977 by $9.3 billion.
The Administration has proposed that this level of individual in-
come tax reductions be extended and enlarged by an additional $12.6
billion on an annual basis or by $6 billion for the balance of calendar
year 1976. The specific changes recommended by the Administration
are summarized subsequently under "Additional General Tax
Reductions."
BUSINESS TAXES
The Tax Reduction Act of 1975 also reduced corporate income taxes
both by decreasing for 1975 the rate at which the first $50,000 of cor-
porate income was taxed and by increasing for 2 years the invest-
ment tax credit.
Prior to the Tax Reduction Act of 1975, corporate income was sub-
ject to a 22-percent normal tax and a 26-percent surtax (for a total
tax rate of 48 percent). However, the first $25,000 of corporate income
(61)


66-407-76-5





62


was exempt from the surtax so that the first $25,000 of corpox
come was taxed at a 22-percent rate and the income in excem oi
was taxed at a rate of 48 percent. In the Tax Reduction Aco
the first $25,000 of corporate income for 1975 was taxed at a 20-
rate, the second $25,000 of corporate income was taxed at a
rate, and corporate income in excess of $50,000 wa taxed al
percent rate. The Revenue Adjustment Act of 1975 continue
rate reductions for a 6-month period ending June 30,1976. Cent
these reductions would reduce receipts for the transitional quai
$0.3 billion and for fiscal year 1977 by $1.7 billion.
The Administration has proposed that the reduction in the cor
tax rate be continued, but that it be enlarged. The specific ci
recommended by the Adininistration are summarized subseq
under "Additional General Tax Reductions." Other rate redi
proposed to stimulate capital formation and to benefit small bi
were also discussed at that point.
The Tax Reduction Act of 1975 also increased the rate
investment tax credit from 7 percent to 10 percent (from 4 pen
10 percent in the case of utilities) for a period of approximi
years ending December 31, 1976. A corporate taxpayer may el
11-percent credit during this period if an amount equal to 1 r
of the qualified investment is contributed to an employee stock
ship plan. Also, in the case of public utilities, the limitation
amount of tax liability that can be offset by the investment tax
was increased from 50 percent to 100 percent for 1975 and 1976. F
after this limitation is to be gradually reduced back to the 5O-p
level over the period 1977-81. In addition, the limitation on qu
investment in used property was increased by the Tax Reductb
of 1975 from $50,000 to $100,000 until January 1, 1977.
Continuation of the 10-percent credit, which the Administ
has proposed, and the $100,000 used property limitation wo Ird
revenues for fiscal year 1977 by $1.3 billion.

OFFSETTING EXPENDITURE REDUCTIONS
As noted above, the Revenue Adjustment Act of 1975 extend
1975 individual income tax reductions and the corporate tax ri
ductions for 6 months to June 30, 1976. Section 1A of that a
produced in Appendix E) contained language with respect to
ting further extensions of these tax reductions, or additional g
tax reductions, by reducing the level of expenditures that othi
would be made by an equivalent amount, if economic condition:
rant doing so.
Should the Committee determine that it would be appropri
take this provision into account in its report under the Congres





63


Budget Act, it may wish to consider the following options. First, the
Committee could advise the Budget Committee whether or not, iII
the opinion of the Finance Committee, economic conditions either
warrant or do not warrant offsetting continuation and/or enlargement
of the general tax reductions by equivalent reductions in expenditures.
Second, the Committee could simply recommend that the Budget
Committee determine whether economic conditions warrant suclh an
offsetting expenditure reduction.

SUNDRY EXPIRED PROVISIONS
Certain sundry provisions of the Internal Revenue Code due to
expire as of January 1, 1976, were considered by the Committee in
late 1975 and it was agreed that these provisions should be extended
for 1 year without substantive change so as to permit a more careful
analysis of the provisions in the context of general tax revision. The
provisions involved were 5 year amortization for pollution control
facilities, railroad rolling stock, and rehabilitation housing (coal ine
safety equipment was not extended) ; special rules for moving ex-
penses of military personnel; forgiveness of certain student loans;
extension of the period for amendments to certain charitable trusts;
and depreciation recapture rules on Govern ient-assisted housing
projects.
Additional General Tax Reductions

INDIVIDUAL TAXES
As noted previously, the Administration has recommended that the
expiring amount of individual income tax reductions be extended be-
yond June 30, 1976, and that this extension be accompanied by addi-
tional general tax reductions. Specifically, the Administration has
proposed both an interim plan to cover the last 6 months of 1976
so as to minimize the number of changes in withholding tax tables
and a permanent plan to be effective as of January 1, 1977.
The Administration's interim plan includes an increase in the per-
sonal exemption (for 1976 only) to $875; an increase in the low-in-
come allowance (for 1976 only) to $1,750 for single returns and $2,300
for joint returns; an increase in the maximum standard deduction
(for 1976 only) to $2,100 for single returns and $2,650 for joint re-
turns; and a change in the rate structures (for 1976 only) to achieve
an average between present law and the Administration's plan. The
Administration's permanent plan includes an increase in the personal
exemption from $750 to $1,000, a single standard deduction ($2.,500
for married couples filing jointly and $1,800 for single taxpayers) in
lieu of the existing low income allowance and percentage standard de-





64


duction, and a reduction in individual income tax brackets apphct
to the first $10,000 of taxable income. Enactment of the Adminis
tion's proposals for continued and increased general tax reducti
for individuals would reduce revenues for fiscal year 1977 by $
billion, of which $13.0 billion is attributable to tax reductions in
cess of a simple extension of the expiring individual tax reducti4
Other proposals have been made which have the purpose of L
reducing individual taxes and either simplifying the tax structure
making it more equitable.
One group of proposals involves "indexing" either or all of
following provisions to changes in the Consumer Price Index: sta
ard deduction, personal exemption, and tax rates. It is t
indexing the standard deduction contained in permanent law, index
the personal exemption, and indexing the tax rates would red
revenues in fiscal 1977 by $5.1 billion.
Other proposals involve increasing the standard deduction E
stantially as a technique to achieve a greater degree of simplifical
for many taxpayers. It would be possible, for example, to combir
substantial increase in the low income allowance ($1,700 for si
persons and $2,100 for joint returns) and the percentage stand
deduction (20 percent with a maximum of $5,000 in joint returns
allowing a separate deduction for home mortgage interest and ch
table contributions) with a provision indexing the standard deduct
limitations to the cost-of-living index. Using permanent law as a b
the cost of such a proposal would be $11.3 billion in fiscal year 197'
Other proposals involve seeking to change the impact of mar
status on taxes. One such proposal, which would equalize the
treatment of single persons with married couples, would apply
tax rates applicable to married persons filing joint returns to headi
households and to single persons. This would involve a revenue
in fiscal year 1977 of $4.8 billion. Another proposal would take
converse approach by taxing each return as that of a single t
payer. It is estimated that this would result in a revenue loss
$1.8 billion in the fiscal year 1977.

BUSINESS TAXES
The Administration has proposed a series of business tax re'
tions. The Administration's proposal calls for continuing the pi
reductions in the rates of tax on the first $50,000 of corporate inc
with a maximum tax rate of 47 percent for 1976. Commencing in 1,
the maximum tax rate would be 46 percent. The Administration i
proposed making permanent the existing temporary 10 percent mv
ment tax credit. Other proposals of the Administration are discus
subsequently under "Capital Formation".





65


Other tax changes include a proposal for a partially graduated
corporate tax rate. One such proposal would provide a sch-edule of
combined normal and surtax rates in the first year of 18 1)ercelt on
the first $50,000 of taxable income, 45 percent on taxable icone be-
tween $50,000 and $100,000, 46 percent on income between $1000O
and $500,000, 47 percent on income between $500,000 and $1 million,
and 48 percent over $1 million. In addition, the proposal would reduce
both of the tax brackets over $500,000 by one percentage point in 1978
and a further one percentage point in 1980. The surtax exemption
would increase in four steps to $100,000 in 1979. It is estimated that
such a proposal would reduce corporate revenues in fiscal year" 1977
by $3.0 billion.
Another proposal which the Committee may want to consider is
S. 1119, introduced by a number of members of the Small Business
Committee. This bill makes a series of changes favorable to small
business which include: (1) increasing the first year allowance for
depreciation from $10,000 to $15,000 (from $20,000 to $30,000 in the
case of joint returns), (2) removing the requirement that property eli-
gible for first year allowance must have a usef 1l life of 6 years or
more, (3) removing the $50,000 or $100,000 limitation on used pi-
erty eligible for the investment credit, (4) providing a $5.000 exemip-
tion from corporate tax for all corporate taxpayers, (5) increasing
the corporate surtax exemption from $25,000 (at the moment $50,000)
to $100,000, (6) increasing the minimum accumulated earnings credit
from $100,000 to $150,000, (7) providing for the deduction of orga-
nizational expenses by partnerships ratably over a 5-year period, (8)
permitting small business corporations to file for adjustment of over-
payment of estimated income tax on or before the 15th day of the third
month after the close of the year, (9) providing a graduated invest-
ment credit of 12 percent on qualified investment up to $20.000, 10
percent on additional qualifying investment up to $50,000, and S per-
cent on qualifying investment over $50,000. (However, the investment
credit would be limited to the lesser of $1 million or the tax liability
on the first $25,000 plus 50 percent of the tax liability over $25,000.)
The estimated revenue effect of this bill is $1.5 billion in the fiscal
year 1977.




66


Chart 21

Other bx Revision Prow
(dolle b-,"ior, s)


Tax shelters and
minimum tax
Limitation on artificial losses
Other tax shelter amendments
in House bill
1!se bill afive minimum tax
Minimum tax as alternative to
regularincme tax
Othr tax revision pp s
primaily afring indiduals
House bill increases:
Sick pay exclusion
Business use of homer.
House bill decrees:
C-edit forchikd care expenses
Retireme income credit
Othe proposals:
Index retirement inco- credit
Senate child care proViyion
Extra exem ton for disabled
Ta credit fOr higher education
eduction forsavings for h;ghe
education
Deduction for elementary and
secondary education costs
Repeal deduction for State
gasol ine taxes
Forgiveness of certain stdent loam
less than $0.05 billion


FY1917









Chart 21


Other Tax Revision Proposals-1
TAX SHELTERS AND MINIMUM TAX
Present law seeks to prevent individuals with large economic in-
comes from paying little or no income tax through the imposition of a
10-percent minimum tax on selected items of tax preference. This tax,
which is imposed on individuals and corporations., applies in addition
to any regular income tax to which the taxpayer is subject except the
taxpayer receives a $30,000 exemption and a deduction for the amount
of the regular income tax to which the taxpayer is subject. The House
tax revision bill (H.R. 10612) both makes changes directly aimed at
so-called "tax shelters" and in the minimum tax on tax preferences.
The House tax revision bill includes a so-called "Limitation on Ar-
tificial Losses" (LAL). The basic purpose of LAL, which was first
proposed by the Administration in 1973 and is still supported by the
Administration, is to prevent the use of artificial deductions (i.e.,
those that do not accurately reflect current expenses) to shelter
other unrelated income from tax. Essentially, this is accomplished
by precluding the deduction of such artificial losses for tax pur-
poses except to the extent that these losses are offset in the current
or in subsequent years by related income (i.e., income from either the
same activity that produced the loss or from a similar activity). Sub-
ject to somewhat different technical rules and effective dates, the
House tax revision bill applies LAL to real estate, limited fariiiing
operations (not including livestock operations), oil and gas drilling
for production (but not exploration), sports franchises, and movies.
Enactment of the LAL provisions of the House tax revision bill
would increase revenues for fiscal year 1977 by $401 million.
The House tax revision bill also contains other specific tax sit elt-r
provli;ons. These include recapture rules for real estate and oil and
gas; limiting loss deductions to the amount a taxpayer has "at risk"
in the case of livestock, certain crops, movies, and oil and gas wells;
requiring corporate farms to use accrual accounting procedures; limit-
ing the deduction of interest (including prepaid interest) ; and re-
stricting the use of partnerships for tax shelter operations. Enactment
of these provisions of the House tax revision bill would increase reve-
nues for fiscal year 1977 by $98 million.
The House bill also modifies the existing minimum, tax ol tax
preferences (described above) by increasing the rate of tax to 15 per-


(67)





68


cent. lowering the exemption, eliminating the existing deduction
regular income taxes, and adding two new items of tax prefer
The new items of tax preference are (1) itemized deductions in
of 70 percent (but not more than 100 percent) of adjusted pci
cone, and (2) intangble drilli c on oil and gas wells, other
exploratory wells, in excess of those that could have been dedi
had tHe taxpayer elected to capitalize the intancible costs and d(
them over the life of the well or 10 years. Enmactent of the mini
tax provisions of the House tax revision bill would increase rev(
for fiscal year 1977 by $1.1 billion.
As a substitute for the current minimum tax on tax prefer
which is imposed in addition to the regular income tax, the Adn
ration in 1973 proposed an alternate, rather than additional,,
mum tax known as "M1nium. Taxable Inome" (MTI). lnde
proposal, an individual would compute his income tax both nde
regular method and under MTI and then pay the greater am,
Essentially, MTI would require the taxpayer to increase his adj-
gross income by selected items of tax preference and then to reduz
resulting fig-re by his personal exemptions plus $10,000, The
tax rates are then applied to determine the individual's mini
tax. As modified by the Administration (principally to make
neutral as to the charitable contribution deduction), enactrei
MTI would increase revenues for fiscal year 1977 by $1.1 billion
compared to existing law.
Interest has been expressed in the concept of an Alternitive 1
mviun Tax as a substitute for both LAL, as passed by the House
for the present minimum tax on tax preferences. Such a tax base 4
include taxable income plus specified items of preference. The
could include many of the items taxed under the House bill undE
LAL provision. A separate tax rate schedule could be applied tX
income with the same rate schedule as present law but the appli
rates would be half the regular rates. The taxpayer would pay thi
(in lieu of his regular tax) if it results in a higher tax liability.
expected that such a tax would increase revenues by $1.1 billion.

Other Tax Revision Proposals Primarily Affecting Tndivi
HOUSE BILL INCREASES
The House bill contains a series of provisions which primarily
individuals. Some of these provisions would result in tax iner
The sick pay exlusi on under current law and the specu treat,
military di1abiity payments for future members of the armed ei




69


would be substantially revised. The present sick pay exclusion would
be simplified to provide a maximum annual exclusion of $5,200 ($100
per week) for taxpayers under age 65 who are permanently and totally
disabled. It would no longer be available for temporary sickness. The
revised sick pay exclusion would also be reduced on a dollar-for-dollar
basis by the taxpayer's income (including disability income) in excess
of $15,000. The changes in the tax treatment of military disability pay-
ments would only apply to payments made to members of the armed
services who enlist after September 24, 1975. Veterans' Administration
disability payments would continue to be excluded from gross income.
Future members of the armed services would still be allowed to exclude
military disability retirement payments from their gross income if
the payments were related to "combat injuries". It is estimated that
these changes will result in an increase in revenues for fiscal year 1977
of $331 million. When fully effective, the provision would increase
revenues by $450 million.
The deduction for expenses attributable to the business use of a home
would be substantially limited. Under the House proposal, this deduc-
tion would be permitted only where a home is used exclusively on a
regular basis as the taxpayer's principal place of business or a place of
business used for patients, clients, or customers in meeting or dealing
with the taxpayer in the normal course of business. In the case of an
employee's business use of a home, such use must be for the convenience
of the employer. The deductions attributable to the rental of vacation
homes would also be restricted. If a vacation home were to be used by a
taxpayer for personal purposes for more than 2 weeks or 5 percent of
the time the property is actually rented, the deductions attributable to
this property would be limited. It is estimated that these provisions will
result in an increase in revenues of $186 million for fiscal year 1977 and
will reach $313 million annually when fully effective. Other provisions
of the House bill increasing revenues include a limitation on deductions
allowable for the expenses of taxpayers attending conventions outside
the United States, its possessions, and the Trust Territory of the Pa-
cific. These deductions would be allowed for not more than two foreign
conventions per year. If less than one-half of the total days of a for-
eign trip are devoted to business-related activities, no deduction would
be allowed for that portion of transportation expenses. It is estimated
that this provision will result in an increase in revenues of less than $5
million per year.
HOUSE BILL DECREASES
The House bill also contains a number of provisions which provide
for tax decreases. In lieu of the present itemized deduction for house-
hold and dependent care expenses, the House would provide for a tax





70


credit equal to 20 percent of the employment-related ex ii
for the care of a child under age 15 or an incapacitated adu
amount of employment-related expenses which may be taken i
count would be limited to $2,000 for one dependent and $4,000
or more dependents. The credit would be extended to married
where the husband or wife or both work part time. The cril
also be available to married couples where one spouse is a ft
student and the other spouse works. The credit would also be e3
to a divorced or separated parent who has custody of the ci
though the parent may not be entitled to a dependency exempt
the child. Finally, payments for services rendered by certain i
uals who may be related to the taxpayer would be eligible for th
if the related individual is not a resident of the same househol
taxpayer and if the related individual is not a dependent of t
payer or his spouse. It is estimated that this provision will redu
eral revenues by $330 million for fiscal year 1977, and by $483
when fully effective.
The present retirement income credit would be restructured a
verted to a tax credit for the elderly, available to all taxpayers
or over regardless of whether they have retirement income or
income. The maximum amount on which the credit would be coi
would be increased to $2,500 for single persons age 65 or over,
$3,750 for married couples filing joint returns where both spot
age 65 or over. (Under present law the maximum amount on -
credit is computed in the case of single persons is $1,524; a
couple, $2,286 in the case of one "retirement income" recipie
$3,048 in the case of two retirement income recipients.) This
credit would be phased out by $1 for each $2 of adjusted gros
above $7,500 for single persons and $10,000 for married couph
estimated that this provision would result in a reduction in revs
approximately $340 million annually.
Other provisions of the House bill reducing revenues
changing the deduction for alimony payment8 to a deductia
gross income in arriving at adjusted gross income. This revision
permit taxpayers who elect the standard deduction as well asthx
itemize their deductions, to benefit from this deduction. It is est
that this change will result in a reduction' of revenues of $41
for fiscal year 1977 and $59 million when fully effective. The de
for moving expenses would also be modified. The maximum de(
for premove house-hunting and temporary living expenses at t
job location would be increased from $1,000 to $1,500. The ma
deduction for qualified expenses incurred in connection with ti
purchase, or lease of a residence would be increased from $2





71


$3,000. The mileage limitation which presently requires a taxpayer s
new principal place of employment to be at least 50 miles farther from
his former residence than his former principal place of employment
would be reduced to 35 miles. Also, the requirement that members of
the Armed Forces include in income any moving expenses for wliih
they are provided as in-kind services by the departmentt of Defense
or the Department of Transportation would be eliminated for re-
quired moves incident to permanent changes of station.
Members of the Armed Forces would be exempted from the mileage
limitation and from the "39-week rule" requiring taxpayers to be full-
time employees in their new location for at least three-quarters of the
following year, i.e., 39 weeks during the next 12-month period. This
proposed change would result in an estimated reduction in revenues of
$43 million for fiscal year 1977 and $62 million when fully effective.
In addition to the changes contained in the House-passed bill, several
major changes have been proposed in the Senate. One such proposal
would increase the maximum amount on which the retirement incoaw
credit is computed annually for inflation. This maximum amount
would be increased in accordance with increases in the Consumer
Price Index. This provision would result in a reduction in Federal
revenues for fiscal year 1977 of $275 million.
The deduction for child care expenses could be converted froii) an
itemized deduction to a deduction from gross income in arriving at
adjusted gross income. This would permit taxpayers who elect the
standard deduction as well as those who itemize their deductions to
deduct child care expenses. The Senate approved such a change as an
amendment to the Tax Reduction Act of 1975. This change would
reduce Federal revenues by $1 billion for fiscal year 1977.
As an amendment to the Revenue Act of 1971, the Senate added a
provision allowing an additional personal exemption for disabled pe-
8ons. A number of bills have subsequently been introduced to provide
such tax relief. Adoption of this provision would reduce Federal
revenues by $522 million for fiscal year 1977.
The Senate approved, as part of the Revenue Act of 1971, a pro-
vision to allow a tax credit for the expenses of higher educatin (in-
cluding business, technical, or vocational education). Numerous bills
and amendments have been introduced since that time to provide this
kind of tax relief. It is estimated that a tax credit for this purpose
would reduce Federal revenues by approximately $2.1 billion for
fiscal year 1977.
There is a proposal for a tax credit of 20 percent of the amounts
deposited in an educational savings plan for postsecondary eduatWon
for himself or a dependent. The credit would not apply to deposits





72


excess of $25in an eligible account in anyyear orfor at
dependent who currently would be enrolled in an eligible r
ary education institution. It has been estimated that this pro
reuce revenues by $1.55 billion in fiscal year 1977 and $1
when fully effective.
Legislation has been introduced in the Senate to author
tion for the costs incurred in providing a dependent with o
awl 8econdar?" eckool trabii. The cost of such a proiis'
mated to be $2.1 billion for fiscal year 1977.
The present dedwetion for State g8oline taaea, which is a
persons who itemize deductions, could be repealed. The elm
this provision would increase Federal revenues for fiscal ye
approximately $538 million.
If student loas are forgiven when the student, after p
performs some specified conditions (such as taking a te:
in the State where the school is located) this forgiveness i
treated as taxable income. The forgiveness of the loan in
could be excluded from taxable income. The effect on reve:
fiscal year 1977 it is estimated would be $10 million.







74


Chartf22

Oterbx Revision WosaIs
(dollars in billion)


Tax treatment of
reign income
House bill:
Reduction in DISC
*Other provisions
Ote ropoIs:
Taxation of torignsource
shipping income
Elimination of tax deferml
Rwaw& lapr~wii6n
y nt !'ion
Exclude inve nts by
-n-eigners fm U.S ya


Adiinistmton
ctionfori


*Ta *I ir ..A..A -A of individual and
corporate tes
Employee sbo*,csk p ts
Net operating loss carrybck
Refunable inv bnetax credit
Uided deduction for ntr on uvftp
Evdusion of rnwestd dividnds
auction for dividends on
rrred stock
Eiiminate 20% depreciation
variance (ADR)
*les than $0.05 billion


a


rnt


+CA

+0.1
+0.4
+.6
-0.1


-03
-0.3
"-.8

-02
-'1.6
-QZ
-2.0
-:35
-0.1
+0.8










Chart 22


Other Tax Revision Proposals--2

Tax Treatment of Foreign Income
The taxation of U.S. companies operating abroad and U.S. citizens
residing abroad would be changed in several ways under the House
bill. Several of the changes proposed would result in tax increases.
The major increases would occur with respect to the areas described
below.
HOUSE BILL
Domestic Intermational Sales Corporatian (DISC) treatment would
be eliminated for products sold for use as military equipment and for
agricultural products not in surplus in the United States. In addition,
DISC benefits would be available only for increases in exports over a
base period. The base period method of computation would be required
for taxable years beginning after December 31, 1975. Such a base
period computation would involve a moving base period. From 1976
through 1980, the base period would be taxable years 1972, 1973, 1974.
Beginning in 1981, the base period would move 1 year forward each
year. Companies whose total DISC benefits are less than $100,000 per
year would not be subject to the new base period method of computa-
tion and would be permitted to calculate their DISC benefits as under
present law. It is estimated that this provision will result in an increase
in revenues for fiscal year 1977 of $391 million and $551 million when
this change is fully effective.
The $20,000 exclusion (or in certain instances $25,000) for income
earned abroad by U.S. citizens living or residing abroad would under
the House bill be phased out over a 4-year period by lowering the ex-
clusion by $5,000 (or $6,250) each year. Where the full exclusion is not
available, a deduction of up to $1,200 would be provided for elementary
and secondary school expenses of dependents of U.S.-taxpayers em-
ployed outside the United States. Also, an exclusion from gross in-
come would be provided for amounts paid for municipal-type services
furnished in a foreign country by an employer on a nondiscriminatory
basis. Present law would also be modified to permit a foreign tax credit
to be claimed by individuals who use the standard deduction. This pro-
vision would result in an increase of Federal revenues of $8 million for
fiscal year 1977 and $48 million when fully effective.
(75)





76


Another change in the House bill would repeal the "per -o
limitation on the foreign ta credit for taxable years ending af
cember 31, 1975. Thus, taxpayers would be required to cmput
limitation of the amount of foreign tax which can be used to r
U.S. tax under the overall limitation. The effect of this provisi
to require losses from any foreign country first to reduce iome
other foreign countries in calculating the foreign tax credit i
tion. This will reduce the amount of foreign taxes which ca
used as a credit against U.S. tax. It is estimated that this ch
increase revenues by approximately $5 million for fiscal year
which will increase to $5 million when fully effective.
Dividends received by U.S. shareholders from Zes-demloped
try corporationswould be required to be "grossed-up" by the an
of taxes paid to less developed countries for the purpose of comp
the foreign tax credit and related foreign source taxable ini
Under existing law, which does not provide for a "gross-up" i
case of less developed countries, a U.S. corporation can n
dividends from a foreign subsidiary and where the rate of foreign
is one-half the U.S. rate (or 24 percent) and in such a case the i
mum tax on such dividend income would be 42.2 percent asop,
to the maximum U.S. statutory rate of 48 percent. It is estimate
this provision will increase revenues by $8 million for fiscal year
and by $55 million when fully effective.
The provision in present law which permits a 14 percentage
lower tax rate for Western Hemisphere Trade Corporationsa-
be phased out over a 5-year period. Elimination of the special'
tax rate for Western Hemisphere trade corporations would in
Federal revenues by $15 million for fiscal year 1977, and by $50 m
when fully effective.
OTHER PROPOSALS
Presently, most countries do not tax domestic shipping and thi
reciprocal exemptions do not tax shipping of most other natioi
addition, questions have arisen as to whether income derived o
high seas is income from any particular country. Considerat
being given by some to attributing one-half the shipping itwo
the exporting country and one-half to the importing country an(
ing that portion of the income in each country. A proposal o
type would raise revenue of $140 million in the fiscal year 19T
approximately the same amount thereafter.
The income of foreign corporations controlled by U.S. corpor
or citizens is generally not subject to U.S. tax until that inco
repatriated. This is commonly known as tax deferral. There al
are exceptions to this general aspect of the tax laws that have
adopted to avoid certain abuses in tax haven countries. These c






tions were expanded in the Tax Reduction Act of 1975. If the general
treatment of controlled foreign corporations were changed so that the
income of a controlled foreign corporation were required to be taken
into account currently for the purposes of U.S. taxation, it is estimated
that corporate liabilities would be increased by approximately $120
million for fiscal year 1977 and $365 million annually thereafter.
The Administration has proposed a runaway plant provb.on deny-
ing tax deferral treatment in the case of income earned by foreign
subsidiaries of U.S. companies in foreign countries where a foreign
country has made a concession from its general tax rate for that par-
ticular type of income. In addition, the Administration proposed deny-
ing tax deferral to foreign subsidiaries of U.S. corporations where a
large portion of the income produced by the company is attributable
to products shipped to the United States. It is estimated that these
two provisions would raise $29 million in fiscal year 1977 and some-
what lesser amounts thereafter.
It has been proposed that the provision which permits Domestic
International Sales Corporations to defer the reporting of certain in-
come be repealed. Total elimination of the DISC provisions would
result in an increase in revenues for fiscal year 1977 of $1.6 billion.
It has been proposed that the present 30 percent withholding tax on
dividends and interest received on investments made within the United
States by foreign persons be repealed. The exemption for interest
and dividends would not apply to direct investments by foreigners, i.e.,
those corporate investments in which foreigners control more than
50 percent of the U.S. corporation, but would apply only in the case of
foreign recipients of interest and dividends with stockholdings of
10 percent or more. It is estimated that this provision would reduce
Federal revenues by approximately $55 million for fiscal year 1977,
and $145 million when fully effective.

Capital Formation
ADMINISTRATION PROPOSALS
The Administration has proposed an incentive for broader stock
ownership plans. These plans would permit deferral of tax for funds
invested in stock purchase plans established by employers or directly
by individuals. A limit would be imposed on the maximum annual con-
tribution, and this maximum would be phased out at higher income
levels. Funds invested through this medium would have to remain
invested for at least 7 years and would be subject to tax at the time of
withdrawal. It is estimated that adoption of this provision would re-
duce Federal revenues by approximately $300 million for fiscal year
1977, rising to $671 million by 1981.


66-407-76----6





78


It hu ben proposed in connection with the Financial
Act that a new mortgage Mveetment ta credit be
credit would be equal to a percentage of the interest income reive
residential mortgas. The tax credit would range from 1.5
3.8 percent, depending on the fraction of the institution's
in the form of residential mortgages. Individuals holding
mortgages would be eligible for the credit at the 1.5 percent rate. U
this proposal the current tax provisions permitting financial in
tions to maintain excess bad debt reserves would be phased out.
estimated that the combined effect of these proposals would be t
duce Federal revenues by $264 million in fiscal year 1977 and thi
duction can be expected to reach $913 million by 1981.
To promote construction of electric utility facilities the Adm
tration has proposed tax relief for electric utilities. A pe
crease in the investment tax credit from 10 percent to 12 percent
the allowance of a current investment tax credit on p payn
made during the course of construction of these facilities
provided. Also, the 5-year amortization provision for pollution
trol facilities would be extended. Utilities would be permitted to
to begin depreciation of accumulated construction p expf
tures during the construction period. Finally, shareholders woul
permitted to defer the tax on dividends paid by utilities where
elect to have those dividends reinvested in additional common E
rather than receiving those dividends in cash currently. It is
mated that these changes would reduce corporate income tax rec
by $773 million during fiscal year 1977.
Integration of the corporate and individual income taxe is desi
to eliminate (in whole or in part) "double taxation." Taxation C
corporate-source income at the shareholders' tax rate is refer
as complete integration, and elimination of the double tax oni
dividend income is referred to as partial integration. Partial inb
tion can be achieved by either a dividend deduction at the corpi
level, or by treating the corporate tax as a withholding of th
payable on the dividend income by the individual shareholder, (
plete integration treats the entire corporate income as received b:
individual and the corporate tax as a withholding of the tax dt
the individual. Tentative revenue estimates show that full integn
would reduce revenues by $18 billion and partial integration by
billion.
Firms establishing permanent ESOP's would get an extra
percentage points of investment credit (i.e., a 12-percent invest]
credit instead of a 10-percent credit). At the end of the second
(after the plan is established) the employer would put one percez





79


point of the extra investment credit into the ESOP (plus interest).
The second extra one percentage point of the investment credit, plus
interest, would be put into the plan at the end of the third year.
The employer would contribute an additional amount of his own
funds equal to one percentage point of the investment credit phis
interest to the ESOP at the end of the fourth year and again at the
end of the fifth year. These contributions representing the employers
own funds, would be tax deductible.
The ESOP would have to be permanent and consist of the employ-
er's common stock with voting and dividend rights at least as favor-
able as the employer's other common stock. The investments could
start with convertible debentures or convertible preferred stock but
must be converted to common stock when released from the lender's
lien. All employees would be covered except when a union's member-
ship votes to reject the plan.
These changes would reduce Federal revenues by $178 million in
fiscal 1977 and by $256 million when the full effect of these changes
are realized.
The Senate Finance Committee included in the Tax Reduction
Act of 1975 (H.R. 2166) a provision which generally would have
allowed business taxpayers, both individuals and corporations, to elect
to convert carryover periods to which they are entitled under the net
operating loss provisions in present law into carrvback periods. For
example, a taxpayer now subject to the general rule could have elected
to use an 8-year carryback period (3-year carryback under present
law and an additional 5-year carryback under the new provision) with
no carryover period. This election was to be applicable to net operat-
ing losses for taxable years ending after January 1, 1970. The revenue
loss is estimated at $1.6 billion for fiscal year 1977 and $400 million
thereafter.
A refundable investment credit has been recommended for business
firms that may lose unused credits at the end of the carryforward
period. This problem occurs where the size of the investment credit
has been too high relative to the company's taxable income to be used
up within the statutory period. Enactment of this proposal would
reduce revenues by $150 million in fiscal year 1977 and by $500 million
annually in the future.
A proposal for the deduction of interest on savings has been
put forward to encourage individuals to increase their savings. It
would allow a taxpayer to deduct from gross income up to $1,000
(for joint returns-$500 for singles) of interest and dividends earned
on personal savings deposits. For this proposal, the savings deposits
may be in a commercial bank or mutual savings bank, a savings (or





80


building) and loan association or a crdit union insured by a Fe
or State insurance corporation. The revenue loss under this pro
would be $2 billion in fiscal yen' 1977.
Another type of incentive which has ben put forward is a lit
exclusion for dividends reinvested in common stock. Under tis
posal an individual could exclude dividends equal up to 25 pere
taxable income where such dividends were reinvested, a
utilization of this provision, Federal revenues would be reduce
$1.9 billion for fiscal year 1977 and by $2.9 billion when the prov
is fully effective. Assuming a 90% utilization, the revenue loss v
be $3.5 billion in fiscal year 1977 and $5.1 billion when the ponsi
fully effective.
A deduction for dividends paid on preferred stock by corpora
has also been proposed. This provision would reduce Federal rev(
by $103 million for fiscal year 1977 and $590 million when
effective.
Under the Asset Depreciation Range (ADR), a taxpayer
select a useful life for depreciation purposes that is as much
percent shorter than the guideline lives for a class of aets. A
posal has been made to repeal the provision that permits an ek
to shorten the guideline lives by 20 percent. This proposalV
increase revenues by $800 million in fiscal year 1977 and by $2.5 b
a year when fully effective.







82


Chart 23


OtherTax Revision roposals-
(dollars in billions)


Capitaains and l
*incr e in holding period
#Increase in capita offset
against ordinary income
Capital loss caryback brindiduals
Sliding scale tax mt
Elimination of capital gains for coal,
iron ore and timber
Exclusion of reinveted capfal gains


Exempt organizations
Houe bill:
#Tax-free rollover to IRA on plan
terminations
Use of an IRA where limited
plans are provided
Establishment of IRA forsose
Decrease in foundation payout
requirement
Reduction in foundation tax to 2%
Filer Commission recommendations


FY1977

-0.2

415towZO
+0.3
-0.6


-0.1
-O.4
"0.1


-6.3


* Iess than 0.0,5 bilI ion


4










Chart 23


Other Tax Revision Proposals-3
CAPITAL GAINS AND LOSSES
Two major changes regarding the taxation of capital gains and
losses have been included in the House bill.
The holding period for long-term capital f/a;s laid losses would L)e
increased from 6 months, under present law, to I year. The increase
would be phased in over a 3-year period by increasing the 6-month
holding period to 8 months for taxable years beginning in 1976, to 10
months for taxable years beginning in 1977, and to 1 year for tax-
able years beginning after 1977. It is estimated that this provision will
increase revenues by $137 million for fiscal year 1977 and by $407
million when fully effective.
The amount of ordinary income against which a capital loss may be
deducted would be increased from $1,000 to $2,000 for taxable years
beginning in 1976 to $3,000 for taxable years beginning in 1977 and to
$4,000 for taxable years beginning after 1977. It is estimated that this
provision will result in a decrease in revenues of $154 million for fiscal
year 1977, and $339 million when fully effective.
OTHER PROPOSALS
In addition to these changes in the taxation of capital gains and
losses, a number of other proposals have been advanced.
Individuals with capital losses of $30,000 or more in any taxable
year could be provided an option of electing a 3-year carryback of
capital losses against capital gains (but not against ordinary income).
Individuals who utilize the carryback option would have to recompute
their regular tax for the prior years to which the losses are carried
back. It is estimated that this provision would result in a decrease
revenues of $30 million for fiscal year 1977.
In the case of capital assets held for extended periods of time (i.e.,
more than 5 years) it has been proposed that the amount of capital
gains tax imposed be reduced according to a sliding scale. This would
be accomplished by increasing the amount of capital gain excluded,
from 50 percent under present law, up to a maximum of 80 percent, by
increasing the amount of gain excluded at the rate of 2 percent per
year. In addition, it has been proposed that instead of increasing the
amount of gain excluded from taxable income, another method for


(83)





814


reducing capital gains tax on assets held for long periods o
would be to increase annually the adjusted basis of capital &
account for increases in value based on inflation. It is
Federal revenues would be reduced by $1.542.0 billion for fisi
1977 where the amount of tain that is excluded is gradually in
to 80 percent.
Under present law capital gains treatment is provided for rc
received from the sale of coal and iron ore. In addition, capita
treatment is provided with respect to the sale of certain timbe
estimated that the repeal of the capital gains treatment for rc
on coal and iron ore and repeal of capital gains treatment in f
of certain sales of timber would increase Federal revenues b
million for fiscal year 1977 and by $415 million by 1981.
A limited exclusion for reinvested capital gai, has also be
posed. Under present law, taxpayers who realize capital gaii
erally pay tax with respect to such gains in the year of realiza-
has been proposed that the first $1,000 of realized net capita
($2,000 in the case of joint returns) be excluded from income
year of realization, but only if and to the extent an equivalent i
is invested in stock or securities of a domestic corporation wit
same taxable year. Any gain deferred would be taken into ace
computing the tax basis of the stock or securities purchased
taxpayer. Assuming a 50% utilization of this provision, rc
would be reduced by $351 million in fiscal year 1977; assuming
utilization, revenues would be reduced by $632 million in fise
1977.
EXEMPT ORGANIZATIONS
The House bill includes a provision to correct an oversight
Employee Retirement Income Security Act of 1974. This chat
mits individual employees to receive lump sum contribution
within one taxable year on account of the termination of a 1
etc. plan or the complete discontinuance of contributions un
plan, and to reinvest those funds in an Individual Retiremi
count. This treatment is commonly referred to as a tax-free i
of such funds. It is estimated that enactment of this provision
reduce Federal revenues by $52 million for fiscal year 1977.
The House bill provides that employees who are active parti
in qualified pension, profit-sharing, stock bonus, or annuity ph
are to be allowed a deduction for their contributions to what
ferred to as "limited employee retirement accounts" (LERA'
deduction allowed in this case is limited to the lesser of $1,500 o
cent of compensation reduced by "qualifying employer contrib.




85


under any qualified plans or 403(b) annuity contracts covering such
employees. A number of additional rules awl i N0111( be
applicable to these special plans. It is estimated tlat tlis !'o-'iso
will result in a decrease in revenues of $3(1 mi 1 million for fi -- :1 I Ier 1977.
Legislation has been proposed to permit a person to (esabiish and
contribute to an individual retirenm(fnt accoutr (IRA) for, oi Is,/ (-.
Under present law, employee, not covered by a qualified pension
plan may establish an IRA and take a tax deduction of 15 percent
of earned income (up to $1,500 per year) for contributions to tile
IRA. Married women performing household work but not otherwise
employed may not set up an IRA for their retirement. Permitting a
worker to establish an IRA for his or her spouse would de1esre-
nues by $127 million in fiscal year 1977.
Legislation has been proposed to reduce the (listribution require-
ments now imposed upon grant-making private fo. ndutioiws. Under
present law, private foundations are generally required to distribute
annually for charitable purposes an amount equal to the greater of
their actual income or a specified percentage of the value of their in-
vestment assets. The specified percentage was originally set at 6 per-
cent and the Treasury was given the authority to vary that percentage
from year to year in accordance with changes in money rates and in-
vestment yields. Enactment of legislation to reduce the specified per-
centage to 5 percent and eliminate the authority of the Treasury to
vary the specified percentage is supported by the Administration and
would not reduce revenues.
Legislation has also been proposed to reduce the rate of tax on
private foundation investment income from 4 percent to 2 percent.
Enactment of such legislation would reduce revenues by $35 million
in fiscal year 1977.
The Report of the Commission on Private Philanthropy and Public
Needs (the so-called "Filer Commission") contains a series of rec-
ommended changes in the tax laws applicable to the deduction for
charitable contributions and to exempt organizations. Two of these
recommendations would have a substantial revenue impact if enacted.
The first of these two recommendations would permit taxpayers who
utilize the standard deduction to deduct charitable contributions as an
additional itemized deduction (revenue loss $2.9 billion). The second
recommendation would permit families with less than $15,000 in in-
come to deduct an amount equal to 200 percent of their charitable con-
tributions and would permit families with income between $15,000
and $30,000 to deduct an amount equal to 150 percent of their charita-
ble contributions (revenue loss $6.6 billion).




86


Chart 24


OerTax Revision NoaIs -
(dollars in billions)
te a nd gifttaes F
Increase exemption to$I0/0O0 -1.0
AdminiStrat on o -22
for farms and small *uiww
Valuing prioertyonbis ofuse *
Integrte ;este and gift twzs -0.1
Max gen eationskippil trusts 0.1
increase marital deduction -0.4
Tcaptalainsatdeath
Ss atde6 +06
Excise taxes
R I tax on trucktruck parts .7
Increase tax onalcoholic bevero+ 1.5
Increase tax on cigarettes + 1.4
Miscellaneous tax revision
proposals
Tax t ent of d isti butions *
by bank holding companies
Sub:)idizd taxaIc option for .O
Statenimunl sabonds
Incresi allowable industrial -00
revenue b vd el to $t0 million
Revision of treatment of certain
disaster paymen~s -
Employment tax credit -0.4
Special rules for deprese areas -0.3


*It" than$0.05 billion










Chart 24


Other Tax Revision Proposals-4
ESTATE AND GIFT TAXES
The House tax revision bill would make no changes in the Federal
estate and gift tax provisions of existing law. However, nulnero's
revisions have been proposed, including those suniimarized below.
A number of proposals to increase the present $'(;0.000 excmp/;oa
have been introduced.
Fiscal year 1977 reduction in Federal revenues
Increasing $60,000 exemption to: Billions
$100,0 -----------------------------------------------------$1.0
$150,000 -----------------------------------------------------$1. 7
$200,000 -----------------------------------------------------$2. 2
Others have suggested that any liberalization from the taxpayer's
standpoint be provided in the form of a tax credit rather than an in-
crease in the exemption. For example, a tax credit of $27,000 would
cost approximately the same revenue as increasing the present $60,000
exemption to $100,000 (namely, $1 billion). A tax credit of $37,500
would involve approximately the same revenue as increasing the pres-
ent $60,000 exemption to $200,000 (namely $2.2 billion).
The Administration has proposed to ease the burden of estate and
gift taxes on farm and other small businesses. It is estimated that
this provision, which is expected to expand the number of estates
eligible for the deferred payment of estate taxes will result in a reduc-
tion in receipts of approximately $3 million for fiscal year 1977 and
$16 million by 1981.
Another change in the Federal estate tax laws which has been sug-
gested is to alter the method of valuing property included in the gross
estate of the decedent. Under this proposal land and similar property
would be included in the gross estate at its value based on current use,
which is generally lower than the fair market value of such property.
It is estimated that this provision would reduce estate tax revenues
by $20 million.
(87)





88


.A.nother proposal which has been recommended by the T
Department in the past and also by the American Law Institute i
provide for the integration of the estate and gift taxes. At the pi
time, there is a $30,000 exemption under the gift tax (in addit
the $3,000 exclusion per donee) which is wholly separate and
from the $60,0 exemption under the estate tax. Moreover, th,
tax rate structure is completely independent of the estate ta3
structure although not independent of subsequent if ts. In other v
to the extent of prior gifts an additional gift is subject to tai
higher rate bracket. The proposals to integrate the estate and gift
could provide a single exemption (perhaps ,90,000) which cot
used either for gift or estate purposes or a combination of th
Similarly, there would be a single cumulative rate structure f
two taxes with gifts previously made affecting not only the bi
at which the subsequent estate is taxed as well. It has been esti
that an integrated system of the type referred to above would
in a revenue loss of $59 million in fiscal year 1977 and a gain ol
million when fully effective.
At the present time, generation skipping trusts make it
avoid the imposition of an estate tax by leaving a life estate or in
in a property to a son but providing that the property will go
simple to the grandson upon the death of the son. Various
methods have also been used to avoid the imposition of the one or
estate taxes in the case of property going through a trust or thro
life estate. Some have recommended that the estate tax laws be
fled to impose an estate tax at the time of the termination of ti
estate or life interest in the same manner as if it were a part i
estate of such individual. It is estimated that such a system, if adi
would result in a revenue gain of $118 million in the fiscal yea]
and $251 million when fully implemented.
Under present law a deduction is provided for an estate where
erty passes to a surviving spouse. This deduction is equal to a
mum of 50 percent of the adjusted gross estate. It has been pro
that the marital deduction be increased to $100,000 plus 50 perc
the adjusted gross estate. It is estimated that this provision'
result in a reduction in estate tax revenues of $400 million in
year 1977.
It has also been suggested that no Federal estate tax be i
where the property of one spouse is transferred on death to a sa
ing spouse. This proposal would be implemented by providing a
tal deduction equal to 100 percent of the adjusted gross estate
estimated that this provision would reduce estate tax revenue
$700 million in fiscal year 1977.




89


Under existing law, individuals may hold assets wh1ichi have app,'e-
ciated or depreciated in value over time at their death. A- ho -e
are passed to an heir or other beneficiary, the new liolder of those
assets assumes as his basis for those assets the market value of tlio
property as of the date the estate is valued for Federal estate tax pur-
poses. Thus under present law no gain or loss is taken into account as
income during the last year of the decedent's life. It has been proposed
that the gains which have accrued during the decedent*s lifetiniv should
be taxed at the time of his death. While the imp(ositioit of a of/);/U
gais tax /VkLe the obe i present law at dilbh would likely co ntain a
series of transitional rules, the full effect of such changi-e, although h
reached gradually, would ultimately increase Federal estate lax riv-
enues by $1.0 billion.
Under another proposal an individual who inherits property from a
decedent would take the same basis (or "carry over" the basis) in that
property as that of the decedent. As indicated above, under present law
the basis which is taken by the person inheriting property is the value
of the property as of the date the estate is valued. Under this pro-
posed change, estate tax revenues would be increased by $6'V0 million
in fiscal year 1977.
EXCISE TAXES
During consideration of H.R. 2166, the Tax Reduction Act of 1975
and H.R. 6860, the Energy Conservation and Conversion Act, the
Finance Committee agreed to repeal the Federal excise taxes on trucks,
buses, and truck parts. Repeal of the excise tax on trucks and buses, etc.
would reduce receipts for the highway trust fund by $741 million for
fiscal year 1977.
During consideration of the Tax Reduction Act of 1975, an amend-
ment was offered which would have increased the excise taxes on ds-
tilled spirits, beer, and wines. It is estimated that these proposed
changes would increase excise tax receipts by approximately $1.5 bil-
lion for fiscal year 1977.
Under another proposal the manufacturers excise tax on cigarettes
would be increased by $2.50 per thousand. This would increase excise
tax receipts by approximately $1.35 billion in fiscal year 1977.

MISCELLANEOUS TAX REVISION PROPOSALS
In 1974, in connection with its consideration of a major bill, the Ways
and Means Committee agreed to a provision dealing with the income
tax treatment of divestitures of either bank or nonbank assets by bank
holding companies required under the Bank Holding Company Act
Amendments of 1970. Under this proposed change, three alternative
methods were proposed in order to provide tax relief to individuals





90


and corporations making such divestitures. These methods in l
the distribution of stock of the bank or nonbank corporation t
holders of the bank holding company on a tax-ree basis. In addi
a "roll-over" was proposed. This would allow the tax on gain fro
sale pursuant to a required divestiture to be deferred if the prce
sale were reinvested in qualified replacement property. The t
method provided was an installment payment provision for tax
on bank holding company divestitures. Under this alternative thi
on the gain realized from such sales would be paid in equal an
installments over a period beginning in the year after the dispose
and ending no later than 1985. It is estimated that these provi
would reduce Federal revenues by $20 million for fiscal year 1972
$100 million by 1981.
In order to expand the opportunities available to State and
governments for financing capital projects, a proposal for an opt,
taxable bond qith a Federal 8UbSidy for higher interests costs has
advanced. The subsidy level varies between 30 and 50 percent ii
several proposals; in the Kennedy-Reuss bill, the proposed sul
level is 40 percent. Issue of this type of bond would be at the opti(
the local government, and the tax-exempt bond privilege would rei
intact. With a 40-percent subsidy the net revenue loss would be
million in fiscal year 1977 and $335 million after 5 years.
Several proposals have been made to raise the limit on small i
of indstria deveopment bonds from $1 million under present la
$10 million. The revenue loss is estimated at $50 million in fiscal
1977 and $240 million after a several year interval for adjustmei
plans to the new level.
In the tax revision bill passed by the House, adjustments
adopted in the provisions affecting payments for crop destntction
d;sasters. When the taxpayer has received payments under the A.
culture and Consumer Protection Act, lie would be allowed to ci
whether to include the payments in income in the year the payme
received or in the year income from the crops normally would]
been received. In addition, where a taxpayer has received compensate
for a loss that is the result of a disaster in 1972, in an area design
by the President as a disaster relief area, the tax on the first $5,0(
compensation is not to exceed the tax that would have been, paid
$5,000 deduction had not been claimed. The revenue loss under t
provisions would be $57 million in fiscal year 1977.
A number of proposals have been put forward as tax inceive4
tbe employment of addtional workers in the private sector. Tnde
such proposal (S. 2382) a tax credit equal to 14.9 percent of coy'
annual wages (i.e., the 11.7 percent of wages paid as social securi-







medicare taxes and 3.2 percent of wages paid as uneili)loymnent com-
pensation taxes) would be provided to employers with respect to a
maximum of seven new positions added annually and filled by uie-
ployed persons or new entrants into the job market. It is estimated that
this proposal would reduce Federal revenues by -'s7 millhon III
fiscal year 1977 and S,.90) billion after 5 years. Another measure
which has been introduced (S. 2629) would provide for a 10 per-
cent tax credit up to a inaxniimin of $8()I )er (lalifying employee.
The number of employees qualifying for the $S(00 credit would he
limited to the lesser of the number of unemployed workers and nlew
entrants into the labor force hired during the year, or the net, ueelcas('
in the firm's employees in excess of the firn's average eiq)loyilje('nt over
its base period employment. In addition, the dollar value of tle tax
credit could not exceed that coml)any's investment in new plant and
equipment. It is estimated that this provision would reduce Federal
revenues by approximately $320 million in fiscal year 1977.
To stimulate additional jobs in areas of particularly high unemploy-
ment (7 percent or more), the President has proposed tax incentives to
encourage construction of new facilities and/or expansion of old facili-
ties in such areas. These incentives would include a full investment tax
credit, and very rapid amortization (one half the normal useful life
for buildings and five years on all capital equipment). These provisions
would be limited to projects started between January 20, 1976, and Jan-
uary 20, 1977, and which were completed within 36 months. These in-
centives would reduce Federal revenues by $286 million in fiscal year
1977 and by $1.0 billion in fiscal year 1981.




92


Chart 25

Energybx Proposals
ollarsin billions) FYlgr,
&W* conser,3ton measures $3
Home insulaion tax credit
Business insulation tax credit -0.I
Paper recycling tax cred it*
ReaI excisetax on radial tires -0.1
Tax on buses use of oil and gas +02
Energy supply measures
Tax credit for home solar energy
Tax credit for business solar a d
geothermal energy
Investment credit for synthetic
fuel development
Geothermal energy exploration
incentives
Oil and gas exploration incentives -0.8
12% investment credit for fuel
source development
Othe eergy measures
IZ% investment credit for certain
milroad equipment and facilities


*-less than $0.05 bi'lIion










Chart 25


Energy Tax Proposals

ENERGY CONSERVATION MEASURES
The estimates for energy conservation measures shownt are dlriV,'(
from provisions tentatively approved by, or unde r cons ide ration by.
the Finance Committee in its deliberations on the Energy Conserva-
tion and Conversion Act (H.R. 6860). The estimates asurcu an ena-
ment date of July 1, 1976. an immediate effective date for (xclue tUx{".
and a Jan-ary 1 effeefive date foi, tax ,itl.
The home insulation tax credit would provide a refl(able f-i-
credit of 30 percent of the first $750 of expenditures for insulhtoof
a principal residence (maximum credit of $225). The revemle
would be $320 million in fiscal year 1977.
The investment tax credit of 10 percent for insulation installed in
new and existing business and industrial structures w ould reduce rev-
enues by $143 million in fiscal year 1977.
During its markup sessions on the energy tax bill (H.R. 6860) last
July, the Committee approved a tax credit of 10 percent on the price
paid by a recycler on the purchase price of wastepaper to be recycled.
This provision would reduce revenues by $35 million in fiscal year
1977 and $45 million when fully effective.
A repeal of the 100 per pound excise tax on radial tires and the 5
per pound excise tax on tread rubber used to recap or retread all tires
would reduce revenues by $92 million in fiscal year 1977.
The business use tax would place an excise tax on business use of
oil and natural gas with certain exceptions. In fiscal year 1977. the tax
would produce $158 million in Federal revenues.
For homeowners, the Finance Committee tentatively agreed to a re-
fundable tax credit for the home installation of geothermal and solar
energy equipment of 40 percent on the first $1,000 of expenditures and
25 percent of the next $6,400 (maximum credit of $2,000). The reve-
nue loss in fiscal year 1977 is estimated to be less than $5 million.
For businesses, an investment tax credit of 20 percent was agreed
to for the purchase of geothermal and solar energy use equipment. The
revenue loss in fiscal year 1977 is estimated to be less than $5 million.
(93)


6-407 7 ...-.. 7





94


The geothermal energy exploration revenue loss estimates as
enactment of tax incentives like those found in S. 2608 (introdw
Senator Fannin). The bill would allow current expensing of g
mal intangible drilling costs and a percentage deduction from
geothemal energy income. The fiscal year 1977 revenue lo wo-
leQs than $5 million.
A provision tentatively approved by the Committee would p
a 12-percent investment tax credit for underground coal n
equipment, coal conversion equipment, waste recycling equipm&
facilities necessary to permit the use of geothermal heat enei
waste as fuel. If this provision were enacted, there would be a r(
loss of $44 ijilion in its first year of effect. Similar tax incentive
synthetic fuel production investment would be provided by a t
troduced by Senator Hansen (S. 2109).
Oil and natural gas exploration incentives have been proposed
proposal would allow a 10-percent investment credit on inta
drilling costs plus allowances for geological and geophysical exi
lae acquisition costs, secondary and tertiary recovery, and well
ovels. Enactment would produce a revenue loss of $750 million
I ist year of effect.
The final energy revenue estimate assumes enactment of an i
ment tax credit of 12 percent (with an additional 1 percent for r
ing contributions to employee stockownership plans) for ra
rolling stock and track improvements. This provision, tentative
)prove(l by the Committee, would produce a revenue loss of $61 n
in fiscal year 1977.







96


Chart 26
Tax Expenditures: Present L

(dollars in billions)


Personal


investment


FY1976
I24,2


JulytD
Soot.

$6,1


Business investment
Income security


Revenue sharing
gI purpose
aSSi 1nce


and
fiscal


Health
Commrr~erce and transportation
Natural resources.
environment and energy
Other tax expenditures


14.3
19.1
10.9


5,7


7.1
2*8
12.8


3.6
4.8
2.7

1.4
1.8
0.7
3.2