Order Code RL32367
Temporary Tax Provisions (“Extenders”)
Expiring in 2007
Updated October 17, 2007
Pamela J. Jackson
Specialist in Public Sector Economics
Government and Finance Division
Jennifer Teefy
Information Research Specialist
Knowledge Services Group

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Temporary Tax Provisions (“Extenders”)
Expiring in 2007
Summary
Several temporary tax provisions expired in 2005 and were retroactively
extended through December 31, 2007. Often referred to as “extenders,” these
provisions were originally enacted with expiration dates that have subsequently been
extended, in some cases numerous times.
The temporary nature of extenders can be considered useful as it allows
policymakers to evaluate the effectiveness of the provisions on a regular basis. If an
extender is found to be ineffective, its scheduled expiration allows several
policymaking options, including allowing the provision to expire or redesigning the
provision to improve its use as a policy tool. However, policymakers have, for the
most part, considered the extenders as a group during the enactment process, and
have not reviewed the unique strengths and weaknesses of specific provisions.
Treating permanent provisions as temporary masks their long-run budgetary cost and
leads to uncertainty for taxpayers’ planning.
The extenders include tax credits, which are the Work Opportunity Tax Credit
(WOTC), the Welfare-to-Work Tax Credit (WWTC), the New York WOTC, the
credit for holders of qualified zone academy bonds, the research and experimentation
tax credit, the credit for first-time homebuyers in the District of Columbia, the New
Markets Tax Credit, and the possession tax credit with respect to American Samoa.
The extenders include deductions for expenses of elementary and secondary school
teachers, corporate contributions of computer technology, costs of remediation of
“brownfields,” contributions to Archer Medical Savings Accounts, capital investment
in oil and gas produced from marginal wells, state and local sales taxes, and several
depreciation allowances. The depreciation allowances include an accelerated
provision for property on Indian reservations, qualified leasehold improvements, and
qualified restaurant improvements. Other temporary tax provisions that expired
included tax incentives for investment in the District of Columbia Enterprise Zone,
an increased “cover over” of tax on distilled spirits from Puerto Rico and the U.S.
Virgin Islands, and an excise tax to induce parity in the application of certain mental
health benefits.
In the 110th Congress, several extenders have been included in legislation associated
with the minimum wage debate and the enactment of tax benefits to offset potential
higher wage costs for small businesses. When H.R. 2206 became law (P.L. 110-28)
in May 2007, one of the temporary tax provisions, the Work Opportunity Tax Credit,
was extended through August 31, 2011. Currently active legislation, H.R. 3648,
includes a provision to extend the deduction of qualified mortgage insurance
premiums through December 31, 2014.
This report discusses the nature of extenders, as temporary provisions and as tax
benefits. Descriptions of the extenders are included. This report will be updated as
warranted by legislative events.

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Contents
Developments in the 110th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Developments in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Extenders as Temporary Tax Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Extenders as Tax Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Temporary Tax Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Employment Tax Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Work Opportunity Tax Credit (WOTC) . . . . . . . . . . . . . . . . . . . . . . . . 7
Welfare-to-Work Tax Credit (WWTC) . . . . . . . . . . . . . . . . . . . . . . . . . 7
Indian Employment Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Election to Include Combat Pay as Earned Income for Purposes
of Earned Income Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Tax Credit for Holders of Qualified Zone Academy Bonds . . . . . . . . . . . . . 9
Tax Credit for First-Time Homebuyers in the District of Columbia . . . . . . . 9
Tax Credits for Research and Experimentation Expenses . . . . . . . . . . . . . . 10
New Markets Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Possession Tax Credit with Respect to American Samoa . . . . . . . . . . . . . . 11
Credit for Certain Expenditures for Maintaining Railroad Tracks . . . . . . . 12
Temporary Tax Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Expense Deduction for Elementary and Secondary School Teachers . . . . . 13
Deduction for Tuition and Related Expenses . . . . . . . . . . . . . . . . . . . . . . . 14
Premiums for Mortgage Insurance Deductible as Interest that is
Qualified Residence Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Enhanced Deduction for Corporate Charitable Contributions of
Computer Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Encouragement of Contributions of Capital Gain Real Property Made
for Conservation Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Expensing of “Brownfields” Environmental Remediation Costs . . . . . . . . 17
Contributions to Archer Medical Savings Accounts . . . . . . . . . . . . . . . . . . 18
Special Rules for Deduction for Oil and Gas from Marginal Wells . . . . . . 19
State and Local Sales Tax Deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Depreciation Allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
15-Year Straight-Line Cost Recovery for Qualified
Leasehold Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
15-Year Straight-Line Cost Recovery for Qualified
Restaurant Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Acceleration for Property on Indian Reservations . . . . . . . . . . . . . . . . 21
Seven-Year Recovery Period for Motorsports Entertainment
Complexes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Other Tax Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
District of Columbia Enterprise Zone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
“Cover Over” of Tax on Distilled Spirits to Puerto Rico and the
U.S. Virgin Islands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

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Parity in the Application of Certain Mental Health Benefits . . . . . . . . . . . . 24
Penalty-Free Withdrawals from Retirement Plans for Individuals
Called to Active Duty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Use of Qualified Mortgage Bonds to Finance Residences for Veterans
Without Regard to First-Time Homebuyer Requirement . . . . . . . . . . 25
Federal Unemployment Tax Act (FUTA) Surtax of 0.2% . . . . . . . . . . . . . . 26
List of Tables
Table 1. Tax Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 2. Tax Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

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Temporary Tax Provisions (“Extenders”)
Expiring in 2007
Several temporary tax provisions expired in 2005 and were retroactively
extended through December 31, 2007. Often referred to as “extenders,” these
provisions were originally enacted with an expiration date that has then been
temporarily extended, in some cases numerous times. The extenders provided
special tax treatment for certain types of activities and investment; they benefitted
both individuals and corporations. The extenders included credits, deductions, and
other provisions.
The extenders include tax credits, which are the Work Opportunity Tax Credit
(WOTC), the Welfare-to-Work Tax Credit (WWTC), the New York WOTC, the
credit for holders of qualified zone academy bonds, the research and experimentation
tax credit, the credit for first-time homebuyers in the District of Columbia, the New
Markets Tax Credit, and the possession tax credit with respect to American Samoa.
The temporary tax provisions include deductions for the expenses of elementary
and secondary school teachers, corporate contributions of computer technology, costs
of remediation of “brownfields,” contributions to Archer Medical Savings Accounts,
capital investment in oil and gas produced from marginal wells, state and local sales
taxes, and several depreciation allowances. The depreciation allowances include an
accelerated provision for property on Indian reservations, qualified leasehold
improvements, and qualified restaurant improvements.
Other temporary tax provisions include tax incentives for investment in the
District of Columbia Enterprise Zone, an increased “cover over” of tax on distilled
spirits from Puerto Rico and the U.S. Virgin Islands, and an excise tax to induce
parity in the application of certain mental health benefits.
Developments in the 110th Congress
In the 110th Congress, attention on minimum wage hikes led to proposals to
increase tax incentives for small businesses. The tax packages were designed as
offsets to aid businesses that may be adversely impacted by higher wage costs
associated with the minimum wage increase. Originally introduced in H.R. 2, the
Fair Minimum Wage Act of 2007, and S. 248, the Small Business and Work
Opportunity Acts of 2007, certain temporary provisions were most recently added to
the conference report for H.R. 1591, the U.S. Troop Readiness, Veterans’ Care,
Katrina Recovery, and Iraq Accountability Appropriations Act, 2007. H.R. 1591
passed both the House and Senate in March 2007 and the conference report passed
in both chambers in April 2007. H.R. 1591 was presented to the president and

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vetoed. Subsequently, the tax and minimum wage provisions were added to H.R.
2206, the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq
Accountability Appropriations Act, which was introduced on May 8, 2007. While
H.R. 2206 became law (P.L. 110-28) in May 2007, several of the original tax
provisions in H.R. 1591 were not included in the final legislation. The temporary tax
provision that was included in the law was an extension of the Work Opportunity
Tax Credit through August 31, 2011. Currently active legislation, H.R. 3648,
includes a provision to extend the deduction of qualified mortgage insurance
premiums through December 31, 2014.
Developments in the 109th Congress
In the fall of 2005, S. 2020 and H.R. 4297 were introduced. Among the
provisions in the bills were proposals to extend certain expiring tax provisions. In
December 2005, H.R. 4297 was passed in the House and sent to the Senate. The
Senate stripped H.R. 4297 as passed in the House, added the tax provisions from S.
2020, and passed H.R. 4297 in February 2006. During the conference, however, the
extenders were dropped from the legislation. Tax writers indicated that the expiring
provisions would be added to the conference report for H.R. 2830, the pension bill
that was scheduled for conference shortly after the passage of H.R. 4297. Late in
July 2006, however, the expiring provisions were dropped from the pension bill’s
conference report. On July 28, the House added the provisions to H.R. 5970, the
Estate Tax and Extension of Tax Relief Act of 2006, and passed the legislation the
next day. H.R. 5970 was placed on the Senate calendar, but several motions to
proceed to consider the bill failed just before the August recess. In December 2006,
the extenders were incorporated into the Tax Relief and Health Care Act of 2006
(TRHCA, H.R. 6111), which passed both the House and Senate and was signed into
law (P.L. 109-432). The legislation, which extended the temporary tax provisions
through December 31, 2007, was signed on December 20, 2006.
Analysis
Several tax provisions expired in 2005 and were retroactively extended in late
2006. Many of the provisions had been extended at least twice since their original
expiration date. Among the extenders, one provision was 20 years old, another was
10 years old, and nine other provisions had been in existence for five years or more.
The durability of the extenders suggests they may be more than temporary in nature.
The analysis of temporary tax provisions is complex, involving the examination
of issues of policymaking and economics. Tax incentives are designed to alter the
behavior of those who are the intended beneficiaries. Economic analysis provides
a framework to examine the success of temporary tax provisions in achieving their
intended outcomes.

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Extenders as Temporary Tax Provisions
The extenders are a recurring legislative issue because of their temporary nature.
Each time an extender’s expiration approaches, Congress faces the choice to extend
the tax provision, redesign it, allow it to expire, or make it a permanent provision in
the tax code. The reason for their temporary, yet normally extended character, may
be, in part, tax revenue: temporary extensions have lower short-run revenue costs
than permanent law, although the ostensible lack of permanence often masks the
long-term costs associated with the provisions. Temporary tax provisions are often
extended for one or two years at the most, and at the time of extension, the costs
appear small enough to warrant nominal offsets as required under the pay-as-you-go
rule.1 Yet, increasingly, the provisions have been extended for five and 10 years and
have long-term revenue losses similar to other permanent parts of the tax code.
Extenders, like all tax benefits, affect revenue estimation as well. Budget
estimates are required to be made assuming current law proceeds uninterrupted. As
a result, revenue projections are made assuming temporary tax provisions expire
according to current law. Thus, if temporary provisions are frequently extended
automatically, revenue projections may be inaccurate. An example that illustrates
this point is when tax writers are looking for revenue offsets to balance tax cuts. In
the 108th Congress, legislation (H.R. 6) proposed several incentives for energy
production. Some of the cost of those incentives was intended to be offset by a $10
billion increase in expected tax revenue for 2009 through 2014 from an ethanol tax
credit set to expire in 2008. If the credit is extended rather than allowed to expire,
the revenue projections for those years is overstated.2
It might also be argued that the temporary nature of the provisions is useful,
quite apart from revenue considerations. The temporary nature of expiring
provisions allows policymakers to evaluate their effectiveness and allow for
reassessment of their value on a regular basis. In theory, extenders that fail to
accomplish their purpose could be allowed to expire. Yet, only one extender, a
corporate deduction for group legal services provided to employees, has been allowed
to expire in the past 25 years. That provision expired in 1993.
If provisions are thought to be ineffective, a policy alternative to allowing
temporary provisions to expire is to redesign them. As an example, Congress
replaced the Targeted Jobs Tax Credit, which was enacted in 1978, with the Work
Opportunity Tax Credit in the Small Business Job Protection Act of 1996, P.L. 104-
188. The temporary credit was initially effective for one year and then reauthorized
by the Taxpayer Relief Act of 1997, P.L. 105-34, which also modified the credit by
1 Pay-as-you-go (PAYGO) was a requirement established by the Budget Enforcement Act
of 1990, which proposed that any new direct spending or decrease in revenues for a fiscal
year must be fully offset with additional revenue or entitlement savings elsewhere.
Originally enacted for fiscal years 1991 through 1995, PAYGO rules were extended twice
and expired at the end of FY2002.
2 Martin Vaughan, “GOP Support Unclear for Thomas Tax Bill,” Congress Daily, AM
Edition, [http://nationaljournal.com/pubs/congressdaily/], visited March 4, 2004.

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shortening the eligibility time, changing the subsidy rate, and adding a new group to
the eligible population.
The extenders were not originally enacted at the same time. Many originated
in one of the tax bills enacted during the late 1990s, and some in the mid 1980s.
While their origins differ, the provisions have increasingly been considered as a
group. Several of the extenders that expired in 2005 had been most recently extended
by the Working Families Tax Relief Act of 2004, P.L. 108-311. Some of those
temporary provisions were the Work Opportunity Tax Credit (WOTC), the Welfare-
to-Work Tax Credit (WWTC), the credit for holders of qualified zone academy
bonds, the deduction for capital investment in oil and gas produced from marginal
wells, and the “cover over” of tax on distilled spirits from Puerto Rico and the U.S.
Virgin Islands. Of those provisions, six had been extended by the Tax Relief
Extension Act of 1999 (TREA; P.L. 106-170). Three of the six temporary provisions
had been originally enacted by the Taxpayer Relief Act of 1997 (TRA; P.L. 105-34).
The three provisions were the Welfare-to-Work Tax Credit (WWTC), the credit for
holders of qualified zone academy bonds, and the deduction for capital investment
in oil and gas produced from marginal wells.
Each extender is unique and addresses a separate topic in the tax code.
Consideration of them as a group may ignore some of the strengths and weaknesses
specific to individual provisions. Ideally, the purpose of each expiring provision
should be clear, as well as the appropriateness of using the tax code to subsidize the
targeted objective as opposed to a direct subsidy. Additionally, the benefits of the
provisions should be examined to determine if they outweigh the costs of the
provisions and to ensure that forgoing the tax revenue from the activity is justified
relative to other policy goals.
Treating permanent provisions as temporary also leads to uncertainty for
government and taxpayer planning and causes, in some cases, significant impacts.
When taxpayers are uncertain whether temporary provisions will be extended, they
may have difficulty making reliable and effective business plans. An example of
government uncertainty involves state employment agencies that certify the workers
who qualify for the Work Opportunity Tax Credit and the Welfare-to-Work Tax
Credit. If those credits are not extended, the state certification workers would need
to be reassigned to other tasks. If the credits are reinstated, the states would then
have to reassign the workers a second time. Those workers would also face a
backlog of pending certifications created during the lapse of the temporary provision.
Extenders as Tax Benefits
Temporary tax benefits are a form of federal subsidy that treats eligible activities
favorably compared to others, and channels economic resources into qualified uses.
Extenders influence how economic actors behave and how the economy’s resources
are employed. Like all tax benefits, economic theory suggests every extender can be
evaluated by looking at the impact on economic efficiency, equity and simplicity.
Temporary tax provisions may be efficient and effective in accomplishing their
intended purpose, though not equitable. Alternatively, an extender may be equitable
but not efficient. Policymakers may have to choose the economic objectives that

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matter most. Doing so on a case-by-case basis for extenders may prove to be the best
option to achieve the desired results.
Efficiency. Extenders often provide subsidies to encourage more activity than
would otherwise be undertaken. According to economic theory, in most cases an
economy best satisfies the wants and needs of its participants if markets operate free
from distortions by taxes and other factors. Market failures, however, may occur in
some instances, and economic efficiency may actually be improved by tax
distortions.3 Thus, the ability of extenders to improve economic welfare depends on
whether or not the extender is remedying a market failure. According to theory, an
extender lowers efficiency if it distorts behavior in the absence of a market failure.
If an extender addresses a market failure and thus improves economic
efficiency, the effectiveness of extenders can also be determined by examining their
success in causing the intended response, or degree of response, by recipients of the
tax incentive. Tax provisions can be an effective way to achieve program goals when
they provide benefits to the intended entities or induce desirable activities. An
extender may not be effective if it subsidizes activities that would have been
undertaken in the absence of the tax incentive or if the activities undertaken are not
the intended activities targeted by the tax incentive.
An extender is also considered effective to the degree that it stimulates the
desired activity better than a direct subsidy. Direct spending programs are often more
successful at targeting resources than indirect subsidies made through the tax system.
Fairness. A tax is considered to be fair when it contributes to a socially
desirable distribution of the tax burden. Tax benefits such as the extenders can result
in individuals with similar incomes and expenses paying differing amounts of tax,
depending on whether they engage in tax subsidized activities. This differential
treatment is a deviation from the standard of horizontal equity, which requires that
people in equal positions should be treated equally.
Another component of fairness in taxation is vertical equity, which requires that
tax burdens be distributed fairly among people with different abilities to pay. Most
extenders benefit those who have sufficient income to pay tax. Those individuals
without sufficient income to pay tax do not have the opportunity to benefit from
extenders. The disproportionate benefit of tax expenditures to individuals with
higher incomes reduces the progressivity of the tax system, which is often viewed as
a reduction in equity.
An example of the effect a tax benefit can have on vertical equity violation can
be seen by identifying two individual teachers who have both incurred $250 in
classroom-related expenses and are eligible to claim the above-the-line deduction for
expenses. Yet the tax benefit to the two differs if they are in different tax brackets.
3 Market failure occurs when the marginal benefit of an action does not equal the marginal
cost. For example, polluting forms of energy production cause social costs that are not taken
into account by the producer; hence, there is an argument for taxing this type of energy or,
alternatively, subsidizing less polluting firms.

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A teacher with lower income, who may be in the 15% income tax bracket, receives
a deduction with a value of $37.50, while another teacher, in the 31% bracket,
receives a deduction value of $77.50. Thus, the higher income taxpayer, with
presumably greater ability to pay taxes, receives a greater benefit than the lower
income taxpayer.
Simplicity. Extenders contribute to the complexity of the tax code and raise
the cost of administering the tax system. Those costs, which can be difficult to
isolate and measure, are rarely included in the cost-benefit analysis of temporary tax
provisions. The complexity of the tax code adds to the time cost of taxpayers in
either learning how to claim various incentives and doing so, or an increased direct
cost of paying tax professionals to perform the service for the taxpayer.
Temporary Tax Credits
Some of the temporary provisions extended by the Tax Relief and Health Care
Act of 2006 (TRHCA, P.L. 109-432) include employment credits, the credit for
holders of qualified zone academy bonds, the credit for first-time homebuyers in the
District of Columbia, and the research and experimentation tax credit.
Table 1. Tax Credits
Internal Revenue Code
Provision
Section
Work Opportunity Tax Credit
51(c)(4)
Welfare-to-Work Tax Credit
51A(f)
Indian Employment Tax Credit
45A(f)
Inclusion of combat pay as earned income for EITC
32(c)(2)(B)(vi)(II)
Credit for holders of qualified zone academy bonds
1397E(e)(1)
Tax credit for first-time D.C. homebuyers
1400C(i)
Tax credit for research and experimentation
41(h)
New Markets Tax Credit
45(d)
Possession Tax Credit with respect to American Samoa
27(b), 936
Credit for Certain Railroad Track Expenditures
45G(f)
Employment Tax Credits
Several temporary tax credits were enacted to lower the relative cost of hiring
targeted group members by subsidizing their wages, increasing employers’
willingness to hire them despite their presumed lower productivity. Current law
provides several separate credits, but they are the statutory descendent of a single

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provision — the Targeted Jobs Tax Credit — that was first enacted in 1978. While
the credits targeted similarly situated populations, their benefits to employers differed
slightly.
Work Opportunity Tax Credit (WOTC). This credit is available for wages
paid by employers who hired individuals from certain targeted groups. The WOTC
was taken for first-year wages paid to eligible individuals who begin work after
September 30, 1996, and before January 1, 2006. The credit amounts to 40% of the
first $6,000 of wages (or the first $3,000 of wages for qualified summer youth
employees) paid to each targeted group member during the first year of employment,
and 25% in the case of wages attributable to individuals meeting only minimum
employment levels. An employee must have completed a minimum of 120 hours of
service for the wages to be taken into account for calculation of the credit.
Individuals who fit into one of the following target groups qualify for the WOTC:
qualified IV-A or Temporary Assistance to Needy Families (TANF) recipients,
qualified veterans, qualified ex-felons, high risk youth residing in an empowerment
zone, enterprise community, or renewal community, vocational rehabilitation referral,
qualified summer youth employees, qualified food stamp recipients, or qualified
Supplemental Security Income recipients.
The WOTC was extended through August 31, 2011, by the U.S. Troop
Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability
Appropriations Act, 2007 (P.L. 110-28). That legislation also established as a new
targeted group of eligible employees for the credit. Individuals are designated as
community residents, rather than high risk youth and are required to be between 18
and 40 in age and have a principal place of abode in an empowerment zone,
enterprise community, renewal community, or rural renewal community (defined as
an area outside a metropolitan statistical area that has had a net population loss
during specified periods).
Welfare-to-Work Tax Credit (WWTC). This nonrefundable credit is
available to private sector, for-profit employers who hire long-term recipients of
TANF benefits. During the first year in which WWTC-eligible persons are hired,
employers can claim an income tax credit of 35% of the first $10,000 earned by the
employee. The employer can claim an income tax credit of 50% of the first $10,000
in earnings during the second year of their employment. In addition to gross wages,
certain tax-exempt amounts received under accident and health plans, as well as
under educational or dependent assistance programs, qualify for this subsidy rate.
The maximum amount of the credit an employer can claim is $3,500 per worker in
the first year of employment and $5,000 per worker in the second year of
employment. An employer’s usual deduction for wages has to be reduced by the
amount of the credit and the credit could not exceed 90% of an employer’s annual tax
liability. Employers cannot claim the WOTC and WWTC for the same individuals.
The eligible group is defined as members of a family that received benefits for
at least 18 consecutive months ending on the hiring date, members of a family that
received benefits for a total of 18 (not necessarily consecutive) months beginning
after August 5, 1997 (the date of the credit’s enactment), members of a family that
are no longer eligible for assistance after August 5, 1997, because of any federal- or

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state-imposed time limit (if they were hired within two years after the date the benefit
ceases).4
TRHCA included a combination and modification of the two credits along with
an extension through December 31, 2007. In the 110th Congress, S. 248 would make
this provision permanent and H.R. 2 would extend it through 2012.
Indian Employment Tax Credit. A nonrefundable credit is available to
employers for the first $20,000 of certain wages and health insurance costs paid for
qualified employees through December 31, 2005. Qualified employees must be
enrolled members of an Indian tribe or their spouses and can be full- or part-time
employees. They must also perform a substantial amount of their services to the
employer within an Indian reservation, and the principal place of residence of the
employee while performing services for the employer must be on or near the
reservation on which the services are performed. Qualified wages are wages paid or
incurred by an employer for services performed by a qualified employee. Wages are
excluded if they qualify for the Work Opportunity Tax Credit.
The Indian employment credit was enacted by the Omnibus Budget
Reconciliation Act of 1993 (P.L. 103-66) and extended twice, by the Job Creation
and Worker Assistance Act of 2002 (P.L. 107-47) and the Working Families Tax
Relief Act of 2004 (P.L. 108-311). TRHCA enacted an extension through December
31, 2007. In the 110th Congress, H.R. 1875 and S. 176 propose to make this tax
provision permanent.
Election to Include Combat Pay as Earned Income
for Purposes of Earned Income Credit
The earned income tax credit (EITC) is a refundable tax credit for eligible low
income workers. The amount of EITCs received by childless adults or families with
children is based on income and age of the earner(s). “Earned income,” for the
purposes of the EITC, includes taxable wages, salaries, tips, and other employee
compensation. Combat pay, under Internal Revenue Code, Sec. 112, is generally
excluded from income for tax purposes; therefore, some low income military families
who receive the EITC based on taxable military pay could lose this tax credit if they
begin receiving non-taxable combat pay.
As a result of sustained deployments in Iraq, some military households eligible
for the EITC were unable to claim it because of high combat pay earnings. A
temporary provision was included in the Working Families Tax Relief Act of 2004
(P.L. 108-311), effective for tax years beginning after October 4, 2004, and ending
on December 31, 2005, allowing members of the military to include combat pay in
earned income for the purposes of calculating the EITC. The Gulf Opportunity Zone
Act of 2005 (P.L. 109-135) extended this temporary combat pay/EITC provision
4 For more detailed information on both the Work Opportunity Tax Credit and the
Welfare-to-Work Credit, see CRS Report RL30089, The Work Opportunity Tax Credit
(WOTC), by Linda Levine.

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through the end of 2006, and the Tax Relief and Health Care Act of 2006 (P.L.
109-432) extended it through the end of 2007.
H.R. 393, H.R. 2222, H.R. 3529, S. 455, S. 516, and S. 1333, introduced in the
110th Congress, propose to make this tax provision permanent. H.R. 3629 would
extend the provision through 2011.
Tax Credit for Holders of Qualified Zone Academy Bonds
Qualified Zone Academy Bonds (QZAB), which were first introduced as part
of the Taxpayer Relief Act of 1997 (P.L. 105-34), are a type of bond that offers the
holder a nonrefundable federal tax credit instead of interest. Qualified zone
academies are public schools and programs that provide education and training below
the post-secondary level. Issuers of QZABs are required to use the proceeds to
finance public school partnership programs in economically distressed areas. QZAB
holders are limited to banks, insurance companies, and corporations actively engaged
in the business of lending money.
Initially, state and local governments could issue QZABs only in 1998 and 1999,
subject to a national limitation of $400 million each year. The Ticket to Work and
Work Incentives Improvement Act of 1999, P.L. 106-170, extended this provision,
authorizing up to $400 million of QZABs to be issued in 2000 and 2001, with any
unused authority carried over for several years. The Job Creation and Worker
Assistance Act of 2002, (P.L. 107-47), extended the QZAB program with an
additional $400 million of bond capacity available for 2002 and 2003. The Working
Families Tax Relief Act of 2004 (P.L. 108-311) authorized an additional extension
through December 31, 2005.5 TRHCA enacted a two-year extension of the
provision, through December 31, 2007. In the 110th Congress, S. 912 includes a
provision that allows for the authority to issue such QZABs up until and including
September 30, 2008. H.R. 2470 would terminate the authority to issue such bonds
after 2009.
Tax Credit for First-Time Homebuyers in
the District of Columbia
This credit allows a nonrefundable credit against federal taxes of up to $5,000
for the first-time purchase of a principal residence in the District of Columbia. The
credit is available only once for homebuyers who acquire title to a qualifying
principal residence after August 1997 and before December 31, 2005. The tax credit
was created by the Taxpayer Relief Act of 1997 (P.L. 105-34) to provide an incentive
to purchase a home in DC, thus increasing the rate of owner-occupied home
ownership. Compared to neighboring Maryland (70.7%) and Virginia (75.1%), the
District of Columbia’s home ownership rate is significantly lower (42.7%).6
5 For more detailed information, see CRS Report RS20606, Qualified Zone Academy Bonds:
A Brief Explanation, by Steven Maguire.
6 U.S. Congress, Senate Committee on the Budget, Tax Expenditures: Compendium of
Background Material on Individual Provisions, committee print prepared by the
(continued...)

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CRS-10
The credit was most recently extended by the Working Families Tax Relief Act
of 2004 (P.L. 108-311). TRHCA enacted a two-year extension of the tax credit,
through December 31, 2007.
Tax Credits for Research and Experimentation Expenses
A business credit for research expenses is available as a subsidy for research and
experimentation (R&E) expenses paid or incurred through December 31, 2005.
Under IRC section 41, the regular tax credit is generally equal to 20% of a firm’s
qualified research expenses above a base amount. This incremental design is
intended to encourage firms to increase spending on R&E more than they otherwise
would from one year to the next by lowering the after-tax cost of this added R&E
spending.
The R&E tax credit, originally enacted in the Economic Recovery Tax Act of
1981 (P.L. 97-34), has been extended 11 times, most recently by the Ticket to Work
and Work Incentives Improvement Act of 1999 (P.L. 106-170) and by the Working
Families Tax Relief Act of 2004 (P.L. 108-311). TRHCA retroactively extended the
tax credit, through December 31, 2007, and modified the credit rules.7
At least six bills have been introduced in the 110th Congress that would modify
the research tax credit: S. 14, S. 41, S. 592, S. 833, H.R. 1712, and H.R. 2138. All
would extend the credit, S. 14, S. 41, S. 833, H.R. 1712, and H.R. 2138 permanently
and S. 592 through 2012. Among other amendments, H.R. 1712 and S. 41 modify
the tax credit by establishing a standard 20% credit rate for research expenses
exceeding 50% of average expenses over the preceding three-year period.7
New Markets Tax Credit
The New Markets Tax Credit (NMTC) program permits taxpayers to receive a
credit against federal income taxes for making qualified equity investments in
designated Community Development Entities (CDEs). Substantially all of the
qualified equity investment must in turn be used by the CDE to provide investments
in low-income communities. The credit provided to the investor totals 39% of the
cost of the investment and is claimed over a seven-year credit allowance period. In
each of the first three years, the investor receives a credit equal to 5% of the total
amount paid for the stock or capital interest at the time of purchase. For the final four
years, the value of the credit is 6% annually. Investors may not redeem their
investments in CDEs prior to the conclusion of the seven-year period.8
6 (...continued)
Congressional Research Service, Library of Congress, 107th Cong., 2nd sess., S. Prt. 107-80
(Washington: GPO, 2002), pp. 213-215.
7 For more detailed information on the Research and Experimentation Tax credit, including
its design, legislative history, effectiveness, and key policy issues, see CRS Report
RL31181, Research Tax Credit: Current Status and Selected Issues for Congress, by Gary
Guenther.
8 U.S. Department of the Treasury, Community Development Financial Institutions Fund,
(continued...)

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CRS-11
The NMTC program was added by the Community Renewal Tax Relief Act of
2000, P.L. 106-554, and allows a maximum annual amount of qualified equity
investments of $3.5 billion per year for 2006 and 2007. TRHCA extends the $3.5
billion annual allocation through 2008. Two bills introduced in the 110th Congress,
H.R. 2075 and S. 1239, seek to extend the NMTC through 2013 and provide for an
inflation adjustment to the limitation amount for such credit after 2008. Also in the
110th Congress, an amendment to S.Con.Res. 21 (S.Amdt. 629), proposes
reauthorization of the NMTC for an additional five years.
Possession Tax Credit with Respect to American Samoa
Section 936 of the Internal Revenue Code allows certain domestic corporations
with business operations in the U.S. possessions, including American Samoa. The
tax credit is intended to offset the U.S. tax imposed on certain income related to
operations in American Samoa. Income eligible for the section 936 credit includes
non-U.S. source income from the active conduct of a trade or business within a U.S.
possession, the sale or exchange of substantially all of the assets that were used in
such a trade or business, or certain possessions investments. The section 936 credit
expired for taxable years beginning after December 31, 2005.
American Samoa has a tax system that mirrors U.S. tax law. Residents of
American Samoa are taxed by both the United States and American Samoa.
Nonresidents are taxed by American Samoa on their American Samoa-source income
and income effectively connected with an American Samoa trade or business.
American Samoa corporations are subject to U.S. tax on income effectively
connected to a U.S. trade or business, and, in some cases, on passive income from
U.S. sources and on U.S. branch profits.
To qualify for the possession tax credit for a taxable year, a domestic
corporation must satisfy two conditions. First, at least 80% of the gross income of the
corporation for the three-year period immediately preceding the close of the taxable
year must be derived from sources within American Samoa. Second, the corporation
must derive at least 75% of its gross income for that same period from the active
conduct of a possession business.
TRHCA extended the credit through December 31, 2007. H.R. 1916,
introduced during the 110th Congress, seeks to extend this tax credit beginning after
December 31, 2007, and lasting until December 31, 2017.
8 (...continued)
New Markets Tax Credit Program, website, [http://www.cdfifund.gov/what_we_do/
programs_id.asp?programID=5], visited June 22, 2006.

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CRS-12
Credit for Certain Expenditures for
Maintaining Railroad Tracks
A 50% general business credit9 is available to eligible taxpayers for qualified
railroad track maintenance expenditures paid or incurred in tax years beginning after
December 31, 2004, and beginning before January 1, 2008. The purpose of the credit
is to enable small and mid-sized railroads to update and upgrade their track capacities
in order to promote those railroads as an alternative to shipping freight on roadways.
The railroad track maintenance credit cannot exceed the product of $3,500 and
the number of miles of railroad track owned or leased by or assigned to the eligible
taxpayer (e.g., $3,500 x 200 miles). Eligible taxpayers include Class II and III
railroads10 and certain persons who are assigned tracks by a Class II or Class III
railroad. Qualified railroad track maintenance expenditures include expenses for
maintaining railroad track owned or leased, as of January 1, 2005, by a Class II or
Class III railroad.
The railroad track maintenance credit was introduced by the American Jobs
Creation Act of 2004 (P.L. 108-357). In the 110th Congress, H.R. 1584 and S. 881
propose increasing the allowable amount of the railroad track maintenance tax credit,
extending the credit through 2010, and allowing the credit against alternative
minimum tax liabilities.
Temporary Tax Deductions
Temporary tax deductions include provisions for individuals and corporations,
such as deductions for: expenses of elementary and secondary school teachers,
corporate contributions of computer technology, costs of remediation of
“brownfields,” contributions to Archer Medical Savings Accounts, and capital
investment in oil and gas produced from marginal wells.
9 The general business credit includes a number of credits designed to encourage certain
business activities.
10 The U.S. Department of Transportation’s Surface Transportation Board’s regulations
divide railroads into three classes based on annual carrier operating revenues. Class I
railroads are those with annual carrier operating revenues of $250 million or more (in 1991
dollars); Class II railroads are those with annual carrier operating revenues of more than $20
million but less than $250 million (in 1991 dollars); and Class III railroads are those with
annual carrier operating revenues of $20 million or less (in 1991 dollars). See 49 CFR Part
1201, General Instruction 1-1(a).

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CRS-13
Table 2. Tax Deductions
Internal Revenue
Provision
Code Section
Expense deduction for elementary and secondary
62(a)(2)(D)
school teachers
Deduction for tuition and related expenses
222
Deduction for mortgage insurance premiums
163(h)(3)(E)(iv)(I)
Enhanced deduction for corporate contributions of
170(e)(6)(G)
computer equipment for educational purposes
Contributions of qualified property for conservation
170(b)(1)(E)(vi)
purposes
Expensing of “brownfields” environmental
198(h)
remediation costs
Contributions to Archer medical savings accounts
220(i)
Suspension of income limitation on percentage
613A(c)(6)(H)
depletion for oil and gas from marginal wells
Deduction of state and local sales taxes
164
15-year straight-line cost recovery for qualified
168(e)(3)(E)(iv)
leasehold improvements
15-year straight-line cost recovery for qualified
168(e)(3)(E)(v)
restaurant improvements
Accelerated depreciation for property on Indian
168(j)
Reservations
Seven-year recovery period for motorsports
168(i)(15)(D)
entertainment complexes
Expense Deduction for Elementary and
Secondary School Teachers
An above-the-line deduction (i.e., a deduction for non-itemizers) for certain
classroom expenses paid or incurred during the school year by eligible elementary
and secondary school (K-12) teachers, among other educators, was authorized in the
Job Creation and Worker Assistance Act of 2002. The provision, effective for
taxable years beginning after December 31, 2001, and before January 1, 2006, allows
for up to $250 annually of expenses paid or incurred for books, supplies, computer
equipment, and supplementary materials to be deducted. Under previously expired
law, teachers were allowed to deduct these expenses only when itemizing on the tax

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CRS-14
return and (as with other deductions) only if the total of all itemized deductions
exceeded 2% of adjusted gross income.11
TRHCA retroactively extended the deduction for two years, through December
31, 2007. Six bills introduced in the 110th Congress would make this provision
permanent: H.R. 411, H.R. 549, H.R. 2204, H.R. 3595, H.R. 3605, S. 14, S. 505, and
S. 1339. In addition to permanency, H.R. 549 and S. 505 seek to increase the
allowable tax deduction to $400, and H.R. 2204, H.R. 3605, and S. 1339 would
increase the deduction to $500.
Deduction for Tuition and Related Expenses
In June 2001, as a part of the Economic Growth and Tax Relief Reconciliation
Act of 2001 (EGTRRA, P.L. 107-16), Congress passed a new set of rules regarding
the deductibility of higher education expenses. Starting in 2002, a new deduction was
created for post-secondary education expenses paid by taxpayers for themselves, their
spouse, or dependents. This “above-the-line” deduction was for tuition and
education-related expenses paid for enrollment at any accredited post-secondary
institution. This temporary tuition deduction, available during tax years 2002 through
2005, was available to taxpayers regardless of whether they claimed the standard
deduction or itemized deductions when filing their income tax return. The deduction
was not restricted by the overall limitation on itemized deductions.
The “above-the-line” deduction was limited to $3,000 for 2002 and 2003. The
deduction was limited to $4,000 for 2004 and 2005. It was generally available to
taxpayers with adjusted gross incomes below $65,000 ($130,000 for married
individuals filing jointly). For 2004 and 2005 the maximum that could be deducted
was either $2,000 or $4,000 depending on adjusted gross income. If adjusted gross
income was $65,000 or less ($130,000 or less for those filing a joint return), the
maximum deduction was $4,000. If adjusted gross income was more than $80,000
($160,000 for married individuals filing jointly), the deduction could not be claimed.
Only certain higher education expenses were allowable for deduction. For
example, tuition and fees required for enrollment or attendance at an eligible post-
secondary educational institution were allowable. However, taxpayers were required
to subtract any scholarships, educational assistance allowances, or other nontaxable
sources of income spent for educational purposes from the tuition and fees expense.
This reduced amount was the qualified amount eligible for the deduction. Personal
expenses and the cost of books were not allowable. Taxpayers could not claim a
course involving sports, games, or hobbies, unless such course is part of the student’s
degree program.
The income tax code disallows education expenses claimed for certain tax
incentive programs to be claimed for the deduction as well. Any qualified education
expenses deducted as a business expense, claimed for an education tax credit, or paid
with earnings from either a Coverdell education savings account or U.S. education
11 For more detailed information see CRS Report RS21682, The Tax Deduction for
Classroom Expenses of Elementary and Secondary School Teachers by Linda Levine.

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CRS-15
savings bonds, could not be claimed for the “above-the-line” tuition and fees
deduction.
Additionally, the use of the deduction is conditional on the tax status of the
student in relationship to the taxpayer. If the taxpayer claims an exemption for a
dependent who is an eligible student, the taxpayer can include expenses paid for the
student in determining the deduction. If the dependent pays the qualified expenses
and the taxpayer claims an exemption for that student, neither the taxpayer nor the
dependent can deduct the expenses.
TRHCA retroactively extended the deduction for two years, through December
31, 2007. In the 110th Congress, several bills would make this provision permanent,
including H.R. 411, H.R. 686, H.R. 1407, H.R. 1437, H.R. 2734, and H.R. 3388.
H.R. 2411 would extend the provision through 2010, and H.R. 2782 would extend
it through 2009.
Premiums for Mortgage Insurance Deductible
as Interest that is Qualified Residence Interest
Mortgage insurance, which guarantees loan repayment in case of death or
disability of the borrower, is often required by lenders for individuals who do not
have sufficient funds for a full down payment on a residence. Premiums paid or
accrued for qualified insurance on mortgage loans can be treated as qualified
residence interest12 and deducted from income tax. “Qualified mortgage insurance”
is mortgage insurance provided by the Veterans Administration (VA), the Federal
Housing Administration (FHA), the Rural Housing Administration (RHA), and
private mortgage insurance as defined under Section 2 of the Homeowners Protection
Act of 1998 (12 U.S.C. Sec. 4901).
The deduction of qualified mortgage insurance premiums generally applies to
amounts paid or accrued only during 2007, with respect to contracts issued during
2007; the provision terminates for premiums paid or accrued after December 31,
2007. This deduction is also subject to a phaseout. For every $1,000, or fraction
thereof, by which the taxpayer’s adjusted gross income exceeds $100,000, the
amount of deductible mortgage insurance premiums is reduced (but not below zero)
by 10 %. In the case of a married taxpayer filing separately, the amounts are lowered
to $500 and $50,000. The purpose of this phaseout is to prevent taxpayers with
adjusted gross incomes greater than $109,000 ($54,500 for a married taxpayer filing
separately) from claiming this tax benefit.
Prepaid mortgage insurance amounts that are allocable to periods beyond the
year in which they are paid are attributed to a capital account and treated as paid in
the allocable year (contracts issued by the VA or RHA are excluded from this
12 The qualified residence interest deduction is a permanent provision which allows
taxpayers to deduct interest accrued or paid on mortgage or home equity loans for qualified
residences. A qualified residence is generally defined as the taxpayer’s primary residence
or his second home.

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CRS-16
provision). If the mortgage is paid off before the end of its term, a deduction is not
allowed for the unamortized balance of the capital account.
Premiums paid for mortgage insurance were not deductible in the past, and this
new, temporary provision was as added by the Tax Relief and Health Care Act of
2006 (P.L. 109-432). In the 110th Congress, H.R. 1813 and H.R. 1416 propose to
make this provision permanent. H.R. 3648, which has been reported out of
committee, would extend the provision through December 31, 2014.
Enhanced Deduction for Corporate Charitable
Contributions of Computer Technology
Section 170(e)(6) of the Internal Revenue Code allows for an enhanced
deduction for corporate contributions of computer equipment to public libraries and
elementary and secondary schools. Generally, tax law allows for certain
contributions of inventory or other ordinary-income property, and short-term capital
gain property to be made by C (ordinary) corporations (S corporations, which are
taxed as partnerships, are not eligible). In the case of charitable contributions, the
amount of the deduction is limited to the taxpayer’s basis (original investment) in the
property. Special rules provide enhanced deductions for certain corporate
contributions of inventory property for the care of the ill, the needy or infants and
certain contributions of scientific equipment. Under these special rules, the amount
of the enhanced deduction is equal to the donor’s basis in the donated property plus
one-half of the amount of ordinary income that would have been realized if the
property had been sold.
Congress extended this special rule to provide an incentive for businesses to
donate their computer equipment for the benefit of primary and secondary school
students. Computer equipment includes computer software, computer or peripheral
equipment, and fiber optic cable related to computer use. In addition to the
augmented deduction benefit, the donor, by not selling the property, avoids realizing
any capital gains and the subsequent income tax on those gains.
Originally authorized by the Taxpayer Relief Act of 1997 (P.L. 105-34), the
provision was then extended for three years by the Community Renewal Tax Relief
Act of 2000 (CRTRA, P.L. 106-554). CRTRA also expanded the deduction to
include property donated to public libraries, property donated no later than three
years (instead of two) after the date of taxpayer acquisition, and property donated
after reacquisition by computer manufacturers. The most recent extension, through
December 31, 2005, was authorized by the Working Families Tax Relief Act of 2004
(P.L. 108-311). TRHCA retroactively extended the deduction for two years, through
December 31, 2007.
Encouragement of Contributions of Capital Gain
Real Property Made for Conservation Purposes
This provision, introduced by the Pension Protection Act of 2006 (P.L.
109-280), provides incentives for individuals to make qualified conservation
contributions of real estate and ownership interests in real estate during 2006 and

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CRS-17
2007. The act raises the charitable deduction limit for individuals from 30% to 50%
of adjusted gross income for qualified conservation contributions, and allows
taxpayers to carry these deductions forward for 15 years.
A qualified conservation contribution is a contribution of qualified real property
interest to a government or publicly supported charity (or organization that is
controlled by a government or publicly supported charity) exclusively for
conservation purposes.13 Qualified real property interest is either the entire interest
of the donor14, a remainder interest (which allows the donor to continue occupying
the donated property during his or her lifetime), or a restriction (granted in
perpetuity) on the use which may be made of the real property.
For qualified farmers or ranchers who contribute property used for agriculture
or livestock production, the charitable deduction limit is raised to 100% of adjusted
gross income, provided that such contribution does not prevent the use of the donated
land for farming or ranching purposes. A “qualified farmer or rancher” is a taxpayer
whose gross income from the trade or business of farming is greater than 50% of the
taxpayer’s gross income for the taxable year.
Private corporations that are engaged in farming or ranching activities may
deduct up to 100% of adjusted taxable income for such contributions, provided that
the terms of the gift did not limit the farming activities on the property. Such
corporations could also carryover the deduction for a 15-year period.
This provision is effective for contributions made in taxable years beginning
after December 31, 2005, and before January 1, 2008. In the 110th Congress, H.R.
1576 and S. 469 propose to make this provision permanent.
Expensing of “Brownfields” Environmental
Remediation Costs
Section 198 of the Internal Revenue Code was created by the Taxpayer Relief
Act of 1997 (P.L. 105-34) to allow firms that undertake certain expenditures to
deduct those costs against income in the year incurred. The allowable expenditures
were made to control or abate hazardous substances in a qualified contaminated
business property. These expenditures would have otherwise been allocated to a
capital account and could have been deducted only at some later point — for
example, when the land was sold.
13 A qualified conservation contribution is one that is made for any one of the following four
purposes: (1) the preservation of land areas for outdoor recreation by, or the education of,
the general public; (2) the protection of a relatively natural habitat of fish, wildlife, or plants,
or a similar ecosystem; (3) the preservation of open space (including farmland and forest
land) where such preservation is for the scenic enjoyment of the general public, or made
pursuant to a clearly delineated federal, state, or local government conservation policy that
will yield a significant public benefit; and (4) the preservation of a historically important or
a certified historic structure.
14 Other than qualified mineral interest, which means subsurface oil, gas or other minerals
and the right to access these minerals.

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CRS-18
Expensing, or deducting against income, provides a tax subsidy for capital
invested by business. By expensing hazardous control and abatement costs rather
than capitalizing those costs, taxes on the income generated by the expenditures were
effectively zero. This provision provides a financial incentive to businesses and
encourages them to invest in the clean up and redevelopment of “brownfields,” which
are abandoned industrial sites and dumps that would be cleaned up and redeveloped
except for the prohibitive costs and complexities of environmental contamination.15
The provision, which has been extended three times, by the Tax Relief
Extension Act of 1999, P.L. 106-170; the Community Renewal Tax Relief Act of
2000, P.L. 106-554; and the Working Families Tax Relief Act of 2004, P.L. 108-311,
required that eligible expenditures be incurred before January 1, 2006.
In the 109th Congress, both the House and Senate versions of H.R. 4297 as well
as H.R. 5970 proposed to extend the provision for two years through December 31,
2007, and to expand the definition of hazardous substance to include petroleum
products, which include crude oil, crude oil condensates, and natural gasoline.16
TRHCA included the same proposal. In the 110th Congress, H.R. 1753 would make
this provision permanent.
Contributions to Archer Medical Savings Accounts
Archer Medical Savings Accounts (MSAs) are tax-advantaged personal savings
accounts used for unreimbursed medical expenses. MSAs were first authorized by
the Health Insurance Portability and Accountability Act of 1996 (HIPPA, P.L. 104-
91). Individuals’ contributions are deductible from gross income up to an annual
limit of 65% of the insurance deductible or earned income, whichever is less.
Earnings on account balances are not taxed. These accounts are designed to
encourage individuals to purchase high-deductible health insurance and to maintain
a reserve for routine and other unreimbursed health care expenses. Contributions are
allowed only if individuals are covered by a high-deductible health plan and no other
insurance.
Archer MSAs were initially introduced as Medical Savings Accounts (MSAs)
and later renamed by the Community Renewal Tax Relief Act of 2000, P.L. 106-554.
MSAs were intended to slow the growth of health care costs, which had, at that time,
exceeded the general rate of inflation for many years. By creating these accounts and
giving consumers a larger financial stake in purchasing health care, policy makers
were attempting to reduce third-party payments which were perceived to lower the
effective price of health care to individuals and lead to excessive use. High-
15 For more details, see U.S. Congress, Senate Committee on the Budget, Tax Expenditures:
Compendium of Background Material on Individual Provisions, committee print prepared
by the Congressional Research Service, Library of Congress, 107th Cong., 2nd sess., S. Prt.
107-80 (Washington: GPO, 2002), pp. 325-327
16 U.S. Congress, Joint Committee on Taxation, Description of H.R. 4297, A Bill to Provide
for Reconciliation Pursuant to Section 201(b) of the Concurrent Resolution on the Budget
for Fiscal Year 2006, 109th Cong., 2nd sess., JCX-75-05 (Washington: GPO, 2005), p. 35.

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CRS-19
deductible insurance, by requiring consumers to assume more of the initial costs
incurred each year, might have encouraged more prudent choices.
Archer MSAs have not attracted many participants. The number of existing
Archer MSAs has never come close to the limit of 750,000 accounts. In October
2002, the IRS estimated that there would be 78,913 Archer MSA returns filed for tax
year 2001; it also determined that 20,592 taxpayers newly established Archer MSA
accounts in 2002. This low participation rate may have been influenced by several
factors. Archer MSAs may not have appealed to certain categories of individuals.
Those with chronic illnesses were more likely to desire low-deductible health plans
that would have been ineligible for the program. Low-income individuals, being
unwilling to incur high out-of-pocket costs, may have chosen low-deductible health
plans. Additionally, individuals with other health plan options through their
employer or community would not be eligible to participate.17
After 2002, no new contributions were to be made to Archer MSAs, except by
or on behalf of individuals who previously made Archer MSA contributions, by
employees of small employers, and by self-employed individuals with prior Archer
MSA participation. Thus, taxpayers who participated in the programs could
continue, but no new accounts could be opened. The Job Creation and Worker
Assistance Act of 2002, P.L. 107-147, extended this provision for an additional year
through December 31, 2003. The next extension, through December 31, 2005, was
authorized by the Working Families Tax Relief Act of 2004 (P.L. 108-311). TRHCA
retroactively extended the deduction for two years, through December 31, 2007.
Special Rules for Deduction for Oil and Gas
from Marginal Wells
Firms that extract oil and gas were permitted an income tax deduction to recover
their capital investment. That income tax deduction was determined using a method
of percentage depletion, which was based on a fixed percentage of gross income.
Among the limitations that apply in calculating percentage depletion deductions is
a restriction that the amount deducted may not exceed 100% of the net income from
oil and gas properties in any one year. Special percentage depletion rules applied to
oil and gas production from marginal properties. One special rule, section
613A(c)(6) of the Internal Revenue Code, suspended the 100% of net income
limitation as applied to domestic oil and gas production from marginal properties.
This tax incentive, designed to be a production subsidy, was criticized by some
observers as inefficient. As a subsidy, the incentive was intended to increase
investment exploration and output. In the short-run, it may have some impact on
reducing dependence on imported oil. In the long-run, critics maintain that the
provision may have contributed to a faster depletion of resources by encouraging
swift development of existing properties.18
17 For more detailed information, see CRS Report RS21573, Tax-Advantaged Accounts for
Health Care Expenses: Side-by-Side Comparison, by Bob Lyke and Chris Peterson.
18 For more detailed information see CRS (archived) Report RL32265, Expired and Expiring
(continued...)

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CRS-20
Initially enacted by the Taxpayer Relief Act of 1997, P.L. 104-34, the 100%
taxable income limitation suspension has been extended three times, by the Ticket
to Work and Work Incentives Improvement Act of 1999, P.L. 106-170; by the Job
Creation and Worker Assistance Act of 2002. The most recent extension, through
December 31, 2005, was authorized by the Working Families Tax Relief Act of 2004
(P.L. 108-311). TRHCA retroactively extended the deduction for two years, through
December 31, 2007.
State and Local Sales Tax Deduction
For taxable years beginning in 2004 and 2005, at the election of the taxpayer,
an itemized deduction could be claimed for state and local general sales taxes in lieu
of the itemized deduction for state and local income taxes. Enacted by the American
Jobs Creation Act of 2004 (P.L. 108-357), the itemized deduction included individual
income taxes, real property taxes, and personal property taxes paid by the taxpayer.
The itemized deduction was not allowable against the alternative minimum tax.
Taxpayers had two options with respect to the determination of the sales tax
deduction amount. Taxpayers could deduct the total amount of general state and local
sales taxes paid by accumulating receipts showing general sales taxes paid.
Alternatively, taxpayers could use allowable deduction tables created by the Secretary
of the Treasury. The tables are based on average consumption by taxpayers on a
state-by-state basis taking into account filing status, number of dependents, adjusted
gross income, and rates of state and local general sales taxation.
The term “general sales tax” means a tax imposed at one rate with respect to the
retail sale of a broad range of classes of items. However, in the case of certain items,
like food, clothing, medical supplies, and motor vehicles, the fact that the tax does
not apply with respect to some or all of such items is not taken into account in
determining whether the tax applies with respect to a broad range of classes of items.
The fact that the rate of tax applicable with respect to some or all of such items is
lower than the general rate of tax is not taken into account in determining whether
the tax is imposed at one rate.19
The House-passed version of H.R. 4297 proposed to extend the deduction for
one year by allowing taxpayers to elect to deduct state and local sales taxes in lieu of
state and local income taxes through taxable years beginning on or before December
31, 2006. TRHCA retroactively extended the deduction for two years, through
December 31, 2007. H.R. 60, H.R. 2734, H.R. 3592, H.R. 3680, S. 143, and S. 180,
introduced in the 110th Congress, would make this provision permanent.
18 (...continued)
Energy Tax Incentives, by Salvatore Lazzari, available from author upon request.
19 For more detailed information see CRS Report RL32781, Federal Deductibility of State
and Local Taxes, by Steve Maguire.

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CRS-21
Depreciation Allowances
A taxpayer is allowed to recover, through annual depreciation deductions, the
cost of certain property used in a trade or business, or for the production of income.
The amount of the depreciation deduction allowed with respect to tangible property
for a taxable year is determined under the tax code’s modified accelerated cost
recovery system (MACRS). Under MACRS, the cost of eligible property is
recovered over specific periods of time (recovery periods), depending upon the type
of property, and at specified rates over the prescribed recovery periods.
The tax code allows depreciation allowances for improvements made on leased
property and typically requires the use of MACRS to determine the actual amount
of depreciation even if the MACRS recovery period assigned to the property is longer
than the term of lease. If a leasehold improvement constitutes an addition or
improvement to nonresidential real property already placed in service, the
improvement is depreciated using the straight-line method over a 39-year recovery
period. However, exceptions exist for certain qualified leasehold improvements and
certain qualified restaurant property.
15-Year Straight-Line Cost Recovery for Qualified Leasehold
Improvements. In the case of qualified leasehold improvement property, Section
168(e)(3)(E)(iv) of the Internal Revenue Code allows a 15-year recovery period for
property placed in service before January 1, 2006. Property placed in service after
that date and later is subject to the rules described above. Qualified leasehold
improvement property is any improvement to an interior portion of a nonresidential
building. The improvement must be placed in service more than three years after the
date the building was first placed in service. In the 110th Congress, H.R. 2014, S.
1361, and S. 347 propose to make this provision permanent, and S. 349 and H.R. 2
would extend the provision to March 31, 2008.
15-Year Straight-Line Cost Recovery for Qualified Restaurant
Improvements. In the case of qualified restaurant property, Section
168(e)(3)(E)(v) of the Internal Revenue Code allows a 15-year recovery period for
property placed in service before January 1, 2006. Property placed in service after
that date and later is subject to the rules described above. Qualified restaurant
property includes any improvement to a building where more than 50% of the
building’s square footage is devoted to the preparation of, and seating for on-
premises consumption of, prepared meals. The improvement must be placed in
service more than three years after the date the building was first placed in service.

TRHCA extended the provisions to apply to property placed in service through
December 31, 2007. In the 110th Congress, H.R. 3622 and S. 347 would make this
provision permanent, while H.R. 2 and S. 349 would extend the provision to March
31, 2008.
Acceleration for Property on Indian Reservations. A temporary tax
provision allows for the accelerated depreciation of qualified Indian reservation
property that is placed in service after 1993 and before January 1, 2005. For business
property on Indian reservations, IRC Section 168(j) allows for a shorter recovery

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CRS-22
period than is provided for under MACRS standards. The shorter periods applicable
for Indian reservations are indicated below.
Applicable Period for
MACRS Standard
Indian Reservations
3-year property
2 years
5-year property
3 years
7-year property
4 years
10-year property
6 years
15-year property
9 years
20-year property
12 years
Nonresidential real property
22 years
The accelerated depreciation provision requires that property be used in the
active conduct of business within an Indian reservation. The provision was enacted
by the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66) and extended by
the Job Creation and Worker Assistance Act of 2002 (P.L. 107-47). TRHCA
extended the accelerated provision through December, 31, 2007. H.R. 1875 and S.
176 in the 110th Congress would make this provision permanent.
Seven-Year Recovery Period for Motorsports Entertainment
Complexes. Taxpayers generally capitalize the cost of property used in a trade or
business and recover such cost over 15 years. An exception exists, however, for the
theme and amusement park industry, whose assets are assigned a seven-year recovery
period.
The American Jobs Creation Act of 2004 (AJCA; P.L. 108-357) assigned a
seven-year modified accelerated cost recovery period to motorsports entertainment
complexes, which include land improvements and support facilities, but not
transportation equipment, warehouses, administrative buildings, hotels, or motels.
The provision is effective for property placed in service after October 22, 2004,
and before 2008. The AJCA specifies that the provision applies to motorsports
entertainment complexes permanently situated on land and, during the 36-month
period following the first day of the month in which the facility is placed in service,
hosts one or more racing events for automobiles (of any type), trucks, or motorcycles
which are open to the public for the price of admission. Also covered by the
provision are any ancillary facilities and land improvements in support of the
complex’s activities (including parking lots, sidewalks, waterways, bridges, fences,
and landscaping); support facilities (including food and beverage retailing, souvenir
vending, and other nonlodging accommodations); and appurtenances associated with
such facilities and related attractions and amusements (including ticket booths, race
track surfaces, suites and hospitality facilities, grandstands and viewing structures,
props, walls, facilities that support the delivery of entertainment services, other
special purpose structures, facades, shop interiors, and buildings). In the 110th
Congress, H.R. 1304 and S. 557 propose to make this provision permanent.

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CRS-23
Other Tax Provisions
District of Columbia Enterprise Zone
The District of Columbia (DC) Enterprise Zone includes the DC Enterprise
Community and the census tracts in the District of Columbia with a poverty rate of
at least 20%. Businesses in the DC Zone are eligible for the following tax benefits:
1) a wage credit equal to 20% of the first $15,000 in annual wages paid to qualified
employees who resided within the District of Columbia; 2) $35,000 in increased
section 179 expensing; and 3) in certain circumstances, tax-exempt bond financing.
Additionally, a capital gains exclusion is allowed for certain investments in small
business stock held more than five years and made within the DC Zone, or within any
District of Columbia census tract with a poverty rate of at least 10%.20 The DC Zone
incentives, created in the Taxpayer Relief Act of 1997 (P.L. 105-34), were applicable
from January 1, 1998 through December 31, 2003, and then extended through
December 31, 2005. TRHCA extended the provisions through December 31, 2007.
“Cover Over” of Tax on Distilled Spirits to Puerto
Rico and the U.S. Virgin Islands
In general, federal excise taxes do not apply to items produced and consumed
in Puerto Rico, the U.S. Virgin Islands (USVI), and other U.S. possessions.
However, so that goods produced in the possessions do not have a tax-induced price
advantage in U.S. markets over goods produced in the mainland, an “equalization
tax” is levied on goods imported into the United States from Puerto Rico or the
USVI. The tax is equal to the excise tax that applies to like items of domestic
manufacture. That tax is then rebated or “covered over” to the Puerto Rico and
USVI. The amounts covered over to Puerto Rico and the USVI are deposited into
the treasuries of the two possessions for use as those possessions determine. The
provision was granted because Congress believed that rebating the increased rate of
tax would contribute to the economic stability of Puerto Rico and the USVI.21
In 1984, the Deficit Reduction Act, P.L. 98-369, increased excise taxes on U.S.
distilled spirits to $12.50 from $10.50 per proof gallon; subsequent legislation
increased the rate to $13.50. However, the 1984 Act also amended the Internal
Revenue Code, section 7652, by adding subsection (f) which initially imposed a
$10.50 limitation on “cover over” of the tax on distilled spirits. In 1993, the Omnibus
Reconciliation Act, P.L. 103-66, extended the limitation such that the cover over
amount was increased to $11.30 per gallon effective for the five-year period
beginning October 1, 1993. The Tax Relief Extension Act of 1999, P.L. 106-170,
extended the amendment for an additional two years, increasing the rate to $13.25
and the Job Creation and Worker Assistance Act of 2002, P.L. 107-147, provided a
20 For more details, see U.S. Congress, Senate Committee on the Budget, Tax Expenditures:
Compendium of Background Material on Individual Provisions, committee print prepared
by the Congressional Research Service, Library of Congress, 107th Cong., 2nd sess., S. Prt.
107-80 (Washington: GPO, 2002), pp. 317-320.
21 U.S. House Committee Report to H.R. 3090, H.Rept. 107-251, October 17, 2001.

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CRS-24
second extension effective through December 31, 2003. A third extension was
authorized by the Working Families Tax Relief Act of 2004, P.L. 108-311, which
made the provision effective through December 31, 2005.
TRHCA included a two-year extension of the $13.25 per proof gallon cover
amount for rum brought into the United States through December 31, 2007. After
that date, the cover amount would revert to $10.50 per proof gallon. In the 110th
Congress, H.R. 52 would repeal the cap on this cover over tax as of January 1, 2007.
Parity in the Application of Certain Mental Health Benefits
The Taxpayer Relief Act of 1997 (P.L. 105-34) imposed an excise tax on group
health plans that fail to meet the requirements of the Mental Health Parity Act of
1996 (Title VII of P.L. 104-204). The Mental Health Parity Act requires group
health plans that provide both medical and surgical benefits and mental health
benefits cannot impose aggregate lifetime or annual dollar limits on mental health
benefits that are not also imposed on substantially all medical and surgical benefits.
The excise tax is equal to $100 per day during the period of noncompliance and
is imposed on the employer sponsoring the plan if the plan fails to meet the
requirements. The maximum tax that can be imposed during a taxable year cannot
exceed the lesser of 10% of the employer’s group health plan expenses for the prior
year or $500,000.
The excise tax was applicable to plan years beginning on or after January 1,
1998 and expired with respect to those benefits for services provided on or after
September 30, 2001. The FY2002 appropriation for the Departments of Labor,
Health and Human Services, and Education (P.L. 107-116, section 701), enacted on
January 10, 2002, retroactively restored the excise tax to September 30, 2001 and
effective through December 31, 2002. The excise tax was extended by the Job
Creation and Worker Assistance Act of 2002 through December 31, 2003 and by the
Working Families Tax Relief Act of 2004 through December 31, 2005.
The Mental Health Parity Reauthorization of 2003, P.L. 108-197, was
introduced (S. 1929) and passed in the Senate in November 2003. After being passed
in the House on December 8, 2003 the bill was signed into law on December 19,
2003. The legislation extends the mental health parity provisions through 2004 but
did not address the extension of the Internal Revenue Code containing the excise tax
penalty provision. TRHCA retroactively extended the excise tax through December
31, 2007.
Penalty-Free Withdrawals from Retirement Plans
for Individuals Called to Active Duty
Distributions from qualified retirement plans received by participants who have
not yet reached the age of 59½ are considered early withdrawals and are subject to

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CRS-25
a penalty tax of 10%.22 Military reservists and national guardsmen called to active
duty for an indefinite period or a period in excess of 179 days may make early
withdrawals from an IRA, 401(k) plans, 403(b) annuities, and certain similar
arrangements, without having to pay the 10% penalty tax. These withdrawals must
be made during the period beginning on the date of the call and ending at the close
of the active duty period. This provision is available to individuals called to active
duty after September 11, 2001, and before December 31, 2007.
An individual who receives a qualified reservist distribution may repay the
amount of the distribution, through one or more contributions, at any time during the
two-year period beginning on the day after the end of the active duty period. The
dollar limitations that are usually applicable to contributions to individual retirement
plans are waived in this circumstance. However, no deduction is allowed for any
contribution under this provision.
The Pension Protection Act of 2006 (P.L. 109-280) created this temporary tax
provision. Legislation has been introduced in the 110th Congress which would make
the provision permanent (H.R. 867, Guardsmen & Reservists’ Tax Fairness Act of
2007). H.R. 2355, the Reservists and Guardsmen Tax Relief Act of 2007, proposes
to extend the provision for an additional year, up to and including December 31,
2008. S. 1636 would permanently allow penalty-free withdrawals from retirement
plans for individuals called to active duty for at least 179 days.
Use of Qualified Mortgage Bonds to Finance
Residences for Veterans Without Regard to
First-Time Homebuyer Requirement
Veterans who served in the active military and did not receive a dishonorable
discharge may receive a loan financed by qualified mortgage bonds issued after
December 20, 2006, and before January 1, 2008, without regard to the first-time
homebuyer requirement. Generally, qualified mortgage bonds cannot be used to
finance a mortgage for a homebuyer who owned interest in a principal residence in
the three years preceding the execution of the current mortgage (the “first time
homebuyer” requirement). Veterans are eligible for this exception one time only
without regard to the date they last served on active duty or the date they applied for
a loan after leaving active duty.
Qualified veterans’ mortgage bonds must meet certain requirements in order to
be eligible for residence financing. For example, at least 95% of the proceeds from
such bonds must be used to provide financing for single-family, owner-occupied
residences for veterans. Both the principal and the interest of the bonds must be
secured by the general obligation of the state of residence. Except in the case of a
qualified rehabilitation or the replacement of a construction period loan or temporary
initial financing such as a bridge loan, proceeds may not be used to acquire or replace
existing mortgages.
22 Any amount withdrawn prematurely from a qualified retirement account is also subject
to regular income taxes.

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CRS-26
This provision was enacted by the Tax Relief and Health Care Act of 2006 (P.L.
109-432). In the 110th Congress, H.R. 3629 proposes to extend this provision
through 2011.
Federal Unemployment Tax Act (FUTA) Surtax of 0.2%
The Federal Unemployment Tax Act (FUTA) of 1939 (P.L. 76-379) established
a joint state and federal basis for financing unemployment compensation (UC)
created in the Social Security Act of 1935 (P.L. 74-271). FUTA imposes a 6.2%
gross tax rate on the first $7,000 paid annually by covered employers to each
employee in covered positions.
Employers in states with UC programs approved by the federal government and
no delinquent federal loans to their state Unemployment Trust Fund (UTF) account
may credit 5.4 percentage points against the 6.2% tax rate, making the minimum net
federal unemployment tax rate 0.8%. Since all states have approved programs, 0.8%
is the effective federal tax rate. This federal revenue finances administration of the
system, half of the Federal-State Extended Benefits (EB) Program, and a federal
account for state loans. The individual states finance regular UC benefits, as well as
half of the EB Program through state taxes authorized by the State Unemployment
Tax Acts.
As part of the Unemployment Compensation Amendments of 1976 (P.L.
94-566), Congress passed a surtax of 0.2% of taxable wages to be added to the
permanent FUTA tax rate. Thus, the current effective 0.8% FUTA tax rate has two
components: a permanent tax rate of 0.6%, and a surtax rate of 0.2%. The surtax was
introduced to help repay loans to the states from the federal account in UTF.
Congress has extended the surtax five times, most recently with the Taxpayer Relief
Act of 1997 (P.L. 105-34), which extends the tax through December 31, 2007.
Except for nonprofit organizations, state and local governments, certain
agricultural labor, and certain domestic service, FUTA covers employers who pay
wages of at least $1,500 during any calendar quarter or who employed at least one
worker in at least one day of each of 20 weeks in the current or prior year. FUTA
does cover agricultural labor for employers who paid cash wages of at least $20,000
for agricultural labor in any calendar quarter or who employed 10 or more workers
in at least one day in each of 20 different weeks in the current or prior year, as well
as domestic service employers who paid cash wages of $1,000 or more for domestic
service during any calendar quarter in the current or prior year.
crsphpgw

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