"(4) FORM AND CONTENTS OF CERTIFICATE.-Earned income eligibility certificates shall be in such form and contain such other information as the Secretary may by regulations prescribe.

"(5) TAXABLE YEAR DEFINED.-The term 'taxable year' means the last taxable year of the employee under subtitle A beginning in the calendar year in which the wages are paid.".

(2) CLERICAL AMENDMENT.-The table of sections for chapter 25 is amended by adding at the end thereof the following new item:

"Sec. 3507. Advance payment of earned income credit.".

(c) INFORMATION SHOWN ON W-2.-The first sentence of section 6051(a) (relating to receipts for employees) is amended

(1) by striking out "and" at the end of paragraph (5),

(2) by striking out the period at the end of paragraph (6) and inserting in lieu thereof", and", and

(3) by adding at the end thereof the following new paragraph: "(7) the total amount paid to the employee under section 3507 (relating to advance payment of earned income credit).".

(d) REQUIREMENT OF RETURN.-Subsection (a) of section 6012 (relating to persons required to make returns of income) is amended by adding at the end thereof the following new paragraph:

"(8) Every individual who receives payments during the calendar year in which the taxable year begins under section 3507 (relating to advance payment of earned income credit).".

(e) CROSS REFERENCE.-Section 6302 (relating to mode or time of collection) is amended by adding at the end thereof the following new subsection:

"(d) CROSS REFERENCE.

"For treatment of payment of earned income advance amounts as payment of withholding and FICA taxes, see section 3507(d).”.

(f) DISREGARD TO TERMINATE IN 1980.-Section 2(d) of the Revenue Adjustment Act of 1975 (relating to disregard of refund) is amended

(1) by inserting before "shall not be taken into account" the following: ", and any payment made by an employer under section 3507 of such Code (relating to advance payment of earned income credit)", and

(2) by inserting after "shall not be taken into account" the following: "in any year ending before 1980".

(g) EFFECTIVE Date.—

(1) The amendments made by subsections (a) and (d) shall apply to taxable years beginning after December 31, 1978.

(2) The amendments made by subsections (b), (c), and (e) shall apply to remuneration paid after June 30, 1978.

(3) Subsection (f) shall take effect on the date of the enactment of this Act.

SEC. 106. APPLICATION OF CERTAIN CHANGES IN THE CASE OF FISCAL YEAR TAXPAYERS.

Section 21 (relating to effects of changes in rate of tax) is amended by adding at the end thereof the following new subsection:

"(f) CHANGES MADE BY REVENUE ACT OF 1978.-In applying subsection (a) to a taxable year which is not a calendar year

"(1) the amendments made by sections 101, 102, and 301 of the Revenue Act of 1978 (and no other amendments made by such Act), and

"(2) the expiration of section 42 (relating to general tax credit), shall be treated as a change in a rate of tax.".

Subtitle B-Itemized Deductions; Etc.

SEC. 111. REPEAL OF DEDUCTION FOR STATE AND LOCAL TAXES ON GASOLINE AND OTHER MOTOR FUELS.

(a) REPEAL.-Paragraph (5) of section 164(a) (relating to deduction for taxes) is hereby repealed.

(b) CONFORMING AMENDMENTS.—

(1) The heading of paragraph (5) of section 164(b) is amended by striking out "AND GASOLINE TAXES".

(2) The text of such paragraph (5) is amended by striking out "or of any tax on the sale of gasoline, diesel fuel, or other motor fuel".

(c) EFFECTIVE DATE.-The amendments made by this section shall apply to taxable years beginning after December 31, 1978.

SEC. 112. TAXATION OF UNEMPLOYMENT COMPENSATION BENEFITS AT CERTAIN INCOME LEVELS.

(a) INCLUSION IN GROSS INCOME.-Part II of subchapter B of chapter 1 (relating to amounts specifically included in gross income) is amended by adding at the end thereof the following new section: "SEC. 85. UNEMPLOYMENT COMPENSATION.

"(a) IN GENERAL.-If the sum for the taxable year of the adjusted gross income of the taxpayer (determined without regard to this section and without regard to section 105(d)) and the unemployment compensation exceeds the base amount, gross income for the taxable year includes unemployment compensation in an amount equal to the lesser of

"(1) one-half of the amount of the excess of such sum over the base amount, or

"(2) the amount of the unemployment compensation.

"(b) BASE AMOUNT DEFINED.-For purposes of this section, the term 'base amount' means—

"(1) except as provided in paragraphs (2) and (3), $20,000, “(2) $25,000, in the case of a joint return under section 6013, or “(3) zero, in the case of a taxpayer who

"(A) is married at the close of the taxable year (within the meaning of section 143) but does not file a joint return for such year, and

"(B) does not live apart from his spouse at all times during the taxable year.

"(c) UNEMPLOYMENT COMPENSATION DEFINED.-For purposes of this section, the term 'unemployment compensation' means any amount received under a law of the United States or of a State which is in the nature of unemployment compensation.".

(b) REPORTING OF UNEMPLOYMENT COMPENSATION PAYMENTS.Subpart B of part III of subchapter A of chapter 61 (relating to information concerning transactions with other persons) is amended by adding at the end thereof the following new section:

"SEC. 6050B. RETURNS RELATING TO UNEMPLOYMENT COMPENSATION.

"(a) REQUIREMENT OF REPORTING.-Every person who makes payments of unemployment compensation aggregating $10 or more to any individual during any calendar year shall make a return according to the forms or regulations prescribed by the Secretary, setting forth the aggregate amounts of such payments and the name and address of the individual to whom paid.

"(b) STATEMENTS TO BE FURNISHED TO INDIVIDUALS WITH RESPECT TO WHOM INFORMATION IS FURNISHED.-Every person making a return under subsection (a) shall furnish to each individual whose name is set forth in such return a written statement showing"(1) the name and address of the person making such return, and

"(2) the aggregate amount of payments to the individual as shown on such return.

The written statement required under the preceding sentence shall be furnished to the individual on or before January 31 of the year following the calendar year for which the return under subsection (a) was made. No statement shall be required to be furnished to any individual under this subsection if the aggregate amount of payments to such individual shown on the return made under subsection (a) is less than $10.

"(c) DEFINITIONS.-For purposes of this section

"(1) UNEMPLOYMENT COMPENSATION.-The term 'unemployment compensation' has the meaning given to such term by section 85(c).

"(2) PERSON.-The term 'person' means the officer or employee having control of the payment of the unemployment compensation, or the person appropriately designated for purposes of this section."

(c) CLERICAL AMENDMENTS.—

(1) The table of sections for part II of subchapter B of chapter 1 is amended by adding at the end thereof the following new item: "Sec. 85. Unemployment compensation."

(2) The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by adding at the end thereof the following new item:

"Sec. 6050B. Returns relating to unemployment compensation.".

(d) EFFECTIVE DATE.-The amendments made by this section shall apply to payments of unemployment compensation made after December 31, 1978, in taxable years ending after such date.

SEC. 113. REPEAL OF DEDUCTION FOR POLITICAL CONTRIBUTIONS; INCREASE IN CREDIT.

(a) REPEAL OF DEDUCTION.

(1) REPEAL.-Section 218 (relating to deduction for contributions to candidates for public office and newsletter funds) is hereby repealed.

(2) CONFORMING AMENDMENTS.—

(A) The table of sections for part VII of subchapter B of chapter 1 (relating to additional itemized deductions for individuals) is amended by striking out the item relating to section 218.

(B) Section 642 (relating to special rules for credits and deductions of estates and trusts) is amended by striking out subsection (i) and by redesignating subsections (j) and (k) as subsections (i) and (j), respectively.

(c) INCREASE IN AMOUNT OF CREDIT.-Paragraph (1) of section 41(b) (relating to maximum credit) is amended by striking out "$25" and "$50" and inserting in lieu thereof "$50" and "$100", respectively. (d) EFFECTIVE DATE.-The amendments made by this section shall apply with respect to contributions the payment of which is made after December 31, 1978, in taxable years beginning after such date.

Subtitle C-Credits

SEC. 121. PAYMENTS TO RELATED INDIVIDUALS UNDER CHILD CARE

CREDIT.

(a) IN GENERAL.-Paragraph (6) of section 44A(f) (relating to payments to related individuals) is amended to read as follows:

"(6) PAYMENTS TO RELATED INDIVIDUALS.-No credit shall be allowed under subsection (a) for any amount paid by the taxpayer to an individual—

"(A) with respect to whom, for the taxable year, a deduction under section 151(e) (relating to deduction for personal exemptions for dependents) is allowable either to the taxpayer or his spouse, or

"(B) who is a child of the taxpayer (within the meaning of section 151(e)(3)) who has not attained the age of 19 at the close of the taxable year.

For purposes of this paragraph, the term 'taxable year' means the taxable year of the taxpayer in which the service is performed."

(b) EFFECTIVE DATE.-The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 1978.

Subtitle D-Deferred Compensation

PART I-DEFERRED COMPENSATION PROVISIONS

SEC. 131. DEFERRED COMPENSATION PLANS WITH RESPECT TO SERVICE FOR STATE AND LOCAL GOVERNMENTS.

(a) IN GENERAL.-Subpart B of part II of subchapter E of chapter 1 (relating to taxable years for which gross income included) is amended by adding at the end thereof the following new section: "SEC. 457. DEFERRED COMPENSATION PLANS WITH RESPECT TO SERV. ICE FOR STATE AND LOCAL GOVERNMENTS.

"(a) YEAR OF INCLUSION IN GROSS INCOME.-In the case of a participant in an eligible State deferred compensation plan, any amount of compensation deferred under the plan, and any income attributable to the amounts so deferred, shall be includible in gross income only for the taxable year in which such compensation or other income is paid or otherwise made available to the participant or other beneficiary.

"(b) ELIGIBLE STATE DEFERRED COMPENSATION PLAN DEFINED.-For purposes of this section, the term 'eligible State deferred compensation plan' means a plan established and maintained by a State"(1) in which only individuals who perform service for the State may be participants,

"(2) which provides that (except as provided in paragraph (3)) the maximum that may be deferred under the plan for the taxable year shall not exceed the lesser of

"(A) $7,500, or

"(B) 333 percent of the participant's includible compensation,

"(3) which may provide that, for 1 or more of the participant's last 3 taxable years ending before he attains normal retirement age under the plan, the ceiling set forth in paragraph (2) shall be the lesser of

"(A) $15,000, or

"(B) the sum of—

"(i) the plan ceiling established for purposes of paragraph (2) for the taxable year (determined without regard to this paragraph), plus

"(ii) so much of the plan ceiling established for purposes of paragraph (2) for taxable years before the taxable year as has not theretofore been used under paragraph (2) or this paragraph,

"(4) which provides that compensation will be deferred for any calendar month only if an agreement providing for such deferral has been entered into before the beginning of such month,

"(5) which does not provide that amounts payable under the plan will be made available to participants or other beneficiaries earlier than when the participant is separated from service with the State or is faced with an unforeseeable emergency (determined in the manner prescribed by the Secretary by regulation), and

"(6) which provides that

"(A) all amounts of compensation deferred under the plan, "(B) all property and rights purchased with such amounts, and

"(C) all income attributable to such amounts, property, or rights,

shall remain (until made available to the participant or other beneficiary) solely the property and rights of the State (without being restricted to the provision of benefits under the plan) subject only to the claims of the State's general creditors. A plan which is administered in a manner which is inconsistent with the requirements of any of the preceding paragraphs shall be treated as not meeting the requirements of such paragraph as of the first plan year beginning more than 180 days after the date of notification by the Secretary of the inconsistency unless the State corrects the inconsistency before the first day of such plan year.

"(c) INDIVIDUALS WHO ARE PARTICIPANTS IN MORE THAN ONE PLAN.

"(1) IN GENERAL.-The maximum amount of the compensation of any one individual which may be deferred under subsection (a) during any taxable year shall not exceed $7,500 (as modified by any adjustment provided under subsection (b)(3)).

"(2) COORDINATION WITH SECTION 403(b).—In applying paragraph (1) of this subsection and paragraphs (2) and (3) of subsection (b), an amount excluded during a taxable year under section 403(b) shall be treated as an amount deferred under subsection (a). In applying clause (ii) of section 403(b)(2)(A), an amount deferred under subsection (a) for any year of service shall be taken into account as if described in such clause.

"(d) OTHER DEFINITIONS AND SPECIAL RULES.-For purposes of this section

"(1) STATE.-The term 'State' means a State, a political subdivision of a State, and an agency or instrumentality of a State or political subdivision of a State.

"(2) PERFORMANCE OF SERVICE.-The performance of service includes performance of service as an independent contractor. "(3) PARTICIPANT.-The term 'participant' means an individual who is eligible to defer compensation under the plan.