[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]




 
 PRESIDENT'S TAX RELIEF PROPOSALS: TAX PROPOSALS AFFECTING INDIVIDUALS

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

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 21, 2001

                               __________

                            Serial No. 107-6

                               __________

         Printed for the use of the Committee on Ways and Means


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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa                     JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia                 WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania           XAVIER BECERRA, California
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

                     Allison Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel




Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.




                             C O N T E N T S

                               __________
Advisory of March 14, 2001, announcing the hearing...............     2

                               WITNESSES

American Council for Capital Formation, Margo Thorning, presented 
  Allen Sinai, Decision Economics, Inc...........................    80
American Farm Bureau Federation, Bob Stallman....................    74
Barcia, Hon. James A., a Representative in Congress from the 
  State of Michigan..............................................    12
Center on Budget and Policy Priorities, Wendell Primus...........    38
Chicago Public Schools, Paul Vallas..............................   113
Decision Economics, Inc., Allen Sinai, presented by Margo 
  Thorning, American Council for Capital Formation...............    80
Detzel, Lauren Y., Dean Mead Egerton Bloodworth Capauano & 
  Bozarth, P.A...................................................    87
Family Research Council, Charles A. Donovan......................    34
Hutchison, Hon. Kay Bailey, a United States Senator from the 
  State of Texas.................................................     7
Independent Sector, and YMCA of the USA, Kenneth Gladish.........   122
National Federation of Independent Business, and C.J. Coakley 
  Company, Inc., Maria Coakley David.............................    70
Rebuild America's Schools, Robert P. Canavan.....................   110
Savings Coalition of America, and Merrill Lynch & Co., Inc., 
  Edward O'Connor................................................   115
Seattle Times, Frank A. Blethen..................................    77
Weller, Hon. Jerry Weller, a Representative in Congress from the 
  State of Illinois..............................................    10

                       SUBMISSIONS FOR THE RECORD

Abrams, Howard E., Emory University, Atlanta, GA, statement and 
  attachment.....................................................   139
Air Conditioning Contractors of America, Arlington, VA, Larry 
  Taylor, statement..............................................   145
Cal-Fed School Infrastructure Coalition, Sacramento, CA, Terry 
  Bradley, letter................................................   146
College Savings Plans Network, Lexington, KY, Georgie Thomas, 
  letter.........................................................   147
Morella, Hon. Constance A., a Representative in Congress from the 
  State of Maryland, statement...................................   149
National Association of Realtors, Linda Goold, letter............   150
National Automobile Dealers Association, Robert J. Maguire, 
  statement......................................................   154
National Center for Policy Analysis, Bruce R. Bartlett, statement   155
Nature Conservancy, Arlington, VA, Michael Dennis, statement.....   160
Niche Marketing, Inc., Newport Beach, CA, and Professional 
  Benefit Trust, Woodstock, IL, Judith A. Carsrud, and Tracy 
  Sunderlage, joint statement....................................   161
Responsible Wealth, Boston, MA, Charles E. Collins, statement....   166
Simpson, Hon. Alan K., Washington, DC, statement.................   168
Washington Council Ernst & Young, LaBrenda Garrett-Nelson, 
  Phillip D. Moseley, and Robert J. Leonard, statement...........   170
White House Conference of Small Business, Debbi Jo Horton, East 
  Providence, RI; Joy Turner, Piscataway, NJ; Jill Gansler, 
  Baltimore, MD; Jack Oppenheimer, Orlando, FL; Paul Hense, Grand 
  Rapids, MI; Tommy Bargsley, Austin, TX; Edith Quick, St. Louis, 
  MO; Jim Turner, Salt Lake City, UT; Sandra Abalos, Phoenix, AZ; 
  and Eric Blackledge, Corvallis, OR, letter.....................   171


 PRESIDENT'S TAX RELIEF PROPOSALS: TAX PROPOSALS AFFECTING INDIVIDUALS

                              ----------                              


                       WEDNESDAY, MARCH 21, 2001

                          House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:05 a.m., in 
room 1100 Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
March 14, 2001
No. FC-6

                      Thomas Announces Hearing on

                    President's Tax Relief Proposals

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold an additional 
hearing on President Bush's proposed tax relief provisions that affect 
individuals. The hearing will take place on Wednesday, March 21, 2001, 
in the main Committee hearing room, 1100 Longworth House Office 
Building, beginning at 10 a.m.
      
    Oral testimony at this hearing will be from invited witnesses only. 
However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    On February 8, 2001, President Bush released his ``Agenda for Tax 
Relief'' that includes doubling the child credit, relief of the 
marriage tax penalty, and repeal of the death tax.
      
    On February 13, 2001, the Committee held a hearing on President 
Bush's tax relief proposals. On March 1, the Committee on Ways and 
Means ordered favorably reported H.R. 3, the ``Economic Growth and Tax 
Relief Act of 2001,'' a bill reducing individual income tax rates, with 
a new 12 percent rate taking effect on January 1, 2001. On March 8, 
2001, H.R. 3 passed the House by a vote of 230 to 198.
      
    In announcing the hearing, Chairman Thomas stated: ``Now that the 
House has passed the heart of President Bush's tax relief plan--the 
permanent reduction in individual income tax rates--we will now turn to 
fixing other problems in the Tax Code. Married couples shouldn't pay 
more in taxes just because they're married. People shouldn't pay more 
taxes when they die. And more families could benefit by doubling the 
$500 per child tax credit. In summary, we are just beginning to provide 
real and lasting tax relief to the American people who pay the bills, 
and I look forward to hearing from the witnesses about the need for 
further tax relief.''
      

FOCUS OF THE HEARING:

      
    The focus of this hearing will be the President's tax relief 
proposals, other than permanent marginal rate reduction, with 
particular emphasis on marriage penalty relief, death tax repeal, and 
doubling the child credit.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Thursday, 
March 22, 2001, to Allison Giles, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Committee office, room 1102 Longworth House Office 
Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or 
MS Word format, typed in single space and may not exceed a total of 10 
pages including attachments. Witnesses are advised that the Committee 
will rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone, and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                


    Chairman Thomas. Good morning. Today, the Committee 
proceeds with its second hearing on President Bush's tax relief 
plan, and today we are going to look more closely at the 
President's proposals addressing the marriage tax penalty 
problem in the Tax Code, the question of the estate or the 
death tax, the child credit, and other provisions in the 
President's tax relief plan. Obviously, there are Members who 
were advocating positions in these areas prior to the 
President's plan being presented, in fact for a number of years 
laboring in the vineyards, and we are going to hear their 
suggestions, as well.
    According to the Congressional Budget Office, almost 25 
million married couples pay an average of about $1,400 in 
higher taxes just because they are married. That is not fair. 
Last year, President Clinton vetoed a strong bipartisan bill 
written in large part by our colleague from Illinois on the 
Committee, Mr. Weller. In fact, 48 Democrats in the House of 
Representatives voted for our balanced approach, and we 
believe, working together in a bipartisan way, we will see a 
similar support in fixing the marriage tax penalty once again. 
The difference, of course, is that if it does arrive at the 
President's desk in a bipartisan way, this President will sign 
that legislation.
    Likewise, the House passed strong bipartisan legislation 
written by the team on this Committee of the gentlewoman from 
Washington, Jennifer Dunn, and the gentleman from Tennessee, 
Mr. Tanner, that repealed the estate or death tax. Sixty-five 
Democrats in the House voted for that approach in the last 
Congress. Our goal, obviously, is to make sure that something 
similar to that is placed on this President's desk. We believe 
if we are able to do that, that, too, will be signed.
    In 1997, Congress passed with overwhelming support the $500 
per child tax credit to help those families with children help 
make ends meet. The President has proposed doubling that $500 
credit, phasing it in to the $1,000 limit. We think we need to 
look at that portion of the President's tax proposals, as well.
    There are other portions of the President's plan, including 
the education saving incentives, the charitable giving, the 
permanent extension of the research and development tax credit, 
and other areas where Americans can increase savings and 
investment.
    Finally, let me say that notwithstanding all of the 
suggestions of additional changes in the Tax Code, I do find it 
rather remarkable that the initial statement was that no plan 
should be offered until the budget resolution is passed and we 
now find, especially in the other body, a number of our 
colleagues on the other side of the aisle rushing to the 
microphone with the latest plan to make changes in the Tax 
Code, notwithstanding the fact that a budget resolution has not 
passed the Budget Committee and it has not passed the floor. I 
fully intend to have any provisions that we have pass on the 
floor of the House after a budget resolution passes the floor 
of the House.
    I do welcome, and I think all of us welcome, our colleagues 
in looking at new and additional ways in which we can reduce 
the tax burden on hard-working American income taxpayers, those 
who are married and those who are not, those who have children 
and those who do not. The key here is to come together, move 
product, place it on the President's desk, and let the American 
people know that we understand we need to change the burden of 
taxation on income tax-paying Americans and then continue with 
the fine work in this Committee in the other areas of 
jurisdiction of this Committee.
    With that, I would recognize the gentleman from New York, 
the Ranking Member, Mr. Rangel.
    [The opening statements of Chairman Thomas and Mr. Ramstad 
follow:]
   Opening Statement of the Hon. Bill Thomas, M.C., California, and 
                 Chairman, Committee on Ways and Means
    Good morning. Today the Committee proceeds with its second hearing 
on President Bush's tax relief plan.
    Today, we will be looking more closely at the President's proposals 
to fix the marriage tax penalty, repeal the death tax, double the child 
credit and other provisions in the President's tax relief plan.
    According to the Congressional Budget Office, almost twenty-five 
million married couples pay an average of $1,400 in higher taxes just 
because they're married. That's not fair. Last year, President Clinton 
vetoed a strong bipartisan bill written by Mr. Weller to fix the 
marriage tax penalty. In fact, forty-eight Democrats in the House of 
Representatives voted for our balanced approach, and we hope to have 
similar bipartisan support for fixing the marriage tax penalty again. 
This year, however, we have a President who will sign the bill.
    Likewise, Congress passed the strong bipartisan bill written by our 
colleagues Mrs. Dunn and Mr. Tanner to completely repeal the death tax. 
Sixty-five Democrats in the House voted for that approach. They 
understand that the death tax should be repealed for one reason, which 
is simply that Americans should not be taxed when they die. That is 
wrong. I'm glad that President Bush's plan buries the death tax once 
and for all, and I look forward to discussing the options available to 
us as we move forward to eliminate the death tax.
    In 1997, Congress passed with overwhelming support the $500 per 
child tax credit, which has helped millions of families with children 
make ends meet. President Bush has proposed to double that credit up to 
$1,000 per child, and I would suspect that there would be strong 
bipartisan support for this proposal as well.
    There are other important components in the President's plan B 
including education savings incentives, charitable giving, and the 
permanent extension of the R&D tax credit. The Committee will be 
looking at all these and other proposals to expand savings and 
investments opportunities as we work together to provide real and 
lasting tax relief to the American people.

                                


       Opening Statement of the Hon. Jim Ramstad, M.C., Minnesota
    Mr. Chairman, thank you for your leadership in examining and acting 
on the President's tax relief agenda for Americans.
    We have now seen the responsible framework of this year's budget 
resolution. Our budget will allow us to pay down an unprecedented 
amount of debt, preserve Social Security and improve Medicare, fund 
important education, medical research and defense priorities, and 
provide meaningful tax relief.
    The House recently sent the Senate the first installment of the 
President's tax relief plan--a reduction in marginal tax rates for all 
taxpayers. These rate reductions are urgently needed to stimulate our 
sputtering economy. It is time now to turn to the next critical 
elements of the President's plan.
    The President's plan is pro-family and pro-fairness. It recognizes 
the sacrifices families make to raise children. It defends married 
couples against higher taxes simply because they are married. It 
rewards charitable giving to help Americans in need. And it buries the 
unfair death tax, which prevents families from passing farms and 
businesses to the next generation.
    I look forward to hearing from our distinguished witnesses about 
these crucial tax relief proposals.
    Thank you, Mr. Chairman.

                                


    Mr. Rangel. Thank you, Mr. Chairman. Mr. Chairman, 
yesterday, you indicated that there may be a markup on certain 
legislation either on Thursday or Friday. Could you share with 
us whether or not these hearings today would have any 
relationship at all with legislation that you intend to mark 
up, and if so, what would the connection be? Are we to assume 
that whatever testimony we hear today may be the subject of a 
bill to be marked up this week?
    Chairman Thomas. I would tell the gentleman that as we are 
looking at the other portions of the President's tax plan, 
having moved the permanent marginal rate reduction, to other 
areas that this Congress had involved itself with prior to the 
election of President Bush, the marriage penalty and the death 
tax aspect are represented in large part by, for example, some 
of the Members in front of us.
    We believe that between now and when we have our next 
markup, we can incorporate a number of ideas of the 
President's, but also our colleagues' ideas, and I look forward 
to working with the gentleman from New York. As he knows, we 
have already supplied him with significant information in terms 
of the direction that we believe we are going to take.
    I am never, however, surprised of the valuableness of 
hearings and information provided to us by witnesses which, of 
course, can be incorporated in any markup as long as we have 
about 24 hours prior to the markup. So I look forward to 
hearing the witnesses, listening carefully to what they have to 
say, digesting it, and then if, in fact, we do find information 
that is very useful that we had not anticipated, including it 
in a markup.
    Mr. Rangel. Mr. Chairman, I am embarrassed not to fully 
understand what you said.
    Chairman Thomas. What I said was we ought to listen to the 
witnesses carefully, see what they have to say, and if we agree 
they have something worthwhile to say and we have not 
anticipated it in legislation, to include it.
    Mr. Rangel. But I was only talking, Mr. Chairman, about 
whether or not their gems of wisdom would be of assistance to 
us with a bill since we have yet to know what is in the bill 
that we may mark up tomorrow or Friday. I guess that was my 
partisan way of requesting, do we have the slightest clue as to 
what the language would be in a bill that we may mark up on 
Thursday or Friday, and what the cost would be, so that we 
could more intelligently ask questions of these witnesses?
    You mentioned the death tax. I assume you mean the estate 
tax repeal. If that is going to be something that we are 
marking up this week, then, of course, we would want to ask 
questions about this when having these expert witnesses here. 
And, of course, if you have no intention of marking up bills 
that relate to their expert testimony then we would listen and 
absorb it, but we would not waste a lot of time asking 
questions on a bill that we are not marking up tomorrow or the 
next day. But, of course, if you feel more comfortable not 
answering any questions, then I will just not inquire any 
further.
    Chairman Thomas. Great. And with that, we will----
    Mr. Rangel. That is the end of my opening statement, Mr. 
Chairman.
    Chairman Thomas. And with that, we will turn to the panel.
    Mr. Camp. Mr. Chairman, if I might just have a minute.
    Chairman Thomas. The gentleman from Michigan.
    Mr. Camp. I just wanted to briefly welcome the panel, 
including my colleague and friend from Michigan, Congressman 
Barcia. We have adjoining districts. I look forward to your 
testimony. Thank you, Mr. Chairman.
    Mr. Crane. Mr. Chairman.
    Chairman Thomas. I thank the gentleman. The gentleman from 
Illinois.
    Mr. Crane. May I welcome my distinguished colleague from 
Illinois, Mr. Weller.
    Mr. Rangel. Mr. Chairman, I would like to welcome the 
Senator and my colleagues for whatever wisdom they can share 
with us from now and to the end of this session, because we 
will never know when we will have a chance to use their advice. 
We thank you for sharing your views with us now.
    [Laughter.]
    Chairman Thomas. The chair is constrained to say, though, 
it is much more difficult in picking up the pearls of wisdom 
from our witnesses if the Members are not here, so I anticipate 
full attendance through the entire hearing.
    Now, it is my pleasure to turn to the gentleman from 
Illinois and the gentleman from Michigan on the House side and 
the Senator from Texas, who has been a champion for a long time 
on examining the Tax Code in which there ought not to be 
punishment for the act of marriage. And with that, I will turn 
first to the Senator from Texas and indicate that if you have 
any written testimony, we will make it a part of the record and 
you can address us in any way you see fit.
    I will also tell you that you have to turn the mike on and 
it is very uni-directional in terms of its sound. You have to 
speak into it.

  STATEMENT OF THE HON. KAY BAILEY HUTCHISON, A UNITED STATES 
                SENATOR FROM THE STATE OF TEXAS

    Mrs. Hutchison. Thank you very much, Mr. Chairman. I do 
appreciate your holding this hearing and I do hope there will 
be a markup soon on marriage penalty relief.
    I want to start by saying that I have introduced every 
iteration of marriage penalty relief in the last 4 years in 
Congress, and I want to acknowledge that Congressman Weller has 
done the same thing on the House side. He has really been a 
leader. We have worked together and, of course, have passed 
marriage penalty relief twice, only to see it vetoed. But this 
time, I believe we can work on a bill that will be signed by 
the President and will give measurable tax relief to married 
couples who now suffer a penalty. And I want to welcome 
Congressman Barcia, also, to help us in this effort so that we 
can have a bipartisan effort.
    Of course, 21 million American couples do suffer a marriage 
penalty tax in this country and there should be zero tax to 
being married. Let me give you an example from Texas.
    Heather Diederich and Willie Simmons live in Tyler, Texas. 
They are engaged to be married May 26, so when the 
distinguished Ranking Member says, why are we talking about 
this today, are we really going to do something, I hope we are 
going to do something before May 26 for this couple. They both 
work for a local grocery store chain. Heather is a single 
mother of a 3-year-old boy. She makes $20,000 a year. Willie 
makes $19,000 a year. When they get married, they will be hit 
with a marriage penalty of $1,600. Mr. Chairman, this is wrong 
and we could do something about it to help this couple before 
the end of the year, after they have gotten married.
    I think we need to talk about what is possible within the 
range of the President's plan of $1.6 trillion. Based on my 
experience and on what we have been able to pass through 
Congress before, I think it is important that we do something 
simple and fair, not something that is going to add layers in 
the reporting requirements, layers in forms or any more 
complicated responsibility for filing.
    I believe increasing the standard deduction for a married 
couple filing jointly so that it is twice that of a single 
person and widening the 15 percent tax bracket so that we can 
at least alleviate the pain at that lowest level and it will 
give some relief to every couple that either does not itemize 
and takes the standard deduction or anyone who is paying taxes 
would get some relief from the 15 percent bracket.
    Now, this has been tested. We have passed it through 
Congress twice before. I think it is very important--and, in 
fact, Chairman Grassley on the Senate side is trying very hard 
to stay within the President's allocations. Based on the most 
recent allocation of the OMB, the President's proposal would 
reinstate the 10 percent second earner deduction and it would 
cost $112 billion. If we do both the 15 percent bracket 
doubling and the standard deduction doubling, it would cost 
about $183 billion. But if we phase it in slower, it would come 
about within the President's cost. So we would not be having to 
take away from any of the other tax cut proposals that you have 
already passed and are in the President's plan.
    Now, I think it is important that we do this, but I want to 
just regress for a moment here and say, after what we have seen 
in the stock market and in the economy in general in the last 2 
months, I think we need to do something more bold, Mr. 
Chairman. I think we need to look at actually front end loading 
all of our tax cuts more. I think we need to send real relief 
to our taxpayers so that we can spur this economy which is 
sinking every day and which, I think if we take a bold move, we 
can do.
    The income tax withholding surpluses, not even looking at 
Social Security are increasing even for this year. So I think 
we could increase both the marriage penalty relief and the tax 
bracket relief even more this year, and I would encourage us to 
do that. I think the failure to do so is unfair, and I thank 
you for taking this as a priority and I hope very much that it 
will be in the next one or two bills that will be passed by the 
House and I hope that we can act expeditiously in the Senate. 
Thank you, Mr. Chairman.
    Chairman Thomas. Thank you very much, Senator.
    [The prepared statement of Mrs. Hutchison follows:]
       Statement of the Hon. Kay Bailey Hutchison, U.S.S., Texas
    Thank you, Mr. Chairman, Ranking Member Rangel and members of the 
committee for inviting me to speak at this hearing on individual tax 
relief. I am pleased to talk about ending one of the most egregious 
aspects of our tax code--the marriage penalty. As a Senator, relieving 
the marriage penalty has been one of my highest priorities.
    Right now, married couples all over America--21 million or so--are 
being penalized by our tax code for no apparent reason other than 
because they are married. The Treasury Department estimates that 48% of 
married couples pay a marriage penalty. According to a study by the 
Congressional Budget Office, the average penalty paid is roughly 
$1,400.
    Let me give you an example: Heather Diederich and Willie Simmons 
live in Tyler, Texas, and are engaged to be married on May 26. Both 
work at Brookshires, a local grocery store chain. Heather is the single 
mother of a 3-year-old boy and makes $20,000 a year. Willie makes 
$19,000 a year. When they get married, they will be hit with a marriage 
penalty of $1,600.
    Other than love, what incentive do these two young people have to 
get married? Indeed, they are faced with an unbelievable disincentive. 
It would save them $1,600 a year if they simply lived together. $1,600 
is equal to half a year's rent.
    It doesn't have to be this way. According to the Congressional 
Budget Office's latest projections, we will achieve a $5.6 trillion 
surplus over the next 10 years. This surplus is affording us an 
unprecedented opportunity to relieve the marriage penalty in a 
meaningful way. With this in mind, Mr. Chairman, I would like to 
suggest that there be certain standards for how Congress addresses the 
marriage penalty.
    First, marriage penalty relief should not add another layer of 
complication for taxpayers. Our tax code is already enormously complex. 
Every year, America's taxpayers are forced to spend billions of dollars 
in tax preparation fees and millions of hours filling out complicated 
tax forms. Marriage penalty relief should not contribute to this 
already significant burden.
    Second, marriage penalty relief should ensure that all married 
couples are treated equally. We should strive to bring relief to as 
many couples as possible, and we should not create a tax system in 
which we discriminate against certain couples solely on the basis of 
the division of income. Under current law, couples earning the same 
amount of combined income pay the same amount in taxes, regardless of 
whether one spouse chooses to work within the home. We need to make 
sure this remains the case.
    On this point, some have argued that single-earner couples should 
pay more in tax than two-earner couples with the same combined income. 
This is because single-earner couples currently benefit from what they 
call a marriage ``bonus.''
    For the most part, so-called marriage ``bonuses'' arise in single-
earner families. For example, let's say a man who earns $40,000 a year 
is engaged to a single mom who earns no income. Once they get married, 
he will pay less income tax than he did as a single person and, 
therefore, would be receiving a marriage ``bonus.''
    But let's keep in mind that his $40,000 income will now have to 
support three people instead of just one. His expenses have increased, 
not decreased. By getting married, he is hardly getting a ``bonus''--at 
least in the monetary sense of the word.
    Would it be fair for this couple to pay more in tax than a similar 
family in which both spouses work outside the home and earn the same 
total income? The answer is no.
    Over the last four years, I have introduced every iteration of 
marriage penalty relief in the Senate. In the final analysis, I believe 
that the simplest and fairest way to address this issue is to do two 
things:

   Increase the standard deduction for married filing jointly 
        so that it is twice that of an individual; and
   Widen the 15% tax bracket.

    By taking this approach, we will not be adding a single ounce of 
complexity for taxpayers, and we won't be choosing which married 
couples should get relief. In effect, everyone who is married will 
benefit, and no couple will be discriminated against based on the 
division of income.
    Of course, this approach does not address the marriage penalties 
found in the upper income brackets. However, expanding the 15% bracket 
and increasing the standard deduction for joint filers is a reasonable 
and responsible first step--one that will fit within the $1.6 trillion 
the President has set aside in his budget for tax relief.
    Based on the Joint Tax Committee's estimates of the marriage 
penalty relief bill that Congress approved last year, doubling the 
standard deduction and expanding the 15% bracket would cost $183 
billion over 10 years. According to the Office of Management and 
Budget, the President's proposal--which would reinstate the 10% second-
earner deduction--would cost $112 billion. These two revenue estimates 
are not that far apart, and I believe we can close the gap between them 
by phasing in the 15% bracket expansion at a slightly slower pace than 
we did in last year's bill, thereby achieving savings over the 10-year 
period.
    I would support expanding the other brackets if surpluses continue 
to grow. Doubling the standard deduction and widening the 15% bracket 
now, however, would be a significant down payment.
    Again, Mr. Chairman, I would like to emphasize the importance of 
enacting meaningful marriage penalty relief this year. I believe our 
failure to do so--especially at a time when the federal government is 
receiving record income tax surpluses--would send the wrong message to 
couples like Heather and Willie in Tyler. Let's give them marriage 
penalty relief this year, and let's do so in a way that is simple and 
fair.
    Thank you, Mr. Chairman.

                                


    Chairman Thomas. Now I will turn to our colleagues. Any 
written testimony you have will be made a part of the record 
and you can take the time and share it to talk about your bill 
or your desires in terms of marriage penalty reform in any way 
you see fit.
    Mr. Weller.

    STATEMENT OF THE HON. JERRY WELLER, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF ILLINOIS

    Mr. Weller. Thank you, Mr. Chairman, Mr. Rangel, members of 
the Committee. Thank you for your warm welcome this morning and 
the opportunity to work with all of you as we work to bring 
fairness to the Tax Code.
    I also want to acknowledge my friend, Senator Hutchison, 
and my friend, Congressman Barcia, for their good work on 
working to eliminate the marriage tax penalty. Clearly, this is 
an issue that should be addressed in a bipartisan way and I am 
proud to bring before this Committee a bipartisan bill that we 
will discuss today.
    I also want to acknowledge that President Bush has 
recognized the need to address the marriage tax penalty and 
included a provision in his package. We like his provision. 
However, many of us believe we should do more than the 
President proposes in addressing the marriage tax penalty.
    I believe that the whole issue of the marriage tax penalty 
is best framed by asking some basic questions of fairness, and 
that is, is it right, is it fair that under our Tax Code, 25 
million married working couples, on average, pay higher taxes 
than they would if they stayed single? Is it right, is it fair 
that 25 million married working couples, on average, pay $1,400 
more in higher taxes just because they are married?
    And if you think about it, I represent the south side of 
Chicago and the south suburbs. Fourteen-hundred-dollars is real 
money back home in Illinois. It is a year's tuition at a 
community college, several months' worth of car payments. It is 
three months' worth of day care at a local child care center in 
Joliet, Illinois.
    Working to address the issue of the marriage tax penalty, I 
joined with my colleagues, Representatives Barcia, Capito, 
Kerns, and almost 230 other bipartisan Members in this House 
and introduced H.R. 6, legislation designed to address the 
marriage tax penalty. We offer a solution. We offer a solution 
in H.R. 6 which provides broad marriage tax relief, wiping out 
the marriage tax penalty for the vast majority of those who 
suffer it. We do it in several ways.
    First, we double the standard deduction for joint filers to 
twice that of singles. That helps those that do not itemize 
their taxes.
    Second, we widen the 15 percent bracket so that joint 
filers can earn twice as much in the 15 percent bracket as a 
single filer. That helps those who itemize their taxes, such as 
average middle class married couples who happen to own a home 
and, of course, itemize their taxes.
    In H.R. 6, we help the working poor by addressing the 
marriage tax penalty under earned income credit, helping the 
working poor, and we also recognize the need to address the 
AMT, the alternative minimum tax consequences through our 
solution and we work to make our proposal, of course, holding 
those harmless and ensuring that no one suffers higher 
consequences because of our solution.
    The bottom line is, we want to eliminate the marriage tax 
penalty. It is an issue of fairness. I was proud when this 
House and the Senate this last year sent twice to the President 
a solution which wiped out the marriage tax penalty. 
Unfortunately, the previous President chose to veto those 
bills. I was also very proud that our legislation was 
bipartisan. Fifty-one Democrats joined every Republican House 
Member in voting to eliminate the marriage tax penalty this 
past year when we sent that legislation to the President. 
Building on that, I believe we have a real opportunity.
    I am joined today by Jim Barcia, a friend of mine from 
across the aisle, a Democrat from Michigan, a great guy, 
someone who has been working as my partner in the House on 
working to eliminate the marriage tax penalty, and Mr. 
Chairman, with your permission, I would like to yield the 
remainder of my time to Mr. Barcia to present the merits of our 
legislation.
    [The prepared statement of Mr. Weller follows:]
           Statement of the Hon. Jerry Weller, M.C., Illinois
    Mr. Chairman, I want to thank you for granting me the opportunity 
to testify on this historic effort to bring about tax fairness. I 
appreciate the Committee allowing me to testify on an issue that is 
really an issue of fairness for working couples, eliminating the 
marriage tax penalty imposed on married working couples by our tax 
code.
    On March 16, 2001, Representatives Barcia, Capito, Kerns and I 
introduced H.R. 6 with the goal of significantly reducing the marriage 
tax penalty for the majority of American families who suffer it. H.R. 6 
now enjoys broad bipartisan support with 225 cosponsors. The bill we 
introduced last week is exactly the same as the bill the House and 
Senate sent to President Clinton last year. Unfortunately, President 
Clinton chose to veto this bill, in spite of the fact that 51 Democrats 
voted in favor of the Conference Report. I am proud that H.R. 4810 has 
obtained such strong bipartisan support and I look forward to working 
with Representative Barcia, the lead Democrat cosponsor of H.R. 6, to 
continue to increase the bipartisan support for H.R. 6 this year.
    As it was introduced on March 16th, H.R. 6 significantly reduces 
the marriage penalty for 25 million American working couples by 
doubling the standard deduction to twice that of singles and widening 
the 15% income tax bracket to relieve the marriage tax penalty on those 
who itemize their taxes as homeowners. The bill also provides marriage 
tax relief for the working poor who benefit from the Earned Income 
Credit and ensures that no one sees their taxes rise because of this 
proposal and its relationship to AMT.
    Since 1969, our tax laws have punished married couples. For no 
other reason than the decision to be joined in holy matrimony, more 
than 25 million couples a year are penalized an average $1,400 per 
year. They pay more in taxes than they would if they were single. Not 
only is the marriage penalty unfair, it's immoral that our tax code 
punishes society's most basic institution. The marriage tax penalty 
exacts a disproportionate toll on working women and lower income 
couples with children.
    Let me give you an example of how the marriage tax penalty unfairly 
affect a middle class, married working couple in my district.
    By now, many of you are familiar with two school teachers that live 
in my district in Joliet, Illinois. Shad and Michelle Hallihan make a 
combined income of $61,500 a year in salary. Let's assume that they 
each make about the same salary--Shad at $31,500, Michelle at $31,000. 
In addition, they have one child. If they both filed their taxes as 
singles, as individuals, they would pay taxes in the 15 percent 
bracket.
    But when they made the choice to live their lives in holy 
matrimony, and now file jointly, their combined income of $61,500 
pushed part of their income into a higher tax bracket of 28 percent, 
producing a tax penalty of $828 in higher taxes.
    On average, America's married working couples pay $1,400 more a 
year in taxes than individuals with the same incomes. That's serious 
money. $1,400 is a year's tuition at Joliet Junior College. Over ten 
years, average couples pay $14,000 more in taxes than singles! This can 
represent the cost of a new car or a year of college tuition at almost 
any university in America.
    I believe that in an era of federal budget surpluses which do not 
include Social Security revenues, American families deserve a fairer 
tax code. We should focus on tax code fairness and simplification 
beginning with eliminating the unfairness of the marriage tax penalty.
    I think the issue of the marriage penalty can best be framed by 
asking these questions: Do Americans feel its fair that our tax code 
imposes a higher tax penalty on marriage? Do Americans feel its fair 
that the average married working couple pays almost $1,400 more in 
taxes than a couple with almost identical income living together 
outside of marriage--is it right that our tax code provides an 
incentive to get divorced?
    Eliminating the marriage tax penalty addresses an important issue 
of fairness--I am excited by the prospect that we can work together to 
eliminate it. Mr. Chairman, I would again like to thank you for giving 
me the opportunity to address the Committee on this important issue 
affecting 25 million American families. I would be happy to answer any 
questions.

                                


  STATEMENT OF THE HON. JAMES A. BARCIA, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Barcia. Thank you, Mr. Chairman and distinguished 
Committee Members. It is a privilege for me to join with my 
good friend, Congressman Weller, and the distinguished Senator 
Kay Bailey Hutchison, in presenting testimony in favor of H.R. 
6 this morning. I want to thank you for granting me this 
opportunity to testify before you on this issue that is of such 
critical importance to our Nation's married couples. My 
comments will be brief, although I see I have about a minute 
left, I will try to stay in that range.
    Chairman Thomas. In the bipartisan way, we will give you a 
full five minutes.
    Mr. Barcia. Thank you, Mr. Chairman. As the lead Democratic 
cosponsor of the Marriage Tax Elimination Act, I first would 
like to recognize the leadership of Congressman Weller and I 
want to thank him for giving me the opportunity to do my part 
to ensure that, one day, the marriage penalty is taken out of 
the Federal Tax Code. It has truly been an honor and a pleasure 
to work with him. Without his leadership, vision, and 
perseverance, as well as that of Senator Hutchison on the other 
side of the Capitol, frankly, we would not be here this 
morning.
    Let me begin by saying that, fundamentally, the marriage 
penalty is an issue of tax fairness. Congressman Weller once 
said that the only form someone can file to avoid the marriage 
tax penalty is the paperwork for a divorce. That is not the 
message that this Congress, nor any Congress, should send to 
working families across our Nation. Marriage is a sacred 
institution and our Tax Code should not discourage it by making 
married couples pay more.
    As you know, the marriage penalty occurs when a couple 
filing a joint return experience a greater tax liability than 
would occur if each of the two people were to file as single 
taxpayers. The Congressional Budget Office estimates that more 
than 25 million married couples suffer under this financial 
burden. The penalty harms the pocketbooks of working families, 
with an average couple losing about $1,400 under the current 
system.
    The bill that we recently introduced will fix the grave 
injustice of our current Tax Code that results in married 
couples paying higher taxes than they would if they had 
remained single. For me, this bill strikes to the heart of 
middle-income tax relief. These are the people who are the 
backbone of our communities. These are the people who need tax 
relief the most.
    With a record budget surplus, the time is long overdue for 
Congress to remove the marriage penalty from the Tax Code. This 
bipartisan bill achieves that goal, and I know that all of us 
present here today who support the measure will not stop 
working until this legislation is signed into law.
    I will not be redundant in terms of the two distinguished 
colleagues who have articulated the framework of the 
legislation, but wanted to add my support for the good work 
this Committee is doing in helping to correct this injustice in 
our Federal Tax Code and want to thank you, Mr. Chairman, for 
the attention and time that you are devoting to this issue and 
your leadership, as well as the Members of the Committee, on 
this very important issue that, hopefully, Congress will pass 
expeditiously. Thank you for the time.
    [The prepared statement of Mr. Barcia follows:]
         Statement of the Hon. James A. Barcia, M.C., Michigan
     I want to thank you for granting me this opportunity to 
testify before you on this issue that is of such critical importance to 
our nation's married couples. My comments will be brief.
     As the lead Democratic cosponsor of the Marriage Penalty 
Elimination Act, I would like to recognize the leadership of 
Congressman Weller, and I want to thank him for giving me the 
opportunity to do my part to ensure that one day the Marriage Penalty 
is taken out of the tax code. It has truly been an honor to work with 
him.
     Without his leadership, vision and perseverance we frankly 
would not be here this morning.
     Let me begin by saying that--fundamentally--the Marriage 
Penalty is an issue of tax fairness. Congressman Weller once said that 
the only form someone can file to avoid the marriage tax penalty is the 
paperwork for divorce.
     That's not the message that Congress should send to 
working families across our nation.
     Marriage is a sacred institution and our tax code should 
not discourage it by making married couples pay more.
     As most of you know, the Marriage Penalty occurs when a 
couple filing a joint return experiences a greater tax liability than 
would occur if each of the two people were to file as single 
individuals.
     The Congressional Budget Office estimates that more than 
25 million married couples suffer under this burden.
     The penalty harms the pocketbooks of working families--
with an average couple losing about $1,400 under the current system.
     The bill that we recently introduced will fix the grave 
injustice of our current tax code that results in married couples 
paying higher taxes than they would if they had remained single.
     For me, this bill strikes to the heart of middle income 
tax relief. These are the people who are the backbone of our 
communities, these are the people who need tax relief the most.
     With a record budget surplus, the time is long overdue for 
Congress to remove the marriage penalty from the tax code.
     This bipartisan bill achieves that goal--and I know that 
all of us present here today who support the measure will not stop 
working until this legislation is signed into law.
     Thank you.

                                

    Mr. Weller. Mr. Chairman, may I reclaim 30 seconds of the 
time that I yielded to Mr. Barcia, if I could just briefly? I 
do want to acknowledge Shad and Michelle Hallihan, two public 
schoolteachers who are an example----
    Chairman Thomas. The gentleman's time has expired.
    [Laughter.]
    Mr. Weller. Two public schoolteachers who suffer the 
marriage tax penalty and they are looking to us to solve that 
problem today. Thank you, Mr. Chairman.
    Chairman Thomas. I actually would tell the gentleman, I 
believe I know them----
    [Laughter.]
    And the gentleman has done an excellent job.
    Does the gentleman from Florida wish to inquire?
    Mr. Shaw. No, Mr. Chairman. I just want to congratulate 
each one of the witnesses on the good work that they have done 
and their persistence in seeing that this does become law. 
Having four kids who are struggling to raise a family, all of 
whom, I am pleased to say, are happily married, I am very 
hopeful we will be able to do it, and I hope we can do it 
before this couple has grandchildren. I yield back, Mr. 
Chairman.
    Chairman Thomas. I thank the gentleman.
    Does the gentleman from California, Mr. Stark, wish to 
inquire?
    Mr. Stark. I just wonder if any of the witnesses know what 
we can anticipate we will be looking at. What is going to be in 
the bill? Do you know, Jerry? What is going to be in the bill? 
What are we going to mark up? Do you know?
    Mr. Weller. Mr. Stark, we have made suggestions to Chairman 
Thomas, who has been very inclusive in this process, and, of 
course, when he is prepared to release the mark, we will take a 
look at it. But we have suggested in H.R. 6----
    Mr. Stark. Are you going to vote for it, whatever it is?
    Mr. Weller. Chairman Thomas has been very receptive to many 
of the ideas we have been suggesting to him.
    Mr. Stark. That was not what I asked. You will vote for 
whatever it is?
    Mr. Weller. I certainly expect and hope to vote for the 
proposal we vote on later this week.
    Mr. Stark. Senator, you would support it without knowing 
what it is going to be?
    Chairman Thomas. Would the gentleman yield?
    Mr. Stark. Happily.
    Chairman Thomas. The bill that has been introduced in the 
House by the two gentlemen who are in front of us will be the 
base text.
    Mr. Stark. Aha.
    Chairman Thomas. However, as is usually the case in this 
Committee for as long as I have been on this Committee, there 
is a chairman's substitute which will be offered. So if the 
gentleman is concerned about what the base bill is going to be, 
the gentleman only needs to consult H.R. 6, introduced at the 
beginning of the----
    Mr. Stark. What is going to be the chairman's substitute?
    Chairman Thomas. The gentleman will see the chairman's 
substitute, as has been the case, when the majority, who were 
the Democrats, the day before the markup.
    Mr. Stark. So we call that a pig in a poke, I think, but 
you may call it a substitute.
    Senator, will you vote for whatever form of marriage 
penalty the Chairman decides will finally be in his substitute? 
Are you willing to say that today?
    Mrs. Hutchison. Mr. Stark, I do not know that you have ever 
heard a Senator agree to vote for a bill just as it came out of 
the House, so that would be sort of a different kind of a 
question.
    Mr. Stark. So you are not sure, either.
    Mrs. Hutchison. Let me say, I know what you are doing. I 
think we all do. I am working very hard with the chairman and 
ranking member of the Finance Committee and trying to make some 
very simple points, and those are that we should try to affect 
as many married couples as we possibly can.
    Mr. Stark. What limits us from being completely fair? You 
do not change the upper brackets in any of your bills. Is it 
perhaps that you do not think we have enough money to do this 
completely?
    Mrs. Hutchison. I think we have competing priorities and 
that is why we have the opportunity----
    Mr. Stark. Would you rather have a drug benefit for seniors 
or would you rather have a bigger marriage tax penalty relief?
    Mrs. Hutchison. They are not mutually exclusive, Mr. Stark.
    Mr. Stark. Oh, they are both money. You cannot have them 
both.
    Mrs. Hutchison. I disagree with you totally. I think tax 
relief should be a first priority, because----
    Mr. Stark. Before drug benefit for seniors?
    Mrs. Hutchison. No, Mr. Stark. I do not think they are 
mutually exclusive, and as soon as you are able to, in an 
orderly way, take up each issue as it comes, we have a budget, 
we have tax relief, we have----
    Mr. Stark. I beg to differ with the----
    Mrs. Hutchison. We have Medicare reform, and I do think 
Medicare reform----
    Mr. Stark. I beg to differ with you, Senator. We do not 
have a budget.
    Mrs. Hutchison. Mr. Stark, I do think Medicare reform----
    Mr. Stark. We do not have a budget, Senator.
    Mrs. Hutchison. Needs to be done as a whole and not 
piecemeal.
    Mr. Stark. Senator, we do not have a budget. Do you?
    Mrs. Hutchison. We are working on a budget, yes.
    Mr. Stark. But you do not have one, do you?
    Mrs. Hutchison. Mr. Stark----
    Mr. Stark. So, in effect, you do not know what you are 
talking about when you talk about a budget.
    Mrs. Hutchison. Mr. Stark, I would just say that we have 
very good estimates on what our surplus is going to be----
    Chairman Thomas. Senator----
    Mrs. Hutchison. And, in fact, those surpluses are going up.
    Chairman Thomas. Senator, if you would refrain for just a 
minute, I understand the gentleman's exuberance and frustration 
at being in the minority, but that should not replace common 
courtesy in terms of responding to a fellow colleague who is a 
Senator. Would the Senator----
    Mr. Stark. I would repeat my question, Senator. Do you know 
what you are talking about when you talk about a budget?
    Mrs. Hutchison. I assure you that I do.
    Mr. Stark. You do? What is your budget, then?
    Mrs. Hutchison. And I do know that----
    Mr. Stark. How much is budgeted?
    Mrs. Hutchison. The estimates are, on our surplus and what 
we are going to have in the way of----
    Mr. Stark. How much is your tax bill going to be, Senator?
    Mrs. Hutchison. Our tax bill is going to be $1.6 trillion--
--
    Mr. Stark. All right.
    Mrs. Hutchison. And we are going to have $1 trillion in 
added capacity for spending that we plan to encourage spending 
in Medicare, in public education, and national defense.
    Mr. Stark. And how much is your drug benefit going to be 
for the seniors?
    Mrs. Hutchison. Mr. Stark, I know what you are trying to do 
and I think $1 trillion set aside for added spending needs and 
priorities is quite responsible.
    Mr. Stark. That is not what I asked you. You may think 
that, but I asked you if you have any idea what you are going 
to spend on a drug benefit for seniors, and I think the answer 
is you do not.
    Mrs. Hutchison. Mr. Stark, I think it is very important 
that we----
    Mr. Stark. Senator, do you or do you not know what you are 
going to spend on a drug benefit?
    Mrs. Hutchison. We are able to address any issues----
    Mr. Stark. I am asking for a yes or no response. I do not 
need any help from pipsqueaks on this side of the aisle, Mr. 
Chairman. You can ask a question on your time, son.
    Chairman Thomas. The gentleman's time has expired.
    Does the gentleman from New York wish to inquire?
    Mr. Houghton. I would like to ask Mr. Stark whether he 
intends to vote against the bill without having seen it.
    Mr. Stark. Unlike Mr. Houghton, not being a Republican, I 
am unable to make statements about thingsthat I may or may not 
do.
    Chairman Thomas. I think the gentleman wants a yes or a no.
    [Laughter.]
    Mr. Stark. Mr. Houghton, I do not intend to vote for any 
bill until there is a budget and I know what the priorities are 
and what the effects will be on the American people and whether 
the seniors will have a drug benefit or not, or is it just a 
few thousand wealthy Republicans who will get huge tax breaks 
under the chairman's bill. So that is where I am. If your 
children and my children are just waiting there panting to get 
their hands on estates, that may be one thing. I do not intend 
to do that, discrediting the people who need a drug benefit.
    Mr. Houghton. You know, Mr. Stark, you tend to pull in my 
children with your children on almost every opportunity. Thank 
you very much.
    Chairman Thomas. Does the gentleman from California, Mr. 
Matsui, wish to inquire?
    Mr. Matsui. I would just like to thank Mr. Weller for the 
photo because I miss that couple. I have not seen them in a 
while.
    [Laughter.]
    Actually, I have no questions at this time, Mr. Chairman.
    Chairman Thomas. Thank you. Does the gentleman from 
Louisiana wish to inquire?
    Mr. McCrery. No questions.
    Chairman Thomas. The gentleman from Pennsylvania? Does the 
gentleman from Michigan wish to inquire? The other gentleman 
from Michigan?
    Mr. Levin. I do not think so, except the question has been 
raised about when we will see the details of a proposal, and 
maybe you can let us know, Mr. Chairman, when we are going to 
see the legislation, your mark, that is proposed to be handled 
either tomorrow or Friday. Really, I think this legislation is 
much too important for us to go in without being fully aware of 
the details. So maybe you could let us know. We have not seen 
it. I do not think some of your colleagues on the Republican 
side have seen it. At least we on the Democratic side have not 
seen it. So when do you intend to give us your mark?
    Chairman Thomas. I will tell the gentleman that he 
apparently is chafing under the rules that this Committee has 
operated under for a number of years.
    Mr. Levin. I am not chafing. Mr. Chairman----
    Chairman Thomas. We are following exactly the rules that 
the gentleman's party followed when they were in the majority, 
and that is you have been supplied with the base text 2 days 
before the markup. The chairman's mark or the substitute is to 
be supplied one day before the markup with revenue tables. This 
is the day before the markup. You will receive the substitute 
and the revenue tables today. The gentleman is complaining that 
I am not meeting his time table, but rather I am meeting the 
rules of this Committee. That is the gentleman's problem.
    Mr. Levin. Mr. Chairman, I am not chafing and I do not 
think anybody else should. It is suggested that we mark up a 
bill involving hundreds of billions of dollars and you say--I 
am not sure what rules you are talking about. I think there is 
a 48-hour rule, is there not?
    Chairman Thomas. I will tell the gentleman he received it 
48 hours before the markup if the markup is to occur on 
Thursday. If, in fact, we decide to have the markup on Friday, 
he will then have an additional 24 hours in which to consider 
the base text under the rules. The base text is H.R. 6. Not 
only is it not unfamiliar to us, but it passed the House just a 
year ago by a very large bipartisan majority. We are focusing 
primarily on the marriage penalty structure in H.R. 6. There 
may be some revisions to bring it current and to make other 
adjustments that have come to us since the bipartisan passage 
of that marriage penalty legislation.
    Mr. Levin. All right. And also, there is a child credit 
proposal that is going to be in the mark?
    Chairman Thomas. We are going to try to put a child credit 
provision, which is the President's doubling of that child 
credit phased in with, again, modifications, in part, as the 
gentleman well knows, from the marginal rate reduction bill. 
There is a problem with the alternative minimum tax exacerbated 
by the gentleman's tax bill of 1993 which has not been dealt 
with, but we are dealing with it so that no income tax payer 
who gets a tax cut inadvertently gets an increase in their 
taxes because of the alternative minimum tax.
    Mr. Levin. Right.
    Chairman Thomas. That will be part of the adjustment in 
dealing with the child credit.
    Mr. Levin. And the estate tax, will that----
    Chairman Thomas. That will not be marked up this week.
    Mr. Levin. And so you are saying that sometime today--it 
could be as late as five or six or seven o'clock--we are going 
to receive your mark?
    Chairman Thomas. The gentleman will receive the day before 
the markup the chairman's substitute or the mark, as has been 
done traditionally in this Committee for years.
    Mr. Levin. Well, Okay. I----
    Chairman Thomas. I understand the gentleman's frustration 
with----
    Mr. Levin. I am not frustrated----
    Chairman Thomas. With not getting the information as soon 
as he would like to release to the press and others. But we are 
going to follow the rules of this Committee.
    Mr. Levin. Mr. Chairman, I think it is still my time, so 
let me just say----
    Chairman Thomas. I thank the gentleman for yielding.
    Mr. Levin. It is not a question of yielding. I am glad to 
yield to you at any point. It is not a question of giving 
information to the media. This Committee has a responsibility. We are 
talking about a $1.6 trillion, I think, plus, tax proposal, and now the 
second chunk is supposed to be marked up. We are talking about hundreds 
of billions of dollars and I think we should not worry so much about 
the past but argue about or discuss what is an intelligent way to 
proceed in the present.
    And all I am saying is for us to receive a mark, which is 
the precise proposal we would be considering and perhaps 
amending, less than 24 hours before you want us to mark up, I 
think is not reflective of due consideration of major tax 
policy.
    Chairman Thomas. I will tell the gentleman if he will 
examine in his packet a description of the Marriage Penalty and 
Family Tax Relief Act of 2001, which was provided to the 
gentleman's staff yesterday, he might become familiar with----
    Mr. Levin. I have read it.
    Chairman Thomas. Oh, Okay. You have read it. Fine.
    Mr. Levin. That is not the bill that will be before us 
tomorrow.
    Chairman Thomas. Does the gentlewoman from Washington wish 
to inquire?
    Ms. Dunn. Thank you very much, Mr. Chairman. I have no 
questions but I simply want to congratulate Congressman Weller 
and Senator Hutchison for taking leadership on this very 
important issue of marriage penalty tax relief. I appreciate 
the chairman's comments that we will have the budget on the 
floor of the House before we act on this particular bill on the 
floor of the House, and I think that is important in terms of 
priorities.
    So I just want to thank you both very much for doing 
something, and Congressman Barcia, for doing a lot of work on 
an issue that my constituents are very, very interested in 
seeing done. This is the year to do it. We have the dollars in 
the surplus. We have budgeted the dollars for marriage penalty 
tax relief and I congratulate you both for being successful.
    Chairman Thomas. Does the gentleman from Washington wish to 
inquire?
    Mr. McDermott. Thank you, Mr. Chairman. I am sorry I am a 
little bit late because I was over at the Budget Committee, 
where I was walking through the budget for the first time. What 
I am having trouble understanding is how do you know which 
figures to use, because we just got the budget last night at 
ten o'clock, and how do you know that there is money in here to 
do the tax cuts that you are asking for? Where are you getting 
your figures from, or are you just deciding how much money you 
want to give and----
    Mrs. Hutchison. Mr. McDermott, I would just answer by 
saying that we get the figures from OMB and the Congressional 
offices, the Congressional Budget Office, and we know how much 
surplus we are going to have over the next 10 years. Our 
proposal is to spend $1.6 trillion of that proposed $5.6 
trillion surplus in giving money back to the people who earned 
it. That is a decision that we have made and I think that there 
is no question that the budget is going to go through in a 
timely manner and so are the tax relief bills that are going 
through both houses of Congress and I am very pleased that they 
will be.
    Mr. McDermott. Does it trouble you at all that you are 
using the Medicare surplus as a part of this tax cut?
    Mrs. Hutchison. I do not think we are going to not address 
the Medicare issue. We have been trying to address that issue, 
quite frankly, for the last few years, and not only has 
Congress not been able to agree on the right approach, but we 
have not had support from the President. So I think all of us 
would like to address the issue and I hope we can do it in a 
bipartisan way on an expedited basis and that we will use some 
of the $1 trillion surplus that we are setting aside for 
spending priorities.
    Mr. McDermott. Five-hundred-and-sixty-five billion of which 
is from Medicare. If we demonstrate in the process of this 
budget hearing that you are using the Medicare trust fund for 
funding of the tax cut, would you vote against that?
    Mrs. Hutchison. I do not think that you will be able to 
make that case. I think----
    Mr. McDermott. I understand that, but if I can, if we do, 
will you vote against it?
    Mrs. Hutchison. Well, let me just say that you used the 
term $565 billion and we know we are going to have $1 trillion 
left over if we stick with the $1.6 trillion tax cut, so there 
will be plenty of money if that is our priority to address the 
issue.
    Mr. McDermott. I know you can construct a $1 billion. We 
have got charts and all kinds of stuff in here. But the fact 
is, you have to use the Medicare trust fund to create that 
contingency fund, as the President calls it, or as it appears 
in the budget document. I think that that is going to become 
clear. I think that a lot of people are going to get into a 
position where they have committed themselves to tax cuts, and 
then they are going to stand up and say, well, I voted for H.R. 
2, because everybody in here voted for H.R. 2. We said, we are 
putting this in a lockbox and we are not going to take any of 
that hospital trust money and use it for anything else except 
for Medicare.
    Mr. McCrery. Will the gentleman yield?
    Mr. McDermott. Just a moment. We are going to now change 
that definition of what Medicare is from hospitals to 
everything in the whole of the Medicare program. We are 
changing the concept of the tax that the people in America are 
paying into Medicare or the Part A hospital trust fund. And in 
using that money for other things, you are simply spending Part 
A money on other things in the budget. There is no way to avoid 
it, given the numbers that are here.
    Mr. McCrery. Will the gentleman yield?
    Mr. McDermott. Yes, I yield to the gentleman.
    Mr. McCrery. I understand what the gentleman is trying to 
say, and I know that he does not want to mislead anybody, so I 
want to make it clear that nobody is proposing that the 
Medicare trust fund be violated. In other words, the gentleman 
knows that the trust fund is composed of government 
securities--not cash, government securities--and I believe what 
the gentleman is referring to is the cash----
    Mr. McDermott. You are saying that it is not fungible? Come 
on, Jim.
    Mr. McCrery. I believe what the gentleman is referring to 
is the cash surplus that is used to buy those government 
securities and place the government securities in the trust 
fund. Nobody is going to take those government securities out 
and spend them. That would be spending the trust fund. Now, if 
the gentleman is referring to the cash surplus that the 
trustees use to buy those securities, that is a different 
matter. But I know the gentleman does not mean to imply that we 
are going to violate the Medicare trust fund. Nobodyis 
proposing that and I know the gentleman knows that.
    Mr. McDermott. I guess my time has expired, so I will not 
answer that any more than to say you can do all the monkeying 
you want with the budget figures, but the fact is that the 
money is being used for the tax breaks.
    Chairman Thomas. Does the gentleman from Pennsylvania, Mr. 
English, wish to inquire?
    Mr. English. No questions.
    Chairman Thomas. Does the gentleman from Wisconsin, Mr. 
Kleczka, wish to inquire?
    Mr. Kleczka. Dare I? Mr. Weller, how does your marriage 
penalty relief differ from the President's proposal, and could 
you also give me the 5- and 10-year cost?
    Mr. Weller. The proposal the President puts forward, and 
first, I want to acknowledge that I am pleased with----
    Mr. Kleczka. Do not acknowledge. I only have 5 minutes.
    Mr. Weller. I recognize that, and I am giving you the 
abbreviated answer. Let me first acknowledge we have a 
President who wants to address the marriage tax penalty and he, 
in his proposal, provides roughly $100 billion in marriage tax 
relief over 10 years, and the way he does it is he provides for 
a second earner deduction of 10 percent of up to $30,000 of the 
second earner's income, which means a $3,000 deduction. That 
would provide about $700 in marriage tax relief for those who 
are able to use that.
    The average marriage tax penalty is about $1,400. Shad and 
Michelle Hallihan suffer the average marriage tax penalty, and 
what we propose doing is to ensure that those who----
    Mr. Kleczka. Mr. Weller, what is the cost of your H.R. 6?
    Mr. Weller. The proposal that we offer is roughly $180 
billion over ten. We, of course, solve the marriage tax penalty 
and essentially eliminate the marriage tax penalty for the vast 
majority of those who suffer it in several ways.
    Mr. Kleczka. And the further question is, when can a 
married couple anticipate receiving the full $1,400 relief, 
because I believe your bill is phased in, also.
    Mr. Weller. Our legislation is phased in. The standard 
deduction, we double the standard deduction for joint filers. 
That would be immediately available in the 2001 tax year. 
Actually, our proposal is retroactive, so it would be available 
this year.
    Mr. Kleczka. When can a married couple expect the $1,400?
    Mr. Weller. Well, those who use the standard deduction 
would see benefit this year under our proposal because we do 
make it retroactive.
    Mr. Kleczka. Okay.
    Mr. Weller. Those who itemize their taxes, it is phased in 
over five years, so the widening of the 15 percent bracket. 
Those who benefit from the EIC would see benefit in the first 
year.
    Mr. Kleczka. So a couple would see the $1,400 possibly in 
2006, is that accurate?
    Mr. Weller. Once fully phased in, that is correct.
    Mr. Kleczka. Thank you very much. My colleague, Mr. 
McDermott, talked about this contingency fund, and I know 
Senator Hutchison also indicated that we are going to have $1 
trillion available even after the tax cuts for star wars, for a 
drug benefit, for education, for all sorts of other programs 
which a lot of members are looking forward to supporting.
    However, I think in discussions we had in this Committee 
and discussions we had yesterday with the trustee for the 
Social Security and Medicare trust fund, what we found out, 
Senator, is that over one-half of that $1 trillion you talk 
about being a contingency fund is the Medicare HI trust fund. 
Well, here we go again, and I guess we can debate it, but the 
figures and facts that we have indicate that $526 billion of 
this $1 trillion or whatever the amount is is counting that 
surplus from the Medicare HI trust fund. So I think we can keep 
talking about $1 trillion being available, but in essence, that 
is not really accurate. Let me thank the chair.
    Chairman Thomas. Does the gentleman from Arizona wish to 
inquire?
    Mr. Hayworth. I thank the Chairman for the time and I thank 
my colleagues from the House and our friend from the Senate, 
the lady from Texas, for coming down to visit with us this 
morning.
    Mr. Chairman and my colleagues, listening to some of the 
comments here today reminds us of a road we have been down 
before, and we heard it yesterday with the interesting 
questions going to the Secretary of the Treasury. Though 
Halloween is some months away, it appears that we are getting 
the sequel to so many cheap horror films today with perhaps a 
misunderstanding of the budgetary process and perhaps an honest 
difference of opinion.
    Senator Hutchison, I think we all can appreciate passion 
and differences of opinion, and goodness knows I have had my 
share of passionate exchanges with people where we have 
profound disagreements. I will lament the fact that there are 
those here who perhaps did not want to hear your answers and so 
I feel compelled to apologize on their behalf, because I know 
they seek civility in what we do here.
    I also thank my colleague from Michigan for pointing out 
the fact that this is a bipartisan bill, and I would address my 
inquiry to Mr. Barcia. Jim, what are you hearing from your 
constituents? What are they telling you about the marriage 
penalty and why did you feel compelled to join with Congressman 
Weller and Senator Hutchison in offering this piece of 
legislation?
    Mr. Barcia. Thank you, Congressman Hayworth. When this 
legislation was introduced, we, of course, sent out a news 
release in our district. It was carried extensively by our 
electronic and print media throughout our region of the State 
and I received a lot of positive comments about people who, as 
Congressman Weller mentioned, could use that additional $1,400 
to $1,600 of annual tax relief to apply to the cost of tuition 
for their children, or themselves if they are being retrained 
if they have recently lost their employment.
    We are seeing the signs of the economy slowing down in 
Michigan, and for the first time in quite a while now, we are 
seeing layoffs in my district. So a lot of people certainly 
would appreciate having that additional tax relief to either 
pay down perhaps some credit card debt, to perhaps address the 
increasedenergy costs which we anticipate in this next winter 
season, both Michigan being a major tourism State and relying on 
tourism for the economic health of many of our shoreline communities in 
my district. The cost of gasoline is expected to rise again, as well as 
home heating costs may be a serious issue for many families throughout 
Michigan and the frost belt States.
    So I think a lot of people, when they read that we have a 
surplus at the Federal level, that they feel that this would be 
one way to target tax relief to working families, especially 
those where both spouses work to sustain the family 
economically. So I am very pleased and honored to be able to 
join Congressman Weller and the other Democrats and Republicans 
on this legislation to--what we hope to achieve is to have a 
fairer Federal tax code. Yes, it will provide tax relief, but 
there is simply no rationale why a couple should be punished 
for being married if a couple that lives together without the 
benefit of marriage is not susceptible to that same tax burden.
    So I guess that is why I joined with Congressman Weller, 
and I want to thank my Democratic colleagues who serve on the 
Committee also for giving me a pass on some of these difficult 
questions today. I am here because I think the issue is one of 
tax fairness and I am honored to lend my support. We do have a 
lot of Democratic cosponsors and we have reached out to many in 
my caucus to join in this effort.
    Mr. Hayworth. I thank my colleague from Michigan and I do 
believe that despite some of the rather provocative 
protestations of some of my friends on the other side, we are 
seeing a bipartisan consensus on this issue, because after all, 
Mr. Chairman and my colleagues, I believe in all 50 of our 
States when people apply for marriage licenses, they are not 
asked their party registration in the intent for that civil 
union.
    So I look forward to moving forward and I thank the 
chairman also for operating under the time-honored regular 
order and rules of this Committee, despite, again, some of the 
rather passionate protests we are hearing today. It is as if 
institutional history failed to exist, and I would also 
acknowledge that we are not being uncivil when we follow the 
rules. I thank the chair.
    Chairman Thomas. I thank the gentleman.
    Does the gentleman from Georgia, Mr. Lewis, wish to 
inquire?
    Mr. Lewis of Georgia. Thank you very much, Mr. Chairman. 
Thank you so much. Let me thank my colleagues from the House 
and friend from the Senate for being here today, and let me say 
to my colleague from the great State of Arizona, civility and 
peace is not the absence of tension and conflict. It is the 
presence of justice and fairness.
    Mr. Chairman, I want to say to you, sir, this member is not 
frustrated. I am not frustrated, not at all. But I do not 
understand, I do not understand for the life of me, how do we 
plan to do all these things with such a massive tax cut, pay 
down the national debt, save Social Security, take care of 
Medicare, educate all of our children, and look out for the 
basic human needs of our people? I do not understand how we are 
going to do it. I wish you could tell me.
    But as a member who believes in the philosophy of non-
violence and passive resistance, I do not have any questions. I 
yield back the time, Mr. Chairman.
    [Laughter.]
    Chairman Thomas. I thank the gentleman. I can assure him, 
he just needs to vote ``yes'' as these measures come up.
    Does the gentleman from Colorado wish to inquire?
    Mr. McInnis. Thank you, Mr. Chairman. I do. First of all, 
Senator and colleagues up there, it is interesting that when 
the cameras are in the room, the Committee sometimes takes on 
an atmosphere of a little more courtroom drama, including some 
of the examination that took place. I would assure our guest 
from the other side of the Capitol that rudeness is not routine 
on the Committee and I think it is unfortunate that we saw a 
display of it this morning.
    We all have a lot of interest in what to do with our 
economy as we go through here. I am reading Newsweek, and I get 
to page, about 36, before they quit talking about the economy. 
We have got a serious problem out there.
    And I would say to my colleague, my respected colleague 
from the State of Georgia, this is not a massive tax cut. We 
have a massive problem on our hands that is taking place as we 
now speak. We have got to get some money out there to the 
people that are going to bring this consumer confidence back 
up, and $1.6 trillion over a 10-year period of time is not what 
could be classified as a massive tax cut.
    We are going to be able to take care of more needs than we 
have ever taken care of in the history of this country. But at 
the same time, I think we have fiscal responsibility that we 
need to exercise and I think that the bill that is in front of 
us, the proposals that are being discussed in front of us which 
will later accumulate into a bill, are a step in that right 
direction.
    I would also say to my colleagues that I have heard some 
discussion about, well, maybe sometime this afternoon they are 
going to get a copy of a bill and they do not have time to read 
it or things like that. I think that is a little unfair 
description of what is occurring. The content, the Chairman has 
said repeatedly during this meeting, that you can pick up a 
good portion of the content, so you can get kind of a head 
start on your reading this evening by looking at the content of 
the previous bill last year, which was vastly supported, and I 
would venture to say that the bipartisanship demonstrated today 
in the support of this bill will also be demonstrated on the 
House floor when the final vote comes down, although it may not 
be demonstrated here in this Committee. But once it leaves the 
Committee, it will be.
    The fact is, all of us can get a start on what the 
substance of this bill is by simply reading it. I mean, there 
is a lot of material here that will prepare you. So I do not 
think anybody is going to get caught off guard. I think we all 
have a good idea of what is coming forth and I would hope that 
we move forward in a little more bipartisan fashion and with a 
little more teamwork.
    And again, I commend members of both parties sitting up 
there that are sponsors of this bill and thank the Senator for 
coming over. Mr. Chairman, I yield back my time.
    Chairman Thomas. I thank the gentleman.
    Does the gentleman from New York, Mr. McNulty, wish to 
inquire?
    Mr. McNulty. I do. Thank you, Mr. Chairman. I thank the 
chairman and the ranking member. I thank our witnesses this 
morning.
    I will not ask a question, Mr. Chairman, just want to take 
a moment to express the same concern that was expressed by my 
colleague, John Lewis, with regard to the overall amount of the 
tax cut, and I continue to make this simple point. The numbers 
do not add up. If you assume a $5.6 trillion surplus over the 
next tenyears and you do what the President said in his address 
to the joint session of Congress by subtracting $2 trillion for debt 
reduction, which is something I support, and then if we keep our word 
on the lockbox, $2.5 trillion in Social Security trust fund and $400 
billion in the Medicare trust fund, you are down to $700 billion. And 
then if you have a $1.6 trillion tax cut, you are back into a deficit 
situation. We did that before. I do not want to go back to the days of 
deficit spending, but I do want to work with the Chairman, the ranking 
member, and the other members of the Committee in having some 
reasonable tax cut proposal. Thank you, Mr. Chairman.
    Mrs. Hutchison. Mr. Chairman.
    Chairman Thomas. I thank the gentleman. Yes, the 
gentlewoman.
    Mrs. Hutchison. Could I just say one point on the numbers. 
I think you are doubling up on the debt reduction and the 
Social Security lockbox and that is where you get the deficit.
    Mr. McNulty. And I want to respond to that, because I still 
have time, then. That is the same rhetoric we keep hearing, and 
my good friend from Louisiana makes that point, too. But when I 
talk about the Social Security trust fund, I am talking about 
the cash. The President of the United States said in a meeting 
directly with me that he wants to take care of these funds and 
he said that it is a crisis that we are facing in the years 
ahead, especially when the baby boom generation retires.
    Now, we cannot solve that problem, Senator, by putting a 
bunch of IOUs in that lockbox. In that lockbox to me means 
money, and if we stop stealing the Social Security trust fund 
money, which we have been doing for 30 years--and listen, 
Senator, I am an equal opportunity critic on that, because 
during most of those years, we had Republican Presidents. 
During most of those years, we had Democratic Congresses. If we 
want to point the finger, there is enough blame to go around 
for everybody.
    That is not what I am about. I am talking about the future. 
I am talking about avoiding this crisis that we are talking 
about in the future with regard to Social Security, and the 
best way to do that, Senator, is to stop stealing the money.
    Mrs. Hutchison. Mr. McNulty, I would just say that you have 
to use accurate math, and part of paying down the debt is in 
the Social Security side and you just cannot double count it.
    Mr. McNulty. We have another whole $1 trillion, Senator, 
that we owe to the Social Security trust fund from before. This 
is the projected surplus in the fund we ought to leave there to 
take care of this impending crisis. And on top of that, we 
still owe $1 trillion to the fund in IOUs. Let us not put more 
IOUs in the box. Let us leave the cash in the box.
    Mrs. Hutchison. I would just say, if you are looking toward 
the future, paying down the debt and strengthening Social 
Security is an important part of this whole package.
    Mr. McNulty. Senator, somebody is using the money twice, 
but it is not me.
    Chairman Thomas. Does the gentleman yield back the balance 
of his time?
    Mr. McNulty. I do, Mr. Chairman.
    Chairman Thomas. I thank the gentleman.
    Does the gentleman from Florida wish to inquire?
    Mr. Foley. Thank you very, very much, Mr. Chairman. I am 
indeed sorry I missed the bipartisan retreat. I wonder if the 
moderator was Jerry Springer.
    Mr. Weller, you sound like you are interested in obviously 
eliminating the marriage penalty, but you also sound like you 
are willing to compromise with the President. Is that what I 
hear you say today?
    Mr. Weller. We, of course, not only want to work with the 
President to eliminate the marriage tax penalty, but we also 
want to make it a bipartisan effort, and that is why I 
appreciate the good work of Mr. Barcia and his colleagues on 
his side of the aisle, our colleagues on his side of the aisle 
who are working with us.
    The bottom line is, the President has a plan. It eliminates 
about half the marriage tax penalty. Many of us believe we can 
and should do more. We believe it will fit in the framework of 
the $1.6 trillion in tax relief over 10 years, and we have got 
a $5.6 trillion surplus of extra tax revenue. The President 
proposes taking a portion of that, essentially less than one-
fourth, to provide tax relief, and a key part of his tax relief 
proposal not only is helping our economy, but also bringing 
fairness to the tax code.
    I, for one, and I know many in this House agree that the 
most unfair consequence of our complicated tax code is the 
marriage tax penalty. It is just wrong that 25 million couples 
pay $1,400 more in higher taxes just because they are married. 
My hope is that we will continue to have bipartisan support. I 
would note that 51 Democrats voted for the proposal that every 
House Republican voted for this past year, and unfortunately, 
the previous President vetoed it.
    But we have a new President who, at the time that President 
Clinton vetoed our effort to eliminate the marriage tax 
penalty, said had the same bill reached his desk and he was 
sitting in the Oval Office, he would sign it into law. Of 
course, H.R. 6, the base bill that we have before you today, is 
legislation that President Bush said he would have signed had 
he received it had he been President last August.
    Mr. Foley. Mr. Barcia, we have heard a lot this morning 
about failure to have a budget before we consider tax relief. 
Can you tell me what was in the thinking of the Democratic 
Caucus when they offered a substitute proposal last week, 
because it would seem to me if the budget is the hold up and 
they are accusing us of constructing this fictitious document 
of tax relief without a budget, how did your side come to the 
floor with an alternative proposal?
    Mr. Barcia. I think the feeling was that the expenditures 
would be less, but I understand your point, and perhaps some 
Members of the Committee might----
    Mr. Pomeroy. Will the gentleman yield?
    Mr. Barcia. Sure.
    Mr. Pomeroy. We constructed our alternative within a 
framework that allowed one-third of the projected surplus for 
progress on eliminating the debt, one-third for tax relief for 
the American people, one-third held in contingency in case 
these 10-year projections do not all come in, as well as for 
the critical investments that we made. So we recognized it was 
out of order, but we felt that at least trying to get it back 
into a framework that allowed a balance was the appropriate way 
to proceed.
    Mr. Foley. Reclaiming my time, so it was a political 
response. Nobody wanted to be outside the box. No one wants to 
go home on Sunday to tell your Members of the congregation you voted 
against marriage penalty.
    Senator, during the debate on capital gains reduction, I 
remember Mr. Rubin and Mr. Clinton and others roundly 
criticizing us, saying if we cut capital gains, it would have a 
huge effect on the economy. We would blow up the deficits. We 
would cause irreparable damage to the economy. Was not the 
response of the reduction of capital gains the opposite? Was it 
not stimulative? Did we not see income to the Treasury that was 
dramatic and increasing revenues to the Treasury?
    Mrs. Hutchison. That is correct, Mr. Foley. It was the 
opposite. There was not only no loss, there was actually a gain 
in revenue when capital gains were lowered and many people are 
talking about adding that to a tax cut package because we do 
need a response, as Mr. McInnis pointed out, to the real crisis 
we are facing in our economy. It has been shown that lowering 
capital gains taxes is a positive factor and I think it would 
give a lot of people more incentive to invest and save.
    Mr. Foley. And we have studied, obviously, the economic 
projections. We have looked very carefully. We have used CBO, 
OMB in order to determine the scope of our initiative today, 
have we not?
    Mrs. Hutchison. Well, of course. We would not be talking 
about tax relief if we had not had growing surpluses being put 
forward. In fact, when we first started talking about tax cuts, 
the surplus was $3 trillion. Now it is $5.6 trillion, and the 
surplus for this year is also being now looked at and revised 
upward toward $90 to $100 billion this year. I hope we can 
front end load some of these tax cuts.
    Mr. Foley. Thank you, Senator. How many Democratic 
cosponsors are there of this initiative on marriage penalty? 
Are you----
    Mr. Barcia. We lost two recently. We have, I think, close 
to 40-50--excuse me, 15. We expect more to join when we see the 
actual language that is reported from the Committee.
    Mr. Foley. So there is bipartisan support, no question?
    Mr. Barcia. There will be, and as I think Congressman 
Weller pointed out, 51 Democrats last year on the floor voted 
for it. I think as more discussion occurs on the issue of the 
fairness of the marriage penalty, or the unfairness of the 
marriage penalty, perhaps we will be joined by more Democrats. 
We have some new Members that may be lending their support, as 
well.
    Mr. Foley. I want to thank you all for your courtesy today 
and for your complete answers and for your testimony.
    Chairman Thomas. Does the gentleman from Louisiana wish to 
inquire, Mr. Jefferson?
    Mr. Jefferson. Yes, briefly, Mr. Chairman. Thank you for 
the allowance.
    Mr. Weller, let me ask you, I suppose you have looked at 
President Bush's proposal in this area compared to your own. 
What do you think are the major shortcomings, if there is one, 
or the major shortcoming, if there is only one, of President 
Bush's plan as opposed to yours with respect to attacking this 
question?
    Mr. Weller. Thank you, Mr. Jefferson. I think to begin 
with, number one, I think it is important to acknowledge we 
have a President who wants to address the marriage tax penalty 
and that is progress. The President's proposal, which provides 
a second earner deduction, essentially would eliminate about 
half the marriage tax penalty for the average couple who is 
able to use the second earner deduction.
    Many of us feel we need to do more, and the proposal, the 
bipartisan proposal in H.R. 6 that we are presenting today 
would essentially wipe out the marriage tax penalty for the 
vast majority of those who suffer it. I would point out, it is 
phased in. It will not happen immediately. But under our 
proposal, we, of course, provide for a doubling of the standard 
deduction, which will help those who do not itemize. That would 
be available immediately. We propose phasing in a widening of 
the 15 percent bracket so that joint filers could earn twice as 
much in the 15 percent bracket as single filers, and those who 
benefit from this, and this is why it is so important that we 
widen the 15 percent bracket, are those who itemize, who are 
homeowners. You give to your church or your synagogue or own a 
home, you itemize your taxes.
    Mr. Jefferson. Before my time is gone on this, I am 
satisfied with your answer so far. Which half of the taxpayers 
are left out from the President's proposal? Is it not the tax 
that is on the lower end of the income scale and is it not the 
half, really, that needs this relief the most?
    Mr. Weller. The President's proposal would benefit all 
those where you have two-earner households. So if you have a 
lower moderate income family with two earners in the household, 
they would benefit from the President's proposal. But I would 
point out that in the proposal that we offer, we not only 
double the standard deduction and widen the 15 percent bracket, 
but we also help those who utilize the earned income tax credit 
because there is a marriage tax penalty under the EIC and we 
adjust the eligibility threshold for joint filers, eliminating 
the marriage tax penalty for them, and that will help those who 
suffer the EIC.
    And last, if I could, just to complete the description of 
the bill, we also address any AMT consequences that would occur 
from the adjustments we make in the tax code.
    Mr. Jefferson. Do you not think if we are going to provide 
relief here and if the President is only going to let us take 
care of half of the married couples that we ought to take care 
of the half that needs this help the most? Your bill does do, 
as you just pointed out, some things through EITC, which, of 
course, is going to be helpful to that lower end of the income 
scale. We are going to end up with this bill being slanted, as 
we did with the rate adjustments, geared more to people who are 
the upper income and that is not where we should be going with 
this, I do not believe, Mr. Weller. Thank you, Mr. Chairman.
    Chairman Thomas. I thank the gentleman.
    Does the gentleman from Texas wish to inquire?
    Mr. Brady. Thank you, Mr. Chairman. I want to thank 
Congressmen Weller and Barcia for your leadership in this 
effort and I want to also welcome my Senator, Kay Bailey 
Hutchison, to the Committee. I also, Senator, want to apologize 
for the conduct and behavior of my colleague specifically from 
California. As you know, sometimes when your argument lacks 
substance and intellect, you resort to rudeness and 
interruption and badgering a witness.
    Now, you are a Senator from a major State. You have been 
involved in eliminating the marriage penalty long before some 
of our born-again repealers have gotten involved. You know how 
people act. But what bothers me is the thought that there may 
be young people in this Committee room, or because our hearings 
are so often televised, watching on TV, who think that some of 
the leaders of our Nation with such big responsibility can be 
so small in stature. So let me apologize again to you.
    I am somewhat astonished at the point that keeps being 
raised and demanded of you, where is the money, stop stealing 
our money. I know that there is quite a bit of dollars in this 
budget. I cannot tell you exactly where it is, but I can tell 
you where it has gone.
    I know that we went on a $50 billion spending spree the 
final weeks of Congress up here, not that we do not need 
another Lawrence Welk museum, not that the ``big dig'' should 
not soon approach the cost of the international space station, 
not that we should not--and this is what we did--we actually 
funded a program to give lifelong housing and health care to 
chimpanzees who have been used in research. Lifelong health 
care and homes for chimpanzees, but not a dime for the long-
term reform of Medicare. How dare we demand from you where the 
money is. I think the taxpayers ought to be demanding from us, 
where is our money? Where are your priorities?
    It seems to me we finally have a President who has said, we 
cannot go on a spending spree. If we say no to a program, 
Washington, D.C. will not slide off into the Potomac, and we 
have got a President who understands first things first and 
that he has put his priorities together.
    So I appreciate the fact that you are trying to restore 
fairness to our Tax Code. It is wrong to tax people more for 
being married. And yes, we do have the money to restore 
fairness. Thank you, Senator.
    Mr. Herger. Would the gentleman yield?
    Mr. Brady. Yes.
    Mr. Herger. Thank you. I want to thank the gentleman from 
Texas for pointing out how we have not managed many of our tax 
dollars in the past, and I would also like to point out another 
distinction and that is we have heard from some of our good 
friends on the other side of the aisle that they think perhaps 
this tax reduction, allowing people, couples like we see over 
here that are married, that are paying a penalty of $1,400 a 
year more than they should, that somehow we are allowing them 
to keep too much. One-point-six trillion is too much, we hear 
argued, and I would argue that it is not nearly enough. If we 
put it into perspective of what other tax reductions have been 
over the years, and as the gentleman knows, in 1963, the 
Kennedy tax reduction, this is only half of what it was 
equivalent to that time, or in 1983, the Reagan tax reduction 
is one-third of what it was equivalent at that time. And so if 
anything, during this time of turmoil in our economy, if 
anything, the taxpayers, this couple and every other couple 
that is married that is being penalized----
    Mr. McNulty. Would the gentleman yield?
    Mr. Herger. We should allow them more. It is not my time to 
yield, but I appreciate your bringing it out and I yield back 
my time to the gentleman from Texas, who controls the time.
    Chairman Thomas. Does the gentleman from Tennessee, Mr. 
Tanner, wish to inquire?
    Mr. Tanner. Thank you very much, Mr. Chairman. I would just 
like to make the observation that we are being asked to vote on 
a tax plan that is phased in over 5 or 6 years based on 10-year 
projected numbers. However one puts the pieces together, that 
is what we are being asked to do.
    Now, the uncertainty of this 10-year projection is 
unassailable, in my view, by any reasonably sane human being. 
Nobody knows what the next 10 years hold for this country. 
People are surprised when you tell them that only 29 percent of 
this 10-year projection is supposed to even show up here in the 
next 5 years. Last year, we spent $205 billion in interest 
checks we wrote. All of the corporate income taxes in the 
country amounted to $207 billion. Said another way, all of the 
corporate income taxes that corporations in this country pay go 
to pay nothing but interest. Over 20 percent of every dime that 
we send in personally, in our personal income tax returns next 
month, will go, 20 percent or a little better, to pay nothing 
but interest on the national debt.
    Now, when we are talking about why we need a budget first, 
if we do not have a budget, everything fits. Now, the Secretary 
of the Treasury was over here 2, 3 weeks ago. He said $1.6 
trillion is the number for the tax cut, and if I cannot hold it 
to that, I ought to leave town. Those are his words, not mine. 
The Chairman of the Budget Committee a couple of days ago said 
$1.6 trillion is merely the floor. The Majority Leader a couple 
of days ago said the $1.6 trillion figure is irrelevant. 
Without a budget, everything fits.
    Now, in the President's plan, we do not have, for example, 
the alternative minimum tax provisions that many of us think 
ought to be included. We added over here to his plan a 
retroactive feature to the marginal rate reductions that cost 
$150 billion to as much as $300 billion, depending on who you 
talked to and how quickly it is phased in. We do not have in 
the President's plan Portman-Cardin, which I think will do more 
for this country in terms of aligning people to put aside 
$5,000 into an IRA account and make a tax deduction on their 
tax return for that. I think that is much more valuable to 
working people than a marginal rate reduction for some guy that 
makes $50 million playing basketball or baseball, but that is 
another question we could talk about.
    I believe that a 100 percent self-employment deduction for 
health care insurance premiums is a great boon to this country, 
just as the saving rate would be increased by Portman-Cardin, 
but this would allow people to deduct for health insurance 
premiums. We desperately need more money in the health system. 
People are talking about a capital gains reduction. That is not 
in the President's $1.6 trillion.
    So my point is, all of this discussion is terrific. All of 
us want a tax cut of some kind, but without a budget, all of 
this stuff fits and all of us know that it cannot. So when 
people say, well, we need a budget passed in the House, we do 
need a budget passed in the House, but that is like taking a 
dollar bill and tearing it in half. You have got to have the 
other half, and that is the Senate budget resolution, before 
you have a dollar to spend. That is not going to occur for 
another couple of months.
    So what some of us have asked, and begged for, really, in 
many respects, is we are interested in marginal rate. We are 
interested in everything the President has got. We are 
interested in marriage penalty. We are interested in AMT. We 
are interested in R&D extenders. They are not in the 
President's plan. Everybody knows we have done it forever. It 
is good for business in this country. It keeps business and 
laboratories in this country. It ought to be done.
    But without a budget, again, to sound like Johnny one-note, 
everything fits and we all know that it cannot and we all know 
that we have this cloud of debt hanging over the country. I 
have argued that as long as we are paying 14 cents out of every 
dollar in interest on this country, people in this country, 
including our children, are going to be overtaxed. They have to 
be because they are dragging around this mortgage on their 
backs.
    Now, I do not know that we can do anything about it today. 
I commend you fellows and Senator Hutchison for being here this 
morning. I would hope that you would see the wisdom of what 
some of us are trying to say as it relates to a universe, a 
business plan, a budget, so that we can make the tradeoffs 
between the marriage penalty, between R&D, between capital 
gains, between Portman-Cardin, between whatever you want to put 
in it. But until we reach that point, we are being asked to 
vote on tax measures that are based on 10-year projections 
phased in over 5 or 6 years, and that is a very, very difficult 
position to be in. Thank you.
    Chairman Thomas. I thank the gentleman.
    Does the gentleman from Wisconsin wish to inquire?
    Mr. Ryan. Yes, Mr. Chairman. I just wanted to commend my 
colleagues for coming here today. Hopefully, this can continue 
to be a bipartisan issue. I was blessed with the ability to be 
married 3 months and 19 days ago, so I would like to just voice 
my support for a chairman's mark that eliminates the marriage 
tax penalty retroactive to December 2, 2000. If that is 
possible, I would be for that.
    But in all seriousness, I am learning how this Committee 
works. This is a good lesson today. I am concerned about some 
of the rhetoric I hear in this Committee. Hopefully, we can 
still work together to pass things that I think we all 
basically believe in, and Mr. Barcia, seeing you here today is 
a great thing because it tells me that in the United States 
Congress, in our conferences, there is broad and deep 
bipartisan support. It is not a Republican issue. It is not a 
Democratic issue. It is an issue of fairness to repeal the 
marriage penalty. So I hope that when this bill gets to the 
floor of the Congress, those principles and that support will 
be reflected, and thank you for your participation today.
    Chairman Thomas. Does the gentlewoman from Florida wish to 
inquire?
    Mrs. Thurman. Thank you, Mr. Chairman. Mr. Weller, I want 
to go back a little bit and let us talk about what happened 
last year, because I think it is important because I think we 
are losing or leaving out some very important steps that took 
place.
    Last year, if I remember correctly, the total of your bill 
was somewhere around $283 billion. Is that about right, by the 
time it got to the floor?
    Mr. Weller. The conference report.
    Mrs. Thurman. Okay, and then there was a substitute that 
was offered on the floor for marriage tax penalty, is that 
right?
    Mr. Weller. You are talking about the Democratic 
substitute?
    Mrs. Thurman. Correct.
    Mr. Weller. Yes. The Democratic substitute only addressed 
marriage tax penalty for those who do not itemize. So if you 
are a homeowner, they would have been left out under the 
substitute.
    Mrs. Thurman. But some believe that it was fixing the 
penalty and not going beyond the penalty.
    Mr. Weller. Well, if you actually analyze that proposal, 
the alternative failed to help millions of middle class married 
couples who are homeowners, and because they are homeowners, 
they itemize their taxes, and the only way to help those who 
itemize their taxes is actually to broaden the bracket itself, 
and that is why we proposed broadening the 15 percent bracket 
so that joint filers could earn twice as much as a single filer 
and stay in the 15 percent bracket. That will help those who 
give money to church and charity. That will help those who 
itemize their taxes because they own a home.
    Mrs. Thurman. And point well taken, but on the other side 
of it, it did help us with a marriage tax penalty. I mean, you 
cannot deny that there was. And that was about $90 billion, if 
I remember correctly. This year, you have the President who has 
put in one for about $100 billion.
    What I am concerned about is the way this debate is 
characterized. We could have had a marriage tax penalty bill 
passed and signed into law, maybe not everything you wanted, 
certainly not everything that everybody wanted, but one that 
would have done something for married couples. Mr. Barcia, 
would you agree with that?
    Mr. Barcia. Well, I think there is sentiment in our caucus 
to address some of the inequities in the marriage context.
    Mrs. Thurman. But the fact of the matter is, we got the 
signal from the President that, in fact, he would accept some 
compromise on this piece of legislation that many of us--all of 
the Democrats on this Committee--voted for, both in this 
Committee and on the floor. In fact, 198 Democrats voted for 
this bill on the floor to try to take care of a marriage tax 
penalty.
    So in the spirit of bipartisanship and in the spirit of 
moving ahead, we could have had a bipartisan bill if we would 
have had some Republicans come over to the other side and help 
support a bill that would have gone to the President that would 
have been passed----
    Mr. Weller. Could I respond?
    Mrs. Thurman. And we could have been back up here this 
year, maybe extending it with the other tax bills, because we 
are all talking about brackets again. We are doing an awful lot 
of the same kind of thing that might have been accomplished in 
the bill last year.
    But let me just suggest to all of us that while neither one 
of those bills passed, neither one of them were signed into 
law, the fact of the matter is, the American public still 
became the beneficiary of these bills not passing because we 
took those dollars of tax cuts that were not spent and we put 
them in paying down the debt. So we helped every American 
family in some ways.
    But I just did not want it to be characterized that the 
marriage tax penalty was and could not be passed. This is an 
art of compromise. There is not a constituent in this country 
that does not understand that. The difference is, in 
bipartisanship, there becomes compromise. Bipartisanship is not 
just taking one side and not having another being able to 
participate. Thank you.
    Mr. Weller. May I respond?
    Chairman Thomas. Sure.
    Mr. Weller. Your point is well taken. I am very proud that 
this Congress has paid off $600 billion in national debt and we 
are on track to eliminate the available national debt by the 
end of the decade. I am proud of that and that was a great 
accomplishment we can all be proud of.
    And as you pointed out, there was an alternative which was 
supported only by one party, and I would note that the proposal 
we have brought before the Committee today in H.R. 6 is the 
proposal which received bipartisan support. H.R. 6 received the 
votes of 51 Democrats as well as all Republicans, so you had 
support from both sides of the aisle under this bill. It went 
through the House and Senate. There were a half a dozen or so 
Democrats in the Senate that voted for this proposal.
    So we have kind of vetted it through the process, and when 
it comes to marriage tax penalty, there are about 63 different 
consequences in the code and that consequence suffered by joint 
filers is the biggest marriage tax penalty and that is what we 
addressed, as well as the earned income credit marriage 
penalty, in our proposal.
    So I believe that the proposal we have before you today in 
H.R. 6 is the bipartisan proposal, and the fact that we have 15 
Democrats under the leadership of Mr. Barcia that have joined 
as original cosponsors of this bill, we have almost 230 members 
of the House cosponsoring this legislation, I think we have a 
tremendous opportunity with a President who said he would have 
signed it into law now, that he would sign H.R. 6 once we put 
it on his desk. So I appreciate the opportunity to discuss 
this. Thank you.
    Chairman Thomas. The gentlewoman's time has expired.
    Does the gentleman from Texas wish to inquire?
    Mr. Johnson of TEXAS. Thank you, Mr. Chairman.
    Chairman Thomas. I would tell the Committee that it appears 
as though we have a four-vote sequence. The gentleman from 
Texas will probably be the last inquirer on this panel. I will 
make sure that the other gentleman from Texas and the gentleman 
from North Dakota will be the first inquirers on the next 
panel, and I apologize because somebody else controls the time. 
The fact that we have multiple Members from States indicates 
that I was referring to the Republican following the Democrat, 
the gentleman from Texas, Mr. Sam Johnson.
    Mr. Johnson of TEXAS. Thank you, Mr. Chairman.
    Mr. Brady, that is my Senator. She is yours, too, and yours 
too, Doug, and she is a great one and a great representative 
for the State.
    Listen, I just want to tell you guys, we are arguing about 
peanuts here. What we have got is tax relief for married 
couples and it applies across the board. We are not trying to 
reduce taxes for those people who do not pay any taxes. We are 
trying to reduce taxes for people who pay taxes--families, 
people with children, husbands and wives, whether they work or 
not. And I think that it is something we have to do for 
America.
    They talk about Portman-Cardin. We are going to do Portman-
Cardin. It is just not in the tax bill that we are talking 
about today. It is not in the President's proposal that we are 
talking about today. We need to work with this administration, 
we need to work with the United States Senate, people like 
Senator Hutchison who can get the job done, and pass marriage 
penalty relief. I do not think it makes a tinker's dam whether 
we have a budget or not. You guys are focusing on the wrong 
thing. The emphasis ought to be on tax relief for the American 
people because we have a tax surplus out there and the people 
of America need their money back. Would you agree, Ms. 
Hutchison?
    [Laughter.]
    Mrs. Hutchison. Since you are my Congressman, I agree 
wholeheartedly.
    [Laughter.]
    Mrs. Hutchison. Certainly, I do appreciate so much the 
comments of everyone. I think that it is very clear that if 
there is a priority for tax relief, the inequity in the tax 
code should be addressed, and that is the marriage penalty tax. 
We are not even talking about lowering taxes. We are talking 
about bringing equity back into the tax code for people who get 
married. And I think it should be marriage penalty relief for 
people who are two working people getting married or for two 
people who are married and one spouse is staying at home 
raising children. We are paying too much in taxes and people 
deserve to have the relief, and I thank you for the support and 
I know this Committee is going to do what is right.
    Mr. Johnson of TEXAS. Thank you, Senator, and thank you, 
Mr. Chairman. I yield back the balance of my time.
    Chairman Thomas. I thank the gentleman.
    I do want to thank this panel, especially for their 
perseverance. The chair will indicate that we will now go to a 
series of votes and the chair intends to reconvene the hearing 
about 5 minutes after the last vote has ended. The Committee 
stands in recess.
    [Recess.]
    Chairman Thomas. The Committee will reconvene. Our guests 
will find their seats, and if we can find Mr. Donovan. Dr. 
Primus, our biorhythms are much more in tune with the Committee 
based on the years you spent with us. Thank you very much, Mr. 
Donovan.
    Our next panel consists of Charles Donovan, Executive Vice 
President of the Family Research Council, and Wendell Primus, 
Director of Income Security, Center on Budget and Policy 
Priorities, a longtime staff member, someone who should be 
familiar with most of us.
    With that, I would indicate to each of you that any written 
statements you may have will be made a part of the record and 
you can address us in the time that you have in any way you see 
fit. We will start with Mr. Donovan and then go to Dr. Primus.
    Mr. Donovan.

  STATEMENT OF CHARLES A. DONOVAN, EXECUTIVE VICE PRESIDENT, 
                    FAMILY RESEARCH COUNCIL

    Mr. Donovan. Thank you, Mr. Chairman. I want to thank you 
and the Members of the Committee for holding this hearing on 
marriage penalty relief. This time of year, we watch the 
National Collegiate Athletic Association tournament with some 
wonder, and one of the phrases we will undoubtedly hear is 
about teams that do not make it all the way to the championship 
game or make it and do not win the game. And the cliche that is 
applied to them is they are always a bridesmaid and never a 
bride.
    I think there is some feeling with respect to marriage 
penalty relief that the proposals that have been advanced over 
the last 5 years qualify as bridesmaids. We have had several 
proposals, as Senator Hutchison outlined this morning, that 
have made it through the Congress and all the way to the 
President's desk. We believe that there is really no more 
urgent cause in the tax code, no more urgent need than to 
provide relief from this penalty for married couples.
    The bill last year fits, we think, very nicely with the 
ambition of finding this relief for married couples, regardless 
of the work arrangements they may make in order to earn the 
income their families require. Last year during the political 
campaign, now-President Bush indicated that if he had been in 
the Oval Office when the legislation that passed Congress last 
year had reached his desk, that he would have signed it. He 
asked the rhetorical question, what kind of tax code imposes a 
penalty on a couple for deciding to get married, and his answer 
was, a bad tax code does that.
    Vice President Cheney on another occasion in debate about 
marriage penalty relief indicated his concern that the tax code 
not do too much to require certain behaviors on the part of 
couples or individuals in orderto earn a tax benefit. It is for 
that reason, that specific reason, that we believe that marriage 
penalty relief should make no distinction between and among the 
multifarious work arrangements that couples make in order to earn the 
income they need to support their household and raise their children.
    There was in the middle of the 1990s a pretty considerable 
debate about the ``mommy track,'' about whether or not it was 
better for a mother to be in the home, at what ages for the 
children this was best, and so forth. We believe that there 
ought to be a truce called in that debate, and maybe in some 
ways there has been. The real issue is marriage and whether or 
not our tax code--and it does, in fact, now--continues to 
provide a disincentive to marriage.
    The urgency is apparent in the birth data that we continue 
to see. There are some 30 percent of all children who are born 
without benefit of a father married to the mother. When you 
throw in family disintegration, something like four out of ten 
children will face a period in their lives when they will not 
have a father in the home. The costs exacted on society in the 
well-being of children, in economic costs, in educational 
deficits, and there is considerable evidence with respect to 
delinquent behavior among adolescents, all of these things 
suggest that there are considerable cost impositions on the 
failure to deal with the need to encourage marriages to occur 
and to stay together. Tax policy obviously cannot do all of 
this, but it can do something, and the marriage penalty is the 
prime thing that it does.
    The other reason we have to get away, in my opinion, from 
debates about how much and where work is performed by couples 
in a marriage is that in most cases, in most marriages, couples 
themselves go through cycles. When married, typically both 
husband and wife are working. Through the years in which 
children are born, even the data now show that the vast 
majority of women raise children up until age five. And the 
work patterns after that may vary tremendously, from part-time 
work to tag-team parenting, where the couple makes sure that 
one parent is with the child at all times. All of these things 
are just evidence that there is no single family model out 
there for work relationships and, therefore, tax relief, in our 
view, the elimination of the marriage penalty ought to help all 
couples regardless of how they make their work and family 
arrangements.
    We would urge that there be a generous effort to relieve 
the marriage tax penalty, that now, in these times of budget 
surpluses, is the time to take this step, and that it should 
begin with a decisive down payment on reclamation of the two-
parent married household. We believe the time to act on these 
measures is now and we want to express our appreciation to the 
Committee for its interest in debating this subject and moving 
it forward. Thank you, Mr. Chairman.
    Chairman Thomas. Thank you very much.
    [The prepared statement of Mr. Donovan follows:]
   Statement of Charles A. Donovan, Executive Vice President, Family 
                            Research Council
    Good Morning, I am Chuck Donovan, the Executive Vice President of 
the Family Research Council, an organization representing some 450,000 
families across the United States. Thank you for taking the time to 
consider my statement today regarding the position of Family Research 
Council on the need for marriage tax penalty relief.
    The heart of family, the foundation of civilization, is marriage. 
As the institution ordained by the Creator for the begetting and 
raising of children, marriage has had special protection within the law 
and the culture; it is indispensable to civilized life. American 
society cannot survive if marriage ceases to be the normative way to 
raise children. When families collapse, communities collapse. The 
wreckage is all around us. The institution of marriage deserves the 
highest protection under the law. There are many ways government can 
help. One way is to treat marriage and married childbearing properly 
and favorably in the tax code.
    As a matter of family policy, structuring taxes and other 
incentives so that they are available only for dual-earner couples 
contributes to the undermining of marital arrangements that most 
couples prefer. By discriminating against single-earner families, our 
tax code effectively dismisses the sacrifice the stay-at-home spouse 
makes on behalf of the family and society. In choosing to have one 
spouse stay at home families are penalized by the government, and the 
labor of love that this arrangement represents is subjected to a 
punitive tax.
    The tax proposal put forward by the White House is replete with 
admirable pro-family and pro-charitable provisions, which we 
wholeheartedly embrace. Nonetheless, the proposal moves in the wrong 
direction on marriage penalty relief, and marriage is the key to 
perfecting the other pro-family provisions in the plan. Those who want 
to help strengthen marriages and families must abide by the rule of 
non-discrimination: they cannot make family benefits contingent upon 
both parents' participation in the workforce. While the proposed tax 
package, overall, provides many benefits to working class American 
families, the fact remains that it will have a negative effect on 
marriage as an institution. The marriage penalty provision picks and 
chooses which families get relief and which families do not. From our 
perspective, it would be better to do nothing about the marriage 
penalty than to do this.
    We have this on good authority, Vice President Cheney made the same 
case during the Vice Presidential debate last fall, when he defended 
stay-at-home moms against his opponent's tax plan, ``They discriminate 
between stay-at-home moms with children that they take care of 
themselves, and those who go to work who have their kids taken care of 
outside the home. You, in effect, as a stay-at-home mom get no tax 
advantage under the Gore plan.'' And again: ``If you live your life the 
way they want you to live your life, if you do, in fact, behave in a 
certain way, then you qualify for a tax credit and at that point you 
get some relief.'' (10/5/2000, Centre College, Danville, KY. www.c-
span.org/campaign2000/transcript/debate__100500.asp, p. 7.)
    I would argue that the proposal before your committee does the same 
thing that Vice President Cheney criticized his opponent for, that is, 
it provides incentives for certain behaviors. ``It is a classic example 
of wanting to have a program, in this case a tax program, that will in 
fact direct people to live their lives incertain ways rather than 
empower them to make decisions for themselves.'' (10/5/2000, Centre 
College, Danville, KY. www.c-span.org/campaign2000/transcript/
debate__100500.asp, p. 8.)
    Is the purpose of fixing the marriage tax to accord long overdue 
socioeconomic respect for marriage as an institution fundamental to our 
society and to the raising of children? Or is the purpose to enable 
government to engage in national economic planning by using tax policy 
to influence human behavior?
    Giving a tax cut only to two-earner couples would send the message 
that the government sees no value in a homemaker's work at home, that 
the role of a ``non-working'' wife and mother is less socially 
beneficial (or less worthy) than paid employment. In fact, these 
spouses, primarily women, have sacrificed all of their income during 
this period in their lives and in their children's lives. They have 
foregone a second income and all the material advantages they might 
have conferred on their offspring. It makes no sense to increase their 
taxes merely because they stay home with their children.
    This debate is not about money. It is a matter of right and wrong. 
Marriage is good for this country, and it's wrong that our tax code 
penalizes it. This is not so much a tax cut as it is a tax correction 
and correcting the problem is not complex.
    There are several ways to eliminate the marriage penalty properly, 
without undermining marriage as an institution. The essential idea is 
to treat married couples as a single economic unit, just like other 
legally recognized economic partnerships, permitting them to share 
their income for purposes of taxation. The bill passed by Congress last 
year espoused this idea; a pro-marriage solution is available. The 
Marriage Penalty Relief Act of 2000 incorporated the very important 
policy change of treating all married couples equitably, whether they 
earn one income or two.
    This committee now has the same--indeed an even better--opportunity 
to provide substantial relief to millions of American families, while 
recognizing and supporting the vital contribution marriage makes to the 
betterment of society. Will your proposal treat all married couples and 
their multitude of work and family arrangements alike? It should. It is 
unfair to reject marriage tax relief for families who decide to have 
one spouse stay at home because they have decided to care for their 
children themselves, or because one spouse is unable to work, or 
because one spouse is pursuing higher education.
    The current proposal for reducing the marriage penalty is modest, 
in purely economic terms. But in terms of family tax policy, it 
reinforces a policy denigrates some of the most important benefits 
marriage confers on society and the economy. More broadly, by moving 
toward an individual basis for taxation, instead of a family basis, the 
policy discourages the economic and personal interdependence that lie 
at the heart of marriage.
    While there are 66 provisions in the tax code that produce marriage 
penalties, according to the American Institute of Certified Public 
Accountants, the standard deduction and the graduated rate structure 
combined cause 55.6 percent of extra marriage taxes. Because the 
standard deduction amount for joint filers is not twice that for those 
claiming single or head of household status, a married couple can 
deduct less money from their income than can an unmarried couple with 
the same combined income. The income thresholds that push taxpayers 
into higher brackets for joint filers are less than twice what they are 
for those claiming single or head of household status. This means that 
a married couple can be forced into a higher tax bracket than an 
unmarried couple earning the same combined income.
    Since the marriage penalty is largely the result of inequities in 
the rate structure, the marriage tax penalty would be substantially 
reduced for all married couples by placing each bracket breakpoint for 
married couples at precisely twice the level for single filers. 
Expanding the standard deduction for married couples to twice the 
amount for singles would eliminate the marriage penalty for lower 
income couples and provide at least some tax relief for one-income 
families. This approach was taken last year and, according to the 
Congressional Budget Office (CBO), doubling the standard deduction 
alone would affect approximately 21 million married couples. 
Implementing these proposals would help to ensure that ``no married 
couple is left behind.''
    Family Research Council strongly believes that a policy of tax 
fairness is no less important than the dollar figure attached to it. 
Any marriage penalty relief should apply equally to all married couples 
and all work arrangements. This principle of equity was tested in 1995 
when Senators Kay Bailey Hutchison and Barbara Mikulski advocated 
legislation allowing homemakers to contribute the same amount to an IRA 
as working spouses, thus treating working and ``non-working'' spouses 
equally. At that time, the limit had been $2,000 for a working spouse 
and $250 for a homemaker. Relying upon that same principle of equity, 
Congress should provide equal marriage penalty relief to single- and 
dual-earner couples. Tax fairness requires that relief from the 
marriage penalty apply equally to all married couples.
    Most of you already know the history of the battle to eliminate the 
marriage tax penalty, but let me state for the record the work and the 
commitment of Congress on this issue.
    In 1995, the House and Senate both passed measures to relieve the 
marriage penalty. The final version, doubling the standard deduction 
for joint filers to twice the amount single filers enjoyed, was 
included in a tax package which was vetoed by President Clinton.
    In 1998, the House of Representatives passed reductions in the 
marriage penalty but the measure died in the Senate.
    In 1999, Congress voted to reduce the ``marriage penalty'' by 
increasing the standard deduction for married couples to twice that for 
singles, and doubling the 15% bracket breakpoint for married couples to 
twice that of singles, this too was vetoed by President Clinton as part 
of a larger tax reduction package.
    Last year, the House and the Senate passed, by overwhelming 
margins, marriage penalty relief, which included a doubling of the 
standard deduction and bracket adjustments to ensure that all married 
couples received marriage penalty relief. President Clinton vetoed this 
legislation. The bill passed by Congress last year, H.R. 6, serves as a 
good starting point for meaningful reform of the unfair marriage tax 
penalty. This approach has the support of the Family Research Council.
    I urge the Ways and Means Committee to seize the opportunity before 
it. This is not the time for debate and competition among married 
couples who arrange their work and family time in an astonishing 
variety of ways. Congress passed the right marriage penalty relief in 
the recent past when the President's veto pen was at the ready. A new 
era is upon us, the revenue to do justice is at hand, and the ink in 
that pen has now run dry. It is time to act on behalf of marriage and 
to turn the tax code toward home.

                                


    Chairman Thomas. Dr. Primus.

STATEMENT OF WENDELL PRIMUS, DIRECTOR, INCOME SECURITY, CENTER 
                ON BUDGET AND POLICY PRIORITIES

    Mr. Primus. Thank you, Mr. Chairman and Members of the 
Committee, for the opportunity to come back and testify today 
on two aspects of President Bush's tax plan, the expansion of 
the child tax credit and marriage penalty relief.
    As you know, the President's proposal doubles the current 
child tax credit, but it provides no benefit to families who 
currently owe no income tax. It also makes eligible for the 
first time families with two children who have incomes between 
$130,000 and $300,000. Approximately 24 million children, 33.5 
percent of all children in this country, would not benefit from 
this expansion of the child tax credit. Two-thirds of the 
children excluded from the expansion, almost 16 million 
children, live in families where earnings exceed $5,150, the 
amount equivalent to working half-time for the entire year at 
the minimum wage.
    Fifty-five percent of African American children and 56 
percent of Hispanic children would receive nothing from this 
expansion. And if you look at this by State, there are numerous 
States where over 40 percent of the children would not benefit, 
including Arizona, California, Georgia, Louisiana, New York, 
North Dakota, Tennessee, and Texas, for example.
    A married family of $25,000 with two children gets nothing 
from this expansion, while such a family with $150,000 will get 
$2,000 from the child credit provision. This is because the 
President's proposal extends the child tax credit to many 
families with high incomes that currently receive no credit. 
The percentage of children left out under the Democratic 
proposal is significantly less, 14 percent versus 33.5 percent 
under the President's.
    There are four reasons, Mr. Chairman, why working families 
that do not pay Federal income taxes should benefit from the 
tax legislation. The first is that in the context of a strong 
economy and the ``make work pay'' policies of EITC and child 
care, many single-mother families have responded to your 
welfare reform bill by working harder. Yet, their overall 
income gains have been small. They deserve an income boost.
    For example, mothers in the second quintile of female-
headed families, the second-to-lowest fifth, who have income 
between 86 and 127 percent of poverty, on average, increased 
their earnings by $4,600. Yet, their income only increased by 
$1,555. Female-headed families in the middle of that 
distribution, with incomes between 127 and 173 percent of 
poverty, also average earned about $4,550 more, yet their 
disposable income increased by less than 40 percent.
    The second reason is that this approach fails to reduce 
high marginal tax rates that many of these low-income families 
face--and I know all the Members of this Committee are 
concerned about high implicit marginal tax rates. A large 
number of low-income families that confront some of the highest 
marginal tax rates of any families in the nation would not have 
their marginal tax rates reduced as a result of this proposal. 
It is one of the reasons that these families are working harder 
but their income gains have not gone up. I have an example in 
the testimony from Maryland where a mother who has child care 
expenses and increases her earnings from $10,000 to $15,000, 
her marginal tax rate is 70 percent. As her earnings increase 
from $15,000 to $20,000, she faces a 60 percent marginal tax 
rate.
    The third reason is that these families owe other income 
taxes. They also owe State income taxes, gasoline, property 
taxes, and sales taxes. You can fix this by making the child 
tax partially refundable, let us say 5 to 10 to 15 percent of 
earnings up to the maximum credit allowed, or you could do this 
by changing the EITC. Phasing the EITC out at a lower rate 
would alleviate some of these marginal tax problems.
    Finally, Mr. Chairman, as my colleague here at the table 
indicated, about a third of the births in this country are to 
unmarried women. Half of these children now come home to a two-
parent unmarried family, but most of those families have very 
low incomes and would not benefit from the marriage penalty 
relief that is in the President's proposal.
    So in conclusion, what I would like to say is our analysis 
finds that a third of these children do not benefit, yet these 
families pay taxes and face high marginal tax rates. Similarly, 
the proposal provides no marriage penalty relief to the 
families that face the highest marriage penalties as a percent 
of income and does nothing to equalize the tax treatment of 
marriage and cohabitation for a family with children in the 
part of the income range where cohabitation rates are the 
highest. I would respectively urge the Committee to design 
alternatives that address those shortcomings.
    Chairman Thomas. Thank you very much.
    [The prepared statement of Mr. Primus follows:]
  Statement of Wendell Primus, Director of Income Security, Center on 
                      Budget and Policy Priorities
    Mr. Chairman and Members of the Committee on Ways and Means: Thank 
you for the opportunity to testify today on two aspects of President 
Bush's tax plan--the expansion of the child tax credit and marriage 
penalty relief.\1\ My name is Wendell Primus, and I am Director of 
Income Security at the Center on Budget and Policy Priorities. The 
Center is a nonpartisan, nonprofit policy organization that conducts 
research and analysis on a wide range of issues affecting low- and 
moderate-income families. We are primarily funded by foundations and 
receive no federal funding.
---------------------------------------------------------------------------
    \1\ This testimony draws heavily upon the work of colleagues at the 
Center, including Isaac Shapiro, Iris Lav, Nicholas Johnson, Allen 
Dupree, and James Sly. The analysis in the following Center papers 
contributed significantly to this testimony: In Many States, One-Third 
to One-Half of Families Would Not Benefit from Bush Tax Plan, More Than 
Half of Black and Hispanic Families Would Not Benefit from Bush Tax 
Plan, and Alleviating Marriage Penalties in the EITC. All papers are 
available online at www.cbpp.org.
---------------------------------------------------------------------------
    My testimony is divided into four sections. The first part of my 
testimony discusses the design of the Administration's expansion of the 
child tax credit. The second section addresses the question of whether 
a tax bill should benefit families raising children that do not 
currently pay federal income taxes. The third section examines other 
options for improving the tax code and assisting the working poor that 
are not reflected in the Administration proposal. The final section 
assesses the issue of marriage penalties.
I. Child Tax Credit Expansion is Inappropriately Designed
    Under the Bush tax plan, the current child tax credit of $500 per 
child is doubled to $1,000 by 2006. Nearly all families that owe no 
federal income tax will fail to benefit from this expansion.\2\ For a 
family with two children, eligibility for the child tax credit under 
current law ends at $130,000 of income for a married family with two 
children. The Bush plan would extend this limit to $300,000 for such a 
family.
---------------------------------------------------------------------------
    \2\ The exception is a limited number of cases including working 
families with three or more children that may claim some or all of the 
child credit as a refund. In such cases, the credit is limited to the 
amount by which the employee share of a family's payroll tax liability 
exceeds its EITC. IRS data show that only about 750,000 families 
benefitted from this provision in 1998.
---------------------------------------------------------------------------

      Many Children Would Not Benefit from Expansion of the Credit

    As a result of this design, an estimated 12.2 million low- and 
moderate-income families with children--31.5 percent of all families 
with children--would not receive any tax reduction from the Bush 
proposal.\3\ Approximately 24.1 million children--33.5 percent of all 
children--live in these families. The vast majority of left-out 
families include workers.
---------------------------------------------------------------------------
    \3\ The national estimates were prepared using the latest data 
(1999) from the Census Bureau. For the state estimates cited later, we 
used Census data from 1997, 1998, and 1999. The data for 1997 and 1998 
were adjusted to simulate the current $500-per-child tax credit, and 
the combined data at the state level were slightly scaled to match 
nationwide estimates of the numbers of left-out families and children 
for 1999, the latest year for which CPS data are available. The 
resulting state-level figures may be considered accurate to within 
about 2 to 5 percent, depending on the state. For comparison, these 
figures are approximately as accurate as the U.S. Census Bureau's 
annual estimate of poverty rates by state, which also are based on 
three-year pooling of data.
---------------------------------------------------------------------------
    Approximately two-thirds of the children excluded from the 
expansion--a total of almost 16 million children--live in families 
where earnings exceed $5,150, an amount equivalent to working 20 hours 
per week throughout the year at the minimum wage rate.
[GRAPHIC] [TIFF OMITTED] T3537A.001

      Over One-Half of Minority Children Left Out of Bush Tax Plan

    Among African-Americans and Hispanics, the figures are especially 
striking. While one-third of all children would not benefit from the 
Bush tax credit expansion, more than half of black and Hispanic 
children would not receive any assistance.

   An estimated 55 percent of African-American children and 56 
        percent of Hispanic children live in families that would 
        receive nothing from the tax cut.
   Of the 24.1 million children living in families that would 
        receive no benefit from the tax cuts, an estimated 10.1 million 
        are non-Hispanic whites, 6.1 million are black, and 6.5 million 
        are Hispanic.
        [GRAPHIC] [TIFF OMITTED] T3537A.002
        
 In Many States, Families of One-Third to One-Half of Children Do Not 
                                Benefit

    We have also estimated the number of families and children who 
would receive no assistance from the Bush tax plan on a state-by-state 
basis. As Appendix Table 1 shows, the figures indicate that throughout 
the country there would be substantial numbers of children left out of 
the plan. In some states, very high numbers of children and families 
would receive no benefit.

   An estimated 3.7 million children in California, 2.3 million 
        children in Texas, 1.9 million children in New York, and 1.2 
        million children in Florida, along with their families, would 
        receive no benefit from the tax proposal. In each of another 
        eight states--Arizona, Georgia, Illinois, Michigan, North 
        Carolina, Ohio, Pennsylvania, and Tennessee--the families of 
        half a million children, or more, would fail to gain from the 
        tax cut plan.
   Approximately 52 percent of children in New Mexico live in 
        families that would not benefit under the tax proposal. Other 
        states in which approximately 40 percent to 50 percent of 
        children live in families that would not benefit include 
        Alabama, Arizona, Arkansas, California, Georgia, Idaho, 
        Louisiana, Mississippi, Montana, New York, North Dakota, 
        Tennessee, Texas, and West Virginia, plus the District of 
        Columbia. Not surprisingly, because the families that would be 
        left out of the Bush plan are those with incomes below the 
        poverty line or modestly above it, these states tend to have 
        relatively high levels of child poverty.
        [GRAPHIC] [TIFF OMITTED] T3537A.003
        
   The Bush Child Tax Expansion Particularly Benefits Higher-Income 
                                Families

    While the proposal to double the child tax credit would be of 
little or no help to millions of children in low-income working 
families, it would provide the largest tax reductions to families with 
incomes above $110,000 and confer a much larger share of its benefits 
on upper-income families than on low- and middle-income families. The 
chart below illustrates this. A married family of $25,000 with two 
children gets nothing under the Bush child tax credit proposal, while 
such a family with $150,000 will receive $2,000 just from the child 
credit provision.

   Married families with two children in the $110,000 to 
        $250,000 range would receive an increase in the child tax 
        credit of more than $500 per child. For many of these 
        taxpayers, the child credit would rise from zero under current 
        law to $1,000 per child under the Administration's plan.
        [GRAPHIC] [TIFF OMITTED] T3537A.004
        
    This is because the Bush proposal extends the child tax credit to 
many families with high incomes that currently receive no credit, an 
outcome reflecting two aspects of the Bush plan. The plan both 
increases the point at which the child credit begins to phase out and 
slows the rate at which it phases out.
    Under current law, the credit for a married family with two 
children phases out between $110,000 and $130,000. Under the Bush plan, 
when fully in effect starting in 2006, the credit for such a family 
would phase out between $200,000 and $300,000. This means that for a 
married family with two children:

   All such families with incomes between $110,000 and $300,000 
        would get a larger credit than under current law.
   All such families with incomes between $130,000 and $300,000 
        would be made eligible for the credit for the first time.
   All such families with incomes between $130,000 and $200,000 
        would receive a gain of $1,000 per child under the 
        Administration's proposal, for a total of $2,000; under current 
        law they do not receive a credit.

    The precise point at which the credit would drop back to zero would 
vary by the number of children in the family. The more children in the 
family, the longer it would take for the credit to phase out. If, for 
example, a high-income family has three children, the family's new 
child tax credit of $3,000 would phase out between $200,000 and 
$350,000. There are approximately three million children in higher 
income families who would benefit from the proposed increase in the 
income eligibility limit for the child tax credit.
    In crafting its proposal to expand the child tax credit, the 
Administration faced a choice. It could propose increasing the size of 
the credit without explicitly changing which families are covered by 
it; it could propose extending the credit to more low- and moderate-
income families; it could propose extending the credit to more low- and 
moderate-income families and to high-income families; or it could 
extend the credit only to high-income families. The Administration 
selected the fourth option. As a consequence, Center calculations based 
on data from the Institution on Taxation and Economic Policy data 
indicate that when the increase in the child credit is fully in effect, 
the 20 percent of families with children with the highest incomes would 
receive about 35 percent of the new tax cuts. The bottom 40 percent of 
families with children would receive less than 10 percent of the tax 
cuts.

            Democratic Proposal Excludes Many Fewer Children

    By expanding the Earned Income Tax Credit, the Democratic 
alternative tax cut proposal would extend assistance to many of the 
working families that will be left out of the Administration's 
proposal. Because the EITC is refundable, this approach would reach a 
greater share of children.
[GRAPHIC] [TIFF OMITTED] T3537A.005

    As the figure shows, the percent of children left out under the 
Democratic proposal is less than half the number left out under the 
Bush option. Some 14 percent of children live in families that would 
benefit under the Democratic alternative, as compared to 34 percent 
under the Administration's plan. Appendix Table 1 shows the differences 
in coverage by state. In almost every state, the Democratic alternative 
leaves out less than half as many children as the Bush plan.
II. Should Families with Children That Do Not Pay Federal Income Taxes 
        Benefit from Tax Reduction Legislation?
    The estimated cost of the child tax credit expansion over the next 
10 years is $193 billion. The President has indicated that the 
rationale for expanding the child tax credit is not simply tax relief 
but ``to help families rear and support their children.'' He also has 
placed a special emphasis on reducing marginal tax rates. This section 
will discuss why working families that do not pay federal income taxes 
should benefit from the tax legislation.

Many single mother families have responded to welfare reform by working 
harder. Yet their overall income gains have been small. They deserve an 
                             income boost.

    A major theme of welfare reform has been to prod, assist, and 
enable families to work their way out of poverty. There is considerable 
evidence that welfare reform--in combination with a strong economy (low 
unemployment rates, increasing real wages) and ``make work pay'' 
policies (an expanded EITC and increased child care expenditures)--has 
significantly increased employment rates among single mothers and 
expanded their earnings. An analysis of Census data \4\ shows that 
female-headed families in the second-poorest fifth of female-headed 
families (the 1.8 million families with incomes between 86 percent and 
127 percent of the poverty line in 1999) increased their earnings on 
average by $4,574 between 1995 and 1999, after adjusting for inflation, 
an increase of more than 70 percent. Yet their disposable income 
increased only $1,555. Only one-third of their earnings gains were 
reflected in disposable income gains.
---------------------------------------------------------------------------
    \4\ For a complete description of how the analysis was performed, 
see Appendix Table 2.
---------------------------------------------------------------------------
    Female-headed families in the middle fifth (the 1.8 million 
families with incomes between 127 percent and 173 percent of the 
poverty line) had a similar experience. In the context of a strong 
economy, they responded to welfare reform and the ``make work pay'' 
policies by working more and earning an additional $4,550. Yet their 
disposable income increased by less than 40 percent of their earnings 
increase. It seems appropriate that these families receive an income 
boost.
    Most of these families, however, will receive no income gain from 
the child credit expansion. No additional children will be removed from 
poverty as a result of the Bush tax plan. In contrast, approximately 
200,000 additional children would be removed from poverty by the 
Democratic plan.
    A study by the Manpower Demonstration Research Corporation finds 
that improving income--and not just employment--is important if the 
lives of children in poor families are to improve.\5\ The MDRC report 
examined five studies covering 11 different welfare reform programs. 
The report's central finding was that increased employment among the 
parents in a family did not by itself significantly improve their 
children's lives. It was only in programs where the parents experienced 
increased employment and increased income that there were positive 
effects--such as higher school achievement--for their elementary 
school-aged children.
---------------------------------------------------------------------------
    \5\ Pamela A. Morris, et al., How Welfare and Work Policies Affect 
Children: A Synthesis of Research, January 2001.
---------------------------------------------------------------------------

The Bush approach fails to reduce the high marginal tax rates that many 
                       low-income families face.

    Throughout the presidential campaign and early into the new 
Presidency, President Bush and his advisors have cited the need to 
reduce the high marginal tax rates that many low-income working 
families face as one of their tax plan's principal goals. They have 
observed that a significant fraction of each additional dollar these 
families earn is lost as a result of increased income and payroll taxes 
and the phasing out of the EITC.\6\ Yet a large number of low-income 
families that confront some of the highest marginal tax rates of any 
families in the nation would not have their marginal rates reduced at 
all by the Bush plan.
---------------------------------------------------------------------------
    \6\ For example, for a family with two children, the size of the 
Earned Income Tax Credit is reduced by 21 cents for each dollar of 
income between $13,090 and $32,121.
[GRAPHIC] [TIFF OMITTED] T3537A.006

    Analysts across the ideological spectrum, including the Joint Tax 
Committee on Taxation \7\ and the Congressional Budget Office, have 
long recognized that the working families who gain the least from each 
additional dollar earned are those with incomes between about $13,000 
and $20,000. For each additional dollar these families earn, they lose 
up to 21 cents in the EITC, 15.3 cents in payroll taxes (including the 
employer share), 24 cents to 36 cents in food stamp benefits, and 
additional amounts if they receive housing assistance or a child care 
subsidy on a sliding fee scale, are subject to state income taxes, or 
have to pay income-related premiums for health insurance. Their 
marginal tax rates are well above 50 percent. Yet the Bush plan 
provides no marginal tax rate relief to them.
---------------------------------------------------------------------------
    \7\ Joint Committee on Taxation, Overview of Present Law and 
Economic Analysis Relating to Marginal Tax Rates and the President's 
Individual Income Tax Rate Proposals, JCX-6-01, March 6, 2001.
---------------------------------------------------------------------------
    To a large extent, these high marginal tax rates are one of the 
reasons the income gains between 1995 and 1999 shown previously are so 
small relative to the earnings increases. (Another part of the reason 
is that in many instances, these families no longer receive food stamp 
and cash benefits to which they remain entitled.)


----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Gains in Disposable Income as Earnings Increase
for a Mother with Two Children in Maryland

----------------------------------------------------------------------------------------------------------------
Annual Earnings                                                 $10,000      $15,000      $20,000      $25,000
----------------------------------------------------------------------------------------------------------------
Disposable Income                                               $17,903      $19,423      $21,414      $24,145
----------------------------------------------------------------------------------------------------------------
% of Earnings Gain Reflected in Disposable Income                    NA          30%          40%          55%
----------------------------------------------------------------------------------------------------------------
Marginal Tax Rate                                                    NA          70%          60%          45%
----------------------------------------------------------------------------------------------------------------


    The table above is illustrative. It shows the income gains as 
earnings increase by $5,000 for a single mother with two children in 
Maryland. These examples (which are similar in other states) show that 
the implicit tax rates faced by these families are very high. If the 
purpose of the major provisions in the Bush tax cut is to decrease 
marginal tax rates for low-income working families, why don't the 
families facing the highest marginal tax rates in the nation receive 
any marginal rate reductions?

  Many of these families owe federal taxes other than federal income 
                taxes, often paying significant amounts

    Since the reason that millions of families and their children would 
not benefit from the Bush plan is that they do not owe federal income 
taxes, some have argued it is appropriate that they not benefit. ``Tax 
relief should go to those who pay taxes'' is the short-hand version of 
this argument. This line of reasoning is not persuasive for several 
reasons.
    First, for most families, the biggest federal tax burden by far is 
the payroll tax, not the income tax. Data from the Congressional Budget 
Office show that in 1999, three-fourths of all U.S. families paid more 
in payroll taxes than in federal income taxes. (This comparison 
includes both the employee and employer shares of the payroll tax; most 
economists concur that the employer's share of the payroll tax is 
passed along to workers in the form of lower wages. This is also the 
approach used by CBO and the Joint Committee on Taxation.) Among the 
bottom fifth of households, 99 percent pay more in payroll than income 
taxes. Low-income families also pay federal excise taxes and state and 
local taxes, which are discussed further on the next page. While the 
Earned Income Tax Credit offsets these taxes for working poor families, 
many families with incomes close to or modestly above the poverty line 
who would not benefit from the Bush plan are net taxpayers.
    For example, a married family with two children and income of 
$25,000 would pay $3,825 in payroll taxes (again, counting both the 
employee and employer share) and lesser amounts in gasoline and other 
excise taxes. The family pays various state taxes as well. The family 
would receive an Earned Income Tax Credit of $1,500, well under half of 
its payroll taxes. As a result, even if just payroll taxes and the EITC 
are considered, the family's net federal tax bill would be $2,325. 
Nonetheless, this family would receive no tax cut under the Bush plan.

 Low- and moderate-income families in every state pay state and local 
 taxes, often paying a larger percentage of income in such taxes than 
                        higher-income families.

    Families with incomes below or near the poverty line bear 
substantial state and local tax burdens. These taxes commonly include 
sales taxes, excise taxes on such items as gasoline, property taxes 
(passed on by landlords to tenants in the form of increased rent), 
various tax-like fees, and sometimes state- or locality-specific taxes 
such as local taxes on wages. In addition, many states have income 
taxes that tax families at lower income levels than the federal income 
tax does. The Institute on Taxation and Economic Policy estimates that 
state and local taxes equal anywhere from eight percent to 17 percent 
of the income of an average low-income married couple, depending on the 
state. Furthermore, these burdens are inequitably distributed; in 
almost every state, lower-income families pay a larger share of their 
incomes in state and local taxes than higher-income families do.\8\
---------------------------------------------------------------------------
    \8\ Institute on Taxation and Economic Policy, Who Pays?, 1996.
---------------------------------------------------------------------------
    Although some states have taken steps to reduce the burden of taxes 
on low-income families in recent years, they are limited in their 
ability to do so. States that for many years have levied the sales, 
excise and property taxes that are most burdensome on the poor cannot 
simply eliminate those taxes without dramatic effects on state budgets. 
In addition, it can be cumbersome for states to target relief to poor 
families that are burdened by these taxes. For example, the sales tax 
is collected by merchants from consumers without regard to their income 
level, and property taxes are passed through from property owners to 
renters as part of a rent payment.\9\ Moreover, states with higher 
levels of poverty often have the least fiscal resources with which to 
pay for tax relief for low-income families.
---------------------------------------------------------------------------
    \9\ States that have income taxes do have the ability to enact 
refundable income tax credits that would help offset other taxes for 
poor families. Even the most generous such credits, however, offset 
only a portion of families' overall state and local tax burdens. In 
Minnesota, for instance, one of the two or three states that have made 
the most use of refundable tax credits and sales tax rebates, the 
Department of Revenue calculates that the overall state and local tax 
burden on low-income taxpayers exceeds 10 percent of income even after 
the credits and rebates are taken into account.
---------------------------------------------------------------------------
    These state and local taxes that poor families pay often help 
finance federally required services or joint federal-state programs. 
For instance, state contributions to Medicaid typically are financed in 
whole or in part by general fund taxes such as state sales taxes and 
excise taxes. Similarly, state contributions to federal highway 
construction often are financed by gasoline and other motor vehicle 
taxes. In part because these and other federal programs rely on state 
and local taxes, it can be appropriate for the federal government to 
administer tax relief that helps offset the burden of those taxes.
III. Assisting Low- and Moderate-Income Families with Children
    If a large tax cut is enacted, it should include, rather than leave 
out, low- and moderate-income families with children. The Committee 
could benefit low- and moderate-income working families in the 
following ways.

             Make the child tax credit partially refundable

    This could be done in a variety of ways. For example, a family with 
children might receive a tax credit of five percent to 15 percent of 
earnings up to the maximum credit per child. This would insure that 
low-income families with earnings receive assistance in raising their 
children. If a partially refundable child tax credit equal to 10 
percent of earnings were enacted up to a maximum of $1,000 per child, 
only seven percent of children would be excluded from receiving any 
benefit. Some 1.1 million more children would be removed from poverty 
if the credit were designed in this fashion. In addition, this approach 
would lower implicit marginal tax rates significantly and give those 
mothers who responded to welfare reform an important income boost.
    An alternative approach is one suggested by Belle Sawhill and Adam 
Thomas of the Brookings Institution.\10\ This would provide a credit of 
15 percent of earnings above $8,000. Such a structure encourages full-
time employment and offsets some of the marginal taxes incurred by low-
income working parents as they become ineligible for means-tested 
benefits.
---------------------------------------------------------------------------
    \10\ Isabel Sawhill and Adam Thomas, A Tax Proposal for Working 
Families with Children, Policy Brief No. 3, The Brookings Institution, 
January 2001.
---------------------------------------------------------------------------

                 Expansion of Earned Income Tax Credit

    One important proposal is to provide a larger EITC benefit for 
families with three or more children. Congressman Cardin and others 
introduced this approach last year in the House. Senators Hatch, 
Jeffords, Breaux, and Rockefeller have advanced such proposals in the 
Senate. This idea is not a new one; in Wisconsin, a bipartisan group of 
state legislators designed and secured passage of a substantially 
larger EITC for families with three or more children a decade ago. 
Then-governor Tommy Thompson signed that legislation into law and has 
championed the Wisconsin EITC.
    Recent research indicates the EITC has a powerful effect in 
increasing employment among single female parents and also that the 
EITC lifts more children out of poverty than any other program or 
category of programs. Nevertheless, the official poverty rate remains 
24 percent for children in families with three or more children and 19 
percent when the EITC and various non-cash benefits are counted. In 
both cases, this is more than double the poverty rate among children in 
smaller families.
    Another useful proposal is to lower the EITC phase-out rate. As I 
pointed out earlier, families with two or more children earning between 
$13,000 and $20,000 face especially high marginal tax rates. The 
Administration's plan fails to reduce the marginal tax rates of these 
families because it does not expand refundable tax credits.
    One approach the Administration could have taken in assisting these 
working poor families with high marginal tax rates would have been to 
reduce the rate at which the EITC phases down for families in this 
income range.\11\ For families with two or more children that earn 
between $13,000 and $22,000, the phase-out rate could, for example, be 
reduced from 21 percent to 16 percent. For families with two or more 
children who have earnings above $22,000, the phase-out rate would 
remain at its current level. If this approach is coupled with EITC 
marriage penalty relief (described below), these EITC improvements 
would reduce marginal tax rates for a large share of low-income working 
families that face high marginal tax rates today and would get no 
relief from the high rates under the Administration's plan.
---------------------------------------------------------------------------
    \11\ Congressman Cardin and others proposed this change last year.
---------------------------------------------------------------------------
    An alternative approach to reducing implicit marginal tax rates 
would be to link the phase-out of the EITC to the point where food 
stamp eligibility ends.

             Other Important Steps to Help the Working Poor

    Additional steps would help states in the next stage of welfare 
reform and support recipients as they make the transition from welfare 
to work. Funds to reduce the vast disparities in TANF resources 
available to states through supplemental grants are needed. Another 
important step that would benefit low-income working families would be 
to enact H.R. 4678, the Child Support Distribution Act of 2000, which 
passed the House last year by a vote of 405-18. H.R. 4678 would greatly 
improve and simplify the child support distribution system and ensure 
that children benefit more when their non-custodial parents pay child 
support.
    Expanding health care coverage is another important way to support 
the working poor. Research has shown that expanding state Medicaid 
programs to cover parents also increases the number of low-income 
children protected by health insurance. Congress should consider 
expanding funding for the State Children's Health Insurance Program 
(SCHIP) and allow states to use SCHIP funds to extend coverage (either 
through Medicaid or through separate state programs) to low-income 
working parents (including noncustodial parents who pay child support), 
along with their children. This approach is preferable to a modest 
refundable tax credit for the purchase of health insurance.
IV. Marriage Penalties
    The rise in the number of unwed mothers receiving low-income 
assistance over the last several decades and the increase in 
cohabitation has motivated policy-makers to question whether welfare 
and tax policies influence a range of decisions about family formation, 
including decisions to marry, have children, or cohabit. Conservatives 
(and liberals) have been troubled by these trends for many years.
    About one-third of births in this country are to unmarried women. 
New research indicates that in approximately 40 percent to 50 percent 
of cases, those out-of-wedlock babies come home to a two-parent but 
unmarried family.\12\ Based upon data from the Urban Institute, about 
half of these children live in families below 150 percent of the 
poverty level. The question is whether the tax and transfer system is 
creating incentives to form single-parent, cohabiting, or married 
families. The issue is not solely whether the families become married 
but also their choice of living together or living separately.
---------------------------------------------------------------------------
    \12\ McLanahan, Sara, Irwin Garfinkel, and Marcia Carlson, The 
Fragile Families and Child WellBeing Study Baseline Report: Baltimore, 
Maryland, 2000.
---------------------------------------------------------------------------
    In a recent paper that I co-authored with Jennifer Beeson, we 
examined carefully the economic incentives in the entire tax and 
transfer system between those three choices for couples with children. 
Contrary to popular wisdom, the transfer system does not treat two-
parent married families differently from two-parent unmarried families 
that have a child in common.
    When economies of scale and the child support system are taken into 
account, this research shows that family income is maximized when the 
parents live together--either married or unmarried. If the economic 
incentives favor living together, what about marriage? Among these 
lower-income families, our research indicates that the transfer system 
treats married families and cohabiting families with children about the 
same, but the tax code does not. It favors cohabitation over marriage 
in many instances because of the marriage penalty in the EITC.
    Research suggests that marriage penalties and bonuses in the tax 
code have little effect on marriage rates at any income level. To the 
extent that studies find any effect of tax considerations on the 
decision to marry, the effect on marriage decisions for every tax 
dollar foregone has been found to be very small. In some of the latest 
research, Ellwood finds that the combination of the Earned Income Tax 
Credit and welfare reform has encouraged single parents to work but has 
had no discernible effect on marriage or cohabitation.\13\ Rosenbaum 
found that tax incentives may have an influence on decision to enter 
into marriage, but the magnitude of the effect is hard to measure. He 
also finds that it is unlikely that tax incentives influence a decision 
to end a marriage.\14\ Nevertheless, there is much we do not know in 
this area, and public policy needs to signal strongly what it believes 
is best for couples (and their children).
---------------------------------------------------------------------------
    \13\ Ellwood, David T., The Impact of the Earned Income Tax Credit 
and Social Policy Reforms on Work, Marriage, and Living Arrangements, 
unpublished manuscript, 1999.
    \14\ Rosenbaum, Dan, Taxes, the Earned Income Tax Credit, and 
Marital Status, presented at the ASPE/Census Bureau Small Grants 
Sponsored Research Conference, Washington, D.C., May 18-19, 2000.
---------------------------------------------------------------------------
    The chart below indicates that couples with lower earnings (the 
income range where cohabitation is most frequent) face the highest 
marriage penalties. Under current law, a couple where each adult earns 
$10,000 faces a marriage penalty of 4.2 percent of income; this 
increases to 4.5 percent of the couple's income when each adult earns 
$20,000. The couple where each adult makes $30,000 faces a marriage 
penalty of less than one percent of income.
    President Bush's proposal to reduce marriage penalties by providing 
an additional deduction for two earner married couples does not affect 
low- and moderate-income working families that have no income tax 
liability. The Administration does not make any changes to the Earned 
Income Tax Credit, which is the primary source of marriage penalties 
for families in lower income ranges. If as a society we want to signal 
that marriage is the best solution for raising children, why would we 
ignore the cases where the marriage penalties are the greatest, and 
where cohabitation is the most prevalent?
    In the last session of Congress, virtually every major tax bill 
providing marriage penalty relief--including the bills that Congress 
passed and former President Clinton vetoed in 1999 and 2000--included a 
provision that reduced the marriage penalty for low- and moderate-
income families receiving the EITC. Though the specifics were 
different, each bill reduced the marriage penalty in the EITC by 
increasing the income level where the EITC begins to phase-out for 
married couples, which is set under current law at $13,090 regardless 
of marital status. By raising this income level for married couples, 
the effect is to increase the amount of EITC a married couple can 
receive when its income falls in the phase-out range of the EITC 
schedule under current law.

   In 2000, the House increased the beginning of the EITC 
        phase-out by $2,000 in H.R. 4810, while the Senate version of 
        the same bill increased the beginning of the phase-out by 
        $2,500. The conference report that passed both houses of 
        Congress used the $2,000 increase from the House bill.
   In 1999, Congress increased the beginning of the EITC phase-
        out by $2,000 in its reconciliation tax bill (H.R. 2488).
   Democratic alternatives to these Republican tax bills also 
        included increases in the EITC for married couples, as does the 
        current Democratic alternative.
   The Heritage Foundation, in a recently published book, calls 
        for a larger effort to shrink EITC marriage penalties and has 
        called on policymakers to devote $5 billion a year for this 
        purpose. Isabel Sawhill of the Brookings Institution and David 
        Ellwood of Harvard also have called for larger efforts to 
        reduce EITC marriage penalties than last year's bills would 
        have made.

    The Administration's plan departs from the bipartisan consensus 
formed in Congress over the past two years to reduce marriage tax 
penalties for low-wage working families, not just for middle- and 
upper-income families. This is a serious deficiency that is difficult 
to understand.
V. Conclusion
    This analysis finds that one-third of children would not benefit 
from the expansion of the child tax credit. Yet these families pay 
taxes, and face high marginal tax rates in many instances. Similarly, 
the tax proposal provides no marriage penalty relief to many families 
that face the highest marriage penalties and doesnothing to equalize 
the tax treatment of marriage and cohabitation (i.e., to stop favoring 
cohabitation over marriage) for families with children in the part of 
the income range where cohabitation rates are the highest. I would 
respectfully urge the Committee to design alternatives that address 
these shortcomings.

                       Appendix Table 1.  Non-Beneficiaries of Tax Cut Proposals: Children
----------------------------------------------------------------------------------------------------------------
                                              Administration        Democratic Proposal     Additional Children
                                                 Proposal        ------------------------       Assisted by
                                         ------------------------                         Democratic Alternative
                  State                                                            %     -----------------------
                                           # Children      %       # Children   Children                   %
                                                        Children                           # Children   Children
----------------------------------------------------------------------------------------------------------------
Alabama                                      436,000        38%      195,000        17%      241,000        21%
Alaska                                        50,000        25%       20,000        10%       30,000        15%
Arizona                                      565,000        41%      185,000        13%      380,000        27%
Arkansas                                     276,000        40%      104,000        15%      172,000        25%
California                                 3,744,000        40%    1,421,000        15%    2,323,000        25%
Colorado                                     233,000        20%       95,000         8%      138,000        12%
Connecticut                                  191,000        21%       70,000         8%      121,000        13%
Delaware                                      70,000        34%       25,000        13%       45,000        22%
Florida                                    1,213,000        35%      462,000        13%      751,000        21%
Georgia                                      859,000        41%      362,000        17%      497,000        24%
Hawaii                                       108,000        33%       42,000        13%       66,000        20%
Idaho                                        138,000        40%       35,000        10%      103,000        30%
Illinois                                     985,000        30%      420,000        13%      565,000        17%
Indiana                                      390,000        26%      137,000         9%      253,000        17%
Iowa                                         201,000        28%       63,000         9%      138,000        19%
Kansas                                       201,000        30%       78,000        12%      123,000        18%
Kentucky                                     326,000        35%      159,000        17%      167,000        18%
Louisiana                                    496,000        44%      219,000        19%      277,000        24%
Maine                                         90,000        29%       47,000        15%       43,000        14%
Maryland                                     255,000        21%      107,000         9%      148,000        12%
Massachusetts                                471,000        31%      244,000        16%      227,000        15%
Michigan                                     807,000        28%      356,000        12%      451,000        16%
Minnesota                                    297,000        22%      138,000        10%      159,000        12%
Mississippi                                  339,000        45%      119,000        16%      220,000        29%
Missouri                                     435,000        30%      187,000        13%      248,000        17%
Montana                                       98,000        41%       35,000        14%       63,000        27%
Nebraska                                     132,000        29%       42,000         9%       90,000        20%
Nevada                                       172,000        29%       46,000         8%      126,000        21%
New Hampshire                                 83,000        23%       38,000        11%       45,000        13%
New Jersey                                   486,000        24%      219,000        11%      267,000        13%
New Mexico                                   278,000        52%       98,000        18%      180,000        33%
New York                                   1,865,000        39%      939,000        20%      926,000        19%
North Carolina                               644,000        34%      261,000        14%      383,000        20%
North Dakota                                  61,000        40%       21,000        13%       40,000        27%
Ohio                                         887,000        30%      440,000        15%      447,000        15%
Oklahoma                                     282,000        35%      120,000        15%      162,000        20%
Oregon                                       291,000        33%      124,000        14%      167,000        19%
Pennsylvania                                 835,000        29%      358,000        12%      477,000        17%
Rhode Island                                  68,000        26%       35,000        13%       33,000        13%
South Carolina                               338,000        37%      122,000        13%      216,000        24%
South Dakota                                  50,000        27%       22,000        12%       28,000        15%
Tennessee                                    528,000        38%      190,000        14%      338,000        25%
Texas                                      2,256,000        41%      839,000        15%    1,417,000        26%
Utah                                         171,000        24%       49,000         7%      122,000        17%
Vermont                                       43,000        28%       22,000        14%       21,000        14%
Virginia                                     439,000        26%      164,000        10%      275,000        16%
Washington                                   391,000        28%      190,000        13%      201,000        14%
Washington, DC                                54,000        48%       34,000        30%       20,000        18%
West Virginia                                161,000        45%       69,000        19%       92,000        26%
Wisconsin                                    316,000        20%      114,000         7%      202,000        13%
Wyoming                                       43,000        33%       16,000        12%       27,000        21%
US Total                                  24,148,000        34%    9,894,000        14%   14,254,000        20%
----------------------------------------------------------------------------------------------------------------

                               __________

                    Appendix Table 2.  Income Changes Among Single Mother Families: 1995-1999
                            (Includes Incomes of Related Adults and Unrelated Males)
----------------------------------------------------------------------------------------------------------------
                                                                                          Percent of Earnings
                                                           1995      1999     Change      Change Reflected in
                                                                                        Disposable Income Change
----------------------------------------------------------------------------------------------------------------
Quintile 1
Earnings                                                   2,473     3,465       992
AFDC/TANF, SSI, and Food Stamps                            4,647     2,932   (1,715)                     -27.2%
Disposable Income                                          9,551     9,281     (270)

Quintile 2
Earnings                                                   6,427    11,001     4,574
AFDC/TANF, SSI, and Food Stamps                            6,126     3,158   (2,968)                      34.0%
Disposable Income                                         16,331    17,886     1,555

Quintile 3
Earnings                                                  15,661    20,211     4,550
AFDC/TANF, SSI, and Food Stamps                            3,696     1,556   (2,140)                      39.7%
Disposable Income                                         22,672    24,480     1,808

Quintile 4
Earnings                                                  26,920    32,423     5,503
AFDC/TANF, SSI, and Food Stamps                            1,653       921     (732)                      75.6%
Disposable Income                                         31,009    35,170     4,161

Quintile 5
Earnings                                                  57,423    71,891    14,468
AFDC/TANF, SSI, and Food Stamps                              698       251     (447)                      94.7%
Disposable Income                                         59,165    72,865    13,700
----------------------------------------------------------------------------------------------------------------
Source: CBPP tabulations of the Current Population Survey.
Values are in 1999 dollars.
Disposable income income includes the value of means-tested in-kind benefits and the EITC, and deducts federal
  income and payroll taxes and work expenses.
Quintiles are formed by dividing the family's disposable income by the poverty threshold for a family of that
  size.
Each quintile contains approximately an equal number of individuals, 5.5 million in 1995 and 5.3 million in
  1999.
The number of families gradually increase from approximately 1.7 million in the bottom quintile to 2 million in
  the top quintile.
The maximum incomes used as quintile cut-points, as a percent of the families poverty threshold, are 86%, 127%,
  173% and 252% in 1999. They were somewhat lower in 1995.

                                


    Chairman Thomas. I thank both of you for your testimony.
    Mr. Donovan, I understand how you feel with your analogy, 
always a bridesmaid and never a bride, although I would believe 
that the appropriate phrase in the 106th Congress was that you 
were left at the altar. You were, in fact, ready to go to the 
wedding ceremony and were not allowed. It is my strong belief 
that following the November elections, we will move marriage 
penalty reform out of the House, out of the Senate, and present 
it to the President and the President will sign it.
    Dr. Primus, you indicated that the President's plan is 
deficient in a number of areas and I want to focus in on, if 
you will help me, in terms of, if you will, a prioritization of 
where, if the Committee were to focus on adjustments or a 
better understanding of where the inequities are the greatest. 
If you looked at, for example, the marriage penalty, are you 
familiar with H.R. 6 in terms of the adjustment on the earned 
income marriage penalty aspect of H.R. 6?
    Mr. Primus. Yes.
    Chairman Thomas. Would that be a step in the right 
direction vis-a-vis the rate adjustment program of the 
President?
    Mr. Primus. My understanding, Mr. Chairman, is that 
particular proposal would only affect families who pay income 
taxes and, therefore, would not affect families who are hit by 
the highest marriage tax penalties because of the EITC design.
    Chairman Thomas. All right. So you are still looking for, 
and obviously the President has indicated that we are going to 
address the payroll tax question when we look at Social 
Security and other areas.
    Let us turn to the child credit, then. If you were to pick 
the aspect of the President's plan that probably needs to be 
focused on most, what would you put as the number one concern?
    Mr. Primus. I would probably put as number one reducing the 
marginal tax rates for mothers at the beginning of the EITC 
phase-out, the mothers from $13,000 to about $20,000 of 
earnings, because they have an EITC phase-out of 21 percent. 
They can have their food stamps being phased out. In the case 
of Maryland, child care copays in the State were going up.
    Chairman Thomas. OK. We have in current law, under the 
current child credit, a provision which partially adjusts on 
the basis of the child credit. Are there flaws with the current 
law adjustment?
    Mr. Primus. Yes, Mr. Chairman. I think it is very 
complicated. For one, it only applies to families, as you know, 
with three or more children.
    Chairman Thomas. You have been behind the scene on a lot of 
activities. I know this was after your time. Why was it 
structured to apply to families with three or more rather than 
families with one or two?
    Mr. Primus. I do not know. There was some attempt to 
increase the refundability of the child tax credit in 1997, but 
this was a very, very narrow approach to increasing that 
refundability. Also, it only takes into account, Mr. Chairman, 
the employee portion of the payroll tax, and I think all 
economists agree that low-income families pay both the 
employer's and the employee's share of those payroll taxes.
    Chairman Thomas. I think most economists would say every 
employee, whether they are low income or not, pay all of those 
costs, notwithstanding the pay stub saying that is divided.
    Mr. Primus. OK. We agree.
    Chairman Thomas. So would a step toward making it fairer be 
to move it to any number of children rather than just above 
three?
    Mr. Primus. That would be a very small step in the right 
direction.
    Chairman Thomas. I understand. What other aspects of the 
President's proposal would you change if you could on the child 
credit?
    Mr. Primus. Well, as I indicated in my testimony, I would 
like to make the child tax credit partially refundable against 
earnings, so that, for example, if you picked a simple 10 
percent rate, then a mother who earned $10,000 would get 10 
percent of $10,000 or $1,000. If she had two children, she 
would not get the full credit of $2,000. But that is what I 
would do first with respect to the child tax credit.
    Chairman Thomas. And what would you do next?
    Mr. Primus. What I would do next is try to do something on 
the EITC. But in terms of the child tax credit, making it 
partially refundable, I think, is the right thing to do.
    Chairman Thomas. And then what would you do next?
    Mr. Primus. Then I would do some of the marriage----
    Chairman Thomas. No, on the child credit.
    Mr. Primus. Do something to reduce----
    Chairman Thomas. We are still on the child credit.
    Mr. Primus. OK. Some have advocated full refundability. My 
sense is that proposal probably is not going to get the vote of 
a majority of this Committee. But I talked about the families 
that face the highest marginal tax rates, those families that 
have, again, responded to your welfare reform bill and are 
working harder. I think they need an income boost and that is 
for families in the $10,000 to $20,000 range. You can do that 
by lowering and do a kink like Mr. Cardin and others have----
    Chairman Thomas. Yes, but those are all permutations of 
your earlier points and I understand that, so we have exhausted 
the suggested changes to the President's plan as far as you are 
concerned?
    Mr. Primus. Yes.
    Chairman Thomas. Otherwise----
    Mr. Primus. Oh, I also----
    Chairman Thomas. We will keep it in place as he proposed 
it.
    Mr. Primus. I would not extend it to families of very high 
income levels. Since you have provided lots of tax relief in 
the rate reduction bill that has already passed the House, I am 
not convinced that families above $130,000 need more tax 
relief.
    Chairman Thomas. But that is current law, is it not?
    Mr. Primus. Yes. It ends at $130,000.
    Chairman Thomas. So you would not extend it beyond current 
law?
    Mr. Primus. That is correct.
    Chairman Thomas. OK. Obviously, I want to get the input, 
because if we are looking at changing the President's proposal, 
I want to make sure, given your background knowledge and 
involvement, that I get an exhaustive list of changes from you 
so that if, in fact, we make those changes, my colleagues on 
the other side of the aisle will be able to readily recognize 
where those suggestions came from in terms of trying to fashion 
a package that is fairer and more equitable, and I appreciate 
your comments.
    The gentleman from California.
    Mr. Stark. Is it in order for me, Mr. Chairman, as long as 
we are dealing with a bill we have not seen, for me to ask 
unanimous consent to incorporate Dr. Primus' ideas in the bill 
that we will see soon?
    Chairman Thomas. The gentleman can certainly try. First of 
all, the chair wants to apologize to the other gentleman from 
Texas, because I had told him that he would be first off, and 
frankly, four votes and lunch blurred my memory.
    Mr. Stark. Let me, then, by all means, yield to my 
colleague from Texas, if I may, Mr. Chairman.
    Chairman Thomas. I appreciate the gentleman allowing me to 
honor the commitment that I made to him and to his colleague, 
but since his colleague is not here, we only have to allow the 
gentleman from Texas.
    Mr. Stark. I yield to him.
    Mr. Doggett. Let me just ask, as a preface to my questions, 
Mr. Chairman, I understand what you said this morning about 
this description of the Marriage Penalty and Family Tax Relief 
Act, that while you would be perfecting it further through the 
benefit of witnesses like this, you anticipate that the 
subjects that will be included in the bill we will mark up in a 
few hours would be limited to the five that are included in the 
description?
    Chairman Thomas. I will tell the gentleman, a few hours 
means tomorrow----
    Mr. Doggett. Yes, sir.
    Chairman Thomas. And my characterization of tomorrow is one 
I prefer rather than a few hours.
    Mr. Doggett. Tomorrow, then.
    Chairman Thomas. Yes. I will tell the gentleman that he is 
substantially correct, with the exceptions of testimony that 
may allow us to make some adjustments that would make the 
package more relevant.
    Mr. Doggett. On the same subjects?
    Chairman Thomas. Exactly.
    Mr. Doggett. We are not getting into----
    Chairman Thomas. That is correct.
    Mr. Doggett. Retirement or estate tax or capital gains 
tomorrow?
    Chairman Thomas. No, that is correct.
    Mr. Doggett. Just these? OK.
    Chairman Thomas. The base text will be H.R. 6, as adjusted 
with a child credit, subject to modification based upon the 
excellent testimony of the witnesses.
    Mr. Doggett. I understand and thank you for your 
clarification.
    Mr. Donovan, our colleague, Mr. Weller, made clear earlier 
this morning that he found the proposal by President Bush on 
the marriage penalty to be deficient, but as I read your 
written testimony, it is much stronger than your testimony you 
just gave us. In no uncertain terms, you condemn President 
Bush's proposal on marriage tax penalty and, in your words, say 
that it is so bad that ``it would be better to do nothing about 
the marriage penalty than to do this.'' Does that written 
testimony still reflect your position, sir?
    Mr. Donovan. That is my written testimony. Let me state our 
views on the bill overall.
    Mr. Doggett. Well, does that reflect your views, since my 
time is limited? You stick by your written testimony that his 
proposal is so bad that it would be better to do nothing than 
to adopt the Bush proposal, is that correct?
    Mr. Donovan. The deficiency in the proposal is that----
    Mr. Doggett. Well, let me just ask you if it is correct or 
not, your written testimony.
    Mr. Donovan. I have stated that that is my testimony and--
--
    Mr. Doggett. I appreciate it.
    Mr. Donovan. I need to give to the Committee the words 
around it, if I may.
    Mr. Doggett. I want to ask you one further question to 
clarify that, then. Is it your feeling, coming assomeone who 
has been married myself now for 32 years and has an appreciation for 
the institution of marriage, that the institution of marriage is so 
important that we should, in writing our tax laws, seek to discriminate 
against those who are not married?
    Mr. Donovan. I think that we should provide tax relief to 
the American people.
    Mr. Doggett. Do you believe that our--just tell me. I 
understand you may want to elaborate to other members, but do 
you or do you not believe that we should discriminate as we 
write our tax laws against those people that do not have the 
good fortune, such as myself, to have been married, in my case, 
32 years?
    Mr. Donovan. Congressman, I think that married people and 
the children they raise, if they raise them successfully, they 
provide a wealth of benefits to single people, including paying 
for the Social Security benefits of that rising generation to 
whom a non-married person with no children does not.
    Mr. Doggett. I could not agree with you more.
    Mr. Donovan. I think that there is no discrimination----
    Mr. Doggett. I could not agree with you more that families 
who----
    Mr. Donovan. As a result of policies that favor families 
with children.
    Mr. Doggett. Yes, sir. Reclaiming my time, I could not 
agree with you more that married families contribute greatly to 
our society, and I take your answer, then, to be that you do 
think that it is appropriate in designing our tax laws that we 
should discriminate against those people who are not married.
    Mr. Donovan. I believe that we should provide preferences 
for families with children to raise their children, yes.
    Mr. Doggett. A preference to me as a married person means 
that someone who does not enjoy my good fortune is taxed at a 
higher rate, and as you know, there are many single individuals 
who are taxed at a higher rate, and if we adopt the proposal 
that you advance, we will discriminate against them even more. 
And my feeling, Mr. Donovan, is that a widower, an abused and 
abandoned spouse, someone who is single by choice, might well 
contribute as much as someone who is married, that a single mom 
who is out there who is trying to make ends meet and who is 
single through no fault of her own and has kids to support and 
is working and trying to get them through school and do the job 
of two parents, does not deserve to have to pay higher taxes 
and be discriminated against just because of your belief and my 
belief in the value of the institution of marriage and all that 
it contributes to our society.
    But that is one of the problems that I have had with the 
bills that have been introduced, is that they are not written 
on a neutral basis because groups such as yours are so 
committed to the institution of marriage that they are willing 
to have our tax laws written deliberately to be discriminatory 
against single individuals in our society and, in fact, at the 
conclusion----
    Chairman Thomas. The gentleman's time has expired, but go 
ahead and finish your sentence.
    Mr. Doggett. It was a mighty fast 5 minutes. In my 
district, in Travis County, Austin, Texas----
    Chairman Thomas. Time goes fast when you are having fun.
    Mr. Doggett. It does.
    In Austin, Texas, I actually have more individuals who 
stand to not gain and be potential beneficiaries from this 
proposal, who are either divorced, separated, widowed, or live 
as single individuals, than those who do not. And it seems to 
me that the goal ought to be to treat everyone equitably and 
fairly without regard to their choice of being married or not 
being married. Thank you.
    Chairman Thomas. The gentleman's time has completely 
expired.
    Does the gentleman from Florida wish to inquire?
    Mr. Shaw. Thank you, Mr. Chairman. Wendell, it is good to 
welcome you back to the Committee where you spent so many 
years, both on the majority and the minority side as the winds 
of change went about changing much of that. I have always 
valued your opinion on many things. I count you as a friend and 
perhaps would characterize you as an honest liberal, and that 
is not an oxymoron. I think you sincerely believe what you say 
and you are a good advocate for it, and I think you make a lot 
of sense a lot of times and I enjoy your testimony. I 
particularly enjoy the dialog back and forth with the Chairman.
    As you recall, we worked together, and I think there was 
good bipartisan support for the earned income credit. It was 
EITC back then. We have changed the name of it. But I want to 
be sure that the record is complete in many areas. Right now, 
the EIC payment, someone earning, a family with two kids 
earning, say, $10,000 a year, they would receive back, I think 
under EIC, $4,000, which is more than the payroll tax that they 
would pay in.
    I also think the record should be clear that low-income 
people, because of the progressivity of the Social Security 
payment schedule, that they get a better deal than the high-
income people when it comes to retirement and Social Security.
    You are nodding yes, and I assume that I can put a ``yes'' 
in the record, that you do agree with what we are saying.
    Mr. Primus. Yes. They ultimately will benefit from some of 
those payroll tax payments.
    Mr. Shaw. Now, also, is it your opinion--and this is 
getting a little bit out of your scope of direct testimony, but 
I think you are certainly qualified to answer the question--is 
it your opinion that if we pass these bills and put money back 
into the paycheck or refund, as the case may be with the EIC, 
that this would go a long way toward helping to stimulate the 
economy by putting money back into the economy? Is that your 
opinion, particularly at the lower income level?
    Mr. Primus. Yes. I appreciate all those kind words, Mr. 
Chairman. I am getting a little nervous about where this 
conversation is going.
    Mr. Shaw. Oh, I think----
    Mr. Primus. I firmly believe, yes, that increasing the 
EITC--I mean, the purpose of the EITC was, as you know, to 
refund or rebate some of the payroll taxes at the bottom end of 
the income distribution, but it was also----
    Mr. Shaw. It was also to reward work.
    Mr. Primus. To give an earnings supplement. Rather than 
increasing the minimum wage, the Congress made decisions that 
said--because sometimes an increase has adverse employment 
effects--the right way to help low-income wage earners was 
through the EITC, which then became an earnings supplement and 
an alternative way of rewarding their wages, if you will.
    And just because that says they should not be paying 
Federal income taxes does not necessarily mean that these 
families should not get some benefit from the expansion of the 
child tax credit.
    Mr. Shaw. In other words, then, if you go back to the 
minutes of the meetings that we had and the hearings that we 
had, the purpose, I believe, as it was framed, was to reward 
work. And I think that the Human Resources Subcommittee did an 
awful lot of work back then in seeing that that happened.
    I do have one simple question that I would like a yes or no 
from you. I just want to get it on the record. Is welfare 
reform a success, yes or no?
    Mr. Primus. For some mothers, yes; for others, no.
    Mr. Shaw. That is a yes or no, I guess.
    Mr. Primus. I also think that is pretty close to the truth.
    Mr. Shaw. Well, I think all of us know that overall it has 
been a tremendous success in getting people off the welfare 
rolls, getting them to take control of their life and getting 
them on the track toward a better life. Even though it may be a 
struggle for some at the beginning, at least it is a beginning 
for all. And I think that you would agree with that.
    Mr. Primus. Yes. And as I said in my testimony, I mean 
quite amazingly, these mothers are earning a lot more money. 
More of them have gone into the labor force. But the other 
effect is they are not getting as much of increased earnings 
reflected in their income gains as I think you and I would like 
to see. I mean, if you earn an additional $4,500 but only get 
$1,500 more in income, that is not a very good return for all 
that extra earnings.
    Mr. Shaw. Well, at least it is earnings and it is 
productivity, and it has really tremendously done a lot for the 
self-esteem of particularly these single moms out there that 
were really at the bottom rung of the economic ladder as well 
as the ladder of self-esteem.
    Thank you, Mr. Chairman. I yield back.
    Chairman Thomas. I thank the gentleman.
    The gentleman from California, Mr. Stark. Thank you for 
your courtesy.
    Mr. Stark. Certainly. I have been taking a back seat to 
some Texans here. I would like to talk to my colleague from 
Texas, Mr. Doggett. I refuse to take a back seat any longer. I 
presume that if he is going to get credit from Mr. Donovan's 
organization for being married, I then would get three or four 
times the credit that he is getting. And if this is a linear 
sort of thing, I probably then should get three or four times 
the tax credit. I like that idea.
    Wendell, your appendix suggests that, if I read it 
correctly, you talk about non-beneficiaries of the tax cut 
proposals, which I presume are those before us. Do you include 
in that table a combination of both the earned income tax 
credit and the marriage penalty? Is this a compendium or is it 
only one of those two?
    Mr. Primus. It reflects the President's proposal of the 
child expansion, the marriage penalty, et cetera. It reflects 
all of the President's proposals.
    Mr. Stark. OK. So what you are telling me is that under the 
President's proposal, there would be 24,148,000 children who 
would not benefit from this proposal. How many children are 
there?
    Mr. Primus. About 71 million.
    Mr. Stark. So more than a third of the children in the 
United States would receive no benefit from either of these or 
the combination of these proposals.
    Now, to be bipartisan, under our Democratic proposal there 
would be almost 10 million who would not also, so that this is 
not--but it remains that more than two and a half times more 
children would be left out of this.
    Now, can you characterize for me, if it isn't a random 
selection, who are those 71 million children that this bill 
would discriminate against?
    Mr. Primus. Well, most of those, I think about 80 percent 
of the children excluded, have an earner. Two-thirds have an 
earner who is earning at least half-time.
    Mr. Stark. Excuse me. Have an earner? You mean one----
    Mr. Primus. Have some earnings in that family where the 
child resides.
    Mr. Stark. OK.
    Mr. Primus. Two-thirds of those children excluded, again, 
16 million, reside in families that earn more than half time, 
full year, at minimum wage. So these families have earners and 
have substantial amounts of earnings.
    Mr. Stark. Could you bracket that? I mean, 20, 30, 40? How 
much earnings? I am trying to get a picture of----
    Mr. Primus. Well, they clearly have earnings between $5,150 
and--where they start to pay Federal income taxes. That range 
of income, if you will, is where two-thirds of the children 
excluded reside.
    Mr. Stark. So under 25,000 bucks.
    Mr. Primus. Yes.
    Mr. Stark. I guess that is what I am getting at.
    Mr. Primus. That is the right number for a family of--a 
married family with two children, approximately.
    Mr. Stark. So basically we are leaving out of our--in this 
bill, and would the suggestions that you made to the Chairman 
alter that? I know this is a rough cut, but if we are leaving 
out 24 million children in the lowest-income group of 
Americans, just to save them the embarrassment of giving all 
this money to therichest couple of thousand if we got rid of 
the death tax, how could we save the Republicans from themselves and 
allow them to do something for the lower income children? Would your 
suggestions to the chairman take care of that?
    Mr. Primus. Well, obviously, the suggestion that says make 
the credit partially refundable against earnings would only 
leave out then the children where the household doesn't earn a 
thing. And that is a very small percentage; probably 20 percent 
of the children now left out would be left out if you made the 
credit partially refunded against earings. Obviously, then, if 
you start the credit at higher income levels or make it 
partially refundable at higher income levels, that percentage, 
as you can see from the Democratic alternative, which really 
targeted families at about $8,000 and higher, roughly, left out 
14 million children.
    Mr. Stark. Mr. Donovan, do you think Mr. Primus' idea is 
good?
    Mr. Donovan. To be honest with you, I haven't studied that 
proposal. I would like to read his testimony and have a chance 
to respond in writing.
    Chairman Thomas. The gentleman's mike is not on. It is hard 
to hear the response.
    Mr. Stark. He is not familiar with it.
    Thank you, Mr. Chairman.
    Chairman Thomas. Thank you.
    Does the gentleman from Louisiana wish to inquire?
    Mr. McCrery. Yes. Thank you, Mr. Chairman.
    I will put this question to both of you. What do you think 
the purpose of the child tax credit is? Why do we have a child 
tax credit? Mr. Donovan.
    Mr. Donovan. I believe the child tax credit is appropriate 
recognition of the important investment that society and 
parents make in their children. It is a recognition of the 
extreme costs of raising a child in the world today, from 
providing food and shelter, the traditional things, and also 
the expectations these days that children will have the best of 
education, and parents are responsible, first and foremost, for 
providing that. Five hundred dollars is not a huge step in that 
direction for most parents.
    Mr. McCrery. Do you agree with that, Dr. Primus?
    Mr. Primus. Yes, I think the rationale, as the President 
has said, it is not just simply tax relief, but to help 
families rear and support their children. I think it is an 
important public function to help families raise their 
children.
    Mr. McCrery. I agree, and I also agree with your statement, 
Mr. Donovan and Dr. Primus, of the rationale for the public 
policy of the child tax credit. And if that is the rationale, 
then it seems to me, Mr. Chairman, that this Committee ought to 
try to give that advantage in the tax code to everybody that 
has children that pays taxes, whether it is income tax or 
payroll tax. And so I think that our friends on the other side 
of the aisle and Dr. Primus make some good points. And I would 
hope that this Committee could maybe look at the President's 
proposal and massage it a little bit to make sure that that 
sound public policy of helping people to rear their kids is 
extended to all parents with children who pay taxes.
    Thank you.
    Chairman Thomas. I thank the gentleman.
    Does the gentleman from Pennsylvania, Mr. Coyne, wish to 
inquire?
    Mr. Coyne. Thank you, Mr. Chairman.
    Dr. Primus, you may have given this statistic, but I guess 
it would be worth repeating. How many more low- and moderate-
income families would receive benefits in earned income tax 
credit under the Democratic alternative than under President 
Bush's plan? Do you have those figures?
    Mr. Primus. Because you do all of your additional tax 
relief at the bottom through the EITC, that difference is 
approximately 10 million children.
    Mr. Coyne. Ten million more children would receive the 
benefit----
    Mr. Primus. No, no. Fourteen million more children.
    Mr. Coyne. Would receive the benefit than under President 
Bush's plan. Thank you.
    Chairman Thomas. I thank the gentleman.
    Does the gentleman from Michigan, Mr. Camp, wish to 
inquire?
    Mr. Camp. Thank you, Mr. Chairman.
    Either Mr. Donovan or Mr. Primus, can you talk a little 
bit, if you are able to, about the ability of the IRS to 
administer a refundable child tax credit? And have you done any 
research or do you have any information on the ability to keep 
that program with integrity and to make sure that it does 
really get to the people who need it and deserve it?
    Mr. Primus. I think the IRS is capable of administrating a 
refundable child tax credit. Most of those families do get some 
benefit from the EITC. We can always try to do a better job, 
but there is no doubt in my mind that the IRS could administer 
a refundable, as Congressman McCrery indicated, credit that 
gave some relief to all families who paid income or payroll 
taxes.
    Mr. Camp. Have you done any research or any studying on 
that area? I realize your supposition, you think they can do 
it. Is there anything you have examined that would support 
that, or have you----
    Mr. Primus. Well, they do administer the refundable credit 
of the EITC, which----
    Mr. Camp. And there are problems with that in administering 
it, would you agree?
    Mr. Primus. And there are some problems with that.
    Mr. Camp. So why would this not be any different?
    Mr. Primus. I think the major problem in the earned income 
tax credit is which family should receive taxrelief because of 
a child. There are some very complicated provisions of the EITC.
    For example, in a household with three generations, let's 
say a grandmother makes $25,000, but the mother makes $15,000, 
and they would file separate returns today. The EITC doesn't go 
to the mother. She is ineligible for the EITC because it is 
supposed to go to the grandmother in that household. So that is 
one example.
    So I think there are ways that some of the very complex 
rules surrounding the EITC--the Treasury has put forward some 
proposals that--for example, lots of time noncustodial parents 
are taking advantage, of the EITC when they are eligible. We 
could make sure that doesn't happen by matching IRS information 
against the child support registry data and immediately calling 
it a math error and adjusting the return. I think those are 
some of the provisions that would reduce the EITC error rate 
considerably.
    Mr. Camp. That would assume any parent paying support 
doesn't have custody, which isn't always the case. The registry 
doesn't distinguish in terms of where the child is physically 
living. But I understand your point and----
    Mr. Primus. In most cases, I wouldn't expect a parent who 
has custodial status--you know, where the kid is residing with 
that parent, shouldn't be paying child support. I mean, either 
there is something wrong with the child support system then 
where the dad is paying child support to himself because the 
kid is residing with him. That doesn't make sense.
    Mr. Camp. Well, in a lot of the joint custodial 
relationships now, that is different. Anyway, I know my time--
Mr. Donovan, any comment on the refundability of the child tax 
credit and its----
    Mr. Donovan. No, I have no data on the difficulty in 
applying it. I know that there has been some error. We do 
support refundability against Social Security taxes, both 
employer and employee.
    Mr. Camp. All right. Thank you.
    Thank you, Mr. Chairman.
    Chairman Thomas. I would just interject briefly. It seems 
to me that--and I agree with the gentleman from Michigan that 
there has been an error rate problem with the earned income 
credit. But I think that is largely to the extent of the fact 
that a number of these people have multiple employers and that 
it is the flow of income and that, as a matter of fact, in any 
system that says you get more relief if you claim more income, 
whether you actually make it or not, there is a perverse 
incentive there.
    But in dealing with the child credit, I think everyone 
would have to agree that the determination of whether or not 
there is a child is an easier determination in which to verify, 
much the same as indicating that you are filing married 
jointly. No one would do that now because of the penalty. But, 
in fact, they may want to file separately, notwithstanding the 
fact that they may, in fact, be married.
    Both of those, I think, are far easier to detect if someone 
is trying to commit fraud on a tax form. It is a question of 
degree, but I believe we are pushing the argument quite a ways 
if we are dealing with the child credit or marriage penalty, as 
opposed to falsifying income for the purpose of actually 
getting more back, claiming that you made more than you 
actually did. That to me is the real perversity of the earned 
income credit in terms of the way in which you can defraud the 
system.
    Does the gentleman from Massachusetts wish to inquire? Mr. 
Neal.
    Mr. Neal. Thank you, Mr. Chairman.
    Dr. Primus, I had an opportunity to talk with President 
Bush about a month ago about the AMT issue, and he described it 
as ``a huge problem.'' Based upon the Chairman's bill here, do 
you think that there is any legitimacy to the argument that the 
same benefit that is being promised in the bill will actually 
be denied based upon implementation?
    Mr. Primus. I think the issue of the AMT is a huge problem. 
My understanding from the Joint Tax Committee is that about 1.5 
million taxpayers are hit this year, and under current law that 
goes up to 21 million by the year 2011, and that the 
President's proposal increases that an additional 15 million or 
so.
    I know that in the bill that passed the Committee and was 
taken up by the full House, there were some provisions to 
address that. But my understanding is those provisions made 
very small differences in the number of families who would be 
affected by the AMT.
    Mr. Neal. Let me follow up on that. As I understand it, and 
perhaps as you understand it, the bill that passed the 
Committee here continues the current law waiver of AMT 
limitations for the child credit but not for other non-
refundable credits such as the education credits.
    Is it possible that a family with children in college would 
actually find their taxes going up next year compared to their 
taxes in 2001?
    Mr. Primus. Yes. Again, many families in this situation 
currently can use the full amount of the education credits, the 
HOPE and the lifetime learning credit, if they have two 
children in college. But if you don't continue this waiver, 
their taxes will go up.
    Mr. Neal. My interest here, once again, is not in trying to 
draw any partisan fire on this issue as much as it is to 
acknowledge that the President is right that it represents a 
huge problem. And as much as we have discussed it here, I don't 
think any of us really like the solution offered to date.
    Mr. Primus. Right. I think you know all this very well. The 
alternative minimum tax was set up to make sure that some very 
high income families wouldn't take undue advantage of tax 
preferences. It was supposed to affect a very narrow band of 
high-income families.
    I don't believe the majority or the minority on this 
Committee is going to let the AMT affect millions and millions 
of families, which means they have to do two calculations.
    Mr. Neal. Thank you, Mr. Chairman.
    Chairman Thomas. Not only new calculations but to spend 
money to make sure that people do not fall into the trap of the 
AMT, which was exacerbated in the 1993 tax bill and which we 
have not addressed, and now discovering in giving people tax 
relief, in fact, on the back side, they will not be getting 
that relief. And I can assure you as we move these different 
pieces of legislation, we will do our best to include 
provisions beyond the one mentioned to hold those individuals 
harmless until we can sit down and fundamentally address the 
problem of the alternative minimum tax.
    But no one, no new individuals, if we can help it, should 
fall into the alternative minimum tax by virtue of the tax 
relief packages that we will be moving through, whether it is 
the marriage penalty, child credit, or any other area of tax 
relief.
    Does the gentleman from Minnesota wish to inquire?
    Mr. Ramstad. Thank you, Mr. Chairman. Just very briefly.
    Good to see you again, Dr. Primus and Mr. Donovan. I liked 
Mr. Shaw's characterization of the honest liberal, and I think 
it is healthy when a honest liberal and an honest conservative 
are showing such a concurrence of views on some very important 
elements of our tax relief that we are trying to get to the 
American people. And I think that reflects the bipartisan 
nature of this tax relief. Certainly that was reflected in the 
vote last year on the bill to eliminated the marriage penalty, 
to phase it out, a large number of people from the other side, 
Members from the other side of the aisle.
    I wanted to thank you particularly, Mr. Donovan, for the 
work that you and your organization have done. It will benefit 
80,000 couples in my 3rd Congressional District of Minnesota, 
80,000 married couples right now paying an average of $1,400 
more in taxes. So I appreciate Mr. Weller's leadership on the 
panel and certainly your organization's efforts as well.
    I just want to take a minute to respond to the colloquy, 
Dr. Primus, that you had with Mr. Shaw on welfare reform, just 
one minute.
    That question, I think, was best answered, for me at least, 
not in the statistic that, in fact, 49 percent fewer people are 
on the welfare rolls nationally--in Minnesota, it is a little 
less, 40 percent fewer welfare recipients than before welfare 
reform. But that was answered for me up close, anecdotally, by 
a former welfare mother who became a friend of mine through a 
group I go to every week to stay sober, a group of recovering 
people. And she was a very diehard opponent of welfare reform: 
What are you doing? I have two children and you can't take this 
welfare away.
    At Christmas and Hanukkah season, I was back home at this 
meeting, and she came up to me and was very, very warm and 
jubilant. And I said, What has gotten into you? And she said, I 
just want to thank you for welfare reform; because of it, I 
have a job now, I am not on welfare. I was able to learn 
computer skills, and for the first time since my kids started 
school, they didn't wear hand-me-downs the first day of classes 
in September. I went to Target and got them clothes, and I am 
making more money than I ever thought possible.
    You could just see the dignity, I could just see the 
dignity and self-worth, self-respect. So, for me, that is a 
resounding yes, and I am glad to see at least partially, Dr. 
Primus--and I have always appreciated your views even though 
they diverge with mine on some of the issues. But I respect you 
and appreciate your honest answer to that question of Mr. 
Shaw's. I just couldn't let the opportunity go by without 
addressing that.
    Thank you again, both of you, for your input here today, 
and I appreciate, as I said, the concurrence of your views, 
surprisingly, on some of the very important issues that this 
bipartisan tax relief package addresses.
    Thank you. I yield back, Mr. Chairman.
    Chairman Thomas. I thank the gentleman.
    Does the gentlewoman from Washington wish to inquire?
    Ms. Dunn. Thank you very much, Mr. Chairman. And I, too, 
want to applaud Mr. Weller for the good work he has done on 
keeping the importance of the marriage penalty before us in 
what has turned out to be a very positive era where we have the 
dollars that we can do this thing, this right thing, and we can 
do it in the right way.
    A point on welfare reform. Having served on that Committee, 
having helped to write that legislation, I am absolutely 
delighted in the results it has had over the last few years. We 
took great care as we were writing welfare reform to make sure 
that we considered how we could be helpful in moving women from 
welfare into work. And now as we consider the reauthorization 
of that bill, we have a chance to observe, as I have done over 
the years in meeting with welfare moms and dads, to find out 
what is going right and what may not be going right with this 
legislation. We have a chance now to make sure that nobody 
falls through the cracks on welfare reform.
    But I guess I am most grateful to Mr. Weller because he has 
been persistent on this issue, and at many points he could have 
phased out his support. It will be because of him--Mr. Weller--
that we will have been successful at the time that we pass this 
off the floor of the House. I think myself personally that it 
is time we honor marriage, not tax it.
    I yield back.
    Chairman Thomas. I thank the gentlewoman.
    Does the gentlewoman from Florida wish to inquire?
    Mrs. Thurman. Thank you, Mr. Chairman.
    I am sorry to both of you that I missed the opening 
statements and obviously some exchanges that happened here. 
But, Dr. Primus, I just have one question. We are a political 
body, and we all have to go back home, and we have to explain 
to our constituents why we did or did not vote for something. 
And I found your Table 1 very interesting, particularly as it 
relates to each State, and particularly the amount of children 
that would or would not be in it.
    And you may have gone over this in your testimony, and I 
hope that my colleagues will just let me ask you to kind of 
walk us through here and give us an idea of, as we put a bill 
together, what is--how do we make the largest impact on 
children with families so generally all children would be 
covered?
    Mr. Primus. Well, Congresswoman, as that table shows, in 
the State of Florida 1.2 million children, or thereabouts, 
would not benefit from the expansion of the child tax credit or 
even the lowering of the income tax rate because those children 
live in families that don't pay income taxes. And most of those 
children would have an earner. Obviously, under a proposal that 
started to give those families something as they started to 
earn money, that number would shrink. And under the Democratic 
proposals in Florida, it shrunk to 462,000; or thereabouts, 
from 35 percent of kids to 13 percent of kids.
    Mrs. Thurman. Is this proposal on all of the tax issues or 
any one in particular? Is this the marriage tax? Is this the 
bracket change or the marginal--I mean, does this include 
everything that has been talked about or----
    Mr. Primus. It includes everything that has been talked 
about as it affects children or families with children. So it 
is not looking at couples without children, et cetera. It is 
saying 1.2 million children in Florida don't get any help from 
the way the President's tax proposals are designed.
    Mrs. Thurman. OK.
    Mr. Primus. And you can do something about that, and as I 
have indicated in the colloquy with Mr. Shaw, a lot of these 
mothers are working harder. And even though their earnings have 
gone up $4,500 on average, their income only went up $1,500. I 
think, they deserve an income boost. They deserve help in 
raising their children. They have done what you wanted them to 
do, in essence, but they didn't get much of an increase in 
income.
    Mrs. Thurman. And these would be some of the same children 
that have lost some of their medical benefits, other areas that 
we would be very concerned about.
    I just might let the Committee know that I was actually in 
Tallahassee on Monday. We have a Federal-State summit, and I 
found something very interesting, that they have asked for a 
waiver from Medicaid, and that was to allow the State employees 
of that State to participate in the CHIP program because they 
actually would meet the financial criteria that we have set for 
children for medical services. So, you know, here is an idea 
that if some of this was given back, they would have an 
opportunity to buy some of that insurance, do some of the 
things that we are asking them to do that we have actually 
taken away from them in the past.
    So, Dr. Primus, thank you very much.
    Chairman Thomas. I would tell the gentlelady, perhaps she 
wasn't here when the Chair invited Dr. Primus to indicate where 
he thought changes could be made. He indicated that he thought 
the current law upper-income level was more appropriate than 
the President's proposal. Obviously, as has been discussed a 
number of times, that child credit shouldn't apply just to 
income but it should apply to other taxes, such as payroll tax 
offset. And I inquired about the current law in terms of low 
income, which sets it at three or more children, and that I 
asked him why it was not one or two. We didn't really have a 
good answer and that it seems to me we will be looking at the 
question of why not have it apply to the first child, second 
child, and so on.
    So he has provided a number of options for us to examine 
any child credit program, to perfect a program to address the 
concerns the gentlewoman has indicated, and a number of other 
colleagues on your side.
    Mrs. Thurman. Mr. Chairman, would that also include some of 
the issues--I know that it has been stated that even in the 
earned income tax credit, the marriage penalty was also 
included, I think, even in Mr. Weller's and all of the others. 
So as we put this bill together tomorrow, those would be 
considerations?
    Chairman Thomas. We would be looking for adjustments in 
that area as well, always mindful that we are going to have to, 
as the gentlewoman well knows, pay down the AMT cost so that 
people would not find the insidious aspect of getting a tax 
reduction but, in fact, on the alternative minimum tax winding 
up paying more.
    Mrs. Thurman. Well, Mr. Chairman, I believe we have moved a 
long way, then.
    Chairman Thomas. I believe that is one of the reasons we 
have hearings, notwithstanding the reaction of my colleagues 
earlier, to hear testimony which may, in fact, produce the 
product that will be before us shortly.
    The gentleman from Illinois I know wants to inquire.
    Mr. Weller. Thank you, Mr. Chairman, and thank you for 
conducting this hearing today as we talk about discrimination 
in the Tax Code, particularly as it affects married couples. I 
note with some interest some of the comments by some of my 
colleagues to talk about if we pass legislation to eliminate 
the marriage tax penalty, somehow that discriminates against 
single people. Well, today under our Tax Code, if two single 
people choose to get married, they are going to pay higher 
taxes as joint filers; whereas, if they stay single, they pay 
less in taxes. So, clearly, our Tax Code today discriminates 
against married couples, and we, of course, are looking today 
for solutions to eliminate that penalty on families who work 
and suffer the marriage tax penalty.
    I have a couple of questions I would like to ask, Mr. 
Chairman. First, I would like to direct my first question to 
Dr. Primus.
    Dr. Primus, you noted in your testimony that legislation 
that we sent to the President last year that President Clinton 
vetoed addressed the marriage penalty that earned income tax 
credit participants participate in. Are you familiar with H.R. 
6, the legislation that we reintroduced this year, which is 
modeled after that legislation?
    Mr. Primus. Yes, somewhat.
    Mr. Weller. OK. Well, we adjust for joint filers for the 
EIC, we adjust the income threshold by $2,000, which eliminates 
that marriage tax penalty.
    Based on your expertise, for those who suffer the marriage 
tax penalty under the EIC, what would that mean in change in 
their income, making that adjustment in the income threshold?
    Mr. Primus. Well, it doesn't eliminate the marriage tax 
penalty. It lowers it. When you expand the phase-out by about 
$2,000, you are lowering that marriage tax penalty by about 
$400, which is $2,000 times the phase-out rate of 21 percent.
    Mr. Weller. It would mean an additional $400 a year.
    Mr. Primus. That is right.
    Mr. Weller. In income for that married couple.
    Mr. Primus. That is right.
    Mr. Weller. Thank you.
    Mr. Donovan, some have said why not just double the 
standard deduction for joint filers to twice that for singles 
as a solution to the marriage tax penalty and forget about the 
other things. You know, if we were solely to double the 
standard deduction which is used by those who do not itemize, 
it would not affect those who itemize their taxes.
    From your perspective and your organization, what are the 
benefits of widening the 15 percent bracket as we propose in 
H.R. 6 to married couples who suffer the marriage tax penalty? 
Who would benefit directly, and what would be the benefit?
    Mr. Donovan. Well, it would certainly benefit a large 
number of families who may have just acquired a home, which is 
probably the first significant step they have taken financially 
since getting married. Theywork hard to get to that place in 
life. The expansion of that bracket is not going to help upper-income 
families in any way, shape, or form.
    I was asked earlier about discrimination between single 
people and married couples. The most dramatic difference 
between being single and being married is the number of people 
you have to care for. The typical family earning the median 
income or up to $50,000 or $60,000 a year is caring for three 
or four people, not one person. If you look at in terms of the 
tax relief they would get by expanding that 15 percent tax 
bracket, on a per capita basis they are probably still paying 
more taxes than a single person.
    So we believe it is essential to reach a large swath of 
married couples who need the relief and also the growing group 
of individuals who are living together without benefit of 
marriage and need an incentive to marry. We would favor that. 
We think that tax policy ought to encourage that, not 
discourage it.
    Mr. Weller. What would you consider to be a typical married 
couple? Do you have an example that you could use which would 
be a typical married couple suffering the marriage tax penalty?
    Mr. Donovan. Well, we have talked in terms of averages. The 
average is about a $1,400 penalty for a married couple. The 
median family income I believe is in the upper $30,000 range. 
That family has one or two children, typically. And if they 
were not to be assisted by this tax relief, they would incur 
that penalty.
    Mr. Weller. I know some have said that many of those who 
suffer the marriage tax penalty are rich people. I find that 
the average couple that usually brings the marriage penalty to 
my attention when I am back home are a construction worker and 
a schoolteacher making about $65,000. They have a child. They 
own a home. Their average marriage tax penalty is $1,400, and 
that is real money. Where I come from, that is a year's college 
tuition; $1,400 is several months' worth of car payments for 
many families; it is 2 to 3 months of child care at a day-care 
center. If both mom and dad work, many times they need day-
care, and that would pay for 2 to 3 months' worth of day-care 
per child.
    Mr. Chairman, I see my time has expired, and I do want to 
thank you again for conducting this hearing.
    Chairman Thomas. I thank the gentleman.
    Does the gentleman from Texas, Mr. Brady, wish to inquire?
    Mr. Brady. Mr. Chairman, we have had a very thorough 
discussion today, and I appreciate the panelists here. But in 
the sake of time and the other two panels we still have to go, 
I would yield the balance of my time.
    Chairman Thomas. The Chair thanks the gentleman, and I do 
want to thank the panel. We appreciate your testimony, 
especially in providing very specific assistance to the 
Committee in suggesting some changes that would make a better 
package. I want to thank you very much.
    At this time the Chair would ask the next panel to please 
come forward: Maria Coakley David, chief financial officer of 
the C.J. Coakley Company; Bob Stallman, president of the 
American Farm Bureau Federation; Frank A. Blethen, publisher of 
Seattle Times; Lauren Y. Detzel, who is an attorney; and I 
believe Margo Thorning will be with us because, unfortunately, 
Dr. Allen Sinai could not get out of Logan Airport because of 
the weather. But I would call to my colleagues' attention the 
materials submitted by Dr. Sinai that perhaps will be commented 
on.
    Before I turn to the panel, however, though, I would like 
to recognize the gentlewoman from Washington for the 
introduction, a special introduction, of one of the Members of 
the panel. The gentlewoman from Washington.
    Ms. Dunn. Thank you very much, Mr. Chairman, and I welcome 
the panel.
    Today we are going to hear from a panel of people regarding 
the repeal of the estate tax, better known as the death tax. 
Some of the members of this panel are going to tell you the 
story of how the death tax has begun to impact middle-income 
people. I think that is a story that is not often told, and the 
reason that I and my cosponsor, Mr. Tanner, have not chosen to 
take time away from this panel is because these folks can tell 
the story a lot better than we can. They are on the frontlines. 
So you will be hearing something about that today.
    You will hear about the death tax impact on businesses, 
family held businesses, family farms, small businesses that are 
owned by families, and probably you will hear how current law 
almost totally ignores the health of these operations.
    You will also hear how the compliance cost to provide for 
paying the death tax after the head of a household dies 
extracts huge amounts of money through compliance out of our 
economy, some say almost as much money as the death tax brings 
into the government itself.
    So I am very grateful that we have this panel here so that 
you can listen with objectivity, as our Committee always does, 
but so you can also question these folks.
    It is a particular pleasure that I introduce to you Frank 
Blethen who is the publisher and one of the owners of our major 
daily newspaper in Washington State, the Seattle Times. He has 
worked on this issue for a number of years. He knows the ins 
and outs from personal experience. He speaks on behalf of four 
other owners of this newspaper and on behalf of five 
generations of folks who have been in the same family that owns 
the Seattle Times.
    I yield back my time, Mr. Chairman. Thank you for that 
opportunity.
    Chairman Thomas. I thank the gentlewoman.
    I would tell each of the panel Members, any written 
testimony that you may have will be made part of the record, 
and during the time that you have available to you, you can 
address us in any fashion you see fit.
    I will start with Ms. David, and then we will simply move 
across the panel. And you need to turn the microphone on.

STATEMENT OF MARIA COAKLEY DAVID, CHIEF FINANCIAL OFFICER, C.J. 
COAKLEY COMPANY, INC., FALLS CHURCH, VIRGINIA, ON BEHALF OF THE 
          NATIONAL FEDERATION OF INDEPENDENT BUSINESS

    Ms. David. Thank you, Ms. Dunn, thank you, Mr. Chairman, 
and thank you, members of this Committee. On behalf of the 
600,000 members of the National Federation of Independent 
Business, NFIB, I appreciate the opportunity to present the 
views of small business owners on the subject of death taxes.
    My name is Maria Coakley David. I have had the honor and 
privilege to watch the American dream unfold before my eyes. My 
parents founded a family business. It is known as the C.J. 
Coakley Company, Incorporated, which is a commercial 
construction company based in Falls Church, Virginia.
    I have four children. My oldest is 16, and I hope that one 
day I will be able to pass on our family business down to our 
third generation.
    My father and mother are first-generation Irish Americans. 
They started our business with 10 employees in 1962 out of the 
basement of our home in Arlington, Virginia. My father was laid 
off from his job as a plasterer at the time. I was 2 years old.
    Running a family business is hard work. In fact, the 
likelihood of a small business passing successfully to the 
first generation is about 3 in 10, and passing again to the 
next generation is only 1 in 10.
    With hard work and luck, we have built a solid, successful 
company, but through thick and thin, one overriding challenge 
has never been conquered. Its existence threatens our 
livelihood and the livelihood of our employees. It threatens 
the tax base of our community, our growth, and our ongoing 
charitable acts. The threat I am referring to is the death tax.
    As many on this Committee know, the death tax taxes the 
same assets twice. As an honest citizen, I have paid taxes my 
whole life. Annually, I pay income taxes, employment taxes, 
property taxes, local taxes, Social Security taxes, Medicare 
taxes, and excise taxes, just to name a few. And after I pay 
all my taxes, I make a choice to invest these aftertax dollars 
into the business.
    Sadly, the death tax will take away in after-tax dollars 
much of what we have built over the last 39 years. The death 
tax endangers both my family's business and the jobs of our 
valuable employees because much of our assets are tied up in 
the equipment, inventory, and other assets that are necessary 
to run our company. If we do not have cash assets available to 
pay the death tax, we will be forced to sell critical parts of 
the business or the entire business outright in order to cover 
these tax liabilities.
    My experience with the death tax is extensive. I would 
estimate in my 17 years with our family business I have spent 
between 6,000 and 8,000 hours studying the estate tax law and 
what it is going to do to our company.
    My father passed away 2\1/2\ years ago. Today, my mother is 
72. While I pray that she will live a long life and outlive all 
of us, we know that a day will come when the business must move 
from its first generation to the next. When that day comes, the 
last thing I want on my mind is a critical business decision. 
But today, I am left with little choice. The Federal government 
demands that I visit the undertaker and the IRS within months 
of each other.
    I have been keeping tabs on this debate over the past two 
decades, and I often read that only 2 percent of American 
taxpayers actually pay this tax. However, I have also read that 
77 percent of Americans feel this is an unfair tax.
    Mr. Chairman and members of the Committee, I can assure you 
that way more than 2 percent of Americans do pay this tax, not 
necessarily to the Federal government but to lawyers, 
accountants, and life insurance agents. My family alone pays 
thousands of dollars a year in life insurance premiums to cover 
the liability in the event of my mother's death. Plus, I would 
estimate that annual legal and accounting fees cost us 
thousands more.
    It is important to realize that this is money that is not 
available to be spent on growing our business, on providing 
better employee benefits, like better health care and better 
401(k) benefits.
    I know that opponents of repeal say that small business 
owners don't need to worry about the death tax because there is 
a special provision in the law to protect small businesses. 
Unfortunately, the small business exemption that we have on the 
books is useless. Very, very few people qualify. That is why 
NFIB and I support the full repeal, not a patchwork of reforms.
    Additionally, I have heard opponents say that we should all 
just use insurance products to mitigate the effects of the 
death tax. Well, unfortunately, my father was uninsurable for 
many years of his life, as are countless other Americans. We 
have purchased a policy on my mother, but as you have heard, 
these products are extremely expensive.
    In addition, the value of a family business is a moving 
target, dramatically impacted by our economy. This makes the 
liquidity issue that insurance addresses only a partial 
solution.
    Personally, I would rather spend my time focusing our 
family company on growth, on employee benefits, and on 
community relationships. Since 1975, C.J. Coakley Co., Inc., 
has sponsored many charitable causes. One such cause was the 
philanthropic entity called Seton Centers, which my mother 
founded in 1975. This organization focuses on diagnosing and 
assisting children with learning disorders. We also are 
involved in supporting activities and scholarship at many 
universities, including Marymount University, Clemson 
University, Maryland University, and many others.
    We do all of this and more because we truly are about these 
causes, not because a lawyer told us we could avoid taxes in 
doing so. For example, my brother suffered from dyslexia when 
he was growing up, and this was why our family was compelled to 
create the Seton Centers, which helps students in elementary 
and high schools throughout Northern Virginia.
    Mr. Chairman, I hope you and the Committee will ignore the 
scare tactics surrounding the issue of charitable giving. Most 
Americans are generous to their fellow neighbors. We Americans 
give because we care, and, of course, we will continue to do 
so.
    Finally, we all know that there are people out there on the 
other side of this issue who say we should keep the death tax. 
I could not disagree more. The death tax kills jobs, small 
business growth, and the incentive to work hard and take risk.
    I implore you to stop holding family businesses hostage to 
the death tax. It is quite simply unfair to tax someone a 
second time at their death.
    In closing, Mr. Chairman, I would like to strongly 
encourage this Committee and Congress to bury the death tax 
once and for all. I understand that a majority of Members in 
the House of Representatives has expressed support for 
completely eliminating the death tax by cosponsoring H.R. 8, 
the Death Tax Elimination Act. I hope this support will 
translate into action in the very near future on legislation 
that repeals this unfair tax on small business and on the 
economy as a whole.
    I thank the Chairman of this Committee for holding this 
important hearing, and I thank all of you for the opportunity 
to present my views before you today.
    [The prepared statement of Ms. David follows:]
Statement of Maria Coakley David, Chief Financial Officer, C.J. Coakley 
   Company, Inc., Falls Church, Virginia, on behalf of the National 
                   Federation of Independent Business
    Good morning. On behalf of the 600,000 members of the National 
Federation of Independent Business (NFIB), I appreciate the opportunity 
to present the views of small business owners on the subject of death 
taxes.
    My name is Maria Coakley David. My family owns and operates C.J. 
Coakley Company, Inc., which is a construction company based in Falls 
Church, Virginia. Our business focuses on interior construction. We are 
currently working on rehabilitation at the Pentagon and the Interstate 
Commerce Commission. We also work on private buildings, commercial 
office space, residential buildings and had a contract for work at 
Redskins' Park. Additionally, our company completed work right here--
modernizing the elevators in the Longworth House Office Building.
    I have 4 children. My oldest is 16, and I hope that one day I will 
be able to pass our family business down to the third generation of 
Coakley-David's--my children and my nieces and nephews. My father and 
mother, who are first generation Irish-Americans, started our business 
with 10 employees in 1962 out of the basement of our home in Arlington, 
Virginia. I was 2 years old at the time and throughout my life, I have 
been involved in the business. As an adolescent, my father and mother 
regularly asked me my opinion on business matters and attempted to 
involve me in the workings of the business. After majoring in 
accounting and having a brief career as a CPA, I returned to the 
Washington, D.C. area to work in our family business. Since then, it 
has been my focus almost every day of the year.
    Running a family business is hard work. In fact, the likelihood of 
a small business passing from the first generation to the next is about 
3 in 10, and to pass this same business to the third generation is 
about 1 in 10. We struggle at times to keep the doors open during 
economic down times. With hard work and luck, we have built a solid, 
successful company. But through thick and thin, one overriding 
challenge has never been conquered--its existence threatens our 
livelihood and the livelihoods of our employees. It threatens the tax 
base of our community, our growth and our ongoing charitable acts. The 
threat I am referring to is the death tax.
    As many on this Committee know, the death tax taxes the same assets 
twice. As an honest citizen, I have paid taxes my whole life. Annually, 
I pay income taxes, employment taxes, property taxes, local taxes, 
social security taxes, and excise taxes, just to name a few. After I 
pay all of these taxes, I make a choice to invest these after tax 
dollars back into the business. Sadly, the death tax will take away in 
after tax dollars much of what we have built over the last 39 years. 
The death tax endangers both my family's business and the jobs of our 
employees because much of our assets are tied up in equipment, 
inventory and other assets necessary to run our company. If we do not 
have cash assets available to pay the death tax, we will be forced to 
sell critical parts of the business or the business outright in order 
to cover the tax liabilities. This tax literally puts almost four 
decades of work, planning, blood, sweat and tears at risk.
    My experience with the death tax is extensive. My father passed 
away two and a half years ago. Today my mother is 72 years of age. 
While I pray that she outlives us all, we know the day will come when 
the business must move from its first generation to the next. When that 
day comes, the last thing that I want on my mind is a critical business 
decision. But, today I have no choice. The federal government demands 
that I visit the undertaker and the IRS within days of each other. I 
think it is terrible that our government places such burdens on 
families at a time when it should lend a helping hand.
    Many in this room may remember a day in 1985 when a plane crashed 
onto the 14th Street Bridge in Washington, D.C. That is the day my 
parents decided to do something about the death tax burden. You see, my 
parents were on the plane that took off directly ahead of this flight. 
Their proximity to that event convinced my parents that it was time to 
be proactive about passing the business to the second generation.
    Until that point, my parents did not think about death and taxes 
being linked. Like many small business owners, they did not think about 
anything other than running and building a successful business. Our 
business today provides good jobs to over 300 employees. We are a 
typical small business when it comes to job creation. In fact according 
to the U.S. Small Business Office of Advocacy report, since 1970, small 
businesses have created two-thirds of net new jobs in America. If it 
were not for the death tax, this job creation would be even higher.
    I have been keeping tabs on this debate over the past couple of 
years, and I often read that only 2% of American taxpayers actually pay 
this tax. Mr. Chairman and members of this Committee, I can assure you 
that more than 2% of Americans do pay this tax--not to the federal 
government, but to lawyers, accountants and life insurance agents. We 
get involved in estate planning, because if we don't, all that we have 
worked for will be eliminated. To ignore the death tax statute is 
suicide for our family business. My family alone pays $100,000 per year 
on a life insurance policy to cover the tax liability in the event of 
my mother's death. Plus, I would estimate annual legal and accounting 
fees at $20,000.
    It's important to realize that this $120,000 is money that is not 
spent on growing our business or on providing better employee benefits, 
like health care, dental plans or 401(K) plans. These are products that 
we want to offer to our employees in order to maintain a quality work 
force.
    I know that opponents of repeal say that small business owners 
don't need to worry about the death tax because there is a special 
provision that protects small businesses already in the law. 
Unfortunately, the small business exemption that we have on the books 
is useless. That's why NFIB supports full repeal, not a patchwork of 
reforms. We have been down the path of reform before, as recently as 
1997, and at the end of the day, it only led us to a more complex 
statute filled with provisions that just do not work, and require more 
legal and accounting fees.
    Additionally, I have heard opponents say that we should all just 
use insurance products to mitigate the effects of the death tax. Well, 
my father was uninsurable when he was alive, as are countless other 
Americans. We have purchased a policy on my mother, but as you have 
heard, these products are extremely expensive. Unfortunately, we have a 
tax law that forces small businesses to slow their growth and divert 
needed cash flow to inefficient endeavors. Particularly in today's 
economy, one must wonder why this is so.
    Personally, I would rather spend my time focusing our family 
company on growth, on employee benefits and on community relationships. 
Since 1975, C.J. Coakley, Inc. has sponsored a philanthropic entity 
called Seton Centers. It was founded by my mother. This organization 
focuses on diagnosing and assisting children with learning disorders. 
We work directly with schools--both at the elementary and high school 
level--in the Northern Virginia area. In 1997, we also started a 
foundation that fosters educational endeavors. We are also involved in 
supporting activities and scholarship at Marymount University.
    We do all of this because we truly care about these individual 
causes, not because some lawyer told us we could avoid taxes by jumping 
through a few hoops. For example, my brother suffered from dyslexia 
when he was growing up, which is why our family felt compelled to 
create Seton Centers. I support Marymount University because I went to 
school there. I also support Marymount because it is a local school 
with a strong ethics and philosophy program. Mr. Chairman, I hope you 
and the Committee will ignore the scare tactics surrounding the issue 
of charitable giving. Most Americans are generous to their fellow 
neighbors. We give because we care.
    Finally, we all know that there are people out there on the other 
side of this issue who say we should keep the death tax. I could not 
disagree more. The death tax kills jobs and small business growth in 
America. It also kills incentive to work hard and take risk. Why work 
so hard to give it all away? If guilt-ridden billionaires are worried 
about funding the government, then I would encourage them to fire their 
lawyers and accountants and dedicate their estates to the federal 
government right now, today. I implore you to stop them from holding 
the rest of us hostage to the death tax.
    In closing, Mr. Chairman, I would like to strongly encourage this 
Committee and the Congress to bury the death tax once and for all. I 
understand that a majority of members in the House of Representatives 
have expressed support for completely eliminating the death tax by 
cosponsoring H.R. 8, the Death Tax Elimination Act. I hope this support 
will translate into action in the very near future on legislation that 
repeals this unfair tax on small businesses and on all Americans.
    I thank the Chairman of this Committee for holding this important 
hearing, and thank all of you for the opportunity to present my 
experience before you today.

                                


    Chairman Thomas. Thank you very much.
    Unless anyone does not believe what the American Farm 
Bureau does to have political acumen, it is my pleasure to 
introduce the national president of the American Farm Bureau 
from Columbus, Texas, Mr. Stallman.

  STATEMENT OF BOB STALLMAN, PRESIDENT, AMERICAN FARM BUREAU 
                           FEDERATION

    Mr. Stallman. Thank you, Mr. Chairman, distinguished 
Committee members. My name is Bob Stallman. I am a rice and 
cattle producer from Columbus, Texas, and do serve as the 
elected president of the American Farm Bureau Federation. Thank 
you for the opportunity to explain why the Farm Bureau believes 
that the death tax should be repealed.
    Eliminating death taxes is the top tax priority of the 
American Farm Bureau Federation. Families own 99 percent of our 
Nation's farms and ranches, and unless death taxes are 
repealed, many of these family farms are at risk.
    The impact of death taxes with rates as high as 55 percent 
is so severe that its imposition can destroy farm businesses. 
When this happens, open space can be lost. Surviving family 
Members can be displaced. Employees can lose their jobs, and 
rural communities can lose their economic base.
    Excessive tax rates are not the only reason that death 
taxes are so damaging to farm and ranch operations. Farm 
operations are capital-intensive businesses whose assets are 
not easily converted to cash. In order to generate the funds 
that are needed to pay hefty death taxes, heirs often have to 
sell parts of the businesses. When parts are sold, the economic 
viability of the business is destroyed.
    Death taxes can also affect the longevity of farm and ranch 
businesses while the owner is still alive. Children must decide 
whether or not they intend to continue the family business. 
When faced with the realization that their family farm may not 
survive death taxes, many choose to voluntarily leave farm 
operations. Without children interested in the business, it is 
common for farmers to sell. Where there are alternative uses 
for farmland, land is often developed for those other uses and 
open space is lost.
    An increase in the estate tax exemption is not the answer. 
Only repeal can erase the burden and uncertainties of estate 
tax planning. Because it is often difficult to predict the 
future net worth of a farm or ranch operation, many farmers and 
ranchers feel compelled to spend money for estate planning and/
or life insurance. This expense is a drain on ongoing farm 
operations, and for some, particularly given the economic 
conditions we face in agriculture today, the cost prohibits 
estate tax planning. Even with the best of plans, no attorney 
or accountant can guarantee that the plans farmers pay for will 
actually save their farms.
    Death tax relief that targets farmers and small businesses 
isn't the answer either. Congress tried to provide relief to 
just family businesses in 1997 when it created the qualified 
family owned business exemption. Even though well intended, the 
provision is so complicated that it is not widely used. 
Attempts to target death tax relief make the law even more 
complex and necessitate even more extensive and expensive death 
tax planning. Even with the best advice, estates may fail to 
meet eligibility criteria at death, making a bad situation even 
worse.
    Those who support death taxes often say that the tax should 
not be repealed because only 1 to 2 percent of estates are 
subject to the tax. Farm and ranch estates pay taxes at a much 
higher rate than the population at large. In a 1997 report, 
USDA estimated that over 14 percent of our most productive 
farms would owe Federal death taxes. Farm Bureau considers the 
loss of the most productive of our Nation's farms and ranches 
unacceptable.
    Farm Bureau supports H.R. 8, the Death Tax Elimination Act 
of 2001, introduced by Representatives Dunn and Tanner. The 
bill phases out death taxes by lowering rates 5 percent a year 
until death taxes are gone. The legislation offers the added 
benefit of doubling the exemption as a way of providing 
immediate relief while we wait for the phase-out to be 
completed.
    Farm Bureau also supports H.R. 8 because it continues the 
stepped-up basis. This is important to farmers and ranchers 
because of the relationship between basis and the capital gains 
taxes that farmers pay. Complete elimination of stepped-up 
basis would impose a new, potentially huge capital gains tax on 
farmers and ranchers. This would occur because farmers and 
ranchers hold their land for as long as they are in business. 
Statistics show that 79 percent of a typical farmer's or 
rancher's assets is land that has been held for 30 years while 
increasing in value 6 times.
    Capital gains taxes increase the price of land, making it 
more difficult for children to take over the farms while their 
parents are still alive. The tax makes it harder for farmers to 
acquire land to expand so that additional family Members can 
enter the business. In addition, capital gains taxes also make 
it more difficult for family Members who want to keep farming 
to buy out their non-farming relatives who may have inherited 
part of the farm.
    Last year, Congress passed a death tax elimination bill 
with Farm Bureau's support that provided a limited step-up in 
basis of $5.6 million per couple. If a change in basis is 
unavoidable, improvements in last year's bill are needed to 
make sure that businesses with assets that are held for long 
periods of time are not subject to excessive taxation. Farm 
Bureau recommends increasing the threshold and taking steps to 
make sure that taxes are not triggered on highly leveraged 
property at death.
    Farmers and ranchers and other small businessmen are not 
alone in their support for death tax repeal. Last year, 
Congress overwhelmingly passed the Death Tax Elimination Act of 
2000. This year, over half of the House has cosponsored H.R. 8. 
Public opinion polls consistently show that seven of ten 
Americans think that death taxes should be repealed. Now is the 
time for Congress to eliminate death taxes.
    Thank you.
    [The prepared statement of Mr. Stallman follows:]
 Statement of Bob Stallman, President, American Farm Bureau Federation
    Chairman Thomas, Ranking Member Rangel and distinguished committee 
members. My name is Bob Stallman. I am a rice and cattle farmer from 
Columbus, Texas, and serve as the elected President of the American 
Farm Bureau Federation. Thank you for this opportunity to explain why 
Farm Bureau believes that death taxes should be repealed.
    Eliminating death taxes is the top tax priority of the American 
Farm Bureau Federation. Families own 99 percent of our nation's farms 
and ranches and unless death taxes are repealed, many of these family 
farms are at risk. The impact of death taxes, with rates as high as 55 
percent, is so severe that its imposition can destroy farm businesses. 
When this happens open space can be lost, surviving family members can 
be displaced, employees can lose their jobs and rural communities can 
lose their economic base.
    Excessive tax rates are not the only reason that death taxes are so 
damaging to farm and ranch operations. Farm operations are capital 
intensive businesses whose assets are not easily converted into cash. 
In order to generate the funds that are needed to pay hefty death 
taxes, heirs often have to sell parts of the businesses. When parts are 
sold, the economic viability of the business is destroyed.
    Death taxes can also affect the longevity of farm and ranch 
businesses while the owner is still alive. Children must decide whether 
or not they intend to continue the family business. When faced with the 
realization that their family farm may not survive death taxes, many 
choose to voluntarily leave farm operations. Without children 
interested in the business, it is common for farmers to sell. Where 
there are alternative uses for farmland, land is often developed for 
other uses and open space is lost.
    An increase in the estate tax exemption is not the answer. Only 
repeal can erase the burden and uncertainties of estate tax planning. 
Because it is often difficult to predict the future net worth of a farm 
or ranch operation, many farmers and ranchers feel compelled to spend 
money for estate planning and/or life insurance. This expense is a 
drain on ongoing farm operations and for some the cost prohibits estate 
tax planning. Even with the best of plans, no attorney or accountant 
can guarantee that the plans farmers pay for will save their farms.
    Death tax relief that targets farmers and small businesses isn't 
the answer either. Congress tried to provide relief to just family 
businesses in 1997 when it created the Qualified Family Owned Business 
Exemption. Even though well intended, the provision is so complicated 
that it is not widely used. Attempts to target death tax relief make 
the law even more complex and necessitate even more extensive and 
expensive death tax planning. Even with the best advice, estates may 
fail to meet eligibility criteria at death, making a bad situation even 
worse.
    Those who support death taxes often say that the tax should not be 
repealed because only one to two percent of estates are subject to the 
tax. Farm and ranch estates pay taxes at a rate much higher rate than 
the population at large. In a 1997 report, USDA estimated that over 14 
percent of our most productive farms would owe federal death taxes. 
Farm Bureau considers the loss of the most productive of our nation's 
farms and ranches unacceptable.
    Farm Bureau supports H.R. 8, the Death Tax Elimination Act of 2001, 
introduced by Reps. Dunn and Tanner. The bill phases out death taxes by 
lowering rates five percent a year until death taxes are gone. The 
legislation offers the added benefit of doubling the exemption as a way 
of providing immediate relief while we wait for the phase-out to be 
completed.
    Farm Bureau also supports H.R. 8 because it continues the stepped-
up basis. This is important to farmers and ranchers because of its 
relationship between basis and the capital gains taxes that farmers 
pay. Complete elimination of stepped-up basis would impose a new, 
potentially huge capital gains tax on farmers and ranchers. This would 
occur because farmers and ranchers hold their land for as long as they 
are in business. Statistics show that 79 percent of a typical farmer or 
rancher's assets is land that has been held for 30 years while 
increasing in value six-fold.
    Capital gains taxes increase the price of land making it more 
difficult for children to take over farms while their parents are still 
alive. The tax makes it harder for farmers to acquire land to expand so 
that additional family members can enter the business. In addition, 
capital gains taxes also make it more difficult for family members who 
want to keep farming to buy out their non-farming relatives who may 
have inherited part of the farm.
    Last year Congress passed a death tax elimination bill with Farm 
Bureau's support that provided a limited step-up in basis of $5.6 
million per couple. If a change in basis is unavoidable, improvements 
in last year's bill are needed to make sure that businesses with assets 
that are held for long periods of time are not subject to excessive 
taxation. Farm Bureau recommends increasing the threshold and taking 
steps to make sure that taxes are not triggered on highly leveraged 
property at death.
    Farmers and ranchers and other small businessmen are not alone in 
their support for death tax repeal. Last year Congress overwhelmingly 
passed the Death Tax Elimination Act of 2000. This year over half of 
the House has cosponsored H.R. 8, the Death Tax Elimination Act of 
2001. Public opinion polls consistently show that seven of ten 
Americans think that death taxes should be repealed. Now is the time 
for Congress to eliminate death taxes.

                                


    Chairman Thomas. Thank you very much, Mr. Stallman.
    Mr. Blethen.

   STATEMENT OF FRANK A. BLETHEN, PUBLISHER, SEATTLE TIMES, 
                      SEATTLE, WASHINGTON

    Mr. Blethen. Thank you, Chairman Thomas.
    I am the fourth-generation publisher of a 104-year-old 
independent, family operated newspaper, the Seattle Times. We 
are the largest newspaper in the Pacific Northwest. We employ 
over 2,500 people. We are known as a model workplace. We have 
been named 9 years in a row to Working Mother magazine's top 
100 list. We are one of the few employers in the Pacific 
Northwest with an on-site day-care center, which we started 13 
years ago.
    We are also known for our journalism. We won three Pulitzer 
Prizes and were a finalist seven other times in the past 
decade.
    We are committed to diversity and racial justice. We have 
one of the Nation's five most diverse newsrooms. In 1999, the 
Washington, D.C.-based Leadership Conference on Civil Rights 
awarded me the Chairperson's Award for Special Merit for my 
family's fight against I-200, the anti-affirmative action 
initiative in Washington State.
    We are a values-based organization that puts our public 
service stewardship ahead of profits. The average public 
newspaper industry profit margin is more than twice what we 
will accept. The average industry newsroom has one employee for 
every 10,000 circulation. We have two. This is because, like 
most other independent and family businesses, we choose to 
invest in our company, our employees, and our community.
    There are 5 family shareholders in our fourth generation 
and 11 in the fifth. Nine of us are actively involved. One is 
terminally ill, and the others are still in school.
    Having worked with three generations on estate planning for 
30 years, I have seen firsthand why the death tax kills most 
family businesses after the first generation and the rest after 
the second generation. I have experienced the disincentive to 
build the business and to create jobs.
    When I started my career, the newspaper industry was 
dominated by locally owned newspapers that served our democracy 
with a wide variety of voices. Today, out of about 1,500 daily 
newspapers, there are fewer than 300 independents left.
    During my career, I have watched the death tax kill this 
wonderful community service and diversity of voices by driving 
ownership into a handful of absentee conglomerates who worry 
about profit margins rather than local communities and the 
First Amendment.
    There are other reasons independent businesses don't 
survive, but the root problem is clearly the death tax, a tax 
which takes the incentive out of investing in the business or 
developing competent successors.
    Family newspaper owners have few choices when moving beyond 
the second generation and planning for the death tax. None of 
them are good for their employees or communities and all of 
them hurt job creation and investment.
    My good friends, publisher Alexis Reeves and Alejandro 
Aguirre, will tell you the death tax is just as devastating to 
small- and medium-sized businesses as it is to larger 
companies. Alexis is a third-generation publisher of the twice 
weekly inner-city Afro-American newspaper, The Atlanta Daily 
World. She employs about 20 people. Alejandro is the second 
generation in the largest Spanish language newspaper in Miami. 
The existence of both newspapers is threatened if the death tax 
isn't repealed.
    I urge you to ask: Why aren't there more multi-generation, 
independent family businesses in all industries?
    In an era when we lament the corporatization and 
impersonalization of America, we have an ineffective tax that 
favors absentee public corporations over independent local 
ownership. Yet these disadvantaged businesses are where the 
bulk of living-wage job creation takes place in America.
    Unfortunately, much of this job creation is currently 
offset by the rampant public company downsizing and layoffs 
hammering our national economy and our local communities today.
    By repealing the death tax, you have an opportunity to 
repeal the one tax that would turn our tax system around to one 
that seeks to preserve, perpetuate, and protect independent 
businesses and all the jobs and investments that go with them.
    Our economy is comprised of two parts: the publicly traded 
sector and the private, non-publicly traded sector. Federal 
taxes should be neutral in regards to these sectors. 
Unfortunately, the Federal inheritance tax is not neutral. It 
severely penalizes the most important sector for job creation: 
the private, non-publicly traded sector. And it is a tool for 
the publicly traded sector to competitively overwhelm and often 
eliminate private sector competition.
    Repealing the death tax would be excellent public policy, 
strongly favored by a strong majority of voters. Repeal will 
finally level the playing field between public and private 
companies, and repeal will stimulate the economy by encouraging 
all sizes of multi-generation family businesses and 
entrepreneurs to grow their business through investment and job 
creation.
    Thank you.
    [The prepared statement of Mr. Blethen follows:]
   Statement of Frank A. Blethen, Publisher, Seattle Times, Seattle, 
                               Washington
    My name is Frank Blethen.
    I am the fourth generation publisher of a 104-year old independent, 
family-operated newspaper, The Seattle Times. At 500,000 circulation, 
we are the largest Sunday newspaper in the Pacific Northwest, and we 
are the largest daily newspaper in Washington state.
    We are known in the newspaper industry as a model workplace, having 
been named nine years in a row to Working Mother magazine's national 
top 100 list for best places for mothers to work. We are one of the few 
employers in the Northwest operating an on-site day care center, which 
we started 13 years ago, in 1987.
    We are also known for our journalism. We won three Pulitzer Prizes 
and were a finalist seven times during the past decade.
    We are committed to diversity and racial justice. We have one of 
the nation's five most diverse newsrooms. We are considered a civil 
rights and diversity leader. In 1999 the Washington, D.C.-based 
Leadership Conference on Civil Rights awarded me the Chairperson's 
Award for Special Merit for my family's fight against I-200, the anti-
affirmative action initiative in Washington state.
    We are considered to be progressive in the areas of race, equality, 
environment, domestic violence, education, job creation and ethical 
leadership.
    We are a values-based organization that puts our public-service 
stewardship ahead of profits. The average newspaper industry profit 
margin is more than twice what we accept. The average industry newsroom 
has one employee for every 10,000 circulation, we have two. This is 
because we, like most other independent and family businesses, choose 
to invest in our company and our community for the long term. This is 
what distinguishes the independent, private, non-publicly traded sector 
of our economy from the publicly traded sector.
    There are five family shareholders in our fourth generation and 
eleven in the fifth. Nine of us are actively involved. One is 
terminally ill and the others are still in school.
    Having worked with three generations of the Blethen family on 
estate planning for thirty years, I have seen first-hand why the Death 
Tax kills most family businesses after the first generation and the 
rest after the second generation. I have seen the disincentive to 
invest in and to build the business and to create jobs.
    When I started my career the newspaper industry was dominated by 
locally-owned, independent newspapers that served our democracy with a 
wide variety of voices and who served their local communities with 
strong connections and investments.
    Today, out of about 1,500 daily newspapers there are fewer than 300 
independents left.
    During my career, I have watched the death tax kill this wonderful 
community service and diversity of voices by driving ownership into a 
handful of large, absentee, public-company conglomerates. Many now 
controlled by faceless, institutional investors who worry about stock 
price and profit margins, rather than local communities, journalism, 
public service and the First Amendment.
    There are other reasons independent businesses don't survive. But 
the root problem is clearly the death tax. A tax which takes the 
incentive out of investing in the business or developing competent 
successors.
    Family newspaper owners have few choices when moving beyond the 
second generation and planning for the death tax. None of them are good 
for their employees or communities and all of them hurt job creation 
and investment. They are:

   liquidate
   sell out
   go public
   do costly, extensive estate planning, which drags capital 
        and precious time away from the business and often does not 
        solve the problem.

    Many weekly and daily newspapers are too small to sell or go 
public, even though their very existence is threatened by the death 
tax. The ones that are large enough to go public to preserve family 
control are living on borrowed time. Witness the recent acquisition of 
the Los Angeles Times, Arizona Republic and Indianapolis newspapers by 
large, faceless, institutionally-owned public chains.
    My good friends publishers Alexis Reeves and Alejandro Aguirre will 
tell you the death tax is just as devastating to small- or medium-sized 
businesses as it is to larger companies. Alexis is the third generation 
publisher of the twice-weekly inner-city African-American newspaper, 
The Atlanta Daily World. She employs about 20 people. Alajandro is the 
second generation in the largest Spanish language newspaper in Miami. 
Both businesses are faced with liquidation or sale if the death tax 
isn't repealed.
    A holding company technique, such as what my family has adopted, 
will only work as long as you can get all shareholders to agree to 
forgo wealth and liquidity for modest dividends and possible employment 
participation. This happens through heavy restriction on selling stock 
outside the family, so as to limit the individual's estate tax bill and 
facilitate gifting. But, it necessitates reckless gifting, such as I 
was forced to do in 1976 when I gifted 50% of my stock to my then two 
and four year-old sons. That gifting could have put our company at 
unnecessary risk. How could I know, when my sons were two and four, 
what kind of people and stewards they would turn out to be? The death 
tax forces family business owners into risky and sometimes fatal 
decision making.
    Even in a holding company model like this, there is an onerous 
financial burden placed on individual shareholders. In our case, each 
family owner is forced to spend personally between $30,000-$50,000 per 
year on life insurance and estate planning. This is money that would 
otherwise be invested back in the business or donated to the community.
    I urge you to ask, why aren't there more multi-generational, 
independent and family businesses? Quite simply, the problem is the 
death tax.
    In an era when we lament the ``corporatization'' and 
``impersonalization'' of America, we have an ineffective tax that 
favors absentee, public corporations over independent, local ownership 
in a variety of industries--from newspapers, to funeral homes, to drug 
stores, to jewelry stores, to car dealerships. And these are the 
businesses that invest in our local communities, and it is where the 
bulk of job creation takes place in America.
    Unfortunately, much of this job creation is offset by the rampant, 
public company downsizing and layoffs hammering our national economy 
and local communities today.
    By repealing the death tax, you have an opportunity, for the first 
time in all of our careers, to repeal one tax that would turn around 
our tax system to one that seeks to preserve, perpetuate and protect 
independent businesses and all the jobs, investment and community 
benefits that go with them.
    Our economy is comprised of two parts. The publicly traded sector 
and the private, non-publicly traded sector. Federal taxes should be 
neutral in regards to these two sectors. We need them both to be 
healthy, strong and balanced. Unfortunately, the Federal Inheritance 
Tax isn't neutral. It severely penalizes the most important sector for 
job creation and investment--the private, non-publicly traded sector. 
And, it is a tool for the publicly traded sector to competitively 
overwhelm and often eliminate private sector competition.
    Repealing the death tax is a responsible measure and a critical 
component of tax reform. It will level the playing field between 
private and public companies and will certainly stimulate the economy 
by encouraging entrepreneurs to grow their businesses, grow jobs and 
increase their investment in local communities.
    Thank you for considering these critical concerns.

                                


    Chairman Thomas. Thank you, Mr. Blethen.
    Dr. Thorning.

 STATEMENT OF ALLEN SINAI, CHIEF GLOBAL ECONOMIST, CENTER FOR 
 POLICY RESEARCH, AMERICAN COUNCIL FOR CAPITAL FORMATION, AND 
  PRESIDENT, DECISION ECONOMICS, INC., AS PRESENTED BY MARGO 
        THORNING, AMERICAN COUNCIL FOR CAPITAL FORMATION

    Ms. Thorning. Thank you, Mr. Chairman. My name is Margo 
Thorning. I am the chief economist and senior vice president 
for the American Council for Capital Formation. For over 25 
years, the ACCF has focused its attention on tax policies to 
encourage saving, investment, and economic growth.
    Mr. Chairman, I appreciate the chance to appear before this 
Committee and to share with you the results of a new study 
which I would like to ask be included in the record, 
``Macroeconomic and Revenue Effects of the Elimination of the 
Estate Tax.''
    Chairman Thomas. Without objection, and any written 
statements on the part of any of the witnesses will be made a 
part of the record.
    Ms. Thorning. This new study is based on an analysis by Dr. 
Allen Sinai, an internationally respected macroeconomic 
modeler, frequent consultant to the Federal Reserve Board, and 
other Government agencies. The Sinai-Boston Model, which the 
analysis uses, includes considerable detail on the demand, the 
supply side, financial flows, capital flows, and other 
macroeconomic variables.
    Using a model like Dr Sinai's, it is possible to estimate 
the impact of a change in tax policy on all sectors of the 
economy. Since I have limited time, I just want to give you the 
principal findings, and then I would be pleased to answer 
questions if you have any.
    Dr. Sinai modeled five different options for estate tax 
repeal or reform, and the uniform conclusion is that under 
repeal and reform options he looked at, gross domestic product 
increases by a range of $90 billion to $150 billion over 8 
years compared to the baseline forecast. Furthermore, job 
growth increases in the range of 80,000 jobs to 165,000 jobs 
per year compared to the baseline forecast. New business 
incorporations rise in the range of 45,000 a year to as much as 
190,000 per year. Finally, tax receipts, excluding estate tax 
receipts, increase due to the stronger economy. We see higher 
corporate tax receipts, higher income tax receipts, more 
capital gains, more payroll taxes. Dr. Sinai estimates that we 
get back 20 cents for every dollar we lose for estate tax 
reductions.
    One of the options he modeled, which was immediate repeal 
and loss of step-up in basis, actually raises revenue, total 
Federal tax revenues, compared to the baseline forecast.
    So, in conclusion, his model allows us to glimpse the 
direction of change that the major variables in the economy 
would show if we repeal or substantially reform the death tax. 
And I think his model rather well captures the stories that 
have been told to us by Ms. David, Mr. Stallman, and Mr. 
Blethen.
    So, with that, let me stop and I would be pleased to answer 
any questions.
    [The prepared statement of Mr. Sinai follows:]
  Statement of Allen Sinai, Chief Global Economist, Center for Policy 
   Research, American Council for Capital Formation, and President, 
                        Decision Economics, Inc.

                       Special Report--March 2001

Macroeconomic and Revenue Effects of the Elimination of the Estate Tax
    For nearly a quarter of a century, the ACCF Center for Policy 
Research has sponsored pathbreaking research on tax policies to 
encourage saving, investment, and economic growth. As the Bush 
Administration and the U.S. Congress prepare to debate various tax 
reduction proposals, the Center, in order to focus the discussion on 
the macroeconomic impact of five different options for repealing or 
reforming the federal estate tax, offers this Special Report, based on 
macroeconomic estimates, prepared by Dr. Allen Sinai, chief global 
economist and president, Decision Economics, Inc.
    The key conclusions of Dr. Sinai's preliminary findings are that 
when his model of the U.S. economy is used, estate tax repeal or reform 
increases both real Gross Domestic Product (GDP) and U.S. employment, 
compared to the baseline forecast. In addition, there are more new 
business incorporations and greater potential output of goods and 
services. Finally, federal tax receipts rise in response to the 
stronger economy, feeding back approximately $0.20 per dollar of estate 
tax reduction, to some extent helping to pay for the estate tax 
reduction. In fact, one of the options, immediate repeal and 
elimination of step-up in basis, could increase total federal net tax 
revenues by $55 billion over the 2001-2008 period due primarily to the 
repeal of step-up in basis. ACCF Chief Economist Dr. Margo Thorning was 
invited to testify on the ACCF/Sinai study's findings before the House 
Ways and Means Committee on March 21. Earlier, the study was released 
at a March 15 Senate Finance Subcommittee on Taxation hearing on death 
tax repeal and reform.
Introduction
    The Sinai-Boston Econometric Model of the U.S. is a large-scale 
quarterly econometric model that includes considerable detail on 
aggregate demand, financial markets, sectoral flows of funds and 
balance sheets, interactions of the financial system with the real 
economy, and detailed trade and international financial flows. The 
advantage of a general equilibrium macroeconomic model instead of a 
partial equilibrium model for analyzing the impact of a change in the 
tax code is that a general model measures how the economy will respond 
after all aspects of the economy, financial system, inflation, and 
potential output are allowed to adjust to the new tax rates.
Macroeconomic Impacts
    Dr. Sinai estimates the impact of five different reform and repeal 
options, including: (1) immediate repeal coupled with elimination of 
the step-up in basis; (2) immediate repeal of the estate tax with step-
up in basis retained; (3) phaseout of the estate tax over eight years; 
(4) reduction of the top estate tax rate from 55 percent to 20 percent 
(the highest capital gains tax rate); and (5) reduction in the top 
estate tax rate from 55 percent to 39.6 percent (the top current 
individual income tax rate). Option 3 passed Congress last year as H.R. 
8, the ``Death Tax Elimination Act of 2000.''
    Preliminary results from early simulations, subject to further work 
and analyses, suggest the following effects from immediate elimination 
or reform of the estate tax, retroactive to January 1, 2001.

   GDP increases a cumulative $90 billion to $150 billion over 
        the 2001-2008 period, or 0.1 percent to 0.2 percent compared 
        with the baseline for several years out of the eight years in 
        the preliminary runs (see Figure 1 and Table 1).
   Job growth ranges from 80,000 to 165,000 per year and the 
        unemployment rate is slightly lower as a result (by 0.1 
        percent), with essentially no change in the inflation rate (see 
        Figure 2 and Table 1).
   Both consumption and personal saving rise, as does national 
        saving, despite the loss in estate tax receipts to the federal 
        government.
   The level of potential output is somewhat higher, by an 
        average $6 billion to $9 billion per year.
   Tax receipts, excluding estate tax receipts, rise in 
        response to the stronger economy and financial system, feeding 
        back approximately $0.20 per dollar of estate tax reduction, to 
        some extent helping to pay for the estate tax reduction. One 
        option--immediate repeal combined with the elimination of step-
        up in basis--increases total federal tax receipts by almost $55 
        billion over the 2001-2008 period compared to the baseline 
        forecast because of the tax saving from elimination of step-up 
        and the increase in capital gains realizations (see Figure 3 
        and Table 1).

    Dr. Sinai estimates that about $45 billion of the $55 billion 
revenue increase is due to the elimination of step-up, rather than to 
faster economic growth.
    Phasing in estate tax relief over eight or 10 years obviously 
reduces the macroeconomic impacts as does eliminating step-up in basis.
Conclusions
    While work remains to be done in simulating and estimating the 
effects of removing the estate tax, this early work provides a glimpse 
of the directions of movement for key parameters of the macroeconomy--
economic growth, jobs, entrepreneurship, and potential output--in 
response to estate tax elimination. Dr. Sinai's findings about the 
positive economic impact of estate tax repeal buttress the results of a 
recently released ACCF Center for Policy Research analysis by Syracuse 
University Professor Douglas Holtz-Eakin, ``Estate Taxes, Labor Supply, 
and Economic Efficiency.''
    Allen Sinai is President and Chief Global Economist of Decision 
Economics. PDE is a global economic and financial market information 
and advisory firm serving financial institutions, corporations, 
governments, and individual investors, with offices in New York, 
Boston, London, and Tokyo. Dr. Sinai is a pioneer in econometric model 
building and the information systems approach to economic forecasting, 
analysis, and monitoring. His previous experience includes senior-level 
positions at Lehman Brothers, Inc., and Data Resources, Inc. (where he 
was a co-developer of the DRI model of the U.S. economy). He also has 
participated in finance and economic programs at several prominent 
universities, is a fellow and past president of Eastern Economic 
Association, and author of numerous articles and publications. His 
advice is sought by both political parties, Congressional committees, 
and he has served as a consultant to the Federal Reserve Board. Dr. 
Sinai holds a B.S. degree in economics from the University of Michigan 
and Ph.D. in economics from Northwestern University.
                               __________

                 Table 1:  Impact of Estate Tax Repeal/Reform on U.S. Economic Growth, 2001-2008
                           Changes from baseline, cumulative except as otherwise noted
----------------------------------------------------------------------------------------------------------------
                                                  Immediate    Immediate                              Lower Top
                                                   Repeal,      Repeal,       8-Year     Lower Top    Rate From
                                                   Loss of      Step-up      Phaseout    Rate From      55% to
                                                   Step-up      Retained                 55% to 20%     39.6%
----------------------------------------------------------------------------------------------------------------
Real GDP (billions of 1996 dollars)                   $131.6       $149.4       $103.2       $124.3        $88.2
Employment (average difference in levels per         164,761      132,443       94,311      113,647       80,521
 year)
New Business Incorporations (average difference       45,736      261,181      130,859      188,929      145,427
 in levels per year)
Total Federal Tax Receipts (fiscal years)              $54.3      -$211.1      -$110.4      -$108.8       -$37.0
----------------------------------------------------------------------------------------------------------------
Note: Assumes the saving in taxes paid is treated as an increase in disposable income as opposed to reinvesting
  in assets or paying down debt. Under different assumptions about how the tax savings is taken, the
  quantitative estimates might change but the direction of the results would not.
Source: ``Macroeconomic Effects of the Elimination of the Estate Tax,'' by Allen Sinai, chief global economist
  and president, Decision Economics, Inc., preliminary report prepared for the American Council for Capital
  Formation Center for Policy Research, Washington, D.C., March 2001.

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    Chairman Thomas. Thank you very much.
    Ms. Detzel.

  STATEMENT OF LAUREN Y. DETZEL, ATTORNEY, DEAN MEAD EGERTON 
     BLOODWORTH CAPAUANO & BOZARTH, P.A., ORLANDO, FLORIDA

    Ms. Detzel. Thank you. My name is Lauren Detzel. I am an 
attorney from Orlando, Florida, and I have specialized in 
estate and tax planning for almost 25 years, and I am a former 
Chair of the Tax Section of the Florida Bar. I represent, among 
others, business owners, ranchers, citrus growers, and real 
estate developers, but I am here today representing the public 
sector for the sole purpose of bringing attention to some 
possible consequences of pending legislation dealing with the 
estate tax that may be overlooked or overshadowed by other 
testimony.
    First, repeal may cost much more than $236 billion. While 
the White House administration claims that the proposed phase-
out of the estate tax would cost the Federal Government $236 
billion over the next 10 years, it may cost much more in lost 
revenue. How so?
    Well, first, repeal of the gift tax will compromise the 
income tax because it will permit taxpayers to shift income to 
lower tax brackets. The present Federal gift tax system was 
adopted not just to supplement the estate tax, but also to 
preserve the integrity of the Federal income tax system. If the 
gift tax is repealed, the income tax will be compromised 
because it will permit taxpayers to give income-producing 
assets to others in lower income tax brackets at no gift tax 
cost and to reacquire the income again without tax. This will 
shift a heavier burden of taxes to those who work because this 
shifting of this tax can only be done with investment income, 
not earned income.
    Second, continued step-up in basis for inherited assets 
will erode the income tax even further by allowing individuals 
to show low-basis assets to others who will die soon. Under 
current law, the income tax basis of an asset is changed to its 
fair market value when the owner dies. This is what has been 
referred to today here as a step-up in basis. Without a gift or 
estate tax, property owners will transfer their appreciated 
assets to others who will die soon and arrange fairly easily to 
reinherit the property in order to secure the step-up in basis. 
Neither the gifts to the others nor the reinheritance will be 
subject to gift or estate tax.
    Income taxation of life insurance proceeds will have to be 
changed or carryover basis will be a hollow victory. Under 
current law, proceeds paid by reason of the death of an insured 
are not included in gross income. Unless this provision is 
repealed, individuals can move a significant portion of their 
wealth to life insurance policies to avoid income tax if a 
carryover basis system is enacted. Again, this favors those 
with investment type assets because this mechanism of moving 
assets to inside an insurance product umbrella would not be 
available to those owning farms, small businesses, real estate 
development, et cetera.
    Carryover basis will represent a new complex tax system, 
which Congress has previously rejected. In 1976, Congress 
adopted a carryover basis system for inherited wealth. Four 
years later, and after much study and analysis, it 
retroactively repealed that system, in large measure because it 
was regarded as too complicated and because it required too 
much recordkeeping by taxpayers. Nothing has changed, and the 
same will be true today.
    Widows and many others will pay more tax with a carryover 
basis system and no estate tax. Today, a widow may inherit 
assets, pay no estate tax, due to the unlimited marital 
deduction, and secure a complete step-up in basis and assets so 
that no income tax is paid either. If carryover basis is 
enacted, along with the repeal of the estate tax, that same 
widow will now pay more tax. She will pay the income tax on 
assets sold during her lifetime.
    Widows will be adversely affected by repeal of the estate 
tax in other ways. In addition to the added income tax burden, 
widows also may likely lose in two other ways if the estate and 
gift tax is repealed.
    First, most States allow a widow to demand a minimum share 
of her deceased spouse's estate, but this share can be 
diminished in many States by her husband making gifts at least 
1 year before death. This doesn't occur now because that would 
cost a gift tax. If the barrier of gift tax is taken down, 
individuals who want to disinherit their spouses will be able 
to do so much more easily.
    Second, most married persons leave their entire estate to 
or in trust for their surviving spouses, primarily because no 
estate tax has to be paid under that arrangement until the 
surviving spouse dies. If there is no estate tax, fewer married 
decedents will choose to have their entire estate dedicated to 
their surviving spouses.
    Severe complexity will arise from a phased-in repeal of 
estate tax. Many of the bills would phase in repeal of the 
estate tax. Such proposals would represent an enormously 
complicated system for individuals. Each person would have to 
prepare new dual track wills, providing at a minimum for 
different dispositions of their wealth upon death, depending 
upon whether they or their spouses die before or after the 
estate tax is totally repealed. Further, many taxpayers will be 
forced to do planning to save estate taxes now because they 
can't be assured that they are going to outlive the phase-in 
period. And after repeal, they will have to do planning again 
in many cases to attempt to unwind the planning that they have 
to do now. So they will get to pay me now and they will get to 
pay me later. Also, a carryover basis system will likely 
require as much or more planning for individuals.
    A more sensible approach should be adopted. Virtually 
everyone agrees that the Federal estate tax system should be 
improved. It shouldn't apply to small family farmers, 
businesses, and others whose wealth is relatively modest. 
Provisions currently in the Code can be changed to accomplish 
that. What is critical is for Congress to thoroughly study the 
overall social, fiscal, and economic impact of any significant 
change to such an important part of our Nation's tax laws.
    Thank you for your consideration.
    [The prepared statement of Ms. Detzel follows:]
 Statement of Lauren Y. Detzel, Attorney, Dean Mead Egerton Bloodworth 
               Capauano & Bozarth, P.A., Orlando, Florida
I. SUMMARY
     Repeal Will Cost Much More Than $236 Billion. While the 
White House administration claims that the proposed phase out of the 
estate tax would cost the Federal government $236 Billion over the next 
ten years, it will undoubtedly cost the United States government much 
more in lost revenue.
     Repeal of the Gift Tax Will Compromise the Income Tax 
Because it Will Permit Taxpayers to Shift Income to Those in Lower Tax 
Brackets. First, the present Federal gift tax system, enacted in 1932, 
was adopted not just to supplement the estate tax but to preserve the 
integrity of the Federal income tax system. If the gift tax is 
repealed, the income tax will be compromised because it will permit 
taxpayers to give income producing assets to others in lower income tax 
brackets at no gift tax cost.
     Continued Step-Up in Basis for Inherited Assets Will Erode 
the Income Tax Even Further by Allowing Individuals to Shift Low Basis 
Assets to Others Who Will Die Soon. Second, under current law, the 
income tax basis of an asset is changed to its fair market value when 
the owner dies, in most cases. This basis adjustment is known as the 
``income tax free step-up in basis.'' Without a gift or estate tax, 
property owners will transfer their appreciated assets to others who 
will die soon and arrange to reinherit the property in order to secure 
the step-up in basis. Neither the gifts to the others who will soon die 
nor the reinheritance will be subject to gift or estate tax.
    Not all the bills introduced to repeal the estate tax would permit 
an unlimited step-up in basis. However, all bills would provide a 
relatively high level of step-up. That means that the ``gaming'' of the 
type described above will continue. A limited step-up in basis merely 
means it will be harder to achieve a significantly increased basis when 
someone dies.
     Income Taxation of Life Insurance Proceeds Will Have to be 
Changed or Carryover Basis Will be a Hollow Crown. Under current law, 
proceeds paid by reason of the death of an insured are not included in 
gross income. In effect, life insurance proceeds are entitled to the 
income tax free step-up in basis enjoyed by most other assets owned at 
death. It seems certain that unless this provision is repealed, 
individuals simply will move all or a significant portion of their 
wealth to life insurance policies if a carryover basis system is 
enacted. If the exclusion from gross income for life insurance proceeds 
were eliminated as part of a carryover basis system, the impact on the 
life insurance industry and the beneficiaries of such policies would be 
significant.
     Carryover Basis Will Represent a New Complex Tax System, 
which Congress Has Previously Rejected. In the Tax Reform Act of 1976, 
Congress adopted a carryover basis system for inherited wealth. Four 
years later, it repealed the system retroactive to its original date of 
enactment in large measure because it was regarded as too complicated. 
The same will be true today.
     Widows and Many Others Will Pay More Tax With a Carryover 
Basis System and No Estate Tax. Today, a widow or widower may inherit 
assets, pay no estate tax (due to the marital deduction) and securea 
complete step-up in basis. Others, under the current tax system, save 
more income tax from the stepped-up basis of inherited wealth than they 
pay in estate tax.
     Widows, Charities and Others Will be Adversely Affected by 
Repeal of the Estate Tax. As already discussed, widows and widowers 
will be disadvantaged by a repeal of the estate tax unless a complete 
step-up in basis system is retained. Widows (or widowers) also will 
likely lose in two other ways. First, most states require that a widow 
(or widower) inherit a minimum share of the deceased spouse's estate. 
Although that forced inheritance can be avoided in most states by 
making gifts to others at least a year before death, usually that does 
not occur because such gifts result in gift tax. If the barrier of gift 
tax is taken down, individuals who want to disinherit their spouses 
will be able to do so much more easily. Second, most married persons 
leave their entire estate to or in trust for their surviving spouses. 
The reason is because the tax allows the estate tax to be postponed 
until the surviving spouse dies. If there is no estate tax, fewer 
married decedents will choose to have their entire estate dedicated to 
their surviving spouses. The real impact will fall more severely on 
women than men because there are many more widows than widowers.
    Charities will likely receive less from decedents' estates than 
they do today. Although it is difficult to quantify what the drop off 
in bequests to charity will be, many knowledgeable persons think it 
will be significant. It might be mentioned that the proposal to make 
the income tax deduction for donations to charity an ``above the line'' 
deduction apparently is premised on the theory that giving tax breaks 
for gifts to charity will spur more charitable giving. The same is true 
for transfers at death. If there is no tax benefit to making charitable 
bequests, during lifetime or at death, fewer will do so.
     Severe Complexity Will Arise From a Phased-In Repeal of 
Estate Tax. Many of the bills would phase in the repeal of the estate 
tax. Such proposals would represent an enormously complicated system 
for individuals. Each person would have to have ``dual track'' wills 
and other estate planning documents providing, at a minimum, for 
different dispositions of their wealth upon death depending upon 
whether they (or, in some cases, their spouses) die before or after the 
estate tax is totally repealed. Also, a carryover basis system will 
likely require as much or more planning for individuals and as many 
decisions in post-death estate administration as does the current 
estate and gift tax system. Everyone, currently rich or currently poor, 
will have to retain records of purchases, sales, depreciation, trades 
and all other factors that could affect ownership and income tax basis 
to comply with carryover basis rules.
     A More Sensible Approach Should Be Adopted. Virtually, 
everyone agrees that the Federal estate tax system should be improved. 
It should be made not to apply to the estates of owners of small family 
farms and other small family businesses and others whose wealth is also 
modest. Provisions currently in the Code can be changed to accomplish 
that. What is critical is for the Congress to thoroughly study the 
overall social, fiscal and economic impact of any significant change to 
an important part of our nation's tax laws. The Federal estate and gift 
tax system certainly is one of those important parts.
II. ANALYSIS
     Repeal Will Cost Much More Than $236 Billion. The $236 
Billion revenue loss over the next ten years attributable to the repeal 
of the estate, gift and generation-skipping transfer taxes (see 
Subtitle B of the Internal Revenue Code of 1986, as amended) is 
premised upon an eight- to ten-year phase-out of those taxes. The loss 
of revenue to our Federal government attributable to the collection of 
those taxes could be as great as $1 Trillion over the ten-year period 
following complete repeal. If the phase-in of repeal is faster, the 
cost will increase; if the phase-in is slower, the cost will decrease, 
all other things being equal. In any case, the $236 Billion estimate of 
lost revenue to the Federal government fails to take into account that 
the income tax revenues also will be substantially diminished if the 
estate and gift tax system is repealed. Income tax revenues will 
diminish because individuals will be free to transfer income producing 
assets to others in lower income tax brackets and to transfer assets to 
others who will die soon, thereby securing the income tax free change 
in basis that will occur upon death.
     Repeal of the Gift Tax Will Compromise the Income Tax 
Because it Will Permit Taxpayers to Shift Income to Those in Lower Tax 
Brackets. The present Federal gift tax system, enacted in 1932, was 
adopted not just to supplement the estate tax but to preserve the 
integrity of the Federal income tax system. See Dickman v. United 
States, 465 U.S. 330 (1984). Repealing that tax will compromise the 
income tax because it will permit taxpayers, without any gift tax cost, 
to give income producing assets to others in lower income tax brackets. 
For example, a father, rather than selling appreciated stock he owns, 
would give it to his daughter (or a trust for her benefit) who is in a 
lower income tax bracket than he is. She (or her trust) would sell it 
and pay a lower tax than her father would have paid. She then could 
give the proceeds back to her father, again without gift tax. 
Individuals, in fact, may gift all income producing assets, such as 
stocks producing dividends, real estate producing rents and bonds 
producing interest (as well as appreciated assets) to others in lower 
tax brackets. This will reduce income taxes on those whose income is 
derived from assets and shift a heavier burden to those whose income is 
produced by working. John Buckley noted in his article which appeared 
in Tax Notes, on January 22, 2001, that 70 percent of individual tax 
returns are filed by individuals who are totally exempt or in the 15 
percent tax bracket, thus making the pool of individuals to be used for 
these purposes quite extensive.
    Partnerships also will prove to be a convenient way to control the 
recognition of gain, the collection of income and its distribution. 
Without any concerns about estate and gift tax, individuals are likely 
to form limited partnerships of which they are the general partners and 
give away (non-voting) limited partnership interests to others in lower 
income tax brackets which will cause the taxable income and gain to be 
attributed to the limited partnership units to be taxed to the 
recipients of such gifts. Because the wealthy individual is the general 
partner, he can control the distribution of any actual cash to the 
limited partner and indirectly control the gift of some or all of such 
cash back to himself.
    Individuals with trusted relatives overseas may be able to 
completely avoid paying any Federal income tax on their income 
producing assets. They will be able to give the assets to their 
relatives (either directly or through certain types of trusts or 
partnerships) who are neither U.S. citizens nor U.S. tax residents. The 
relatives (or their trusts or partnerships) will be able to invest to 
avoid U.S. income taxes (such as by investing in United States Treasury 
Bonds). In turn, these individuals will be able to give the income, 
directly or indirectly, to the original American property owner who 
made the gifts of the income producing assets.
    Although some may contend that the ``anticipatory assignment of 
income,'' ``sham,'' and ``step transaction'' doctrines would prevent 
such income shifting, those claims probably are meritless unless 
significant new tax legislation is enacted. Proof of that is contained 
throughout the Internal Revenue Code, such as the so-called ``kiddie'' 
tax contained in section 1, the grantor trust rules contained in 
sections 671-679, and the family partnership rules contained in section 
704(e). In any case, because such gifted transfers will no longer be 
reported (as the gift tax system will be repealed), enforcement will 
become extremely problematic. To think that individuals will not take 
action to reduce their income taxes when the barrier of gift taxation 
is removed ignores the history of our tax system and is naive.\1\
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    \1\ An article written by Jonathan Blattmachr and Mitchell Gans 
cites numerous examples of the potential to ``game'' the income tax 
system. See ``Wealth Transfer Tax Repeal: Some Thoughts on Policy & 
Planning'', Trusts & Estates, Volume 140 #2 pg. 49 (Feb. 2001).
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     Continued Step-Up in Basis for Inherited Assets Will Erode 
the Income Tax Even Further by Allowing Individuals to Shift Low Basis 
Assets to Others Who Will Die Soon. Under current law, the income tax 
basis is changed to the asset's fair market value when its owner dies, 
in most cases. See section 1014(a). This is known as the ``income tax 
free step-up in basis.'' Without a gift or estate tax, property owners 
will transfer their appreciated assets to others who will die soon, 
thereby securing the stepped-upbasis and arranging to reinherit the 
property when the others die.\2\ Neither the gifts to the others who 
will soon die nor the reinheritance will be subject to gift or estate 
tax. And, under current law, the person to whom the assets will be 
given does not even have to be granted any ownership in the assets that 
will be included in his or her estate and which will receive the step-
up in basis at death. All that need be granted is what is called a 
``general power of appointment.'' That is a power to direct that the 
property may be paid to the person who holds the power, his estate, his 
creditors or the creditors of his estate. Such a power causes the 
property to be included in the power holder's estate. See section 2041. 
But such a power causes estate tax inclusion even if it may be 
exercised only with the consent of someone who would not be adversely 
affected by the exercise of the power. For example, an individual 
holding appreciated property finds an unrelated person who will soon 
die. The property owner grants the dying person a general power of 
appointment that may be exercised only with the consent of the property 
owner's spouse, children, attorney and accountant. It is inconceivable 
that the person granted the power will be permitted to exercise it. 
Also, the power causes the property to be included in the power 
holder's estate even if he is completely unaware of the power. Of 
course, any system permitting even a partial step-up in basis at death 
will have to be revised to prevent that result. But other methods to 
``game'' the system are certain to arise. It is appropriate to mention 
that gaming the system with a step-up in basis rule without estate tax 
will apply not just to capital gain property but virtually every other 
type of property, including inventory and other assets which if sold 
would be taxed as ordinary income.
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    \2\ Section 1014(e) disallows a basis adjustment for property given 
to a decedent within one year of his or her death but only if the 
property is reinherited by the donor. It is relatively easy to 
circumvent this provision by having the decedent create a trust for the 
benefit of the donor and others such as other members of the donor's 
family.
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    Not all the bills introduced to repeal the estate tax would permit 
an unlimited step-up in basis. However, all bills would provide a 
relatively high level of step-up. That means that the gaming of the 
type described above would occur even with a limited step-up in basis. 
A limited step-up in basis merely means it will be harder to achieve a 
significantly increased basis when someone dies. For example, if a 
step-up in basis is permitted for $2.8 Million of assets and an 
individual owns $28 Million of appreciated property, he would have to 
find ten individuals who will die soon rather than only one. Senate 
Bill 275 introduced by Senator Kyl on February 7, 2001, provides for a 
step-up in basis at death equal to the aggregate basis of all of the 
decedent's property plus $2,800,000.00. Unlike H.R. 8 (the Death Tax 
Elimination Act of 2000, passed by Congress but vetoed by President 
Clinton on August 31, 2000) which utilized an asset by asset carryover 
basis approach, Senate Bill 275 would allow an executor to transfer 
basis from assets not likely to be sold or which will depreciate (such 
as personal residences, cars, boats, art, jewelry, etc.) to investment 
assets to effectively reduce capital gains on the sale of such assets.
    Also, depending upon the exact provisions enacted, bills that are 
intended to limit the level of step-up in basis actually will permit 
individuals to secure a much greater step-up in basis than the dollar 
limitation contained in the bill. The reason relates to debt on 
property. For example, an individual owns real estate having a current 
fair market value of $10 Million with an income tax basis of only $1 
Million. The individual borrows $9 Million before death, securing the 
debt with the property. (The $9 Million of borrowed cash, of course, 
has a $9 Million basis). But now there would be an increase in basis 
because, under current law, which does not appear to be changed by the 
bills which would limit the step-up in basis, the debt against the real 
estate would be added to basis upon the individual's death. In fact, as 
explained in McGrath & Blattmachr, Carryover Basis Under the 1976 Tax 
Reform Act (Journal of Taxation, 1977) (hereinafter referred to as 
``McGrath & Blattmachr''), pp. 161-162, the basis of property subject 
at death to debt could be greater under a carryover basis system than 
the current system providing for a step-up in basis at death. Moreover, 
as that book details, other opportunities to avoid the carryover basis 
system exist and will be developed.
     Income Taxation of Life Insurance Proceeds Will Have to be 
Changed or Carryover Basis Will Be a Hollow Crown. Under current law, 
proceeds paid by reason of the death of an insured are not included in 
gross income. See section 101(a)(1). In effect, life insurance proceeds 
are entitled to the income tax free step-up in basis enjoyed by most 
other assets owned at death. It seems certain that unless that 
provision of the law is repealed, individuals simply will move all or a 
significant portion of their wealth to life insurance policies if a 
carryover basis system is enacted. Under the carryover basis system 
enacted by the Tax Reform Act of 1976, insurance proceeds continued to 
be excluded from gross income and that represented a severe threat to 
the integrity of that carryover basis system. For example, individuals 
will borrow against their appreciated assets, place them into cash 
value life insurance products, and have the same investments made 
inside the policy that the individual would have made (or continue to 
have made) if the cash had not been placed inside of the policy's cash 
value. If the exclusion from gross income for life insurance proceeds 
were eliminated as part of a carryover basis system, the impact on the 
life insurance industry and the beneficiaries of such policies would be 
significant. It would represent the most severe change in the taxation 
of life insurance proceeds since the adoption of the Sixteenth 
Amendment to the United States Constitution. Clearly, serious thought 
would have to be given to making such a fundamental change to the tax 
law. Yet serious thought must be given to eliminating or restricting 
the income tax free receipt of death proceeds under section 101(a)(1) 
if any type of carryover basis system is adopted as part of estate tax 
repeal. As pointed out earlier, failure to limit the step-up in basis 
at death will go far in destroying the integrity of the Federal income 
tax system.
     Carryover Basis Will Represent a New Complex Tax System, 
Which Congress Has Previously Rejected. In the Tax Reform Act of 1976, 
Congress adopted a carryover basis system for inherited wealth. Four 
years later, it repealed the system retroactive to its original date of 
enactment in large measure because it was regarded as so complicated. 
In fact, the House Ways & Means Committee (or subcommittees of the 
Committee) held extensive hearings about the system. Most witnesses 
stated that the system was ``unworkable.'' The complexity of the system 
is discussed in detail in McGrath & Blattmachr. The same will be true 
for any carryover basis system enacted today. Yet, as explained above, 
some type of carryover basis system is certain to be adopted if the 
estate tax is repealed. Otherwise, the Federal income tax system will 
be at risk, as detailed earlier.
     Widows and Many Others Will Pay More Tax With a Carryover 
Basis System and No Estate Tax. Today, a widow or widower may inherit 
assets, pay no estate tax (due to the estate tax marital deduction 
allowed under section 2056) and secure a complete step-up in basis. As 
explained, some type of carryover basis system seems inevitable if the 
estate tax is repealed. Hence, surviving spouses will be disadvantaged 
by the new system. Allowing widows (or widowers) to continue to enjoy a 
complete step-up in basis will erode any carryover basis system 
intended to apply to others, such as children. For example, a man would 
leave his appreciated assets to his widow, who would secure the tax 
free step-up in basis. She could immediately give those assets to her 
children. The carryover basis system will be eroded, accordingly, if 
not made to apply to the inheritances of surviving spouses. Others, 
under the current tax system, save more income tax from the stepped-up 
basis of inherited wealth than they pay in estate tax. For example, 
under current law a man dies owning real estate having a gross fair 
market value of $10 Million, subject to a $9 Million debt, and a basis 
of close to zero (due to depreciation taken during lifetime or for 
other reasons). He leaves the real estate to his son. Because the net 
value of the real estate is only $1 Million, the son will pay no more 
than $550,000 \3\ in estate tax, and likely less than that. The son's 
basis in the inherited real estate is the property's gross value of $10 
Million. If he sells the property for its fair market value of $10 
Million, he pays no capital gains tax, and so he nets $9.45 Million 
(after the $550,000 estate tax paid). (In fact, if the son could 
depreciate the basis of the property and deduct the depreciation 
against ordinary income the step-up in basis would save him even more.) 
But under the elimination of the estate tax/carryover basis system, he 
may be limited to his father's basis of zero. Hence, if he sells the 
real estate for $10 Million, he will net only $8 Million because he 
will have to pay $2 Million in capital gains tax, and if the debt is 
still owed, he will be $1 Million ``in the hole.''
---------------------------------------------------------------------------
    \3\ The Federal estate tax, in fact, can rise to 60% in some cases. 
See section 2001(c)(2).
---------------------------------------------------------------------------
     Widows, Charities and Others Who Will Be Affected by 
Repeal of the Estate Tax. As already discussed, widows and widowers 
will be disadvantaged by a repeal of the estate tax unless a 
completestep-up in basis system is retained. Widows (or widowers) also 
will likely lose in two other ways. First, most states allow a widow 
(or widower) to demand a minimum share of the deceased spouse's estate. 
See e.g., New York EPTL 5-1.1 and Florida Statutes Sec. Sec. 732.201-
228. Although that ``forced inheritance'' can be avoided in most states 
by making gifts to others at least a year before death, usually that 
does not occur because such gifts result in gift tax. If the barrier of 
gift tax is taken down, individuals who want to disinherit their 
spouses (or more severely limit what the spouse can demand upon death) 
will be able to do so much more easily. Second, most married persons 
leave their entire estates to or in trust for their surviving spouses. 
The reason is because the tax allows the estate tax to be postponed 
until the surviving spouse dies. See section 2056(a). If there is no 
estate tax, fewer married decedents will choose to have their entire 
estates dedicated to their surviving spouses. The real impact will fall 
more severely on women than men because there are many more widows than 
widowers.
    Charities will likely receive less from decedents' estates than 
they do today. Although it is difficult to quantify what the drop off 
in bequests to charity will be, many knowledgeable persons think it 
will be significant. See The New York Times (National Edition), 
Saturday, February 10, 2001, page A-11, entitled, ``A Bush Aide Faults 
Plan to Repeal Estate Tax'' (``John J. DiIulio, Jr., Director of the 
New White House Office of Faith-Based and Community Initiatives, says 
repeal could undercut another administration priority: encouraging 
private contributions to charities, religious and nonreligious alike, 
that help the poor.'') It might be mentioned that proposals contained 
in bills currently before the Congress to make the income tax deduction 
for donations to charity an ``above the line'' deduction apparently is 
premised on the theory that giving tax breaks for gifts to charity will 
spur more charitable giving. The same is true for transfers at death. 
In fact, there should be a greater incentive to give more to charity at 
the 55 percent estate tax bracket than at the lower income tax 
brackets. If there is no tax benefit to making charitable bequests, 
during lifetime or at death, fewer will do so.
     Severe Complexity Will Arise From a Phased-In Estate Tax. 
Many of the bills would phase-in the repeal of the estate tax. Such 
systems would represent an enormously complicated system for 
individuals. Each would have to have ``dual track'' wills and other 
estate planning documents providing, at a minimum, for different 
dispositions of their wealth upon death depending upon whether they 
(or, in some cases, their spouses) die before or after the estate tax 
is totally repealed.\4\ These individuals also will face the 
uncertainty of whether total repeal will ever be achieved due to the 
needs of our government for additional revenue or because of change in 
political philosophy or change in governing parties. Individuals will 
be caught in a twilight zone of uncertainty on whether they should make 
tax-efficient gifts, use the marital deduction, and take other common 
estate planning steps, such as creating a so-called ``personal 
residence trust'' described in section 2702 or a ``charitable lead 
trust'' described in section 170(f)(2)(B) or family partnerships. 
Further, after the estate tax has phased-out, not only will new 
documents have to be redone, but it may be difficult to unwind the 
planning done in anticipation of estate tax being paid.
---------------------------------------------------------------------------
    \4\ In addition, all wills that have previously been ``estate tax 
planned'' will need to be reviewed and/or revised, particularly those 
that provide a marital deduction formula bequest to a spouse equal to 
the amount necessary to reduce the estate tax to zero. If there is no 
estate tax or need for a marital deduction, these formula clauses could 
end up providing that the spouse receives nothing.
---------------------------------------------------------------------------
    Also, a carryover basis system will likely require as much or more 
planning for individuals during life and as many decisions in post-
death estate administration as does the current estate and gift tax 
system. See, e.g., McGrath & Balttmachr, Chapter 19. Everyone, 
currently rich or currently poor, will have to retain records of all 
purchases, sales, depreciation, trades and all other factors that could 
affect ownership and income tax basis of all assets (even personal use 
assets) they ever acquire to comply with carryover basis rules. No 
matter how high the step-up in basis level the law allows, each person 
will hope his or her wealth will exceed that level and, as a result, 
each will have to maintain the records. In fact, with respect to 
marketable securities, a carryover basis system will require much more 
record keeping than does the current estate and gift tax system. Under 
the current system, no records of basis, stock splits, stock dividends, 
tax free exchanges, etc. need be maintained for purposes of inheritance 
because of the step-up in basis at death, and the rule for valuation of 
marketable securities for estate tax purposes is simple and direct. See 
Treasury Reg. 20.2031-2. Under carryover basis, complete and lifelong 
record keeping for marketable securities (and all other assets that 
might be owned at death) must be kept for life. In fact, it might 
require multi-generational record keeping because assets inherited by a 
child might be kept until the child, in turn, dies and then inherited 
by members of the child's family. It is appropriate to mention again 
that Congress retroactively scrapped the carryover basis system it 
enacted in 1976 by the Windfall Profit Tax Act of 1980 in significant 
part on account of the record keeping and administration problems such 
a system presented.
     The States Will Lose Enormous Revenue if the Federal 
Estate and Gift Tax Systems Are Repealed. Every state will lose in one 
way, if the Federal estate and gift tax systems are repealed, and the 
43 states (and the District of Columbia) which impose income taxes will 
lose to an even greater degree. First, every state, without exception, 
imposes a death tax equal to the state death tax credit allowed under 
section 2011. That credit reduces the gross Federal estate tax, dollar 
for dollar, up to the limit set forth in the section. In many states, 
the estate tax represents a significant portion of the state's revenue. 
In New Hampshire, for example, it is about 4.5%; in Florida and New 
York, it is approximately 2.7%. Although some states could enact an 
independent estate tax system to curb this shortfall, that will be 
politically difficult if not impossible for many and unconstitutional 
for others. For example, Florida's Constitution prohibits the 
imposition of any estate tax, except for the state death tax credit 
amount because that merely represents ``free'' revenue sharing from the 
Federal government to the state. Florida Constitution, Article 7, 
Section 5.
    As indicated, the states (and cities) that impose an income tax 
will face a more serious erosion of revenue if the gift tax is 
repealed. The type of shifting of income producing assets to others, 
which is certain to happen to avoid or reduce Federal income tax, will 
occur to an even greater degree with respect to avoiding state (and 
local) income taxes. In fact, it will be easier to avoid state and 
local income taxes than Federal income taxes. There are several 
reasons. First, states are limited by the United States Constitution 
(and often their state constitution as well) as to their ability to tax 
property located outside of their jurisdiction. Second, individuals can 
create trusts for their own benefit outside of their home state in 
jurisdictions which impose no state income tax. That can be done even 
if the trust permits distributions back to the grantor only with the 
consent of an ``adverse party.'' See section 677(a). Although trusts 
reach the top Federal income tax rate at very low levels of taxable 
income, so no Federal income tax may be saved by creating such a trust, 
all state and local tax may be avoided. If the Federal government loses 
no income tax revenue by such shifting of income, it will have no 
incentive to try to challenge such arrangements. And, of course, 
virtually every state (and local) income tax system relies on 
enforcement primarily by the IRS. That, in turn, raises another reason 
why the ability to shift income away from the states will occur. It 
simply will be impossible, as a practical matter, for the states to 
attack such arrangements. The states (and cities) will not even be 
aware that the shift of ownership has occurred because there need be no 
reporting of such gifts of income producing property because the 
Federal gift tax will be repealed.
    As indicated, the impact on many states will be more significant 
than the loss of the state death tax credit amount. For example, in New 
York State, state income taxes on capital gains, dividends and interest 
comprise about 9% of that state's total revenues. Certainly, not all 
that tax will be avoided but it is likely a significant portion will 
be. New York's income tax reaches a level of only about 6%. In states, 
such as Oregon and California, where the tax rates are higher, the 
erosion will be greater.
    It is incumbent upon the Congress to consider the impact on the 
states in considering what should be done with respect to the Federal 
estate and gift tax systems.
     A More Sensible Approach Should Be Adopted. Certainly, the 
Federal estate and gift tax system should be revised to make it apply 
in ways that are fairer and which simplify the system. Provisions 
already in the Internal Revenue Code reduce or eliminate estate tax on 
farms and other closely held business and provide ways in which the 
estate tax may be paid over an extended time. See sections 2032A, 2057, 
and 6166. Certainly, the limitations contained in the Code should be 
increased and, perhaps, liberalized and the provisions simplified. 
Also, the basic estate tax exemption (currently $675,000) should be 
increased, and then ``indexed'' for inflation. Also, the initial rates 
above the exemption (now 37%) should be reduced, the ``brackets'' 
spread out and the top rate (of 55%) should begin only at a very high 
level (such as $10 Million). These brackets should also be indexed for 
inflation. However, as recently suggested by noted commentator, Steve 
Leimberg, ``no matter which side of the repeal/reform issue you are on 
. . ., it is essential to perform a thorough and multi-dimensional (and 
ideally bipartisan and professionally conducted) impact study before 
any new major tax legislation is passed so that the overall economic 
and social implications and costs of proposed tax law changes are 
thoroughly considered.'' He goes on to note that ``there is no `free 
lunch' in the tax law. All change--no matter how it is presented to the 
public comes at a cost to someone. We need our leaders on both sides of 
the political fence to be more open, honest and provide better and more 
complete explanations of how tax law changes affect various segments of 
the population.''

                                


    Chairman Thomas. Thank you very much. This is the kind of 
panel that allows us to allow you to discuss among yourselves 
the arguments that are presented so that we can listen, and I 
appreciate the panel's willingness to present their positions.
    I probably better understand Ms. Coakley David's position 
from a real-world situation, I guess, and, Mr. Stallman, I am 
little more familiar with farms and the problems especially of 
busting up farms and the inability to try to sell the pieces 
off to make them economically viable and that downturn, and I 
guess a family owned newspaper.
    So if the panel will allow me for my time, I would like to 
turn to Dr. Thorning and ask her, first of all, to respond to 
some of the points that Ms. Detzel made and then give Ms. 
Detzel an opportunity to respond back.
    In the spirit of expanding on the question of repeal/not 
repeal, rather than some interim position, which I think most 
of us can envision, which would basically be raising the 
threshold, would you comment on the arguments that Ms. Detzel 
made about the complications and difficulties of repeal, Dr. 
Thorning?
    Ms. Thorning. Thank you, Mr. Chairman. I think it is 
possible to get there from here, basically. I think it would be 
possible to repeal the tax. The issue about step-up in basis, 
as the point was made at the Senate Finance Committee hearing 
last week, if a provision were structured so that relatively 
small estates don't have to keep track of the cost basis of 
assets, you would find the middle- or higher-middle-income 
people with their estates being able to keep track of the cost 
basis of their assets, especially given the change over the 
past few years in the composition of those assets. More and 
more wealth is held in the form of equities, and it is 
relatively easy to keep track of the cost basis of those.
    So if a provision were structured to exclude a certain 
amount from the estate tax, I think most people would certainly 
be able to keep track of the basis. So I think that the fear of 
complexity from giving up step-up in basis should not be a 
reason to say that we don't repeal the estate tax. I think it 
can be addressed and can be handled.
    Second, with respect to the overall impact of repeal of the 
estate tax, the estate tax is a tax on capital, it is a tax on 
business. It requires enormous planning to avoid. The 
efficiency cost of the estate tax is probably much greater than 
the revenue, $30 billion a year, that is being collected.
    Many of our competitors around the world, including Canada 
and Australia, don't have an estate tax, and they seem to 
function just fine. And most other countries have much lower 
estate tax rates.
    So for what we are getting, $30 billion a year, we are 
spending enormous amounts wasting society's resources trying to 
avoid it, and as the results of Dr. Sinai show and Professor 
Douglas Holtz-Eakin, who is also at Syracuse University in New 
York, has also done some work indicating the drag that this tax 
has on our economy in terms of job growth and GDP growth and 
other economic variables.
    So it seems to me we can get there from here, and we 
certainly ought to do it.
    Chairman Thomas. Ms. Detzel, what about it? You argued that 
it costs a lot of money. Dr. Thorning and others are arguing 
that, in fact, it doesn't lose nearly as much and there may be 
an adjustment. Do you want to respond to any of the points?
    Ms. Detzel. Well, let me just say----
    Chairman Thomas. Microphone, please. It is hard to hear.
    Ms. Detzel. Let me just say that if we end up with a system 
that is something in between a full step-up and a full 
carryover, we have just now made the most complicated thing we 
could possibly do. A lot of people will spend a lot of time 
planning to utilize, whether it is 1.3 or 2.8 that is currently 
in the Kyl bill, whatever the partial step-up is, there will be 
a lot of planning that will be done to utilize that step-up in 
basis, and that will effectively erode the carryover basis.
    In addition, if we bring in carryover basis, I thought I 
heard one of the gentlemen dealing with family farms was 
against the carryover basis because of all the problems that it 
gives for farms, particularly debt-financed farms. We would 
have to bring in some very complicated, difficult provisions in 
order to avoid having problems with debt-financed real estate. 
And if you do that, then you allow--if you have an exception 
for debt in the carryover basis, then you are going to give 
planners a great opportunity to completely avoid carryover 
basis by simply borrowing before death.
    So every one of these impacts on something else, and my 
point here is not to be for or against one thing or the other, 
but simply to recognize that we have had the estate and gift 
Tax Code for 80-some years and it is integrally related with 
the income tax, and we must analyze what changes we make there, 
what that will have on other parts of our Tax Code.
    Chairman Thomas. And the fact that if we, in fact, make a 
decision, a better decision--it is always driven by revenue to 
a certain extent--would be to do whatever we do fairly quickly 
and fairly cleanly so that people can begin to transition into 
the system, although that is a function of revenue available 
with a number of other draws.
    Ms. Detzel. I would say that the absolute worst situation 
for my clients is a phased-in repeal, because they absolutely 
have no idea what to plan. We don't have any idea what to plan 
right now. So I would hope that whatever it is that we are 
going to end up with, we would end up with it quickly.
    But a phased-in repeal, most people are going to have to 
plan, anyway. How can you take the chance that you are not 
going to outlive the 8 or the 10 years? So you are going to 
have to plan. You are going to spend those dollars. You are 
going to make transfers that are irrevocable, create trusts 
that you can't terminate, because you really can't afford to 
buy life insurance products, because you can't afford not to. 
And then when the estate tax has phased out, you are going to 
do it all over again.
    Chairman Thomas. Well, my question would be to those who 
are in the very real-world situation of planning for that, you 
are planning under the current system, anyway. Is it that 
complicated?
    Mr. Blethen. With all due respect, we are doing all that 
right now.
    Chairman Thomas. Yes.
    Mr. Blethen. And the worst possible case is to not repeal 
the death tax, whether it is phase-out or immediately.
    Chairman Thomas. The idea being that you are doing all of 
that now and eventually you realize at some point someone won't 
have to do it if it is not you?
    Mr. Blethen. And we are not only doing that, we are making 
decisions to not invest in our businesses and to not create 
jobs because of it.
    Ms. Detzel. Well, let me just say that the planning, this 
planning, as I am sure you all can appreciate, is ongoing. It 
is not something that you do, you put over in the safety 
deposit box, and you are done. This is something that you have 
to keep up with every year.
    Mr. Blethen. I have been doing it for 30 years. I know it.
    Ms. Detzel. And so my point is that a phased-in repeal, you 
will have to continue to make these payments. It is not 
something you can just plan now and quit. You will be making 
these plans, paying these premiums, or paying me for 
practically the entire time of the phase-in.
    Mr. Blethen. Right. But----
    Ms. Detzel. So I would say that a phased-in repeal is----
    Chairman Thomas. Let the gentleman who is living it now 
respond.
    Mr. Blethen. You know, there is one consistency in all 
this, that the people who benefit are the insurance companies 
and the planners.
    Chairman Thomas. And even if it is a phase-out, it at least 
eventually comes to an end? Is that----
    Mr. Blethen. Well, she is right. I mean, we have got to 
continue all that complexity with the phase-out. But at least 
there is a light at the end of the tunnel, and at least we can 
begin making investment decisions and decisions that will start 
in stimulating the economy. The sooner the phase-out, the more 
benefit we will get, and the more economic stimulation we will 
get.
    Chairman Thomas. Any last comments? My time is up.
    Ms. David. I would just say I would agree, and I think 
ideally a complete repeal immediately is the best scenario, 
because it stops all of this spending and all of this wasted 
time that businessowners would prefer to invest in their 
employee benefits and economic growth.
    Chairman Thomas. And we would all like to pay cash for our 
house, too. You just have to deal with a lot of desires within 
a structure to try to make it as meaningful as possible, and we 
will take that advice.
    Does the gentleman from Pennsylvania wish to inquire?
    Mr. Coyne. Thank you, Mr. Chairman.
    Ms. Detzel, as you know, the Democrats have proposed a $2 
million per person exclusion in the proposal they have made 
relative to the estate tax. I wonder if you could describe who 
would be left if that were to be adopted. What types of payers 
would be left if that $2 million exemption was given?
    Ms. Detzel. Well, I am a Member of the American College of 
Trust and Estate Council. It is an organization comprised of 
estate planning attorneys, and we have been monitoring this 
closely. You will see a number of our members who have 
submitted comments on this legislation on both sides of this 
argument for as long as it has been proposed. And I would say 
that we spend a fair amount of time discussing that, and I 
think it is a pretty good consensus by most of us estate 
planners around the country that if you adopted an immediate $2 
million or $2.5 million per person exemption, the vast majority 
of our clients would be exempted from the estate tax. And that 
would, you know, eliminate most of the planning, most of the 
problems for a large part of our clients.
    Mr. Coyne. Could you explain more why you estimate in your 
testimony that the true cost of the estate tax repeal is nearly 
double than was originally estimated?
    Ms. Detzel. Well, I think that there are--first of all, I 
think that it is very difficult to estimate. I am not an 
economist. It is very difficult to estimate what the estate tax 
revenue will be year by year. But I know that from my practice 
I have seen more and more over the last few years. Since we 
adopted the unlimited marital deduction in 1981, of course, for 
the first years there was a significant reduction in estate tax 
revenue, and those revenues have been picking up, in large part 
because the second spouse--that gave us a deferral of estate 
tax until the second spouse died. And now the second spouses 
are beginning to die, and so we are seeing a lot more revenue. 
And, of course, assets have increased in value. That has 
increased the revenue.
    Beyond the additional estate tax that I think will probably 
be raised because of these factors, there is a lot of income 
tax to be lost. A lot of income tax to be lost. I can tell you 
that if we get a repeal of gift tax, a lot of my clients will 
pay a lot less income tax. It will be very easy to avoid paying 
income tax or to move income tax down to lower bracket 
taxpayers.
    All we have to do is create a--one example, one easy 
example is to create a family limited partnership with my 
investment assets. I am the general partner. I give away the 
limited partnership interest to my children or other family 
members in lower income tax bracket. I am the general partner. 
I control distributions. I control the disposition of those 
assets entirely. But the income tax, most of the income tax 
flows through a partnership to its partners. And so that would 
go to the limited partners who are in lower income tax 
brackets, and I could--and the reason why that is not done now 
is because there is a gift tax that is associated with giving 
away those limited partnership interests.
    So we can give those partnership interests away gift-tax-
free, and then we can even get the income, if any is ever 
distributed to those lower bracket taxpayers, back through a 
gift that doesn't cost anything either. That is just one simple 
example of how income tax could be greatly disadvantaged by a 
repeal of a gift tax.
    In fact, there was one statistic that was published last 
month or in January in Tax Notes that 70 percent of all 
individuals who file tax returns pay no income tax or are in 
the 15 percent bracket. That is 70 percent of America that can 
be used by the other 30 percent to reduce their income tax.
    Mr. Coyne. Thank you.
    Chairman Thomas. Thank you.
    Does the gentleman from Michigan wish to inquire?
    Mr. Camp. Thank you, Mr. Chairman. Thank you all for your 
testimony. And I understand there are differences of opinion on 
this issue, but when I think of lost income tax or lost estate 
tax revenue, it is assuming that this is the Government's money 
to lose. And, frankly, this is not the Government's money. It 
is the people's money.
    So I come down on the side of trying to make sure that we 
preserve family-owned farms and family businesses because I 
think something is lost in the corporate structure that we have 
seen with a lot of our businesses that might have remained true 
to different principles or to their employees. So there is an 
intangible there.
    Dr. Thorning, I just want to say I appreciate this report 
that you have brought to the Committee because the scoring that 
we have around here tends to show that full repeal is a large 
revenue loss, because we score under these very strict rules 
that don't really look at the real world. And so I think 
particularly your report is very helpful to show that 
employment would go up and that under some scenarios actually 
revenues to the Government would go up under a full repeal 
plan. So I appreciate that very, very much.
    Mr. Stallman, do you have any comment on an exemption 
amount or level that you would support or feel comfortable 
with?
    Mr. Stallman. Changing the exemption really doesn't address 
the fundamental problem that we see with the death tax. It is a 
tax policy that discourages savings and investment in favor of 
consumption, one that makes the hurdles higher for 
entrepreneurs to be successful who create most of the jobs in 
this country; and probably from our point of view, it is a tax 
that disproportionately and negatively impacts the most 
productive farms and ranches in this country.
    No matter where you set an exemption, it is still going to 
have a definite negative impact on those most productive farms 
and ranches in this country who produce most of the 
agricultural products. And you don't do away with the burden of 
planning. You don't know what asset values are going to do for 
the future, and so you haven't really solved much of the 
problem. That is why we strongly support repeal of the death 
tax.
    Mr. Camp. I appreciate that, particularly also your 
comments on the fact that many agricultural assets are long-
held, many have had debt, significant amounts of debt, and the 
distortion effects of not having a step-up in basis for those 
particular farms and ranches is a real problem.
    Anyway, thank you all for your testimony, and I yield back 
the balance of my time.
    Chairman Thomas. I thank the gentleman.
    Does the gentlewoman from Florida wish to inquire?
    Mrs. Thurman. Thank you, Mr. Chairman.
    Mr. Stallman, and also to Ms. David, you know, last year we 
did have a piece of legislation, as you know, that would have 
gone to the President and that, in fact, would have been signed 
into law that would have put it at about $5 million or $4 
million.
    One of the things that I find interesting is that the plan 
that we have looked at over the years is something that is 
gradually going to go into effect over a 10-year period of 
time. We have seen what that potentially could do in damaging.
    In offering something that could have gone into effect, 
quite frankly, I would have appreciated your support last year 
on that because--and I think some of your farmers and your 
small businesses would have appreciated that, because there are 
people who are now being affected in the fact that it wasn't 
done. And so the very same people you are here to protect may 
be the ones that fell or had a death in their family where this 
happened to them and they got no effect from any kind of a 
repeal in looking at this.
    But in saying that, I will tell you that I would probably 
support that bill again. I probably cannot support the full 
repeal. Mr. Camp's issue about it being the people's money, he 
is absolutely correct. It is the people's money. But, Mr. 
Stallman, let me just suggest to you that one of the issues 
that we have been talking about on the Democratic side in the 
budget and something that I have looked at over the years in 
the agriculture area has been you come to us constantly to use 
the people's money to help strengthen agriculture, to do things 
such as research, disaster. This year you are asking--and have 
actually jumped up from $18 billion. So we are spending the 
people's money in ways that you have also asked us to do to 
support.
    And, Ms. David, as well, if I look at all of the tax 
issues, we have small business tax exemptions for all kinds of 
things: health care, meals exemption, travel. We do a lot of 
things in the Code today to try to, in fact, take care of those 
kinds of issues.
    So I think that while I don't disagree--and I certainly 
have farmers who would be beneficiaries. Actually, one family 
that has come to me most recently very concerned because they 
can't pay the death tax of $2 million. But you know what? If 
this law had been in effect when we wanted it to be, they 
wouldn't be sitting in that situation.
    So I think that is a real downfall that we are looking at 
in any of these proposals or what has happened, and that is the 
immediateness of the issue. So I would appreciate it.
    Ms. Detzel, I appreciate the fact that you have come here 
by yourself and the only one that seems to be kind of looking 
at this issue all the way across the income tax part of it. And 
in your remarks you said there are some things we could do to 
put into effect something that would be beneficial for all 
income taxpayers. Could you expand a little bit on that for us?
    Ms. Detzel. I am sorry. What----
    Mrs. Thurman. You had just said I think in part of your 
testimony----
    Chairman Thomas. Ms. Detzel, would you turn your microphone 
on?
    Mrs. Thurman. In part of your testimony, you talked a 
little bit about that there were things that we might could do 
to help people such as your clients, and maybe you have already 
had this----
    Ms. Detzel. Well, I can tell you that my clients would--and 
I represent a very broad base of individuals from small citrus 
growers to very, very wealthy people in the entertainment 
industry in central Florida. But the majority of the clients at 
my firm and most of my friends who are attorneys would really 
like to see an immediate increase in the exemption now. And 
whether that is $2 million or $5 million, I don't know. But a 
several-million-dollar increase in the exemption is, I think, 
extremely important to come in now.
    I am just like you. I have a number of clients that I am 
filing tax returns for, people who, if the bill had gone in 
last year, we wouldn't be paying those checks. And they are not 
terribly thrilled that it is taking forever to get this relief, 
and they would like to see the relief at the lower level, not 
at bringing rates down gradually for the highest taxpayers over 
a number of years, but let's give the exemption to the people 
who need it the most, the ones that are just over the $675,000 
level.
    So I think that my clients would like to see something done 
quickly and something done that increases the exemption right 
away.
    Mrs. Thurman. I appreciate those comments, and I know I 
didn't give you all a chance to respond because I needed to get 
this other part in, but as you can see, I think that kind of 
made our point. Thank you.
    Chairman Thomas. Does the gentlewoman from Washington wish 
to inquire?
    Ms. Dunn. Thank you very much, Mr. Chairman. I am 
listening, and I am intrigued by your testimony, Ms. Detzel, 
and I just am curious. It seems to me that if you do advocate 
an increase in an exemption--and I didn't see that in your 
written testimony, but I am hearing you saying now--that all 
these moves that you make to sound very fraudulent are going to 
still occur. What is to say that they won't?
    Ms. Detzel. There are tradeoffs with all of these, OK? And 
I am not advocating anything in particular. I am not advocating 
complete repeal, a phased-out repeal, exemption increase. My 
testimony was to understand that with every single thing that 
we attempt to do, there is an impact on others. And it will be 
choices. What you all do all the time is make choices between 
things. And I simply wanted everyone to understand what was the 
effect of particular choices.
    Ms. Dunn. Good, thank you very much.
    Ms. Detzel. So every single thing has----
    Ms. Dunn. That is interesting to me. Let me ask you another 
question. You talk about provisions already in the Internal 
Revenue Code reduce or eliminate a State tax on farms and other 
closely held businesses. I assume, in that one that you are 
referring, to the 1997 exemption, I would like to ask Mr. 
Blethen what he thinks about that.
    Mr. Blethen. That was the stepped up basis that they--I am 
sorry.
    Ms. Dunn. It was in 1997 we provided, the best of 
intentions, a $1.3 million exemption for family held 
businesses.
    Mr. Blethen. Oh, excuse me.
    Ms. Dunn. And I am curious to hear--and certainly, the 
other panelists can answer too--I am curious to hear how 
effective that has been for you.
    Mr. Blethen. Well, it has not been effective at all. While 
it would certainly benefit my family personally, it would not 
be very good public policy. The issue for us is one of what is 
the best public policy that creates economic stimulation and 
job creation? And when you look at the private, independent, 
non-publicly traded business sector, I can just use my industry 
as an example of why raising the exemption doesn't work.
    If the IRS were to value the smallest newspaper, daily 
newspaper in the State of Washington, from little Ellensburg, 
the value would be $10 million. Family-owned newspapers in 
Eugene, Oregon and Bangor, Maine, at today's prices, if the 
family-owners were to die, will probably be valued at 75 to 100 
million by the IRS. Family-owned papers in Bakersfield, 
California, Spokane, Washington and Portland, Maine, would be 
valued around 200 million by the IRS. These are family 
businesses that all mirror what my testimony was. They have 
more employees than you have in public companies. They invest 
more. They have lower profit margins. They create jobs and they 
create investment. And today we all hold off on investment 
decisions and job creation decisions, and in our case, $200,000 
a year just to pay the insurance companies and the planners so 
that we can have a chance of surviving another generation.
    Mr. Stallman. As I said in my testimony, the Qualified 
Family-Owned Business Exemption was well intended, but the 
hoops you have to jump through in terms of definitions of 
active engagement of the owner, of the length of time the 
assets have to be held in production and several others, 
doesn't allow the flexibility you need in today's modern 
farming operations and family structures to make the changes 
you need. So it has been--hasn't been used just because of that 
complexity.
    Ms. Dunn. In fact, between 1 and 3 percent of family held 
businesses have qualified for that exemption, and two-thirds of 
them have been challenged by the IRS, so I think you make a 
very good point.
    I am concerned about the discussion of an exemption level, 
and I would just mention this to Ms. Thurman, because she is 
interested in that, and a proposal that came out last year. Any 
exemption level is going to be arbitrary, and I think you start 
with that as a base level of unfairness.
    There is, for example, in my hometown, Seattle, Washington, 
an $80 million company, and you would think that sounds like a 
wealthy company. They employ 1,000 people. It is called GM 
Nameplate. They are going to be forced, if we are not able to 
phase out this death tax, to repeal, to sell that company. And 
then you have to wonder, because it has happened over and over, 
and we all know of companies in our own communities that have 
been forced to sell because capital gains tax rates are lower 
than death tax rates and the family decides it cannot survive--
--
    Mrs. Thurman. Will the gentlewoman yield?
    Ms. Dunn. But this is the kind of risk that we run into. 
Let me yield, when I am finished with my questions, to Ms. 
Thurman.
    I would say too, as we discuss this setting arbitrary 
limits, people will try to stay within those limits. That is 
what compliance costs are all about. We are seeing compliance 
costs in the market right now, dollars being taken out of the 
private sector, to purchase life insurance policies, or to--to 
go to your business, Mrs. Detzel, and hire you for your 
services--that are huge amounts of money that aren't being used 
to stimulate job increase or to provide medical benefits to 
employees in companies. And I think we run into that danger if 
we don't take the opportunity we have now to phase this out.
    I yield back, Mr. Chairman.
    Chairman Thomas. The gentlewoman's time has expired. We 
will pick you up. We have got some folks coming.
    Does the gentleman from Pennsylvania, Mr. English, wish to 
inquire?
    Mr. English. Thank you, Mr. Chairman, I do. I am very 
intrigued by the testimony that this panel has presented. And, 
Ms. Detzel, I am curious about some of the details in your 
testimony, or lack thereof. You make the assertion that the--as 
I understand it, that the elimination of the estate and gift 
tax will have a significant impact on charities. And what you 
quote as a source on that is a New York Times article recently. 
Are you aware of any--and excepting that you have presented 
yourself not as an economist--are you aware of any economic 
studies that would support your position on that?
    Ms. Detzel. No, sir. And I deliberately stayed away from 
discussing the issue of impact on charitiesbecause it is a very 
controversial issue, as to whether the repeal of the estate of the gift 
tax will have impact on charitable giving. There are a number of 
different people who are commenting one way or the other. My personal 
viewpoint, from my own personal practice, is that the majority of 
charitable planning that is done in my firm is tax motivated, and 
whether that is what is around the country, I can't tell you. I know a 
number of people have commented. I know of no economic study.
    Mr. English. On that point, as I assume you are aware, Mr. 
Bush has also proposed some changes in the charitable tax 
treatment of charitable giving. Are you aware of that?
    Ms. Detzel. Yes, I am. And I guess I am a little confused, 
because it seems a little inconsistent to say that----
    Mr. English. Really?
    Ms. Detzel. Well, the provision in particular that says we 
are going to give an above-the-line deduction for income tax 
purposes, which generally lower brackets, we need to do that as 
an incentive for charitable giving. We need to give that tax 
incentive. But we are not recognizing that when we take away a 
55 percent benefit, that that might be a disincentive. I mean, 
we are saying on one hand we need to give the people an 
incentive to make gifts, but on the other hand we take away 
that tax incentive.
    Mr. English. Do you think that Mr. Bush's plan might, by 
providing a new charitable tax incentive, be compensating for 
the elimination of the estate tax, and isn't that good tax 
policy?
    Ms. Detzel. Well, again, I am not a politician or an 
economist, but I can simply say that the estate tax and gift 
tax rates are at the top end or at 55 percent, and the loss of 
a gift--individuals, if they are not able to take advantage of 
a 55 percent deduction, they may not make the charitable gifts 
that they otherwise would, and whether that will be compensated 
or not by the other ones, I can't tell you.
    Mr. English. Ms. Detzel, let us be clear, I only brought 
this up because it is referenced in your testimony. So you are 
the one who has raised the issue of the impact on charitable 
giving, which apparently you are not prepared to quantify.
    Dr. Thorning, have you studied this issue, and are you 
aware of any scholarly work on the likely economic impact on 
charities of the repeal of the death tax?
    Ms. Thorning. Yes, Mr. English. Let me just mention that 
this report issued by the Joint Tax Committee on March 21st 
contains some good scholarly references, and I believe the 
implication----
    Mr. English. More scholarly than a New York Times article?
    Ms. Thorning. I think so. I mean, they are citing Jim 
Peterba at MIT and people like that. So this Joint Tax 
Committee document makes the case that charitable giving might 
actually increase with the repeal of the death tax. 
Furthermore, there was a Harris Poll recently that concluded 
that 71 percent of the people polled said that they would 
increase charitable giving if the estate tax were repealed. So 
I think there is at least a strong possibility that charitable 
giving would be positively impacted by estate tax repeal, and 
there is no real reason to conclude that it would drop off.
    Mr. English. Now, Ms. Detzel, in your testimony, you also 
intimated that the repeal would likely cost more than $236 
billion, and the reason being in part, you indicate that income 
tax revenues would actually drop because of assets being 
transferred to other individuals who have lower tax rates and 
might even be transferred offshore.
    Dr. Thorning, you have analyzed this. Would you care to 
comment on whether that is a serious issue?
    Ms. Thorning. The question of how much repeal would cost, I 
noticed in Ms. Detzel's testimony, she suggested that repeal 
might cost a trillion dollars over 10 years, as opposed to 
the--I think it is $266 billion associated with the President's 
proposal. So I was wondering about that myself, and it seems to 
me, based on the macroeconomic analysis we have seen, for every 
dollar of estate tax repeal, we will probably get back at least 
20 cents on the dollar. So you already shaved 50 billion off 
the 266 billion static revenue cost. And when you take account 
of other factors that may come into play, it seems to me that 
the case can be made that with a stronger economy and more 
jobs, we are likely to see something much less costly than even 
the static revenue estimate.
    Mr. English. Well, doctor, my time has expired, but I would 
recommend to all of the panelists, and in fact, all of my 
colleagues on the Committee, a fine thin book by a constituent 
of mine, Dr. Hans Senhols, now retired, formerly of Grove City 
College. He wrote a book a number of years ago called ``Death 
and Taxes,'' which suggests that perhaps the repeal of the 
estate tax might actually generate even more revenue than the 
estate tax currently generates through increased economic 
activity through the balance of the tax system.
    But I thank you, I thank all of you for your testimony, and 
I yield back, having no time, to the Chair.
    Chairman Thomas. I told you I eagerly await an autographed 
copy of the book.
    Does the gentleman from Missouri wish to inquire?
    Mr. Hulshof. I do, and thank you, Mr. Chairman. Thank all 
the panelists for being here. Several of you that I have met 
and had a chance to converse with on other occasions, and 
welcome.
    I am mindful, Mr. Stallman, I think, of something you said 
as far as the consumer-driven nature that we are as a society. 
Our next-door neighbors, my wife and mine, in Columbia, 
Missouri, they are an elderly couple. They have got this huge 
RV, and a bumper sticker on that RV that says, ``I'm spending 
my kids' inheritance.'' And of course, they go to Florida about 
3 months every year, probably much to the chagrin of their 
children, who we know as well.
    Ms. Detzel, let me ask you this, and this is really more of 
a rhetorical question. But I am the only son of a farm family 
in Missouri. My parents are both healthy, alive and well, and 
actively engaged in farming. We have a 600-acre farm. My 
question would be, does my father and mother need an estate 
plan? And that is a rhetorical question because probably the 
answer you would give me would say, ``Well, it depends.'' It 
depends on many things. It depends on things within the 
decision-making control of my parents, depends on some things 
out of their control. For instance, if we were to draw an 
arbitrary line and say that family farms up to $1.3 million and 
below are not subject to the death tax, a 600-acre farm at 
$2,000 an acre, which is not that far afield, just the farmland 
itself would come underneath that arbitrary figure. On the 
other hand, if improvements were made to that farm and it were 
$2,500 per acre, that same 600-acre farm would be over the 
exemption at $1.5 million, and really, fair market value, is 
something that--and again, I am using this on personal example. 
But, Mr. Stallman, in your situation, or any farmer's 
situation, there are some things completely within the control 
of the individual or family owning the estate, and some factors 
completely out of the control, including, of course, when their 
time on Earth is gone, and some who have not put those estate 
plans in place.
    So my real question to you is actually something that Dr. 
Thorning suggested, and I quoted Dr. Thorning's words, 
``wasting society's resources,'' and again, an anecdotal 
situation that occurred yesterday is the reason that I bring it 
before this Committee.
    A representative of a family winery in my congressional 
district, second generation winery, and they are hopeful that 
it will be in the family to pass on to the next generation. 
They were very candid with me and said that they expend about 
between $30,000 and $50,000 a year on term life insurance, the 
proceeds of which would go to pay potentially the death tax. 
Now, I think that falls right in line with Dr. Thorning's 
representations, and others, who have said--Mr. Blethen, yours, 
that certain decisions about investments or whether to make 
them or not, or how to commit certain resources or not, is 
driven by the fact that we have this estate tax. Any comments 
on that, and not necessarily my family--I am not asking for a 
free estate plan here----
    Ms. Detzel. I have some ideas.
    Mr. Hulshof. But specifically, I mean, isn't that--in the 
example of my constituents say, that spending 30 to 50,000 a 
year in term life insurance, isn't that a waste of resources?
    Ms. Detzel. Well, I would absolutely agree, and I think 
that----
    Chairman Thomas. Ms. Detzel, I will have to remind you 
again, you need to turn the microphone on.
    Ms. Detzel. Sorry. I thought it was on. Excuse me.
    I would have to say that I agree with you, and that I think 
that--and the worst situation that your parents would be in 
would be they don't know where they fall, they don't know 
whether they are going to outlive whatever the repeal phase-in 
period might be, and wouldn't they be better served by having 
certainty of knowing that the estate tax is either repealed, or 
they have some large exemption, that they know what it is going 
to be and be able to fall within, and not be in this world of 
maybe this and maybe that, so maybe I have to buy term 
insurance for a while.
    Mr. Hulshof. And my comment--because my time is short--I do 
appreciate your willingness to be here and have us think about 
some of these issues, but I think you have hit--really, you 
have come to the crux of the matter, and that is, so long as we 
maintain some sort of estate tax, there will always be that 
uncertainty. It could be that a new interstate is built 
alongside someone's farm and suddenly the value of that farm 
has skyrocketed well beyond someone's knowledge at the time 
that they created a estate plan. So my belief is--recognize the 
Chairman's tapping of the gavel--as a final comment would just 
be, that as long as the United States Tax Code, the Internal 
Revenue Code, continues to have estate taxes, there will always 
be that uncertainty as to whether or not a family farm or 
family business would come within that estate tax, and 
therefore, is a compelling reason, as far as this 
representative is, to the need to see its complete repeal.
    Thank you, Mr. Chairman.
    Chairman Thomas. Thank the gentleman. Does the gentleman 
from North Dakota wish to inquire?
    Mr. Pomeroy. Yes, Mr. Chairman. I will begin by yielding 20 
seconds to the gentlelady from Florida.
    Mrs. Thurman. Thank you, Mr. Pomeroy.
    Back to Ms. Dunn. I just want to say first of all, we set 
limits on all tax bills. We always have 130, 150, 300,000, 
whoever, number one. And second, that was not an arbitrary 
number. It was based on the findings that it took in about 98 
percent of small business farmers, which was about 2 percent of 
the estate tax payers, and that is how that exclusion came up, 
which was how the whole dialog started, small businesses and 
farmers.
    Mr. Pomeroy. I thank the gentlelady, reclaiming my time.
    Mr. Stallman, good to see you again. Used to see you up 
there on the Ag. Committee, reminded you that it was North 
Dakota's three votes in that exciting Farm Bureau election that 
put you in as president, so I know you will be very interested 
in the view from the northern plains.
    Actually, there are two views from rural America about 
repeal of the estate tax, and the minority actually sought to 
have another farmer on this panel, but one with a very 
different position than yours, one opposing repeal. And I would 
just--you know, there is an awful lot of loose talk about the 
family farm in this estate tax debate. I just would like to put 
it into perspective.
    In 1998 about 2 percent of all estates were taxable. Of 
that 2 percent, 1.4 of the 2 percent had 50 percent of their 
assets in farmland. And so we are talking about 642 estates 
nationwide. Now, in your testimony, Mr. Stallman, you talked 
about these being the most productive farmers. You know, I 
don't necessarily agree that the biggest farmers are the most 
productive, the very, very biggest few, you talk about them 
producing most of the produce. They don't produce most of the 
produce. Most of the produce in this country is produced by 
family sized farmers, whose problem is having any net worth, 
not having a taxable net worth at estate tax time.
    I appreciate so the leadership though that you brought to 
your organization relative to farm program. You have asked 
for--actually, in January you signed a letter that indicated we 
ought to double ag. spending up to $18 billion a year. And your 
most recent position is we need $9 billion in emergency relief 
this year, an additional 12 billion over each of the years of 
the 9 years in this period, a total of 105 billion over 10 
years over the baseline. I agree with you. I think we need that 
kind of new investment in agriculture. Unfortunately, it is not 
reflected in the President's budget.
    And this really calls into focus, I think, what we are 
talking about with the tax bill. There are tradeoffs. We pass a 
larger tax bill, there is less we can do in other areas. Now 
you have said that repeal of the estate tax is your number one 
tax priority. Well, how does it compare to your priority of 
increasing the investment in agriculture along the lines that 
you have outlined? Would you say that building a farm bill with 
counter-cyclical price protection is a bigger priority for you 
than repealing the estate tax?
    Mr. Stallman. We could probably debate farm policy far 
beyond the tolerance of the Chairman.
    Mr. Pomeroy. And that is why I didn't even ask you that 
question. I asked you a pretty straightforward one, estate tax 
repeal or price protection in the farm program?
    Mr. Stallman. Well, my point would be that with respect to 
farm policy spending, where do those benefits go? You have a 
society where consumers spend the lowest amount of their 
disposable income of any society in the world. That is how you 
can----
    Mr. Pomeroy. In court, Mr. Stallman, we would say that is a 
non-responsive answer. Let us see you get one of these two 
priorities. I am just trying to understand your organization. 
Is improving the farm program your biggest priority of this 
Congress, or is repealing the estate tax your biggest priority 
of this Congress?
    Mr. Stallman. Those are both our priorities. We don't 
assign rankings on those priorities.
    Mr. Pomeroy. So they are equal priorities. That is helpful. 
Let us say that the repeal, because of cost factors, would 
include carryover basis replacing the present stepped-up based. 
Under that circumstance, would you support repeal with 
carryover basis, or would that give you cause to look at maybe 
increasing the exclusion instead?
    Mr. Stallman. Well, at the present time we are in support 
of the Dunn-Tanner Bill, and we don't speculate as an 
organization, about where we would be on particular issues or 
priorities until we see the legislation actually in place. We 
have an internal----
    Mr. Pomeroy. That is fair.
    Mr. Stallman. We have an internal process----
    Mr. Pomeroy. Do you oppose carryover basis?
    Mr. Stallman. Yes, we want to keep the stepped-up basis.
    Mr. Pomeroy. Again, to put it in perspective, I don't think 
the debate before this Congress is going to be repeal versus 
doing nothing, it is repeal versus reform. I favor a $5 million 
exclusion. I believe that the alternative considered will be in 
that range. Now, at that point in time, I mean USDA tells us 
1\1/2\ percent of all farms exceed 3 million. Let us take it up 
to 5. We are clearly dealing, in terms of the issues impacting 
the farmer, with the greatest issues that they face.
    Now, you mentioned that the estate tax is just so doggoned 
unfair we ought to repeal the thing. Do you think it is--you 
know, I got a lot more farms being lost and inter-generational 
transfer being disrupted due to nursing home costs than I do 
impact of estate costs. Do you think it is unfair that a family 
farm can't pass from one generation to the other due to nursing 
home costs?
    Mr. Stallman. I think anything that prevents the inter-
generational transfer of a farm and ranch is probably not, 
quote, ``fair.''
    Mr. Pomeroy. I absolutely agree with you. So then I think 
we need to deal with those points of unfairness interrupting 
transfer, that impact the greatest number of farms. I thank the 
gentleman.
    Chairman Thomas. I thank the gentleman. I thank the panel. 
I appreciate very much--oh, I am sorry, the gentleman from 
Texas, Mr. Brady.
    Mr. Brady. Thank you, Mr. Chairman, especially since we 
have a Texan on the panel, which I personally would like to 
point out, I like to have Texans on every tax relief panel that 
we have if we get a chance. Thank you, Mr. Chairman.
    Ms. Detzel, thank you for making the most articulate 
argument for substantial reform of the Tax Code that I have 
heard in some time, and thank you too for exposing the flaw in 
our Democratic friends' proposal. It is time for Washington to 
stop picking winners and losers in the Tax Code.
    And under their proposal, Mr. Stallman, many of your 
farmers we like under that proposal, so you win.
    Mr. Blethen, I am sorry, you don't fit our type, you lose. 
It is time for us to stop picking winners and losers in our Tax 
Code.
    Dr. Thorning, you made a very valid point, that if we look 
at it economically, repealing the death tax helps grow the 
economy, helps create more jobs, helps create new businesses, 
and actually helps pay for itself. Those are pretty strong 
arguments.
    Mr. Blethen, you made a point, or inferred one, that is 
real important. Today minority--the two fastest business types, 
minority and women-owned businesses, fastest-growing, some are 
building wealth the first time their generation, are now 
finding that they cannot pass that new wealth, those new 
businesses, those farms, down to their next generation. It is 
very critical we give them a chance, for a lot of reasons, to 
do that.
    Mr. Stallman, you know, it is easy. One of our former 
Presidents, in visiting Kansas City said, ``It's easy to be the 
farmer when you're 1,000 miles from the field. You've got a 
pencil for a plow.'' That happens here all the time, and while 
we talk about the cost of death tax repeal, I don't think 
people realize the cost to our communities when we lose our 
family farms. I don't think they understand, even have a clue, 
as how devastating it is.
    And my belief is we were asking you to make priorities 
here, but it seems to me if maybe we would just allow farmers 
to compete around the world for business, you wouldn't have 
some of these priorities that come up here. So thank you for 
being a leader in this effort.
    Finally, Ms. Coakley David, let me tell you my story, in 
one minute, Mr. Chairman. I had a nursery from our district 
come up here to Washington, all the way to Washington, and the 
two children who worked in the family nursery, had for a long 
time--one of the brothers didn't--but they just went through on 
paper how the death tax worked for them. And what they showed 
me, was even with the improvements we made a couple years ago, 
that basically, if they could afford enough life insurance, and 
if they could get a loan when their parents died, they might be 
able to keep their family nursery. Now, think what they were 
telling me. ``If we can make enough money off our parents' 
death, and if we can go back into debt, which we have worked a 
lifetime getting out of, by the way, then we might be able to 
keep our own business.'' That is wrong, and it is terribly 
unfair. And people have different visions of what Washington 
should be, but the least, we ought to be fair to people, and 
our Tax Code ought to reflect that. So I just want to thank all 
the leadership that you have given to NFIB and the farm bill, 
your personal perspective, Mr. Blethen, and thank the 
panelists.
    Thank you, Mr. Chairman.
    Chairman Thomas. I want to apologize to the gentleman from 
Texas, and I do once again want to thank the panel. It was 
especially informative, especially your willingness to discuss 
each other's positions. It is very valuable for the Committee 
to see that sort of interaction. I know a lot of members would 
like to simply have it go one way, but having a three-way 
discussion allows us to better understand it from a real-world 
point of view. And I want to thank the panel very much for 
their time and consideration.
    At this time the Chair would call, as we say, the last but 
certainly not the least, a panel, Mr. Edward O'Connor, First 
Vice President, Retirement and Education Savings at Merrill 
Lynch, and he will be representing the Savings Coalition of 
America. Mr. Kenneth Gladish--Dr. Kenneth Gladish, National 
Executive Officer, YMCA of the United States, speaking for the 
Independent Sector. Mr. Robert Canavan, who is Chairman of 
Rebuild America's Schools Coalition, accompanied by Mr. Vallas, 
who is the CEO of the Chicago Public Schools System.
    Given the way you sat down, I would tell you that each of 
you, if you have written testimony, it will be made a part of 
the record, and you can address us in any way you see fit. And 
perhaps we will start to your right and my left with Mr. 
Vallas, and then work to Mr. O'Connor and Mr. Gladish.
    The microphone needs to be turned on, and you need to speak 
directly into it.

  STATEMENT OF ROBERT P. CANAVAN, CHAIRMAN, REBUILD AMERICA'S 
                            SCHOOLS

    Mr. Canavan. Mr. Chairman, just very briefly, I am Robert 
Canavan, chair of Rebuild America's Schools, and if I may, I 
will submit my written testimony for the record. Mr. Vallas, 
the chief operating officer of the Chicago Public Schools will 
present the Coalition's oral testimony.
    Thank you for having us here, Mr. Chairman.
    [The prepared statement of Mr. Canavan follows:]
  Statement of Robert P. Canavan, Chairman, Rebuild America's Schools
Modern Schools: Helping Students Achieve Accountability
    Mr. Chairman and Members of the Ways and Means Committee: Thank you 
for the opportunity to address the Committee in the context of the 
President's revenue provisions. Rebuild America's Schools recognizes 
the President's emphasis on education in his budget and revenue 
proposals. Leaving No Child Behind is the goal and objective of public 
education. We believe parents, school boards, educators, and community 
leaders in urban, rural and suburban school districts across America 
are committed to meet the President's challenge.
    Rebuild America's Schools also supports the President's call for 
accountability. Schools boards, teachers, parents and students are 
ready to be accountable. But, as we call for greater accountability, we 
should also make sure that the students' workplace--where he or she is 
performing and being accountable--is a safe, modern learning 
environment.
    We need to give students the classrooms that will help them 
succeed. A clean, safe, modern classroom is more likely to help a child 
succeed than a dark, overcrowded, hot or cold, under-equipped classroom 
built for the 1950's not the 21st Century.
    We read an interesting parallel in the Wall Street Journal of March 
19th about Treasury Secretary O'Neill's concern for safe working 
environments. Secretary O'Neill is quoted that his focus on worker 
safety and worker relations ``. . . is a precondition for beginning to 
get people to believe that you care about them and that they matter as 
human beings.'' Our coalition asks what is the message we are giving to 
America's students if they are not provided clean, safe, up to date 
work environments in their schools?
    Rebuild America's Schools thanks Congresswoman Johnson and 
Congressman Rangel for the leadership they are providing on the 
important issue of school facilities. Their ``America's Better 
Classrooms Act'' will give local communities a tool to finance modern 
schools to help students meet the President's challenge.
Rebuild America's Schools: $268 Billion Necessary to Modernize Schools
    Rebuild America's Schools is a national coalition of education 
organizations, school boards and districts, PTAs, architects--all 
helping local communities find the resources to give their children 
modern classrooms.
    Rebuild America's Schools Coalition was organized in 1997 in 
response to the 1996 Government Accounting Office Study documenting the 
national cost to renovate and repair school building at $112 billion. 
Communities across the country knew they were struggling at the local 
level to find the resources to finance school repairs and renovations. 
The GAO study documented that schools in every state were in need of 
repair and modernization.
    Since the GAO study in 1996 subsequent reports placed the estimates 
for school repair even higher. In1999 the National Center for Education 
Statistics estimated repair costs at $127 billion. A study by the 
National Education Association projected the cost of renovating, 
repairing schools and building new schools, for rising student 
enrollments, to be $268 billion. This need was documented again in the 
recently released report of the American Society of Civil Engineers 
grading federal support for infrastructure. Schools again received the 
lowest grade, D-.
    The American Institute of Architects estimates that thousands of 
schools--all across the nation in urban and rural schools are in 
desperate need of repair. Nearly, 60 percent of the schools need either 
new roofs, plumbing or heating systems, or electrical power and 
lighting systems. Many of these schools were built nearly 50 years ago 
and most cannot accommodate growing enrollments. The AIA also estimates 
that 36 percent of schools use portable classrooms. There are at least 
16,000 portable classrooms in use in Florida. More than 2 million 
California school children attend classes in portable classrooms.
    The need is real.
California: One State's Student Enrollments as an Illustration
    The California Federal School Infrastructure Coalition supports 
Rebuild America's Schools. Cal-Fed has written to the Committee on this 
issue and I will use their information to illustrate one state's school 
construction situation. Every state faces the same problems to 
differing degrees.
    The California Department of Finance estimates that California's 
student population will grow by an average of 37,653 pupils per year 
between 2000-2005. Currently, California has a K-12 student population 
of approximately 5,951,612 students. Projections are that by the year 
2005, California will have a student population base of 6,134,412 
students.
    In 1998 California voters passed Proposition 1A that provided state 
funds for modernization and new construction. The state funding from 
the proposition requires a match from local school districts. The 
entire $2.1 billion has been apportioned to school districts and there 
is a pending project list totaling over $1 billion. These state funds 
were intended to last through 2002.
    Despite this investment, the additional need for deferred 
maintenance and modernization in California over the next five years is 
estimated conservatively at $7 billion while new school construction 
needs are estimated to exceed $9.6 billion.
    To illustrate these costs, a 1999 estimate placed the cost of a 
600-student elementary school at $7.75 million in California. A 1,000-
student middle school would cost $13.75 million and a 2,000-student 
high school would cost $36 million if not higher. Many communities in 
California will have to build more than one elementary school, more 
than one middle school and more than one high school per year.
    School districts and voters in California are struggling to provide 
the resources to meet these documented needs. Federal support does 
help. California has succefully used the Qualified Zone Academy Bond 
program (QZAB) to renovate, repair, and reform programs helping to 
create innovative and model schools.
    As of January 2001 California has fully allocated the QZAB 
allocations for 1998, 1999, 2000, and 2001 totaling approximately 
$222,488,000. Local districts have requested an additional $85,000,000 
for QZAB projects.
    Some of the successful QZAB projects include a Technology Academy 
in the Pomona Unified School District, the Center for Advanced Research 
and Technology in the Clovis and Fresno Unified School districts, and 
two Computer Certification Academies in the Baldwin Park Unified School 
District. An extension or expansion of the QZAB program would be 
quickly utilized in California and other states as well.
    In addition to California, QZABs are being used in 23 of the 25 
states represented by members of the Ways and Means Committee.
America's Better Classrooms Act: Leveraging Federal Support Through 
        School Modernization Bonds
    State and local governments are trying to provide the school 
facilities that will Leave No Child Behind. But, state and local 
resources cannot address the magnitude of the problem. There is a role 
for the federal government. The federal government supports 
transportation, and science--areas of national interest. Maintaining 
our public schools and providing students safe schools and classrooms 
is in the national interest.
    Congresswoman Johnson and Congressman Rangel and members of this 
committee on both sides of the aisle have introduced H.R. 1076 the 
America's Better Classrooms Act. This bill will use an estimated 
federal investment of $2.7 billion over 5 years to leverage almost $25 
billion in local school construction bonds. This is a frugal and wise 
investment.
    In the 106th Congress 231 members of the House cosponsored the 
America's Better Classrooms Act. We expect a clear bipartisan majority 
of the House to again support this legislation. Providing students the 
decent, modern classrooms they need to learn and succeed is an issue 
that should unite members from both sides of the aisle.
    As this Committee addresses the issue of tax reduction, Rebuild 
America's Schools believes Mrs. Johnson's and Mr. Rangel's bill 
provides local property tax relief. Local communities are constantly 
struggling to balance local tax rates with the need to modernize 
existing schools and to build new schools. The America's Better 
Classrooms Act uses a tax credit in lieu of interest to support local 
community efforts to finance school construction bonds. The interest 
saved through the Johnson Rangel tax credit over the life of the 
typical school bond will lessen the burden of local property tax 
necessary to finance the bond.
School Modernization Tax Credits: Local Decision Making
    The school modernization bonds in the America's Better Classrooms 
Act provide a federal tax credit in lieu of interest. The 
responsibility for the bond principal is with the states and local 
communities.
    At the same time, all decision-making prerogatives related to the 
actual school renovation and construction remains a local community 
decision. The federal government provides an interest subsidy while 
leaving the decisions about the construction of the schools at the 
local level. The Johnson Rangel bill allocates the credits to the 
states through the Treasury Department. States then make sub-
allocations to school districts. That is the extent of the federal 
involvement. Decisions about where to build, how to build and what to 
build are made at the local level.
Private Activity Bonds: One of a Menu of Options
    The President has proposed private activity bonds as a means to 
address the nation's school facility problems. We appreciate that this 
proposal recognizes the need for federal support for local school 
districts. Private activity bonds, which require the participation of a 
developer, can be used by some school districts. Some school districts 
may be able to find such a partner. But, other districts will not. Many 
more will have difficulty finding the resources through their operating 
funds to pay the required lease fees. For example, in California, 
school districts do not have the revenue source to make lease payments 
to a developer constructing a school through private activity bonds.
    Many rural schools will have difficulty finding a developer to 
build a school with private activity bonds. Rebuild America's Schools 
and Organization Concerned About Rural Education (OCRE) estimate that 
one out of every two public schools in America is located in a rural 
area or small town. Thirty-eight percent of America's students go to 
schools in rural areas. Forty-one percent of public school teachers 
work in rural schools. Rural communities will have difficulty using the 
private activity bonds.
    If combined with Mrs. Johnson's and Mr. Rangel's school 
modernization bonds private activity bonds could be part of a menu of 
federal options available to help school districts address their 
pressing school construction needs.
Conclusion
    Rebuild America's Schools appreciates the attention the Ways and 
Means Committee is giving to the issue of federal support for local 
community efforts to modernize schools. The Committee included some 
components of the America's Better Classroom Act in the tax bill passed 
last year. Rebuild America's Schools asks the Ways and Means Committee 
to include the America's Better Classrooms Act school modernization 
bonds and the QZAB extension in addition to the private activity bond 
proposal in your education tax package this year.
    Students need and deserve safe, modern classrooms to achieve the 
standards called for by the President.
    Thank you Mr. Chairman and Members of the Committee.

                                


    Chairman Thomas. Thank you for coming.
    Mr. Vallas.

  STATEMENT OF PAUL VALLAS, CHIEF EXECUTIVE OFFICER, CHICAGO 
                         PUBLIC SCHOOLS

    Mr. Vallas. Well, fine. Thank you very much.
    As a member of the Coalition, I was asked to come here 
today to really put a human face on how school construction 
support can be of benefit to local school districts.
    Very quickly, and I will certainly try to be quick, just a 
perspective on the Chicago Public Schools. Chicago has 601 
schools, 435,000 students. In 1995, when the Mayor was given 
full responsibility over the schools, only 10 percent of those 
schools were in good condition and about a fifth of our schools 
were built right around the turn of the century and hadn't been 
renovated in decades. Today, 5 years later, we have 70 new 
schools, additions and annexes and over 500 major renovations. 
And by September of next year, all of my high schools will be 
fully wired and fully ``Internetted'' in virtually every single 
classroom.
    If you are familiar with what has happened in Chicago, with 
the rising test scores, and the increasing graduation rates, 
and increasing enrollment, clearly, the success is, in part, 
due to the fact that our schools have been renovated, and most 
of them have been renovated, and they are modern facilities. 
But we still have about $2.5 billion in need. We have come 
close to addressing about 60 percent of our needs. Eighty-one 
percent of all of the money that has gone into renovating our 
schools, we have already spent close to $3 billion, has come 
from local effort, mainly property taxes--18 percent from the 
State and only 1 percent from the Federal government.
    Our additional needs are to provide us with overcrowding 
relief, to continue to renovate our obsolete buildings, to 
upgrade facilities for our E-rate qualifications and to upgrade 
facilities for the ADA requirements, which remains an 
underfunded Federal mandate.
    Let me point out that I would like to make a few comments 
about Johnson-Rangel proposal. First of all, we have been 
strongly in support of this proposal we consider it to be far-
reaching. It also allows us, as a school district, to leverage 
a considerable amount of money at a modest cost to the Federal 
government. I think it is $6.8 billion over 10 years. Twenty-
five billion would be raised. For Chicago, alone, that could 
generate $537 million and cut our borrowing costs in half.
    We have been, in Chicago, strongly supportive of financial 
support to parochial and private schools. We share many 
facilities. We support parochial school charters. We don't 
oppose vouchers. We have a growing charter school population in 
Chicago, so it is not a public-parochial school issue.
    The proposal requires local effort. We have to issue the 
bonds in order to take advantage of the tax breaks, so the 
local effort is there, and it also is a proposal that places 
maximum effort on local autonomy and local control. So, to a 
certain extent, school districts still control their own 
destiny because they are the ones who have got to decide 
whether or not they are going to make that a local effort.
    Now, that said and done, that does not mean we are in 
opposition to other measures. We support the use of the Tax 
Code to promote investment in school construction and repair, 
whether they are things like investment tax credits or doing 
something through the capital gains or doing something through 
private activity bonds. But the bottom line is, each of those 
proposals will always have a limited impact of the limited 
market. We think a combination of proposals will make a 
difference. We truly believe that the Johnson-Rangel bill is 
most far-reaching and will have the broadest impact, as pointed 
out by my testimony.
    In the fifties, the Eisenhower administration built the 
interstate highway system in the name of the national security, 
and of course Governor Stratton, who recently passed away in 
Illinois, Republican Governor, was also instrumental using the 
national security issue to do the local investment in the 
interstate highway system. We certainly consider education and 
the building of the school infrastructure no less a national 
security issue today than the interstate highway system was in 
the 1950s. We certainly think it is something that is going to 
have a long-term far-reaching impact.
    But we are a school district that has invested a 
considerable amount of money. We do need support to finish the 
job. There are districts in far worse shape than us who have 
not even begun to do their renovations, and we are certainly 
here to be supportive and cooperative in any way. We think, 
ultimately, a smorgasbord of proposals will probably be needed 
on the part of the Federal government to truly help the locals 
complete the job, but the Johnson-Rangel bill we think can be 
the cornerstone of any comprehensive approach to help local 
school districts, deal with their critical infrastructure 
needs.
    Thank you very much.
    [The prepared statement of Mr. Vallas follows:]
   Statement of Paul Vallas, Chief Executive Officer, Chicago Public 
                                Schools
    Good afternoon everyone, and thank you House Ways and Means 
Committee chairman and members for the opportunity to discuss how the 
federal government can help us at the local level rebuild America's 
schools.
    Since 1996, the Chicago Public Schools has committed $2.6 billion 
to improving school infrastructure through our Capital Improvement 
Program.
    Our main objectives have been to reduce overcrowding, improve the 
physical condition and operating efficiency of school facilities, and 
improve the overall quality of the learning environment at each school.
    As a result, we have 15 new schools, 29 additions and 27 annexes 
completed or underway. We have more than 1,100 renovation projects such 
as new roofs, tuck-pointing and windows; 70 campus parks; 247 new 
playlots; 14 athletic fields and stadium renovations; and have added 
1,100 new classrooms. Overall, our efforts have increased student 
capacity by 32,000.
    In order to fund these projects, we have utilized the Qualified 
Zone Academy Bonds thoughtfully created by Congressman Charles Rangel. 
Congressman Rangel, we thank you for your leadership in this program.
    CPS was the first school district to use the QZAB, which helped 
build Chicago's first public JROTC academy. In December, CPS had its 
third consecutive annual QZAB issuance, which generated $13.4 million 
for school improvements at five high schools.
    Now that the QZAB is in its last year, we are asking that it be 
extended so more CPS schools can benefit. We also thank Congressman 
Weller, for exploring the issue of reallocating unspent QZAB funds to 
states like Illinois, which have used their entire allocations every 
year since the program began.
    We also have relied heavily on state and city revenues to rebuild 
the schools in the nation's third-largest school district.
    However, more revenue is needed, and CPS and Chicago's taxpayers 
cannot continue to fund the expanding costs of this program alone.
    CPS still needs an estimated $2.5 billion to complete additional 
improvements, and the federal government should help shoulder this 
load.
    Federal funding could be used to construct more new schools to in 
turn relieve overcrowding and replace obsolete buildings. Funds, also, 
are needed to renovate existing schools, including the electrical 
upgrades necessary to support the low voltage E-Rate wiring discounts 
and bringing the schools in compliance with the Americans with 
Disabilities Act--an unfunded Federal mandate.
    School construction is important in America for three reasons.
    First of all, it allows students to learn in a clean and safe 
environment that does not distract from the school day.
    How can students be expected to concentrate when there are leaks in 
the ceiling, a draft from a broken window or when they are housed in a 
building that is more than 100 years old? These problems send students 
the message that they are not important, and that's not the message we 
want to send.
    In fact, what we are trying to do is fulfill a second purpose for 
capital improvement programs, which is to equip schools with state-of-
the-art labs and technology. These facilities will prepare students to 
be a competitive part of America's workforce.
    Lastly, school construction means more jobs for America's current 
workforce. Take CPS for example, 52 percent of our construction work 
has been done by Chicago residents and 54 percent of the work was 
completed by minority- and women-owned businesses. Every school 
district and city could benefit economically from construction programs 
like these.
    To reiterate Chicago Board of Education President Gery Chico's 1999 
testimony before the House Ways and Means Committee, the federal 
government's response to America's school construction needs must be 
simple, flexible, substantial and immediate.
    We need to develop a significantly larger, long-term, permanent 
partnership between the Federal government and state and local 
governments in funding school infrastructure needs--a partnership 
similar to that which exists in transportation. Just as the Eisenhower 
administration justified the interstate highway system investment as 
necessary to protect the national security interest, the federal 
government must ensure the future security of the nation by investing 
in school infrastructure.
    A federal program should also support infrastructure funding 
through a dedicated revenue source and include private and parochial 
schools, among other things.
    President Bush's inclusion of private activity bonds in his 
Education Plan is proof that school construction is still a national 
issue. In Chicago, this has been our philosophy for the past six years.
    That is because we have realized that what happens in our school 
district affects other school districts, and vice-versa. So together, 
we have and will continue to share ideas on how to improve America's 
schools for all students.
    Now we are again asking the federal government to take a more 
significant role in improving schools as well.
    Thank you.

                                


    Chairman Thomas. We thank the Coalition very much.
    Mr. O'Connor.

STATEMENT OF EDWARD O'CONNOR, FIRST VICE PRESIDENT, RETIREMENT 
AND EDUCATION SAVINGS, MERRILL LYNCH & CO., INC., ON BEHALF OF 
                  SAVINGS COALITION OF AMERICA

    Mr. O'Connor. Thank you, Mr. Chairman and the Committee, 
for the opportunity to express our strong support for the 
President's proposals to promote education savings.
    I am Ed O'Connor, first vice president of Retirement and 
Education Savings at Merrill Lynch & Co. I see day in and day 
out the challenges people face in trying to save for their 
children's education and for their own retirement. I must say I 
have been in the business for 15 years, and I have really 
sensed very recently the additional stress that American 
families are having in being concerned about retirement and 
education savings, more than any other time in my career.
    I am here today on behalf of the 75-member organizations of 
the Savings Coalition of America that have joined together to 
support incentives to increase personal savings. At the outset, 
I would like to commend the President for his proposals to 
provide individual tax relief. One positive way to reduce the 
tax burden on Americans is to reduce the anti-savings bias in 
the Federal tax law. By giving incentives to save, we will not 
only reduce the individual tax burden, but also ensure that 
important future education and retirement needs are met and 
generate increased national savings that will fuel continued 
economic growth.
    Mr. Chairman, your leadership on savings issues, including 
IRAs, is well-known. My testimony today focuses on the critical 
task of helping American families prepare for the cost of 
higher education, but before I discuss those issues, I would 
like to encourage this Committee to continue its great efforts 
to enact the truly bipartisan retirement savings legislation, 
like the bill introduced by Representatives Portman and Cardin.
    Increasing retirement savings must be a critical national 
priority. Changes should include four key elements: The first 
is to increase the IRA contribution limit to $5,000; the second 
is to increase allowable contributions to the various salary 
reduction plans we have; thirdly, we should allow meaningful 
catch-up contributions to IRAs and salary reduction plans for 
those who are approaching their retirement; and, fourth, we 
should enhance the portability of the various retirement 
programs.
    Efforts in the retirement area would address a very 
important issue for Americans, and efforts in education savings 
addresses the other one. The high cost of attending college is 
well-documented. In the past, most families have been forced to 
fund college through a combination of pay-as-you-go financing 
and pay-after-you-go student loans. Until recently, Federal 
government education programs focused only on financial aid and 
loans. Please don't get me wrong. Student loans have helped 
many millions of Americans, including myself, to attend college 
and should continue to play a part in financing higher 
education, but a college education financed merely with student 
loans can place a significant financial burden on an American 
family as they strive to build their career and/or their 
family.
    A dear friend of mine and neighbor is just this week making 
her final student loan payment. She is a mother of three, and 
she is 46 years old. Just last year, she put her oldest 
daughter into college. So here she is beginning a new financial 
burden before she finished her first financial burden.
    We believe that the best way to finance college is to save 
as much as possible and as soon as possible. If the Federal 
government provides meaningful saving incentives, millions of 
more Americans will begin to save more and start sooner, and be 
able to meet all or most of the college costs that are in front 
of them.
    Only in the last few years, with the creation of the 
Education IRA and section 529-qualified State tuition plans, 
has the signal been sent that saving for college ahead of time 
is important. While both the education IRA and section 529 
plans have helped, they have the potential to do much more than 
they do today. My written testimony highlights a number of 
relatively modest changes that would improve education savings 
substantially. I will highlight two.
    To date, the education IRA has had only a limited impact on 
education savings, and this is, in large part, because of the 
unrealistically low $500 annual contribution limit. Five 
hundred dollars per year clearly is not enough. For a child 
born today, if the maximum $500 contribution were made to a 
child's education IRA each year, that child will be lucky to 
have enough just saved for the first year of school in college. 
We support the President's proposal to allow at least $2,000 
per year in education IRA contributions.
    The second proposal is regarding section 529 programs. 
These are, as you do know, the State-run tuition programs, and 
they have become an effective savings tool for higher 
education, but here also certain modest improvements could 
greatly increase their effectiveness. In particular, 
distributions from section 529 plans that are used for higher 
education expenses should not be subject to Federal tax. 
American families should not have to save additional after tax 
dollars to pay taxes on dollars dedicated for college.
    Thank you, Mr. Chairman and the entire Committee. Let us 
not forget that retirement savings is preparing for our future, 
and education savings is investing in our future.
    Thank you.
    [The prepared statement of Mr. O'Connor follows:]
  Statement of Edward O'Conner, First Vice President, Retirement and 
  Education Savings, Merrill Lynch & Co., Inc., on behalf of Savings 
                          Coalition of America
    Thank you, Mr. Chairman, for giving us the opportunity to express 
our strong support for the proposals to promote education savings that 
are contained in the President's budget. I am Ed O'Connor, First Vice 
President, Retirement and Education Savings at Merrill Lynch & Co., 
Inc. In that capacity, I see day in and day out the challenges people 
face in trying to save for their children's education and their own 
retirement. The President's proposals and other similar pro-savings 
proposals of Members of this Committee will go a long way in helping 
Americans meet those critical savings challenges.
    I am here today on behalf of the Savings Coalition of America. The 
Savings Coalition was established in 1991 to support incentives to 
increase personal savings in the United States. Its main objective is 
to win passage of expanded Individual Retirement Account (IRA) 
legislation for all Americans. There are approximately 75 member 
organizations of the Savings Coalition representing a wide variety of 
private interests including banking, securities, financial services, 
consumer groups, engineering, home-building, realtors, intangible 
assets, trust companies, health care industry, insurance, education and 
business groups.
    At the outset, I would like to commend the President for his tax 
relief proposals, and, in particular, his proposals to provide American 
families with expanded tax incentives to save for education expenses. 
With taxes consuming an ever-larger amount of Americans' income, we 
salute the President's efforts to reduce the individual tax burden. One 
positive way to reduce the tax burden on Americans, while also to 
fulfilling other important national objectives, is to alleviate the 
anti-savings bias in the federal tax code. By providing families with 
enhanced savings incentives, not only will the individual tax burden be 
reduced, but important future education and retirement needs will be 
financed. As a bonus, we will generate the increased national savings 
that is critical to fueling continued economic growth in the future.
    In recent years, this Committee has been pivotal in providing 
American families with exciting new tools for retirement and education 
savings. Mr. Chairman, your leadership on savings issues, particularly 
with respect to expanded IRAs, is well-known. Similarly, the bipartisan 
efforts of Representatives Portman and Cardin and many other Members of 
this Committee with respect to retirement savings are well documented. 
With the strong leadership of this Committee, I believe that we have a 
historic opportunity to reduce Americans' taxes, increase savings, and 
solidify the education and retirement future of millions of Americans.
    In my testimony today, I will focus on the critically important 
task of helping American families prepare for the costs of higher 
education. Before reaching those issues, the Savings Coalition of 
America, on behalf of millions of American savers, would like to 
encourage this Committee to continue its efforts to enact bipartisan 
retirement savings legislation introduced last week by Representatives 
Portman and Cardin, along with more than 250 of their House colleagues. 
Enhanced retirement savings opportunities must be a critical national 
priority. Changes should include (1) increasing the IRA contribution 
limit to $5,000, (2) increasing allowable contributions to salary 
reduction plans (such as 401(k) plans, 403(b) arrangements, 457 plans 
and SIMPLEs), (3) allowing meaningful catch-up contributions to IRAs 
and salary reduction plans for those approaching retirement, and (4) 
enhanced portability of retirement assets between plans. Efforts in 
that area would complement the increased education savings 
opportunities that I will address in my testimony today.
Background
    Families confronting college education costs for one child face a 
formidable challenge. For families with two, three or more children, 
college education costs can be overwhelming. In the past few years, 
Congress has created two new savings tools to help American families 
prepare for education expenses--the Education IRA and section 529 
qualified state tuition plans (QSTPs). While both the Education IRA and 
QSTPs have helped American families meet their education savings 
challenges, they have the potential to do much more. Indeed, based on 
our experience on the front lines of college financing, we believe that 
enactment of a few relatively modest changes described below could 
improve Education IRAs and QSTPs substantially.
    The high cost of getting a college degree is well documented. Since 
the early 1980s, the cost of college has increased at a significantly 
faster pace than inflation. Today, most families fund college education 
through a combination of pay-as-you-go financing (e.g., part time jobs 
for the student) and pay-after-you-go student loans. Over the last two 
decades, as college tuition and other education costs have continued to 
rise, direct financial aid has diminished. As a result, it has become 
more and more difficult for families to cover college expenses as they 
are incurred. That, in turn, has meant that student and parent loans 
have been used to finance an increasing share of higher education 
costs. For many, the price of a college education now involves having 
to deal with an overwhelming repayment burden for many years after 
graduation. When the interest costs on these loans are factored into 
the cost of education, the burden imposed on American families becomes 
even greater.
    The difficulties in financing higher education are also getting 
worse because the level of education and specialization required to 
compete is rapidly increasing. In the 1970s, a college degree replaced 
a high school diploma as a prerequisite for many jobs. Today, four 
years of college is often not enough training. Instead, it has become 
increasingly common that graduate studies are necessary to stay current 
with either the technology or techniques in a given career. This 
necessary post-graduate study further increases the total costs of 
higher education.
    Federal government programs and policies have historically been 
designed to help people deal with the burdens of college through 
assistance with these pay-as-you-go and pay-after-you-go methods of 
financing. Over the years, Federal assistance has taken many forms, 
including grants and other financial aid, tax credits, subsidized 
higher education loans, and tax advantages for student loans (such as 
the ability to deduct student loan interest). Until the last few years, 
those who have wanted to save for college in advance have received 
little incentive from the federal government.
    Having said that, Mr. Chairman, I also want to stress that we do 
not believe that student loans (and other federal programs) to help pay 
for college education are bad. Just the opposite, student loans have 
helped many millions of Americans attend college. However, by focusing 
efforts primarily on assisting with pay-as-you-go financing and 
subsidized loans, the federal government has sent a strong signal that 
advance funding of college was not very important. To the contrary 
though, most families with children will need a wide range of 
resources--substantial education savings, federal grants and loans, 
student jobs, etc.--to meet their higher education needs.
    With this backdrop, it becomes clear that the best way to finance 
college education with the least disruption for families, and the 
smallest financial burden after college graduation, is to save as much 
as possible for college in advance. By saving before a child reaches 
college age, families can help ensure that adequate funds will be there 
to allow their children to attend college. Moreover, by beginning an 
education savings strategy for a child at an early age, the family 
further reduces its overall burden through theso-called ``miracle of 
compounding.''
    Education IRAs and QSTPs are excellent tools for increasing 
education savings for the entire family. One aspect of the Education 
IRA and QSTP savings programs that is often overlooked is that they are 
savings vehicles for the extended family. We have found that 
contributions do not only come from parents. They come from 
grandparents, aunts, uncles, and others who want to contribute to a 
loved one's future education. Often the grandparent may be 
uncomfortable giving money directly to the grandchildren (or the 
grandchildren's parents), perhaps because they are concerned that the 
funds may be expended for another purpose before matriculation. Yet 
those same grandparents are comfortable setting up an Education IRA or 
QSTP for each of their grandchildren. In providing a mechanism that 
allows these extended-family members to contribute to a child's higher 
education costs, these education savings vehicles have opened up new 
avenues for college savings.
    Despite those and other advantages, there is still a need to 
improve education savings programs. Many commentators have rightly 
criticized the anti-savings bias in the tax code, and a logical step in 
alleviating that bias is through enhanced incentives for education 
savings--where there is a real chance that each dollar of new savings 
will also mean a dollar less of debt incurred through student and 
private loans.
Improving the Education IRA
    When first created in 1997, the Education IRA held out hope as a 
potentially critical new education savings vehicle for American 
families. By giving a tax advantage for college savings, the Federal 
government sent out a highly visible signal to American families that 
saving in advance for a child's higher education costs must be a high 
priority.
    In spite of this great potential, the Education IRA has had only a 
limited impact. While helping some families meet a portion of higher 
education costs, the Education IRA has not reached its full potential 
for a number of reasons--particularly the unrealistically low $500 
annual contribution limit. Indeed, we frequently hear feedback from 
parents, grandparents, and other customers that the account is simply 
inadequate to meet more than a small fraction of the education savings 
need. In addition, the Education IRA rules need to be simplified. 
Complex restrictions on eligibility and ``fine print'' on the 
availability of favorable tax treatment confuse people and scare them 
away from contributing, further discouraging use.
    Increasing the $500 Contribution Limit. The current $500 maximum 
contribution to an Education IRA is woefully inadequate. For a child 
born today, if the maximum $500 contribution were made to the child's 
Education IRA in each year, that child would only have about $17,000 by 
the time he or she reached college age in 2019 \1\--an amount that 
could be little more than is needed to fund one semester's tuition, 
room and board at an in-state public institution.
---------------------------------------------------------------------------
    \1\ Assumes seven percent annual rate of return on investment in 
the Education IRA.
---------------------------------------------------------------------------
    The $500 contribution limit also creates many other problems that 
severely limit the effectiveness of the Education IRA. First, during 
the early years of an Education IRA, the account balance is so small 
that the broadly available savings vehicles, whether bank or brokerage 
accounts, mutual funds, or annuities, have administrative costs that 
could exceed any earnings. For example, if a financial institution 
charges only $20 annually to administer an Education IRA, the assets in 
the account would have to earn more than 4 percent just to break even 
during the first year the account is in existence. In addition, many 
products require an initial investment greater than $500. People 
understand this, and many are reluctant to begin savings through a 
vehicle that could lose them money during the early years.
    Equally important, the small account size that flows from the 
current $500 contribution limit has meant that many financial 
institutions do not even offer Education IRAs to their customers. For 
those institutions that have incurred the expense of offering Education 
IRAs, advertising has been minimal. If we are to get American families 
focused on the importance of saving for college early, we need to make 
them more aware of the scope of the financial crunch that comes when 
children begin college. Advertising of Education IRAs would be an 
effective instrument for educating the American people about the 
importance of college saving. Significant advertising is unlikely to 
occur as long as the maximum annual Education IRA contribution is $500.
    For these reasons, we believe that the annual Education IRA 
contribution limit should be increased substantially and we commend the 
President for his proposal to provide up to $2,000 per year in 
contributions. At that level, significant advertising could be expected 
and many of the small account problems would be eliminated for most 
contributors. Equally important, if the savings begins early enough in 
the child's life, this higher contribution limit could go a long way 
toward financing the total cost of a college education.
    Allowing Catch-Up Contributions. The members of this Committee may 
also wish to consider those who are already approaching college age. 
For a family with a child aged fourteen, even $2,000 per year would 
only fund a portion of the cost of attending college. In the retirement 
area, bipartisan proposals have included ``catch-up'' contributions 
that would allow those approaching retirement (i.e., age 50 and older) 
to make increased contributions to their IRAs and employment-based 
retirement plans. A similar catch-up concept would make a great deal of 
sense for children over a specified age (e.g., age 13 or older).
    Extending the Deadline for Contributions. Further confusion is 
caused by the rules governing timing of contributions to Education 
IRAs. Today, an Education IRA contribution for a year must be made by 
December 31st of that year. This is different from the rule that 
applies to all other IRAs. For all other IRAs, contributions can be 
made at any time through the due date of the individual's tax return. 
People understand the IRA rule and do not understand why the Education 
IRA rule should be different. Having the same deadline for all IRA 
contributions (including traditional IRAs, Roth IRAs and Education 
IRAs) would reduce confusion.
    Perhaps more important, the IRA approach to the timing of 
contributions has proven very successful in increasing IRA 
contributions. A substantial portion of total IRA contributions occur 
after the close of the year. We have found that one of the main reasons 
is that many individuals do not focus on the need to contribute until 
they focus on the amount of tax they are paying. For others, a tax 
refund may provide an ideal resource for saving. If that refund is not 
saved right away, however, it often will not remain unspent for long. 
For these reasons we strongly encourage the Committee to modify rules 
on timing of Education IRA contributions to track the rules currently 
applicable to all other IRAs.
    Improving Distribution Rules. Another element of unnecessary 
complexity in the current Education IRA results from uncertainty 
regarding the tax treatment of distributions. Under the rules currently 
in effect, amounts distributed from Education IRAs are excludable from 
gross income to the extent that the amounts do not exceed qualified 
higher education expenses during the year of the distribution. That is 
a fair and easy rule to understand--if you use the money for college 
costs, you do not pay tax.
    The problems with the current distribution rules arise in the 
interaction of the Education IRA tax treatment and the HOPE and 
Lifetime Learning credits. Today, if the HOPE or Lifetime Learning 
credit is claimed with respect to a beneficiary for the year in which 
the Education IRA withdrawal is made, then the Education IRA loses its 
tax-advantaged treatment. This is true even if the family is entitled 
to a HOPE credit or Lifetime Learning credit with respect to some 
college expenses and the student is making the Education IRA withdrawal 
to pay other expenses.
    Although some type of rule to prevent ``double dipping''--claiming 
the HOPE or Lifetime Learning credit for the same expenses that are 
paid out of the Education IRA--makes sense, the current rule is a clear 
case of overkill. For the Education IRA to be successful, individuals 
making contributions need to know with considerable certainty that they 
will get the tax benefit if they use the account to cover college 
costs. As a result, we recommend that the current rule denying all tax 
advantages to Education IRA withdrawals in any year in which HOPE or 
Lifetime Learning credits are claimed should be replaced with a 
narrower rule targeted to combat double dipping.
    Expanding Eligibility. Today, eligibility to contribute to an 
Education IRA is limited depending on the contributor's modified 
adjusted gross income. Our experience with traditional IRAs, Roth IRAs 
and Education IRAs shows that limiting access based on income ends up 
reducing savings at all income levels. Right about the time someone 
starts getting interested in setting up a new IRA or Education IRA, 
they hear a disclaimer that only certain individuals are eligible and 
that they should immediately check with their tax advisor to see if 
they qualify. That scares people, especially middle income families who 
do not have a tax advisor. They automatically assume that they are one 
of the ones that are excluded. Or they decide not to start the pattern 
saving because they assume they will not be eligible next year and that 
it is just not worth the trouble.
    The experience with the income limits that were placed on 
traditional IRAs in 1986 is illustrative of this point. Although the 
intention may have been to take the IRA away from more affluent 
households, the end result of the 1986 Act income limits was to drive 
over seven million Americans with income below $50,000 out of IRAs. In 
fact, IRA contributions dropped by more than 40 percent for those who 
continued to be eligible for deductible IRAs in the year after the 
income limits were imposed. Before the changes that went into effect in 
1998, IRA participation among those with income under $50,000 had 
dropped by over 65 percent.
    The lesson of the IRA experience is clear. Income limits confuse 
potential contributors and, in the end, also drive away people who are 
eligible to contribute. All Americans should have access to savings 
vehicles for their children's education. For these reasons, we strongly 
encourage elimination of complex Education IRA income eligibility 
rules.
    Permitting Rollovers to Roth IRAs. A similar problem arises with 
the severe restriction on Education IRA withdrawals if the individual 
does not withdraw funds to go to college. Today, an individual must 
withdraw all Education IRA balances within 30 days after attaining the 
age of 30 and the earnings portion of such distribution is fully 
taxable and subject to a 10 percent penalty tax because the amount was 
not used for education.
    To understand the uncertainty that this age 30 rule creates, you 
can put yourself into the shoes of a grandparent wanting to contribute 
to an Education IRA of a young grandchild. That grandparent may hope 
(or even expect) that the grandchild will go to college, but they have 
no way of being absolutely certain. In many cases, that uncertainty can 
be enough to cause the grandparent not to make the Education IRA 
contribution. If on the other hand, the grandparent knew that if the 
child did not use the funds for college they could be transferred to a 
Roth IRA as the start of a retirement nest egg, the chances are 
increased that the grandparent would make the contribution.
    In fact, the large lifetime earnings differential between those who 
have a college degree and their peers who are high school graduates is 
well documented. A leg up on retirement savings for those who are more 
likely to work all their lives at lower wage rates would be an 
important and equitable step in closing that gap. Of course, the vast 
majority of the children will end up using the money for college as 
originally intended, but the added flexibility will provide the needed 
comfort to the individual making the contribution in the first place.
Qualified State Tuition Programs (QSTPs)
    Section 529 of the Internal Revenue Code provides federal tax rules 
for state-run QSTPs. Merrill Lynch assists states by acting as program 
manager for QSTPs. In that capacity, Merrill Lynch and other Savings 
Coalition members provide management, investment, administrative and 
advisory services to the programs.
    QSTPs operate differently than Education IRAs, and have their own 
federal tax rules. QSTP are sponsored by a State, and can operate 
either as a ``pre-paid'' tuition plan or an education savings account--
(many states sponsor both). In most instances, states have contracted 
with a financial institution like Merrill Lynch to administer its QSTP. 
QSTPs are relatively new arrangements that are evolving as the 
different states continue to improve their programs to better meet the 
higher education savings needs of American families. For those who have 
become acquainted with the unique advantages of QSTPs, however, these 
state-run programs have become a powerful tool for higher education 
savings. Still, certain improvements could greatly enhance the 
effectiveness of QSTPs in helping children attend college. These 
include the following:
    Improving the Tax Treatment of Distributions. Today, for federal 
tax purposes, QSTP distributions for higher education expenses are 
generally taxable to the student to the extent they exceed 
contributions. We urge enactment of proposals that would allow QSTP 
distributions (or education benefits) to receive tax treatment similar 
to that currently afforded Education IRAs (i.e., distributions for 
higher education expenses generally would not be taxable). To the 
extent that American families are saving for higher education expenses 
and receiving distributions from QSTPs solely to meet those expenses, 
the federal government should exempt such amounts from federal 
taxation. By doing this, American families would not have to save 
additional amounts to pay taxes on QSTP distributions, and they would 
be provided an additional tax incentive to save for their children's 
higher education costs. Consequently, we support the President's budget 
proposal to provide a full tax exemption to all QSTPs.
    Confirming That Periodic Rebalancing of Investments is Allowed. 
Section 529(b)(5) provides that a QSTP contributor or beneficiary may 
not directly or indirectly direct the investment of contributions to 
the QSTP. In other areas of the tax law where there are prohibitions on 
investor control by account or fund owners, those requirements have 
been interpreted to mean that the owner cannot select the individual, 
underlying investments of the account or fund (e.g., the owner would 
not be permitted to direct the purchase of stock in a particular 
company or companies).
    With respect to QSTPs, however, the Internal Revenue Service 
(Service) has issued proposed regulations that imply that QSTP owners 
would generally be prohibited from changing their broad investment 
criteria after the initial selection. The narrow interpretation of the 
law contained in the regulations is inconsistent with the underlying 
purpose of the legislation and is not supported by the statutory 
language or its legislative history.
    With the kind of volatility we have seen in investment markets 
recently, it is understandable why many individuals would be reluctant 
to make an irrevocable investment decision for a period of perhaps 
twenty years with regard to a matter as important as a child's 
education. Yet, that would be the end result if the Service were to 
finalize the position taken in the proposed section 529 regulations.
    While there are other issues that remain to be resolved in 
connection with the regulatory process, we urge the members of this 
Committee to clarify (either formally or informally) that the section 
529(b)(5)prohibition on investment direction in the statute was not 
intended to preclude reasonable periodic rebalancing of broad 
investment choices within a QSTP. There seems to be no policy rationale 
for the view that an investment decision once made could never be 
changed.
    Expanding the Definition of Qualified Higher Education Expenses. 
Section 529 currently limits the maximum amount of qualified higher 
education expenses for room and board to the minimum amount charged by 
an institution to any student, without regard to whether or not the 
student has reasonable living expenses that are higher than the 
minimum. This limitation can be particularly unfair to students living 
off-campus. Thus, the definition of qualified higher education expenses 
should be amended to permit reasonable room and board expenses.
    Allowing Rollovers. Today, QSTP amounts cannot be rolled over to a 
first cousin of the designated beneficiary. Because the federal 
government should encourage higher education savings by extended family 
members, the rules should allow rollovers to first cousins. Under this 
more logical rule, a grandparent could contribute to a QSTP for one 
grandchild, but if it became prudent to transfer those amounts to the 
QSTP of another grandchild who is a first cousin of the original 
designated beneficiary, the grandparent would have the flexibility to 
do so. Similarly, when there is no change in the designated 
beneficiary, rollover from one QSTP to another should be allowed. We 
urge this Committee to provide that a transfer of credits (or other 
amounts) from one qualified tuition program for the benefit of a 
designated beneficiary to another qualified tuition program for the 
benefit of the same beneficiary would not be considered a distribution, 
without any restrictions being placed on such transfers.
Conclusion
    Thank you for giving me the opportunity to present this statement 
on the critically important issue of education savings. We need to give 
American families the best tools we can to help them prepare for their 
children's future education costs. While the Education IRA and QSTPs 
are a good start, modest improvements in these programs could help them 
reach their full potential--and unlock the key to the higher education 
dreams of millions of American families and their children.
    In the end, each American must accept significant responsibility 
for saving for their future needs. But the government must help by 
reducing the tax burden on those who save and by making the savings 
choices simple and understandable. With that end in mind, our national 
savings strategy must include an effective set of incentives that will 
expand personal savings, especially for education and retirement. 
Improving existing savings vehicles like the Education IRA, QSTPs, 
IRAs, and employment-based plans should be the backbone of that effort. 
We need to give American families the best tools we can to help them 
prepare for the future.

                                


    Chairman Thomas. Thank you very much, Mr. O'Connor.
    Mr. Gladish.

    STATEMENT OF KENNETH GLADISH, PH.D., NATIONAL EXECUTIVE 
   OFFICER, YMCA OF THE USA, ON BEHALF OF INDEPENDENT SECTOR

    Mr. Gladish. Thank you, Mr. Chairman and Members of the 
Committee. I am Ken Gladish, national executive director of the 
YMCA of the USA. I am honored to testify today on behalf of the 
nation's 2,500 YMCAs (I might say, parenthetically, YMCAs in 
each of the districts of the Congressmen represented here) and 
on behalf of Independent Sector, a nonpartisan, nonprofit 
coalition of over 700 national voluntary and philanthropic 
organizations.
    We are heartened by President Bush's call for increased 
charitable giving and community involvement, and we strongly 
endorse his proposal to provide tax incentives to increase 
charitable donations by all taxpayers, not just those who 
itemize their deductions.
    The YMCA itself reaches 17 million people across the 
country and provides a wide range of vital community services 
in such areas as child care, juvenile delinquency prevention, 
health and wellness classes, teen centers and family programs. 
To ensure that our programs are available to people of all 
faiths, ages, and abilities, and incomes, YMCAs collectively 
raised more than $682 million last year across the country to 
provide scholarships and subsidies for those in need. Every 
dollar of this makes a difference, and a lot of it comes a 
dollar at a time.
    Take New York City, population 8 million. The YMCA of 
Greater New York, which I understand was Congressman Rangel's 
alumni YMCA, raised $1,700,000 last year in one particular 
program to provide low-income youth with financial assistance 
and subsidies. This $1.7 million came from 6,106 donors. 
Ninety-four percent of those donors gave $1,000 or less, 66 
percent of those donors gave $100 or less. As a matter of fact, 
the most common contribution was $20.
    Now look at Dubuque, Iowa, population 60,000. Last year, 
the YMCA of Dubuque raised $44,000 for their campaign called 
Partners for Youth. Average contribution: $100. This holds true 
in YMCA's throughout the country and for many not-for-profit 
entities and organizations of all kinds. A huge amount of our 
support comes from what most of you would consider small gifts 
and small givers. It is these small giftswe rely on, and it is 
this type of people that we need more of.
    Our Tax Code is the most powerful tool available to send a 
message that we, as Americans, highly value and strongly 
support charitable giving, but today this message goes only out 
to the 30 percent of taxpayers who itemize their deductions. 
Mr. Chairman, the nonitemizer deduction would provide a strong 
stimulus for increased giving and new givers. My written 
testimony cites a recent report by PricewaterhouseCoopers which 
showed that had the President's nonitemizer charitable 
deduction been in effect in 2000, total charitable giving would 
have increased by $14.6 billion, an increase of 11.2 percent. 
And perhaps more importantly, 11 million Americans who are not 
currently givers would have been inspired to begin the habit of 
giving. And once you start giving and you see the amazing 
impact you can have on the life of another person, it is hard 
to stop.
    When the Clippard family of Colerain Township outside of 
Cincinnati first started giving to the YMCA, their annual gift 
was about $100 a year. Over the years, their contributions 
slowly increased, the number of hours they spent volunteering 
slowly increased, and now thanks to a large and generous gift, 
this same family that started at $100 has named the new 
Clippard Family Branch of the YMCA serving Colerain Township.
    I know that this Committee will be working to provide major 
tax relief for America's hardworking low- and middle-income 
families. The nonitemizer deduction is an extremely attractive 
means of providing part of this needed tax relief since the 
deduction would achieve three important social goals rather 
than just one. It would reduce taxes, target those cuts to low- 
and middle-income taxpayers who make up the majority of 
nonitemizers and encourage increased charitable giving to the 
thousands of community-based and faith-based nonprofits that 
are on the front lines of helping our neediest citizens.
    I mentioned earlier that YMCA has raised $682 million last 
year to provide programs for those in need. While we consider 
$682 million a good start, more needs to be done. We want more 
families to be able to afford high-quality child care; we want 
more teens to have safe and structured activities after school 
and in good school programs; we want more elderly people to be 
able to participate in our health and wellness programs.
    Mr. Chairman and Committee Members, allowing nonitemizers 
to take the charitable tax deduction will be a powerful tool in 
helping charitable organizations address the pressing needs of 
communities and citizens throughout the country.
    Thanks for the opportunity to share our views on this 
important provision in the President's tax plan to encourage 
increased charitable giving.
    I speak on behalf of the YMCA of the USA, our 18 million 
members, and our colleagues of the Independent Sector.
    [The prepared statement of Mr. Gladish follows:]
Statement of Kenneth Gladish, Ph.D., National Executive Director, YMCA 
              of the USA, on behalf of Independent Sector
    Mr. Chairman and Members of the Committee, I am Ken Gladish, 
National Executive Director of the YMCA of the USA. Together, the 
volunteer-run, community-based YMCAs are the nation's second largest 
national nonprofit organization. Across the country, there are nearly 
2,500 YMCAs serving nearly 17 million people, half of whom are youth. 
We serve all ages, incomes, abilities and faiths through a variety of 
programs including child care, delinquency prevention, health and 
wellness, teen centers, and family programs. YMCAs collectively are the 
largest providers of child care and school age care in the country--
serving 9 million youth in out-of-school time. To successfully provide 
these and other critical youth and family programs, last year YMCAs 
raised $682 million in charitable gifts and had over 600,000 volunteers 
give of their time and energy.
    The YMCA of the USA is proud to be a member of Independent Sector, 
a nonpartisan, nonprofit coalition of over 700 national voluntary and 
philanthropic organizations that share a commitment to strengthening 
communities through philanthropy, volunteerism, and citizen initiative. 
I am honored to testify on their behalf this morning about the tax 
incentives President Bush has proposed to encourage charitable giving 
by all Americans.
    America's charitable nonprofits, both secular and faith-based 
organizations, are vital to our democracy and our quality of life. We 
depend on a strong base of charitable giving to sustain programs and 
services that benefit all citizens, particularly our most vulnerable 
individuals and families. Our tax code has been and remains the most 
powerful tool available to send the message that we as Americans highly 
value and strongly support charitable giving. But today, that message 
goes out only to the 30% of taxpayers who itemize their deductions. The 
tens of millions of hard-working low- and middle-income Americans who 
claim the standard deduction do not receive any recognition or 
encouragement through the tax code for their charitable giving. 
Intended or not, the message those taxpayers receive is that their 
charitable contributions are not worth counting.
    Tax policy should strongly encourage giving by all Americans--not 
just those taxpayers who itemize deductions. President Bush's proposal 
to extend the charitable contributions deduction to all taxpayers would 
provide that strong incentive and encouragement. We applaud and endorse 
the legislation introduced by Representative Philip Crane (H.R. 777) 
and Representative Jennifer Dunn (H.R. 824) which includes this 
critical provision of the President's tax plan. Enacting the charitable 
deduction for taxpayers who do not itemize their deductions is the only 
real way for Congress to send the message that charitable giving is an 
important value for all Americans.
    Beyond its powerful symbolic importance, the non-itemizer deduction 
would provide a strong stimulus for increased giving and new givers. A 
recent report by the National Economic Consulting Division of 
PricewaterhouseCoopers concluded that had the non-itemizer deduction as 
proposed by President Bush been in effect in 2000, total charitable 
giving would have increased by $14.6 billion--an increase of 11.2%. 
Perhaps even more important, PricewaterhouseCoopers concluded that the 
non-itemizer deduction would have stimulated charitable gifts by 11 
million Americans who would otherwise havegiven nothing. The long-term 
importance of encouraging these millions of Americans to develop the 
habit of giving will be invaluable to the ability of charitable 
nonprofits to carry out the programs and services so imperative to the 
continued health and vitality of communities throughout America.
    There is further clear and compelling evidence that providing a 
non-itemizer deduction would dramatically increase charitable 
contributions. In 1981, Congress enacted the non-itemizer deduction on 
a 5-year trial basis from 1982 to 1986. The deduction was phased in 
gradually and was in full effect only in 1986. Significantly, between 
1985, when non-itemizers were allowed to deduct only 50% of their 
contributions, and 1986, when non-itemizer gifts were fully deductible, 
total giving by non-itemizers increased by 40%, according to IRS data.
    Sadly, since Congress permitted that legislation to sunset in 1986, 
seven of ten taxpayers can no longer deduct their charitable 
contributions and the resulting loss in charitable giving has been 
substantial. A recent analysis drawn from the Spring 2000 IRS 
Statistics of Income Bulletin shows a dramatic difference between the 
amounts contributed by itemizers and non-itemizers in every income 
group.
    The increased charitable contributions that will result from the 
non-itemizer deduction will provide much needed funding to thousands of 
community-based and religious organizations that are addressing 
America's most urgent social concerns. Well over half of the 
contributions made by non-itemizers go to religious and human service 
organizations. A tax deduction for charitable contributions will 
provide additional funds to those non-itemizers who already give to 
increase their donations, and it will provide the needed incentive to 
new givers to make contributions to the agencies that serve their 
community.
    With the increased contributions produced with the non-itemizer 
deduction, community-based organizations, like the YMCA, will be able 
to continue to provide vital social services. These very contributions 
will allow YMCAs to effectively serve the growing needs of our 
country's youth. The YMCA has recently launched the YMCA Teen Action 
Agenda--a national campaign to double the number of teens we serve from 
one in ten to one in five by 2005. We are committed to providing teens 
with the services and support, such as GED and job training, mentoring, 
tutoring, and computer skills training, to become contributing members 
of society. To succeed at this auspicious goal and effect change among 
disadvantaged teens and their families, in particular, the YMCA will 
have to raise substantial funding--much of which will have to come from 
individual contributions. We are currently partnering with JCPenney 
Afterschool Alliance and PepsiCo, which have generously provided 
critical corporate support for Y teen programs. But, this provides only 
a start. To serve 4.8 million teens, caring, committed individuals in 
communities across our nation will have to generously contribute to 
their local YMCA. The non-itemizer deduction will prove critical in 
making this a reality. No other measure could do more to strengthen 
America's vital infrastructure of community-based service 
organizations.
    The non-itemizer deduction would be simple for taxpayers and easy 
for the IRS to administer. It is hard to imagine a tax provision easier 
to explain. The message to non-itemizers would be simple and clear: 
when you donate to a charitable nonprofit, you can take a deduction off 
your taxes. The deduction would require only a single additional line 
on the Form 1040EZ, and the IRS has already developed clear, user-
friendly instructions explaining what types of contributions are and 
are not deductible for itemizing taxpayers.
    A first-dollar non-itemizer deduction would not create an 
unreasonable compliance risk. Itemizers--whose gifts account for 80% of 
all charitable giving--have always been allowed a first-dollar 
deduction for their charitable gifts. Congress has never viewed this as 
creating an unacceptable compliance risk, and there is no reason non-
itemizers should be treated less favorably.
    A first-dollar non-itemizer deduction does not give an 
inappropriate double tax benefit for charitable contributions. Congress 
has never viewed the standard deduction as including an explicit 
charitable contributions component. Instead, Congress has fixed the 
amount of the standard deduction based on its desire to encourage a 
high proportion of Americans to use the simpler ``short form'' tax 
form. There is no policy tension between maintaining the standard 
deduction and allowing a first-dollar non-itemizer deduction. In fact, 
there is clear precedent in the 1981 legislation that permitted non-
itemizers to take a standard deduction and to deduct their charitable 
contributions.
    Implementing the charitable contribution deduction without a floor 
will have the most positive effect on increasing contributions and 
encouraging new givers. The PricewaterhouseCoopers study I referred to 
earlier found that a non-itemizer deduction without a floor would have 
produced a $14.6 billion increase in giving in 2000 and would have 
stimulated 11 million Americans who had not previously donated to begin 
to develop a lifetime habit of giving. By contrast, the PWC study 
showed that imposing a $500 floor would have stimulated only $3.7 
billion in increased gifts.
    Another study by the Urban Institute, using a different charitable 
giving model, also found that allowing non-itemizers to deduct 
charitable gifts beginning with the first dollar given would stimulate 
more giving than allowing a deduction only for gifts in excess of a 
floor of $250 for single filers.
    Last, but not least, the non-itemizer deduction would provide 
important tax relief to low- and middle-income Americans. In recent 
months, broad consensus has emerged on the importance of enacting a 
significant, broad-based tax cut. Major tax relief for America's hard 
working low- and middle-income families must surely be a part of any 
such legislation. The non-itemizer deduction is an extremely attractive 
means of providing part of this needed tax relief since the deduction 
would achieve three important social goals rather than just one--it 
would reduce taxes, target those cuts to low- and middle-income 
taxpayers who make up the majority of non-itemizers, and encourage 
increased charitable giving to the thousands of community-based and 
faith-based nonprofits that are on the front lines of helping our 
neediest citizens.
    It is important to note that this benefit will only extend to 
taxpayers at the lowest income levels if the legislation allows a 
deduction for the first dollar given. Adding a floor below which 
contributions could not be deducted would immediately put this 
important deduction beyond the reach of many low-income non-itemizers. 
Low-income non-itemizers considering making gifts early in the year 
often won't know whether they'll be able to make total gifts during the 
year in excess of the floor. And thus, they won't know whether any of 
their gifts will be tax deductible. This is hardly the way to affirm 
the importance of their gifts.
IRA Charitable Rollover Incentive Act
    President Bush's tax proposals include other incentives to increase 
charitable giving which we know will receive careful attention from 
this committee. Before I conclude, I would like to add our voice of 
support for one other specific proposal, and that is the provision in 
the President's proposal that would make it easier for individuals to 
donate funds from their Individual Retirement Accounts to charities. 
The IRA Charitable Rollover Incentive Act (H.R. 774) removes the tax 
barriers to such donations by allowing donors to exclude from their 
taxable income any IRA funds rolled over to a charity. This proposal is 
widely supported in the nonprofit sector, and would, if enacted, unlock 
substantial new resources for the support of charitable organizations 
and their public-service missions. Although charitable organizations 
frequently receive inquiries from potential donors about giving regular 
IRA funds during their lifetimes, when donors realize that they may 
have to pay a significant amount of tax to make the contribution, these 
types of gifts rarely get made.
    This proposed legislation is good public policy. It would unlock 
substantial new resources for the support of charitable organizations 
and their public-service missions. There are many middle-income 
Americans who have accumulated funds in their IRAs that, as a result of 
favorable markets and moderate inflation, now exceed their needs and 
expectations and who would like to contribute some of those funds to 
charity if it would not have detrimental tax consequences.
    The work of our secular and faith-based charitable nonprofits is 
integral to strengthening communities throughout our country and 
addressing the pressing issues and concerns they face today. The non-
itemizer charitable deduction will provide significant help in 
recognizing and encouraging charitable giving by all Americans to 
support these important efforts. Moreover, it will provide the needed 
incentive to spur more Americans to get involved in community-based 
organizations and begin a life-long habit of making charitable 
contributions. Thank you for the opportunity to share our views on 
these important provisions in President Bush's tax plan to encourage 
increased charitable giving. I would be pleased to answer any questions 
that you may have.
                               __________
                           Independent Sector

   A Charitable Tax Deduction for Nonitemizers Should Be Enacted by 
                                Congress

    Since Congress permitted the charitable tax deduction for 
nonitemizers to sunset in 1986, seven of ten taxpayers, the 
nonitemizers, can no longer deduct their charitable contributions and 
the resulting loss in charitable giving has been substantial. This 
becomes obvious when a comparison is made of the amount contributed by 
itemizers and nonitemizers who are in the same income groups.


----------------------------------------------------------------------------------------------------------------
                                                     Amount           Amount        % of Income     % of Income
                 Income Group                    Contributed by   Contributed by  Contributed by  Contributed by
                                                   Itemizers       Nonitemizers      Itemizers     Nonitemizers
----------------------------------------------------------------------------------------------------------------
$1 < $5,000                                                $308              $29           10.6%            1.1%
$5,000 < $10,000                                           $738             $138            9.3%            1.8%
$10,000 < $15,000                                          $941             $216            7.4%            1.7%
$15,000 < $20,000                                        $1,186             $285            6.8%            1.7%
$20,000 < $25,000                                        $1,150             $330            5.1%            1.5%
$25,000 < $30,000                                        $1,333             $364            4.8%            1.3%
$30,000 < $40,000                                        $1,349             $465            3.9%            1.3%
$40,000 < $50,000                                        $1,425             $654            3.2%            1.5%
$50,000 < $75,000                                        $1,740             $965            2.8%            1.6%
$75,000 < $100,000                                       $2,357           $1,333            2.7%            1.6%
$100,000 < $200,000                                      $3,466           $1,254            2.6%            1.0%
$200,000 < $500,000                                      $7,694           $2,934            2.7%            1.0%
$500,000 < $1 million                                   $19,651           $6,876            2.9%            1.0%
$1 million or more                                     $140,972          $21,015            4.7%            1.0%
----------------------------------------------------------------------------------------------------------------
Source: Data prepared for The New Nonprofit Almanac and Desk Reference by Independent Sector (Jossey-Bass, 2001)
  using data from the IRS Statistics of Income Bulletin, Spring 2000.

    The average annual amount contributed per tax return for itemizers 
is $2708; the average for nonitemizers is $328.
    Eighty-seven million tax filers are nonitemizers. It is clear that 
if all nonitemizers raised their contributions to the amount given by 
itemizers, giving would increase greatly. In fact, charitable 
contributions by nonitemizers increased by 40% or $4 billion from 1985 
to 1986, according to Internal Revenue Service data. Nonitemizers were 
permitted to deduct only 50% of their charitable contributions and they 
gave $9.5 billion that year. In 1986, they could deduct a full 100% 
and, according to the IRS, they gave $13.4 billion--an increase of 40%. 
The message from that experience is apparent. Charitable tax deductions 
do stimulate substantially increased giving from middle income 
Americans.
    Nonitemizers are low to middle income American households (70 
million have incomes under $30,000 a year) who support services such as 
the Red Cross and the American Cancer Society. They give to churches 
and synagogues, environmental organizations, schools, colleges, 
hospitals, food programs for the homeless, and the Boy Scouts and Girl 
Scouts. They give to advocacy organizations, health research, the arts, 
international development, and myriad activities in the public interest 
that enrich our society and protect its people. Congress should enact a 
legislation that will permit these moderate income Americans to take a 
deduction for their contributions to charity.

                                


    Mrs. Johnson OF CONNECTICUT. [Presiding.] Thank the 
gentleman and thank the panel.
    Mr. McCrery.
    Mr. McCrery. Thank you, Madam Chair, and I want to thank 
the panel for your testimony.
    Mr. O'Connor, with respect to the Portman-Cardin proposal 
that would increase the opportunity to save and invest, you 
have mentioned that you considered this to be something that 
Congress could do to stimulate the economy. Could you go into a 
little more detail as to why the Portman-Cardin provisions 
would stimulate economic activity.
    Mr. O'Connor. Let us look at the history. Today we have 
approximately $12 trillion that Americans have saved in some 
form of a retirement plan. That has been accumulating over the 
past 20 years, and I do not think that it is a coincidence that 
we have just experienced unprecedented economic expansion.
    My previous position in Merrill Lynch, just to give it from 
another perspective, was an international assignment. And I 
must tell you, if you are not aware of this, that all of the 
other major countries in the world look at our retirement 
system and want to emulate it. However, when you look at our 
savings rate, as you well know, it is the lowest out there from 
all of the developed countries.
    What I see in behavior, and this is from my marketing 
experience with Merrill Lynch, is today about 35 to 40 percent 
of the people who can make an IRA contribution do. The rest do 
not, for various reasons. We have done extensive research on 
why you do not do something that is good for you, and it comes 
down to complexity. Quite frankly, it is only $2,000 a year, 
and over the last 20 years inflation has eaten away at that 
value. So, hence, to grow it to $5,000 is just merely to begin 
to give back some of that inflation that is taken away from us.
    I believe that if we increase the IRA contribution to 
$5,000, not only will the people who currently save $2,000 put 
more in, possibly as much as $5,000 if they can afford it, then 
many other Americans that have forgotten about the IRA will 
also be stimulated to save. And I see trillions more that will 
be saved in retirement plans that are securing the retirement 
of Americans in the future and providing capital to our small 
businesses and large businesses going forward.
    Mr. McCrery. So, when people save, that helps small 
businesses and other businesses to expand and produce jobs; is 
that what you mean by the last statement?
    Mr. O'Connor. Yes. Yes, clearly.
    Mr. McCrery. Well, your speaking was a little fast for 
somebody from Louisiana, but I think I caught most of it. The 
gist of it is that Portman-Cardin would be good for the economy 
and would be a boost to economic activity.
    Mr. O'Connor. Yes.
    Mr. McCrery. Even maybe this year, in the anticipation that 
it would be coming.
    Mr. Brady. Would the gentleman yield?
    Mr. McCrery. I would be glad to yield.
    Mr. Brady. I didn't catch quite all of it. What percentage 
did you say of those who can save do use IRAs?
    Mr. O'Connor. There are 2 percentages, actually. The best 
way to compare this, there are two studies that were done.
    In 1986, when we put the income limitations on the IRA, 40 
percent of the people who could make an IRA deduction in the 
subsequent year, stopped making IRA deductions--people with an 
income far below the income limitation. There have been studies 
done, and we have researched that, that once they saw an extra 
complexity coming into play, it scared people away. And some of 
the comments I heard earlier with regard to the death tax and 
the complexities that scare people away and cause more burden 
on people than you realize. I think that is what happened with 
the IRA.
    Mr. Brady. So we scared 40 percent of the proven savers 
away.
    Mr. O'Connor. IRA contributions dropped 40 percent once we 
instituted the income limits.
    Mr. Brady. Thank you, Mr. McCrery.
    Mr. McCrery. Mr. Chairman, thank you.
    Mr. O'Connor. Was that slow enough?
    [Laughter.]
    Mr. McCrery. It could be better, thanks.
    Mrs. Johnson of CONNECTICUT. Thank you very much.
    Mr. Coyne.
    Mr. Coyne. Thank you.
    Mr. Canavan, Mr. Vallas, we appreciate your testimony on 
behalf of the school construction and bond legislation, and Mr. 
Rangel from New York, I know, appreciates your endorsement of 
that concept and would have been here except that he was called 
to another meeting.
    Mr. O'Connor, I wonder what extent your proposal, relative 
to the help with education bonds and education efforts, is 
geared toward the moderate and low income of the country?
    Mr. O'Connor. Well, I believe a $2,000-a-year education IRA 
clearly is for middle class America.
    Mr. Coyne. What about the lower income than middle class 
America, how would you--how would you describe your efforts on 
behalf of those people who don't consider themselves middle 
income?
    Mr. O'Connor. Well, there are other programs that are 
helping lower income families.
    Mr. Coyne. Are they a part of your recommendation?
    Mr. O'Connor. I am sorry.
    Mr. Coyne. Are they a part of your recommendation here?
    Mr. O'Connor. Certainly, certainly. The education IRA today 
you can put away as little as you can afford, and we encourage 
you to put away whatever you can if you can, in fact, save. 
Today, though, if you are fortunate enough to save as much as 
$500, it is still not enough. And what we are really looking to 
do here is help middle-class Americans to be able to save for 
college.
    Mr. Coyne. Well, if you are a family of four, with a 
$22,000-a-year income, it is very difficult to be able to put 
away $2,000 for education purposes.
    Mr. O'Connor. It is very difficult.
    Mr. Coyne. Yes.
    Mr. O'Connor. But today----
    Mr. Coyne. So your proposal, is there anything that 
addresses that instance, where the family has an income of 
$22,000, a family of four?
    Mr. O'Connor. Well, I guess the best way to answer that, 
you are absolutely right, for that example of a family of four, 
at $22,000, it would be very difficult to put away that much 
money. But, today, with the anti-savings bias we have, it is 
impossible for them today to put away that much money.
    Mr. Coyne. All right. Thank you.
    Mr. O'Connor. It is much more difficult.
    Mr. Coyne. Thank you.
    Mrs. Johnson of CONNECTICUT. Mr. English.
    Mr. English. Thank you, Madam Chair.
    This is an excellent panel. Mr. O'Connor, I appreciate your 
testimony, and I would be particularly interested if you could 
elaborate on a couple of points. For example, one of the points 
in your testimony relates to the income eligibility limits for 
participation not only in education IRAs, but also other IRAs. 
Can you comment, your experience has been that by putting in 
artificial income limits, for an instrument that is intended to 
attract people who are going to invest in the long term, that, 
as a practical matter, it ends up making the instrument 
substantially less attractive to the individual, as I 
understand your testimony. Would you care to comment on that, 
and how much more attractive would education IRAs be if we were 
to take income limits off them entirely?
    Mr. O'Connor. Well, again, let us point to the history 
again. I will give you two examples. I will mention again the 
experience of 1986, where 40 percent of people who were 
eligible to make an IRA contribution who did the previous year 
stopped because of the additional complication that was applied 
to an IRA.
    In Merrill Lynch's own business with their clients, we have 
noticed that it is closer to 66 percent of our own clients, who 
are essentially middle-class Americans who are eligible to make 
an IRA contribution each and every year, do not. And what we 
believe, also, we found with the education IRA, there are two 
reasons we believe, from our research, that has not become as 
popular as it should have. One is it is, again, only $500 a 
year, and it is something they realize is not nearly enough to 
save. So, again, it dissuades them from even considering it.
    And, again, I really believe that complication, that there 
is an income limit, it is funny, and you would think people 
would be more rational, but clearly, from the behavior we have 
seen, once you put complications such as income limits, and 
again perhaps let us talk about the previous panel and the 
death tax, you put complications, it adds much more of a burden 
to an American family than you would think otherwise.
    Mr. English. One of the reasons why we put these income 
limits on is a concern that these provisions might ultimately 
come to benefit the affluent taxpayers. I am not sure why that 
bothers us as much as it does, but it certainly seems to figure 
large in the debate.
    I noticed Mr. Bush's proposal, with regard to QSTPs, would 
substantially make them much more attractive, take much of the 
tax burden off of participants in State tuition assistance 
plans of various sorts. I have long supported liberalizing the 
tax treatment of these particular State-managed programs. But I 
noticed in 1997 the Treasury came out very strongly, at the 
last minute, against our inclusion of new tax breaks for the 
State programs, and the rationale that was provided was, to me, 
an astonishing one, that somehow these QSTPs could become a tax 
break for the affluent, a loophole.
    Can you visualize any situations where Bill Gates, for 
example, could utilize one of these tax-exempt--well, one of 
these tax-advantaged, and we hope in the future, tax-exempt 
programs to avoid the payment of taxes? Can you see any ways 
that these programs could be gamed from a tax standpoint?
    Mr. O'Connor. It is very hard to visualize. If you treat 
these as education savings vehicles, which they are, and if you 
want to call it tax-favor treatment only applies to qualified 
expenses of a student going to school, I don't see how it could 
be created as a tax shelter for some other purpose.
    Mr. English. And I can't really picture that either, but 
that certainly has been a concern in the past. If we were to 
liberalize the tax treatment of QSTPs, say, make them 
completely tax free, which would be my preference, question one 
is should we include any income limitations, and question two 
is should we allow private institutions, for example, an 
association of private universities, to set up competing plans 
and manage plans with the same tax advantage, offering the same 
benefits to students?
    Mr. O'Connor. Well, the Savings of Coalition of America is 
pro-savings. So any time we do hear about an income limitation 
of any sort, again, my previous discussion about what that does 
to the overall interests of Americans to the plan.
    With regard to qualified State tuition plans and the 
ability for private institutions to have a plan, again, the 
Savings Coalition of America is pro-savings, and any vehicles 
that again provide tax incentives, really, I delay, when I say 
tax incentives, because we really start with a biased system 
for savings, and any of these programs to help alleviate that 
bias, we are for, for all income levels and from all sources.
    Mr. English. Thank you very much.
    Mrs. Johnson of CONNECTICUT. Mr. Hulshof.
    Mr. Hulshof. Thank you, Madam Chairwoman.
    Earlier today, probably long before you all came into this 
magnificent hearing room and we were discussing the marriage 
penalty, maybe some of you were here, but our colleague, Mr. 
Ryan of Wisconsin, as we were discussing a marriage penalty, 
pointed out the fact that he has been now happily married for 3 
months, and I think 16 days, and how that changed his 
perspective, as we were talking about the marriage penalty.
    My wife and I have a 16-month-old daughter, and I will tell 
you, Mr. O'Connor, we seem to be focusing our entire 
questioning with you, but how our perspective has changed, as 
we think way down the road about college or education expenses. 
I was extremely pleased that in the last session of Congress 
the speaker asked me to take forward H.R. 7, which was the 
Education Savings and School Excellence Act, and we are working 
on that legislation again on this side. I know the Senate 
Finance Committee considered it last night.
    So a couple of points I want to really echo and then maybe 
ask you to comment on. I think, and do you have any statistics 
to bear out the fact that there is a $500 annual contribution 
limit, that if we were to increase that, say, to $2,000 per 
year, the additional savings that might occur? Do you have any 
numbers or statistics to help in that regard?
    Mr. O'Connor. Additional savings, meaning additional 
savings----
    Mr. Hulshof. For education savings accounts.
    Mr. O'Connor. Oh, no, we really don't because this is a new 
program. We suspect it will be a significant increase, 
significant for two reasons. One, as you may have noticed, when 
the education IRA was first passed, a lot of our colleagues in 
the industry, our competitors, didn't even bother to advertise 
the $500 education IRA because, quite frankly, we are profit-
making enterprises, and it was very hard to justify significant 
advertising. So the awareness of education IRAs is still quite 
low.
    I am, personally, proud of Merrill Lynch because we have 
been very active in telling our clients that we do have a 
vehicle here and we have been advertising it. Now, in our 
advertising, we have acquired approximately 60,000 families who 
have opened up an education IRA with us, and we are very proud 
of that.
    I really don't want to try to put a number to this, but I 
believe that if we increase the education IRA to $2,000, not 
only would Merrill Lynch be more successful in acquiring 
accounts and getting families to save more, but many more 
financial service providers would get involved, and it would be 
manyfold more in savings, manyfolds.
    Mr. Hulshof. Let me pass along, at least, the best 
information that we have, at least under last Congress's bill, 
H.R. 7. First of all, if we were to increase the contribution 
limit to $2,000 and, as you also know, Mr. O'Connor, there are 
some limitations. You mentioned that the education expenses 
have to be qualified expenses----
    Mr. O'Connor. Yes.
    Mr. Hulshof. And, of course, right now under current law, 
back in 1997, is that it is just the tax buildup or the 
interest buildup that is going to see the tax savings. I mean, 
these are aftertax dollars going into an education savings 
account. It is the compound interest that is derived over the 
life of this education savings account, and it can only right 
now, under present law, be used for a public college. And so we 
are trying to expand that option of not just public college, 
but any college or any K through 12 expense, regardless of 
where the child goes to school or whether the child is home 
schooled.
    And some of the numbers that we have received in analysis 
by either Joint Tax or Congressional Budget Office is that 70 
percent of the tax savings from an expanded education savings 
account would go to families with children in public schools 
making less than $70,000 a year. And so I think it really 
undercuts the argument. In fact, my colleague from Pennsylvania 
talked about there seems to be some skepticism of expanding 
these accounts because it would go to the more affluent, and I 
think, at least the best analysis that we have is that 
predominantly these tax savings go to middle-income families or 
those making up to or below $70,000 a year--roughly, 14 million 
families, of which about 11 million families have children who 
would attend public schools.
    And, again, that is part of this discussion is people say, 
well, we can't do this because it is taking somehow money away 
from public schools into private schools, when, in fact, this 
has nothing to do with the amount of money we allocate or 
appropriate every year through the appropriations process. 
These are additional dollars not being committed to educating 
our kids that would now be part of the educational process, 
over and above what we are allocating and appropriating every 
year.
    And so I want to thank you, particularly, and all of you 
for your viewpoints today, and thank the Chairman for yielding.
    Mrs. Johnson of CONNECTICUT. Mr. Brady.
    Mr. Brady. Thank you, Madam Chairwoman.
    Dr. Gladish, growing up in a small to medium town, I can 
tell you the YMCA had a very positive impact on my life. We 
need to do what we can to keep encouraging contributions to 
organizations like yours.
    Mr. Vallas and Mr. Canavan, I am not quite yet convinced 
about the Federal government's role in local school 
construction, but for the sake of not having the Chairwoman hit 
me in the head with her gavel, let me move on quickly to Mr. 
O'Connor on savings.
    [Laughter.]
    Mr. Brady. For the life of me, I don't understand why we 
tax savings. We encourage people to save for the future, but we 
tax them when they do. We say, ``Don't rely on Social Security 
for retirement. Build your own retirement plan,'' but we say 
you can only save this much without us taking our share of it.
    And it seems like with Congressman Hulshof's bill, if 
education, if we save early, the interest works for us, the 
money builds for us, and it helps us reach our American dream.
    I have a 27-month-old child, just a little older than 
Kenny's daughter, and so I am concerned about it, too. But if 
you wait or in a situation where you have to borrow, the 
interest and the money works against you. It makes it harder to 
reach that dream. It just makes good sense to encourage people, 
especially middle-income families. Thankfully, we have programs 
for a family that makes $22,000 with four children. Thankfully, 
we have Pell grants and student loans, work study programs and 
scholarships.
    Those on the other end of the spectrum, who have plenty of 
money, don't worry about it. But it is a lot of middle-income 
families who really look at the cost of education and college 
these days and just swallow hard. I mean, how are they ever 
going to save enough money for that? And the only way they are 
going to stand a chance to do that is if we allow them, and get 
out of the way, to allow them to save.
    And my final point is people say that savings reform is tax 
relief. I don't think it is tax relief for us to remove an 
artificial barrier for people saving their own money for their 
future, and I dare someone to call that tax relief. That is 
simply getting out of the way so that people can save their own 
hard-earned money, which has already been taxed at least once, 
and to allow them to move forward.
    Any comments you have?
    Mr. O'Connor. Well, just to add to that, you may recall, in 
the beginning of my oral statement, in the 15 years I have been 
in this business, in trying to help people save for college, 
save for retirement, it really, in the last few years, it has 
really become a very big issue for Americans, and I am talking 
middle class Americans--middle class Americans who, because of 
a greater share of their income today than 10 years ago is 
taxed, because financial aid for college is down, housing costs 
are up, all of the other costs that are on a middle class 
family, and inflation of college has grown 1- to 2-percent 
faster than regular inflation and 2- to 3-percent faster than 
their incomes.
    Education savings is a big issue for middle-class America, 
and I see it every day in my job.
    Mr. Brady. A final note. As you have noted before, even in 
our best economic times, we seem to be saving less and less. 
Since we have scared off 40 percent of our proven savers in 
1986, we ought to try to do our best to attract them back into 
the savings effort.
    Mr. O'Connor. I agree.
    Mr. Brady. So thank you, Madam Chairwoman.
    Mrs. Johnson of CONNECTICUT. Thank you.
    Mr. Canavan, I do want to thank you for your intense 
interest in the issue of schools and their ability to build the 
schools that we need now and for communities and their ability 
to build the schools that we need now and to repair and 
modernize that our schools are in.
    Would either you or Mr. Vallas like to comment on the 
difference between the money we appropriated last year, which I 
believe was $1.2 billion, which is a fair amount of money, and 
this leveraged approach that we are proposing in the bill that 
Charlie Rangel and I have sponsored? What is the relative 
impact of these two approaches?
    Mr. Vallas. Well, if I can just speak insofar as Chicago is 
concerned, we have once again, just to put it into perspective, 
we have 601 schools, 435,000 students. We are the third-largest 
school system in the country.
    The emergency bill that was passed last year generated $25 
million for Chicago. And, of course, it required really no 
local contribution. It was an allocation to us. The Johnson-
Rangel bill would generate $537 million in reduced borrowing 
costs.
    Mrs. Johnson of CONNECTICUT. In other words, the local 
communities would still have to make----
    Mr. Vallas. That is correct.
    Mrs. Johnson of CONNECTICUT. Roughly the investment they 
are planning to make now, but by lifting the interest costs 
from their investment, just like a family who had a 25- or 30-
year mortgage, the interest cost is often as much as the 
mortgage.
    Mr. Vallas. In effect, on like 30-year notes, it would 
reduce our borrowing costs by half, which would enable us to 
build twice as many new schools.
    In Chicago, for example, while we have built 70 new 
buildings, and the price of an elementary school is roughly 
between $15 to $18 million, the price of a middle school is $20 
to $22 million, and the price of a high school is $30 to $35 
million.
    Mrs. Johnson of CONNECTICUT. And what were those prices 
about 10 years ago?
    Mr. Vallas. The prices are going up. I would say that the 
prices were about one-third less, but the ability to borrow now 
and to build now saves us money over the long term because the 
costs just continue to climb, and the ability to raise the 
money now and to invest now allows us to accelerate the 
progress that children have made academically.
    Because let me tell you there is a direct correlation 
between the quality of the facilities, whether they are wired 
for the Internet, whether they are modern facilities, and the 
maintenance, the upkeep. For example, when I build new schools, 
when we built our 70 new buildings, our utility costs in those 
schools were cut in half, in part because we now have modern, 
efficient buildings. Despite the gas crunch, the natural gas 
crunch that everybody experienced over this past year, my 
utility costs last year went down about 15 percent, largely 
because we had so many new buildings online and because they 
were much more efficient. So investing now not only benefits us 
from an academic standpoint, but it actually saves school 
districts money over the long term.
    But $537 million, the beauty of the Johnson-Rangel bill is 
it requires local match. It requires that local investment be 
made. It simply doesn't say we are going to give you money, and 
you don't have to exercise any local effort, and the fact that 
it leaves autonomy at the local level so that school districts 
can make their own choices about what to build, what to 
renovate, what to replace, and I think that is the great 
advantage of the proposal.
    Mrs. Johnson of CONNECTICUT. The great number of schools 
that a city like Chicago has to manage and the need to replace 
so many old schools, as well as repair and modernize, is simply 
an extraordinary need.
    I believe that you said it went up a third in the last 10 
years.
    Mr. Vallas. Yes.
    Mrs. Johnson of CONNECTICUT. If you look at the last big 
round of school building, I think costs have gone up more like 
double because of the greater code requirements, the greater 
wiring requirements, and in some places, earthquake 
requirements and so on.
    Mr. Vallas. In Chicago, we have been able to maintain very 
tight controls because we have, we take full advantage of the 
market, and while there is clearly school control and oversight 
over our construction programs, we have privatized much of the 
management of our construction programs.
    For example, we have built--those prices I gave you are the 
prices that we spent on schools for the last 5 years--we have 
had maybe 5.5 percent change orders on our construction 
project. This is very well-managed. So there has been no 
controversies about the costs of our buildings. But for many 
smaller school districts--we are a large district, and it gives 
us the ability to leverage our resources. It gives us the 
ability to negotiate rate reductions on utility costs because 
we are so large.
    But when you get into smaller districts, rural districts, 
downstate districts, they don't have that capacity. When a 
district just wants to borrow enough to build one new school or 
two new schools or maybe torenovate half a dozen schools, they 
don't have the capacity to control the costs because they don't 
dominate the market. We are so big, and we are building so many new 
things, that we can literally, it becomes a buyer's market, and that 
gives us the ability to leverage.
    But, certainly, some of the smaller districts, the rural 
districts, the suburban districts where you have three or four 
schools, their costs, their per-unit, per-classroom 
construction costs are probably increasing at a much faster 
rate than we are. The suburban schools have been built at more 
expensive cost to the school district than the city schools 
have been.
    Mrs. Johnson of CONNECTICUT. Thank you.
    Bob, did you want to ask----
    Mr. Canavan. Yes, thank you very much, and I will be 
extremely brief because I know it is the end of the day.
    But one thing I wanted to point out on the strength of your 
bill and Mr. Rangel's bill is that you pay particular attention 
to the needs of rural school districts. Thirty-eight percent of 
the students in the United States are actually attending 
schools in rural areas. The balance that the Johnson-Rangel 
bill provides through these bonds is that urban districts, as 
well as rural districts, have the opportunity to use the tax 
credit to leverage their investment in schools in such a way 
that, in effect, in our opinion, it is local property tax 
relief because every dime of leverage they get from Federal 
support is one less dime they have to ask the local taxpayers 
to provide.
    Mrs. Johnson of CONNECTICUT. I think that is a very 
important point. Having been born and raised in Chicago, I 
understand the enormity of your challenge. But lots of the 
towns that I represent have had literally no growth in their 
property tax base in the last decade, and they aren't likely to 
have much, but the costs of school building continues to rise. 
And I would rather have good local schools than regional 
elementary schools.
    And if we are going to be able to maintain that tradition 
of kids going to school close to where they live, we are going 
to have to find some way to create a partnership that is not 
just State and local in school building, but that is State, 
local and Federal.
    Mr. O'Connor, I did want to close by asking you one 
question. Does it concern you that 50 percent of the workers in 
America have no access to pension plans?
    Mr. O'Connor. Yes, it does concern me very much.
    Mrs. Johnson of CONNECTICUT. And does it concern you that, 
of that 50 percent, probably 30 percent of them, under today's 
rules, couldn't afford to save?
    Mr. O'Connor. I am sorry, could afford to save?
    Mrs. Johnson of CONNECTICUT. Could not afford to save. In 
other words, they don't make enough really to save, and there 
is nothing we do that actually helps them save.
    Mr. O'Connor. That is a very big concern.
    Mrs. Johnson of CONNECTICUT. Well, I really share that 
concern, and it is for that reason that I do worry about having 
no income limit on, and sort of Government incentives to 
savings. If you make lots of money, you can save whether we 
encourage you to save or we don't encourage you to save. You 
can still buy stocks, and the people still do. I mean, lots of 
their money is put into investments that are not rewarded 
through the Tax Code.
    And I think we are doing such a very poor job of looking at 
how we might help people of very minimal means save for their 
retirement, much less their children's education. But I think 
we really have to look at how can we more creatively reach not 
only--and Portman-Cardin will change the rules so a lot more 
employers will be able to offer their employees a pension 
savings vehicle--but they all know, and we all know this is 
true, it is like health benefits, small employers are no 
margin, but low-income employees are not, those folks are not 
going to be able to save for their retirement unless we find a 
way to, in a sense, assist them in the same way we are 
assisting middle-class and upper-middle-class families in 
savings.
    And I hope that you and your firm would be thinking about 
how we might do that.
    Mr. O'Connor. We would do that. What I would suggest, 
though, we are very much pro-savings, and I am speaking here 
for both my firm and the Savings Coalition of America. We are 
pro-savings for all income groups because it is vitally 
important, particularly in the group you are discussing.
    Mrs. Johnson of CONNECTICUT. Yes.
    Mr. O'Connor. But what I would recommend is, when we look 
at that, that we try to integrate that into current savings 
retirement plan systems we have today.
    Mrs. Johnson of CONNECTICUT. But in being pro-savings, I 
think your groups, and I am pro-savings, but I have come to be 
very sensitive to the amount of money that we are expending to 
encourage savings.
    Mr. O'Connor. Uh-huh.
    Mrs. Johnson of CONNECTICUT. And it is all increasingly 
among the group that are saving. Now they are not saving 
enough, but we have got to, in addition to encouraging savings, 
in general, we have got to be sensitive to the fact that we 
need to broaden the savers' base, and to do that we need a 
broader array of approaches. And I really think you guys have 
got to take far more seriously what are the kinds of subsidies, 
like the earned income tax credit really helped people get off 
welfare because it reduces their tax burden even through the 
payroll tax.
    But we have to find some way to help people save, even on 
low salaries, because Social Security is not going to be enough 
to live on, and if they don't have some additional income 
stream. In the same way, I would ask your thoughts on whether 
it might not be wise to tax reward, annuity-type vehicles, more 
than we tax reward just straight savings. Because Social 
Security is not going to be enough to live on, there is a 
social interest in making sure retirees are secure. Don't we 
have a higher responsibility to make sure that people develop a 
retirement income to complement Social Security than simply 
that they save so when they get to 65, they can buy a yacht? I 
mean, is there no social merit difference here?
    Mr. O'Connor. Well, there is a social merit that perhaps we 
are not considering here. I think the best program would be for 
more jobs to be generated, better jobs to be generated, and 
that if there was more savings by all income groups, our 
economy would, in fact, be stronger, and there would be better 
jobs for everyone going forward. And, hence, they would maybe 
perhaps be able to save for themselves better than they can 
today. That I think is the best program.
    Mrs. Johnson of CONNECTICUT. But that program is just more 
of what we have got, and more of what we have got are not 
helping a third of America's workers save, and they are not 
differentiating between savings that could create real 
retirement security and just savings that could buy a nice 
second home on retirement or buy a big sailing ship or 
whatever.
    And I would say that when something is publicly subsidized, 
there ought to be a public purpose. So I am no longer, as I 
once was, comfortable with your position that savings is 
savings, and we ought to just foster more and more of it. We 
have got to look at the fact that there is a big slice of 
working America that can't afford to save, and their not being 
able to save is going to be a public burden when they retire 
because Social Security is going to be inadequate. It is 
inadequate now, but it is going to be really inadequate then 
and that we have to begin looking at this, and that, second, 
there is a different public policy benefit in making sure that 
people have a parallel income stream to Social Security than 
that they just have a lot of money on retirement.
    So I think you guys need to start thinking deeper, more 
deeply, about this issue of savings. I want savings for jobs, 
too, but you know and I know that most of the investment 
capital in America just comes from people investing money in 
stocks, and they are not Government-incentivized savings. So, 
as important as Government-incentivized savings plan are, and I 
think they are terribly important, our policy is too narrow and 
too broadly focused.
    Now I think the education issue is separate because that is 
another one of these issues in which we really need to help 
people save more because the product has gotten so expensive, 
but I think we need to begin to differentiate between savings, 
savings, savings and subsidizing savings versus who are we 
helping to save, how much of America is being benefitted by 
Government savings policy, and are there some savings that are 
a greater public policy purpose than other savings?
    So I just hope that your group will be more aggressive in 
thinking more broadly about the needs of America because just 
sitting here yesterday, the estimates were that by 2030, that 
is 29 years from now, Social Security, Medicare and Medicaid 
will take every single dollar of revenue, every single dollar 
of Federal revenue. Now no society can sustain that. We can't 
let that happen. But it does tell you how big our problems are 
for retirees and for the working families of the future. And I 
think we can no longer be quite as simplistic about things as 
we have been in the past, and I would encourage your group, who 
has been so important to our thinking through savings, to begin 
thinking through savings, who is saving and what are they 
saving for.
    Thanks.
    Mr. O'Connor. We will do that. Thank you.
    [Whereupon, at 3:46 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]
  Statement of Howard E. Abrams, Professor of Law, Emory University, 
                            Atlanta, Georgia
    Mr. Chairman and Members of the Committee, my name is Howard E. 
Abrams and I am submitting these comments to you today on the issue of 
the income tax consequences of repeal of the federal estate, gift, and 
generation-skipping taxes. I am a professor of law at Emory University 
specializing in the taxation of corporations and partnerships. These 
comments are my own. However, I undertook this study at the request of 
The Real Estate Roundtable.
    There is broad bipartisan support for repeal of the federal estate 
and gift taxes. If repeal is forthcoming, though, and a change is not 
made to the rules governing the basis of property received through the 
estate of a decedent, repeal of the death taxes will have the effect of 
exempting substantial unrealized appreciation from all federal 
taxation, income as well as estate. Accordingly, Congress may seek to 
preserve taxation of this unrealized appreciation by providing, as to 
property passing through the estate of a decedent, that the donee will 
take a carry-over basis in such property, much like a gift is treated 
under current law. In general, such a rule will tax the heirs on the 
eventual sale of devised property as the decedent would have been taxed 
had he sold it prior to death; that is, the heirs will step-in-the-
shoes of the decedent for income tax purposes.
    If the property transferred is encumbered, application of current 
doctrine to this new regime might impose taxation not when the heirs 
sell the property but rather when it passes to them from the decedent 
or from the decedent's estate. Such a result can be easily avoided by 
enacting language applicable to death-time transfers modeled after 
current code section 1041, the Code section currently applicable to 
transfers of property between spouses or ex-spouses. Section 1041, 
another step-in-the-shoes rule, accomplishes in the context of divorce 
precisely what a carry-over basis at death rule is intended to 
accomplish in the context of death-time transfers. The discussion that 
follows includes a proposal for such statutory language.
    A carry-over basis rule can impose substantial hardship on the 
heirs if devised property is encumbered. Especially in the context of 
family farms and other real estate holdings, substantial encumbrances 
are the norm. When such property is transferred in a carry-over basis 
regime, upon eventual sale of the property the heirs will be required 
to pay both the lender and the taxes. If the debt is relatively high 
and the carry-over basis relatively low, it could be the case that 
these two payments exceed the full value of the property. In such 
circumstances, the heirs would have in fact received negative value 
assets. To ensure that the death-time transfer of property does not 
result in a net detriment to the beneficiaries, either the amount of 
the gain could be limited or a partial step-up in basis could be 
provided for certain specified debt. The discussion that follows 
includes alternative proposed statutory language for reducing the 
hardships imposed on the heirs in either of these ways.
    Thank you.
 Benefits and Implications to Real Estate Owners of Estate Tax Repeal 
                     and Carry-Over Basis at Death

        Howard E. Abrams,\1\ Professor of Law, Emory University
---------------------------------------------------------------------------

    \1\ Mr. Abrams has been a professor of law at Emory University 
since 1983 and has taught at Cornell Law School, the University of 
Oklahoma School of Law, the University of Georgia School of Law, and at 
Leiden University in the Netherlands. He is the author of four books on 
the taxation of corporations and partnerships, and his articles have 
appeared in the Harvard Law Review, New York University's Tax Law 
Review, the Virginia Tax Review, and other periodicals. Mr. Abrams is a 
regular speaker at the American Bar Association's Tax Section: 
Committee on Real Estate meetings, New York University's Institute on 
Federal Taxation, the AICPA National Real Estate Conference, and 
similar events. Mr. Abrams spent the 1999-2000 academic year with the 
national office of Deloitte & Touche, LLP, as the Director of Real 
Estate Tax Knowledge.
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Overview
    Any tax lawyer will tell you that the best way to minimize income 
taxes is to die, though few clients are willing to act on that advice. 
But even those clients who seek to prove their immortality can take 
comfort that if they depart, the income tax man may be left behind. For 
individuals with substantial assets and insubstantial planning, the 
grim reaper can bring a potentially crippling estate tax liability. But 
for astute taxpayers who hold appreciated assets until death, gains so 
far deferred become gains forever exempted.
    This favorable outcome results from the step-up basis at death 
rule.\2\ Under our current income tax system, death is not a taxable 
event,\3\ which means that those who die owning appreciated assets are 
not by the fact of death alone taxed on their accumulated gains. Taxes 
not visited on the dead, though, would be visited on the survivors were 
it not for the statutory step-up basis at death.
---------------------------------------------------------------------------
    \2\ See Sec. 1014(a)(1).
    \3\ E.g., Rev. Rul. 73-183, 1973-1 C.B. 364.
---------------------------------------------------------------------------
    Thus, if I purchase real estate for $1,000,000 and hold it 
throughout my life as it appreciates to $5,000,000, I pay no taxes on 
that appreciation because I have yet to sell or exchange the property. 
If I continue to hold that property at my death, I will never pay 
income tax on the $4,000,000 of increased value. Further, my heirs will 
be treated as if they bought the property for $5,000,000, ensuring that 
when they sell the property they will pay taxes, if any, only on the 
increase in value of the property occurring after my death: the 
$4,000,000 of gain that accrued in my hands is simply untaxed forever. 
Of course, whether the $4,000,000 of accrued gain escapes the income 
tax or is captured by it because I sell the property prior to my death, 
the entire $5,000,000 value of the property will be ensnared by the 
federal estate tax.
Estate Repeal May Include Carry-Over Basis at Death
    President Bush has proposed repeal of the existing federal estate, 
gift and generation-skipping taxes. By itself, this represents 
substantial tax reduction benefiting a variety of taxpayers including 
all those owning assets at death sufficient to generate an estate tax 
liability; under current law, those are taxpayers with estates of more 
than $675,000. The current estate tax rates range from 18 percent to 55 
percent, with the 55 percent rate applying to estates of $3 million and 
over. Estates between $10 million and $17,184,000 pay a 5 percent 
surcharge on amounts in excess of $10 million in order to phase out the 
benefit of the graduated rates.
    There exists broad bipartisan support for repeal of the federal 
estate and gift taxes not only because repeal represents tax reduction 
but more generally because of a shared sentiment that taxing income 
when it is earned and second time when it is transferred is 
inappropriate double taxation. In addition, by taxing wealth when it is 
transferred, the federal estate and gift taxes can impose a tax burden 
when there are no liquid assets with which to pay the tax liability, 
forcing a sale of farms and small businesses.
    However, political realities suggest that repeal of the estate, 
gift and generation-skipping taxes likely will bring with it some form 
of income tax alternative to the step-up basis at death rule. 
Otherwise, untaxed appreciation would escape estate and income tax 
entirely. A carry-over basis at death rule would treat my heirs not as 
if they bought the property for its death-time value of $5,000,000 but 
rather for the $1,000,000 I actually paid. This carry-over basis rule 
would mean that my heirs step-in-my-shoes for income tax purposes: when 
they sell the property, they are taxed on the amount of gain that I 
would have been taxed on had I sold it during life. As a result, if the 
sale proceeds amount to $5,000,000, the taxable gain will be 
$4,000,000.
    The step-up basis rule likely will be repealed only in part, with 
some limited step-up continuing to be available. For example, the Kyl-
Breaux bill (S. 275) proposes a $2,800,000 step-up cap; other limits, 
both lesser and greater, have been suggested. Under the Kyl-Breaux 
bill, for example, if I die holding a piece of real estate with a basis 
of $1,000,000 and a value of $5,000,000 at my death, my heirs would 
take a basis in this property of as much as $3,800,000,\4\ leaving the 
heirs with a taxable gain of as little as $1,200,000.
---------------------------------------------------------------------------
    \4\ Senate bill 275 proposes a partial step-up basis rule limited 
to $2,800,000 of step-up apportioned over all property gratuitously 
transferred by the decedent at death and during life (and still held by 
the donee at the moment of the donor's death). Without knowing the 
gross unrealized appreciation in all property transferred by the donor, 
it is impossible to know the precise basis that any particular asset 
will take in the hands of the donee under the terms of this bill.
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Ensuring Death is Not a Recognition Event
    For decedents whose estate consists exclusively of cash and 
unappreciated property, estate tax repeal is pure tax reduction and the 
basis rule is irrelevant. Indeed, for taxpayers leaving large estates 
with significant basis, the trade-off of carry-over basis in exchange 
for estate tax repeal will be favorable. Even for taxpayers with 
moderate estates comprised of low-basis assets, the trade-off can be 
positive. For example, consider the case of a taxpayer who dies leaving 
a single piece of real estate valued at $5,000,000 and having an 
adjusted basis of $1,000,000. Under current law, the estate tax burden 
should be about $2,169,450.\5\ If the estate tax is repealed and in 
exchange the heirs are forced to take a carry-over basis in the 
property, the income tax burden on a subsequent sale will amount to 
$800,000 if the gain qualifies as long-term capital gain (or more if 
the property is subject to the 25% depreciation recapture capital gain 
rate). Thus, estate tax repeal saves $1,369,450 in federal taxes even 
with the carry-over basis change. Of course, carry-over basis will also 
force the taxpayer to recognize gain for state income tax purposes (in 
those states having an income tax), so that the effective rate of 
taxation on the gain might be somewhat larger.
---------------------------------------------------------------------------
    \5\ The estate tax liability on $5,000,000 is $2,390,000 less the 
current credit of $220,550, for a net estate tax liability for 
$2,169,450. This liability might be reduced if the decedent devised 
some of the property to charity or to a surviving spouse; it could be 
greater if the decedent made significant life-time transfers.
---------------------------------------------------------------------------
    If the property is encumbered, though, repeal of the estate tax 
coupled with carry-over basis can be much worse for the heirs. Suppose 
this piece of real estate is encumbered by a nonrecourse debt of 
$4,500,000, so the decedent's equity is but $500,000. In such 
circumstances there is no estate tax liability at all under current law 
because the decedent's taxable estate value is determined net of the 
debt, and estates less than $675,000 in net value are not subject to 
estate tax under current law. However, if the heirs were burdened by a 
carry-over basis, the income tax liability again would be at least 
$800,000. That is, repeal of the estate tax and imposition of a carry-
over basis rule would increase net taxation from $0 to at least 
$800,000. Even under the Kyl-Breaux partial step-up bill, the heirs 
would be saddled with an income tax liability of at least $240,000 
despite receiving no benefit from the estate tax repeal.
    And what is worse, much of that tax liability might be due not when 
the heirs sell the property but rather at the moment of the decedent's 
death. To be sure, no one yet is proposing to treat death as taxable 
event under the income tax. However, if the current step-up basis rule 
is changed to a carry-over basis rule, death likely will be a taxable 
event for those who die holding heavily mortgaged property. And while 
Congress could avoid that result by enacting specific language to the 
contrary, such a fix might (in limited circumstances) be worse than the 
cure. To understand why, we must first look at the tax treatment of 
sales and gifts of mortgaged property under current law.
    When property is encumbered by indebtedness in excess of adjusted 
basis, transfer of the property can result in uncomfortable tax 
consequences for the transferor. Debt may exceed adjusted basis because 
the owner has borrowed against unrealized appreciation in the property, 
because depreciation has been claimed at a rate faster than the 
mortgage has been paid down, or by a combination of the two. Regardless 
of the cause, transfer of such excess mortgaged property generally will 
produce gain to the transferor.\6\
---------------------------------------------------------------------------
    \6\ See generally New York County Lawyers' Assn., Committee on 
Taxation, Excess Mortgaged Property--Caveat Venditor: A Report on Some 
of the Consequences of the Carryover Basis Rules on Inherited Excess 
Mortgaged Property, 33 Tax. L. Rev. 139 (1977).
---------------------------------------------------------------------------
    Thus, if a taxpayer owns property with adjusted basis of 
$1,000,000, current fair market value of $5,000,000, and subject to a 
nonrecourse debt of $4,500,000, sale of the property for $500,000 cash 
(subject, of course, to the debt) yields a gain to the seller of 
$4,000,000 because, for computing the seller's gain, both the actual 
cash received as well as the debt transferred are treated as sales 
proceeds.\7\ This taxation is appropriate because the seller has 
pocketed not only the $500,000 cash received at closing but also the 
$4,500,000 received previously as loan proceeds, loan proceeds that 
were not taxable when received and which will no longer have to be 
repaid because the debt has been transferred along with the property.
---------------------------------------------------------------------------
    \7\ Commissioner v. Tufts, 461 U.S. 300 (1983).
---------------------------------------------------------------------------
    Essentially the same analysis applies if the owner makes a gift of 
the property rather than selling it. To be sure, if the property is 
gifted rather than sold the owner will not receive any cash at closing. 
Equally true, though, is that the owner received $4,500,000 tax-free 
when the loan was taken out, and because the loan again goes with the 
property, those tax-free proceeds will not have to be repaid by the 
donor. As a result, the law is clear that if property is gifted having 
adjusted basis of $1,000,000 and subject to a nonrecourse debt \8\ of 
$4,500,000, the donor must recognize income of $3,500,000, that being 
the excess of the loan proceeds over the donor's adjusted basis in the 
property.\9\
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    \8\ If the debt is with recourse, then the loan will have to be 
repaid by the estate prior to the transfer to any heir, either forcing 
the taxable sale of the property or consuming other assets of the 
estate so that the property can be passed on unencumbered.
    \9\ Levine v. Commissioner, 634 F.2d 12 (2d Cir. 1980); see 
Diedrich v. Commissioner, 457 U.S. 191 (1982). If the gift is to a 
charitable organization, the taxation is even greater by reason of 
Sec. 1011(b). Ebben v. Commissioner, 783 F.2d 906 (9th Cir. 1986).
---------------------------------------------------------------------------
    Because the donor is taxed on some of the accrued appreciation, the 
donee's basis must be adjusted upward to ensure that this appreciation 
will not be taxed a second time. Despite the general carry-over basis 
rule for gifted property, the regulations properly provide that the 
donee may increase his basis for any gain recognized by the donor on 
the transfer.\10\ Thus, in this example the donee will take a basis of 
$4,500,000 in the property, so that if the donee eventually sells the 
property for $5,000,000, there will be only $500,000 further gain to be 
recognized.
---------------------------------------------------------------------------
    \10\ Treas. Reg. Sec. 1.1015--4(a) (1972).
---------------------------------------------------------------------------
    If the current step-up basis rule at death is changed to a carry-
over basis rule, the taxation of death-time transfers becomes virtually 
identical to that of gifts. And because we know that gifts of heavily 
mortgaged property are taxable to the donor when the gift is made,\11\ 
presumably the same rule would be applied to transfers at death. Thus, 
a carry-over basis rule at death not only preserves substantial gain 
not taxed under current law but likely accelerates taxation of that 
gain to the moment of the decedent's death.
---------------------------------------------------------------------------
    \11\ See sources cited at note 9 above.
---------------------------------------------------------------------------
    In the context of death-time transfers under a carry-over basis 
regime, it might be the case that transfer from decedent to executor is 
ignored and that the recognition event for heavily mortgaged property 
does not occur until transfer from the executor to the ultimate 
beneficiary. This does not solve the problem of accelerating 
recognition but merely postpones it slightly. Indeed, in some 
jurisdictions real property is not treated as passing through the 
executor's hands; rather, title is treated as flowing directly from 
decedent to beneficiary, and in such cases the recognition event would 
have to be the time of death. In the following discussion when I refer 
to taxation at the time of a decedent's death, it should be understood 
that this reference includes the possibility that such taxation might 
not occur until the property passes through the hands of the executor.
    Death as a recognition event would also arise, if property is not 
given a full step-up in basis at death, upon the death of a partner 
having a negative capital account. For example, suppose four 
individuals contribute $100,000 to a partnership, and the partnership 
uses its $400,000 of equity plus a loan of $1,600,000 to purchase 
improved real estate for $2,000,000. After 10 years, the partnership 
has claimed depreciation of about $800,000, so the partnership's 
adjusted basis in its property equals $1,200,000. The outstanding 
balance on the loan is about $1,400,000 (assuming a 30-year 
amortization schedule), which means that each partner's capital account 
is negative by about $50,000.
    Current law's step-up basis at death ensures there is no taxation 
to a partner who dies at this point, and his share of appreciation in 
the partnership assets escapes income taxation, now and forever. But if 
Congress enacts a carry-over basis at death rule, the partner who dies 
presumably will be taxed at once on a gain of about $50,000.\12\ And 
this taxation is imposed independent of the current value of the 
property. This problem of negative capital accounts is especially 
likely to arise in connection with highly-leveraged real estate 
contributed to an umbrella partnership as part of an UPREIT roll-up.
---------------------------------------------------------------------------
    \12\ Upon the sale or exchange of a partnership interest, the 
transferor partner's share of liabilities are treated as part of the 
amount realized. Treas. Reg. Sec. 1.752-1(h).
---------------------------------------------------------------------------
    Congress could, of course, carefully specify that death-time 
transfers will not be taxable to the decedent even if the property is 
encumbered. Such language would ensure that if I die holding property 
with value of $1,000,000, adjusted basis of $100,000, and subject to a 
nonrecourse debt of $850,000, I would not be taxed on the death-time 
transfer.\13\ Indeed, since my estate may have no liquid assets with 
which to pay a substantial income tax liability, failing to prevent 
acceleration of the gain risks forcing an immediate and distressed sale 
of assets by the estate.
---------------------------------------------------------------------------
    \13\ This is how property is treated when transferred between 
spouses or between ex-spouses incident to divorce. See Sec. 1041.
---------------------------------------------------------------------------
    Unfortunately, no current legislative proposal actually includes 
language to ensure this result. If such language were included, 
however, it would then be the case that whoever inherited the property 
would receive a basis of only $100,000, precisely the result that a 
carry-over basis regime presumably intends. To accomplish this result, 
Congress should amend section 1014 as follows:
Sec. 1014. Property acquired from a decedent [carry-over basis]
    (a) In general.--In the case of property acquired from a decedent 
    within the meaning of subsection (b)--

      1. No gain or loss shall be recognized by the decedent or the 
        decedent's estate on such transfer; and
      2. The basis of such property in the hands of the person 
        acquiring it from the decedent shall be the basis of such 
        property in the hands of the decedent immediately prior to 
        death.

    (b) Property acquired from the decedent.--
    [no change to existing law]
Highly Mortgaged Property Can Be Underwater to the Heirs
    But now consider the hapless beneficiary who has just inherited 
property with current value of $5,000,000, carry-over basis of 
$1,000,000, and subject to a debt of $4,500,000. This inheritance may 
not be quite so good as getting the property free and clear, but the 
equity of $500,000 is still real money. Or so it seems.
    If the property is sold for its current value of $5,000,000, the 
loan must be paid off before the new owner is entitled to keep any of 
the proceeds. Thus, of the $5,000,000 received for the property, 
$4,500,000 must be given to the lender, leaving the new owner with only 
the equity value of $500,000. That would still be a good day's work 
were it not for the pesky carry-over basis rule; because the new 
owner's basis in the property was carried over from the decedent, the 
sale is taxable to the tune of $800,000.\14\ As a result, the new owner 
now not only owes the bank $4,500,000 but the IRS some $800,000 as 
well, so that the inheritance of $500,000 in equity is in reality worth 
negative $300,000. Well advised individuals might know to reject an 
underwater bequest, but who without a tax lawyer in the family would 
suspect that receiving property with $500,000 in equity puts your out-
of-pocket by $300,000 or more?
---------------------------------------------------------------------------
    \14\ Sale for $5,000,000 with a carry-over basis of $1,000,000 
yields a taxable gain of $4,000,000. Taxed at the lowest income tax 
rate applicable to long-term capital gain produces a tax liability of 
$800,000. State taxes would add to this amount.
---------------------------------------------------------------------------
    Not all highly mortgaged property will be underwater in the sense 
that a sale yields proceeds insufficient to both pay of the mortgage 
holder and pay the income taxes on the gain. For example, property with 
current value of $5,000,000, adjusted basis of $1,000,000, and 
encumbered by a debt of $3,000,000 offers net value to a donee who 
takes this property with a carry-over basis. Assuming capital gains are 
subject to a total federal and state tax burden of 25%, our donee can 
sell the property for $5,000,000, pay off the debt of $3,000,000 as 
well as the tax burden of $1,000,000, and still have $1,000,000 in 
hand. Heavily mortgaged property will only be underwater if the amount 
of the outstanding encumbrance plus the tax burden on the unrealized 
appreciation exceeds the value of the property.
    What should Congress do? Under current law, this problem is solved 
by the step-up basis rule at death by eliminating the income tax 
liability. A carry-over basis rule, though, leaves the income tax 
liability intact, which means someone--decedent, heirs, or a 
combination of the two--must both pay off the loan and pay off the 
taxes.
    Current legislative proposals include only a partial repeal of the 
step-up basis at death rule. The Kyl-Breaux bill (S. 275), for example, 
eliminates current death taxes yet retains the step-up basis rule to 
the extent of $2,800,000 in unrealized appreciation. It thus provides 
complete tax relief for individuals whose assets at death include 
appreciation of $2,800,000 or less, regardless of any encumbrance. For 
an individual who dies owning property with value of, say, $10,000,000 
subject to a debt of $9,000,000 and with adjusted basis of $500,000, 
this relief will be partial at best even though the net value of the 
estate is well under the $2,800,000 amount. That is, there will still 
be taxable gain of $6,700,000 (value of $10,000,000 less carryover 
basis of $500,000 plus step-up basis of $2,800,000), of which most 
presumably will be imposed on the decedent at death (gain at death 
presumably will equal outstanding loan amount of $9,000,000 less total 
basis of $3,300,000, or $5,700,000 of taxable gain).
    Imposing a heavy tax burden on the decedent both accelerates the 
tax liability and imposes it at a time when there may be no funds with 
which to pay the taxes. Letting the decedent escape taxation shifts 
that burden to the heirs who, when they sell the property, will end up 
with far less than the equity they anticipate. Indeed, they might even 
end up out-of-pocket.
    The most direct solution to this dilemma would be to defer taxation 
of the unrealized gains until the heirs sell the property--that is, 
provide by statute that no gain is recognized on the devise of 
encumbered property--and then limit the tax liability to ensure that 
the heirs are not out of pocket by reason of the inheritance. Putting 
such a limitation into law would require something like the following:
Sec. 1014. Property acquired from a decedent [gain limitation]
    (a) In general.--In the case of property acquired from a decedent 
within the meaning of subsection (b)--

          1. No gain or loss shall be recognized by the decedent or the 
        decedent's estate on such transfer; and
          2. The basis of such property in the hands of the person 
        acquiring it from the decedent shall be the basis of such 
        property in the hands of the decedent immediately prior to 
        death [possibly including a partial step-up].
          3. Upon the disposition of such property by the person 
        acquiring it from the decedent, any gain recognized shall not 
        exceed the value of the property less the amount of debt 
        encumbering such property at the time it was acquired from the 
        decedent times the highest tax rate applicable to net capital 
        gain.

    (b) Property acquired from the decedent.--
    [no change to existing law]

    Alternatively, Congress could eliminate the problem entirely by 
providing that (1) the decedent is not taxed on the death-time transfer 
of property even if encumbered and (2) the heirs get a step-up for the 
amount of any encumbrance existing at the time of the debt. This would 
avoid the problems indicated above, but it would do so only by bringing 
back--at least in part--the step-up basis rule.
    An astute taxpayer who owned appreciated assets could exploit such 
a rule by borrowing against low-basis property shortly prior to death. 
For example, suppose T owns land with adjusted basis of $0 and current 
value of $10,000,000. Under a carry-over basis at death regime, 
someone--decedent or heir--is supposed to be taxable on the $10,000,000 
appreciation when the property is sold. Yet, if property transferred at 
death qualifies for a step-up basis at death to the extent of any 
encumbrance on the property, T should borrow as much as possible 
against the property immediately before dying.
    For example, suppose T places a $9,000,000 mortgage on the property 
prior to death and then devises both the encumbered land and the 
$9,000,000 loan proceeds to his child. Child takes the property with a 
basis of $9,000,000 rather than $0 if a step-up is provided for the 
debt. However, Child can use the cash to retire the debt and thereby 
own the land free and clear. By running the debt through the decedent's 
estate, the carry-over basis rule has been almost entirely avoided.
    This tax avoidance technique could be eliminated by providing a 
step-up basis only for old and cold debt; that is, for debt placed on 
the property more than one, two or even three years prior to the death-
time transfer. Careful taxpayers could still exploit this rule by 
borrowing early enough, but in such circumstances the loan likely would 
have some business legitimacy because interest would have been paid for 
months or years. Nevertheless, probably the best way to limit gain 
recognition on heavily mortgaged assets without opening the door to 
wholesale tax avoidance is to provide for a basis step-up only as to 
excess qualified nonrecourse financing (within the meaning of 
Sec. 465(b)(6)(B)). By incorporating the definition of ``qualified 
nonrecourse financing,'' the partial step-up is targeted to real estate 
activities and excludes the potential abuse areas of related party debt 
and seller financing. And by further limited the partial step-up to 
excess debt (that is, a step-up for such debt only to the extent it 
exceeds adjusted basis), the step-up will be limited to those cases in 
which the basis is low and the gain to the heirs will be substantial; 
that is, to cases in which the property's equity may not be sufficient 
to cover the eventual tax liability. To enact this result, Congress 
should enact language such as:
Sec. 1014. Property acquired from a decedent [debt step-up]
    (c) In general.--In the case of property acquired from a decedent 
within the meaning of subsection (b)--

          1. No gain or loss shall be recognized by the decedent or the 
        decedent's estate on such transfer; and
          2. The basis of such property in the hands of the person 
        acquiring it from the decedent shall be--

                  i. the basis of such property in the hands of the 
                decedent immediately prior to death [possibly increased 
                for a partial step-up], plus
                  ii. the amount of any qualified nonrecourse financing 
                as described in Sec. 465(b)(6)(B) to the extent the 
                amount of such debt exceeds the adjusted basis of such 
                property determined under subparagraph (i).

    (d) Property acquired from the decedent.--
    [no change to existing law]
Conclusion
    Repeal of the estate tax is not intended to be fundamental income 
tax reform. Yet, if a carry-over basis rule at death replaces the 
current step-up basis rule, the death-time transfer of encumbered 
property might well include not only a new and substantial income tax 
liability but also an acceleration of that liability to the moment of 
death. Carefully drafted language can avoid that acceleration. In 
addition, a tailored step-up for qualified nonrecourse financing can 
ensure that heavily mortgaged real estate will not be a negative value 
asset in the hands of a decedent's heirs.

                                

 Statement of Larry Taylor, President, Air Conditioning Contractors of 
                      America, Arlington, Virginia
    On behalf of the Air Conditioning Contractors of America (ACCA), I 
would like to thank the Committee for holding this hearing which is of 
vital importance to the economic health and future of working families 
across our nation. In addition to being President of ACCA, I am 
President of Air Rite Air Conditioning Company, Inc., a Fort Worth, 
Texas, company that specializes in heating, ventilation, air 
conditioning and refrigeration (HVACR) systems.
    Mr. Chairman, I began my HVACR career working for a company known 
today as TD Industries and stayed with them for over 19 years before 
purchasing Air Rite in 1990. My wife Linda and I, along with our son 
Toby, operate Air Rite and employ 33 ``partners'' who work together to 
make it a better workplace for future ``partners.''
    Air Rite is a fair representation of the typical member company of 
ACCA, and like many of the family-owned company members of ACCA, it is 
Linda's and my sincere hope that we will be able to pass along our 
business to our children.
    Mr. Chairman, ACCA is the nation's premiere trade association of 
those who maintain, design, and install heating, ventilating, air 
conditioning and refrigeration (HVACR) systems. We have 60 state and 
local chapters, representing approximately 9,000 members nationwide, 
the vast majority of which are family-owned and operated small 
businesses. We appreciate the opportunity to support President Bush's 
proposal to repeal the death tax. Repeal of the estate and gift tax has 
long been a legislative priority of ACCA, and we hope the Committee's 
efforts will help focus attention on the need to restore a measure of 
common sense to our nation's tax code by passing H.R. 8.
    Death tax relief is long overdue for four principal reasons. First, 
as you are aware, the death tax is the single greatest threat to 
family-owned businesses. It is estimated that 90 percent of small 
businesses that fail shortly after the death of the founder do so 
because of the punitive estate tax burden placed on the surviving 
family members. In an effort to soften the blow of the death tax and to 
beat these sobering odds, small family businesses spend approximately 
$6 billion a year on lawyers, accountants, and insurance. This is money 
that could be put to better uses, such as growing their businesses. 
Nevertheless, some 70 percent of family businesses still do not survive 
into the second generation. By the third generation, the loss is 87 
percent. H.R. 8 recognizes that this is money that should be used to 
grow business. Eliminating the death tax will dramatically reduce the 
time, money, and energy spent on estate planning, thereby freeing up 
scarce resources and allowing business owners to concentrate on growing 
their businesses, which in turn will produce more revenue to hire new 
employees and expand the family business.
    Second, the death tax lacks economic rationale. If the business of 
the federal government is to confiscate assets simply because it has 
the power to do so, then the death tax is the perfect expression of 
that power. But if the goal of our federal tax policy is to tax 
economic activity, then the death tax merely repeats action already 
taken. It's important to remember that the assets of a deceased 
business owner's estate have been subject to previous taxation. As 
such, it is thoroughly perplexing to family-owned businesses that they 
should be singled out for double, sometimes triple, taxation.
    Third, the death tax exposes the foolish complexity of our tax 
system. Due to the inordinately high rates of the death tax, it is more 
cost effective for families to sell the family business before the 
death of the owner and pay the dramatically lower rates of the capital 
gains tax than to pass the business to the next generation.
    Fourth, and perhaps most troubling, the death tax borders on the 
immoral and runs counter to the ideals upon which this nation was 
founded. This tax, more than any other in the entire Internal Revenue 
Code, singles out and penalizes those Americans who work hard and save 
for their children. There is nothing more inherently wrong than taxing 
the loved ones of a deceased family member upon his death. For an air 
conditioning contractor or other small business owner to work hard all 
of his life, pay business and income taxes, contribute to his 
community, and then to have family members taxed on whatever remains 
upon his death is simply wrong, especially if they are forced to sell 
all or part of the assets to satisfy the tax man.
    There are a couple of arguments levied against adoption of H.R. 8 
that need to be addressed. Opponents of repealing the tax assert that 
H.R. 8 is simply a tax break for the wealthy and that repeal risks 
bankrupting the country. Such assertions make for nice soundbites, but 
the truth is far different. Regarding the charge that only wealthy 
Americans will benefit, it is important to note that, on average, 46 
workers lose their jobs every time a family-owned business is forced to 
shut its doors. And let me assure you that I am not spending my 
weekends with the Rockefellers. The families of deceased HVACR 
contractors are not typically bequeathed stacks of money. In fact, what 
they are left is a business that requires a lot of hard work, time, and 
energy.
    And concerning the suggestion that the national budget will be 
placed at risk, one need only look at the fact that revenues from the 
death tax account for just a little over one percent of federal revenue 
to know that this tax actually provides little benefit to the federal 
treasury. As you know, the government spends considerable funds to 
collect the tax so the net gain is minimal. Further, this argument 
proves too much: if the federal government is truly strapped for cash, 
then why wait until someone dies to confiscate his assets? Why not 
simply raise the marginal tax rates today? But curiously, we don't hear 
calls for such action. In fact, we're currently debating the merits of 
providing long overdue relief on marginal rates as well. Perhaps this 
is because the federal treasury is not in such dire straits as 
opponents of death tax relief would have us believe.
    Mr. Chairman, the death tax combines two certainties, death and 
taxes, into one onerous liability for family-owned small businesses. We 
urge you and members of the Committee to put an end to the death tax by 
supporting H.R. 8. ACCA appreciates this opportunity to testify on this 
issue and believes your role in addressing this critical issue, which 
is of vital concern to small businesses across America, deserves to be 
recognized. We at ACCA are pleased to do so, and thank you for your 
attention to the needs of family-owned small businesses.

                                


            Cal-Fed School Infrastructure Coalition
                               Sacramento, California 95814
                                                     March 20, 2001

The Honorable Bill Thomas
Chair, House Ways & Means Committee
Attention: Bob Winter
House Ways & Means Committee
1102 Longworth House Office Building
Washington, D.C. 20515

Subject: School Construction Needs

Dear Chairman Thomas:

    We appreciate the opportunity to provide information regarding 
school construction needs in California as part of the House Ways & 
Means Committee hearing on the Budget Proposal.
    In California the school facilities problem is at critical 
proportions and necessitates partnerships among local, state and 
federal governments. Based on the California Department of Finance's 
estimated public school enrollment for 2000-2005, California's student 
population will grow by an average of 37,653 pupils per year. 
Currently, California has a K-12 student population of approximately 
5,951,612. Projections indicate that by the year 2005, California will 
have reached a student population base of 6,134,412.
    California passed Proposition 1A in 1998 that provided State funds 
for modernization and new construction needs with a match from local 
school districts. All $2.1 billion allocated for modernization has been 
apportioned with a pending project list totaling over $1 billion. New 
construction funding is available to school districts that qualify 
under a complex priority point system and funds are going quickly. 
These funds were intended to last through 2002. Estimated needs for 
deferred maintenance and modernization in the next five years begin at 
$7 billion as a conservative estimate while new construction needs will 
exceed $9.6 billion.
    It is important to remember that school district capital needs are 
greater than the resources that can be provided from one or two 
government entities. Participation by local, state and federal 
governments is the only way we will develop the resources to build and 
modernize the schools our country needs to serve all our children in 
the future.
    As an example of the above-mentioned support, the Qualified Zone 
Academy Bond Program (QZAB) has been extremely successful in 
California. All funding allocated in 1998, 1999, 2000 and 2001, 
totaling approximately $222,488,000, was fully allocated as of January 
2001. The State of California has received over $85,000,000 in 
additional requests for QZABs that the State cannot meet. An extension 
or expansion of this program would be well utilized in California. Some 
examples of successful QZABs include a Technology Academy in the Pomona 
Unified School District, the Center for Advanced Research and 
Technology in the Clovis and Fresno Unified School Districts and two 
Computer Certification Academies in the Baldwin Park Unified School 
District, all exemplary programs featured on the U.S. Department of 
Education website.
    In addition, the America's Better Classroom Act, introduced last 
week as H.R. 1076 by Congresswoman Nancy Johnson (R) of Connecticut and 
Congressman Charles Rangel (D) of New York, is an important bill 
addressing the need to assist local communities in the building of 
schools. H.R. 1076, providing a federal investment of $2.76 billion 
will generate $24.8 billion in interest-free school construction bonds. 
The federal government provides a tax credit in lieu of interest and 
the responsibility for the bond principal will be at the state and 
local level. All decision-making prerogatives related to the actual 
school renovation and construction remains a local community decision. 
The success of the QZAB program illustrates this fact--the federal 
government provides an interest subsidy while leaving all school 
construction decisions to the local community.
    California is in the process of developing a program for the School 
Renovation Program providing $133 million in school renovation, IDEA, 
and technology funds included in the FY 2001 budget. It is expected 
that these funds will be depleted immediately upon implementation of 
the program.
    Cal-Fed is aware of alternative funding sources such as private 
activity bonds. However, these alternatives do not provide the 
assistance that can be gained through the QZAB Program and most 
importantly the school modernization bonds proposed under H.R. 1076. 
For instance, in California, school districts do not have the revenue 
source necessary to make lease payments to a developer constructing a 
school through private activity bonds. The QZAB Program and H.R. 1076 
would utilize tax-credits thereby providing a better alternative source 
for school districts and better leverage of federal dollars for school 
construction.
    California, like the rest of the nation, has an immediate need for 
school construction funds through a partnership between local, state 
and federal governments. We request your support for the inclusion of 
school construction funding in the current Budget Proposal as well as 
the passage of H.R. 1076.
    Thank you for your consideration.

            Sincerely,
                                              Terry Bradley
                                                              Chair

                                


                      College Savings Plans Network
                             Lexington, Kentucky 40578-1910
                                                     March 22, 2001

The Honorable William Thomas
Chairman
Committee on Ways & Means
United States House of Representatives
Room 1102 Longworth House Office Building
Washington, DC 20515

Dear Mr. Chairman:

    On behalf of the College Savings Plans Network (``CSPN''), which 
represents the college savings programs of all 50 states and the 
District of Columbia, I am writing to express our support for 
legislation to provide an exclusion from gross income for distributions 
from the qualified state tuition programs. CSPN applauds your 
leadership on legislation to encourage saving for college. Section 529 
programs now represent over 1.5 million families who have invested over 
$9 billion for their children's future higher education.
    The state-sponsored college savings programs have achieved 
tremendous success. Since enactment of the Small Business Job 
Protection Act, the number of children participating in the programs 
has skyrocketed, and the number of states with programs has nearly 
doubled. The state-sponsored college savings programs help families 
save for the high cost of a college education. As a result, many more 
of our children will have the opportunity to gain a higher education, 
which benefits the entire nation through a better educated, more 
productive workforce.
    The College Savings Plans Network believes that establishing an 
exclusion from gross income for distributions from the qualified state 
tuition programs is essential to encouraging savings and college 
attendance. An exclusion from gross income would also recognize that 
contributions to the programs cannot be used for any purpose other than 
higher education. Any tax withheld from the distribution would reduce 
funds available to pay college expenses, increasing the cost to attend 
college. The public policy of this proposal is to enable and motivate 
families to save for college by providing clear and easily understood 
tax treatment of the qualified state tuition plans.
    The states also support three additional amendments to Section 529. 
The first is an increase in the amount plans are allowed to pay out for 
room and board costs. The current off-campus amounts are fixed and do 
not take into account geographic differences in the cost of living and 
are not indexed for inflation. The College Savings Plans Network also 
supports the inclusion of first cousins in the definition of ``member 
of family,'' which will allow grandparents to transfer accounts among 
all of their grandchildren. Lastly, the Network supports an amendment 
that would allow for rollovers among qualified state tuition programs 
without having changing the beneficiary. These amendments were included 
in the Senate Finance Committee Chairman's mark of the ``Affordable 
Education Act of 2001'' and the modifications (JCX-9-01 and JCX-11-01) 
approved on March 13, 2001.
    As the administrators of the state-sponsored college savings plans, 
we are concerned about proposals to expand Section 529 to permit 
private colleges and universities to establish qualified savings trust 
programs. CSPN supports proposals designed to encourage families to 
save for their children's higher education. But, as the proposal to 
permit private institutions to establish qualified savings trust 
programs moves forward in the legislative process, we urge the 
Committee to ensure that there is effective oversight and financial 
security of the private institution programs.
    The College Savings Plans Network supports allowing private 
institutions to establish qualified prepaid tuition programs under 
Section 529(b)(1)(A)(i), but believes these institutions must be 
subject to regulation and oversight as rigorous as the oversight to 
which the state programs are subject. Limiting these types of programs 
to prepaid tuition plans rather than savings trusts, we believe, would 
provide adequate safeguards for the sound operation of independent 
school programs.
    The state-sponsored college tuition programs are secured by the 
moral obligation of the states. To back this moral obligation, the 
state programs are subject to multiple levels of oversight. Oversight 
examples include state boards; gubernatorially appointed boards with 
specific qualifications; state audit review; legislative oversight 
committees; public audit reports; required public disclosure; and open 
meeting laws, as well as public record accessibility requirements. 
These oversight mechanisms protect the financial integrity of the 
programs, ensuring that the contributions to the programs are soundly 
invested and that the actuarial goals of the plans are met. Safe 
financial operation of the programs means that when a beneficiary 
enrolls in college, the program can pay out the proper amount of 
tuition.
    The passage of legislation to improve the tax treatment of state-
sponsored college savings programs is crucial to states currently 
administering a college savings plan, as well as to those states 
implementing new plans for the benefit of their residents. Thank you 
again for your leadership and strong support of the state college 
savings programs and the hundreds of thousands of families who 
participate in them. We look forward to working with you as this 
legislation moves through Congress.

            Very truly yours,
                                             Georgie Thomas
                        Chairman, College Savings Plans Network and
                                      New Hampshire State Treasurer

                                


    Statement of the Hon. Constance A. Morella, a Representative in 
                  Congress from the State of Maryland
    I am here to applaud the President's proposal to increase the child 
tax credit from $500 per child to $1,000 per child. Throughout America, 
families with children struggle with the extra cost associated with 
raising children today--especially child and health care costs.
    During the President's inaugural remarks, he said, ``America, at 
its best, is compassionate. In the quiet of American conscience, we 
know that deep, persistent poverty is unworthy of our nation's 
promise.'' With much applause, the President continued, ``And whatever 
our views of its cause, we can agree that children at risk are not at 
fault. Americans in need are not strangers, they are citizens, not 
problems, but priorities.''
    The President's proposal to double the child tax credit from $500 
to $1,000 is an important first step towards achieving our shared 
goals. Unfortunately, the child tax credit expansion, as proposed, 
discounts over 16 million children because they live in families with 
no federal tax liability and therefore will receive no benefit from an 
increase in the child tax credit because it's not refundable--it's not 
available to families without federal tax liability.
    An additional 7 million children live in families who will not 
benefit from an increase in the child tax credit unless it's refundable 
due to their limited tax liability. Yet, these families pay taxes. They 
pay federal and state taxes, payroll taxes, gas taxes, phone taxes, and 
other taxes. Overwhelmingly, they represent working families. Yet, at 
$12,000 or $20,000, they have no federal tax liability and therefore 
unless the child tax credit is made refundable, they will receive no 
benefit from an increased child tax credit.
    Making the child tax credit fully refundable would lift more than 2 
million poor children out of poverty (one in six). It would lift 1.6 
million extremely poor children (one in three) above one-half of the 
poverty line (above $6,645 a year for a three person family). While it 
may not be realistic to achieve full refundability in this tax bill, I 
believe it is important to take the first step towards helping those 
children most in need.
    To that end, I, along with several of my Republican colleagues, 
have formulated language that duplicates the President's proposal to 
double the existing child credit from $500 to $1,000 and increase the 
income phase-out from $110,000 to $200,000. Our bill simply makes $500 
of the credit refundable to low and middle income families. This step, 
modest as it is, would lift over 1 million children out of poverty.
    Certainly, if we agree that children in higher income families need 
help from the child credit, we can agree that low-income children need 
that help as well. It is unconscionable that in America today, federal 
budget experts predict a federal budget surplus of $5.6 trillion over 
the next 10 years and an ``on-budget'' surplus of $3.1 trillion over 
the next 10 years--that over 12 million children live in poverty.
    We can take advantage of the current resources our great nation 
has, by attempting to move children out of poverty--to ensure that no 
child is hungry or homeless, without health coverage, unable to 
concentrate in school because their parents cannot afford a decent 
apartment or a balanced meal. Making the child tax credit refundable 
would be one of the most effective antipoverty strategies in years. 
While I support expanding the Earned Income Tax Credit (EITC) for large 
families, making the child tax credit refundable is several times more 
effective in moving children out of poverty.
    Often people talk about the complexity of the tax code. The beauty 
of making the child tax credit refundable is its simplicity. Families 
in need, regardless of income tax liability, would receive much needed 
benefit--no marriage penalty and very little chance for fraud. Unlike 
some programs, a refundable credit would not result in fraudulent 
claims because children must qualify as dependents. The IRS already has 
an effective system in place to verify any claim of dependents. The 
credit is not income-based so you don't have to have systems set up to 
track parents as they navigate their way through a series of low wage 
jobs.
    Mr. Chairman, I supported the President's income rate tax proposal 
because, like many of my colleagues, I believe Americans pay too much 
in several sections of the tax code. The concept of a refundable child 
tax credit is not new. Back in 1991, the Bipartisan National Children's 
Commission that included the former President George Bush's nominee for 
HHS Assistant Secretary for Families, Youth, and Children Wade Horn 
recommended that Congress should enact a refundable child tax credit.
    Certainly, making the child tax credit refundable will not solve 
child poverty but, it is a step in the right direction, and moving over 
1 million children out of poverty is a giant leap in poverty reduction. 
During the President's inaugural address, he made this pledge: ``When 
we see that wounded traveler on the road to Jericho, we will not pass 
to the other side.'' Thank you, Mr. Chairman, for this opportunity to 
submit my testimony to your committee. I know we share a commitment to 
our nation's children and look forward to working with you on this 
issue.

                                


                   National Association of Realtors
                                       Washington, DC 20001
                                                     March 22, 2001

The Honorable Bill Thomas, Chairman
Committee on Ways and Means
1100 Longworth House Office Building
House of Representatives
Washington, DC 20515

Dear Mr. Chairman:

    The National Association of Realtors (NAR) appreciates the 
opportunity to comment on features of President Bush's tax cut 
proposal. The National Association of Realtors represents more than 
760,000 Realtors who are engaged in every facet of real estate 
brokerage, leasing, property management and sales.
    Our members generally favor low tax rates. Presently, they are 
hopeful that Congress and the Administration can strike a balance 
between tax cuts and reducing the debt. Real estate is particularly 
sensitive to interest rates, and we believe that the combination of tax 
and fiscal policy should foster the lowest possible interest rates and 
tax rates.
    Two features of the President's tax cut plan are the subjects of 
hearings on March 21. NAR wishes to express concerns about marriage 
penalty relief and about some technical aspects of estate tax repeal.
Marriage Penalty Relief
    NAR supports the marriage penalty relief specified by both 
Candidate Bush and in the Administration's ``Blueprint for New 
Beginnings'' (the budget plan). The budget plan reinstates the Reagan 
solution to the marriage penalty. The proposal allows a deduction for 
two-earner families that allows the lower-earning spouse to deduct 10 
percent--up to $3,000--of the first $30,000 of income. An identical 
provision was in effect from 1981-1986. The provision was repealed as 
part of the Tax Reform Act of 1986 because the low tax rates enacted in 
that legislation significantly reduced the impact of the marriage 
penalty. Since 1986, however, tax rates have increased and the marriage 
penalty has again become an anomaly of the Code.
    NAR favors the Bush budget solution to the marriage penalty over 
methods that focus on the standard deduction. In 1999 and 2000, the 
House passed marriage penalty relief that would have doubled the 
standard deduction. Thus, the provision would have gone beyond the 
scope of simply reducing the marriage penalty by providing tax 
reductions to couples who do not experience the penalty because only 
one spouse earns income. Doubling the standard deduction is a simple 
method for addressing this problem, but it excludes working couples who 
itemize their deductions. We cannot discern any policy reason why those 
families who itemize should be denied marriage penalty relief.
    NAR believes that two-income families who itemize their deductions 
should also receive marriage penalty relief. We believe that 
fundamental fairness requires this result. Therefore, we support the 
Administration's budget proposal over relief methods that focus on the 
standard deduction.
    Provisions similar to those found in this year's H.R. 6 were 
advanced in 2000 to correct the marriage penalty. Those provisions were 
vetoed in 2000. This year, H.R. 6 doubles the standard deduction, 
widens the 15% bracket and mitigates the marriage penalty in the earned 
income credit. The sponsors of H.R. 6 acknowledge that it provides no 
relief to individuals who itemize their deductions. They attempt to 
correct this disparity by widening the 15% bracket for married joint 
filers. While this will provide relief to all married taxpayers, 
including those in higher brackets, we note that those who utilize the 
increased standard deduction will also receive the benefit of the 
bracket changes, while those who itemize will receive only the relief 
of the bracket widening. Moreover, since the bracket widening provision 
is phased in, it will take several years before taxpayers who itemize 
will receive relief. Again, we can find no policy basis for providing 
immediate relief to non-itemizers while providing only a single form of 
phased-in relief to itemizers.
Estate Tax Repeal--Support for H.R. 8 as Introduced
    When H.R. 8 was debated in Congress in 2000, NAR sent House and 
Senate members a letter of support for final passage of the conference 
report on the bill but expressed concerns about that bill's provision 
eliminating stepped up basis in favor of carryover basis. In this 
Congress, Ms. Dunn and Mr. Tanner have again introduced H.R. 8 and have 
retained stepped up basis. NAR strongly supports repeal of the estate 
tax and thus supports H.R. 8 in its current form. We believe that the 
Committee should adopt H.R. 8 in its current form, as it achieves both 
objectives of repealing the estate tax and retaining stepped up basis 
for all assets.
Challenges of Carryover Basis
    Because Congress has passed carryover basis once, however, we wish 
to express our concerns about many of the problems associated with that 
change. Our concerns about carryover basis are based largely on 
administrative challenges for property owners, estate administrators 
and tax administrators. We believe that carryover basis is unduly 
complex. Indeed, the carryover basis provisions enacted in 1976 were 
delayed in 1978 until 1980. The Joint Committee ``General Explanation 
of the Revenue Act of 1978'' noted that

          Congress believes that it should thoroughly review the 
        concept of carryover basis in addition to considering its 
        effect on the administration of estates. The Congress believes 
        that the effective date should be postponed in order to review 
        the provisions before they become effective. (General 
        Explanation, p. 294.)

    Congress undertook that review, and concluded that while carryover 
basis was perhaps a supportable policy, it was almost impossible to 
implement. Thus, the carryover basis rules were never put into effect 
and were repealed in the 1980 Crude Oil Windfall Profit Tax Act of 
1980. In fact, the IRS and practitioners were unable to design rules to 
make the carryover basis concept operational. The Joint Committee 
``General Explanation of the Crude Oil Windfall Profit Tax Act of 
1980'' that accompanied the repeal of carryover basis described the 
``Reasons for Change'' as follows:

          A number of administrative problems concerning the carryover 
        basis provisions have been brought to the attention of the 
        Congress. Administrators of estates have testified that 
        compliance with the carryover basis provisions has caused a 
        significant increase in the time required to administer an 
        estate and has resulted in raising the overall cost of 
        administration. Congress believed that the carryover basis 
        provisions are unduly complicated and should be repealed. 
        (General Explanation, p. 120.)

    Advocates of carryover basis have expressed concern that the repeal 
of the estate tax, coupled with retention of stepped up basis, would 
permit substantial amounts of built-in gain in appreciated assets to 
completely escape taxation. Their concerns must be weighed against the 
problems inherent in designingworkable carryover basis rules.
    Even when the estate tax is repealed, the effects of inheriting 
assets will still be felt by heirs because the assets that the heirs 
receive will remain subject to the income tax rules. Thus, rules for 
determining the value of the assets that the heirs receive are 
essential. Current law permits the heirs to receive assets at their 
fair market value by providing a stepped up basis. Carryover basis 
requires that the heirs receive the assets at the value they have in 
the hands of the decedent.
    The vetoed 2000 version of H.R. 8 would have permitted a stepped-up 
basis for $1.3 million of assets. All other assets would be subject to 
carryover basis. This rule has an effect similar to an exclusion and 
would eliminate the complexity of carryover basis for smaller, 
relatively simple estates. This year, Senator Kyl, an advocate of 
carryover basis, has introduced S. 275, which repeals the estate tax 
and institutes carryover basis, subject to a stepped up amount of $2.6 
million per decedent. Thus, under S. 275 a couple could convey assets 
with a value of up to $5.6 million with a stepped-up basis. This 
provision will eliminate some of the challenges of carryover basis and 
will reduce the number of taxpayers subject to the carryover basis 
regime. The remainder of estates and their administrators and heirs 
will, however, face new complexities. The discussion that follows 
enumerates some of the problems with carryover basis and/or a part step 
up, part carryover model.
    Recordkeeping: Carryover basis requires meticulous recordkeeping. 
Heirs will need to know when an asset was acquired and at what price. 
Additional costs arising from acquisition might also have changed the 
basis of the asset. These costs could include items such as commissions 
paid, title search costs and legal and/or financial advice related to 
the acquisition. In the case of stocks and other securities, the heir 
would need to know whether there had been splits and/or mergers or 
acquisitions that applied to the stock. In the case of real property or 
certain tangible personal property, the heir would need to know the 
costs of improvements and repairs, as well.
    Some would say that this is no different from the information the 
recipient of a gift would need to have because gifts are subject to a 
carryover basis. The stark difference between a gift and a bequest, 
however, is that the donor is alive and able to provide information in 
the case of a gift, but the person with all the information is dead in 
the case of a bequest and so cannot provide information.
    Liabilities in Excess of Basis: Under current law, the amount 
property that is subject to the estate tax is the net value of the 
property in the estate. Thus, in a taxable estate, an individual might 
have a property with a fair market value (FMV) of $4 million at death, 
a basis in that property of $300,000, and a debt on the property of $3 
million. The estate tax on this property would be imposed on a value of 
$1 million--the net FMV of the property ($4 million less $3 million 
debt). If an heir later sold the property for $4.5 million, the taxable 
gain would be $500,000 ($4.5 million sales price less stepped up basis 
of $4 million). The debt would have no effect on the stepped up basis 
of the heir at the time of disposition.
    By contrast, the transfer of a debt-encumbered property with a FMV 
of $4 million, debt of $3 million and a basis of $300,000 would be 
treated much differently under carryover basis. The heir would have a 
basis in the property of only $300,000 (the same as the decedent's). A 
subsequent sale of the property for $4.5 million would generate a 
capital gain of $4.2 million ($4.5 million less $300,000--the debt is 
given no effect for measuring gain). At a tax rate of 20% on the 
capital gain, the tax due would be $840,000. This is substantially 
higher than the $550,000 that would be due under the estate tax with 
stepped up basis even if the decedent's estate had been subject to the 
highest estate tax bracket. When the heirs in the stepped up basis 
example above sold the property for $4.5 million, their capital gain 
was $500,000 for an income tax liability of $100,000. The combined 
$550,000 estate tax and $100,000 capital gain tax are still less than 
the $840,000 capital gains tax due in this carryover basis example. The 
$840,000 amount would be even higher if the transaction involved 
recaptured depreciation allowances (which are taxed at 25%).
    Capital gains taxes are imposed on gross amounts, while the estate 
tax is imposed on net amounts. Low basis property with debt 
encumbrances might thus actually be subject to greater tax burdens 
under carryover basis than those imposed by the estate tax. A low tax 
rate imposed on a large base can, depending on circumstances, yield a 
higher tax liability than a high rate tax imposed on a small base.
    A Tax at Death?: Another anomaly might occur with carryover basis 
transfers of low basis, debt-encumbered property. This anomaly arises 
because of the operation of the income tax law, not the estate tax. 
Under current income tax law, the disposition of debt-encumbered, low 
basis property results in a gain to the transferor if the property is 
sold and both the property and the debt are conveyed to the purchaser 
or if the property and the debt are transferred as a gift. The rules of 
Section 1014 operate to require immediate recognition of gain in these 
circumstances.
    If the estate tax were repealed, the income tax rules may affect 
the transfers of property from an estate to an heir. If the basis of 
the property were stepped up as in the example above, the recognition 
provisions of Section 1014 would generally not apply to the estate or 
heir. Current law taxes the net estate and then steps up the basis for 
the heir so that the debt is generally covered by the new basis. By 
contrast, carryover basis could trigger a taxable event at death. If 
the transferor is an estate transferring encumbered property to an 
heir, there may be an immediate tax due because of these income 
recognition rules of current law. The fact that the estate tax is 
repealed would not change the income tax outcome for these assets if 
carryover basis applied. Similar results (i.e., a tax at death) could 
occur when property is distributed from a trust to a beneficiary 
pursuant to a bequest.
    Although the number of assets that would be debt-encumbered and low 
basis is relatively small compared with all assets, we urge Congress to 
correct this anomaly so that the inheritance of debt-encumbered, low 
basis property will not trigger an immediate income tax event. A stated 
goal of advocates of repeal is to assure that death is not a taxable 
event. Correction of this problem will assure that result.
    Tax Attributes: Congress will need to make determinations about how 
to treat the various tax attributes that accompany both individuals and 
their property under the income tax. While the estate tax burden would 
be eliminated with repeal, the estate and its assets will still be 
subject to income tax rules. Congress will need to determine, for 
example, how to treat suspended losses under the passive loss rules 
under Section 469. Will the heir receive a basis adjustment for them, 
or will they disappear, or will they simply remain suspended losses?
    Similarly, Congress will need to make determinations about the 
treatment of charitable contribution carryforwards for individuals and 
businesses, net operating loss carryovers for small businesses, 
investment interest carryforwards and capital loss carryovers. Whether 
these attributes continue to have separate identity and remain subject 
to various limited or unlimited time constraints, or whether they 
become adjustments to basis, administrators will have new burdens as 
carryover basis requires them to attempt to determine which assets 
produced which attributes. These burdens will be magnified in a part 
step up, part carryover scheme like the 2000 version of H.R. 8 or this 
year's S. 275.
    Allocations of Basis: Part carryover, part step up models such as 
last year's H.R. 8 or the current S. 275 will create unique problems 
for administrators of estates that are larger than the allowable step-
up amount. Administrators will need to allocate the step-up amount 
among assets. They will be required to make market predictions about 
the probable subsequent appreciation of the decedent's assets and the 
probable pattern of asset retention and disposition among the heirs so 
that they can make the most favorable allocations for the heirs. Even 
in the absence of an estate tax, it can be assumed that heirs will want 
tominimize their exposure to subsequent capital gains (and, if 
applicable, recapture) taxes. When the size of estates is only 
marginally less than the step up amount, administrators (or Congress) 
will need to devise both taxpayer and IRS recordkeeping rules that will 
allow subsequent heirs to verify either the stepped up or carryover 
basis of each asset.
    Multiple Heirs/Multiple Generations of Heirs: Estate administrators 
of estates larger than any step-up amount will be particularly 
challenged in allocating the step-up amount among two or more heirs. In 
the absence of instructions from a decedent, how would an administrator 
choose to distribute cash, appreciated real estate, appreciated stock 
(whether these appreciated assets were high or low basis) and the 
residue of an IRA or 401(k) plan? Under stepped up basis, the 
determination of comparable value among these assets is relatively 
simple, because the value of each asset in the estate and thus to the 
heir is stepped up to its fair market value.
    Under carryover basis, there would be no consistent method of 
valuing the assets for the assets for the heirs. To the extent that 
heirs disagreed with either the type of property received or its basis 
allocation and potential value, there could be increased controversy 
about disposition of estates. Heirs would likely prefer to receive 
either cash or high basis assets. Because of the potential tax exposure 
for low basis assets, those may become undesirable bequests. Moreover, 
there would be substantial differences in the yearly income tax 
benefits and liabilities to an heir of receiving these different types 
of assets.
    Even more complicated problems arise for multiple heirs and 
multiple generations. Assume that a decedent had an estate with $8 
million of stock in various companies, all acquired on different dates. 
The decedent leaves this stock to each of 3 children, and the allowable 
step-up amount is properly allocated. (This assumes that it is possible 
to make a basis determination and that the decedent had sufficient 
records on all of the stock with which to make the determination.) Each 
of those 3 children holds the stock until his or her death, and each of 
them also has sufficient other assets for his or her own step up amount 
and some carryover basis assets, as well. Further, each of the 3 
children has heirs.
    How will the third generation heirs trace their basis from the 
first generation bequest? from the second generation? How will the 
records--which could cover a period of 40 or more years--be kept and 
retained? Who will bear the responsibility of keeping the records for 
the original bequest? How will the IRS know what assets from the 
original bequest received the step up and which received carryover 
basis? Will it be necessary to file returns, even for stepped up 
amounts? Will the IRS still have those records in a readable format 
after 40 or 50 years? Who will bear the burden of proof for 
establishing basis in multi-generation property? What if some of the 
assets become capital loss property?
    Inevitably, the movement of property from generation to generation 
under carryover basis will compound the complexity of the taxpayer's 
obligations--even in the absence of an estate tax.
    Potential Lock-in Effect: Over time, the basis of some assets will 
become very low relative to the appreciation and built-up gain in the 
assets, especially when the assets are carryover basis assets. This 
will be particularly true of depreciable assets, where, in theory, at 
least, the basis could be reduced to zero if it is not increased by 
improvements and renovations. While we have no empirical data to test 
our view, we believe that, over time, there could be an increasing 
lock-in effect as heirs find that the tax costs of selling low basis 
appreciated assets become increasingly disproportional. Historically, 
Congress has sought to eliminate the lock-in effect for appreciated 
assets. A long holding period for appreciated property with a low basis 
would surely have some lock-in effect.
    Impact on Surviving Spouses: Under current law, an unlimited 
marital deduction permits a spouse to leave all property to the 
surviving spouse without an estate tax consequence. The basis of the 
assets is stepped up to their fair market value. Then, when the second 
spouse dies, the estate tax is imposed on the value of the remaining 
assets. Under carryover basis, the marital deduction disappears, so any 
assets a surviving spouse will receive will be subject to the carryover 
basis rules. Even with a partial step up as under S. 275 (or last 
year's H.R. 8), a surviving spouse who needs cash or income could be 
forced to pay substantial taxes that would not be due under current 
law.
    This will be particularly true in the case of an estate with a 
limited number of illiquid assets. For example, a spouse might inherit 
a going concern small business. The survivor may not wish or be 
competent to operate the business and may wish to derive her income 
from other, more stable sources such as fixed income funds or 
annuities. Under current law, if the spouse sold the business, he/she 
would incur only a capital gains tax on the difference between the fair 
market value of the business at the decedent's death and the sales 
price of the business. Under carryover basis, depending on the 
relationship of sales price, carryover basis amounts and stepped up 
basis amounts, the income tax/capital gains tax liability to the spouse 
at the time of sale might be significantly greater than any estate tax 
might have been.
Conclusion
    The National Association of Realtors supports President Bush's 
original marriage penalty relief provision and is hopeful that any 
marriage penalty that the Committee crafts will apply equally to those 
who itemize their deductions and those who do not.
    NAR also supports full estate tax repeal as found in the 2001 Dunn-
Tanner version of H.R. 8. Despite our concerns from 2000 about 
carryover basis, we believe that its impact can be mitigated by 
assuring that only the most sophisticated taxpayers are subject to it. 
This mitigation can be accomplished by assuring that a step up amount 
at least as great as the $2.8 million in S. 275 is provided. NAR's 
Federal Taxation Committee and leadership have reviewed this issue 
carefully, and believe that full estate tax repeal is in the best 
interests of our members and the clients they serve.
    Should you or your staff have questions related to these issues, 
please feel free to contact me at 202 383 1083 or at 
[email protected].

            Sincerely,
                                                Linda Goold
                                                        Tax Counsel

                                


 Statement of Robert J. Maguire, Chairman, National Automobile Dealers 
                              Association
    Mr. Chairman and members of the Ways and Means Committee, I am 
Robert J. Maguire, CEO of Saturn of Bordentown, Saturn of Toms River, 
Bob Maguire Chevrolet Inc., Bordentown, N.J., Windsor Nissan, 
Highstown, N.J., and 2001 chairman of the National Automobile Dealers 
Association. On behalf of NADA, I commend you for holding this hearing 
and am pleased to submit this testimony in favor of eliminating the 
federal estate tax.
    NADA represents more than 19,500 franchised new car and truck 
dealers who employ more than one million people nationwide. The 
majority of NADA's members are small family-owned and community-based 
businesses. Many dealerships span two, three or four generations. I am 
a second-generation dealer myself. My father started his business in 
1938, and I joined him in 1962 before beginning my own in 1976.
    The estate tax in its current form is destructive to America's 
entrepreneurs. Under the current law, heirs could be required to pay up 
to a 55 percent tax on the estate when the owner dies. There is 
something very wrong in our system when a small businessman or 
businesswoman spends a lifetime building a company, paying taxes, 
providing jobs and serving the community only to have the government 
step in and take 55 percent of everything at death.
    The death of the owner of a small business can trigger an estate 
tax obligation that has immediate adverse consequences. The surviving 
family members often do not have sufficient cash reserves to cover the 
estate tax bill, so they have to borrow money to pay the IRS. This 
increased debt severely restricts the ability of the surviving entity 
to obtain additional capital, which can cripple or kill the business.
    Even the most sophisticated estate tax planning and the purchase of 
life insurance cannot mitigate the effects of the death tax. Most 
assets of automobile dealers are not liquid. A dealer's capital is 
invested in the land under the dealership, buildings housing showrooms, 
vehicle repair equipment, and other facilities. Also, dealers need 
substantial working capital to finance new and usedcar inventory, as 
well as parts and accessories. If the government demands half of the 
fair market value of the business just because the owner dies, families 
in the automobile business are left with few options but to sell their 
businesses or incur substantial debt to pay the tax.
    The estate tax also negatively impacts businesses before the death 
of an owner. Dealers spend thousands of dollars each year in fees to 
attorneys, accountants and life insurers in an attempt to prepare for 
an eventual estate tax liability. Dealers have paid taxes on these 
assets and are frustrated by throwing money at preparation costs rather 
than on more productive measures such as business expansion and 
employee benefits.
    Moreover, the notion that death taxes affect only the rich is 
wrong. To the extent that these taxes reduce savings and investment, 
they slow economic growth and job creation. When a family-owned 
business has to curtail growth or, in many cases, liquidate part or all 
of the business to pay estate taxes, it hurts everyone involved--
owners, customers, suppliers, employees, and their families.
    Preserving family-owned and community-based businesses is crucial 
to the health of the national economy and essential to the economic 
welfare of local communities. These businesses provide the majority of 
new job growth in the country. Very often, family-owned businesses are 
central to the economic vitality of local communities, providing career 
opportunities for millions of working Americans. The vast majority of 
the one million people that dealers employ depend on the stability of 
our businesses to provide for their families. The elimination of the 
estate tax will enable dealers to continue to provide these jobs and 
will help assure the continuity of family business ownership for 
generations to come.
    The death tax is anything but fair. I urge Congress to bury the 
death tax for good.

                                


  Statement of Bruce R. Bartlett, Senior Fellow, National Center for 
                            Policy Analysis
    Mr. Chairman, thank you for the opportunity to testify today on 
issues relating to the marriage penalty and child credit.
    To begin with, I would like to say that my general philosophy of 
taxation is that tax policy should influence individual decisionmaking 
as little as possible. People should neither be encouraged nor 
discouraged from getting married because of the Tax Code. Nor should 
their choice to have or not have children, or to have many or few 
children. These are extremely intimate aspects of family life that I 
think the government intrudes upon only at its peril.
    In short, I favor tax neutrality to the greatest extent that it is 
possible to achieve it. Of course, I recognize that no tax system can 
be completely neutral. But there are degrees of non-neutrality and I 
believe that our current tax system strays very, very far away from 
neutrality and would be improved by moving back in that direction.
    Some people take the position that since perfect neutrality is 
impossible and that tax policy must necessarily influence such things 
as marriage and child bearing to some degree, it follows that it should 
actively promote them. I think this is wrong and leads down a very 
slippery slope that advocates of an aggressive ``pro-family'' policy 
have not fully considered.
    I think it is important to recognize that the current pro-family 
bias of the Tax Code did not come about because Congress made an 
explicit decision to aid families. It resulted from a Supreme Court 
case that gave residents of community property states a tax cut 
unavailable to those in common law states. In effect, the former 
allowed married couples to split their income for tax purposes--each 
spouse being taxed as if he or she earned half the couple's total 
income. With income tax rates much higher than those today and few 
women in the labor force, this meant that married couples in community 
property states paid far less federal income taxes than couples in 
common law states or singles with the same income.
    Eventually, Congress codified income splitting, extending the 
benefits to couples in every state. This created, for the first time, 
an explicit pro-family tax policy, insofar as a married couple 
constituted a family. Prior to this time, couples and singles with the 
same aggregate income paid the same tax. Henceforth, couples would 
generally pay less taxes than a single person with the same income.
    Today, single-earner couples continue to receive the benefit of 
this policy change that took place in 1948, under pressure from a court 
case and without any conscious intent on the part of Congress. Such 
couples generally receive a bonus from the Tax Code, meaning that they 
pay less federal income taxes than a single person with the same 
income.
    By the late 1960s, the gap between a married couple and a single 
person with the same income became so great that it was viewed as 
unfair. Some couples were paying more than 40 percent less income taxes 
than their similarly-situated single counterparts. This led Congress to 
reconfigure the rate schedule such that no married couple would pay 
more than 20 percent less than a comparable single person.
    The unintended result of this policy change was to create a 
marriage penalty for the first time. I define a marriage penalty as a 
situation in which a married couple pays more federal income taxes than 
a single person with the same income. In response to outcries, Congress 
enacted a second earner deduction in 1981, which substantially 
mitigated the effects of the marriage penalty. However, this deduction 
was eliminated in the Tax Reform Act of 1986. Since then, there has 
been growing agitation to once again redress the marriage penalty, a 
situation intensified by the growing role of women in the labor 
force.\1\
---------------------------------------------------------------------------
    \1\ For further details, see Bartlett (1998a).
---------------------------------------------------------------------------
    At this point, I would like to emphasize something: the marriage 
penalty only affects two-earner couples. No single-earner couple ever 
pays a marriage penalty. For the most part, the latter continues to 
receive substantial bonuses from the Tax Code. Thus, the so-called 
marriage penalty is less a penalty for marriage than a penalty for work 
by the secondary earner; usually the wife, but increasingly the 
husband.\2\ Although there is some evidence that the marriage penalty 
affects marriage and divorce decisions, mainly through timing, the 
impact is minuscule.\3\
---------------------------------------------------------------------------
    \2\ According to the Census Bureau, 22.3 percent of married women 
earned more than their husbands in 1999, up from 15.9 percent in 1981.
    \3\ See Alm and Whittington (1992, 1995a, 1995b, 1997 and 1999); 
Alm, Thatcher and Whittington (1999); Dickert-Conlin (1996); Gelardi 
(1996); Sjoquist and Walker (1995); Whittington and Alm (1997).
---------------------------------------------------------------------------
    Of much greater importance is the impact of the marriage penalty on 
the work decisions of secondary earners. A large body of economic 
literature, as well as anecdotal evidence, indicates that such earners 
(i.e., the lower-paid spouse) are much more sensitive to marginal tax 
rates than is the primary earner.\4\ Thus there is reason to believe 
that the marriage penalty is discouraging a not-inconsiderable amount 
of labor at a time when the national unemployment rate is historically 
low.
---------------------------------------------------------------------------
    \4\ See Boskin and Sheshinski (1983), Congressional Budget Office 
(1996), Eissa (1996), Feldstein and Feenberg (1996), Leuthold (1978, 
1979 and 1984), Neff (1990), and Quester (1977 and 1979).
---------------------------------------------------------------------------
    Once it became clear that the major effect of the marriage penalty 
was in discouraging paid labor by married women, the terms of the 
debate changed. Previously, many pro-family advocates had strongly 
opposed the marriage penalty, believing that it discouraged marriage 
and encouraged cohabitation. But when they realized that the marriage 
penalty actually had a trivial effect on marriage, but a big impact on 
the labor supply of married women, they altered their position. Instead 
of abolishing the marriage penalty, many now want more bonuses for 
married couples instead.
    Thus we see that one of the main marriage penalty relief bills in 
the last Congress would simply have increased the standard deduction 
for married couples, so that it would be twice that for singles. While 
it is true that the current break points for the standard deduction do 
contribute to the marriage penalty, this proposal would only offset 
about one-fourth of the total marriage penalty. Moreover, almost half 
the benefits, in terms of tax savings, would go to couples who have no 
marriage penalty.\5\ In short, it is more of a general tax cut for 
married couples with low incomes--or at least those that who do not 
itemize--than relief of the marriage penalty.
---------------------------------------------------------------------------
    \5\  See Bull et al (1999).
---------------------------------------------------------------------------
    To really get rid of the marriage penalty, Congress must allow 
couples to choose their filing status. That is, they could continue to 
file jointly or with each spouse filing as a single, depending on which 
way they come out ahead, tax wise. Of course, there are important 
administrative and technical problems with this approach. For example, 
regulations would have to specify how income and deductions from 
jointly-held assets are to be divided. There is also the question of 
who gets the personal exemption and tax credit for the children.
    Although these are important issues, I think they can be dealt 
with. The real problem is that once we have adopted a system in which 
couples can choose their filing status, it will become clear that the 
sensible thing to do would be to adopt a system in which the 
individual, rather than the family, is the basic unit of taxation. This 
has been advocated for some years by a number of tax theorists.\6\
---------------------------------------------------------------------------
    \6\ See Davis (1988), Gann (1980), Kornhauser (1993), McCaffery 
(1993), Munnell (1980), Rosen (1977), and Zelenak (1994a).
---------------------------------------------------------------------------
    Of course, a major consequence of this would be to eliminate 
existing marriage bonuses from the Tax Code. This is never going to 
happen for obvious political reasons. Nevertheless, it is the logic of 
where a comprehensive effort to eliminate the marriage penalty leads 
us, which is why I think there has been a fall-off in support for 
comprehensive solutions, in favor of half-way measures.
    While the notion of moving away from the family as the basic filing 
unit for taxation may sound like an anti-family policy, I do not 
believe that it is. In my view, a childless married couple has no 
greater claim to be considered a ``family'' for tax purposes, and thus 
entitled to pay lower taxes under the joint schedule, than a cohabiting 
couple or those living in any arrangement considered to be a household 
by the Census Bureau.
    In my view, it is the presence of children that defines a family. 
Thus one cannot separate family tax policy from tax policy regarding 
children. This brings me to the question of the child credit.
    The proposal for a child credit grew out of a concern that the 
personal exemption had not kept pace with inflation for many years. The 
feeling was that the cost of raising children had grown, while the 
exemption had not.
    Implicit in this concern about the erosion of the personal 
exemption was the idea that the exemption ought to be related to the 
actual cost of child rearing. This is consistent with the notion that 
all taxpayers should receive some allowance for the necessities of 
life.\7\ But, of course, there has never been any serious effort to 
calculate such necessities and tie the personal exemption to it. 
Rather, we get at this in a round about way through a combination of 
the personal exemption, standard deduction, EITC, deduction for 
mortgage interest, the child credit and other provisions of the Tax 
Code.
---------------------------------------------------------------------------
    \7\ See Seltzer (1968) and Groves (1963).
---------------------------------------------------------------------------
    In any event, the feeling among many Members of Congress was that 
current economic circumstances justified additional tax relief for 
children. The sensible thing to have done, in my opinion, was to raise 
the personal exemption for children. As far as I can tell, the tax 
credit route was chosen primarily for mathematical simplicity, rather 
than any considered notion that tax credits are inherently superior to 
tax exemptions. From my research, it seems that it was too difficult 
for some people to calculate the dollar value of a higher personal 
exemption, because it is a function of their marginal tax bracket. The 
credit approach simplified this calculation, since almost everyone got 
the same dollar amount of tax saving.\8\
---------------------------------------------------------------------------
    \8\ See Bartlett (1998b).
---------------------------------------------------------------------------
    I think this was an unfortunate decision. I believe it has moved us 
down a slippery slope of increased government intervention in the 
family. The credit is also inferior from the point of view of economic 
incentives.
    The problem with the child credit, in my view, is that tax credits 
in general are too much like direct government spending. Whereas a 
deduction, exemption or exclusion implies that a taxpayer is only 
keeping his or her own money free from the government's grasp, tax 
credits imply that the government is making taxpayers a gift. Tax 
credits also lend themselves more easily to refundability, as with the 
EITC, which blurs the distinction between tax savings and a direct 
government handout.
    I believe it is only a matter of time before demands that the child 
credit be made fully refundable are heard. And once the credit becomes 
refundable and it becomes more like a direct spending program, there 
probably will be calls to formally establish a system of family 
allowances, as are common in Europe. Not only will this put virtually 
every family with children on the dole, but it will open the way for 
government regulation of the family.\9\ As we all know, government aid 
never comes without strings. State and local governments, for example, 
are continually threatened with loss of federal aid unless they change 
their laws or policies in some way favored by Washington.
---------------------------------------------------------------------------
    \9\ See Brannon and Morss (1973) and Zelenak (1994b).
---------------------------------------------------------------------------
    Furthermore, tax credits are generally inferior to tax deductions 
or exemptions precisely because they are not impacted by one's marginal 
tax bracket. Work, saving and investment decisions are all made at the 
margin. Thus the tax rate on the marginal dollar--the last dollar 
earned--is the critical one for economic decisionmaking. Although there 
are those who say that exemptions and credits can be made to be 
economically equivalent, this is a fallacy. They arrive at this 
conclusion only by looking at the effective tax rate and ignoring 
marginal rates.\10\ The logic of this approach is that there is no 
economic difference between a flat rate of 10 percent on $40,000 of 
taxable income, yielding a tax of $4,000, and a tax rate of 100 percent 
with a $36,000 tax credit. Obviously, the incentive effects are going 
to be quite different, even though the same tax is paid in each case.
---------------------------------------------------------------------------
    \10\ See, for example, Turnier and Kelly (1984).
---------------------------------------------------------------------------
    Because exemptions and deductions affect marginal tax rates, by 
raising the income level affected by higher rates, they improve 
incentives to work, save and invest. Although tax credits can be 
designed to increase work, saving and investment, they are inferior to 
deductions. That is because, as I noted earlier, credits are too much 
like subsidies. Government subsidies are almost always bad, because 
they divert economic activity away from those areas established by the 
market toward those dictated by government. The result is malinvestment 
that can cause productivity to fall even when the volume of seemingly 
productive economic activity rises. This is the reason why European 
economies have been less competitive than ours in recent years despite 
higher ratios of saving and investment. Because such investment was 
encouraged and directed by government, rather than market forces, much 
of it simply is wasted.
    The same principle applies to individuals. We want to lower 
marginal tax rates because we want more productive economic activity. 
For this reason, I applaud this Committee's recent action to lower 
marginal income tax rates for all workers and investors. However, 
increasing the child credit cannot be justified on the same grounds. 
Its purpose is not to increase growth or even to increase births, it is 
simply a way of lowering the tax burden on families with children, in 
the belief that they need it.
    I certainly would not argue with the proposition that raising 
children is an increasingly difficult and expensive proposition these 
days. However, the logic of giving a tax credit to families solely 
because they need it, without any underpinning in tax or economic 
theory, poses a danger. It will be much harder in the future to resist 
direct subsidies for families that will bring along increased 
government control as well.
    I would urge the Committee at some future date to perhaps 
commission a study by the Joint Committee on Taxation on the question 
of what principles should underlie tax policy toward children and the 
family. I think the current approach of making ad hoc adjustments in 
response to political pressure is not the best way to go about it.
                               __________
                               References
Alm, James, and Leslie Whittington. 1993. Marriage and the Marriage 
    Tax. 1992 Proceedings of the National Tax Association, pp. 200-205.
Alm, James, and Leslie Whittington. 1995a. Income Taxes and the 
    Marriage Decision. Applied Economics, vol. 27, no. 1 (January), pp. 
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Bartlett, Bruce. 1998a. Tax Aspects of the 1997 Budget Deal. National 
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Boskin, Michael, and Eytan Sheshinski. 1983. Optimal Tax Treatment of 
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    vol. 49, no. 3 (Spring), pp. 349-418.

                                


Statement of Michael Dennis, Vice President and General Counsel, Nature 
                    Conservancy, Arlington, Virginia
    Mr. Chairman and members of the Committee, thank you for the 
opportunity to submit testimony on the critically important issue of 
tax incentives for land conservation. I am speaking today on behalf of 
The Nature Conservancy, a private conservation organization that 
protects the land and water needed to protect the diversity of life on 
earth. For fifty years, we have worked with the private sector, using 
the tools of the market place and the best available scientific 
information, to conserve the special places that ensure the survival of 
plant and animal species. To date, we have helped protect more than 11 
million acres of land in the United States. Our experience working 
hand-in-hand with landowners in diverse communities has led us to seek 
changes in the federal tax code that would more effectively encourage 
and reward private conservation actions.
    I am pleased to be testifying at a time when the White House has 
joined with members of this committee and others in Congress in 
supporting just such a change to the federal tax code. President Bush 
included in A Blueprint for New Beginnings: A Responsible Budget for 
America's Priorities a proposed 50% reduction in capital gains tax on 
sales of land or easements for conservation. This is the proposal that 
Congressman Rob Portman has championed over the last several 
Congresses, and I would like to congratulate Congressman Portman for 
his leadership on this issue. He has been joined in his support of this 
legislation by colleagues on this committee Congresswoman Johnson and 
Congressmen Matsui, Tanner, Houghton and Neal. I urge the Committee to 
support this provision and to include it in tax legislation that it 
sends to the floor.
    In September 1999, I appeared before the Oversight subcommittee to 
outline a number of federal tax code changes that would provide the 
most benefit for conservation. As I testified then, the sustainability 
and quality of life in every region of the country is in danger. The 
rate of the development of land exceeds by far both the rate of 
population growth and the rate of open space conservation. For example, 
between 1987 and 1997, California lost 3 million acres of rangeland. 
The cumulative effect of seemingly unrelated activities such as 
deforestation, the paving over of agricultural land, the filling in of 
wetlands and urban sprawl has been to fragment the landscape and strain 
the fabric of wild and human habitat. We need better tools to encourage 
private landowners to protect their land.
    Today, I urge you to take the first step by enacting the proposed 
provision that speaks to one of the most important conservation needs 
in our country today: allowing landowners to protect the ecological 
values without forfeiting the economic value of their land.
What the proposal does
    The proposal included in the President's Blueprint excludes from 
taxation 50% of any gains realized from private, voluntary sales of 
land or easements for conservation. It creates a vitally important 
incentive for ``land-rich, cash-poor'' landowners who voluntarily chose 
to protect their land. Although every landowner's financial situation 
is unique, I believe that such an incentive would encourage more 
landowners to consider favorably a conservation option for their land 
because they would realize a higher return from such a sale after the 
taxes were paid than if this provision were not in place.
    For example, the Conservancy is working with the owners of Cherry 
Hill Dairy to protect 170 acres of critical upland and wetland habitat 
on the shores of Utah Lake near Provo, Utah. Cherry Hill Dairy has been 
a well-known farming operation and the property has been in the family 
for over 100 years. Should the family sell and easement for the agreed 
upon price of $400,000, the capital gains taxes would be steep and has 
been a barrier to the owners' decision to sell. If President Bush's 
proposal were enacted, the tax savings on such a sale would persuade 
the owners to protect the farm permanently.
How the proposal works
    The capital gains tax conservation incentive is a fiscally 
conservative, market-based approach to land conservation. It achieves 
environmental objectives without imposing new land use regulations. The 
provision is strictly voluntary, administratively simple, and uses 
definitions and tests for conservation purposes that are already 
contained in the tax code. It provides capital gains tax relief for 
sales of land for conservation to government agencies or qualified 
conservation nonprofits. The bill would allow landowners to financial 
value. It would exclude 50% of any gain realized from private, 
voluntary sales of land or interests in land for conservation. The land 
must be used to protect fish, wildlife or plant habitat or open space 
for agriculture, outdoor recreation or scenic beauty.
    The proposal also helps states and local governments leverage funds 
and accomplish more with their tax dollars. Estimates indicate that, 
for every dollar of lost revenue from this tax provision, almost two 
dollars worth of land would be protected. Sales of land to state and 
local governments for conservation would qualify, in addition to such 
sales to federal agencies and conservation nonprofit organizations. 
Citizens who vote to increase their taxes to fund bonds for land 
conservation will benefit because the funds raised will go farther 
toward reaching the community's conservation goals.
Conclusion
    Land conservation is a growing national need. Private landowners 
hold the future of biodiversity in their hands. The tax incentives the 
Conservancy recommends would provide interested landowners with the 
tools to conserve their land and contribute to the public interest in 
the preservation of the diversity of life.
    We appreciate not only the support of President Bush, but also the 
leadership of Congressmen Portman and Congresswomen Johnson and 
Congressmen Matsui, Tanner, Houghton and Neal and encourage the other 
members of Congress to support the innovative, voluntary tax proposals 
that we are discussing today.
    Thank you for your consideration of The Nature Conservancy's 
testimony and the proposal for public incentives for private 
conservation actions.

                                


 Statement of Judith A. Carsrud, Niche Marketing, Inc., Newport Beach, 
California, and Tracy Sunderlage, Professional Benefit Trust, Chicago, 
                                Illinois
    Chairman Thomas and Members of the Committee, thank you for this 
opportunity to describe the benefits working Americans receive from 
welfare benefit trusts set up under Internal Revenue Code (IRC) Section 
419A(f)(6). We urge you to take the necessary steps required to assure 
that these valuable benefits remain available to employees of America's 
small businesses.
    First, let us introduce ourselves. Niche Marketing, Inc. is itself 
a small business. We have three owners, with seven full-time employees. 
We sponsor three 419A(f)(6) trusts, with over 452 participating 
employers. Our trusts provide life insurance and severance benefits to 
all of the participating employers' employees, including the owner-
employees.
    Professional Benefit Trust is based in the Chicago area, and 
sponsors one 419A(f)(6) trusts, covering 384 employer participants and 
their employees. Benefits available to plan participants include life 
insurance, severance benefits long term care and post-retirement 
medical benefits. PBT employs 3 owners, with six full-time employees.
The Purpose of 419A(f)(6) Trusts: Provision of Welfare Benefits
    The ability to participate in a multiple employer welfare benefit 
plan allows all employers--especially small employers--to offer a 
benefits package that enables them to attract and retain a quality 
workforce. In addition to the traditional life and health insurance 
type benefits, the benefits package frequently includes severance 
benefits. These severance benefits give employees a measure of 
confidence and security in making a decision to work for a small 
company that is more vulnerable to dissolution, acquisition, or 
outright failure as a result of market swings, economic downturns, 
under-capitalization, cash flow shortages, and other known plights of 
small business. Both the amount and the timing of severance benefits 
are limited by law--benefits can be paid only when severance occurs 
unexpectedly, and they are limited by Department of Labor rules to no 
more than twice the amount of the worker's annual compensation.
    Welfare benefits provided pursuant to Section 419A(f)(6) are bona 
fide benefits to the employees whose employers adopt such plans, and 
are necessary to the ongoing success and prosperity of such businesses. 
Continuing to allow a tax incentive to provide these benefits is in the 
best interest of the business community, and the workers, who in most 
cases would not otherwise be covered by such benefits.
    The welfare benefits typically provided by a multiple employer plan 
include death benefits and severance benefits.
    Many small businesses provide welfare benefits in addition to 
retirement plans, such as a 401(k) or a pension/profit-sharing plan. 
Severance benefits are not provided as an alternative to pension plans. 
In fact, severance benefits are forfeited to the multiple employer 
trust (not the remaining employees of the employer group) at the 
retirement of the employee.
    A software company in California is a fair example of how severance 
benefits have provided meaningful benefits to its employees and allowed 
the business to recruit top-level employees in their field. Technology 
is a highly competitive field, with fluctuating ups and downs for 
smaller firms. However, the ability of these firms to recruit and 
retain skilled employees is crucial to the firms' success.
    The California company we're describing here employed 12 people. 
Their adopted welfare benefit plan levels included a death benefit of 
ten times compensation and a severance benefit of 10% of compensation 
per year of service. Following a financial setback, a much larger firm 
purchased the business in March 1999. The successor firm did not employ 
the employees, except for the owner-employees. But the employees of the 
old, small firm received severance benefits--taxed as ordinary income--
from the welfare benefit plan, giving them the financial cushion they 
needed while they found new employment.
    If the employer had not been allowed to contribute the cost of the 
current liability for the stated benefits, then there would have been 
no money available to provide severance benefits at the time the 
business was sold. These workers would then have had to deplete their 
savings, if any, or try to live on unemployment compensation. In other 
words, small businesses typically do not have the same ability to ``pay 
as you go'' as do larger firms. These plans do not offer an unfair 
advantage to small business--large businesses are also eligible to 
participate in multiple employer welfare benefit plans. In fact, they 
instead help to level the playing field.
    In short, participation in a 419A(f)(6) trust levels the playing 
field. It helps minimize a competitive advantage a bigger employer 
would otherwise enjoy in putting together a compensation package. It 
puts small employers on a more equal footing as they compete with 
larger, more established employers for quality workers.
    Here's how it works. IRC Section 419A(f)(6) authorizes a tax 
deduction for contributions to welfare benefit plans within a framework 
of defined rules. Generally, 10 or more employers must band together to 
provide welfare benefits; no one participating employer can normally 
contribute more than 10% of the total plan contributions; there can be 
no experience rating by employer--i.e., all of a trust's assets at all 
times must be available to pay benefits to any participating employee; 
and there can be no retirement or other deferred compensation type 
benefits provided through the plan. Assets are independently trusteed 
and administered, and can never revert to the employer.
    The rules seem clear to many 419A(f)(6) plan sponsors, 
administrators and participants. However, in recent years some of the 
rules have been questioned, and some advisors have recommended 
strategies that make aggressive use of the 419A(f)(6) rules. 
Consequently, there has arisen some concern about whether the rules 
need to be tightened to be sure they work as Congress intended--to 
provide a way to allow 10 or more employers banding together to offer 
real benefits to real workers.
Initial Proposal to Clarify, Tighten Falls Short
    The first salvo in the debate on whether or how to clarify the 
rules occurred almost two years ago in then President Clinton's FY 2001 
budget submission. That proposal would have limited the 419A(f)(6) 
deduction to contributions to trusts that offered only group term life, 
health and disability income insurance.
    This proposal is fatally flawed in that it would eliminate 
important welfare benefits--including severance, post-retirement 
medical, and long-term care coverage. Further, in disallowing the use 
of permanent life insurance in a trust, it would impose the very cash 
flow hardship that IRC Section 419A seeks to mitigate--protection of 
employees. At the same time, the proposal, while making the trust 
benefits more expensive and less useful, would not adequately address 
the problems that are causing concern among policymakers.
    The proposal was defeated in a variety of contexts in 2001, but the 
underlying concerns that prompted the proposal in the first instance 
were not addressed. As a result, a cloud remains hovering over the 
419A(f)(6) marketplace. Employers are uncertain about whether they can 
continue to participate in multiple employer welfare benefit trusts; 
and trust sponsors, administrators and participants cannot rely on the 
continued viability of this important employee benefits tool.
    As a result, the usefulness of this tool as a way to attract and 
retain quality workers is being eroded. The very existence of 
businesses like ours that focus on the operation of these multiple 
employer welfare benefits trusts is threatened.
Clarification Is Urgently Needed
    The uncertainty surrounding the continued existence of multiple 
employer welfare benefit trusts makes the need for clear rules, as soon 
as possible, urgent. The rules must assure that these benefit plans 
operate as intended--that 419A(f)(6) trusts cannot be used as a way to 
fund deferred compensation on a tax-favorable basis, or as a way to 
circumvent pension contribution limitations. But clarifying rules, 
which need to be tight and clear, must also allow continued operation 
of trust benefits.
Proposed Modification: Experience Rating, Nondiscrimination, Funding 
        Limits
    To achieve clear, appropriate rules, we respectfully offer a 
proposal that would eliminate the abuses that cause concern among 
policymakers and industry representatives alike, but at the same time 
allow continued availability of multiple employer welfare benefit 
trusts. Our proposal, described in detail in the chart below, would 
clearly restate the current law rule that prevents ``experience 
rating'' by employer. This means that no participating employer would 
realize the results of its own experience with respect to benefits 
claims paid or forfeited, or with respect to segregated asset 
performance or variance from actuarial assumptions.
    This is crucial to the appropriate use of permanent life insurance. 
It is important to emphasize that we believe that current law prevents 
use of experience rating by employer, whether overt or covert. But it 
is apparent that some in the marketplace do not read current law rules 
as restrictively as we do, and so it is appropriate to restate, with 
complete clarity, the rule that disallows experience rating by 
employer.
    Our proposal also sets out rules that will assure that all of a 
participating employer's workers will benefit under the plan. 
Generally, the proposal follows the IRC Section 410 rules as to 
eligibility--an employer's plan must cover all workers who are at least 
age 21, who have one year of service, and who work at least 1,000 hours 
per year. Limitations on both the level of benefit and on the allowable 
deduction for the annual funding of accrued benefits are offered. 
Finally, the proposal includes a fair effective date rule--one that 
gives participating employers and plans two years to make the changes 
that would be required by this proposal in order to bring the plan into 
compliance with the new, clarifying rules.
    In short, our proposal suggests rules that would: (1) result in 
multiple employer welfare benefit plans that cover all a participating 
employer's workers; (2) appropriately limit the annual deduction 
available to help fund the benefits; and (3) assure that the plan works 
equally and as a whole for the benefit of all the workers of the 
participating employers.
    We have tried to design a proposal that meets tax and social policy 
goals and that works for the entire, diverse Section 419A(f)(6) 
marketplace. Our own trusts will have to make extensive and expensive 
modifications to comply with these rules. It is likely that no multiple 
employer welfare benefit trust currently in existence will not face the 
same need to amend plan rules in order to comply. We believe this 
proposal will eliminate the ability to make aggressive and 
inappropriate use of IRC Section 419A(f)(6), and will allow continued 
availability of this important tool for designing practical and 
attractive employee compensation and employment packages.
The Details of the Proposal
    The chart below lays out the various elements of our proposal. It 
describes funding requirements, antidiscrimination rules, and 
appropriate limitations on the annual deduction. It delineates the 
types of benefits that should be available in a multiple employer 
welfare benefit plan. Finally and very importantly, it offers an 
effective date rule that protects employers who have already entered 
into a Section 419A(f)(6) trust, but requires the trust to make the 
changes required to come into compliance with the new rules.

 MULTI-BENEFIT EMPLOYER PLAN FOR TEN OR MORE EMPLOYERS REFORM OF SECTION
              419A(f)(6): Alternative Proposal (March 2001)
------------------------------------------------------------------------

------------------------------------------------------------------------
Funding Requirement            The plan must provide that at all times,
                                all plan assets are available as a
                                single, undivided pool to provide
                                benefits to the covered employees of all
                                individual employers participating in
                                the plan.
                               The definition of experience rating will
                                apply as defined by the Tax Court in
                                June 1997 in Booth v. Commissioner, 108
                                TC 524 (1997).
------------------------------------------------------------------------
Benefits available from the    Plans will be non-discriminatory:
 plan, on a nondiscriminatory      (1) Participation in plan benefits
 basis                            will be provided to any employee
                                  meeting these standards: Age 21, 1,000
                                  hours of service annually, one year of
                                  service.
                                   (2) All benefit formulas must provide
                                  a uniform multiple of compensation to
                                  all participants.
                                   (3) A look-back rule would apply at
                                  employer termination from the trust,
                                  to include all former eligible
                                  employees terminated 24 months prior
                                  to employer termination from the
                                  trust. All eligible employees would be
                                  entitled to a prorata share of a
                                  plan's assets.
                                   (4) Each employer plan must benefit
                                  at least one non-owner employee for
                                  each two owner-employees who benefit;
                                  trust must benefit at least three non-
                                  owner employees for every owner-
                                  employee benefited.
------------------------------  ----------------------------------------
Distribution rules for         In General: No assets of the plan may
 benefits and plan assets       revert to the employer. No assets may be
                                loaned to an employee participant. An
                                employer can only terminate its
                                participation based on a bona fide
                                business purpose.
                               Forfeiture Pool: All assets in forfeiture
                                pool must be used in a nondiscriminatory
                                manner solely for the benefit of plan
                                participants.
                               For employers without severance benefits:
                                An employer can only terminate its
                                participation if all employees of the
                                employer receive a pro-rata share of the
                                plan assets.
                               For employers with severance benefits: If
                                an employer offers severance benefits,
                                the plan assets used to fund the
                                severance benefits cannot be distributed
                                for a purpose other than severance
                                benefits, which are limited to 200% of
                                compensation (as defined in IRC Section
                                401(a)(17)) and payable over not more
                                than 24 months, as defined under DOL
                                Regulation 2510 3-2(b), or other
                                benefits as provided under the plan.
                               For employers with post-retirement
                                medical benefits: No assets used to fund
                                post retirement medical benefits can be
                                distributed for any reason other than
                                post-retirement medical benefits. If a
                                plan participant--including the owner--
                                dies prior to using all his/her post-
                                retirement medical benefits, the unused
                                amounts revert to the plan (a
                                forfeiture). Even when a participating
                                business terminates participation in the
                                plan due to insolvency, sale, merger-
                                acquisition, or other Treasury-approved
                                event, assets attributable to post-
                                retirement medical benefits must stay in
                                the plan until/unless they are paid in
                                the form of medical expense
                                reimbursement after retirement.
                               Rollover: The trustee to trustee transfer
                                of benefits from one multiple employer
                                welfare benefit plan to a similar
                                multiple employer welfare benefit plan
                                will be permitted and not cause
                                constructive receipt to a plan
                                participant.
------------------------------------------------------------------------
Benefit Levels                 Death Benefits:
                                   (1) The maximum benefit will be
                                  governed by the life insurance company
                                  providing the benefits and by the life
                                  insurance industry's standard
                                  financial underwriting guidelines.
                                   (2) Minimum death benefit amounts
                                  will be determined either by the
                                  plan's formula for benefits or by the
                                  life insurance company's minimum
                                  issue, if greater than the plan
                                  formula.
Benefit Levels cont.
                               Severance Benefits:
                                   (1) The maximum severance benefit
                                  will be in accordance with Department
                                  of Labor regulation 2510 3-2(b) (not
                                  in excess of 200% of compensation),
                                  with countable compensation limited by
                                  pension law (IRC Section 401(a)(17).

                               Post-Retirement Medical Benefits:
                                   (1) Normal retirement would be the
                                  year of eligibility for Medicare or
                                  total and permanent disability, as
                                  defined by Social Security.
                                   (2) Forfeiture: Assets to fund these
                                  benefits remain in the plan to pay
                                  benefits. If benefits are never
                                  collected, the result is a forfeiture
                                  of those assets to the welfare benefit
                                  trust.
                                   (3) Pre-retirement death of the
                                  employee: medical reimbursement funds
                                  would be available to pay any
                                  uncovered medical expenses of the
                                  deceased employee's estate.
------------------------------  ----------------------------------------
Cost of Benefits               Deductions would be limited to:

                               Death Benefits:
                                   (1) If term insurance, the annual
                                  term insurance premium.
                                   (2) If whole life insurance, the
                                  level annual premium to normal
                                  retirement age (non-vanish) contract
                                  premium.
                                   (3) If universal life, the guideline
                                  level annual premium (IRC Section
                                  7702). The Section 7702 guideline
                                  level annual premium is the level
                                  annual premium amount payable over a
                                  period not ending before the insured
                                  becomes age 95, computed in the same
                                  manner as the guideline single
                                  premium, except that the annual
                                  effective rate remains at 4% (IRC
                                  Section 7702(c).

                               Severance Benefits:
                                   (1) Reasonable actuarial principles
                                  to purchase the level benefit stated
                                  in the plan document.
                                   (2) No prefunding in excess of the
                                  current level of liability for the
                                  stated level of benefits annually.

                               Medical, health, disability benefits:
                                   (1) Insurance company premiums, and
                                  self-funding up to deductibles and
                                  elimination periods. But, self-funding
                                  would be subject to forfeiture at an
                                  employee's death or termination or
                                  termination of an employer from the
                                  welfare benefit trust.
------------------------------  ----------------------------------------
Application of new rules to    These new rules would be effective as of
 existing plans                 the date of enactment, but benefits
                                earned as of the date of enactment would
                                be grandfathered at their existing level
                                and previous deductions would be
                                grandfathered at their existing level,
                                if the plans are brought into compliance
                                within 24 months of enactment.
------------------------------------------------------------------------
Contact Dani Kehoe (202/547-7566) or Bill Himpler (202/661-6361).

Summary: Multiple Employer Welfare Benefit Trusts Allow Employer To 
        Offer Well-Designed Employee Compensation Packages, But Current 
        Law 419A(f)(6) Rules Require Clarification
    It is important to the competitive well being of many American 
small businesses to assure the continued availability of the multiple 
employer welfare benefit trust mechanism. The benefits packages of life 
and health insurance, and severance benefits payable when termination 
is unexpected and without cause, are significant tools for small 
business' ability to attract and retain quality workers.
    However, the rules governing 419A(f)(6) plans need clarification. 
The proposal we offer, which makes clear that all plan assets are 
available to pay benefits to all plan participants, eliminates the 
possibility of offering benefits on a discriminatory basis, and 
appropriately limits the annual deduction available for the funding of 
these benefits, solves the concerns of policymakers who seek to prevent 
misuse of IRC Section 419A(f)(6) as a way to circumvent pension limits 
and/or provide deferred compensation, but at the same time assures the 
continued viability of the 419A(f)(6) plan.
    We respectfully request and encourage Congress to enact this 
proposal, as swiftly as possible.
    Thank you. We would be happy to discuss any part of this proposal 
or issue in more detail. You can contact us through our Washington 
Representatives, Bill Himpler for Professional Benefits Trust, 202/661-
6361; or Dani Kehoe, for Niche Marketing, 202/547-7566.

                                


     Statement of Charles E. Collins, Responsible Wealth, Boston, 
                             Massachusetts
    My name is Chuck Collins. Thank you for allowing me to submit 
testimony in opposition to the repeal of the federal estate tax.
    I am testifying on behalf of Responsible Wealth, a national 
association of business leaders and investors concerned about economic 
inequality in America. I am coordinator of a petition signed by over 
700 business and philanthropic leaders entitled the Call to Preserve 
the Estate Tax.
    Last Thursday, William H. Gates, Sr., testified on behalf of 
Responsible Wealth before the Subcommittee on Taxes and IRS Oversight 
of the Senate Finance Committee.
    Our petition reads as follows:

          We believe that complete repeal of the estate tax would be 
        bad for our democracy, our economy, and our society. Repealing 
        the estate tax, a constructive part of our tax structure for 85 
        years, would leave an unfortunate legacy for America's future 
        generations.
          Only the richest 2 percent of our nation's families currently 
        pay any estate tax at all. Repealing the estate tax would 
        enrich the heirs of America's millionaires and billionaires 
        while hurting families who struggle to make ends meet.
          The billions of dollars in state and federal revenues lost 
        will inevitably be made up either by increasing taxes on those 
        less able to pay or by cutting Social Security, Medicare, 
        environmental protection, and many other government programs so 
        important to our nation's continued well-being. The estate tax 
        exerts a powerful and positive effect on charitable giving. 
        Repeal would have a devastating impact on public charities 
        ranging from institutions of higher education and land 
        conservancies to organizations that assist the poor and 
        disadvantaged.
          We recognize the importance of protecting America's family 
        farms and small businesses, and the estate tax has many special 
        provisions that do so. But this concern, the rationale usually 
        advanced for eliminating the estate tax, can be addressed by 
        amending the existing estate tax system.
          Let's fix the estate tax; not repeal it.

    To date, over 700 individuals have signed the Call to Preserve the 
Estate Tax. Recent signers include:

    Robert Crandall, retired Chairman, AMR Corporation (American 
Airlines)
    Ted Turner, Vice Chairman, AOL Time Warner
    Paul Brainerd, developer of PageMaker software
    Adele Simmons, former President, The MacArthur Foundation
    Sol Price, founder, Price Clubs and Chairman, Price Entities
    J.P. Guerin, former Chairman, Pacific Southwest Airlines
    Arthur Rock, Venture capitalist, Arthur Rock & Co.

    A complete list of signers to date can be viewed on our web site: 
www.responsiblewealth.org.
    There are many well known and super-wealthy individuals who have 
signed the Call to Preserve the Estate Tax. But the majority of the 
signers are more like the ``millionaires next door'' described in the 
recent book by Thomas Stanley and William Danko, those with wealth 
between one and ten million dollars. Many of the signers have family 
enterprises and will pay estate taxes, yet we believe it would be bad 
for our country to completely repeal it.
    The signers of the Call to Preserve the Estate Tax want to 
stimulate a national dialogue about the potential negative consequences 
of estate tax repeal. We hope the Committee will address important 
fiscal and social questions, such as: What will a $7 billion reduction 
in charitable giving do to our hospitals, universities, nature 
conservancies, and human service organizations? How will states manage 
without the $5.5 billion in their annual revenue that comes linked to 
the federal estate tax? What is the true 20-year fiscal impact of 
repeal? What will be the impact on our economy, democracy and civic 
life of further concentrating wealth and power in the hands of a few, 
at the time of the greatest inequality since the 1920s?
    Some might argue, ``It's easy for these super-wealthy to call for 
preservation of the tax. After all, they can afford high-priced 
accountants and lawyers to avoid it.'' But the estate tax toll is paid 
primarily by the richest half of 1% of households, the 4,000 people who 
die each year with estates over $5 million. Many wealthy people do 
estate planning to reduce their estate taxes by gifts to family members 
while alive, and through charitable giving. But unless they leave their 
entire legacy to charity or a spouse, they cannot escape death nor 
estate taxes.
    We believe, along with Theodore Roosevelt, Louis Brandeis, Herbert 
Hoover and scores of other wise observers in the early 1900s, that it 
is not in the interest of this country to have large fortunes passed 
from generation to generation creating great concentrations of wealth 
and power.
    While we may not be able to insure that all children start their 
lives on a level playing field, that is something we should strive for 
and the estate tax brings us closer to that ideal. A good life should 
be something that is achieved. It should not be delivered as a result 
of the womb you happened to start out from.
    We believe that the estate tax is an appropriate tax and accept it, 
as we do federal income taxes, as the price of living in the United 
States and being a U.S. citizen. It is appropriate that a special tax 
be imposed on those who have so very fully enjoyed the benefit of the 
things this country provides: schooling, order, freedom and 
encouragement to succeed and models of success. In a very practical 
sense the wealth one accumulates derives as much from the environment 
which this grand nation makes available and it is perfectly appropriate 
that the cost of its maintenance be paid back in proportion to what has 
been extracted.
    In the present setting when new tax packages are being designed it 
seems to us particularly bad policy to subtract from the necessary 
revenue the sums produced by the estate tax when those dollars are 
going to have come from somewhere else; someone else. It is perfectly 
clear that that someone else will be a citizen with much less ability 
to pay than the heirs of our wealthiest people. We are concerned about 
the true fiscal impact of repeal. Revenues from this tax will grow 
dramatically in the future. The personal wealth that has been created 
in this country in the last 10 or 20 years is immense and will be 
reflected in sharply increased estate tax revenues.
    We believe that repeal of estate tax will be harmful to our 
charitable institutions and vital civic sector. While many Americans 
give generously regardless of tax consequences, the estate tax greatly 
enhances giving, particularly among those with estates exceeding $20 
million. Charities hurt by repeal would include religious 
organizations, which receive almost 60% of all bequests representing 
10% of total bequest dollars. Educational, medical and scientific 
institutions receive 31% of bequest dollars. And 30% of bequest dollars 
go to private foundations, accounting for one-third of foundation 
assets. We do not know what the full consequences of wholesale repeal 
will be on our nation's hospitals, universities, land conservancies and 
private charities.
    We know this Committee is discussing a proposal to make charitable 
contributions tax deductible for non-itemizers because it would 
encourage charitable giving. We support this proposal and believe the 
same logic applies to the estate tax. Tax policy is an inducement to 
enable already generous people to give more.
    People oppose the estate tax claiming it is not fair. Each tax that 
we have will elicit those who feel this way. But we ask, ``Fair 
compared to what?'' Is it unfair to tax the accumulated wealth of the 
richest 1% of households, much of which is in the form of unappreciated 
capital gains that have never been taxed? Is it more fair to tax the 
wages of low wage workers trying to survive today? Is it fairer than a 
sales tax or property tax? We accept that we must have taxation, and 
that within the spectrum of taxes, the estate tax is among the most 
fair.
    We do not deny that there are some situations where the application 
of the estate tax leads to a result that is undesirable. We are 
concerned that the current estate tax may still affect a small number 
of small farms and family-owned small businesses. The estate tax was 
reformed in 1997 to provide further protections for these enterprises 
through lower asset valuations, higher exemptions and extended low-
interest payment terms. We advocate further reforming the estate tax by 
simplifying it and raising exemptions.
    While we support reform of the estate tax, we strongly oppose 
outright repeal. Society is the co-creator of wealth and as such, we 
believe it is entirely reasonable that a portion of wealth be returned 
to society upon the death of those who have been blessed with great 
wealth. In this manner, the estate tax undergirds social investment 
that will allow the next generation their opportunity at the American 
Dream as our country's founders envisioned.

                                


      Statement of Former Senator Alan K. Simpson, Washington, DC
    Chairman Thomas, Ranking Member Rangel, and all the other 
distinguished Members of the House Ways and Means Committee. I am very 
pleased to have this opportunity to submit testimony today on the issue 
of the federal estate tax.
    First let me express my strong support for the President's efforts 
to substantially reduce taxes for all Americans. President Bush, Vice-
President Cheney, and the entire Administration have successfully and 
commendably changed the course of the debate in this country from 
whether we should cut taxes to how we should best do it. This is the 
most talented group of men and women to serve in the highest levels of 
an Administration in my lifetime. They are also extremely savvy and 
fully understand the legislative process. Lawrence Lindsey, the 
President's chief economic advisor, recently discussed the tax package 
with the Republican leadership saying: ``You guys make the sausage, I 
just brought the meat and spice.'' To me, this indicates that the 
President, the Vice-President, and other key officials who crafted the 
Administration's plan would not summarily reject constructive dialogue 
on how best to achieve their legislative goals. Even from my perch here 
in the private sector, I too would like to engage in such a dialogue. 
However, at the end of the day, when the discussions and the debate are 
over, this country deserves the strongest possible bipartisan tax 
reduction plan, and I for one fully intend to be a very vocal supporter 
of that package.
    In the spirit of early, constructive dialogue I would also 
respectfully recommend to this Committee and to my friends in the White 
House, that as an alternative to a phase out of the estate tax over an 
8 to 10 year period, they might take a serious look at providing 
immediate and dramatic estate tax relief by greatly increasing the 
exemption over which an estate would be liable thereby immediately 
eliminating nearly 90% of those estates that, under current law, would 
have to pay an estate tax. For the small number of estates left that 
would still have to pay, I would further recommend a reduction in the 
rates. I am not attempting to advise you what the exemption should be, 
but it should be large enough to protect the family ranchers and 
farmers that I have known from ever having to worry about this 
liability. In fact, to ensure that result, due to their unique status I 
think it would be worthwhile to craft a special exemption from estate 
taxes for family ranches and farms. There are several reasons why I 
believe that this method of reform is the best route to take, and I 
will briefly list them in this testimony.
    I support the efforts of Americans for Sensible Estate Tax 
Solutions (ASsETS) a coalition including charities, academics, tax 
experts, farm and ranch groups, and estate planners. ASsETS does have 
members who have an economic interest in this matter. There is nothing 
wrong with that, but my participation in this effort is primarily 
motivated by what I believe a phased-out repeal of the tax would do to 
charitable giving in this country. My wife, Ann, and I have spent a 
substantial part of our lives serving on the boards of institutions 
such as Fords' Theater, the Folger Shakespeare Library, the Buffalo 
Bill Historical Center, the Kennedy Center, the Terra Museum, the 
University of Wyoming Art Museum, and the Smithsonian Institution. I 
have seen first hand how the estate tax promotes charitable giving. In 
fact the U.S. Treasury has estimated that a total repeal of the estate 
tax would result in a decrease of up to $6 billion annually in 
charitable giving. Charles Collier, Senior Philanthropic Advisor at 
Harvard University, has said that ``wealthy donors will clearly leave 
more money to their heirs than they will to charities if this repeal 
goes through.'' Multibillionaire, George Soros calls the estate tax 
``one of the main incentives for charitable giving.'' From a practical 
perspective, it's easy to see that without any estate tax, even on the 
very wealthiest, potential heirs may likely say: ``Dad, don't leave the 
Picasso to some museum. Sell it or give it to me, instead.'' And it's 
not just the Picasso, it's also real money to universities, hospitals, 
and other non-profit health and educational groups throughout the 
country.
    My second concern is that there is a great benefit in being able to 
obtain tax advice which has certainty. Under the President's tax 
proposal, estate tax rates would gradually be phased-out over 8 years--
but the limited exemptions in current law would be kept. Today, a 
person can exempt $675,000 from estate tax liability. That will go up 
to $1 million in 2006. Under the President's bill, if your estate 
exceeds the current exemptions, your family would still have to pay 
estate taxes. To believe that an estate phase-out won't be changed by a 
future Congress is really betting the farm! As I don my Republican hat, 
I would like the Members of this distinguished Committee, particularly 
the majority, to assume the possibility--however frightening you think 
it may be--that (1) control of Congress shifts and (2) a future 
Congress needs revenues in order to fund some disaster relief.
    Knowing what we all know about politics, one of the most likely, 
logical revenue raisers would be to further delay or even cancel the 
phase-out. So if we are to leave the final decision to future 
Congresses, the estate planner cannot render the kind of tax advice 
that Americans deserve. Death is quite bad enough. It's even worse in 
combination with financial uncertainty!
    The ASsETS Coalition is promoting immediate, drastic reform of the 
estate tax. We leave it to Congress to decide the exemption, but 
consider this: In 1998 the last year for which we have national 
records, less than 48,000 estates paid any estate tax. That represents 
2% of the number of deaths that year. If you set the exemption at $2.5 
million rather than the current law, you would have eliminated nearly 
40,000 of those estate taxpayers. If you set the exemption at $5 
million, you would have knocked out nearly 4,700 more estates. That 
would leave about 3,000 estates in the entire country owing any estate 
tax at all for that year. Using these 1998 numbers for my state of 
Wyoming, of 4,000 deaths in 1998, a $2.5 million exemption would have 
eliminated all but 6 estates. A $5 million exemption would have totally 
eliminated all but 2 estates. But under the proposal to gradually 
phase-out the rates, 40 Wyoming families would have still had to pay an 
estate tax!
    I think most Wyoming folks would rather have a guaranteed higher 
exemption now and pay nothing, rather than have some ``Congressional 
promise'' to gradually reduce rates and still have to cough up based on 
current exemptions.
    Contrary to some of the hot and heavy rhetoric out there, I am not 
an advocate for the estate tax. It is burdensome, unfair, and ought to 
be changed. I specifically do not want the estate tax to be a threat to 
Wyoming's, or to the rest of the country's family farmers or ranchers 
and their ability to pass those properties down to the next generation. 
In fact, I would even favor a form of legislative ``carve out'' to 
ensure their protection. As stated, it is not a question of whether to 
change the estate tax, but how. I prefer a dramatic, immediate reform 
which would exempt 99% of Americans from paying anything at all. I 
would also prefer immediately lowering the top rates for the eight to 
ten thousand estates that would still be subject to the tax.
    One other aspect of total repeal which should be considered is its 
impact on hard pressed state budgets. Many states have estate tax 
revenues which are dependent on the Federal version. The February 20, 
2001, Dallas Morning News cited that Texas stands to lose $300 million 
a year. My state of Wyoming derives $9.7 million in these kind of 
estate taxes each year. A total repeal would put a hole the size of a 
.45 caliber slug in my state's budget!
    In summary, I very much want the President to succeed with a $1.6 
trillion tax cut. According to the February 18 Washington Post, 
Lawrence Lindsay stated that the President wants to see his approach 
adopted, but is leaving the structure up to the Congress. In order to 
keep the package at $1.6 trillion, a less costly, long-term phase-out 
of the estate tax was chosen. My position, respectfully submitted to 
you, is to keep the package's total price tag, but to provide dramatic 
benefits immediately, provide additional protection for family farms 
and ranches, eliminate all but the super wealthiest from paying any 
estate tax at all, then reduce the rates for the remaining estates 
which do have to pay. That's it. Such an approach will cost less, will 
maintain incentives for charitable giving, will protect farms and 
ranches, will protect state revenues, and will provide clarity and 
certainty in tax planning.
    I would earnestly trust that such an approach would merit your full 
consideration. Thank you so much. My best personal regards to all of 
you.

                                

Statement of LaBrenda Garrett-Nelson, Phillip D. Moseley, and Robert J. 
               Leonard, Washington Council Ernst & Young
    Washington Council Ernst and Young (a division of the National Tax 
Practice of Ernst & Young, LLP, a professional services firm) 
represents a variety of clients on tax legislative, regulatory, and 
policy issues.
                              Introduction
    As Chairman Thomas recognized in his announcement of today's 
hearing, now that the House of Representatives has passed the heart of 
President Bush's tax relief plan for individuals, the Ways and Means 
Committee can ``turn to fixing other problems in the tax code.'' 
Rationalizing and simplifying the most complex provisions of the code 
is one way to reduce significantly the burden on individual taxpayers. 
In this regard, the personal holding company (``PHC'') penalty tax 
ranks among the most outmoded provisions in the Code. This statement 
highlights the need to rationalize the PHC provision to prevent the 
treatment of an active franchising business as a passive personal 
holding company. Several years ago the Congress took action to update 
another aspect of the PHC tax--the provision dealing with lending or 
finance businesses in the Taxpayer Refund and Relief Act of 1999--but 
that legislation was vetoed by former President Clinton.\1\ As was 
proposed in the 1999 PHC legislation for lending or finance businesses, 
the PHC provisions should be modernized to address the treatment of 
franchise royalties.
---------------------------------------------------------------------------
    \1\ See section 1114 of the ``Taxpayer Refund and Relief Act of 
1999,'' H.R. Conf. Rep. 106-289, 106th Cong. 1st 
Sess. (1999) at page 486, describing a provision to modify the PHC 
``Lending or Finance Business'' exception.
---------------------------------------------------------------------------
   The Outdated Personal Holding Company Tax Targets Individual 
        Taxpayers
    The PHC penalty tax was intended to prevent individuals from 
avoiding the graduated individual tax rates by holding investments 
through corporations. A corporation constitutes a PHC if at least 60 
percent of its adjusted gross income is PHC income and if more than 50 
percent of its stock is owned by five or fewer individuals at any time 
during the last half of the taxable year. PHC income generally is 
defined as interest, dividends, royalties, and rents. Section 541 of 
the tax code imposes a 39.6% tax on undistributed PHC income (in 
addition to the normal corporate tax).
    When the PHC tax was originally enacted in 1934, the maximum 
corporate tax rate was only 13.5%, but the top individual rate was 63%; 
this rate differential created an incentive for individuals to organize 
closely held corporations to hold their personal investments. Income on 
the investments would be taxed at the much lower corporate rate, and 
when the individual wanted to unwind the investment, the corporation 
could be liquidated on a tax-free basis. Today, the differential in the 
tax rates no longer provides the same incentive (as the maximum 
corporate tax rate is 35%, only 4.6% less than the top individual rate 
of 39.6%) and a PHC can no longer be liquidated free of tax. Thus, 
commentators have long argued that the PHC tax has outlived its 
original rationale.\2\
---------------------------------------------------------------------------
    \2\ See, e.g., comments of the American Bar Association Section of 
Taxation, Committee on Corporate Tax, reprinted in Tax Notes Today 
(July 26, 1999), presenting arguments in support of repealing the PHC 
penalty tax on the grounds that ``the personal holding company tax adds 
significant complexity to the tax law but raises little revenue,'' the 
tax is a penalty tax that no longer serves its historical purpose; and 
repeal would ``advance the simplification cause without undermining the 
corporate income tax.''
---------------------------------------------------------------------------
   The Current Treatment of Franchise Royalties Fails To Take 
        Account of Active Businesses that Generates This Income
    As one commentator noted ``the 1934 regulation that included 
franchise royalties in the definition of PHC taxable income (the 
predecessor of Reg. 1.543-1(b)(3). . .) has remained virtually intact 
since its inception.'' \3\ The current regulation simply fails to take 
account of active franchisors that have numerous employees and provide 
substantial services to franchisees (such as training programs, 
assistance in site selection, building plans, marketing, research and 
development, and managerial services).
---------------------------------------------------------------------------
    \3\ Accounting and Tax Aspects of Franchising, Schaeffer & Allbery 
(Aspen Publishers, Inc.), page 66.
---------------------------------------------------------------------------
   Congressional Precedents for Updating the PHC Penalty Tax
    The PHC provisions were never intended to apply to active business 
income. Thus, from time-to-time, the Congress has updated the PHC 
provisions to take account of modern practices.\4\ More generally, the 
Congress has acted many times to prevent the treatment of an active 
business operation as a passive activity under the PHC rules.\5\ As 
traced by one commentator:

    \4\ 1982 amendments took account of the fact that lending or 
finance companies were making loans of longer maturities and of the 
increasing use of indefinite maturity loans. H.R. Rep. No. 404, 
97th Cong., 1st Sess. 20 (1981).
    \5\ See, e.g., S. Rep. No. 1707, 89th Cong., 2d Sess. 7, 
63 (1966) (``Your committee believes that . . . rental income arising 
from property manufactured by the taxpayer, in reality, is no more 
passive than sales income derived from property manufactured by the 
taxpayer.'')
---------------------------------------------------------------------------
          From the inception of the personal holding company tax, 
        banks, life insurance companies and surety companies were . . . 
        recognized as active businesses, and were excluded from the 
        personal holding company provision. Thereafter, . . . [relief] 
        has been granted . . . by Congress for comparable reasons: 
        holders of mineral, oil or gas royalties (in 1937), licensed 
        personal finance companies (in 1938), affiliated groups of 
        railroad corporations (in 1938), industrial banks and Morris 
        Plan companies (in 1942), other small loan companies and 
        finance companies (in 1950), corporations renting property to 
        shareholders for use in an active commercial, industrial or 
        mining enterprise (in 1950, retroactive to 1945), domestic 
        building and loan associations (in 1951), shipping enterprises 
        depositing amounts in Merchant Marine Act reserves (in 1954), 
        corporate affiliated groups generally (in 1954), corporations 
        renting property to shareholders but not having other 
        significant personal holding company income (in 1954), small 
        business investment companies (in 1959), music publishers (in 
        1960), movie producers (in 1964 and again in 1976), securities 
        dealers handling U.S. government bonds (in 1964), manufacturers 
        leasing their products and also realizing related royalty 
        income (in 1964 and again in 1966), corporate affiliated groups 
        with life insurance subsidiaries (in 1974), and franchisors 
        leasing the franchise and other property to shareholders for 
        use in an active business (in 1976). Congress, in aiding those 
        afflicted, has repeatedly expressed the intention to keep 
        active businesses out of personal holding company 
        entanglements.\6\
---------------------------------------------------------------------------
    \6\ Morgan, ``The Domestic Technology Base Company: The Dilemma of 
an Operating Company Which Might Be a Personal Holding Company,'' 33 
Tax L. Rev. 241-244 (1978) (footnotes omitted).

    More recently, the Congress acted to modify the application of the 
regulation that produces an inequitable result in the case of franchise 
royalties--the Tax Reform Act of 1986 amended Section 543 of the tax 
code to exclude active software royalties from the definition of PHC 
income.\7\ Based on these precedents, a similar amendment should be 
made to exclude active franchise royalties from the definition of PHC 
income.
---------------------------------------------------------------------------
    \7\ See General Explanation of the Tax Reform Act of 1986, prepared 
by the staff of the Joint Committee on Taxation (May 4, 1987), at page 
371.
---------------------------------------------------------------------------
                               Conclusion
    A review of the legislative history of the PHC provisions supports 
the view that, notwithstanding the language of the relevant Treasury 
regulation, the Congress did not intend to subject active business 
format franchisors to the PHC penalty tax. Under the mechanical 
approach of the regulations, however, the risk of accidental inclusion 
is real and the stakes for individual taxpayers are substantial. 
Modernizing the PHC penalty tax by excluding active franchise royalties 
would greatly simplify the tax code as it applies to individuals, and 
reduce an unnecessary level of complexity.

                                


                   White House Conference on Small Business
                                                     March 21, 2001

The Honorable William Thomas
Chairman
Committee on Ways & Means
United States House of Representatives
Washington, DC 20515

Re: Statement for the hearing on the President's Estate Tax Proposals

Dear Chairman Thomas:

    The undersigned are the elected Regional Taxation Chairs 
representing the 2000 delegates to the last White House Conference on 
Small Business. We were delegated the responsibility for advancing 
implementation of the Conference's recommendations with regard to the 
tax issues and reporting progress back to the delegates.
    The President has proposed a tax relief measure that incorporates 
full repeal of the estate tax, phased in over a period of years, and 
making permanent the tax credit for research and experimentation. We 
are gratified his proposal addresses these elements of tax relief which 
our Conference recommended to Congress, and which we have personally 
recommended to your Committee in past testimony.
    We have said in the past that the White House Conference endorsed 
full repeal of the estate tax, but the delegates have been grateful for 
any changes that reduce the tax heirs to a business might pay at the 
death of a principal owner in order to preserve what is the single 
largest source of new job opportunities in America, the small business. 
The passage of a small business from one generation to the next also 
has a positive impact on the community, promoting stable employment, 
long-term community support of community groups, and an active interest 
in maintaining the quality of education and life in the 
``neighborhood.'' Whatever could be done to increase the exclusion or 
move family-owned business or farm property out from under the estate 
tax is welcomed.
    The President's proposal does not appear to specify how property 
that passes to heirs is to be treated for tax purposes. The Congress 
will decide whether the property receives a stepped up basis, or 
whether the old basis is carried over to the heirs. A number of the 
members of our White House Conference group are concerned about the 
complexity and difficulty of keeping adequate records to support a 
carry-over basis. The country has been down this road before and the 
tax practitioner's within our group still get severe headaches whenever 
they recall the difficulty of reconstructing the basis of business (or 
other) property that has been in a family for a lifetime. If the 
revenue were necessary to make the President's tax plan feasible, we 
would urge the committee to raise the threshold for property excluded 
from any estate tax to a sufficient level to ensure that most small 
businesses are completely excluded. In the alternative, we ask the 
committee to consider some simplified system of evaluating the basis of 
property (a safe harbor) that will not require weeks or months of 
evaluation and paperwork.
    The White House Conference on Small Business Tax Issue Chairs 
welcome the opportunity to continue our work with Congress to suggest 
ideas that would help the nation's small business community. We hope 
Congress continues to listen to the recommendations of small businesses 
and analyze all legislative proposals for their impact on small 
businesses and their employees. Small businesses, after all, provide 
most of the new jobs for our economy. With this in mind, we have 
attached a copy of our latest ``Tax Action Plan'' for you and your 
staff to review. Thank you for your time and attention to our needs.

            Sincerely,
                                  The White House Conference Tax Chairs
               Debbi Jo Horton, Region I, East Providence, Rhode Island
                           Joy Turner, Region 2, Piscataway, New Jersey
                            Jill Gansler, Region 3, Baltimore, Maryland
                           Jack Oppenheimer, Region 4, Orlando, Florida
                           Paul Hense, Region 5, Grand Rapids, Michigan
                                Tommy Bargsley, Region 6, Austin, Texas
                             Edith Quick, Region 7, St. Louis, Missouri
                             Jim Turner, Region 8, Salt Lake City, Utah
                              Sandra Abalos, Region 9, Phoenix, Arizona
                          Eric Blackledge, Region 10, Corvallis, Oregon
                WHITE HOUSE CONFERENCE ON SMALL BUSINESS
                  Small Business Tax Issue Priorities
    This Tax Issue Priority Listing was developed by the Regional Tax 
Issue Chairs representing the 2000 delegates to the White House 
Conference on Small Business. These priorities were developed with the 
input and active assistance of thousands of small business people who 
were Delegates to the last White House Conference on Small Business. 
Because federal tax laws impact every small business, it is critical to 
the growth and progress of the small business community that the law 
reflect sound public policy and fundamental fairness while imposing as 
little administrative burden as possible.
    The Tax Chairs were elected by Delegates from each region of the 
country, and given the responsibility for advancing implementation of 
the Conference's recommendations on tax issues and reporting progress 
back to the delegates. The Tax Chairs have testified before Congress on 
ten occasions, and meet periodically with the staffs of the Ways and 
Means Committee, the Finance Committee, and the House and Senate Small 
Business Committees to help further develop clarifying legislation. In 
addition, the Tax Chairs have worked with IRS Commissioner and the 
Office of Tax Policy at Treasury to create policies that are helpful to 
small businesses.
TAX SIMPLIFICATION IS KEY
    The unifying thread running through all the recommendations of the 
White House Conference is a desire to reduce the overall complexity of 
government for small businesses. The most significant benefit to small 
businesses would come from simplifying the tax code. Allocating and 
reporting income taxes and payroll taxes is the one common experience 
of every business, and may be the only interaction that most businesses 
have with the federal government. Simplifying the tax process would, 
therefore, improve the situation for every small business. Federal 
government studies demonstrate that it costs small businesses 
considerably more, as a percentage of revenue, to comply with the tax 
laws than it costs large businesses.
    The conclusion is that small businesses are at a significant 
competitive disadvantage from the start due to governmental 
requirements. For this reason, the Tax Chairs fully support the 
restructuring passed by Congress and implemented by the IRS, and urge 
that the focus remain on helping small business comply with the law and 
reducing the administrative burdens the tax system imposes.
    One of the major recommendations of the White House Conference 
urged Congress to concentrate on creating a simpler and fairer tax 
system. The Conference attendees did not specify what that system 
should be, but the overriding principle, whether the entire system is 
overhauled or the existing system is streamlined, is that each new tax 
proposal be thoroughly analyzed for its impact on small business. New 
systems which increase the tax or the record keeping burdens on small 
business, prolong the existing problem.
    Within the context of the current tax code, the following items top 
the list of the recommendations made by the delegates to the White 
House Conference and are items we believe should be addressed by 
Congress. Each item reduces the complexity of the Code or extends to 
small businesses reasonable incentives to ensure that government 
requirements do not unfairly reduce their competitiveness.
100% HEALTH CARE DEDUCTION EQUITABILITY
    The tax issue chairs are gratified with the progress that has been 
made to achieve the full deduction of health care expenses for the self 
employed partnerships and S corporations, but remain disappointed that 
the full deductibility enjoyed by larger business will still only be 
phased in over 5 years for smaller businesses. Equal treatment with 
large businesses should dictate that small businesses be able to deduct 
100% of the cost immediately. The White House Conference recommendation 
called for the immediate increase to 100% deductibility to encourage 
more small businesses to provide insurance for their employees.
    Additionally the White House Conference recommendation called for 
the cost to be deducted from business income prior to the calculation 
of FICA, Medicare, or self employment tax as larger businesses do. 
Parity with other forms of business organization and with non-self-
employed workers can never be achieved without recognizing the business 
nature of worker health care costs. It is un-reasonable to allow full 
deductibility and excludability of these benefits for large corporate 
employers and to subject these same benefits to Section 1401 SE taxes 
(or FICA and Medicare in the case of S corporations) for the owners of 
smaller businesses.
    Although there is some tax loss, the immediate increase helps serve 
the policy goal of providing health insurance for as many people as 
possible. When there is a reduced tax incentive for a small employer to 
buy health insurance for themselves and their family (note that 1.4 
million children of self-employed individuals have no health coverage), 
they may decide to forgo offering it to their employees as well. In C-
corporations, the health insurance of the principals in the business 
has always been fully deductible. Unrelated employees of all types of 
business organizations are also allowed full deductibility and 
excludability of such benefits. The Tax Chairs feel tax based decisions 
should not be substituted for sound business judgment in the selection 
of business structure. The 107th Congress should enact, and President 
Bush should support legislation to allow immediate full deductibility 
at the business level as a matter of equity for all business owners.
ESTATE TAX REFORM
    One of the strongest recommendations of the White House Conference 
on Small Business was a call for the repeal of the estate tax. The 
Taxpayer Relief Act of 1997 included a provision that provides some 
help for some qualifying small business (in cases where the value of 
the small business is over half of the gross estate). While this is 
welcome relief, more needs to be done to protect businesses from being 
dismantled at the death of the principal. The passage of a small 
business from one generation to the next has a positive impact on the 
community, promoting stable employment, long-term support of community 
groups, and an active interest in maintaining the quality of education 
and community infrastructure.
    If outright repeal is viewed as too costly, proposals that provide 
for a larger, more effective, targeted reduction of the tax burden on 
small business assets would be helpful. By focusing the legislation, 
Congress can provide relief directly to farms and small family 
businesses with a relatively small loss of revenue. The Congress should 
adopt a tax policy that moves the country toward the positive goal of 
sustaining the economic vitality of a small business and away from a 
policy which requires expensive, complex estate plans and insurance. 
The reality today is that elaborate and costly estate plans must often 
be developed to protect a family business, which drains assets from 
productive business investment. Without such complex plans, there is no 
assurance that the business will survive to serve the next generation 
of owners and workers.
INCREASED SMALL BUSINESS EXPENSING
    Internal Revenue Code Sec. 179 Expensing--The expensing limit of 
IRC Sec. 179 was gradually increased to $25,000 (by the year 2003) as a 
result of the Small Business Job Protection Act passed by Congress in 
1996. We appreciate the attention past Congresses gave to this issue, 
but believe there is a need for additional increases and quicker 
implementation. The Tax Chairs would support, for example, the increase 
of the expensing limit to at least $30,000 effective immediately. 
Expensing is one of the most useful tax simplifiers for small business, 
but its use still remains limited. In addition, Congress did not 
correspondingly raise the $200,000 phase-out limit on purchases. These 
days, one piece of machinery (even for a very small business) can 
exceed this limit, effectively eliminating many small businesses from 
any benefits.
    Expensing Extended to Costs of Fixing Up Property--The Tax Chairs 
support extending Section 179 expensing provisions to cover property 
fix up and improvement costs. Small business store owners should be 
able to expense the costs of improving their store front or the 
building which houses their shop to remain competitive and to help 
ensure that the shops ``on the downtown square'' remain an attractive 
shopping destination for the community. Legislation such as S. 1341, 
The Main Street Business Incentive Act, which was introduced in the 
last Congress, could provide substantial assistance to small business 
for a reasonable cost.
    Software Expensing--One area where the Tax Chairs feel Congress 
could make a tremendous contribution is to allow expensing in the year 
a business purchases standard software for business purposes. It is 
practically impossible to determine what the useful life of software 
will be. With the pace of technology, useful life gets shorter and 
shorter as better products that exploit hardware advances seem to hit 
the market continuously.
DEDUCTION FOR MEALS AND ENTERTAINMENT
    The White House Conference on Small Business recommended 
restoration of the full deduction for meals and entertainment directly 
connected to business. Although no legislation has yet received the 
support necessary for enactment of full deductibility, the Tax Chairs 
would support any increase in deductibility as a step in the right 
direction. Provisions that would raise deductibility to 60% or 80% 
would be valuable to small businesses. This issue is very important to 
those whose business depends on networking contacts or personal 
presentations to close a deal. The ``shop floor,'' or the kitchen table 
of a small business, areunsuitable for marketing or negotiations and 
the best alternative is usually meeting over meals. The tax chairs 
believe that reasonable limits could be placed on full deductibility, 
similar to the governmental ``per diem'' amounts, if needed to prevent 
abuse.
NO INCREASE OF PAYROLL TAX
    The payroll tax can be especially burdensome on a small business 
because it is a regressive tax which must be paid whether or not the 
business makes any profit. The White House Conference was concerned 
that increasing the payroll tax not be viewed as a ``quick and painless 
fix'' for structural deficiencies in federal employment benefit trusts. 
The Conference recognized the importance of public confidence in the 
programs but felt the problem should be addressed directly. Other 
correction proposals, such as fund diversification or partial 
privatization, should also be analyzed for their potential impact on 
small business.
CLARIFICATION OF THE INDEPENDENT CONTRACTOR DEFINITION
    Resolving the long-standing employee vs. independent contractor 
controversy was the number one recommendation of the White House 
Conference on Small Business. The current vague standard leads to 
retroactive reclassifications by the IRS and substantial tax 
assessments plus interest and penalties. For example, the IRS assessed 
almost $750 million using such reclassifications between 1987 and 1994. 
While there have been a number of improvements in ``safe harbors'' to 
reduce overzealous enforcement, as long as the standard remains 
unclear, worker classification is a problem. There must be a clear 
standard defining the difference between an employee and an independent 
contractor so that a business can utilize contract service providers 
with confidence. The Tax Chairs have worked with key House and Senate 
Committee staff members and Administration Officials to indicate the 
types of legislation that would set a clear standard to provide 
security for small businesses while protecting the rights of workers 
who are properly classified as employees. The Tax Chairs believe that a 
reasonable consensus can be reached on this issue and should be adopted 
in the 107th Congress.
ALTERNATIVE MINIMUM TAX REFORM
    One of the top 60 recommendations made by the White House 
Conference delegates to the President and Congress included an overall 
concern for a simplification of the tax code, particularly as it 
related to small business. One major source of complexity is the 
Alternative Minimum Tax, which was originally targeted at wealthy 
taxpayers with low taxable income, but now impacts many average 
taxpayers. With the passage of provisions such as Section 1202, lower 
individual income tax rates, various new tax credits and other similar 
legislation, without a corresponding update of the alternative minimum 
tax provisions, these newer provisions are having the unintended effect 
of subjecting middle income taxpayers, and particularly small business 
owners to its impact and significantly eliminating some of the benefits 
intended to be provided from the tax provisions mentioned earlier.
    Accordingly, the White House Conference Tax Chairs urge the Members 
to seriously address alteration of the Alternative Minimum Tax rules to 
limit it's application to truly high income taxpayers, so that tax 
incentive provisions can have the broad benefits which Congress 
intended.

                                   -