[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
                           SELECT TAX ISSUES

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

                                HEARING

                               before the

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 23, 2004

                               __________

                           Serial No. 108-71

                               __________

         Printed for the use of the Committee on Ways and Means





                                 _____

                 U.S. GOVERNMENT PRINTING OFFICE

23-798                  WASHINGTON : 2006
_________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government 
Printing  Office Internet: bookstore.gpo.gov  Phone: toll free 
(866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250 Mail:
Stop SSOP, Washington, DC 20402-0001




                      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               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana               JIM MCDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania           LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona               EARL POMEROY, North Dakota
JERRY WELLER, Illinois               MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri           STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                    JIM MCCRERY, Louisiana, Chairman

J.D. HAYWORTH, Arizona               MICHAEL R. MCNULTY, New York
JERRY WELLER, Illinois               WILLIAM J. JEFFERSON, Louisiana
RON LEWIS, Kentucky                  MAX SANDLIN, Texas
MARK FOLEY, Florida                  LLOYD DOGGETT, Texas
KEVIN BRADY, Texas                   STEPHANIE TUBBS JONES, Ohio
PAUL RYAN, Wisconsin
MAC COLLINS, Georgia

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

                               __________

                                                                   Page

Advisories announcing the hearing................................     2

                               WITNESSES

Beauprez, Hon. Bob, a Representative in Congress from the State 
  of Colorado....................................................    31
Blackburn, Hon. Marsha, a Representative in Congress from the 
  State of Tennessee.............................................    38
Capps, Hon. Lois, a Representative in Congress from the State of 
  California.....................................................     5
Emanuel, Hon. Rahm, a Representative in Congress from the State 
  of Illinois....................................................    46
Isakson, Hon. Johnny, a Representative in Congress from the State 
  of Georgia.....................................................     7
Kucinich, Hon. Dennis J., a Representative in Congress from the 
  State of Ohio..................................................    30
Larson, Hon. John, a Representative in Congress from the State of 
  Connecticut....................................................    11
Lofgren, Hon. Zoe, a Representative in Congress from the State of 
  California.....................................................    44
McCarthy, Hon. Karen, a Representative in Congress from the State 
  of Missouri....................................................    21
Neugebauer, Hon. Randy, a Representative in Congress from the 
  State of Texas.................................................    24
Ryan, Hon. Tim, a Representative in Congress from the State of 
  Ohio...........................................................    34
Sessions, Hon. Pete, a Representative in Congress from the State 
  of Texas.......................................................    39
Simmons, Hon. Rob, a Representative in Congress from the State of 
  Connecticut....................................................    14
Turner, Hon. Michael, a Representative in Congress from the State 
  of Ohio........................................................    18
Weldon, Hon. Curt, a Representative in Congress from the State of 
  Pennsylvania...................................................    27
Wilson, Hon. Joe, a Representative in Congress from the State of 
  South Carolina.................................................    15

                       SUBMISSIONS FOR THE RECORD

Air Conditioning Contractors of America, Arlington, VA, statement    54
American Institute of Certified Public Accountants, Robert A. 
  Zarzar, letter and attachment..................................    55
American Prepaid Legal Services Institute, Chicago, IL, Andrew 
  Kohn, statement................................................    59
The Bond Market Association, statement...........................    61
Coalition for Tax Fairness, Arlington, VA, Timothy J. Carlson, 
  statement......................................................    63
Garrett, Hon. Scott, a Representative in Congress from the State 
  of New Jersey, statement and attachment........................    70
Green, Hon. Mark, a Representative in Congress from the State of 
  Wisconsin, statement...........................................    71
Honda, Hon. Michael M., a Representative in Congress from the 
  State of California, statement.................................    72
Langevin, Hon. James R., a Representative in Congress from the 
  State of Rhode Island, statement...............................    73
National Association of Bond Lawyers, Monty G. Humble, letter and 
  attachment.....................................................    79
Public Finance Network, joint letter.............................    87
Savers and Investors League, Mirror Lake, NH, W. Thomas Kelly, 
  statement......................................................    90


                           SELECT TAX ISSUES

                              ----------                              


                      THURSDAY, SEPTEMBER 23, 2004

             U.S. House of Representatives,
                       Committee on Ways and Means,
                   Subcommittee on Select Revenue Measures,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 11:33 a.m., in 
room 1100, Longworth House Office Building, Hon. Jim McCrery 
(Chairman of the Subcommittee) presiding.
    [The advisory, revised advisory, and revised advisory #2 
announcing the hearing follow:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                                CONTACT: (202) 226-5911
FOR IMMEDIATE RELEASE
September 15, 2004
No. SRM-4

                      McCrery Announces Hearing on

                           Select Tax Issues

    Congressman Jim McCrery (R-LA), Chairman, Subcommittee on Select 
Revenue Measures of the Committee on Ways and Means, today announced 
that the Subcommittee will hold a hearing on select tax issues. The 
hearing will take place on Thursday, September 23, 2004, in the main 
Committee hearing room, 1100 Longworth House Office Building, beginning 
at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, 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 Subcommittee and 
for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    This hearing provides non-Committee on Ways and Means Members of 
the House the opportunity to testify on tax issues of importance to 
their constituents.
      
    In announcing the hearing, Chairman McCrery stated, ``It is 
important to hear perspectives on tax issues from Members who do not 
sit on the Committee on Ways and Means. This hearing offers an 
opportunity for those Members to share their proposals and ideas for 
simplifying and improving the U.S. Tax Code, as well as discuss tax 
policies of particular interest to their constituents.''
      

FOCUS OF THE HEARING:

      
    The hearing will allow Members of the House who do not sit on the 
Committee on Ways and Means to testify on discrete tax legislation.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://waysandmeans.house.gov, select 
``108th Congress'' from the menu entitled, ``Hearing Archives'' (http:/
/waysandmeans.house.gov/Hearings.asp?congress=16). Select the hearing 
for which you would like to submit, and click on the link entitled, 
``Click here to provide a submission for the record.'' Once you have 
followed the online instructions, completing all informational forms 
and clicking ``submit'' on the final page, an email will be sent to the 
address which you supply confirming your interest in providing a 
submission for the record. You MUST REPLY to the email and ATTACH your 
submission as a Word or WordPerfect document, in compliance with the 
formatting requirements listed below, by close of business Thursday, 
October 7, 2004. Finally, please note that due to the change in House 
mail policy, the U.S. Capitol Police will refuse sealed-package 
deliveries to all House Office Buildings. For questions, or if you 
encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item 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 submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies 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. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    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.

                                 

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                                CONTACT: (202) 226-5911
FOR IMMEDIATE RELEASE
September 23, 2004
SRM-4-Rev

                     Change in Time for Hearing on

                           Select Tax Issues

    Congressman Jim McCrery (R-LA), Chairman, Subcommittee on Select 
Revenue Measures of the Committee on Ways and Means, today announced 
that the hearing on select tax issues, previously scheduled for 
Thursday, September 23, 2004, in the main Committee hearing room, 1100 
Longworth House Office Building, beginning at 10:00 a.m., will now be 
held at 2:00 p.m.

      
    All other details for the hearing remain the same. (See 
Subcommittee Advisory No. SRM-4 dated September 15, 2004.)

                                 

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                                CONTACT: (202) 226-5911
FOR IMMEDIATE RELEASE
September 23, 2004
SRM-4-Rev 2

                     Change in Time for Hearing on

                           Select Tax Issues

    Congressman Jim McCrery (R-LA), Chairman, Subcommittee on Select 
Revenue Measures of the Committee on Ways and Means, today announced 
that the hearing on select tax issues, previously scheduled for 
Thursday, September 23, 2004, in the main Committee hearing room, 1100 
Longworth House Office Building, beginning at 2:00 p.m., will now be 
held at 11:30 a.m.

      
    All other details for the hearing remain the same. (See 
Subcommittee Advisory No. SRM-4 dated September 15, 2004.)

                                 

    Chairman MCCRERY. The hearing will come to order. I would 
ask everyone to take a seat, please. Good morning, everyone. 
Today, the Subcommittee on Select Revenue Measures will hear 
testimony from both Republican and Democrat Members who do not 
sit on the Committee on Ways and Means. Their testimony will 
assist our Committee in exploring ways to improve the tax 
system. After all, it has been my experience that every Member 
of the Congress, regardless of what Committee he or she is on, 
has an opinion about the Tax Code. So, it is only appropriate 
that the Committee on Ways and Means should hear from those 
Members directly. It has been said that we are not the bosses 
of taxpayers, they are ours, and as we recognize that Members 
of Congress are here to serve taxpayers, it is important that 
Members of Congress are responsive to taxpayers whose lives are 
affected in various ways by our tax laws. This hearing offers 
the opportunity to hear from Members regarding tax proposals 
that are important to their constituents. Our Tax Code, I think 
we all can agree, is far from perfect. Many have called it 
hopelessly complex. As policymakers, we must continue to make 
improvements to the system. I believe this hearing will assist 
the Committee in our efforts to improve the tax system, and I 
look forward today to hearing from all of our honored guests as 
they discuss their proposals and give us the benefit of their 
expertise and their experience from their own districts. Now I 
would recognize my good friend and the Ranking Member on the 
Subcommittee, Mr. McNulty.
    Mr. MCNULTY. Thank you, Mr. Chairman. I welcome my 
colleagues and other interested parties here today. Mr. 
Chairman, I am not going to read my statement; I would just 
like to submit it for the record and summarize. It is my 
observation that many Members of the U.S. House of 
Representatives who are not Members of the Committee on Ways 
and Means not only have opinions about the tax law, many are 
more expert in certain sections of the tax law than Members who 
sit on this Committee. Many Members have been proposing various 
changes to the Tax Code for literally years, and I believe that 
a number of those proposals deserve not only a hearing by this 
Committee but adoption by the House of Representatives. So, I 
am very pleased to welcome our colleagues here today, many of 
whom have spent a great deal of time on these proposals over a 
very long period, and I am especially grateful to you, Mr. 
Chairman, for affording them this opportunity.
    [The opening statement of Mr. McNulty follows:]
Opening Statement of The Honorable Michael R. McNulty, a Representative 
                 in Congress from the State of New York
    Thank you, Mr. Chairman. I applaud Chairman McCrery for scheduling 
this important hearing and his outreach to me to insure Member 
participation on a bipartisan basis. I welcome all of the Members 
testifying before the Subcommittee today, and very much appreciate your 
willingness to personally share your views on tax legislation of 
important interest to your constituents.
    Today's hearing has been scheduled to provide House Members--those 
not serving on the Ways and Means Committee--with the opportunity to 
present testimony in support of tax bills, introduced during the 108th 
Congress, which have been referred to us for consideration. Also, we 
can use today's hearing to discuss legislative proposals, particularly 
in the area of tax simplification, which Members are in the process of 
developing.
    The Select Revenue Measures Subcommittee has a long tradition of 
holding hearings on what are often called ``miscellaneous tax'' bills. 
The Subcommittee was re-constituted within the Ways and Means 
Committee, beginning with the 107th Congress, with the primary 
responsibility of considering tax bills of unique interest to specific 
Members of Congress and their constituents.
    Too often, Members' bills can get ``lost in the shuffle'' while the 
more wide-reaching, major tax initiatives of the day dominate the 
Committee's attention and focus. I am pleased that we are able to offer 
Members this opportunity before the end of the 108th Congress.

                                 

    Chairman MCCRERY. Thank you, Mr. McNulty. This morning we 
will begin with Ms. Capps, as she has a markup I believe to get 
to in just a few minutes. So, we are going to allow her to go 
first. Ms. Capps.

  STATEMENT OF THE HONORABLE LOIS CAPPS, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. CAPPS. Thank you, Mr. Chairman, and Members of the 
Subcommittee. I thank you for holding this hearing today of the 
Subcommittee on Select Revenue Measures, and for this 
opportunity to present testimony in support of H.R. 2360, the 
Capital Construction Fund (CCF) Qualified Withdrawal Act. This 
legislation would allow fishermen to use their CCF savings for 
nonfishing purposes. The recent U.S. Commission on Oceans 
Policy report made clear that our oceans are in crisis and 
action needs to be taken at the Federal level to restore the 
health of our ocean ecosystems. The commission's report 
contained a variety of important legislative recommendations, 
including reforming the CCF to reduce overcapitalization of 
America's fishing fleets, and last year I introduced 
legislation, this bill, to do just that. My bill will give 
fishing families greater access to their own money in this CCF. 
The CCF works like an individual retirement account (IRA): 
deposits to the fund earn tax-deferred interest and are 
deducted from the fishermen's taxable income. It is a way for 
fishermen to accumulate funds free from taxes for the purpose 
of buying and refitting fishing vessels. However, if fishermen 
withdraw funds for purposes other than buying new vessels or 
upgrading their current vessels, they can lose up to 70 percent 
in taxes and penalties.
    The program successfully expanded the U.S. fishing industry 
by allowing fishermen to rapidly accumulate the funds necessary 
for future expansion. That was in the past. Unfortunately, as 
the commission's report noted, the CCF is unintentionally at 
this point contributing to the problems facing U.S. fisheries 
by encouraging the growth of U.S. commercial fishing fleets. 
Because of the environmental problems plaguing commercial 
fishing as well as the need in many cases for fishing fleet 
downsizing, the CCF has outgrown its original purpose. The CCF 
Qualified Withdrawal Act encourages more sustainable fishing 
practices by allowing CCF funds to be used for purposes other 
than the purchase or reconstruction of fishing vessels. This 
bill will allow fishermen to roll over funds currently in the 
CCF into IRAs or other types of retirement accounts without 
adverse tax consequences to the account holder. The funds 
rolled into an IRA would be taxed upon withdrawal from that 
retirement account as are regular IRA contributions. In 
addition, the funds could be paid to individuals who are 
leaving a fishery as part of a capacity reduction program, or 
for the acquisition of vessel monitoring systems or fishing 
gear designed to avoid untargeted marine life caught while 
fishing for other species.
    Both the fishing and the environmental community support 
this legislation. It has been endorsed by the Fisherman's 
Marketing Association, the Oregon Trawl Commission, Pacific 
Marine Conservation Council, Oceana, Natural Resources Defense 
Council, Cape Cod Commercial Hook Fisherman's Association, and 
Trawlers Survival Fund. You can tell it is bipartisan and 
bicoastal, the support for this legislation. Mr. Chairman, at a 
time when the fishing industry is in trouble it makes sense to 
open the CCF for other purposes. By allowing fishermen to 
access their money without severe tax penalties, we can give 
more options to those who wish to pursue other careers or 
retirement which in return will help the industry as a whole. 
With this bill we can pursue twin goals: sustain America's 
fisheries, and also protect the financial security of fishing 
families. Again, thank you, Mr. Chairman and Members of the 
Committee, for your interest in this CCF Qualified Withdrawal 
Act. I hope the Committee will approve this legislation which 
means so much to my constituents and fishing families across 
this country. Thank you.
    [The prepared statement of Ms. Capps follows:]
  Statement of The Honorable Lois Capps, a Representative in Congress 
                      from the State of California
    Mr. Chairman and members of the Subcommittee, thank you for holding 
this hearing today and for the opportunity to present testimony in 
support of H.R. 2360, the Capital Construction Fund Qualified 
Withdrawal Act. This legislation would allow fishermen to use their 
Capital Construction Fund savings for non-fishing purposes.
    The recent U.S. Commission on Oceans Policy report made clear our 
oceans are in crisis and action needs to be taken at the federal level 
to restore the health of our ocean ecosystems. The Commission's report 
contained a variety of important legislative recommendations, including 
reforming the Capital Construction Fund to reduce overcapitalization of 
America's fishing fleets.
    Last year, I introduced legislation to do just that. My bill will 
give fishing families greater access to their own money in the Capital 
Construction Fund.
    The CCF works like an IRA--deposits to the fund earn tax-deferred 
interest and are deducted from the fishermen's taxable income. It is a 
way for fishermen to accumulate funds, free from taxes, for the purpose 
of buying or refitting fishing vessels. However, if fishermen withdraw 
funds for purposes other than buying new vessels or upgrading current 
vessels, they can lose up to 70% in taxes and penalties.
    The program successfully expanded the U.S. fishing industry by 
allowing fisherman to rapidly accumulate the funds necessary for future 
expansions. Unfortunately, as the Commission's report noted, the CCF is 
unintentionally contributing to the problems facing U.S. fisheries by 
encouraging the growth of U.S. commercial fishing fleets. Because of 
the environmental problems plaguing commercial fishing, as well as the 
need in many cases for fishing fleet downsizing, the CCF has outgrown 
its original purpose.
    The CCF Qualified Withdrawal Act encourages more sustainable 
fishing practices by allowing CCF funds to be used for purposes other 
than the purchase or reconstruction of fishing vessels.
    This bill will allow fishermen to roll over funds currently in the 
CCF into IRA's or other types of retirement accounts without adverse 
tax consequences to the account holder. Funds rolled into an IRA would 
be taxed upon withdrawal from that retirement account, as are regular 
IRA contributions.
    In addition, the funds could be paid to individuals who are leaving 
a fishery as part of a capacity reduction program, or for acquisition 
of vessel monitoring systems or fishing gear designed to avoid 
untargeted marine life caught while fishing for another species.
    Both the fishing and the environmental communities support this 
legislation. It has been endorsed by the Fisherman's Marketing 
Association, Oregon Trawl Commission, Pacific Marine Conservation 
Council, Oceana, Natural Resources Defense Council, Cape Cod Commercial 
Hook Fisherman's Association, and Trawlers Survivors Fund.
    Mr. Chairman, at a time when the fishing industry is in trouble, it 
makes sense to open the CCF for other purposes. By allowing fishermen 
to access their money without severe tax penalties we can give more 
options to those who wish to pursue other careers or retirement, which 
in turn will help the industry as a whole.
    With this bill we can pursue twin goals--sustain America's 
fisheries and protect the financial security of fishing families.
    Again, thank you Mr. Chairman and Members of the Subcommittee for 
your interest in the Capital Construction Fund Qualified Withdrawal 
Act. I hope the Committee will approve this legislation, which means a 
lot to my constituents and fishing families across the country.
    Thank you.

                                 

    Chairman MCCRERY. Thank you, Ms. Capps; very good concise 
testimony. Speaking of concise, I am sure you are all aware we 
are under the 5-minute rule for presentation of remarks, oral 
remarks. Your written testimony will be inserted in the record 
in its entirety. Next, we have a gentleman who has been 
pursuing changes in the Tax Code for some time along areas of 
his interest, and he is here today to tell us about one of 
those, Johnny Isakson from Georgia.

STATEMENT OF THE HONORABLE JOHNNY ISAKSON, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF GEORGIA

    Mr. ISAKSON. Thank you, Mr. Chairman and Ranking Member. I 
appreciate the opportunity of being here today and discussing 
with you H.R. 2036, which I have introduced and have talked 
about to this Committee once before. I come back to you today 
understanding the timing of the session is close, but also 
understanding the importance of us really paying attention to 
our environment and to development of this country, and to 
creating positive ways that incentivize our communities, the 
development community and our conservation community, to 
protect our precious homeland and use it as an asset for 
generations to come. Mr. Chairman, in the last 225 years our 
country, the continental United States has lost 52 percent of 
its wetlands. In a 5-year period between 1992 and 1997, the 
urban footprint of the United States of America grew by 15 
percent. We are a rapidly growing Nation, and with that we have 
lost a tremendous amount of open and greenspace. I have worked 
for some time and professionally all my life, I was in the real 
estate brokerage and development business, with real property, 
with the development of real estate, with the consequences of 
growth, and with the rising and urgent need to understand that 
our environment is our amenity package for our country and for 
its development.
    House Resolution 2036 takes the approach to create a 5-year 
program, $25 billion in tax credits to be used for the purpose 
of the purchase of conservation easements, according to a 
statewide comprehensive plan allocated among the States by 
conscientious formula, to see to it that we do everything we 
can to protect our open and greenspace. The bill is named after 
the late Paul Coverdell, who was the U.S. Senator from Georgia 
until his death 4 years ago, who began this effort, and I have 
picked up its mantle and am doing everything I can to raise the 
visibility of this important purpose. Mr. Chairman, I guess the 
best way I can emphasize my strong belief in this is to tell 
you the following. My last effort as a private businessman 
before I came to the Congress of the United States was the 
development of a 300-acre tract of land on the Chattahoochee 
River in Atlanta, in suburban Atlanta. I was also a part of the 
Trust for Public Land's effort to create the Chattahoochee 
Greenway, which is substantially created in our State now to 
protect our State's largest natural resource and water supply, 
the Chattahoochee River.
    The property that we purchased along that river had 
significant environmental challenges, and developers in the 
area and other pieces of property had taken the old approach of 
trying to figure out how to shoehorn into a piece of property 
all the development they could with less than the important 
interest and intensity on the environment. We took another 
approach, and we took a risk. The risk was that we would 
protect what ended up being about 22 percent of the total land 
area purchased into a conservation park. We named that park 
after the former President of the Georgia Conservancy; we sold 
to the Trust for Public Land the river frontage, and we took 
the undevelopable or questionably-developable land, created it 
into a seamless park throughout the development as the amenity 
package for this community. It was the biggest hit in the 
metropolitan Atlanta area and development for years, and it 
wasn't because of any genius of the developer or sales and 
marketing techniques; it was because Americans were willing to 
pay for what all of us love and appreciate, and that is our 
natural resource. I would like to ask unanimous consent, in 
addition to my testimony which I previously submitted, to 
submit a Yale University study on the value of conservation 
easements as well as a comprehensive summary of this bill. Mr. 
Chairman, I believe----
    Chairman MCCRERY. Without objection.
    [The information was not received at the time of printing.]
    Mr. ISAKSON. I believe the tax policy drives economic 
policy and decisions, and I think paramount among our 
considerations as public policymakers in the years ahead must 
be the quality of our own and greenspace and our environment. I 
am a believer that a developing country can be a partner with 
the environment in which that country develops. Our most 
important assets for my grandchildren are our waters, our air, 
and our greenspace, as well as the opportunity to thrive in the 
business community in the free enterprise system. It is 
incumbent upon us to create mechanisms to make great 
partnerships between the development community and the 
environmental community. Good tax policy, H.R. 2036, and a 
focus toward environmental and conservation easements versus 
trying to consume through purchase all the land necessary to 
protect, gives America a 10 to 1 return on its investment and a 
comprehensive plan State-by-State to ensure that our future is 
bright, our air is clean, and our water is safe. I thank the 
Chairman.
    [The prepared statement of Mr. Isakson follows:]
Statement of The Honorable Johnny Isakson, a Representative in Congress 
                       from the State of Georgia
    Mr. Chairman, ladies and gentlemen of the Subcommittee. I want to 
say how grateful I am to you for allowing me the opportunity to discuss 
H.R. 2036.
    Let me preface this by saying that one year ago I stood before you 
making the same plea. I am here again because I believe H.R. 2036 
offers us an opportunity to make a difference in our environmental 
policy--one which is fiscally responsible yet effective and productive. 
I believe that all of us have a responsibility to preserve our 
environment and our quality of life. H.R. 2036 has long term benefits 
with immediate and visible results that answer some of the greatest 
environmental concerns this country has ever faced; effective 
immediately.
    I am confident that tax policy is one of the largest drivers of 
economic policy as it determines where and how and how much the 
consumer and private sector invest and spend their earnings, especially 
in the housing and land development sector. By using tax credits given 
for land easements we respect property rights, we preserve the 
environment and we use God's natural gifts as they were meant to be 
used. Overall, the proposed $25 billion in tax credits over the next 
five years will in the long run save the taxpayer and government 
billions, improve air and water qualities, increase desperately needed 
greenspace, allow farmers to produce our vital food supply and improve 
the overall quality of America's communities. How do I know this is 
true? Because I have seen it work first hand.
    I represent the Sixth Congressional District of the State of 
Georgia. My district falls directly in greater Metro Atlanta, the 
country's fastest growing urban area. It is not hard to see the impact 
urban development has had on our city's environment. Simply by looking 
at aerial photographs anyone will notice that unless we act soon, 
America's most precious land will be consumed by urban development. Our 
air and water quality is poor and getting worse throughout the country, 
natural ecosystems are being destroyed, and farmers are being forced to 
sell their land in lieu of neighborhood developers.
    When I first saw the proposal of what is now the largest protected 
natural waterway and greenway of any urban city in America, I knew the 
idea was brilliant. It allowed a nonprofit group specialized in 
acquiring land to leverage $25 million in federal funds to eventually 
raise an additional $105 million in private funding and acquire 60 more 
miles of riverfront property to remain intact in its natural state. All 
this was done while keeping the land in the hands of the private owner.
    Mr. Chairman, we have a large environmental crisis on our hands. 
From 1992 to 1997 alone, 15% of the nation's total urban development 
occurred. Since the beginning of our nation's history, the lower 48 
states have lost 52% of their original wetlands. Of the 76 eco-regions 
in that same area, only nine are considered not to be critical, 
endangered or in a vulnerable condition as habitat for the species they 
contain. If current development and population trends continue, by the 
year 2050 our farmers and ranchers will be required to produce food for 
50% more Americans on 13% less land. The list of problems goes on and 
on. We must act now.
    H.R. 2036 will direct and empower all levels of government, land 
trust, taxpayers, and landowners to work in an aligned partnership, 
focused at the local level to conserve and restore our natural 
infrastructure for generations to come. Additionally, the economic 
gains give a substantive incentive for this plan. The conserved areas 
will filter our water and protect it with earth's natural and finest 
purification. They will clean our air. They will keep our fisheries and 
foodstocks healthy and productive. They will provide much needed 
greenspace for everyone while simultaneously freeing us the cost of 
artificially replacing these same services, and I think it will send a 
strong and positive message to the community that we value our land and 
our environment above building for the sake of building. As people 
realize the value of our environment's natural state and the limited 
nature of land, it will force wise development decisions and encourage 
city innovation.
    Mr. Chairman, just last week we saw the effects of nature's natural 
course on human development. With severe flooding and mudslides in the 
wake of three back to back hurricanes, we again realize how vital our 
nation's wetlands are that act as a buffer for surrounding rivers and 
creeks. As a safety precaution among all the other benefits, this 
legislation will do the job.
    When I was the president of Northside Reality, my last development 
project was a residential neighborhood in Atlanta named Wild Timber. 
What happened was an amazing phenomenon. We decided to sell the 
riverfront property to the Trust for Public Land to ensure that it 
would be preserved and then we promised to preserve 20% of the land 
area as greenspace to act as common buffers behind houses and along 
streams. Basically, we banked on using the environment as our amenity 
package rather than paving tennis courts, multiple swimming pools and 
parking lots, and the people loved it. We broke all development records 
in absorption and popularity as people flocked to enjoy what we had 
preserved just as much as what he had built. People want greenspace. 
People enjoy preservation and they understand that the cost of not 
taking care of our environment from both an economic perspective and a 
social perspective is, in the long run catastrophically high.
    Mr. Chairman, using tax incentives as a catalyst to raise capital 
in order to preserve land makes sense. It is not merely a textbook 
theory, but it has been proven through trial. Because of tax incentives 
one decade ago, the low-income housing standards have risen 
dramatically with large capital investments. Because of tax incentives 
on mortgages, home ownership in our great country is at an all time 
high and remains the highest in the entire world. In Atlanta where we 
first tried the idea of the Chatahoochee River Greenway Project, it 
worked tremendously well and is now the largest preservation project in 
urban America.
    I understand that anything we pass cannot just be a good idea if it 
does not win the support of the people. In our initial polling, we 
found overwhelming support concerning the principles of H.R. 2036 that 
extended beyond all party lines, geographic lines, and social lines.
    H.R. 2036 is an innovative idea and will set the precedent now to 
preserve what land we have left before it is gone. It holds true to the 
principle of America's foundation, a right to private property. It 
encourages a spirit of conservation. It promotes collaboration and the 
formation of an integrated partnership between the public and private 
sector, all working together for common good. My colleague and good 
friend, the late Senator Paul Coverdell believed in this bill, and I am 
honored to take his and others' great ideas to be the torchbearer 
before you today.
    Mr. Chairman, I understand the huge concerns surrounding the budget 
deficit and starting new projects. However, the need for land 
conservation has never been greater than today. This small window of 
opportunity will be lost as time progresses. Developed land can never 
again be recovered. Every one of us knows that land must be preserved 
and that the environment must be protected. By merely purchasing land 
through government appropriations, it is not possible to conserve as 
much that is needed. Without unlimited funds, it is impossible to make 
that method work. In order to get the most land for our dollar, H.R. 
2036 proposes a solution that will let the people work to make it 
happen, using federal support as a catalyst for a much larger tidal 
wave of leveraged action. We will be able to preserve more land for 
less money and keep 100% of the land in the hands of the private land 
owner.
    Mr. Chairman and Committee members, I thank you for your 
consideration and for allowing me to testify regarding this bill.

                                 

    Chairman MCCRERY. Thank you, Mr. Isakson. Now the gentleman 
from Connecticut, Mr. Larson.

  STATEMENT OF THE HONORABLE JOHN LARSON, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CONNECTICUT

    Mr. LARSON. Thank you, Chairman McCrery and Ranking Member 
McNulty, for this opportunity to appear before the Committee on 
Ways and Means and discuss the exemption of tax abatements and 
other local incentives on our volunteer services, most notably 
firefighters, police, and emergency medical services. I seek 
the Committee's unanimous consent to revise and extend, submit 
extraneous materials and supportive data with regard to my 
testimony.
    [The information was not received at the time of printing.]
    Chairman MCCRERY. Without objection.
    Mr. LARSON. Thank you, Mr. Chairman. The genesis of this 
bill comes from local volunteer firefighters. Chief Crombie out 
of South Windsor approached me more than a year and a half ago 
now explaining a problem that local volunteers were having. 
South Windsor is not unlike many communities across this 
country, where there is considerable problems with both 
recruitment and retention of volunteers, especially 
firefighters and emergency medical services. Many States, 
including my own like Connecticut, local legislative bodies 
enacted incentives. Unfortunately, the Internal Revenue Service 
(IRS) in a court decision decided to strike those down, and in 
this case, in the case of South Windsor, treated a tax 
abatement as income. What is worse is that the workers, because 
they don't receive cash, the employer, in this case the 
municipality, is required to pay both portions of the Federal 
Insurance Contributions Act tax, therefore making it almost 
impossible for the local municipality to reach out and get the 
kind of recruitment and retention that they need.
    This has a compounding effect, especially since 
International Fire Chiefs Association has noted that over the 
last 10 years we have seen a decline in volunteerism and 
largely over these very issues of recruitment and retention. 
There isn't a municipality in any one of our States that 
doesn't face these concerns on a regular basis. So, we put 
forward this legislation. We thought that there might be an 
administrative process, but in writing the U.S. Department of 
the Treasury, they responded by saying that they would prefer 
that we go the legislative route with exemptions. What the bill 
does very simply is provide exemptions not only in the case of 
a tax abatement but provides both local autonomy and 
flexibility, local autonomy for the municipality and 
flexibility for the States, so that they might include other 
incentives such as stipends, pay-per-call, health care, 
retirement incentives, State income tax credits, or death 
benefits, thereby leaving the decisions up to the States and 
also not allowing the IRS to reach into local coffers.
    In seeking a cost estimate to this, we have yet to receive 
those. However, it is my contention and my opinion that this 
bill simply prohibits the IRS from claiming new revenue 
sources, or in essence prevents them from reaching into local 
tax coffers as they try to address their concerns and their 
needs with recruitment and retention of volunteers. The 
urgency, I think, is paramount. It wasn't lost on any Member of 
this body in response to September 11 that it wasn't the 
Federal Bureau of Investigations, the Central Intelligence 
Agency, or the Armed Services that responded in New York City, 
here at the Pentagon, or in the fields of Pennsylvania. It was 
local firefighters, emergency medical teams, and police. We 
should be doing everything within our power to make sure that 
we are empowering local municipalities to make sure that they 
are able to continue to recruit and retain these valuable 
citizens in our communities. Passage of this legislation where 
a companion bill has been introduced in the House would address 
an urgent concern needed in each and every one of our States 
and municipalities. Again, I thank the Chairman and the Ranking 
Member and the distinguished Members of this Committee for 
providing us an opportunity to bring this very urgent and 
timely request before you, and we hopefully will receive a 
favorable response.
    [The prepared statement of Mr. Larson follows:]
 Statement of The Honorable John Larson, a Representative in Congress 
                     from the State of Connecticut
    Mr. Chairman, I would like to thank the Subcommittee for the 
opportunity to speak today on H.R. 1859, a bill I introduced to exempt 
local property tax abatements or other local incentives for volunteer 
emergency responders from federal taxation.
    The bill was first introduced in 2002 after South Windsor Volunteer 
Fire Department Chief Phil Crombie, Jr., the Town of South Windsor and 
other volunteer emergency responders in my district alerted me to the 
fact that the tax abatements provided by local governments to volunteer 
firefighters as recruitment and retention incentives was being taxed by 
the IRS. In response, I immediately held a forum in my district to meet 
with community leaders and volunteer emergency responders to solicit 
ideas and input about how to best address this problem. The bill, H.R. 
1859, reflects the valuable input I received at these sessions and 
subsequent discussions and responds directly to the needs and concerns 
of the emergency responders in my district, the State of Connecticut, 
and across the country.
    There is no doubt that volunteer emergency responders play one of 
the most critical roles in ensuring the safety and security of our 
communities. In many areas across the country, they are the only 
responders for fire, medical, natural disasters, terrorist attacks and 
other community emergencies. In nearly all these situations, volunteers 
represent our nations first response, and in many cases, our first 
defense. In this time of heightened concern over the security of our 
homeland and the threat that terrorists pose to our communities, we 
cannot afford to lose these valuable and critical volunteers. 
Alarmingly, however, that is exactly what happened in volunteer fire 
departments nationwide in the past two decades.
    A recent report by the International Association of Fire Chiefs 
(IAFC) found that the number of volunteer firefighters dropped ten 
percent since 1984, from a high that year of 880,000 to 790,000 in 
2001. While an October 2003 survey by the National Volunteer Fire 
Council found that the number of volunteers had increased by about four 
percent between 2001 and 2002, it is clear that more must be done to 
help volunteer departments reverse the damage done by 20 years of 
decline in their ranks.
    According to the IAFC, this decline ``stems from both difficulties 
in retaining current volunteers as well as problems with recruiting new 
volunteers.'' To address these issues, and to provide cities and towns 
with greater retention and recruitment tools, the State of Connecticut 
passed a law in 1999 (Public Act 99-272) which allowed local 
governments to abate the property taxes of any resident who volunteers 
his or her services as a firefighter, emergency medical technician, or 
ambulance driver in their town. Many other states passed similar 
measures.
    However, as cities and towns tried to enact local ordinances to 
take advantage of this law, the Internal Revenue Service (IRS)--in a 
separate property tax abatement case--ruled that under current federal 
law the amount of property tax abated for volunteers was considered 
``income'' subject to federal taxation. Even worse, since the workers 
do not actually receive ``cash'' for these ``wages,'' the ``employer'' 
(i.e. localities) would be required to pay both portions of the FICA 
tax on the amount of property tax abated, and would be subject to an 
additional FICA tax if the localities do not seek reimbursement from 
the volunteers for their portion of the FICA tax.
    This decision clearly undermines the purpose of providing 
incentives for individuals to volunteer their time to keep their 
communities safe and imposes IRS control and influence into local 
government tax policy. In light of this ruling, many towns were forced 
to repeal their abatement incentives, or prevented from even 
considering such programs.
    For example, the town of South Windsor was one of the first in 
Connecticut to enact a property tax abatement incentive for their 
volunteer emergency responders. Their $1,000 abatement clearly had an 
effect: after the law passed, 12 individuals joined the town's 
volunteer fire department, where only five had joined the year before. 
Despite this success, the town was forced to repeal their property tax 
abatement ordinance after the IRS ruling because it was simply 
impossible to reconcile their programs with existing federal tax law.
    After 9/11, President Bush rightly called on Americans to volunteer 
their time in service to their neighbors, community and their nation. 
However, in today's economy where men and women must work longer hours 
or multiple jobs just to break even, finding the time to volunteer is 
in danger of becoming a thing of the past. These types of creative 
incentives help encourage new volunteers to strengthen the ranks of 
volunteer first responders, and provide important retention incentives.
    Last February, I sent a letter signed by the Connecticut delegation 
to President Bush urging him to order an administrative stay on the 
IRS's ruling. In response, the Treasury Department advised that 
exempting property tax abatements from income and wage withholdings 
would best be accomplished through legislative, rather than 
administrative, means. To this end, I introduced legislation in the 
107th and 108th Congresses to clarify the status of local tax 
abatements and other incentives for recruitment and retention offered 
by local governments to volunteer emergency responders under IRS rules. 
The current bill, H.R. 1859, has received the support of 25 Members of 
Congress, and a companion bill has been introduced in the Senate. In 
addition, the Connecticut Attorney General and the Town of South 
Windsor both strongly support this initiative.
    Although this bill specifically exempts property tax abatements, it 
also allows local governments the flexibility and creativity to design 
their own incentive programs. For example, in addition to tax 
abatements, local governments across the country have experimented with 
providing modest stipends that are sometimes paid per call or in lump-
sums per year or quarter, health benefits, retirement awards, state 
income tax credits or death benefits.
    Rather than creating a specific list of benefits and eligible 
volunteer emergency responders, H.R. 1859 provides maximum local 
flexibility to design and implement the type of recruiting and 
retention incentive programs that reflect the needs of their 
communities and volunteers by exempting those benefits ``provided by a 
State or political subdivision on account of services performed as a 
member of a qualified volunteer emergency response organization.''
    This approach ensures that the federal government does not mandate 
the types of incentive programs that can be established while also 
ensuring that States and local governments must first approve and adopt 
appropriate incentive programs and structure through their own 
legislatures. H.R. 1859 protects the prerogative of state and local 
governments to use their own local tax revenue as they see fit by 
prohibiting the IRS from claiming local tax dollars as new federal 
revenue streams.
    I also wrote to the Joint Tax Committee last June and requested a 
revenue estimate to determine the ``cost'' to the federal government. 
However, to this date we have not gotten a response from the committee. 
Regardless of whatever ``rules'' they use to evaluate this proposal, it 
is my opinion that this bill simply prohibits the IRS from claiming new 
revenue sources, rather than taking away existing revenue sources and 
keeps the IRS from reaching into local tax coffers.
    The urgency of this matter is clear. At a time when our communities 
increasingly rely on volunteers to respond to fire, medical and other 
emergencies, local governments must be allowed to provide creative 
incentives to those willing to serve their communities without 
interference from the IRS.
    Thank you, and I look forward to working with the Ways and Means 
Committee and my colleagues in Congress in addressing this critical 
issue for our nation's volunteer emergency responders.

                                 

    Chairman MCCRERY. Thank you, Mr. Larson. Well, we have had 
a Yale study submitted and now we are getting double teamed 
from Connecticut. Our next presenter is Mr. Simmons, also from 
the State of Connecticut. Mr. Simmons, you may proceed.

  STATEMENT OF THE HONORABLE ROB SIMMONS, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CONNECTICUT

    Mr. SIMMONS. Thank you, Mr. Chairman. Because my colleague 
and friend Congressman Larson has done such as excellent job, I 
will ask that my full statement be introduced into the record 
as if read.
    Chairman MCCRERY. Without objection.
    Mr. SIMMONS. Then I would like to summarize it. First of 
all, the State of Connecticut has 169 municipalities. In my 
district, the Second Congressional District, we have 65 towns. 
These tend to be rural, agricultural, small towns. We have no 
county government. I repeat, we have no county government. We 
have town government. Who provides emergency services and 
firefighting for those towns? By and large, volunteers. Because 
of the great job they do, and because it is harder and harder 
to get volunteers to provide these services, the State of 
Connecticut in 1999 passed the law allowing the municipalities, 
allowing these towns by ordinance to establish property tax 
relief as kind of a benefit to these volunteers. I voted for 
that law. I was in the legislature at that time; it is a good 
law, and it helps us with our 65 towns to attract and keep 
volunteers. It gives them a little benefit.
    Well, lo and behold, what happens? The IRS comes in and 
says that this little benefit is taxable income, essentially 
taxable income. So, what do the towns do? Well, in some cases 
the towns wrestle with the paperwork for a while; in other 
cases they just give up. It is too complicated, it is too 
difficult to do. Again, these are small towns. So, this benefit 
which we as citizens of our State try to extend to our 
volunteers and emergency services and firefighting, this 
benefit has now been essentially taken away by the Federal 
Government, and I think that is wrong. I think it is wrong in 
principle, I think it is wrong at a time when we rely on our 
firefighters and our emergency service personnel more than ever 
to deal with issues of homeland security. I think it is wrong 
at a time when the President has urged more Americans to 
volunteer their time to their communities and their country, 
and where he is trying to stimulate volunteerism, which is what 
I understand is coming out of the White House. So, again, I 
commend my colleague, Mr. Larson. He has done a great job of 
bringing this legislation forward. I think there are probably 
other of our colleagues and other States that suffer from the 
same problem, and we thank the Chair and the Committee for 
considering this important proposal.
    [The prepared statement of Mr. Simmons follows:]
 Statement of The Honorable Rob Simmons, a Representative in Congress 
                     from the State of Connecticut
    Mr. Chairman, thank you for the opportunity to testify before your 
Committee today. Mr. Chairman, I represent the 2nd District of 
Connecticut. The 2nd District constitutes half of the land mass of the 
state of Connecticut; approximately the entire eastern half of the 
state. It is a very rural district. What's more, it is a district made 
up of 65 towns. That is 65 autonomous municipalities--we do not have 
county government in Connecticut.
    Mr. Chairman, the vast majority of my district is served by 
volunteer firefighters and emergency workers. The safety and security 
of my constituents depends on their own neighbors sacrificing their 
time to protect the community.
    To thank these citizens for their service and to encourage others 
to serve, Connecticut passed a law in 1999 allowing municipalities to 
establish by ordinance a program to abate property taxes due for any 
fiscal year for a resident of the municipality who volunteers his or 
her services as a firefighter, emergency medical technician, or 
ambulance driver in the municipality.
    Unfortunately, Mr. Chairman, this small benefit for Connecticut's 
volunteer first responders is now in jeopardy. In 2002, the IRS ruled 
that individuals receiving such property tax abatements must report the 
abatement as taxable income when filing their income taxes--effectively 
wiping out their local tax break.
    What's more, this ruling has forced the small towns offering these 
abatements to grapple with daunting amounts of paperwork and red tape 
from the IRS. Understandably, some have--instead of confronting the 
vagaries of federal tax law--simply scrapped this compensation 
altogether.
    Mr. Chairman, the federal government should be rewarding those who 
volunteer their time and resources to serve their communities, not 
punishing them with higher taxes.
    To address this issue, I joined with my colleagues from Connecticut 
to urge President Bush to order an administrative stay of the IRS 
ruling. I'm also an original co-sponsor of legislation, H.R. 1859, 
introduced by my friend Rep. John Larson (D-CT) that would specifically 
exempt the compensation given to local volunteer emergency responders 
from being considered taxable income by the IRS. To date, the President 
has not blocked the ruling nor have we acted on Rep. Larson's bill.
    Mr. Chairman, Connecticut's volunteer first responders are not the 
only ones being adversely affected by this IRS ruling. Other states 
have passed similar legislation to allow their municipalities to offer 
abatements.
    And for good reason. The United States Fire Administration reports 
that nearly 75% of fire departments in America are staffed by 
volunteers, while the National Volunteer Fire Council estimates that 
these volunteers save localities $37 billion in funds not spent on 
full-time firefighters and emergency personnel.
    Individuals who step forward to fill these positions are what I 
call ``citizens in action,'' Mr. Chairman. Their commitment to serve 
benefits the community in two ways. First, it saves their municipality 
thousands of dollars that they would otherwise have to expend on a 
full-time staff of firefighters and other emergency personnel. Second, 
and more important, they can literally mean the difference between life 
and death to their fellow citizens when disaster strikes.
    When people like my constituent Thomas Main of Bozrah, Connecticut 
sacrifice of themselves to protect their neighbor--and save their town 
thousands of dollars in the process--the least we can do is offer them 
a small break on their taxes. Whether they are firefighters, emergency 
medical technicians, or ambulance drivers, they are all heroes in my 
book. Lets show our appreciation to them and get the IRS off their back 
and out of their wallets.
    Thanks again, Mr. Chairman, for allowing me to testify today on 
this important issue.

                                 

    Chairman MCCRERY. Thank you, Mr. Simmons and Mr. Larson. 
Excellent presentation, and it is something that I am sure we 
will take a look at. Next on our agenda is the Representative 
from South Carolina, Mr. Wilson. Welcome. You may proceed.

  STATEMENT OF THE HONORABLE JOE WILSON, A REPRESENTATIVE IN 
           CONGRESS FROM THE STATE OF SOUTH CAROLINA

    Mr. WILSON. Chairman McCrery, Ranking Member McNulty, 
Members of the Subcommittee, I would like to thank you for the 
opportunity to be here today to testify in support of my 
legislation, H.R. 2822, to modify the accumulated earnings tax. 
My interest in this particular tax derived actually from a 
corporate citizen of the district that I represent, and I think 
you all recognize Bose Corporation. We are very pleased that in 
the district that I represent they employ 1,200 people. They 
have just concluded investing $15 million into upgrading the 
manufacturing of the new compact disc version of the Bose, 
which is available immediately for you after the presentation. 
Additionally--this is such an important company. They export to 
42 nations from the facility in South Carolina. My interest 
also has been piqued because this is a model corporation of the 
significance of the Indian-American population in the United 
States. Dr. Amar Bose, there is an article that I wanted to 
submit from Fortune Magazine this month. The Indian American 
population has been so significant in providing opportunities 
of employment for people of the United States. I am very proud 
as the Co-Chair of the Indian Caucus to point that out. 
Additionally, I have a commitment from the company that I would 
like to point out or submit along with questions for the 
record.
    [The information was not received at the time of printing.]
    A final point. I served as a real estate attorney for 25 
years until I was fortunate enough to join you 3 years ago, and 
part of my service was to advise small businesses in the 
formation of their companies, and this directly relates. So, I 
had only wished that I worked with companies that would grow to 
the size of $1.7 billion. That is what we have in front of us. 
To briefly summarize, this legislation permits the corporations 
to accumulate earnings after taxes to protect--and this is 
accumulated earnings tax--against normal business fluctuations 
and unforeseen contingencies without fear of being subject to a 
Draconian penalty of the accumulated earnings tax. The 
legislation does not allow a corporation to avoid its liability 
for the corporate income tax; rather, it allows a corporation 
to save its earnings after it pays its taxes. Most important, 
it provides clear guidelines as to the amount of savings it can 
retain so that the IRS or the courts cannot later use a later 
standard in determining whether the corporation had the proper 
amount of savings.
    By enacting H.R. 2822, Congress would amend the tax laws to 
provide a clear and unambiguous safe harbor for the appropriate 
accumulation of earnings after taxes. Ideally, Congress should 
repeal the accumulated earnings tax. It discriminates against 
successful entrepreneurs who created businesses prior to the 
advent of the limited liability company. That is not really 
feasible at this time. Since the current fiscal situation 
appears to prevent repeal of the accumulated earnings tax, we 
must at least make it more reasonable. The situation before us, 
the amount of working capital that a corporation can maintain 
has been frozen by outdated cases that were decided close to 40 
years ago. These historic precedents do not take into account 
the dynamic economy today. Although our economy is evolving and 
changing, these antiquated court precedents and regulations 
remain. I urge the Committee to act favorably on H.R. 2822. We 
need to prevent the accumulated earnings tax laws from being a 
barrier to sensible business planning, including planning for 
unforeseen contingencies. Mr. Chairman, Members of the 
Committee, I truly appreciate the opportunity to appear before 
you today, my first opportunity, and I would welcome any 
questions. Thank you very much.
    [The prepared statement of Mr. Wilson follows:]
  Statement of The Honorable Joe Wilson, a Representative in Congress 
                    from the State of South Carolina
    Thank you for the opportunity to testify in support of H.R. 2822.
    Enactment of this legislation is necessary to permit corporations 
to accumulate reasonable and sufficient funds to protect against normal 
business fluctuations and unforeseen contingencies without fear of 
being subject to the draconian penalties of the accumulated earnings 
tax. If Congress fails to pass this legislation, the tax law will 
continue to threaten prudent corporations with a confiscatory 
accumulated earnings tax.
    Let us be clear. This legislation does not allow a corporation to 
avoid its liability for the corporate income tax. Rather, it allows the 
corporation to save its earnings after it pays its taxes. Most 
important, it provides clear guidelines as to the amount of savings it 
can retain, so that the IRS or the courts cannot later use a different 
standard in determining whether the corporation had the proper amount 
of savings.
    By enacting H.R. 2822, Congress would amend the tax laws to provide 
a clear and unambiguous safe harbor for appropriate accumulation of 
earnings. Specifically, H.R. 2822 would create a safe harbor that would 
take into account the size of the business being conducted and its 
historical need for earnings. It would allow a corporation to retain, 
at a minimum, sufficient earnings to cover the significant costs and 
expenses it incurred in conducting its business during the prior year. 
A corporation could always accumulate additional earnings if it could 
satisfy the requirements of present law with respect to those earnings. 
Enactment of H.R. 2822 would, however, prevent the IRS or the courts 
from imposing a penalty for an accumulation of earnings that is less 
than or equal to the significant costs and expenses that the 
corporation incurred in conducting its business during the prior year.
    Ideally, Congress should repeal the accumulated earnings tax. It 
discriminates against successful entrepreneurs who created businesses 
prior to the advent of the limited liability company. It discourages 
exactly the behavior that the competitive market and our national 
interest should be encouraging. We live in an age when businesses can 
survive only by accumulating significant resources both to be able to 
weather rapid changes in the marketplace and to invest in new products 
to meet changing consumer demand. Instead of facilitating such 
behavior, the accumulated earnings tax perversely threatens draconian 
tax penalties on corporations that are accumulating profits for 
uncertain future needs.
    If the fiscal situation prevents a repeal of the accumulated 
earnings tax, we must at least act to make it more reasonable. A 
corporation should not be threatened with the application of a penalty 
tax unless Congress has at least provided a clear and objective safe 
harbor that allows a reasonable amount of earnings to be accumulated. 
The need for a clearly-stated objective standard is obvious. In the 
absence of some safe harbor, the uncertainty in the current law, when 
combined with the draconian nature of the accumulated earnings tax, 
essentially forces corporations to minimize the accumulation of 
earnings that might be needed to withstand unexpected adversity.
    Even worse, the accumulated earnings tax allows the IRS and the 
courts to second guess a corporation's business judgments and 
decisions. Revenue agents and judges who do not have experience with 
the uncertainties of business should not be able to use hindsight years 
later to belittle the risks of what were, at the time, uncertain 
business exigencies. At a minimum, Congress must circumscribe the 
complete flexibility of Congress and the courts by providing a safe 
harbor on which corporations can rely.
    The absence of a safe harbor also imposes unnecessary costs on our 
businesses that operate in corporate form. By eliminating the need for 
a corporate taxpayer to retain lawyers and accountants to prepare 
voluminous documentation about potential uses for the earnings, 
corporations would not be incurring significant unnecessary costs 
merely to maintain a reasonable buffer against potential changes in the 
market.
    Unfortunately, neither the IRS nor the courts are attempting to 
remedy the situation. The Treasury Regulations allow a corporation to 
retain sufficient funds for future needs of the business for which the 
corporation has ``specific, definite and feasible plans'' and for 
working capital. Accumulation of earnings for future needs that are 
uncertain or vague, or future uses that are not specific, definite, and 
feasible are not permitted. Although competing effectively requires 
businesses to be opportunistic, to take advantage of unforeseen 
opportunities, and to adjust to unforeseen competitive challenges, the 
current regulations penalize a corporation for maintaining the 
resources to do so.
    In addition, the amount of working capital that a corporation can 
maintain has been frozen by outdated cases that were decided close to 
forty years ago but still serve as controlling authority. These 
historic precedents do not take account of the dynamic economy of the 
present day. In particular, the existing court precedents define 
working capital needs as only the cash that is required for a single 
turnover cycle and do not take into account unanticipated 
contingencies, such as a rapid change in product demand or technology 
that require rapidly incurring costs. These contingencies are likely to 
arise with greater frequency than previously as a result of a rapidly 
changing economy, shorter product life cycles, and greater competition, 
including competition from outside the United States.
    Although the U.S. and the world economy are evolving and changing, 
these antiquated court precedents and regulations remain. As a result, 
the accumulated earnings tax is preventing sensible planning for 
working capital needs and has become a burden to U.S. businesses that 
are trying to compete. Even worse, these outdated standards threaten to 
penalize a corporation for maintaining sufficient working capital to 
carry it through adverse circumstances or sufficient resources to allow 
it to take advantage of competitive opportunities.
    I urge the Committee to act favorably on H.R. 2822. We need to 
prevent the accumulated earnings tax laws from being a barrier to 
sensible business planning, including planning for unforeseen 
contingencies.
    I appreciated this opportunity to address the Committee and would 
welcome any questions. Thank you.

                                 

    Chairman MCCRERY. Thank you, Mr. Wilson. Next the gentleman 
from Ohio, Mr. Turner. By the way, we will allow the Committee 
to ask questions when all the panel members have completed 
their testimony. Mr. Turner.

STATEMENT OF THE HONORABLE MICHAEL TURNER, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF OHIO

    Mr. TURNER. Thank you, Chairman McCrery, and Ranking Member 
McNulty, and Members of the Subcommittee. Thank you for the 
opportunity to testify considering the Brownfields 
Revitalization Act of 2004 (H.R. 4480). I would also like to 
thank my Ohio colleague, Stephanie Tubbs Jones, for assistance 
in the opportunity to testify before the Subcommittee, and 
thank her as an original cosponsor of the legislation that I 
will address in my remarks. I greatly appreciate her leadership 
in the area of brownfield redevelopment. Mr. Chairman, before 
being elected to Congress, I served for 8 years as the Mayor 
for the City of Dayton, where my top priority was urban 
revitalization and economic development. The City of Dayton is 
not unlike many of America's center cities that continue to 
struggle economically. In most of urban America tax revenues 
are declining and jobs are leaving. Although many center cities 
are inventing wonderfully creative programs to achieve 
revitalization, they are hindered by the very thing that makes 
them unique: density. The availability of land is an enormous 
impediment to the economic renewal and revitalization of 
cities. Yet there is a solution to this predicament.
    American cities hold acres of abandoned land that could be 
and should be redeveloped as a key ingredient to urban 
recovery. These abandoned properties include former factories 
and other contaminated sites. These sites are called 
brownfields. Brownfields are defined as abandoned or 
underutilized properties, such as old factories, where 
expansion or redevelopment is complicated by environmental 
contamination. These properties are found in every State and in 
every congressional district. Estimates range from a half a 
million to 1 million brownfield sites nationwide, covering at 
least 178,000 acres, or roughly the combined land area of 
Seattle, Atlanta, and San Francisco. These sites are missed 
economic development opportunities. Based on a survey of 205 
cities, the U.S. Conference of Mayors estimates that 
redevelopment of brownfields located in our cities could 
generate more than 575,000 new jobs, and that renewed activity 
could actually bring in as much as $1.9 billion annually in new 
tax revenues for the cities surveyed. House Resolution 4480, 
the Brownfields Revitalization Act of 2004, provides a Federal 
program to encourage redevelopment by providing funding for 
demolition and environmental remediation costs.
    Specifically, the proposed brownfields tax credit program 
would provide $1 billion in Federal tax credits allocated to 
the States according to population. The credit program would be 
administered by State development agencies and would provide 
credits to brownfield projects where the local government 
entity includes a census tract with poverty in excess of 20 
percent. The redevelopment project may be located anywhere 
within a qualifying local jurisdiction. Brownfield tax credits 
would be allocated for up to 50 percent of demolition and 
remediation costs pursuant to an approved plan. These credits 
would be transferable and could be sold to third parties. The 
proceeds of the sale would be nontaxable. The remainder of 
cleanup costs could be deductible or may be capitalized by the 
property owner, and the plan also includes incentives for 
original polluters to participate in the redevelopment. Parties 
potentially responsible for cleanup costs that contribute no 
less than 25 percent of the environmental remediation costs 
would receive liability releases for 100 percent of approved 
demolition and remediation costs. This program would constitute 
a powerful incentive to transform derelict brownfield sites 
into job producing economic development. Without a federally 
created program, brownfields remain, marring the face of U.S. 
cities. Redeveloping brownfields will revitalize our cities, 
returning them to the life and vitality once seen when these 
sites provided jobs and were anchors for our neighborhoods and 
communities. The bill has been endorsed by the American 
Institute of Architects, the U.S. Conference of Mayors, the 
National Home Builders Association, and has support by the 
members of the real estate roundtable. Thank you.
    [The prepared statement of Mr. Turner follows:]
Statement of The Honorable Michael Turner, a Representative in Congress 
                         from the State of Ohio
    Chairman McCrery, Ranking Member McNulty and Members of the 
Subcommittee, thank you for the opportunity to testify concerning the 
Brownfields Revitalization Act of 2004--H.R. 4480. I would also like to 
thank my Ohio colleague Congresswoman Stephanie Tubbs Jones for her 
assistance in allowing me to testify before the Subcommittee, and thank 
her as an original co-sponsor of the legislation that I will address in 
my remarks--I greatly appreciate her leadership in the area of 
brownfield redevelopment.
    Mr. Chairman I understand that many of my colleagues will address 
the Subcommittee today about key tax issues that are important to their 
constituents. Before being elected to Congress I served for eight years 
as the Mayor of the city of Dayton, Ohio where my top priority was 
urban revitalization and economic development. The city of Dayton is 
not unlike many of America's center cities that continue to struggle 
economically.
    In most of urban America, tax revenues are declining and jobs are 
leaving. Although many center cities are inventing wonderfully creative 
programs to achieve revitalization, they are hindered by the very thing 
that makes them unique: density. The availability of land is an 
enormous impediment to the economic renewal and revitalization of 
cities.
    And yet, there is a solution to this predicament. American cities 
hold acres of abandoned land that could be--should be--redeveloped as 
the key ingredient to urban recovery. These abandoned properties 
include former factories and other contaminated sites. These sites are 
called brownfields.
    Brownfields are defined as abandoned or underutilized properties, 
such as old factories, where expansion or redevelopment is complicated 
by environmental contamination. These properties are found in every 
state and every congressional district.
    Estimates range from 500,000 to 1 million brownfields sites 
nationwide, covering at least 178,000 acres, or roughly the combined 
land area of Atlanta, Seattle, and San Francisco. These sites are 
missed economic development opportunities. Based on a survey of 205 
cities, the U.S. Conference of Mayors estimates that redevelopment of 
the brownfields located in these specific cities, could generate more 
than 575,000 new jobs, and that renewed economic activity could bring 
in as much as $1.9 billion annually in new tax revenue for the cities 
surveyed.
    Local officials, developers and environmentalists all consider 
brownfields a federally created problem in that under current law, a 
property owner may be fully responsible for all costs to remediate 
environmental problems once those problems are identified. One 
unintended consequence of the current environmental laws is that 
properties with suspected contamination are abandoned to avoid 
potential liability for high cleanup costs. The end result is that 
brownfields remain marring the face of our communities, and impeding 
economic development, and job creation.
    H.R. 4480, the Brownfields Revitalization Act of 2004, provides a 
federal program to encourage redevelopment by providing funding for 
demolition and environmental remediation costs. Specifically the 
proposed Brownfields Tax Credit Program would provide $1 billion in 
federal tax credits allocated to states according to population. The 
credit program would be administered by state development agencies, and 
would provide credits to brownfield redevelopment projects where the 
local government entity includes a census track with poverty in excess 
of 20%. The redevelopment project may be located anywhere within a 
qualifying local jurisdiction.
    Brownfields tax credits would be allocated for up to 50% of 
demolition and remediation costs pursuant to an approved plan. These 
credits would be transferable and could be sold to third parties. The 
proceeds of the sale would be non-taxable. The remainder of cleanup 
costs would be deductible or may be capitalized by the property owner, 
and the plan also includes incentives for original polluters to 
participate in redevelopment. Parties potentially responsible for clean 
up costs that contribute no less than 25% of remediation costs receive 
liability release for 100% of approved demolition and remediation 
costs. The remaining 25% of remediation costs could be paid by either 
the property owner or other state or local government entities.
    The Government Accountability Office (GAO) is currently conducting 
a review of EPA's Brownfields Program that Chairman Davis of the House 
Committee on Government Reform and I requested. Although GAO's final 
report on its findings will not be available until December, GAO staff 
has briefed me and my staff on their preliminary findings on several 
occasions. In the course of its work, GAO spoke with over 30 
individuals and groups covering a wide range of stakeholders, including 
EPA, state and local government agencies, national groups with 
brownfields expertise, EPA brownfields grant recipients, real estate 
developers, property owners, attorneys, and nonprofit organizations. 
It's my understanding that--while GAO did not fully analyze the costs 
and benefits of a federal tax credit--the majority of these 
stakeholders believe that a federal tax credit, which would allow 
developers to offset a portion of their federal income tax with their 
remediation expenditures, could complement EPA's Brownfields Program by 
attracting developers to brownfields on a broader national basis. Some 
of these stakeholders said that tax credits are an easily 
understandable and tangible incentive to the private sector and noted 
that other, similar tax credits--such as the affordable housing and 
historic preservation credits--have proven effective in stimulating 
redevelopment.
    Similarly, Cherokee Investment Partners, a private equity fund that 
acquires, remediates and revitalizes brownfields, supports H.R. 4480. 
Cherokee agrees that a transferable tax credit will help make 
revitalization and development viable for many of the sites where the 
high level of risk and cost of remediation make redevelopment 
unattainable.
    This program would constitute a powerful incentive to transform 
derelict brownfields sites into job-producing economic development. 
Without a federally created program, brownfields will remain, marring 
the face of U.S. cities. Redeveloping brownfields will revitalize our 
cities, returning to them the life and vitality once seen when these 
sites provided jobs and were anchors for our neighborhoods and 
communities.

                                 

    Chairman MCCRERY. Thank you, Mr. Turner. Last on our 
beginning panel today but certainly not least, the 
Representative from Missouri, the gentle lady Ms. McCarthy.

STATEMENT OF THE HONORABLE KAREN MCCARTHY, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MISSOURI

    Ms. MCCARTHY. Thank you very much, Mr. Chairman, and also 
to Ranking Member McNulty and the Members of the Subcommittee, 
several of whom are co-sponsors of this legislation. The 
purpose of H.R. 4736, the Independent Films Small Business Job 
Creation Act, is to help create jobs in the United States by 
encouraging investment in film production here at home. The 
U.S. Department of Commerce report released earlier this year 
estimates that runaway production drains as much as $10 billion 
per year from the United States, as the entertainment industry 
foregoes the United States and chooses to make motion pictures, 
television shows, and commercials abroad. This exodus to 
foreign countries or runaway production affects American 
workers and the American economy. Between 1990 and 1998, it is 
estimated that the number of U.S. films made abroad doubled 
from 14 percent to 27 percent. Tens of thousands of artists and 
craftspeople have lost wages, health care benefits, their 
homes, and their dignity as a result of this continuing 
problem. Dramatic State revenue deficits inspired Governors 
Schwarzenegger of California, Bush of Florida, Pataki of New 
York, and Perry of Texas to co-sign a letter urging Congress to 
take action on this critical issue to their State's economy.
    The directors of the Missouri Film Commission have received 
calls from film makers in Montreal and Toronto requesting our 
Missouri signage, newspaper, and license plates to give the 
appearance of Missouri for film productions being shot in 
Canada. Director Ang Lee's movie Ride with the Devil, a $38-
million film about the Civil War, was shot in Missouri; but, 
conversely, I know that Missouri lost the Angelina Jolie 
production, Life or Something Like It, because tax incentives 
utilized in Canada lured the producers to shoot the movie 
there. Missouri, a State that has lost 34,000 jobs since 
January, could have greatly benefited from that production. It 
is estimated the economic multiplier effect of every dollar 
spent on film production yields a $2 to $5 return to the 
community. A Missouri economic study showed that the movie, The 
Game of Their Lives, which was shot in Saint Louis, provided a 
$21-million stimulus to the State of Missouri. That production 
and the opportunity that it represents was nearly lost to 
Canada. It is ironic, but Little House on the Prairie is being 
shot in Canada currently.
    House Resolution 4736 is supported by the Screen Actors 
Guild among others in the industry. It encourages domestic film 
investment by allowing investors to expense their investment in 
the percentage that is spent by the production company each 
year. The deduction is available to investment on film 
productions that have budgets greater than $2 million but less 
than $20 million. That would indicate independent film making. 
So, long as 95 percent of the budget is spent in the United 
States. In summary, this bill would address runaway productions 
by encouraging investment in independent film projects in the 
United States. Many of the business opportunities created by 
film production are in local businesses like catering, car 
services, printers, special effects, and sound technicians, 
telecommunication vendors, retail stores, carpenters, painters, 
stage hands, and dry cleaners. Missouri, Massachusetts, New 
York, Texas, Florida, Illinois, Arizona, North Carolina, Utah, 
Washington, Nevada, and California are increasingly dependent 
on film productions as major contributions to their economies. 
However, foreign countries following the lead of Canada, that 
being Australia, England, and France, are now providing 
incentives to lure U.S. productions to their countries. Using 
standard economic formulas to calculate the multiplier effect, 
each new $10-million film project will yield $35 million in 
ripple effects locally as a stimulus. Chairman McCrery and 
Ranking Member McNulty and Members of the Committee, thank you 
again for this opportunity to discuss important legislation. 
This bill will create jobs locally and stimulate local 
economies across our Nation and continue a great U.S. tradition 
of excellence in the world of film making. Thank you very much.
    Chairman MCCRERY. Thank you, Ms. McCarthy. Before we go to 
questions, I want to recognize for unanimous consent request a 
Member of the Subcommittee, Mr. Sandlin.
    Mr. SANDLIN. Thank you, Mr. Chairman, for recognizing me. I 
know the Chairman is very interested in energy issues, and I 
would like to submit for the record a statement from Charlie 
Stenholm, a Representative from Texas. He is asking that we 
move forward with energy legislation and include the wind 
energy production tax credit in the All American Tax Relief 
Act. So, I would like to submit his written statement for the 
record.
    Chairman MCCRERY. Without objection.
    Mr. SANDLIN. Thank you.
    [The prepared statement of Mr. Stenholm was not received at 
the time of printing.]
    Chairman MCCRERY. I thought all of you did an excellent job 
laying out for the Subcommittee your ideas on how to improve 
the Tax Code, so I don't have a lot of questions because I 
thought you did such a good job of explaining your point of 
view. Mr. Wilson, though, I can't pass up the opportunity to 
ask you the question: why should corporations not be taxed on 
their accumulated earnings? I mean, what would they do with 
that money that they save from not having to pay the taxes?
    Mr. WILSON. Well, they still would be taxed on it.
    Chairman MCCRERY. They pay their initial income tax.
    Mr. WILSON. Then what would happen is that, because it has 
become a moving target how much can be accumulated, what we are 
proposing is that it be a percentage so that IRS and so that 
courts and businesses would know what the number is. So, it is 
a modification. In particular, it also addresses a concern in 
that foreign corporations don't have this problem. Then, in 
particular, Bose is unique in that indeed they put their 
earnings back into research and development, and that is 
indicated in the article that I mentioned from Fortune 
Magazine. So, this is really to still provide for the taxation, 
but it is to make specific as to how much can be accumulated, 
which has been--according to the agent, virtually--and then 
trying to second guess how the corporation operates and where 
it is located and how many people it employs, and so it has 
made it virtually impossible to count on it.
    Chairman MCCRERY. So, it would help them to carry out their 
business plan in a more orderly fashion?
    Mr. WILSON. Yes.
    Chairman MCCRERY. Dedicate that money to research and 
development or to increasing their sales force or whatever it 
might be in a timeframe that they deem appropriate.
    Mr. WILSON. That is right. Obviously I am very interested 
in Bose, with the 1,200 employees in the district. The success 
of it. This would just simply enhance their ability for greater 
research and development. We are all so familiar with how 
extraordinary Bose products have been received around the 
world. Forty-two countries are receiving exports from our 
district, and we want to make it--let us see if we can make it 
to 50.
    Chairman MCCRERY. Thank you. Ms. McCarthy.
    Ms. MCCARTHY. Yes, Mr. Chairman.
    Chairman MCCRERY. I am sure you have had conversations with 
the industry regarding your proposal. Do you have any evidence 
or any suggestion from your conversations with the industry 
that, if we were to make this change in the Tax Code, that the 
industry would respond favorably and bring more of their 
production onto our shores?
    Ms. MCCARTHY. Yes, Mr. Chairman, and I would be glad to 
submit letters from organizations in the industry, like the 
Screen Actors Guild and others, for the record so that you have 
that documentation. Again, we are talking about independent 
films, and those are the ones that really do make a difference 
locally. This does not address Hollywood; they have their own 
incentives.
    Chairman MCCRERY. Right. Well, thank you. Without 
objection, those materials will be inserted into the record.
    Ms. MCCARTHY. Thank you.
    [The information was not received at the time of printing.]
    Chairman MCCRERY. Mr. McNulty.
    Mr. MCNULTY. Thank you, Mr. Chairman. I want to thank each 
of the Members for their testimony. There are a couple of these 
proposals that I already intend to support, a couple of others 
I need to look at a bit further. I want to echo the Chairman's 
remarks that each of the Members did an excellent job in 
presenting their views to the Committee. With that, I wish to 
yield to Ms. Tubbs Jones.
    Mrs. JONES. Thank you, Mr. Ranking Member, Mr. Chairman, my 
colleagues from across the United States. I want to commend you 
in the work that you are doing in this area. Unfortunately, we 
are at the end of the season for the 108th Congress, but I 
would encourage each and every one of you to join together and 
reintroduce much of this legislation in the 109th Congress. I 
want to commend my colleague from Ohio who will be appearing 
here today, Mr. Chairman, and for the record I seek unanimous 
consent to submit an opening statement. Thank you.
    Chairman MCCRERY. Without objection.
    [The opening statement of Mrs. Jones was not received at 
the time of printing.]
    Chairman MCCRERY. Mr. Lewis.
    Mr. LEWIS. I have no questions.
    Chairman MCCRERY. Mr. Ryan.
    Mr. RYAN OF WISCONSIN. None.
    Chairman MCCRERY. Mr. Sandlin.
    Mr. SANDLIN. No, sir, Mr. Chairman. Thank you.
    Chairman MCCRERY. Mr. Collins.
    Mr. COLLINS. No, sir.
    Chairman MCCRERY. See, I told you, you did a great job. 
Thank you all very much for your testimony. Now would the 
second panel please come forward and take your seats? Okay. 
Welcome to the Subcommittee on Select Revenue Measures of the 
Committee on Ways and Means. It is nice to have you with us. We 
are expecting a couple more Members for this second panel. So, 
they will be coming in, but we will go ahead and start with the 
Members who are here. Just to reiterate, your written testimony 
will be included in the record in its entirety, but we would 
like for you to summarize your thoughts and proposals within 5 
minutes. With that, we will begin with Mr. Neugebauer from 
Texas. Mr. Neugebauer.

 STATEMENT OF THE HONORABLE RANDY NEUGEBAUER, A REPRESENTATIVE 
              IN CONGRESS FROM THE STATE OF TEXAS

    Mr. NEUGEBAUER. Thank you, Mr. Chairman. I am here today to 
discuss a very significant issue that is important not only, I 
think, to the people in the United States but it is certainly 
important to the people in my district of west Texas, and that 
is wind energy. In the 1960s, Bob Dylan wrote a popular song, 
``You don't need a weatherman to know which way the wind 
blows.'' Today the wind represents more than weather in west 
Texas; it means economic growth and renewable energy. Texas, 
particularly west Texas, has vast areas of land which have high 
wind power potential. Previous generations in this area relied 
on wind mills to pump water. Today, high-tech wind turbines as 
tall as the Statue of Liberty are producing megawatts of 
electricity, enough power to supply electricity to thousands of 
homes. The wind energy industry contributes directly to the 
economies of 46 States with power plants and manufacturing 
facilities that produce wind turbines, blades, electronic 
components, gear boxes, generators, and a wide range of other 
equipment. Wind farms can revitalize the economy of rural 
communities, providing a steady income through lease or royalty 
payments to farmers and other landowners, as well as property 
and school taxes to the local governments. Although leasing 
arrangements vary widely, a reasonable estimate for income to a 
landowner for a single utility-scale turbine is about $3,000 
per year.
    Wind farms may extend over a large geographic area, but 
their actual footprint covers only a small portion of the land, 
making wind development an ideal way for farmers to earn 
additional income. In west Texas, farmers and ranchers are 
welcoming wind, as lease payments from this new clean energy 
source replace declining payments for oil wells on the 
properties that have been depleted. Local governments are also 
welcoming wind. The county commissioners in Howard County, for 
example, in my district, have proposed issuance of industrial 
revenue bonds to an energy company interested in building 
another wind farm in the county. County officials estimate that 
this new wind farm will bring more than $700,000 to the county 
and other taxing jurisdictions, such as their local schools. 
Additional local income is generated from payments to 
construction contractors and suppliers during the installation 
and from payments to turbine maintenance personnel on a long-
term basis. All of this sounds great, but how much does wind 
energy cost? The actual production of energy comes at a 
relatively low price. State-of-the-art wind power plants can 
generate electricity for less than 5 cents per kilowatt hour in 
many parts of the United States. Over the last 20 years, the 
cost of electricity from utility-scale wind systems has dropped 
more than 80 percent. However, the investment required to 
establish wind production farms runs in the millions of 
dollars. For example, a 160-turbine wind farm built in west 
Texas in 2003 cost more than $80 million.
    The wind energy production credit is a key component in 
financing new wind energy projects. Without consistent 
government policy that creates a consistent business 
environment, investment slows and projects on the drawing board 
are put on hold. Wind energy producers need a tax policy 
consistency in order to develop accurate long-term business 
models, acquire land, and finance expensive construction. As 
you know, the production tax credit expired at the end of 2003, 
costing thousands of jobs and millions of dollars of wind power 
investments in States across the country, including Texas. I 
appreciate the work of this Subcommittee to advance the credit 
and energy bill and the American Jobs Creation Act, and most 
recently including it in the conference report in H.R. 1308, 
which is on the floor today. This credit is crucial to this 
young, growing industry. Wind energy projects require a lead 
time of 6 to 9 months, and expiration of the credit has stopped 
wind projects, and restarting projects will take time.
    This slowdown has affected not only the wind energy 
producers, but their suppliers, their construction workers, and 
local governments. For example, Taylor County, Texas estimates 
that it lost $500,000 in annual revenue this year due to the 
postponement of construction of up to 200 new wind turbines in 
an area school district that has anticipated up to $1 million 
in taxes from this project. To make up for the lost revenue, 
the county had to raise their tax rates. Over the past 2 years, 
the wind industry has installed over 250,000 megawatts of new 
electric capacity, spurring more than $2.5 billion in economic 
activity. However, the expiration of the tax credit has 
resulted in the loss of 2,000 jobs already and 1,500 megawatts 
of new wind energy production and nearly $2 billion in economic 
activity on hold. As work continues on legislation to provide 
relief to American businesses, I believe that the wind energy 
production tax credit is a critical incentive that would 
further fuel economic growth and job creation in west Texas and 
the United States. I would say also that there are some out 
there that think that these credits maybe should be 
transferable as a way to also encourage investment in this very 
important renewable source of wind energy, and certainly I 
would encourage the Committee to look into that as we move 
forward with our energy policy and tax policy in the future. 
Thank you again, Mr. Chairman, for holding these hearings and 
for your allowing me to testify today.
    [The prepared statement of Mr. Neugebauer follows:]
   Statement of The Honorable Randy Neugebauer, a Representative in 
                    Congress from the State of Texas
    Thank you, Mr. Chairman. I am here today to discuss a matter of 
significant importance to my district in West Texas--wind energy.
    In the 1960s, Bob Dylan wrote the popular tune, ``You don't need a 
weatherman to know which way the wind blows.'' Today the wind 
represents much more than weather; it means economic growth and 
renewable energy.
    Texas, particularly West Texas, has vast areas of land with high 
wind power potential. Previous generations in this area relied on 
windmills to pump water. Today, high-tech wind turbines as tall as the 
Statue of Liberty are producing megawatts of electricity, enough power 
to supply thousands of homes.
    As the oldest source of renewable energy, wind power supplies 
affordable, inexhaustible energy to the economy. It also provides jobs 
and other sources of income. Wind powers the economy without causing 
pollution, generating hazardous wastes, or depleting natural resources. 
Best of all, wind energy depends on a free fuel source--the wind--and 
so it is relatively immune to inflation.
    The wind industry contributes directly to the economies of 46 
states, with power plants and manufacturing facilities that produce 
wind turbines, blades, electronic components, gearboxes, generators, 
and a wide range of other equipment.
    The Renewable Energy Policy Project (REPP) estimates that every 
megawatt of installed wind capacity creates about 4.8 job-years of 
employment, both direct (manufacturing, construction, operations) and 
indirect (advertising, office support, etc.). This means that a 50 
megawatt wind farm creates 240 job-years of employment.
    Wind farms can also revitalize the economy of rural communities, 
providing steady income through lease or royalty payments to farmers 
and other landowners, as well as property and school taxes to local 
governments. Although leasing arrangements vary widely, a reasonable 
estimate for income to a landowner from a single utility-scale turbine 
is about $3,000 a year.
    For a 250-acre farm, with income from wind at about $55 an acre, 
the annual income from a wind lease could be $14,000, with no more than 
2 or 3 acres removed from production. Such a sum can significantly 
increase the net income from farming. Farmers can grow crops or raise 
cattle next to the towers. Wind farms may extend over a large 
geographical area, but their actual ``footprint'' covers only a very 
small portion of the land, making wind development an ideal way for 
farmers to earn additional income. In West Texas farmers and ranchers 
are welcoming wind, as lease payments from this new clean energy source 
replace declining payments from oil wells on their property that have 
been depleted.
    Local governments are also welcoming wind. The county commissioners 
in Howard County in my district have proposed issuance of industrial 
revenue bonds to an energy company interested in building another wind 
farm in the county. County officials estimate that a new wind farm 
would bring in more than $700,000 to the county and other taxing 
jurisdictions, such as local schools.
    Additional local income is generated from payments to construction 
contractors and suppliers during installation, and from payments to 
turbine maintenance personnel on a long-term basis.
    Investing in wind energy also makes us less dependent on foreign 
sources of energy. The American Wind Energy Association estimates that 
U.S. wind plants are already helping to reduce the national natural gas 
shortage by 10-15%. By encouraging new domestic energy exploration and 
investing in new energy infrastructure, we can improve our domestic 
energy security.
    All of this sounds great, but how much does wind energy cost? The 
actual production of energy comes at a relatively low price. State-of-
the-art wind power plants can generate electricity for less than 5 
cents per kilowatt-hour in many parts of the U.S. Over the last 20 
years, the cost of electricity from utility-scale wind systems has 
dropped by more than 80 percent. However, the investment required to 
establish a wind production farm runs in the millions of dollars. A 
160-turbine wind farm built in West Texas in 2003 cost more than $80 
million.
    The wind energy production credit is a key component in financing 
new wind energy projects. Without a consistent government tax policy 
that creates a consistent business environment, investment slows and 
projects on the drawing board are put on hold. Wind energy producers 
need tax policy consistency in order to develop accurate long-term 
business models, acquire land and finance expensive construction.
    As you all know, the productions tax credit expired at the end of 
2003, costing thousands of jobs and millions of dollars of wind power 
investments in states across the country, including Texas. I appreciate 
the work of this Subcommittee to advance the credit in the energy bill, 
the American Jobs Creations Act, and, most recently, the proposal to 
include it in the conference report extending other expiring tax 
provisions.
    This credit is so crucial to this young, growing industry. Wind 
energy projects require a lead time of six to nine months. Expiration 
of the credit has stopped wind projects, and restarting projects will 
take time. This slow-down has affected not only wind energy producers, 
but their suppliers, construction workers and local governments.
    For example, Taylor County Texas estimates that it has lost 
$500,000 in annual tax revenue this year due to postponement of 
construction of up to 200 new wind turbines, and area school districts 
had anticipated up to $1 million in taxes from the projects. To make up 
for the lost revenue, the county has raised tax rates.
    Lone Star Transportation of Ft. Worth is losing $1.5 million in 
revenue per month to the production tax credit delay. Last year the 
company earned $20 million--a full 20 percent of company revenues--by 
trucking wind turbine towers, blades and generating units to 
development site.
    Over the last two years, the wind industry has installed over 2,500 
megawatts of new electric capacity spurring more than $2.5 billion in 
economic activity. However, the expiration of the credit has resulted 
in the loss of over 2,000 jobs already and 1,500 megawatts of new wind 
energy production and nearly $2 billion in economic activity on hold.
    As work continues on legislation to provide relief to American 
businesses, I believe that the wind energy production tax credit is a 
critical incentive that will further fuel economic growth and job 
creation in West Texas, and in the United States.

                                 

    Chairman MCCRERY. Thank you, Mr. Neugebauer. Next we have 
from the State of Pennsylvania, the gentleman, Mr. Weldon, a 
classmate of mine, and a very outstanding Member of the Armed 
Services Committee. Welcome to the Committee on Ways and Means.

  STATEMENT OF THE HONORABLE CURT WELDON, A REPRESENTATIVE IN 
            CONGRESS FROM THE STATE OF PENNSYLVANIA

    Mr. WELDON. Thank you, Mr. Chairman, and Mr. McNulty, and 
Members of the Subcommittee. It is a pleasure to be here. The 
legislation I am here to support is H.R. 1824, the Fire 
Sprinkler Incentive Act. It is co-sponsored by 137 Members of 
the House, including 14 Members of this Committee on Ways and 
Means. It is perhaps the most significant legislation that we 
could pass to reduce the loss of lives in America each year. 
Each year, we lose almost 4,000 Americans to fires in 
everything from nursing homes to nightclubs to single family 
homes, and we lose these lives because they are not 
sprinklered. The National Fire Protection Association studies 
that have been done show that any building that is sprinklered 
has never had a multiple loss of life. So, we have never had a 
multiple loss of life by fire in any building that complies 
with the Life Safety and Sprinkler Code of the National Fire 
Protection Association. In addition to the loss of innocent 
civilians, we lose 100 firefighters each year who enter burning 
buildings to attempt to rescue people. Now, why aren't these 
buildings sprinklered? Most new building codes that are applied 
to new construction, whether it is in some cases residential, 
manufacturing, nursing homes, or other, require sprinkler 
protection. The problem, Mr. Chairman, is that many of our 
older nightclubs like the one up in Rhode Island where 100 
people were killed because they were trapped inside the 
building and had no way out, most of them are frame 
construction, most of them have no protection systems 
whatsoever. They were grandfathered in by building codes and 
fire codes because they were built decades ago, and these are 
the most vulnerable facilities where we have the highest loss 
of life.
    How then can we convince a nightclub owner, a nursing home 
owner, or a school to retrofit the building when it would cost 
so much money to put sprinklers in? The current rate of 
depreciation for installing sprinklers would take 39 years for 
recovery. Now, the insurance industry offers significant 
insurance premium reduction if sprinklers are installed. In 
fact, they go as high as 80 percent. If we pass the legislation 
I have before you, you decrease the depreciation from 39 years 
to 5 years, and if you take that increased depreciation, which 
can be used to recover the cost of the sprinkler, and you add 
to that the cost of the insurance savings, then a small 
business owner who runs a nightclub in a small town can put 
sprinklers in and recover the cost within 2 years. That is an 
incentive that anyone would jump at the opportunity. So, you 
are not forcing that nightclub owner to retroactively retrofit 
his facility, you are not mandating that nursing home to do it, 
but it becomes so logical and such a natural that everyone we 
are convinced would move forward to retrofit their buildings, 
because between the increased depreciation and being able to 
write off that cost in 5 years as opposed to 39, and the added 
reduction in insurance premiums, that we can put the systems in 
place that do protect lives.
    Mr. Chairman, the 18 national associations from the 
American Insurance Association to the International Association 
of Firefighters, the International Association of Fire Chiefs, 
the National Volunteer Fire Council, all the major building 
alliances, all of them publicly on the record, as is stated in 
my statement, support this legislation. It makes sense. In the 
end, yes, it will reduce the amount of revenue that we receive. 
Mr. Chairman, it will increase the amount of savings for 
personal--for property loss, for industrial and commercial 
activity, and it will save significant amounts of lives. So, I 
encourage you to consider this. This is not a mandate, it is an 
opportunity, and it is an opportunity that I think will have an 
effect in every congressional district in America in a positive 
way by encouraging those institutions that have life safety 
risk, including homes, to install automatic sprinkler 
protection. Thank you.
    [The prepared statement of Mr. Weldon follows:]
 Statement of The Honorable Curt Weldon, a Representative in Congress 
                     from the State of Pennsylvania
    Thank you for the opportunity to testify before the Committee on 
H.R. 1824, The Fire Sprinkler Incentive Act of 2003. Passage of H.R. 
1824 would serve greatly to help reduce the tremendous annual economic 
and human losses that fire in the U.S. inflicts on the national economy 
and the quality of life. This bill currently has 137 cosponsors, 14 of 
which are members of the Ways and Means Committee.
    From the time a fire begins, detection can be reported within the 
first 3 minutes. Once dispatched, firefighter response begins at 4 
minutes, hoping to arrive on scene and setup for suppression within 10 
minutes. During this time, the level of combustion has grown 
exponentially and leading to flashover two minutes earlier. Flashover 
is the level of combustion that engulfs the entire room in flames--an 
environment that no person can survive.
    Meanwhile, the 70% of smoke alarms that are functional (30% do not 
work, mostly due to dead or non-existent batteries) have alerted 
building occupants to escape through pre-planned evacuation routes. 
Unfortunately, the elderly, unattended children and the mentally or 
physically disabled are often unable to do so.
    This is not a dramatization. In fact, this scenario continuously 
occurs each year. In the U.S., fire departments responded to 1.7 
million fires in 2001, 521,000 structural fires causing 3,745 fire 
deaths, 99 of whom were firefighters (not including those lost on 
September 11th). Fires also caused almost 21,000 civilian injuries and 
$8.9 billion in direct property damage. This translates to the fact 
that fire departments respond to a fire every 18 seconds. Every 60 
seconds a fire breaks out in a structure and in a residential structure 
every 80 seconds.
    The solution resides in automatic sprinkler systems that are 
usually triggered within 4 minutes of ignition when the temperature 
rises above 120 degrees. The National Fire Protection Association 
(NFPA) has no record of a fire killing more than two people in a fully 
operational sprinklered public assembly, educational, institutional or 
residential building. Furthermore, sprinklers are responsible for 
dramatically reducing property loss from as low as 42% to as high as 
70%, depending on the structure.
    Fire sprinklers are the single most effective method for fighting 
the spread of fires in their early stages--before they can cause severe 
injury to people and damage to property. There are literally thousands 
of high-rise buildings built under older codes that lack adequate fire 
protection. In addition, billions of dollars were spent to make these 
and other buildings handicapped accessible; however, people with 
disabilities now occupying these buildings are not adequately protected 
from fire.
    At recent code hearings, representatives of the health care 
industry testified that there are approximately 4,200 nursing homes 
that need to be retrofitted with fire sprinklers. They further 
testified that the billion plus cost of protecting these buildings with 
fire sprinklers would have to be raised through corresponding increases 
in Medicare and Medicaid.
    In addition to the alarming number of nursing homes lacking fire 
sprinkler protection there are literally thousands of assisted living 
facilities housing older Americans and people with disabilities that 
lack fire sprinkler protection.
    In early 2003, the ``Station'' nightclub fire in Rhode Island 
killed 100 occupants. Still today there are thousands of similar 
nightclubs and entertainment venues that need to be retrofitted with 
fire sprinklers.
    Building owners do not argue with fire authorities over the logic 
of protecting their buildings with fire sprinklers. The issue is cost. 
Passage of H.R. 1824 would drastically reduce the staggering annual 
economic toll of fire in America and thereby dramatically improve the 
quality of life for everyone involved.
    Benefits of the Fire Sprinkler Incentive Act also include lower 
local fire department costs, increased loan activity, reduced insurance 
claims and premium costs, larger numbers of retrofitting and 
installation jobs and the generation of payroll tax revenue.
    This bill encourages property owners to install fire sprinkler 
systems by reducing the tax depreciation time on nonresidential real 
property from 39 years to only 5. The benefits of this bill include 
lower fire department costs, increased loan activity, reduced insurance 
claims and premium costs, increased retrofitting and installation jobs, 
and the generation of payroll tax revenue. Most importantly, this bill 
saves lives.
    The installation of fire sprinklers is a high priority for the fire 
community and others concerned with the protection of American lives 
and property. The following organizations have already pledged their 
support for this Act:

    National Fire Protection Association
    Society of Fire Protection Engineers
    International Association of Fire Chiefs
    American Insurance Association
    National Volunteer Fire Council
    Independent Insurance Agents & Brokers of America
    International Association of Fire Fighters
    The Associated General Contractors of America
    International Association of Arson Investigators
    The Lightning Safety Alliance
    National Association of State Fire Marshals
    American Society of Safety Engineers
    International Fire Marshals Association
    American Health Care Association
    American Fire Sprinkler Association
    Underwriters Laboratories, Inc.
    National Fire Sprinkler Association
    International Code Council

    The bill is currently written to apply to all sprinkler 
installations, which includes new and retrofitted buildings. The 
following is a cost estimate that Ways and Means Committee did for 
`retrofitting only' as well, just in case the original is too costly.


                         Tax Depreciation Cost to the U.S. Revenue (millions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                                                          2004-
                                                                   2004    2005    2006    2007    2008    2013
----------------------------------------------------------------------------------------------------------------
Current version: tax incentive for
  ALL sprinkler installations                                      453     587     666     832     975    9,420
----------------------------------------------------------------------------------------------------------------
Alternate version: tax incentive for
  RETROFITS only                                                   113     147     166     208     244    2,355
----------------------------------------------------------------------------------------------------------------


    Year after year, these facts stare us square in the face, costing 
thousands of lives and billions of dollars, but no efforts are made to 
install sprinkler systems in older buildings or those in jurisdictions 
that do not require them due to one reason: cost.
    With the support of every fire service and related association in 
America, Representative James Langevin and I introduced the Fire 
Sprinkler Incentive Act, H.R. 1824. This bill provides a tax incentive 
for businesses to install sprinklers through the use of a 5-year 
depreciation period, opposed to the current 27.5 or 39 year period for 
installations in residential rental and non-residential real property 
respectively. While only a start, the bill intends to eliminate the 
massive losses seen in nursery homes, nightclubs, office buildings, 
apartment buildings, manufacturing facilities and other for-profit 
entities.

                                 

    Chairman MCCRERY. Thank you, Mr. Weldon. Next, another 
Member from the State of Ohio, Mr. Kucinich. You may proceed.

STATEMENT OF THE HONORABLE DENNIS J. KUCINICH, A REPRESENTATIVE 
               IN CONGRESS FROM THE STATE OF OHIO

    Mr. KUCINICH. Thank you very much, Chairman McCrery, 
Ranking Member McNulty, for holding this hearing. I would like 
to bring to your attention and the attention of the Members of 
the Committee a proposal I introduced last year that I believe 
would have a positive impact on millions of taxpayers. I think 
it is fair to say that all Members of Congress believe we need 
to strive for a fair, simple, and adequate tax system. We may 
disagree on how that is to be accomplished, but I think we have 
the same goals. However, I think we can all agree on a need for 
transparency. Transparency in the tax system is necessary to 
achieve fairness. Transparency permits the taxpayer to 
understand how fairness is arrived at in the Tax Code. A 
simplified Tax Code can provide this transparency, which in 
turn provides a sense of trust in government. My hope is that 
this Committee will seriously consider my proposal to create a 
$2,000 simplified family credit, a refundable tax credit that 
simplifies the Tax Code by consolidating the earned income tax 
credit, child tax credit, additional child credit, and 
exemption for children into one streamlined, simplified family 
credit. This tax credit will simplify the Tax Code, provide 
greater transparency, provide extra work incentives, and 
provide a stimulus effect.
    Families should not have to struggle to understand the 
eligibility requirements for each of the various family tax 
breaks in current law. All families should follow the same set 
of rules. The simplified family credit is structured to provide 
progressive tax benefits and a work incentive. The families 
with lower income will get more benefit, but they are also 
rewarded for work. The credit would be steeply phased in at the 
lowest income levels, providing the incentive to work, and a 
substantial benefit. As income rises, a slow phaseout would be 
necessary to ensure we maintain a progressive tax system. The 
cost of this proposal would fall in the range of $20 billion a 
year. Given our current deficit problems, I believe Congress 
should only create the simplified family tax credit if it is 
paid for. In my legislation, H.R. 3655, there are several 
options to pay for this proposal, including rolling back parts 
of the tax cuts enacted in the last 3 years. Those tax cuts 
only added to the complexity of the Tax Code and removed any 
remaining transparency. I want to thank this Committee for the 
opportunity to testify. Thank you.
    [The prepared statement of Mr. Kucinich follows:]
    Statement of The Honorable Dennis Kucinich, a Representative in 
                    Congress from the State of Ohio
    Thank you Chairman McCrery and Ranking Member McNulty for holding 
this important hearing. I would like to bring to your attention a 
proposal I introduced last year that will have a positive impact on 
millions of taxpayers.
    I think it is fair to say that all Members of Congress believe we 
need to strive for a fair, simple, and adequate tax system. We may 
disagree on how this is being accomplished, but we have the same goals.
    However, I think we can agree on the need for transparency. 
Transparency in the tax system is necessary to achieve fairness. 
Transparency permits the taxpayer to understand how fairness is arrived 
at in the Tax Code. A simplified Tax Code can provide this 
transparency, which in turn provides a sense of trust in the 
government.
    My hope is that this Committee will seriously explore my proposal 
to create a $2,000 Simplified Family Credit, a refundable tax credit 
that simplifies the Tax Code by consolidating the Earned Income Tax 
Credit (EITC), Child Tax Credit, Additional Child Credit, and exemption 
for children into one streamlined Simplified Family Credit. This tax 
credit will simplify the Tax Code, provide greater transparency, 
provide extra work incentives, and provide a stimulus effect.
    Families should not have to struggle to understand the eligibility 
requirements for each of the various family tax breaks in current law. 
All families should follow the same set of rules.
    The Simplified Family Credit is structured to provide progressive 
tax benefits and a work incentive. The families with lower income will 
get more benefit, but they are also rewarded for work. The credit would 
be steeply phased in at the lowest income levels providing the 
incentive to work and a substantial benefit. As income rises a slow 
phase out would be necessary to ensure we maintain a progressive tax 
system.
    The cost of this proposal would fall in the range of $20 billion a 
year. Given our current deficit problems, I believe that Congress 
should only create the Simplified Family Tax Credit if it is paid for. 
In my legislation H.R. 3655, there are several options to pay for this 
proposal including rolling back parts of the tax cuts enacted in the 
last 3 years. Those tax cuts only added to the complexity of the Tax 
Code and removed any remaining transparency.
    Thank you for this opportunity to testify today.

                                 

    Chairman MCCRERY. Thank you, Mr. Kucinich. Now the 
gentleman from Colorado, Mr. Beauprez. Mr. Beauprez.

 STATEMENT OF THE HONORABLE BOB BEAUPREZ, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF COLORADO

    Mr. BEAUPREZ. Thank you, Mr. Chairman and Ranking Member 
McNulty and distinguished colleagues on the panel, on the 
Committee. Like many of you, I very much look forward to the 
day when we have a debate over the Tax Code in its entirety. I 
believe we are rapidly reaching consensus that the Tax Code is 
far too complex and inadvertently produces disincentives for 
some of the values that have traditionally made America great. 
The current Tax Code laws serve as a disincentive to work, 
thrift, marriage, and charity. This has to change, and I hope 
to see that change soon. However, this is as much as we can do 
today to make an immediate positive impact on the lives of 
millions of seniors and low-income and middle-income families. 
Mr. Chairman, despite the fact that Social Security was never 
intended to be the sole source of retirement income for 
American seniors, for far too many it has become exactly that; 
and unless you have supplemental retirement income, either 
through your previous employer or personal savings, Social 
Security by itself doesn't provide very much. I want to talk 
about two proposals, both of which are included in one of the 
first pieces of legislation I introduced, that will bring 
relief to millions of American retirees and low-income 
taxpayers.
    Mr. Chairman, the first proposal that I would like to 
discuss is the reduction, or even elimination, of the double 
taxation of Social Security benefits. Not only is this a 
healthy thing to do for the economy, it is the right thing to 
do as well. Nearly everyone knows that the Social Security 
system provides monthly benefits to qualified retirees, 
disabled workers and their spouses and dependents. However, 
what many people do not realize is that after they have paid 
Social Security taxes throughout their entire life and their 
working careers, up to 85 percent of the monthly benefit they 
receive from Social Security may be taxed again. It is 
interesting to note that until 1984, Social Security benefits 
were exempt from the Federal income tax. In 1983 Congress 
passed legislation that made up to 50 percent of the Social 
Security benefits taxable for taxpayers whose income plus one-
half of their Social Security benefits exceeded $25,000 for an 
individual, or 32,000 for a married couple filing a joint 
return. Then, in 1993, Congress saw fit to increase this 
portion of benefits that were eligible for taxation from 50 
percent to 85 percent. This tax increase on senior citizens 
made a bad policy even worse. Essentially, this graduated tax 
scheme penalized seniors with their fixed incomes who have 
worked hard to ensure their retirement security.
    Another area for concern that is rarely mentioned in this 
debate, but carried additional negative consequences to 
America's seniors, is that many States use Federal adjusted 
gross income subject to taxation as a basis for their own 
income taxes. Not only have we imposed a tax on these benefits, 
we have also triggered a State income tax as well in many of 
our States. Eliminating the tax on Social Security benefits or, 
at the very least, repealing the 1993 tax increase will 
positively impact millions of our seniors who find themselves 
on fixed incomes and facing rising payment for health care, 
housing, energy and food costs. In addition, it will increase 
the buying power of a large segment of our economy and help 
further our recovery. Another way I believe the government can 
do more to help seniors is to promote responsible savings, 
which is why I am also here to advocate the elimination of 
taxes on savings accounts. As a former community banker, I have 
first-hand knowledge that many low- and middle-income taxpayers 
have no other investment in their--other than their passbook 
savings accounts.
    Upper-income taxpayers tend to have much more sophisticated 
investments. Very few of them keep large amounts of money in 
passbook savings accounts. So, elimination of taxes on savings 
accounts will benefit lower-income, working families and senior 
citizens who rely on interest to supplement their Social 
Security benefits. As I said earlier, I very much look forward 
to the day when we take up the challenge of overhauling the 
entire Tax Code. Until that occurs, there are some in our 
society who desperately need, and undoubtedly deserve, 
immediate relief. Furthermore, I firmly believe that especially 
during this time of economic recovery, we need to do more to 
help those in our communities who need it the most. I am 
confident that by reducing the tax burden on our Nation's 
seniors, along with our low- and middle-income taxpayer, we 
would improve the lives of millions while encouraging our 
economy to grow. Mr. Chairman, again I want to thank you for 
allowing me to appear before you today. I will look forward to 
continuing the work with you and other distinguished colleagues 
who are here today to pass legislation that will reduce the tax 
burden for all taxpayers and bring simplicity to our confusing 
tax laws. I would be happy to answer any questions you might 
have. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Beauprez follows:]
 Statement of The Honorable Bob Beauprez, a Representative in Congress 
                       from the State of Colorado
    Let me first begin by thanking you Mr. Chairman, the Ranking 
Member, and my other distinguished colleagues who serve on this 
Committee for allowing me the opportunity to appear before you today.
    Like many of you, I very much look forward to the day when we have 
a debate over the Tax Code in its entirety. I believe we are rapidly 
reaching a consensus that the Tax Code is far too complex and 
inadvertently produces disincentives for some of the values that have 
traditionally made America great. The tax laws we currently have in 
place serve only as a disincentive to work, thrift, marriage and 
charity. This has to change and I hope to see it change soon.
    While an over-all fundamental reform of the Tax Code is something 
that I can't wait to begin discussing in the months to come, there is 
much that we can be doing today to make an immediate positive impact on 
the lives of millions of low- and middle-income families.
    I am proud of the work this Congress has done to lower the tax 
burden on all Americans but I want to talk to you today about a 
specific category of Americans who desperately need additional relief--
American seniors.
    Mr. Chairman, despite the fact that Social Security was never 
intended to be the sole source of retirement income for American 
seniors, for far too many it has become exactly that. And unless you 
have supplemental retirement income, either through your previous 
employer or personal savings, Social Security by itself doesn't provide 
very much.
    I want to talk about two proposals--both of which are included in 
one of the first pieces of legislation I introduced--that will bring 
badly needed relief to millions of American retirees, and lower income 
taxpayers.
    Mr. Chairman, the first proposal that I would like to discuss would 
allow Congress to correct a terrible injustice currently being imposed 
on seniors who have worked hard all of their lives and are receiving 
Social Security benefits, by eliminating the double taxation of Social 
Security benefits. Not only is this a healthy thing to do for the 
economy, it is the right thing to do as well.
    Nearly everyone knows that the Social Security system provides 
monthly benefits to qualified retirees, disabled workers, and their 
spouses and dependants. However, what many people do not realize is 
that after they have paid Social Security taxes throughout their entire 
working careers, up to 85 percent of the monthly benefit they receive 
from Social Security may be taxed again.
    It is interesting to note that until 1984, Social Security benefits 
were exempt from the federal income tax. But in 1983 Congress passed 
legislation that made up to 50% of Social Security benefits taxable for 
taxpayers whose income plus one-half of their Social Security benefits 
exceed $25,000 for an individual or $32,000 for a married couple filing 
a joint return.
    Then in 1993, Congress saw fit to increase this portion of benefits 
that were eligible for taxation from 50% to 85%. This tax increase on 
senior citizens made a bad policy even worse. Essentially, this 
graduated tax scheme penalizes seniors with fixed incomes who have 
worked hard to ensure their retirement security.
    Another area for concern that is rarely mentioned in this debate, 
but carries additional negative consequences to America's seniors is 
that many states use federal adjusted gross income--income subject to 
taxation--as the basis for their own income taxes. So not only have we 
imposed a federal tax on these benefits, we have also triggered a state 
income tax as well.
    It is clear to me that repealing the current tax on Social Security 
benefits will positively impact millions of our seniors who find 
themselves on fixed incomes and face rising payments for healthcare, 
housing, energy and food cost. In addition, it will increase the buying 
power of a large segment of our economy and help further our recovery.
    It is widely agreed, however, that Social Security was never 
intended to be the sole source of income for retirees. One way that I 
believe the government can do more to help make seniors less dependent 
on Social Security benefits alone is to promote responsible savings, 
which is why I am also here to advocate the elimination of taxes on 
savings accounts.
    As a former community banker, I have first-hand knowledge that many 
low- and middle-income taxpayers have no other investment than their 
passbook savings accounts. Upper income taxpayers tend to have much 
more sophisticated investments. Very few of them keep large amounts of 
money in a passbook savings account, so elimination of taxes on savings 
accounts will benefit lower income working families and senior citizens 
who rely on interest to supplement their Social Security benefits.
    As I said earlier, I very much look forward to the day when we take 
up the challenge of overhauling the entire Tax Code. But until that 
occurs, there are some in our society who desperately need--and 
undoubtedly deserve--immediate relief. Furthermore, I firmly believe 
that especially during this time of economic recovery, we need to do 
more to help those in our communities who need it the most. I am 
confident that by reducing the tax burden on our nation's seniors along 
with our low- and middle-income taxpayers, we will improve the lives 
for millions while encouraging our economy to grow.
    Mr. Chairman, again I want to thank you for allowing me to appear 
before you today. I look forward to continuing to work with you and our 
other distinguished colleagues who are here today, to pass legislation 
that will reduce the tax burden for all taxpayers and bring simplicity 
to our confusing tax laws and I would be happy to answer any questions 
you might have.

                                 

    Chairman MCCRERY. Thank you, Mr. Beauprez. Last on this 
panel, the gentleman from Ohio, Mr. Ryan. Mr. Ryan.

   STATEMENT OF THE HONORABLE TIM RYAN, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF OHIO

    Mr. RYAN OF OHIO. Thank you, Mr. Chairman, Ranking Member 
McNulty, and also the gentle lady from Ohio. Thank you for 
allowing me to testify on my bill, H.R. 4243, which provides a 
tax credit equal to the yearly cost of qualified college 
textbooks. I am also proud to say that it has been endorsed by 
both the National Association of College Stores and the 
American Association of Publishers. Mr. Chairman, I would like 
to submit the American Association of Publishers letter for the 
record.
    Chairman MCCRERY. Without objection.
    [The information was not received at the time of printing.]
    Mr. RYAN OF OHIO. It is not a secret that our students are 
paying more for their education, more are graduating with 
student loans, and the student loans are larger. The cost of 
college for our country's students is out of control. Last 
week, the biennial study for the National Center for Public 
Policy and Higher Education drops the country to an ``F'' 
rating in affordability from the ``D'' it received in the 
nonprofit group's report 2 years ago. It is not our students 
who are failing us, it is our States and Federal Government 
receiving the flunking grade by not acting decisively to make 
college more affordable. On affordability, the report directly 
contradicts studies that state increases of financial aid have 
kept pace with tuition hikes and college costs have stabilized. 
The result, college is becoming less affordable. How can we 
help our students and their families? My legislation will give 
financial relief in an area that is a significant part of a 
student's education, the cost of textbooks. Our students are 
spending an ever-increasing amount on textbooks. According to 
the National Association of College Stores, the wholesale price 
of college texts has gone up 32.8 percent since 1998, while the 
price of ordinary books rose just 18 percent over the same 
period. That is an average annual increase of 5.9 percent for 
college texts and 3.1 percent for regular books.
    Increasingly, students are paying upward of $1,000 per 
school year for textbooks, and my legislation allows for an 
annual tax credit of up to $1,000. One thousand dollars is 
obviously a lot of money for a student. To put it in 
perspective, in the 2002-2003 school year, the average Pell 
grant recipient was only awarded $2,436. One thousand dollars 
spent on textbooks is 41 percent of that average Pell grant 
award. House Resolution 4243 is not just limited to students, 
because many families work together to afford the cost of a 
family member's college education. Most full-time students 
might not receive all of the benefits of this tax credit, 
because their time is spent in the classroom and not working. 
So, this tax credit can be used by those parents who help pay 
for their son's or daughter's textbooks. My legislation gives a 
tax credit to the taxpayer, the taxpayer spouse or any 
dependent of the taxpayer with respect to whom the taxpayer is 
allowed the deduction under Section 151 and who is an eligible 
student.
    To put this in perspective, consider the following example: 
a family of four with an annual income of $40,000, sending one 
of their children to college, spent--will spend $1,000 on 
textbooks for the year. They would have incurred Federal taxes 
of $2,041, but with my legislation, will receive the full tax 
credit and only incur a Federal tax liability of $1,041. Mr. 
Chairman, my bill is not going to solve the college 
affordability issue completely, but it is a step in the right 
direction by recognizing that students and their families need 
more financial help. We need to support the pursuit of higher 
education, and I thank you for your consideration. We have 
almost 250,000 college-eligible people in this country who want 
to go to college, but feel, one way or another, they can't 
afford it; and this legislation helps move us in the direction 
to incentivize that for them. So, I thank the Committee for the 
opportunity.
    [The prepared statement of Mr. Ryan follows:]
Statement of The Honorable Tim Ryan, a Representative in Congress from 
                           the State of Ohio
SUMMARY OF BILL:
    H.R. 4243 amends the Internal Revenue Code to allow a nonrefundable 
tax credit for the cost of college textbooks. Limits the amount of such 
credit to $1,000 for any taxable year.
TESTIMONY
    Mr. Chairman and Ranking Member:
    Thank you for allowing me to testify on my bill, H.R. 4243, which 
provides a tax credit equal to the yearly cost of qualified college 
textbooks. I am also proud to say that it has been endorsed by both the 
National Association of College Stores and the American Association of 
Publishers. Mr. Chairman, I would like to submit the American 
Association of Publishers' letter for the record.
COST OF COLLEGE OUT OF CONTROL
    It is not a secret that our students are paying more for their 
education, more are graduating with student loans, and the loans are 
larger. The rising cost of college for our country's students is out of 
control. Last week, the biennial study by the National Center for 
Public Policy and Higher Education drops the country to an ``F'' in 
affordability from the ``D'' it received in the nonprofit group's 
report two years ago. It is not our students who are failing us; it is 
our state and federal governments receiving the flunking grade by not 
acting decisively to make college more affordable.
    On affordability, the report directly contradicts studies that 
state increases in financial aid have kept pace with tuition hikes and 
college costs have stabilized. The result? College is becoming less 
affordable.
    How can we help our students and their families? My legislation 
will give financial relief in an area that is a significant part of a 
student's education--the cost of textbooks.
STUDENTS SPEND LARGE AMOUNT ON TEXTBOOKS
    Our students are spending an ever increasing amount on their 
textbooks. According to the National Association of College Stores, the 
wholesale price of college texts has gone up 32.8% since 1998, while 
the price of ordinary books rose just 18% over the same period--that's 
an average annual increase of 5.9% for college texts and 3.1% for 
regular books. Increasingly, students are paying upwards of $1,000 per 
school year for textbooks, and my legislation allows for an annual tax 
credit up to $1,000. $1,000 is a lot of money for a student. To put it 
in perspective, in the 2002-2003 school year, the average Pell Grant 
recipient was only awarded $2,436. $1,000 spent on textbooks is 41% of 
that average Pell Grant award.
Parents
    H.R. 4243 is not limited to just the students, because many 
families work together to afford the cost of a family member's college 
education. Most full-time students might not receive all of the 
benefits of this tax credit because their time is spent in the 
classroom and not working, so this tax credit can be used by those 
parents who help pay for their son or daughter's textbooks. My 
legislation gives the tax credit to the taxpayer, the taxpayer's 
spouse, or any dependent of the taxpayer with respect to whom the 
taxpayer is allowed a deduction under section 151 and who is an 
eligible student.
SAVINGS PER FAMILY
    To put this in perspective, consider the following example.

      A family of four with an annual income of $40,000.
      Sending one of their children to college.
      Has spent $1,000 on textbooks for the year.
      If taking the standard deduction, would have incurred 
federal taxes of $2,041, but with my legislation, will receive the full 
tax credit and only incur a federal tax liability of $1,041.
SCORE
    My bill has not yet been scored.
THANK YOU
    My bill is not going to solve the college affordability issue 
completely, but it is a step in the right direction in recognizing that 
students and their families need more financial help. We need to 
support the pursuit of higher education and I thank you for your 
consideration of this request.

                                 

    Chairman MCCRERY. Thank you, Mr. Ryan. Again, I think the 
members of the panel did an excellent job of laying out your 
proposal. As a consequence of that, I don't have any questions. 
I would point out to Mr. Neugebauer that he did such a good 
job, that there is going to be a bill on the floor this 
afternoon which contains an extension of the wind energy tax 
credit. So, congratulations. Mr. Weldon, you did almost as good 
a job. There is going to be a bill on the floor, we hope next 
week or the week after.
    Mr. WELDON. Really?
    Chairman MCCRERY. Well, don't get too excited. It does 
contain a reduction in the depreciation period from 39 years to 
15 years for leasehold improvements for restaurants, so this is 
one of the things that they could take advantage of by putting 
in sprinklers and getting a shorter depreciation period. So, it 
is a start. With that, I will turn it over to Mr. McNulty.
    Mr. MCNULTY. Thank you, Mr. Chairman. I would echo your 
remarks, I think each of the Members did an excellent job. I am 
already a cosponsor of Mr. Weldon's legislation. I find a 
number of the other proposals very appealing. They certainly 
deserve the consideration of this Subcommittee, the Committee, 
and the full House. With that, I will yield to Ms. Tubbs Jones.
    Mrs. JONES. Mr. Chairman, Mr. Ranking Member, thank you 
very much. I also am a cosponsor of Mr. Weldon's legislation. I 
also have in the hopper somewhere a piece of legislation 
providing benefits to the college and university dormitories, 
fraternities and sororities, for fire prevention, because it 
becomes such a serious issue for our young men and women who 
live in facilities where they are not provided with the 
appropriate fire prevention tools to keep them from being 
victims of fire. So, I congratulate Mr. Weldon and support him. 
I didn't realize--I wasn't a cosigner on Mr. Ryan's 
legislation. I have a college student. I probably don't qualify 
for the credit, but it would be great for my constituents to 
also have the ability to get some type of credit for books. It 
seems like my son is calling me all the time, Mom, this book is 
$150; Mom, this book is $250. I said, go print your own. No, I 
didn't. Just, can I go--an aside. It is a serious cost and 
struggle for families who are trying to pay college tuition and 
the like. To all of my colleagues, thank you for coming forward 
with these suggestions, and we will continue to be supportive 
and give you the opportunity to do this. I am assuming, Mr. 
Chairman--well, I won't say ``we.'' The Chairman will continue 
to do that. Thank you very much. I yield back.
    Chairman MCCRERY. Thank you, Ms. Tubbs Jones. Mr. Ryan.
    Mr. RYAN OF WISCONSIN. I will be brief. No questions. Mr. 
Weldon, I think I am a cosponsor on your bill as well. I think 
we are getting a good consensus on that measure. Mr. Beauprez, 
I think you are hitting the nail on the head. The Social 
Security tax is a double tax. People already paid taxes on that 
dollar. It is really a back-door benefit cut, so I think your 
presence here and your testimony on that are right on target. 
Thank you all for coming.
    Chairman MCCRERY. Thank you. Thank you all again, 
gentlemen, for your excellent testimony. Now, will the third 
panel please come forward. Thank you. Ms. Blackburn coming a 
little early. The third panel was not supposed to be queued up 
until 2:00 p.m., but thanks to the concise testimony of the 
other two panels, we are a little ahead of time. As Mr. McNulty 
pointed out, we are probably the only Committee in Congress 
that is ahead of schedule. So, we are pleased that you are here 
early, and we are going to allow you to proceed. Your written 
testimony will be included in the record, but we would like for 
you to sum up your testimony in about 5 minutes, if you would, 
and then we will see if any other Members have shown up to 
testify. If not, we will ask you questions at that time. You 
may proceed.

 STATEMENT OF THE HONORABLE MARSHA BLACKBURN, A REPRESENTATIVE 
            IN CONGRESS FROM THE STATE OF TENNESSEE

    Ms. BLACKBURN. Thank you, Mr. Chairman. I will have to tell 
you that I do believe our Government Reform Committee hearing 
on piracy and counterfeit goods of intellectual property items 
was running a little ahead of schedule also today. That is why 
I am able to jump out of that one, even though it is 
proceeding, to be here with you. I do want to thank you and the 
Members of your Committee for holding the hearing today and 
giving us an opportunity to talk about some of the tax issues 
that are very important to us; and I want to offer my support. 
The reason I am here today is to offer my support for H.R. 
3776, the Songwriters Capital Gains Tax Equity Act, which was 
introduced by my friend from Kentucky and a Member of your 
panel, Congressman Ron Lewis. We appreciate his leadership on 
that issue. From 1995 until late 1997, I was Executive Director 
of Tennessee's Film Entertainment and Music Commission, and 
through that experience, I came to know and to fully appreciate 
the challenges that are facing our entertainment industry and 
the individuals who are working in that industry. So, when I 
was elected to Congress, I knew that there were certain Federal 
problems that I wanted to put some energy into and try to help 
seek a remedy to.
    Mr. Lewis's bill is a recent solution to a significant 
problem. Right now, our songwriters are forced to pay income 
tax when they are selling their life's work. Their catalog sale 
ends up factoring into their income, rather than being treated 
as a capital gain. We don't do this with the sale proceeds 
generated by works of literature that are produced by authors, 
but we do it with songs and with our songwriters. The reality 
is that few people know the songwriters and even fewer know of 
the challenges our Tax Code presents to them. The songwriters 
are the hidden component in our entertainment industry. 
Everybody probably knows, and I would be willing to venture a 
guess, Mr. Chairman, that you are familiar with the song 
``Heartbreak Hotel,'' that it was the song that launched Elvis 
Presley's career. It was his first single for RCA Records and 
it topped the Billboard charts around the world; it was the 
best selling single of 1956. However, this song was not written 
by Elvis Presley. This song was written by a wonderfully sweet 
lady and very dear friend from Hendersonville, Tennessee, the 
late Mae Axton. She and her songwriting partner, Tommy Durden, 
were reading the newspaper in 1955, and they came across what 
they thought was a heartbreaking story about a man who killed 
himself and left a note with the line, ``I walk a lonely 
street.'' They were inspired--sitting down together, they were 
inspired to flip over that sheet of paper and write out the 
lyrics. Then they produced a demo. Writing that song took them 
about 22 minutes.
    That is the community that we are talking about, the people 
behind the headline. These are the people we are trying to 
help. I have worked with this wonderfully creative and 
entrepreneurial community, and I can tell you, they are the 
epitome of self-employed small business people. Unlike the 
average small business owner, and what makes this issue so 
unique, is that the songwriters have their rate of pay set by 
Federal statute. It is 17 U.S.C. 801. The Federal Government 
sets that rate of pay, and if a songwriter does well and has 
many songs recorded, that collection of lyrics and music is 
known as a catalog. When a songwriter decides to sell this 
catalog, this compilation of their life's work, meaning that 
they are no longer going to get royalties off of that airplay--
they have passed it on, sold it--this asset is taxed as income 
instead of as a capital gain. That is the crux of the problem.
    That is the situation, and Mr. Lewis's Songwriters Capital 
Gains Tax Equity Act would give songwriters the parity they 
deserve and treat their sales as capital gains rather than 
income. In my district, which stretches from Memphis--which we 
know is the home of blues, and it is the birthplace of Rock and 
Roll--to Nashville, which is Music City USA, songwriters are 
our neighbors, they are our friends. They are the people that 
we work with every single day. We know how very important this 
issue is to them. When I came to Congress, one of the first 
things that I did was to create the Congressional Songwriters 
Caucus here in the House to highlight this issue for our 
Members, and at every Guitar Pull that we have had on the Hill, 
this topic comes up. It is a front-burner issue for our 
songwriters, and I am hopeful that this Committee can see merit 
in Representative Lewis's approach. Thank you, Mr. Chairman.
    Chairman MCCRERY. Thank you, Ms. Blackburn. Before I call 
on Mr. Sessions--Mr. Sessions, you can come on up and take your 
seat--I just want to point out that I did nod affirmatively, 
when you asked if I was familiar with ``Heartbreak Hotel,'' 
that is only because I have two much older sisters who were 
Elvis Presley fans.
    Ms. BLACKBURN. I will accept that answer, sir.
    Chairman MCCRERY. Thank you. We will reserve our questions, 
Ms. Blackburn, if you can stay until the completion of Mr. 
Session's testimony. Now I would like to introduce the 
gentleman from Texas, Mr. Sessions. Mr. Sessions, your written 
testimony will be included in the record. You will have about 5 
minutes to summarize your remarks, and you may proceed.

 STATEMENT OF THE HONORABLE PETE SESSIONS, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. SESSIONS. Thank you, Mr. Chairman. I want to thank you 
and the Members of the Subcommittee today for allowing me to 
turn on my mike. There it is.
    Ms. BLACKBURN. Way to go.
    Mr. SESSIONS. In the Rules Committee we have people there 
to turn them on. I guess we don't here. Mr. Chairman, I want to 
thank you for giving me the opportunity to speak today, and I 
would like to let you know that much of the material that I am 
going to provide you today was given to me by the National 
Center for Policy Analysis that has done a lot of work on the 
information that I am going to provide. Today, Mr. Chairman, I 
would like to discuss the adverse effects of the Tax Code on 
women. Now, of course, the Tax Code doesn't tax men at one rate 
and women at another. Theoretically it treats them equally. Due 
to different work patterns between men and women, the outcome 
of our tax law is often negative for women. One major reason 
for this is that the career path of a woman is usually 
different from that of a man. According to the Census Bureau, 
38.6 percent of the women between the ages of 20 and 64 choose 
not to work outside the home in order to take care of their 
children, compared with only 2.6 percent of men. As a result, 
women tend to move in and out of the workforce. They are also 
more likely to have part-time employment or to seek flexible 
hours or what we might call family friendly workplace. As a 
result of these patterns, women are frequently penalized by the 
Tax Code. In particular, they are much less likely to be 
eligible for employee benefits. Married women face higher 
marginal tax rates than their single counterparts. Other 
factors, such as longer life expectancies, also have an impact.
    A prime example of the Tax Code's inequitable impact on 
women is retirement savings. Because of their work patterns, 
women are less likely to qualify for benefits such as a 401(k) 
plan, and a woman who does qualify may not be able to invest if 
she pauses her career to take care of children. One study found 
that among employees ages 18 to 62, the average balance in 
401(k)s and similar accounts for women was about half of that 
of men. Unfortunately, there is no 401(k) equivalent for moms 
who stay at home. Traditional IRAs or spousal IRAs are options, 
but the contribution level limits are lower. The opportunity to 
accumulate tax-favored savings shouldn't depend on where or if 
a person is employed. We need to be especially concerned about 
the women's retirement savings, because they have a longer life 
expectancy and are more likely to live alone. Women need a 
larger nest egg to cover their expenses throughout retirement, 
and those who do save will still face a host of taxes on 
retirement income and Social Security benefits.
    Another area of concern is health care. Employers are able 
to deduct their expenses for providing health insurance, but 
individuals do not receive the same deduction if they purchase 
coverage on their own. Because of such outdated laws, health 
insurance availability is tied to full employment, but many 
women in nontraditional work roles do not qualify for employer-
provided health care. One measure that addresses health care 
coverage is H.R. 583, the Fair Care for the Uninsured Act, 
which would create a refundable tax credit of $1,000 per adult 
or $3,000 for each family for the purchase of private health 
insurance. This credit would be available to individuals who do 
not have access to employer-based health insurance or who are 
not enrolled in a government health program. These are just a 
few of the challenges that women face in retirement planning, 
health care and many other areas, and I know this because I 
have a wife and a mother who are very concerned about not only 
their future but the future of many women who are their 
friends.
    Fortunately, Republicans and President Bush have enacted 
numerous measures that alleviate these problems with the Tax 
Code. We have passed the marriage penalty tax relief and higher 
IRA limits. These measures are in danger of expiring and do not 
fully address the inequities of the law. The newly created 
health savings accounts were also created to help improve 
health care coverage. There is much more that I think we need 
to do and certainly I am trying to challenge our Committee to 
do today in our future. On a broad scale, comprehensive tax 
reform such as a flat tax would eliminate many of the Tax Code 
inequities. In the meantime, though, we should examine more 
specific proposals such as Fair Care. Many of our tax laws are 
still based on the old assumption that a family will have a 
single earner, employed full time by one company that provides 
full benefits, but now this model is the exception rather than 
the rule. Of course, the problems I have discussed apply to 
many men as well. However, women are affected far many times 
more. With the roles of men and women continually evolving, we 
need to replace our outdated tax laws with forward-looking 
reform, with the new ideas of the millennium, and maximize the 
opportunity of each of our citizens. I thank the gentleman for 
allowing me to be here today, and I will make myself available 
for questions, as necessary, by this Committee.
    [The prepared statement of Mr. Sessions follows:]
Statement of The Honorable Pete Sessions, a Representative in Congress 
                        from the State of Texas
    Mr. Chairman, I want to thank you for giving me and my colleagues 
the opportunity to contribute to this important discussion.
    Today, I'd like to discuss the adverse effects of the Tax Code on 
women. Now, of course, the Tax Code doesn't tax men at one rate and 
women at another. Theoretically, it treats them equally. But due to the 
different work patterns between men and women, the outcome of our tax 
laws is often more negative for women.
    One major reason for this is that the career path of a woman is 
usually different from that of a man. According to the Census Bureau, 
38.6 percent of women between the ages of 20 and 64 choose not to work 
outside the home in order to take care of children, compared with only 
2.6 percent of men.\1\ As a result, women tend to move in and out of 
the workforce. They are also more likely to have part-time employment 
or to seek flexible hours or a ``family-friendly'' workplace.
---------------------------------------------------------------------------
    \1\ U.S. Census Bureau, ``Reasons People Do Not Work, 1996,'' Table 
3, p. 5, http://www.census.gov/prod/2001pubs/p70-76.pdf.
---------------------------------------------------------------------------
    As a result of these patterns, women are frequently penalized by 
the Tax Code. In particular, they are much less likely to be eligible 
for employee benefits. Married women may face higher marginal tax rates 
than their single counterparts. Other factors, such as longer life 
expectancy, also have an impact.
    A prime example of the Tax Code's inequitable impact on women is 
retirement savings. Because of their work patterns, women are less 
likely to qualify for benefits such as 401(k) plans. And a woman who 
does qualify may not be able to vest if she pauses her career to care 
for her children. One study found that among employees ages 18 to 62, 
the average balance in 401(k)s and similar accounts for women was half 
that of men.\2\
---------------------------------------------------------------------------
    \2\ Vickie Bajtelsmit, Alexandra Bernasek, and Nancy Jianakoplos, 
``Gender Differences in Defined Contribution Pension Decisions,'' 
Financial Services Review, Vol. 8 (1999), p. 5.
---------------------------------------------------------------------------
    Unfortunately, there is no 401(k) equivalent for moms who stay at 
home. Traditional IRAs or Spousal IRAs are options, but the 
contribution limits are much lower.\3\ The opportunity to accumulate 
tax-favored savings shouldn't depend on where or if a person is 
employed.
---------------------------------------------------------------------------
    \3\ $3,000 for IRAs vs. $13,000 for 401k in 2004.
---------------------------------------------------------------------------
    We need to be especially concerned about women's retirement savings 
because they have a longer life expectancy and are more likely to live 
alone. Women will need a larger nest egg to cover their expenses 
throughout retirement. Those who do save will still face a host of 
taxes on retirement income and Social Security benefits.
    Another area of concern is health care. Employers are able to 
deduct their expenses for providing health insurance, but individuals 
do not receive the same deduction if they purchase coverage on their 
own. Because of such outdated tax laws, health insurance availability 
is tied to full-time employment. But many women in non-traditional work 
roles do not qualify for employer-provided health insurance. One 
measure that addresses health care coverage is the Fair Care for the 
Uninsured Act (H.R. 583), which would create a refundable tax credit of 
$1,000 per adult or $3,000 per family for the purchase of private 
health insurance. This credit would be available to individuals who do 
not have access to employer-provided health insurance or who are not 
enrolled in a government health insurance program.
    These are just a few of the challenges that women face in 
retirement planning, health care, and many other areas. Fortunately, 
Republicans and President Bush have enacted numerous measures that 
alleviate some of the inequities in the Tax Code. We have passed 
marriage penalty relief and higher IRA limits, but these measures are 
in danger of expiring and do not fully address the inequalities in our 
tax law. The newly created Health Savings Accounts will also help to 
improve health care coverage, but there is much more we can do.
    On a broad scale, comprehensive tax reform, such as a flat tax, 
would address many of the Tax Code's inequalities. In the meantime, 
though, we should examine more specific proposals such as Fair Care.
    Many of our tax laws are still based on the old assumption that a 
family will have a single earner, employed full time by one company 
that provides full benefits. But now this model is the exception, 
rather than the rule. And of course, the problems I've discussed apply 
to many men as well. However, women are affected much more often. With 
the roles of men and women continually evolving, we need to replace our 
outdated tax laws with forward-looking reforms that reflect the 
realities of the new millennium and maximize the opportunities for all 
citizens.

                                 

    Chairman MCCRERY. Thank you, Mr. Sessions. Ms. Blackburn, 
you talked about the catalog of songs that a songwriter might 
at some point sell. What if it is just a single song that he 
gets royalties on for, say, 5 years, and then he just wants to 
sell that song? Would he still qualify for the tax break in 
your bill?
    Ms. BLACKBURN. Chairman McCrery, one of the things that 
happens in the industry is, when a songwriter writes that song, 
then they will get their royalty on that as long as they own 
that song. It is the same thing as if you owned a piece of 
property that was a rental piece of property. Then, as long as 
you own that property and rent it out, that rent check comes to 
you. The day you sign the deed and you sell it and you turn it 
over, you no longer have anything to do with it. It is the--it 
is the same thing that happens when you have a song. Now, what 
songwriters will do--and Mr. Lewis may also want to speak to 
this just a little bit--what they will do is, generally they 
retain the ownership of their songs until they are ready to 
retire and then, at that point, they will sell their life's 
work. Now, as with many small business people, who have built a 
factory, whether it is a tool and die factory or a clothing 
manufacturing factory, they are--or insurance agent who has a 
book of business. They are gathering and building, and they are 
making residual income and they are working through that 
process for many, many years. They decide to retire. They know 
this business that they have built or the property that they 
have owned has been their work, and they decide to sell that. 
That is--that lifetime of work, all of those songs, that is an 
artist's catalog, and once they make that sale, it is gone.
    Chairman MCCRERY. Maybe Mr. Lewis can expound on that. What 
if a songwriter doesn't wait until he wants to retire, but is 
there a holding period in their bill--a year or 5 years or 
whatever--at which point he can get capital gains treatment?
    Mr. LEWIS. Well, I think what Ms. Blackburn is saying is, 
it is--and the one-song scenario, I am not sure that a person 
would be interested in selling one song. An example is, like 
Hal David, the writer of many, many songs, ``Raindrops Keep 
Falling on My Head,'' and of Rudy Vallie and others, a whole 
career of writing songs that he put into his catalog. Upon 
wanting to--reaching a period in his life that he would want to 
retire, if he sold that catalog or, as Marsha just said, if I 
was a small business owner, and I put my whole life investment 
into that business, mortgaged my home and everything, basically 
all the profit I made I put back into that business building 
that, because I knew one day that I would probably retire on 
the basis of selling that business, well, that would be fine 
for me because I would have paid capital gains instead of 
income tax on that. The songwriters are saying the same thing. 
They are building, they are building for that future. So, they 
are compiling those songs, and one day they hope to sell that 
small business that they have acquired over the years and the 
investment that they have put into it, and they don't want to 
have to pay income tax. They want to be like any other small 
business and pay capital gains tax. So, we are concentrating on 
that individual that has built a business over the years so 
that they can retire.
    Chairman MCCRERY. Okay. Thank you. Mr. Sessions, you 
certainly point out an area that this Committee has concerned 
itself with over the last few years, and that is trying to make 
sure that women in the workplace are given favorable treatment 
to counter the disadvantage that they have because of the facts 
of life, as you outlined, that they have interruptions in their 
work life. When they have kids, they leave the workplace. They 
come back. It is an area that we have made some improvements 
in, but I agree with you that we need to continue to look at 
that and continue to make sure that the Tax Code does a good 
job of taking into consideration those lifestyle differences 
for women. So, we will certainly continue to do that, and I 
appreciate your comments today on that subject.
    Mr. SESSIONS. Thank you, Mr. Chairman.
    Mr. MCNULTY. I have no questions. I want to thank both of 
my colleagues for their presentations.
    Chairman MCCRERY. Thank you. Mr. Lewis, do you have any 
questions?
    Mr. LEWIS. No.
    Chairman MCCRERY. Mr. Ryan. I thank both of you very much 
for your excellent testimony. We appreciate your taking time to 
come by our Committee and share with us your thoughts. As we 
develop policy in the next couple of years, I am sure we will 
consider what you have brought us today and make some 
improvements in the Tax Code. So, thank you once again. We 
still have a couple of Members on the third panel that were 
supposed to be here at 1:00 p.m. So, we will simply wait for a 
few more minutes. We will leave the record open for a few 
minutes and see if they get here.
    [Recess.]
    Chairman MCCRERY. Welcome, Ms. Lofgren.
    Ms. LOFGREN. Thank you. I was waiting for this on the 
floor. I thought this was going to be at 1:00 p.m.
    Chairman MCCRERY. Yes, ma'am. We would have waited 
patiently if we had had to. We have had two panels and we are 
about halfway through the third panel to testify. Your written 
remarks will be included in their entirety in the record, but 
we would ask you to turn on your microphone and summarize your 
written testimony in about 5 minutes, if you would.

  STATEMENT OF THE HONORABLE ZOE LOFGREN, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. LOFGREN. Thank you, Mr. Chairman. I will not, I 
believe, take the entire 5 minutes. When I learned of the great 
offer to receive testimony from Members who are not Members of 
the Committee, I wanted to take advantage of that opportunity 
because of an issue that I tried to bring to the attention of 
the Committee and, really, in justice to the losers for a 
period of several years. That has to do with the application of 
the alternative minimum tax to incentive stock options. I first 
learned about this when I received a letter from a young man in 
my district, an engineer, who was facing absolute financial 
ruin. This kid had roommates. He shared a house with another 
bunch of recently out-of-college engineers. He was driving a 
car several years old. He had received incentive stock options 
and had not known that even though he never received any money 
from those options, he never made a profit, he never sold them, 
that he was still subject to a tax on the phantom profit that 
existed that he was completely unaware of. As time went on, I 
got other letters from individuals in my district and all 
across the United States of people who had a tax liability for 
income they never received.
    I introduced a bill last Congress, and before that I was 
not the only Member to try to bring a remedy to this problem. 
Congressman Neal and I worked together, and Congressman Johnson 
has a bill in this Congress. None of these bills has received 
action. A lot of the individuals who had tax liabilities of 
hundreds of thousands of dollars on income of maybe $40,000, 
have gone bankrupt. They have lost their homes. They have lost 
their cars. The injustice remains. Should the Committee be 
willing to take action to remedy this, I would be prepared to 
reintroduce H.R. 1487 in an instant, because it is one of the 
nastiest and most unfair things I have seen for people to be 
caught in this terrible situation. People have committed 
suicide in my district over this problem. All along, we have 
done a lot to solve tax problems, for large entities. I would 
urge that we not forget the little guy, the little engineer who 
got caught in this very strange application of the alternative 
minimum tax. I think they deserve our attention, and they 
deserve tax fairness. They deserve justice. So, I wanted to 
bring that to the attention of the Committee. Should you have 
any interest or willingness to pursue this, please do let me 
know, and I will reintroduce my bill. I didn't this year, 
because I was so discouraged and really had been led to believe 
by Members of the Committee that no action would be 
forthcoming. I hope that is not correct. I thank the Committee 
for your courteous attention to me, and for leaving the record 
open.
    [The prepared statement of Ms. Lofgren follows:]
 Statement of The Honorable Zoe Lofgren, a Representative in Congress 
                      from the State of California
    Mr. Chairman and Ranking Member McNulty, thank you very much for 
holding this important hearing to allow non-Ways and Means Committee 
Members of the House the opportunity to testify on tax issues of 
importance to our constituents. I am here today to discuss the 
treatment of incentive stock options by the alternative minimum tax.
    Four years ago, I received a letter from a very young engineer who 
was new to the workforce and employment in the Silicon Valley, my 
district. He was facing financial ruin. Sharing a rented home with two 
roommates, driving a car several years old, he faced the prospect of 
sending almost his entire paycheck to the IRS for the foreseeable 
future.
    His letter was only the first. Over the rest of that year, I was 
inundated with similar letters--administrative assistants, systems 
analysts, programmers, sales and marketing specialists, human resources 
managers--all were facing financial crisis. How could that be?
    I quickly learned that according to our Tax Code, an employee who 
exercises stock options and does not sell during that calendar year has 
a tax liability that is equivalent to the difference between the 
exercise price and the fair market value at the time of exercise. This 
is true even if the employee received no money or profit from the sale 
at all.
    Many young engineers, administrative assistants, and other middle 
income employees have paid thousands of dollars of taxes on ``phantom 
gains'' to the IRS. Even if they attempt to use the capital loss credit 
of $3,000, many of these individuals will be unable to recoup the 
amount of money they paid to the IRS in their lifetime. Take for 
example a woman who was able to obtain a second mortgage against her 
home to pay the $91,000 AMT bill. It will take her over 30 years to get 
the $91,000 back.
    The worst stories are of families who are slapped with thousands of 
dollars of tax bills while going through family illness or death. One 
woman's mother passed away in March 2001. Once her mother's probate 
closed, she not only spent her inheritance, she also spent her sister's 
inheritance, to pay off her AMT tax liability. She is currently in the 
process of selling her house that she planned to retire in to pay off 
the remaining amount she owes the IRS--$140,000.
    Another woman tells me that she received an AMT bill three times 
her family income just after her husband was diagnosed with cancer and 
was not working regularly. He later passed away and the IRS continued 
to charge her interest on delayed payments while she struggled to make 
the payments.
    In the 107th Congress, my colleagues and I worked hard to correct 
this AMT problem. I introduced H.R. 1487, a bill to amend the Tax Code 
to repeal the alternative minimum tax treatment of incentive stock 
options, thereby changing the taxable event from the exercise of the 
stock option to the sale of stock. My bill had 61 bipartisan 
cosponsors. There were also several other valuable approaches to fixing 
this problem, one by Representative Richard Neal and another by 
Representative Sam Johnson. Despite our vigorous efforts towards 
reform, the Ways and Means Committee never gave us the opportunity for 
a hearing or markup of our bills.
    I am hopeful that with today's hearing, we will finally begin to 
correct a problem that has already put so many families in financial 
ruin. If this Subcommittee is serious about helping families, then I 
will be happy to reintroduce my bill from the 107th Congress today so 
we can have a timely hearing and a markup before we adjourn this 
Congress.
    Four years have passed since this problem exploded. It is time for 
us to act.

                                 

    Chairman MCCRERY. Thank you, Ms. Lofgren. We are going to 
recognize Mr. Emanuel, and then we will ask questions, if you 
can stay for that. Next on the panel is the gentleman from 
Illinois, Mr. Emanuel. Please, your written testimony will be 
included in the record. If you turn on your mike and summarize 
that in about 5 minutes, we would appreciate it. You may 
proceed.

 STATEMENT OF THE HONORABLE RAHM EMANUEL, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF ILLINOIS

    Mr. EMANUEL. Well, Mr. Chairman, thank you, and I will try 
to do it in less time so we can get--I know that you have some 
questions and someone on the panel--as Henry Kissinger used to 
say, does anyone have any questions for my answers? Obviously, 
he was serious. I am joking. There are two or three things I 
would like to address, if possible, and take them up in kind of 
magnitude from small to larger. One is an issue known in the 
public as ``janitor's insurance,'' and it has been written on 
extensively in the Wall Street Journal. It has done about four 
or five articles on it. It is a policy where corporations buy a 
life insurance policy on--not key, on what is referred to as 
``alternative key man insurance,'' but those lower on the 
corporate ladder. Many times individuals don't, and their 
spouses don't know the insurance policies are there. 
Corporations can do that. As you know, in some of these 
articles, Wal-Mart buying--one of the most valuable 
contributors to their bottom line was the janitor's insurance 
in certain years from a capital perspective and a profit 
perspective. There are two pieces of the Tax Code where we as a 
society and as a economy, the rest of us, are subsidizing 
corporations both on the front end when they buy it and on the 
buildup of the value of that premium. They get a tax--they 
basically write it off on their taxes. We as taxpayers have to, 
in other words, pick it up for them.
    What you have here is a company that is buying life 
insurance on their employees who don't get--many times they or 
their spouses are not the beneficiary of that policy. In the 
past, Chairman Archer of this Committee has criticized this. 
Secretary of the Treasury Don Regan has criticized it. Leaders 
in the insurance industry themselves have spoken out against 
it, calling it egregious, and yet this inequity exists in the 
Code. Now, you can deal with janitor's insurance and try to 
make it like--or life insurance as a whole, and try to make it 
like some other insurance policies, and that may be one 
solution. At this point, to the tune of $10 billion to $12 
billion based on estimates, the taxpayers are subsidizing a 
policy and corporate bottom line when the so-called 
beneficiaries are not receiving the policy, and I am not sure 
this is exactly what was intended for the Tax Code. There has 
been in the past big, bipartisan criticism of this policy. 
Second, what again was intended for the right reasons, and I 
think now has been used in a way and has morphed into a 
process, is the ``corporate jet'' tax write-off. In many cases, 
the most egregious example here is the Chief Executive Officer 
or corporate executive, because the Chief Executive Officer is 
not the only individual using it, are charged $300--these are 
examples that have been used in the public domain for their tax 
purposes and a sense of income--and yet the corporation writes 
off the use of the corporate jet at that point to the tune of 
$30,000.
    I think we could all agree, it is either $300 or $30,000, 
but the use of that corporate jet is not both simultaneously. 
We as taxpayers pick up the $30,000 hit, again costing 
somewhere--low estimates at about $1.2 billion over 2 years, 
$2.5 billion--$1.2 billion over 5 years, $2.5 billion over 10 
years. I think again an egregious example of where the Tax Code 
not only does not reflect, I think, our values, but more 
importantly, economic sense. Again, you can correct an inequity 
that exists in the Code that also, I think, undermines people's 
confidence in the tax policy and that the taxes are distributed 
fairly. Lastly, an idea I have proposed in the past, and I have 
done other things in my Financial Services Committee on 
auditors and the sense of tax advice that they have been giving 
both to companies that they audit, as well as where they are 
giving tax advice to the Chief Executive Officers of companies 
they audit. On a separate matter, I introduced a piece of 
legislation called the Simplified Family Credit. It takes the 
Earned Income Tax Credit, the Dependent Child Credit, and the 
Child Credit and collapses approximately 2,000 pages of the 
Code down to 12 questions. Now, in those three separate 
credits, there are north of five examples of children, or 
definitions of children. I know, Mr. Chairman, as a father of a 
few children, as the father of three children, I think there is 
only one definition of what a child is and I think we should be 
able to consolidate that definition.
    There is no consolidation and simplification to be brought 
on the Code. If you did that--I don't agree with some of the 
others who criticize the earned income tax credit for fraud and 
abuse, but many times--I will agree that there is fraud, but 
the fraud is unintended. It is not intentional, as it is in 
other places, because of the complexity. The way to deal with 
the abuse in the system would be to bring simplicity so that 
people know what they are filling out. There is literally a 
form for 12 questions, reduces 2,000 pages in total by the IRS. 
It would cost some money, but I also think it would be 
tremendously good for the economy, and it would bring 
simplification to the Code. That is a bigger reform idea than 
the first two. I again want to close by--I appreciate your 
letting me testify and for also holding this hearing today.
    [The prepared statement of Mr. Emanuel follows:]
 Statement of The Honorable Rahm Emanuel, a Representative in Congress 
                       from the State of Illinois
    Chairman McCrery, Ranking Member McNulty, and distinguished members 
of this Subcommittee, thank you for inviting me to discuss ideas for 
tax simplification. I commend this Subcommittee for its excellent work 
and the effort to work to identify ways to relieve Americans from the 
burden imposed on them by the Tax Code.
    I support your goal in this hearing to simplify the Tax Code, which 
values special interests over middle class families. As you are well 
aware, the Code is weighed down by more than 300 changes and over 
10,000 new pages due to recent tax laws that add more phase-ins, phase-
outs, loopholes and sunsets.
    This complexity results in inequities and headaches for middle 
class families, who are all too familiar with convoluted IRS forms and 
the AMT web. If it takes a typical family seven and a half hours longer 
to fill out their tax return than it did a decade ago, then we need to 
simplify the Code. If families must choose between five different kinds 
of tax definitions their child fits into, then we need to reform those 
definitions. If a family sending its kids to college must answer 32 
pages of questions to apply for a loan, then why do companies applying 
for Export-Import Bank loans only have to answer one-page of questions?
    I have introduced two bills referred to this Committee that close 
some of the loopholes that favor special interests and corporate 
America over middle class families: My first bill, H.R. 2127, stops 
companies from accumulating tax gains from a kind of corporate owned 
life insurance policy known as ``janitors insurance.'' These policies 
are sold to employees whose beneficiaries sometimes never realize the 
benefit. Instead, their employers become the beneficiaries--because 
they don't pay taxes on the policy's ``inside buildup'' that accrues as 
the value of the policy increases. Then, once the insured dies, the 
company receives the tax-free death benefit. In addition to closing an 
abusive loophole that has left some survivors with nothing, my bill has 
bipartisan support and would save taxpayers $10 billion over five 
years.
    My second bill, H.R. 4352, also has bipartisan support. It closes 
the $3 billion ``corporate jet'' loophole. Executives who fly in 
corporate jets for personal travel can write-off this perk for about 
half the price of a round-trip first-class ticket from New York to L.A. 
At the same time, the executive's company is permitted to take a full 
tax deduction for the costs of owning and operating the plane. This can 
add up into tens of thousands of dollars. This Committee should ask . . 
. ``Is the flight worth the $300 in income the executive reports, or 
the $30,000 tab that middle-class taxpayers have to pick up?''
    Another idea I have proposed is the Simplified Family Credit, to 
combine four family tax cuts into a single fully refundable credit for 
working families with children. It reduces thousands of pages of the 
Code to a simple postcard-sized form. Both sides of the aisle have 
reasons to work in a bipartisan way toward making this a pillar of 
reforming the Tax Code: simplification and progressivity.
    Finally, I encourage you to consider a ``split refund'' proposal, 
allowing taxpayers to split their refunds and direct portions of their 
refund into different accounts. This idea would increase saving because 
it makes the process of saving refunds much simpler. Many families are 
reluctant to have their entire refund deposited to a tax-preferred 
savings account like an IRA. And current IRS practice of only allowing 
taxpayers to direct their refund to one account actually reduces the 
portion of tax refunds that are saved. A recent pilot project suggests 
families could save under this proposal by simply checking a box on 
their tax returns to save part of their refund.
    Mr. Chairman and distinguished members of this Committee, tax 
simplification transcends fiscal policy alone. It's also about 
priorities and values. Our tax system should respect the values and 
interests of middle class families.

                                 

    Chairman MCCRERY. Thank you, Mr. Emanuel. Ms. Lofgren, I 
think you should reintroduce your bill, maybe next year. We 
probably won't act on it this year, but it seems to me that 
that is something we ought to look at. It does seem to be 
somewhat punitive, certainly in some cases, so I would 
encourage you to continue to pursue that. Don't get 
discouraged. It takes a while around here sometimes to address 
something. So, keep after it. We appreciate very much your 
coming before us today to point out what is a problem in your 
district. Certainly--as with many incentive stock options that 
are around in your district, but certainly everywhere across 
the country, that is a tool that companies can use and they 
want to use; and employees like it, so we ought not discourage 
the use of that through the tax treatment on the alternative 
minimum tax. The best solution, of course, would be to repeal 
the alternative minimum tax altogether, but we can't do that 
quite yet. So, we are working on it. Would you like to respond?
    Ms. LOFGREN. Yes, thank you, Mr. Chairman. I, in the next 
Congress, with some encouragement, would happily pursue it. I 
would say, when I was contacted by these individuals in my 
district--because I do represent Silicon Valley--I assumed it 
was primarily a Silicon Valley issue. I was very surprised, 
therefore, to find out this is not just a Silicon Valley issue. 
There are people all over the United States who got incentive 
stock options. They saw their stock prices go under water in a 
year, and then they got hit with tax bills of $200,000, 
$300,000, $400,000, in one case $1 million on stock that they 
didn't receive a penny of value from. They tend to be people 
who are not the Chief Executive Officers, but the engineers or 
the administrative assistants, people who don't have certified 
public accountants looking over their shoulders. So, I would 
hope that the Committee could act. It is really a very 
compelling situation. I appreciate your kind comments.
    Chairman MCCRERY. Thank you. Mr. Emanuel, this Committee 
has looked at the issue of corporate-owned life insurance. The 
Senate Finance Committee fairly recently adopted a number of 
reforms along the lines that you suggested. Are you familiar 
with those? Have you looked at those?
    Mr. EMANUEL. Yes, I have. Some of them were--yes, I have.
    Chairman MCCRERY. Do you think that they would solve the 
problems that you alluded to in your testimony? Or does more 
need to be done?
    Mr. EMANUEL. Well, Mr. Chairman, if you were talking about 
the same type of reforms that they made, one was--I think their 
reform was on notification, so that the beneficiary and the 
family knew that there was a life insurance policy wrapped 
around the employee, so to say.
    Chairman MCCRERY. Consent also.
    Mr. EMANUEL. I do think that they don't--and I stand 
corrected if I am wrong, my understanding of it. I don't think 
they dealt with the tax provisions, as I outlined here, both 
for the purchase of the policy and the buildup inside.
    Chairman MCCRERY. No, they allow that to continue.
    Mr. EMANUEL. Right.
    Chairman MCCRERY. They do require notification and consent 
of the employees.
    Mr. EMANUEL. Right.
    Chairman MCCRERY. They also limit the employees that can be 
included in the corporate-owned life insurance, which would do 
away with the janitors problem. So, maybe you should look at 
that. Let us know, after you have had time to thoroughly review 
it, if you think we still ought to just repeal the tax 
provisions that allow the company to deduct and then, of 
course, not pay tax on the buildup, the inside buildup.
    Mr. EMANUEL. Right.
    Chairman MCCRERY. Because, after all, as you probably know, 
companies have been using this tool for quite a number of years 
for what I think both you and I would agree is a good social 
policy to fund the benefits that the corporations pay to their 
employees. So, I am not sure that we want to throw that out, 
that tool out, without looking at it very closely.
    Mr. EMANUEL. A, I have looked at what the Senate passed; B, 
I think it is good progress; C, I don't think the option is 
either you exist--you continue to exist the Tax Code as is. 
That means, if you end it somehow or reform it, you eliminate 
how the policy is used to fund other benefits for the company. 
I think there is a way to break bridges, too, so I don't think 
the taxpayers are out on the hook subsidizing what has happened 
in the past.
    Chairman MCCRERY. Well, taxpayers subsidize a number of 
things.
    Mr. EMANUEL. Yes, they do.
    Chairman MCCRERY. They subsidize our health insurance, for 
example, and subsidize the health insurance of the General 
Motors employees at the plant in Shreveport. Again, I think we 
would agree that there is a pretty good social purpose there 
served by that tax deduction that the corporation enjoys and 
that tax exclusion that the employees enjoy.
    Mr. EMANUEL. So, X pie is not a finite pie.
    Chairman MCCRERY. That is something that this Committee has 
to grapple with all the time. I appreciate your remarks and 
your testimony. Mr. McNulty.
    Mr. MCNULTY. Thank you, Mr. Chairman. I want to thank both 
of our colleagues for their testimony. I mentioned in my 
opening remarks that many times Members of this body work on 
various tax proposals over a very long period of time, and they 
tend to get lost in the shuffle when we consider these larger 
bills. That may have been the case in Ms. Lofgren's 
legislation. I would join with the Chairman in urging you to 
resubmit your legislation. We have no further questions on our 
side of the aisle, Mr. Chairman.
    Chairman MCCRERY. Mr. Ryan? Mr. Brady? Well, thank you 
again. Mr. Emanuel, you did such a good job today in talking 
about the single definition of a child. That is actually going 
to be in the bill that is going to be on the floor this 
afternoon. So, you can take credit.
    Mr. EMANUEL. Thank you both. I saw the press release out 
about a year ago.
    Chairman MCCRERY. Thank you again.
    Mr. MCNULTY. Mr. Chairman, I just wanted to make a 
unanimous-consent request. Because we were scheduled to hear 
from 20 Members of Congress today and 16 of them were actually 
able to make it here and present their testimony in person--
there were four who did not--I would ask unanimous consent that 
the testimony of Mr. Hoekstra, Mr. Edwards, Mr. Saxton and Mr. 
Fossella are submitted for the record.
    Chairman MCCRERY. Without objection. Is there any further 
business from any of the Members?
    [The prepared statement of Mr. Hoekstra follows:]
Statement of The Honorable Peter Hoekstra, a Representative in Congress 
                       from the State of Michigan
    Thank you Chairman McCrery for the opportunity to testify before 
you today on tax legislation that is important both to the nation's 
economy and to the efficient use of energy in the United States.
    Last year, a constituent small business owner in Michigan's Second 
Congressional District brought to my attention a problem with the Tax 
Code, a problem that harms the environment and limits the economic 
vitality of an important American industry. The problem is that many of 
the heating, ventilation, air conditioning, and refrigeration systems 
installed in today's buildings are old, inefficient, harmful to the 
environment and need to be replaced. The average lifespan of an air 
conditioning system in a commercial building is 15 years, yet the Tax 
Code treats them as though their lifespan is 39 years.
    The Tax Code specifies a depreciation schedule for HVACR systems of 
39 years. That is more than double the average lifespan of these 
systems. The depreciation schedule in the Tax Code acts as a 
disincentive to invest and replace large, old and inefficient HVAC 
systems in commercial buildings.
    Earlier this year, with bipartisan Members of the full Committee on 
Ways and Means as original co-sponsors, I introduced H.R. 3953, the 
Cool and Efficient Buildings Act.
    This legislation would shorten the depreciation schedule for HVAC 
systems in commercial buildings to 15 years, to more accurately reflect 
the lifespan of these units.
    This simple and common sense change would have a positive impact on 
the economy and the environment.
    Reducing the depreciation period will provide an incentive for 
building owners to upgrade to more efficient equipment by allowing them 
to expense more of the costs of the systems each year. By replacing a 
building's existing units, building owners and managers lower energy 
costs and reduce energy demand.
    The U.S. air conditioning and refrigeration industry employs more 
than 175,000 workers and contributes $17 billion annually to the U.S. 
economy. This U.S. industry exports $4.7 billion annually, providing an 
industry trade surplus of more than $2.1 billion.
    Lowering the depreciation period to an accurate 15 years would 
encourage building owners to invest in new systems, creating business 
for American manufacturers and contractors.
    Making this simple change in the Tax Code will improve the 
environment in two important ways. First, the replacement of old 
systems with newer, advanced technological systems greatly increases 
efficiency and reduces carbon dioxide emissions. New chillers are 34 to 
42 percent more efficient than chillers installed 20 years ago.
    Second, it would provide an incentive for the replacement of the 
36,226 chillers still in use as of January 1, 2004, that use 
chlorofluorocarbon (CFC) refrigerants. This represents 45 percent of 
the original 80,000 CFC chillers banned from production in the United 
States in 1995 due to concerns over the impact of CFCs on the 
environment.
    H.R. 3953, the Cool and Efficient Buildings Act, would make a 
common sense change to the U.S. Tax Code to the benefit of the U.S. 
economy and all Americans. I would like to express my appreciation to 
the 23 Members of Congress who have joined me in co-sponsoring H.R. 
3953 and the various organizations that support this measure, including 
Air Conditioning Contractors of America; the Air-Conditioning and 
Refrigeration Institute; Associated Builders and Contractors; the 
Council for an Energy Efficient Economy; and Sheet Metal Air 
Conditioning Contractors National Association.
    Mr. Chairman, thank you again for the opportunity to speak before 
your Subcommittee.

                                 

    [The prepared statement of Mr. Edwards follows:]
 Statement of The Honorable Chet Edwards, a Representative in Congress 
                        from the State of Texas
    Mr. Chairman:
    I come before you today to support H.R. 720, the Sales Tax Equity 
Act, an important piece of legislation I have cosponsored that was 
introduced by my colleague Rep. Kevin Brady, a leader who has worked 
hard to create an equitable Tax Code for all taxpayers.
    This bill, H.R. 720, provides much needed tax relief for moderate 
and middle income families in my district by restoring the sales tax 
deduction Congress eliminated in 1986 to allow taxpayers in all states 
to deduct their state sales taxes. This would end the unfair 
discrimination against Texas taxpayers who do not have a state income 
tax and currently cannot deduct sales taxes on their federal income tax 
return. Residents of Texas, Florida, Washington, Tennessee, South 
Dakota, Nevada, and Wyoming pay more in federal taxes than residents of 
equal income in other states because these seven states do not have an 
income tax and cannot deduct sales taxes.
    This bill restores tax equity by providing for the highest 
deduction: sales or income to be deducted from your federal tax return. 
Studies indicate that an average family of four can save nearly $300 
off federal income taxes yearly under this proposal.
    In Texas, State Comptroller Strayhorn estimates this legislation 
could create over 16,500 new jobs, $623 million in new investments, and 
$923 million in increased gross state product and other states could be 
expected to benefit comparably.
    This provision has broad bipartisan support as well as the support 
of respected organizations such as the National Conference of State 
Legislatures, the National Taxpayers Union and the National Governors 
Association.
    This is simple--the federal government simply has no right to 
discriminate against Texas taxpayers. And it should not be in the 
business of telling the state what to do with its tax decisions. A 
sales tax deduction would not only lower taxes for people in my 
district, it would result in more jobs, and a better overall economy.
    The bottom line is that this bill treats taxpayers in all 50 states 
fairly and ends the federal bias against sales tax restoring equity 
among all taxpayers. It is the right thing to do for our citizens, our 
economy, and I hope you will carefully consider this important piece of 
legislation.
    Thank you.

                                 

    [The prepared statement of Mr. Saxton follows:]
  Statement of The Honorable Jim Saxton, a Representative in Congress 
                      from the State of New Jersey
    Mr. Chairman, colleagues, I thank you for your time today and for 
the opportunity to appear before you to discuss a matter of great 
importance.
    I have recently introduced the Reservist Employment Act of 2004 and 
the Veterans' Employment Act of 2004 for the consideration of the 108th 
Congress. Similar in language, each of these bills offers a tax credit 
of 1,000 dollars to employers every three years for each veteran or 
reservist in their employment. With the implementation of these 
credits, this legislation would effectively promote the employment of 
those who have served in our nations armed services; and further 
support the many businesses that employ our veterans and reservists 
nationwide.
    Although active in all sectors of America's economy, our veterans 
too often see limitations in the availability of civilian employment 
opportunities. While federal service positions offer some preferences 
to veterans, such provisions are not universal in private industry. For 
many seeking a position in the private sector, the search for 
employment proves long and arduous. With over 6 million of our veterans 
currently unemployed, these men and women need this assistance now more 
than ever.
    During their time in the service, our veterans acquire personal 
attributes that private employers find imperative in today's business 
world. While serving in the armed services, these men and women 
consistently demonstrate a high level of adaptability; the ability to 
work within a team; a strong work ethic; and, more often than not, 
exemplary leadership qualities. Alongside the extensive technical and 
strategic training sustained during their service, the character 
displayed by our veterans should be sufficient to secure them steady 
employment. Unfortunately, we have been shown too often that this is 
not the case.
    During my tenure in Congress, many of my constituents have 
expressed to me their frustration with the lack of availability of 
steady, well paid employment opportunities. Unlike their non-veteran 
contemporaries, they often find employers unfamiliar with the extensive 
training and experience accumulated during their years of service. With 
such skill sets and experience, our veterans most certainly deserve 
broader employment opportunities.
    Similar to our veterans, our reservists are also finding immense 
challenges in the civilian job market. Now as never before, our 
reservists need assistance securing steady employment. Given their 
exemplary character and training, we cannot give private industry any 
justification for not hiring these men and women. As some of the most 
well trained and productive members of our workforce, our reservists' 
credentials should promote their ability to gain employment, not 
inhibit it.
    Due to the limited time commitment typical of an inactive reserve 
member, full-time employment proves absolutely essential to nearly all 
of our reservists. Although many of them serve their country in federal 
service positions, most of our reservists seek employment within the 
private sector. While employers should be familiar with the 
responsibilities of our reservists, the War on Terror has greatly 
increased the possibilities of activation, and, in most cases, 
increased the nature of deployment.
    Since the War on Terror began, the fundamental organization of our 
reserves has changed dramatically and will continue to do so as the war 
progresses. With increasing unpredictability in deployment, the 
stability of a reservist's participation in a civilian job has too been 
altered. As many employers rely heavily on their reservist employees, 
their temporary absence often proves detrimental to these businesses; 
and, although current law prohibits employers from terminating these 
individuals during activation, this provision does not correct the 
potential financial burdens these companies may sustain.
    In a recent letter from one of my constituents, a small business 
owner expressed his dismay over the activation of his reservist 
employee. Hired for his exceptional engineering experience, this 
reservist represents what the employer deemed `his company's most 
valuable asset.' With a staff of only four employees, this gentleman 
will potentially incur the loss of 25 percent of his workforce; and, 
although he may keep his business afloat through temporary employment, 
he will certainly suffer financial loss in the wake of this reserves 
absence. With such sacrifices from American businesses, we need to 
further ensure that our companies may amply withstand these setbacks.
    In recent days, President Bush and his administration announced 
their continuing support for the employment protection of our 
reservists. While I applaud the President's resolve to improve 
employment protection for our troops, we, in Congress, must further 
this cause by passing legislation that encourages reservist employment.
    In the midst of economic recuperation, the American economy has 
seen both an impressive rate of job creation and increasingly 
remarkable level of productivity. After months of economic uncertainty, 
the growth potential exhibited in recent months proves encouraging to 
the future development of American industry. While all areas of our 
government strive to support this recuperation, we do not want to 
inhibit this support with the disruption of our efforts over seas; nor 
do we wish to leave our service men and women out of such growth 
opportunities. As our troops protect the security of America's future 
abroad, I implore you to secure their future at home. Thank you.

                                 

    [The prepared statement of Mr. Fossella follows:]
Statement of The Honorable Vito Fossella, a Representative in Congress 
                       from the State of New York
    Not to be confused with Capital Gains, there is currently a 
deduction for Capital Losses incurred during a year. Under current law, 
taxpayers can deduct a maximum $3,000 from their investment losses. 
However, this $3,000 limit has not been increased or even adjusted for 
inflation since 1978.
    In the 108th Congress, several bills have been introduced to update 
the law, including H.R. 572 (my own bill) and H.R. 4075 (that of Rep. 
Nick Smith). This issue is familiar to Ways and Means--towards the end 
of the 107th Congress a similar approach was endorsed by your Committee 
that would have updated and then indexed the law (H.R. 1619, on 10-8-
02). Unfortunately, the House adjourned before the bill could be 
passed.
    H.R. 572 will update the deduction to $8,250 and index it for 
inflation each year to come. This will save taxpayers and investors 
more than $2.1 billion this year and $24 billion over the next ten 
years. And not just investors, but anyone employed by investors or 
supported by investors will benefit--aiding the entire economy. Those 
hit by the economic downturn of the previous few years will be able to 
save a bit more of their own money to aid the financial recovery.
    I understand the Ways and Means Committee has been swamped with 
work, particularly last year's crucial tax relief package, the Medicare 
Reform bill and the ongoing FSC-ETI debate. However, I am hopeful now 
is the time to revive this issue so that soon it can be passed into 
law. The marginal benefit to the economy during the recovery will pay 
large dividends.
    As the economy and the stock market continue to accelerate, this is 
the perfect time to correct the law without significantly impacting the 
budget--fixing the roof before the next rainy season begins. The 
benefits will be felt most strongly by lower-income Americans, as they 
will appreciate the marginal increase in the deduction most.
    Crucially, families that have lost money in 401k accounts will be 
able to deduct a bigger chunk of their losses to shore up their 
retirement funds. Today, 60% of adults are shareholders. More than 56% 
of the average family's financial assets are composed of stocks and 
mutual funds--16 points higher than a decade ago. 52% of all American 
families (representing 84 million people) are shareholders. It is 
critical that all these people not be unfairly burdened by the outdated 
Tax Code.
    Given this increasing importance of stocks to the economy as well 
as government budgets, updating and indexing this deduction represents 
a solid opportunity to let taxpayers keep more of their money, while 
still not making it so large as to encourage irresponsible investment. 
I thank the Committee for their time and look forward to working with 
them in the future.

                                 

    Mr. MCNULTY. Only the adjournment, Mr. Chairman.
    Chairman MCCRERY. This hearing is adjourned.
    [Whereupon, at 1:25 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]
   Statement of Air Conditioning Contractors of America, Arlington, 
                                Virginia
    The Air Conditioning Contractors of America (ACCA) is pleased to 
provide comments for the record in connection with the September 23, 
2004 hearing of the Subcommittee on Select Revenue Measures of the 
House Committee on Ways and Means on ``Select Tax Issues.'' ACCA 
commends Chairman Jim McCrery (R-LA) and Ranking Member Michael McNulty 
(D-NY) for holding this important hearing to highlight tax issues from 
Members of Congress who do not sit on the House Ways and Means 
Committee.
    ACCA represents the nearly 5,000 men and women who design, install 
and maintain heating, ventilation, air conditioning, and refrigeration 
(HVACR) systems across all 50 states. 75,000 employees in the HVACR 
industry are employed by ACCA member companies.
    Currently, the federal tax code for the depreciation holding period 
for commercial HVACR equipment is 39 years. This is not beneficial to 
owners of commercial buildings because the equipment lifespan of 
properly maintained HVACR equipment is 15 to 20 years. As a result, 
commercial building owners have no incentive to replace older, less 
efficient equipment with newer, more energy efficient HVACR equipment 
because of the 39 year holding period. ``The Cool and Efficient 
Buildings Act,'' H.R. 3953 sponsored by Representative Peter Hoekstra 
(R-MI), would resolve this problem.
    H.R. 3953 reduces the 39 year depreciation holding period to a 
realistic 15 year depreciation holding period for HVACR equipment. 
Because most HVACR equipment has an optimum lifespan of 15 to 20 years, 
H.R. 3953 provides a realistic recovery period, thereby providing an 
incentive to commercial building owners to replace older equipment with 
new equipment.
    In addition to providing a realistic depreciation schedule, H.R. 
3953 also encourages energy conservation. In the past 15 years there 
have been dramatic changes in HVACR technology, making the equipment 
manufactured today extremely energy efficient. The HVACR systems now 
being installed in America's homes and businesses make obsolete many of 
the commercial heating and cooling systems in use today. Providing a 
financial incentive to building owners now would encourage them to 
upgrade to more energy efficient equipment instead of waiting until 
their obsolete equipment breaks down, which is the current practice 
today.
    H.R. 3953 also provides the following benefits:

      New equipment to better manage indoor air quality, 
providing healthier indoor environments, which leads to less worker 
absenteeism and greater productivity.
      Higher efficiency equipment will greatly reduce carbon 
dioxide emissions.
      Increasing the turnover of outdated equipment will 
produce additional manufacturing and service jobs, thus further 
stimulating the economy.

    Passage of H.R. 3953, the ``Cool and Efficient Buildings Act,'' can 
help upgrade the nation's HVACR equipment and promote energy efficiency 
and savings. We applaud Representative Peter Hoekstra, as well as 
original cosponsor Representative Stephanie Tubbs Jones (D-OH), for 
sponsoring this legislation that creates jobs, provides healthier 
indoor environments and reduces carbon dioxide emissions. ACCA strongly 
urges the Subcommittee Members to consider this legislation that 
reduces the depreciation period of commercial HVACR equipment from 39 
to a more realistic 15 years.
    Thank you for the opportunity to submit this statement for the 
Record.

                                 

                 American Institute of Certified Public Accountants
                                               Washington, DC 20004
                                                    October 7, 2004
The Honorable Jim McCrery
Chair, Subcommittee on Select Revenue Measures
1102 Longworth House Office Building
U.S. House of Representatives
Washington, DC 20515

The Honorable Michael R. McNulty
Ranking Member, Subcommittee on Select Revenue Measures
1102 Longworth House Office Building
U.S. House of Representatives
Washington, DC 20515

Dear Chairman McCrery and Ranking Member McNulty:

    The American Institute of Certified Public Accountants (AICPA) is 
pleased to submit our statement in support of allowing small businesses 
the flexibility to adopt any fiscal year end from April through 
November for tax purposes, as proposed in the Small Business Tax 
Flexibility Act of 2003 (H.R. 3225) for the record of the 
Subcommittee's September 23, 2004, hearing. We believe this bill will 
improve the Internal Revenue Code and will give small business start-
ups the fiscal year options that will improve their chances of becoming 
productive, viable and valuable contributors to the American economy. 
Our detailed comments are attached.
    The AICPA is the national professional organization of certified 
public accountants comprised of more than 350,000 members. Our members 
advise clients on federal, state, and international tax matters, and 
prepare income and other tax returns for millions of Americans. They 
provide services to individuals, not-for-profit organizations, small 
and medium-sized businesses, as well as America's largest businesses.
    Small businesses are the primary source of the Nation's job 
creation and economic growth. To make these important contributions, 
start-up businesses must survive. Census data indicates that 20 percent 
of start-up businesses fail after only one year. After 10 years, 70 
percent of these businesses no longer exist. Small Business 
Administration research indicates that most small businesses struggle 
with operational, financial, and tax problems. These problems dominate 
bankruptcy-filing statistics.
    H.R. 3225 would give most small start-ups an additional tool to 
successfully navigate their turbulent beginnings--the flexibility to 
adopt any fiscal year-end from April through November. This flexibility 
would increase the prospects for a small business's survival by:

      Allowing increased productivity during peak business 
periods by easing recordkeeping burdens.
      Increasing access to professional advisors by spreading 
the advisors' workloads out over more of the year.
      Granting access to marginal amounts of additional 
operating resources through short tax deferrals.

    The seemingly straightforward requirement that most passthrough 
entity start-ups must use calendar year-ends creates unintended 
problems for new businesses passing their financial results through to 
their owners. Almost every one of these start-ups must--regardless of 
(1) when they began or (2) their natural business cycle--finalize their 
first-time financial and tax information during the busiest period for 
the very tax professionals they must rely on so heavily. By allowing 
these new and often-fragile businesses the flexibility to move their 
year-ends outside the regular ``tax season,'' Congress could improve 
their chances for longer-term survival and support the newest small 
businesses that form the solid foundation of the American economy.
    We appreciate the opportunity to continue working with the 
Subcommittee on Select Revenue Measures, the Ways and Means Committee, 
Congress, Treasury, and the IRS to reach our common goals of 
simplifying and improving our tax laws. We would be pleased to discuss 
this issue further at any time.
            Sincerely,
                                                   Robert A. Zarzar
                                                              Chair
                                            Tax Executive Committee

                               ----------

           AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
         FISCAL YEAR FLEXIBILITY FOR START-UP SMALL BUSINESSES
                                Overview
    Small businesses are one of the main drivers of the Nation's job 
creation and economic growth. Start-up survivability is a critical area 
of concern that has been studied by the Small Business Administration 
\1\ and others. Census data, as shown in the chart below, indicate that 
after only one year, 20 percent of start-up businesses have 
disappeared. After 10 years, 70 percent of these businesses no longer 
exist.\2\ SBA research indicates that most small businesses struggle 
with operational, financial, and tax problems. These problems dominate 
bankruptcy-filing statistics.\3\ H.R. 3225 proposes giving most small 
business start-ups an additional tool to successfully navigate its 
start-up life cycle by providing the flexibility to adopt any fiscal 
year-end from April through November. This flexibility would increase a 
small business's prospects for survival by:
---------------------------------------------------------------------------
    \1\ FY 2001-2006 SBA Strategic Plan.
    \2\ ``The Estimated Revenue Effect of H.R. 3225, the Small Business 
Tax Flexibility Act of 2003,'' PricewaterhouseCoopers LLP, October 
2003.
    \3\ Financial Difficulties of Small Businesses and Reasons for 
Their Failure, SBA-95-0403, 9/98.

      Allowing increased productivity during peak business 
periods by easing recordkeeping burdens.
      Increasing access to professional advisors by spreading 
the advisors' workloads out over more of the year.
      Granting access to marginal amounts of additional 
operating resources through short tax deferrals.
                 ESTABLISHMENT SURVIVAL AND DEATH RATES
 [For enterprises with 40 or fewer employees at time of establishment 
                               formation.
  Based on Census data for establishments formed in 1990 through 1995]

[GRAPHIC] [TIFF OMITTED] 23798A.001


                              Current Law
    Under current law only C corporations may elect any tax year of 
their choosing. However, S corporations and entities treated as 
partnerships--including most limited liability companies, general 
partnerships, and limited partnerships--(collectively, ``flowthrough 
entities'') generally must adopt a December 31 calendar year-end or the 
year-end of the flowthrough entity's majority owners, which is often 
December 31 \4\ unless a business purpose test \5\ is met or unless a 
section 444 election \6\ is made.
---------------------------------------------------------------------------
    \4\ Section 806 of The Tax Reform Act of 1986 required S 
corporations, personal service corporations and trusts to adopt 
calendar years. The 1954 Code already required all new partnerships to 
use December 31 year-ends.
    \5\ Partnerships or S corporations satisfying the business purpose 
tests under reg. sections 1.706(b)(1)(B)(i) and 1.1378(b)(2) may apply 
to use a ``natural business year.'' However, the IRS grants few 
requests under the current, restrictive rules.
    \6\ The Omnibus Budget Reconciliation Act of 1987 provided some 
relief from fiscal year conformity but further rate changes (from the 
then-28% highest rate to the now-35% highest rate) in the tax law soon 
thereafter made this relief impractical. Section 444 permits businesses 
to elect fiscal years, but requires electing entities to maintain a 
deposit with the Treasury Department equal to the amount of deferred 
income tax, calculated by multiplying the income deferred by the 
highest marginal individual income tax rate plus one percentage point. 
Few entities can utilize the election now because of the high cost and 
the limited deferral time permitted.
---------------------------------------------------------------------------
                           Reasons For Change
    Requiring calendar year-ends for most passthrough entity start-ups 
creates an unintended problem for businesses passing their financial 
results through to their owners for inclusion in the owners' annual tax 
calculation. Applied to virtually every start-up small business in the 
country, these rules result in disruptive and unproductive demands on 
those businesses and their advisors during the same few months every 
year, and create an unnecessary pressure on start-up survivability. The 
substantial workload is compressed into the period from December 
through April. This ``workload compression'' often negatively impacts 
those who can least afford it: most small business start-ups that form 
a solid foundation for the American economy.
    A high number of small business start-ups that will have less than 
$5 million of average annual revenues, and their advisors, are 
disproportionately burdened by this compression, especially in 
comparison with the very modest amount of the nation's taxable business 
income they generate.
    In particular, start-up businesses need extra time and attention 
that is invariably scarce and that commands a premium during the so-
called ``busy season'' from December through April. The first year of a 
business involves making critical decisions that have a significant 
influence on their ability to survive. These decisions include 
determining countless first year elections among the various available 
tax and accounting policies as well as establishing sound, compliant 
and correct business, accounting and tax procedures. In addition to 
other unavoidable calendar year-end responsibilities, start-ups must, 
for the first time, close their books, produce annual financial 
statements for their banks, conclude financial statement audits or 
reviews, and prepare tax returns and tax information for their owners 
well before April 15.\7\
---------------------------------------------------------------------------
    \7\ The IRS has acknowledged the special needs of the small 
business constituency, including start-ups, by creating the Small 
Business/Self-Employed Division. The SB/SE will place a greater 
emphasis on pre-filing activities, such as education, and generally 
ensure that small businesses find tax compliance easier.
---------------------------------------------------------------------------
    Giving small business start-ups the flexibility to choose their 
fiscal year-ends will also facilitate their success in the following 
ways.

      Allowing small business start-ups to spread their 
workloads and ease recordkeeping burdens by adopting a normal operating 
cycle year-end. Most federal and state information and payroll 
reporting requirements must be satisfied on a calendar year basis--
filing Forms 1099 and W-2, and their state equivalents--because these 
reporting requirements principally relate to nonowner calendar year 
taxpayers. Requiring entities to close their books, and where 
applicable, count inventory at the same time of year creates an 
additional and unnecessary burden on small businesses. Permitting 
start-ups to adopt a year-end coinciding with the low point of a 
business's normal operating cycle would allow their paperwork to be 
spread throughout the year and the new entrepreneurs to more closely 
focus on the success of the business, rather than its paper trail.
      Maximizing their access to professional advisors. Small, 
start-up businesses should be able to freely choose their advisors from 
the broadest possible spectrum of qualified advisors. H.R. 3225 helps 
spread out the workload for the advisors, such as CPAs, supporting 
these small business by providing critically needed advice, especially 
to new business operators who are generally less familiar with the full 
spectrum of business and tax responsibilities.
      Providing marginal amounts of operating resources. 
Adoption of a fiscal year would generally encourage capital formation 
through a modest postponement of tax liability for new, growing, 
successful businesses.

    Expanding fiscal year options would also offer advantages to the 
government:

      System processing efficiencies. Our tax system must be 
efficient. Wasted efforts are a drag on the economy. Allowing small 
business start-ups to elect fiscal years would begin to spread the 
IRS's workload out as well by staggering the dates returns must be 
processed by the service centers. Further, requiring a huge number of 
passthrough entities to close their annual accounts at December 31 
means that return preparers cannot physically complete a significant 
number of Forms 1065 or 1120S before the business' owners are required 
to file their individual returns on April 15. The result is an ever-
growing number of Forms 1040 that must be extended each year, solely 
for lack of information from a passthrough entity. H.R. 3225 would 
reduce the need to extend the April 15 deadline for filing individual 
income tax returns because Schedule K-1 information returns from fiscal 
year partnerships and S corporations would be received earlier in the 
recipient's tax year. A start-up business (and therefore its owners) 
almost universally obtains a filing extension to September or October 
to use all available time to manage the new businesses first year tax 
filings. Staggered workloads would also allow tax professionals who 
play a critical role in the nation's self-assessment system to operate 
more efficiently.
      Modest budgetary impact. H.R. 3225 only affects a modest 
number of small entities and has a relatively small budgetary impact 
because the affected entities report only a small amount of taxable 
income to their owners.\8\
---------------------------------------------------------------------------
    \8\ IRS 1992 Statistics of Income (SOI) data indicated that 77.03 
percent of S Corporation returns with positive income report net income 
below $50,000, representing, cumulatively, only 11.66 percent of the 
total positive net income reported on Forms 1120S. 1992 SOI data also 
indicated that 69.63 percent of partnership returns with positive 
income report net income below $50,000, representing, cumulatively, 
only 5.63% of the total positive net income reported on Forms 1065. New 
businesses represent a small fraction of this income.
---------------------------------------------------------------------------
      Focusing on consistency with other small business 
provisions. Both Congress and Treasury have recognized the burden the 
tax laws place on small businesses and adopted Code and administrative 
provisions designed to ease this burden. H.R. 3225 is relatively simple 
and based on existing Internal Revenue Code rules and precedents. For 
example, section 448 permits entities with average gross receipts of 
less than $5 million to use the cash method of accounting, and section 
179 permits small businesses to immediately write off the cost of some 
equipment. More recently, Treasury exempted entities with gross 
receipts under $1 million from the complex inventory rules, and there 
have been legislative proposals to increase this exemption to $5 
million.\9\
---------------------------------------------------------------------------
    \9\ For example, see H.R. 1037, the Small Employer Tax Relief Act 
of 2001.

    Fiscal year conformity causes an unnecessary burden to small 
business start-ups that can be alleviated with modest changes to the 
tax system. Once relieved of these extra pressures, sound new 
businesses will have a greater chance of survivability and for success.
                        Explanation of Proposal
    H.R. 3225 amends the Code by permitting a ``qualified small 
business'' to elect any fiscal year ending on the last day of April 
through November (or at the end of an equivalent annual period (varying 
from 52 to 53 weeks)). Only a new business entity can be a ``qualified 
small business'' and it must elect its fiscal year in its year of 
formation. Specifically, a ``qualified small business'' is any entity 
that:

    1.  Is a newly formed S corporation or a newly formed entity 
treated as a partnership for federal income tax purposes;
    2.  Conducts an active trade or business;
    3.  Is a ``start-up business''; and
    4.  Meets a gross receipts test.

    An entity would qualify as a ``start-up business'' only if no more 
than 75% of the entity is owned by any person who previously conducted 
the same trade or business any time within the previous 12 months. For 
attribution of ownership purposes, husbands, wives and minor children 
(under age 21) are considered one owner.
    An entity would meet the gross receipts test if its average gross 
receipts do not exceed $5 million. Existing rules under section 448(c) 
(3-year test) would be used to determine an entity's average gross 
receipts. Accordingly, when an entity's life is less than 3 years, the 
number of years of existence would be used. In the case of the sale of 
a capital or section 1231 asset, the gain on the sale (not gross 
proceeds) would be used in determining average gross receipts. Multiple 
businesses and complex ownership structures would be aggregated into a 
single ``qualified small business'' using the anti-abuse rules of 
sections 448(c)(2) and 267 (b) and (e).
    Entities that are not ``qualified small businesses'' or that cease 
to qualify (trusts, personal service corporations and flow-through 
entities that are small businesses owned by large partnerships, S 
corporations, or C corporations) would determine their fiscal years 
under existing rules--a ``required'' taxable year; a ``natural'' 
business year; or a ``permitted'' fiscal year as elected under section 
444.
    When the average gross receipts of an otherwise ``qualified small 
business'' exceed $5 million, it must either elect to maintain a 
deposit under section 444 or convert to a permitted year-end under 
existing rules. The entity would report items resulting in net profits 
from its last fiscal year-end to December 31 ratably over the shorter 
of either the number of years its fiscal year was in effect, or four 
years. Net losses would be deducted in the year of change. This would 
mirror existing transition rules under sections 448 and 481, and Rev. 
Proc. 2002-13. Appropriate conforming amendments would also need to be 
made to sections 444, 706, and 1378.
    Under this legislation, each ``qualified small business'' would 
have only one automatic opportunity to adopt a fiscal year. A 
qualifying entity would have to elect a fiscal year for its first year 
of operation on the entity's first filed return of income or default to 
a year allowable under current law.

                                 
 Statement of Andrew Kohn, American Prepaid Legal Services Institute, 
                           Chicago, Illinois
    I am Andrew Kohn, President of the American Prepaid Legal Services 
Institute. The American Prepaid Legal Services Institute (API) is a 
professional trade organization representing the legal services plan 
industry. Headquartered in Chicago, API is affiliated with the American 
Bar Association. Our membership includes the administrators, sponsors 
and provider attorneys for the largest and most developed legal 
services plans in the nation. The API is looked upon nationally as the 
primary voice for the legal services plan industry.
    The hearing today deals with select tax issues. Subcommittee 
Chairman McCrery noted in calling the hearing that it is important to 
hear from non-committee members to discuss tax policies of interest to 
their constituents. I offer this written testimony in support of H.R. 
2031, co-sponsored by Representatives Tom Cole and Brad Carson, from 
Oklahoma, as well as H.R. 973 offered by Representative Dave Camp and 
co-sponsored by 39 other Representatives. The bill amends the Internal 
Revenue Code of 1986 to restore and make permanent the exclusion from 
gross income for amounts received under qualified group legal services 
plans.
    This provision, originally enacted in 1976 and extended on seven 
separate occasions between 1981 and 1991, encourages legal services 
benefits for employees and their families by excluding from income and 
social security taxes employer contributions towards qualified group 
legal services plans. Unfortunately, when this exclusion expired, it 
triggered a tax increase for millions of working Americans whose 
employers contribute to such plans. Currently employees and retirees 
are taxed on the employer's contribution, whether or not they use the 
benefit.
    Large and small employers support group legal plans. The plans 
improve productivity by enabling employees to resolve legal 
difficulties early on before they become more complex, time consuming 
and expensive. By offering an inexpensive and efficient benefit, small 
employers can compete with larger employers for hourly wage workers.
    These plans are also important to employees. With the growing 
complexity of today's world, ordinary citizens need access to 
preventive legal advice. Group legal plans provide employees with low 
cost basic legal services, including assistance with the purchase of a 
home, the preparation of a will, probate services, the resolution of 
domestic relations difficulties, such as child support collection. Many 
plans also offer assistance with elder care issues and the growing 
problem of identity theft. Plans generally do not allow for suits 
against the employer, class actions or fee generating cases.
    More than 8 million working Americans and their dependents are now 
covered by legal plans. They are offered by such national companies as 
Caterpillar, DiamlerChrysler, J.I. Case, Mack Truck, John Deere, Ford 
Motor Company, General Motors, and thousands of small businesses.
    Many people do not realize that Group Legal plans cover not only 
active workers but also cover retirees and surviving spouses. For 
example, one group of 26 auto manufacturing companies alone, including 
Ford, GM, DaimlerChrysler, American Axle, Delphi and Visteon and 
others, provide a group legal benefit for 475,000 retirees and 
surviving spouses.
    In fact, much of the legal work done by legal plan attorneys is 
designed either to prepare workers for retirement or to handle issues 
that arise after retirement.
    Retirement is a complex task today. Those individuals anticipating 
retirement must consider how to:

      Protect their spouses and children in the event of death.
      Anticipate the need for nursing home care, as well as 
Medicare and Medicaid issues.
      Instruct medical professionals on how they want to be 
treated in the event of a serious illness or a life threatening 
accident.
      Instruct family members on how they want their property 
handled in the event of incapacitating illness or accident.
      Address financial issues in the face of a decreased 
income.

    Legal plans provide the advice and legal documents to accomplish 
these tasks including wills and trusts, powers of attorney, living 
wills/medical directives, guardianship and conservatorships, nursing 
home contract review, Medicare and Medicaid appeals and home 
refinancing document review. To implement a comprehensive financial and 
retirement plan, legal documents must be drafted; legal plans provide 
this service quickly and economically. These important legal services 
provide retirement security.
    Legal plans also provide a significant educational benefit on a 
multitude of issues important to working and retired Americans and are 
a vital component of any retirement education plan. Legal plans:

      Educate consumers about budgeting and debt problems.
      Present seminars on preparing for retirement covering 
estate planning, social security and review of IRA's, including such 
issues as what to do with the IRA when the first spouse dies.
      Educate clients on how to avoid identity theft and what 
steps to take if a client is a victim of this crime.

    While qualified employer-paid plans have proven to be highly 
efficient, there is still a cost to the employer for providing this 
aspect of retirement security. Employers must pay an additional 7.65 
percent of every dollar devoted to a legal plan as part of its payroll 
tax, whether for an active employee or a retiree. Both employees and 
retirees are taxed on the benefit whether they use it or not in any 
given year.
    As employers seek to reduce or eliminate benefits in general, 
targeting benefits that are not tax preferred are high on employers' 
lists. Recently this trend toward reducing benefits has taken a toll on 
existing group legal plans. Large employers such as Rouge Steel, Delphi 
and Visteon have either dropped the benefit entirely or created a two-
tier benefit system that eliminates group legal for their newest 
employees. The lack of a tax preference for group legal plans makes the 
benefit vulnerable for reduction or elimination by employers.
    Benefit to retirees and the value of the legal services far exceeds 
the cost of the plan. Many a retiree has commented that without a legal 
plan they did not have the money to hire an attorney to solve their 
legal problem, which could be as serious as defending against a 
wrongful foreclosure. Yet plans with retirees are the most vulnerable. 
In more mature industries, far fewer active workers exist to support 
the retiree community. These so called ``legacy costs'' drive the 
efforts to reduce costs.
    Still employers can provide a substantial legal service benefit to 
participants at a fraction of what medical and other benefit plans 
cost. For an average employer contribution of less than $100 annually, 
employees and retirees are eligible to utilize a wide range of legal 
services often worth hundreds and even thousands of dollars, which 
otherwise would be well beyond their means.
    H.R. 973 and H.R. 2031 are identical and include a straight-forward 
proposal which would repeal this tax increase, restore equity to the 
tax treatment of this benefit and ease the administrative burden on 
employers. This will also demonstrate to small and large businesses and 
the millions of hard-working low and middle-income workers, not only 
that this Congress supports them, but that the tax code can be 
beneficial for them.

                                 
                Statement of The Bond Market Association
    The Bond Market Association appreciates the opportunity to propose 
ways to simplify and improve the U.S. tax code. The Bond Market 
Association represents securities firms and banks that underwrite, 
trade and sell debt securities both domestically and internationally. 
The Association's membership accounts for approximately 94 percent of 
the nation's bond underwriting activity.
    We commend Chairman McCrery for considering the question of 
simplifying and improving the tax code and requesting public input. As 
representatives of the $1.9 trillion municipal bond industry, The Bond 
Market Association is focused on those changes to the current tax code 
that would promote the most efficient use possible of the tax exemption 
for municipalities Congress created 91 year ago. Every year, state and 
local governments save tens of billions of dollars in interest expense 
due to the tax exemption. This savings makes it possible to finance 
schools, roads, airports, environmental infrastructure, low-income 
housing and a variety of other capital projects affordably and 
efficiently. States and localities currently face significant fiscal 
constraints brought about by a weak economy, a poorly performing stock 
market and increasing pressures on spending. The ability to realize 
even more savings through a more efficient tax code is more important 
than ever to state and local governments.
    In response to Chairman McCrery's request for proposals to simplify 
and improve the tax code, the Association proposes a number of common 
sense changes to provisions that, in one form or another, put 
restraints on the municipal bond market. Over the past decades, the tax 
code has generated rules that unnecessarily limit the use of proceeds 
of tax-exempt bond issuance as well as limit the market for these 
securities. Both of these outcomes drive up the cost of borrowing for 
our nation's states and municipalities. The following proposed changes 
would simplify the tax code, reduce compliance costs and make the 
municipal bond market more efficient, which will lead to lower state 
and local borrowing costs. While this statement presents several 
longstanding Association initiatives to simplify the code as it relates 
to tax-exempt bonds, we look forward to a continuing dialog with 
subcommittee members on a broader group of legislative tax issues 
affecting tax-exempt bonds as well as other sectors of the bond 
markets.
Overhaul the AMT
    Congress enacted the alternative minimum tax (AMT) in 1969 to 
ensure all corporate and individual taxpayers pay at least a minimum 
level of taxes. As is sometimes the case with tax policy, however, the 
AMT threatens unintended consequences. Because the standard income 
exemption amount under AMT is not indexed to inflation, the 
Congressional Budget Office estimates the number of individual 
taxpayers subject to the tax will grow to 30 million by 2010, up from 
605,000 in 1997.
    The unintended consequences of the AMT also reach the municipal 
securities market effectively increasing the cost of financing public 
projects for state and local governments. In considering AMT reform, 
Congress should look not only at the direct effect on individual 
taxpayers, but also the indirect effect of higher public borrowing 
costs.
    Municipal securities are typically exempt from taxation with the 
exception of private-activity bonds whose proceeds benefit a private 
party for an approved project and whose source of repayment comes from 
a private source. Private-activity bond interest is subject to both the 
individual and corporate alternative minimum tax. This means 
investors--should they fall under the AMT--will owe a tax on what would 
otherwise be tax-exempt income. To offset this risk, both individual 
and corporate investors in private-activity bonds demand a yield 
premium that has averaged 25 to 40 basis points, over time.
    In addition, the corporate AMT limits demand for municipal bonds 
among property and casualty insurance companies (P&C) who--due to tax 
code restraints on other corporate investors--are the major source of 
corporate investors in municipal bonds. The Internal Revenue Code also 
subjects a portion of interest on public purpose tax-exempt bonds and 
on tax-exempt bonds issued on behalf of tax-exempt 501(c)(3) 
organizations to the corporate AMT. Since 1990, 75 percent of the 
interest on public purpose and 501(c)(3) bonds have been subject to the 
AMT under the ``adjusted current earnings'' provisions. The corporate 
AMT rate is 20 percent so corporations affected by the AMT effectively 
pay a tax rate of 15 percent on tax-exempt interest on public purpose 
and 501(c)(3)bonds.
    The after-tax return on municipals for corporations who pay the AMT 
is low relative to other investment options for P&Cs who find 
themselves under the AMT, rather than the ordinary corporate income 
tax. This creates an incentive for P&Cs to sell municipal bond holdings 
as they approach a point where they should be subject to the AMT. This 
effect is particularly pronounced in times such as the aftermath of a 
major natural disaster when P&Cs must sell assets to pay inordinately 
high damage claims. Ironically, such claims tend to cause P&Cs to 
become AMT payers. Excess AMT liability can be carried forward as an 
ordinary income tax credit in future years. Under some conditions, this 
could cause P&Cs to stay out of the municipal bond market for years.
    The yield premium created by the narrowing of demand for private-
activity bonds translates into higher borrowing costs for the states 
and localities that issue private-activity bonds to finance projects. 
And, if current trends continue, the premium is likely to rise. As more 
and more investors fall under the AMT, the pool of private-activity 
bond investors grows smaller. Until the problem is addressed by 
Congress, either through a broad-based reform or a targeted exemption 
for private-activity bonds, decreased demand for these bonds will 
continue to put upward pressure on yields and raise the cost of 
financing public projects.
    One approach to addressing problems with the individual AMT would 
be to address the overall policy problem of a lack of indexing for the 
AMT exemption. This approach would mitigate, but not, however, solve 
problems raised by applying the individual AMT to private-activity bond 
interest. The best approach for Congress would be to eliminate the 
application of the AMT to private-activity bond interest. It is likely 
that such an approach would have little to no affect on federal 
revenues, since few AMT payers buy private-activity bonds.
Repeal of the 10-Year Rule for Mortgage Revenue Bonds
    State and local housing finance agencies (HFA) will lose an 
estimated $12 billion in mortgage authority, or the equivalent of about 
150,000 mortgage loans, by 2005 unless the 10-year rule is repealed. 
The 10-year rule requires HFAs to use principal repayments and 
prepayments from mortgages to retire mortgage revenue bonds (MRB) that 
are more than 10 years old rather than make new mortgage loans to low- 
and moderate-income homebuyers. The Association supports legislation to 
repeal the rule.
    In 1988, Congress anticipated the end of the MRB program and 
enacted the 10-year rule in an effort to terminate the tax-exempt bonds 
associated with the program. But Congress did not end the program in 
1988 as expected and in 1993 made the MRB program permanent. Now, 16 
years later, HFAs are losing billions of dollars in mortgage authority 
because of the 10-year rule's prohibition on re-lending mortgage 
repayments. HFAs prefer to use the repayments to make new mortgage 
loans or to refund existing bonds to finance new mortgage loans.
    Giving the agencies more flexibility with the use of mortgage 
repayments by repealing the 10-year rule will increase the mortgage 
authority of HFAs in two ways. The repayments can be re-loaned as new 
mortgages. Or, given favorable interest rates, HFAs can use the 
repayments to refund outstanding bonds and make more loans at lower 
rates.
    In periods of lower interest rates, prepayment rates on home loans 
tend to rise as homeowners try to save money through refinancing. 
Similarly, lower interest rates offer HFAs the chance to save on 
interest costs through a refunding, the process of issuing a new bond 
at a lower rate and using the proceeds to retire the existing higher-
rate bonds. Repealing the 10-year rule would allow HFAs to leverage 
repayments this way by making new mortgages with the proceeds of the 
refunding. As a result, a larger volume of mortgage loans would be 
available for families that would otherwise have a difficult time 
borrowing in the conventional mortgage market.
    Pending legislation to repeal the rule, introduced in both the 
House and the Senate, has garnered significant support. H.R. 284 
currently has 350 cosponsors; S. 595 has 72. During the 107th Congress, 
identical legislation had 360 cosponsors in the House and 75 Senate 
cosponsors.
Small-Issuer Arbitrage Relief
    Arbitrage regulations under the U.S. tax code limit the rate of 
return issuers of tax-exempt bonds can earn on the proceeds of tax-
exempt bonds. Issuers--particularly those using bonds to finance 
construction--need to keep bond proceeds in an escrow account. The 
earnings on these escrow accounts must be disclosed to the IRS in a 
filing to determine whether the issuer must rebate any ``arbitrage'' to 
the government. This arbitrage rebate calculation is complicated and 
expensive. For that reason, school districts that issue bonds for 
construction have been exempt from the rebate rule if their total 
issuance is less than $10 million annually with at least $5 million 
devoted to school construction. This issuance limit for small issuer 
arbitrage rebate exemption should be increased to $15 million provided 
that at least $10 million of that total finances school construction 
and then indexed to inflation to keep pace with rising construction 
costs. The Association does not advocate changes to the rules on yield 
restrictions.
Extend the Construction Spend-Down Period
    As long as a local government spends the proceeds of a bond issue 
on a construction project according to a schedule where virtually all 
the proceeds are spent within two years, that bond is not subject to 
certain arbitrage rebate rules. This exemption is useful in reducing 
the cost of state and local construction projects. However, the two-
year schedule often limits the usefulness of this exemption for 
municipalities that undertake multi-year construction and financing 
plans. Congress should extend the construction spend-down exemption 
from two years to four for bonds issued to finance the construction of 
public projects.
Increase Access to Industrial Development Bonds
    Under current law, an issuer is eligible to use ``small issue'' 
industrial development bonds--to finance small, job-creating 
manufacturers--if their total capital expenditure during the six-year 
period around the date of issuance does not exceed $10 million. This 
figure was set 25 years ago and since then its purchasing power has 
declined 50 percent. Congress should double the IDB capital expenditure 
limit to $20 million and index the amount to inflation ensuring this 
important financing tool will remain useful to small manufacturers in 
the future. A similar proposal is currently pending before Congress and 
is under consideration as part of H.R. 4520, the ``American Jobs 
Creation Act of 2004.''
Conclusion
    The Bond Market Association appreciates the opportunity to share 
with the Subcommittee our members' views on simplifying and improving 
the tax code. All of the foregoing proposals, if adopted, would improve 
the efficiency of the tax code and serve to lower the financing costs 
of tax-exempt bond issuers.

                                 
Statement of Timothy J. Carlson, Coalition for Tax Fairness, Arlington, 
                                Virginia
    The Alternative Minimum Tax (``AMT'') has received substantial 
negative press because of its many anomalous provisions; in some cases, 
it is forcing taxpayers into bankruptcy by imposing tax rates of 300% 
or more of their income. While we recognize that a repeal of the entire 
AMT, even a repeal of certain AMT provisions, may not be feasible at 
this time, it is imperative that Congress focus on those taxpayers whom 
the AMT's unintended consequences are most seriously harming, and 
rectify the AMT's most dangerous provision, the Incentive Stock Option 
(``ISO'') rule. Therefore, as an organization devoted to resolving the 
AMT/ISO problem, we offer below a recommendation that would allow the 
Congressional purpose of the AMT to remain intact while providing a 
simple, principled, and equitable solution to the problem, for all 
taxpayers.
I. Background
    During the 1990s, many employers offered ISOs as compensation to 
attract more talented employees than they could otherwise afford. 
Congress encouraged this type of employee investment in their companies 
and in the economy by creating tax rules that did not tax ISOs upon 
their exercise and encourage a quick sale, but instead rewarded 
taxpayers by offering the more favorable capital gains tax rates to 
those who held their stock for one year.
    Due to the complexity of the AMT, most specifically the ISO 
provision, the AMT eliminated these benefits without any warning and 
sent taxpayers into a downward spiral from which many have yet to 
recover. The AMT taxed the transaction on the exercise date as though 
the taxpayer actually sold the stock immediately and realized a gain, 
even though he did not receive any actual gain; the AMT caused these 
massive prepayments on phantom income. Although the language of the AMT 
provides for a credit related to these prepayments, for these 
entrepreneurs and company employees subjected to this AMT, the 
prepayments have become interest-free loans to the Government that, due 
to further quirks in the law, will never be repaid or credited. Those 
taxpayers who do not have the resources to make these massive interest-
free loans to the Government are incurring interest and penalties. Many 
have lost (or are in the process of losing) their homes, retirement 
savings, and college savings--while the prepayments they are making 
build up more useless tax ``credits.'' Those who exercised ISOs, in the 
years 1999-2003 especially, and did not immediately sell (in many cases 
upon the advice of their trusted advisers) continue to suffer greatly 
at the hands of the AMT. Adverse market conditions and a conflict 
between the tax and securities laws have exacerbated the problem.
II. Summary of Proposal
    The proposal contained herein will alleviate current and future 
suffering through targeted and principled measures that will prevent 
similar results from occurring in the future. Our proposal better 
matches the regular tax code's incentives with the AMT's enforcement 
goals, as follows:

      Immediate Relief: Although the proposal summarized 
immediately below presents a comprehensive solution, in the time it 
takes for this proposal to become law, many taxpayers affected by the 
ISO provision will lose their homes. The IRS erroneously has taken the 
position that it is required to enforce the letter of this law, without 
compromise. Congress has already begun efforts to compel the IRS to 
temporarily halt enforcement of this provision or enter into offers-in-
compromise, and must continue support of these efforts.
      Valuation Date: This proposal matches (a) the date on 
which the AMT values the ``economic gain'' earned through the exercise 
of ISOs with (b) the date on which the underlying stock becomes a long-
term capital asset (the later of two years from grant, or one year from 
exercise). Currently, the AMT values the ``gain'' on the day of 
exercise, ignoring any subsequent changes in valuation.
      Sale of Stock: This proposal allows the taxpayer to 
follow Congress's intent and hold the stock until it becomes a long-
term capital asset. Taxpayers can then satisfy their AMT and regular 
tax liability by paying the correct proportionate amount of the sale 
proceeds. Under current law, the AMT may force (a) an early sale of 
stock, subjecting the taxpayer to higher ordinary income tax rates, or 
(b) a later sale of depreciated stock. In either case, the proceeds of 
the sale may be insufficient to satisfy the AMT liability.
      AMT Credit: This proposal synchronizes the return of 
stock-generated AMT credit (prepayment of regular tax), with the 
stock's sale. This appropriately matches true economic gain taxed under 
the AMT with the results correctly determined under the regular tax 
code.
      Voluntary Compliance: This proposal will be correctly 
recognized by taxpayers as equitable, but further reinforces compliance 
by providing for corporate ``matching'' reporting to the IRS of 
employees' ISO exercises, thereby increasing voluntary compliance and 
ensuring everyone pays their fair share. Additionally, this proposal 
encourages those who have failed to report past ISO exercises to come 
forward and report such exercises in the current year. This measure 
serves to increase the amount of revenues collected, without 
significant enforcement efforts. A provision is proposed to 
prospectively institute mandatory reporting of ISO exercises, without 
any additional administrative cost, thereby substantially increasing 
tax revenues.

    The AMT's application to ISOs is causing unintended, egregious, and 
devastating tax burdens on honest taxpayers, and hobbling the very 
entrepreneurial drive that has made small business a powerful engine of 
the U.S. economy. If a change is not made, this situation will recur 
and worsen. This proposal addresses the unintended and unfair 
consequences being suffered by these and other taxpayers, so citizens 
can spend their ambition, time, and effort growing the U.S. economy--
rather than fighting unjust tax laws.
    This proposal's overarching goal is to maintain the AMT as a 
separate tax system and to tax (so-called) economic wealth on a current 
basis. It also reflects Congress's intent regarding the purpose and 
prevalence of ISOs in today's marketplace. By synchronizing the 
disconnects between the regular tax and the AMT's treatment of ISOs, 
this proposal preserves the AMT's prepayment aims while helping 
entrepreneurs return to a position of bolstering this nation's economy. 
We urge you to adopt this recommendation, for the good of the economy 
and to give taxpayers the fair treatment they deserve.
III. Details of Proposal
    This proposal would (A) provide immediate relief to affected 
taxpayers, pending enactment of further legislation, and (B) amend the 
Internal Revenue Code of 1986 to (a) synchronize the AMT prepayment 
rate imposed on the exercise of ISOs with the tax rate to which any 
gains are subject upon the sale of such stock; synchronize the AMT 
valuation date with the date upon which the stock becomes a long-term 
capital asset, thereby ensuring that the AMT prepayment rate does not 
undermine Congressional intent to encourage long-term stock ownership 
and the building of shareholder value; and accelerate the AMT credit to 
better reflect Congress's original intent in enacting the AMT 
provisions; and (b) provide fair and just relief to taxpayers (1) who 
are currently unable to prepay the full AMT arising from their exercise 
of ISOs, or (2) who have prepaid a significantly disproportionate AMT 
arising from their exercise of ISOs, due to the subsequent 
unprecedented drop in stock values and the unintended resulting 
imposition of an AMT on phantom value that the taxpayers never 
realized, at a higher rate than Congress intended. The proposal will 
also add a measure to increase voluntary taxpayer compliance and the 
amount of revenues collected.
SECTION 1. Offers-In-Compromise.
    Concept: Immediately resolve, or otherwise provide instructions to 
the Internal Revenue Service and Department of the Treasury, that the 
IRS and Treasury must utilize the flexibility Congress provided the IRS 
under current law: the Special Circumstances and Effective Tax 
Administration provisions of the Offer-in-Compromise (``OIC'') process. 
The IRS categorically and publicly refuses to consider these cases 
under the OIC procedures, regardless of the facts, and action is needed 
to ensure the IRS properly administers these rules. The IRS's 
administration of the OIC procedures have been under scrutiny by bodies 
including the House Ways & Means Oversight Subcommittee, the Senate 
Finance Committee, the National Taxpayer Advocate, and the American Bar 
Association Section of Taxation, and action must be taken immediately.
SECTION 2. For exercises taking place in 2004 and thereafter.
    Concept: Amend, as appropriate, sections 56 through 59 of the 
Internal Revenue Code to provide that:

    (a) Value: For AMT purposes, the value of the deemed income 
generated from the exercise of ISOs will be determined as of:
    (i) the date that is the later of (A) two years from the date of 
the ISO grant, or (B) one year from the date on which the ISO stock was 
transferred to the employee upon ISO exercise (``the anniversary 
date''), under rules similar to those under Sec. 422(a)(1), or
    (ii) the date of disposition (``the earlier disposition date''), if 
earlier.
    (b) Year of Inclusion: The date determined in paragraph (a) in turn 
will determine the year in which such value is included in AMT income.
    (c) Tax Rate:
    (i) General Rule: The tax rate on the value of the deemed income 
generated from the exercise of ISOs should reflect the tax rate that 
would apply under the regular tax code upon a disposition of such 
shares on the valuation date, whether that be the anniversary date or 
the earlier disposition date.
    (ii) Earlier Disposition Date: If the value is determined as of the 
earlier disposition date, then the disposition is a ``disqualifying 
disposition'' as currently defined in the AMT provisions, and the 
income generated by such disposition is taxed as ordinary income in the 
year of the disposition. This provision matches the value, year of 
inclusion, and tax rate to the consequences under the regular tax code. 
This reflects no change from existing AMT rules to the extent the early 
disposition date takes place in the year of exercise.
    (iii) Anniversary Date:
    (A) If the value is determined as of the anniversary date, then the 
shares are deemed sold on that date, and the income deemed generated by 
such sale is taxed as long-term capital gain in the year of the deemed 
sale. This provision strikes a balance between the AMT's need for 
currency of taxation and the regular tax code's recognition of the 
economic benefits of long-term investing.
    (B) As under current AMT rules, at the time of the deemed sale, the 
basis in those shares increases to the amount of the deemed sale. 
Effectively, the shares have been deemed sold, income paid on the 
deemed gain, and then the shares are immediately repurchased.
    (iv) Adherence to Future Changes: The intent of this provision is 
to better align the Congressional intent regarding the AMT with the 
Congressional intent regarding capital assets and incentive stock 
options. Therefore, should the future bring changes to the capital gain 
structure, in terms of timing, asset characterization, or otherwise the 
aforementioned provisions should likewise be changed.
    (d) AMT Credit for Taxable Years Subsequent to Year of Inclusion: 
Currently, the payment of any AMT generated by the inclusion in AMT 
Income of ``economic income'' from the exercise of ISOs will result in 
an AMT Credit, creditable against regular tax liabilities in subsequent 
years, to the extent such regular tax exceeds the AMT. As described 
below in greater detail, this AMT Credit may take decades or centuries 
to be fully refunded under the current rules. Under this proposal, any 
portion of the AMT Credit currently remaining and attributable to the 
exercise of ISOs shall be fully refunded to the taxpayer upon the 
actual disposition of the stock. To the extent the taxpayer has 
disposed of only a portion of the stock, an appropriate portion of the 
AMT Credit shall be refunded. In this manner, the AMT Credit maintains 
much of the same operation, and generates the proper amount of refund 
in the year of ultimate disposition. At the same time, it better 
matches the intent of Congress. At most, this proposal merely pulls 
forward the payment date of the intended credit to bring about a 
rational result.
SECTION 3. For prior exercises.
    Concept: Amend, as appropriate, sections 56 through 59 of the 
Internal Revenue Code to provide that:

    (a) Affected Taxpayers: Any taxpayers who exercised ISOs during 
prior calendar years are eligible to elect relief under this provision. 
The intent of this provision is to provide relief, similar to that 
described above, to taxpayers whose AMT liabilities failed to reflect 
actual ``economic income'' and who currently have outstanding AMT 
liabilities or AMT credits attributable to the exercise of ISOs.
    (b) AMT Income:
    (i) Disposition During Calendar Year of Exercise: Taxpayers who 
disposed of the acquired stock during the calendar year of exercise 
have already included the proper amounts of income in their AMT and 
regular income, during the proper year, and at the proper rate. Thus, 
no correction is necessary to AMT income or timing. However, to the 
extent any AMT Credit was generated from this exercise and remains 
outstanding, it shall be fully refunded in the current year.
    (ii) Disposition After Calendar Year of Exercise: Taxpayers who 
held the acquired stock beyond the end of the calendar year of 
exercise, but who disposed of such stock either (a) prior to holding 
the stock for one year, or (b) after holding the stock for one year but 
prior to December 31, 2003, have already included amounts of income in 
their AMT and regular income, but the timing, rates, and amounts of 
each such inclusion are not in agreement.
    (A) To the extent any AMT Credit was generated from this exercise 
and remains outstanding, a result similar to that described in Section 
2 above shall be afforded to these affected taxpayers in the current 
year (i.e., taxpayers shall receive a full refund of any remaining 
outstanding AMT credits associated with such stock).
    (B) To the extent any tax liabilities remain outstanding with 
respect to the exercise, a result similar to that described in Section 
2 above shall be afforded to these affected taxpayers in the current 
year (i.e., any outstanding tax liability in excess of the amount which 
would be due under a method consistent with Section 2 above, using the 
disposition date as the valuation date, shall be abated).
    (C) Similarly, to the extent any interest or penalties have been 
paid (or accrued but unpaid) by taxpayers with respect to the exercise, 
a result similar to that described in Section 2 above shall be afforded 
to these affected taxpayers in the current year (i.e., any interest or 
penalties paid (or accrued but unpaid) in excess of the amount that 
would be due under a method consistent with Section 2 above, using the 
disposition date as the valuation date, shall be refunded (or abated)). 
This merely relieves the interest and penalties attributable to the 
unfair, and mitigated, portion of the tax under the current AMT/ISO 
provision; to the extent interest or penalties were paid (or accrued 
but unpaid) on the portion of the tax under the proposed AMT/ISO 
provision, the payments (or accruals) are not refundable (or abatable).
    (iii) Holdings on December 31, 2003:
    (A) Taxpayers who exercised the ISOs during a prior year but who 
did not dispose of the acquired stock prior to December 31, 2003 may 
elect to treat December 31, 2003 as their anniversary date, with the 
consequences described in Section 2 above.
    (B) Because these affected taxpayers included an amount in AMT 
income during the year of exercise and accordingly increased the basis 
in the acquired stock, the deemed disposition described in Section 2 
above will create a deemed loss with respect to the stock. This 
``deemed loss'' shall result in a lower basis in the retained stock, 
but no loss shall be recorded. Rather, to the extent any AMT Credit was 
generated from this exercise, a result similar to that described in 
Section 2 above shall be afforded to these affected taxpayers in the 
current year (i.e. they shall receive a full refund of any excess AMT 
credits associated with such stock to the extent such AMT credits 
exceed the AMT tax due for such stock as calculated on December 31, 
2003 at the capital gains rate).
    (1) To the extent any tax liabilities remain outstanding with 
respect to the exercise, a result similar to that described in Section 
2 above shall be afforded to these affected taxpayers in the current 
year (i.e., any outstanding tax liability in excess of the amount which 
would be due under a method consistent with Section 2 above, using 
December 31, 2003 as the valuation date, shall be abated).
    (2) To the extent any interest or penalties have been paid (or 
accrued but unpaid) by taxpayers with respect to the exercise, a result 
similar to that described in Section 2 above shall be afforded to these 
affected taxpayers in the current year (i.e., any interest or penalties 
paid (or accrued but unpaid) in excess of the amount that would be due 
under a method consistent with Section 2 above, using December 31, 2003 
as the valuation date, shall be refunded (or abated)).
SECTION 4. For increasing voluntary compliances and revenues.
    Concept: Increased Future Compliance: Amend, as appropriate, 
sections 56 through 59, 421 through 422, and/or 6039 of the Internal 
Revenue Code to provide that:

    (a) Section 6039(a) currently requires corporations to furnish 
certain information to taxpayers who acquire stock through the exercise 
of ISOs. To increase voluntary compliance with the AMT provisions, that 
notice shall be copied to the IRS and the exercising taxpayer shall be 
notified of such copy.
    (b) The intent of this provision is to provide the IRS with the 
necessary enforcement tools not present under current AMT law. This 
proposal will increase voluntary compliance in current and future 
years, and will increase the revenues collected by way of the AMT/ISO 
provision.
IV. Analysis of Proposal
 Proposal Aligns the Purposes Behind the AMT Tax Code and the Regular 
                                Tax Code
    Argument A: Congress created the AMT system many decades ago to 
catch very wealthy individuals who were taking affirmative steps to 
avoid tax obligations, and Congress designed the regular ISO tax 
provisions to encourage and reward entrepreneurial activity. The AMT's 
imposition on the exercise of ISOs in prior years, most importantly 
years in which the stock market declines dramatically, not only 
undermines the purpose of the ISO tax provisions, it affirmatively 
punishes and discourages the taxpayers and the economic activity that 
Congress hoped to stimulate with the ISO provisions. Additionally, the 
people finding themselves caught in this AMT trap were not trying to 
avoid their taxes; they were simply enjoying the fruits of their labor 
and pursuing the incentives Congress created. Applying the AMT in the 
current manner is not serving the purposes of either legislation.
    Argument B: Congress encourages insiders to hold on to acquired 
stock and build long-term value. Taxpayers who followed this good 
public policy should not face punitive taxes--up to and exceeding 100 
percent of the value of the asset being taxed. The decline in the stock 
market from 1999-2002 is unprecedented--comparable only to the 1929 
crash. President Bush and Congress have recognized the rarity of the 
circumstances by enacting a host of tax and business incentives 
designed to halt the market's decline and to help restore it to a 
normal level. Imposing the current AMT in this unique circumstance 
results in unintended and undue hardship, because these stockholders 
have already suffered the full decline of the value of the stock (as 
did all investors) but have been taxed as if the stock maintained its 
inflated value. Given the sharp decline in stock value, this tax is 
completely out of proportion with the value of the stock.
    For example, if a taxpayer exercised ISOs for $10,000 and thereby 
acquired stock worth $100,000, the AMT would tax the $90,000 of 
economic income at roughly 28 percent, or $25,000. If the stock 
thereafter declined to $50,000, then although the economic gain 
decreased to $40,000, the AMT remains at $25,000, or roughly 63 percent 
of the economic income.
    Argument C: This proposal aligns the purposes of the AMT and the 
regular tax code, by ensuring that (a) for purposes of the AMT, 
taxpayers prepay a fair tax on the deemed ``value'' of the stock 
arising from the exercise of ISOs, and (b) for purposes of the regular 
tax code, taxpayers who hold their stock for more than one year after 
exercising ISOs benefit from the capital gains rate that Congress 
intended. Congress did not intend taxpayers to be ``caught in an AMT 
trap'' because they followed the incentives of the regular tax code and 
obeyed the SEC insider trading laws. This proposal rectifies the 
unusual and severe disconnect that occurred between the AMT, the 
regular tax code, and the SEC Regulations in the unprecedented economic 
climate of 1999-2002, and can occur again at any time.
    Under the example set forth above under Argument B, the regular tax 
code would tax the later sale of the acquired stock for $50,000 at 15 
percent. Thus, the regular tax due would be $6,000 (15 percent of the 
$40,000 gain). Recall that the AMT attributable to the exercise was 
$25,000. Although the AMT rules provide for an AMT loss ($50,000 here) 
and an AMT Credit (equal to the amount of AMT paid), these losses or 
credits may take decades or centuries to be fully accounted for, as 
described more fully below.
                      Proposal is Revenue Neutral
    This proposal is revenue-neutral from an accounting standpoint 
because the U.S. Government currently carries the taxpayers' AMT 
credits forward to future years. A short-term refund merely pulls 
forward the payment date of the intended credit to bring about a 
rational result, thereby increasing dollars invested in the economy, 
reducing bankruptcies, and increasing voter satisfaction. Additionally, 
this correction to the AMT does not increase Congressional tax 
expenditures, as defined by the Joint Committee on Taxation. In the 
Joint Committee's December 22, 2003 report, Estimates of Federal Tax 
Expenditures for Fiscal Years 2004-2008, prepared for the House Ways & 
Means Committee and the Senate Finance Committee, it was provided that: 
``The individual alternative minimum tax (``AMT'') and the passive 
activity loss rules are not viewed by the Joint Committee staff as a 
part of normal income tax law. Instead, they are viewed as provisions 
that reduce the magnitude of the tax expenditures to which they apply. 
. . . Exceptions to the individual AMT and the passive loss rules are 
not classified as tax expenditures by the Joint Committee staff because 
the effects of the exceptions already are incorporated in the estimates 
of related tax expenditures.''
    The result of the current policy is that the taxpayers who made 
these prepayments have given the Government an interest-free loan; Sam 
Johnson highlighted this unfairness in his introduction to his Bill, 
H.R. 433, and a number of other Bills in recent Congresses have echoed 
that sentiment. Although the interplay of the AMT and regular tax code 
may result in situations in which a taxpayer would not receive the full 
credit back for the excessive prepayments even after 10 years, that 
result is so obviously inequitable that it is impossible to defend. The 
Government should consider whether it is proper for it to retain the 
excessive prepayments indefinitely.
    Additionally, the Proposal increases revenue in an area of frequent 
and undetectable abuse by encouraging compliance with principled laws 
by previously discouraged taxpayers, and requiring compliance as to all 
taxpayers for current and future years. The result will be nearly 100% 
compliance as all taxpayers report and pay a fair tax on ISO/AMT gain. 
Additionally, our Proposal would generate even more revenue by 
encouraging taxpayers who have not reported (either through ignorance 
or perceived necessity) their ISO exercises to come forward and report 
them in the current taxable year.
    Perhaps surprisingly, the timing of the gain calculation will also 
increase future revenues under this Proposal. The number of affected 
taxpayers will remain relatively constant as between the current ISO/
AMT law and our Proposal; however, under our Proposal the valuation 
date is generally one year after the exercise, unlike the current law 
where valuation date is the date of exercise. Because the market 
traditionally increases year after year, the ISO/AMT tax will generally 
be imposed on stock with increased value, and the overall long-term 
effect of our Proposal will be to increase the revenue generated. 
Furthermore, where there are downturns in a particular stock or market, 
our Proposal automatically adjusts to avoid imposing punitive and 
excessive rates on persons who hold on to their stock. This Proposal 
thus generates increased future revenues by supporting the prepayment 
policies of the AMT, while also supporting the policy goals of the 
regular tax code of providing incentives for employees to invest in 
their companies and work for long-term growth rather than short-term 
profits.
    Other considerations for purposes of scoring this Proposal include 
(i) current AMT/ISO liabilities may never be collected because the 
liabilities have exceeded yearly salaries, depleted assets, and caused 
bankruptcies and the losses of jobs; (ii) recent case law that has held 
that the IRS must consider whether a taxpayer's ISO/AMT liability 
should be reduced (thereby reducing revenues generated by current law) 
because the stock to which the liability attached was restricted stock 
and, hence, would be worth less than determined under the current ISO/
AMT provision; and (iii) current enforcement expenditures (for audit, 
litigation, bankruptcy, offers in compromise, committees on effective 
tax administration, etc.) will be eliminated, resulting in substantial 
direct savings and in an indirect benefit from freeing up resources 
that can be used to enforce and collect from persons who owe taxes on 
real gain and who have real assets from which to pay the taxes owed.
  Proposal Addresses the Unfairness of IRS Demanding Massive Interest-
                               Free Loans
    The irony in this situation is that many people are paying 
significant interest on loans from private creditors to prepay their 
interest-free loan to the Government. In some cases, the amounts at 
issue exceed hundreds of thousands, or even millions, of dollars. 
Additionally, the Government is increasing the burden by imposing 
interest and penalties on the taxpayers who haven't been able to pay 
all of their AMT because they simply lack the financial resources. 
Under the proposal, returning an excessive AMT prepayment is not a tax 
rebate, nor is it an unprincipled refund. The AMT credits were in fact 
intended to be returned to the taxpayers in a reasonable time, and to 
the extent the quirks in the AMT code undermine this repayment intent 
and extend the ``repayment period'' out to tens and hundreds of years--
the AMT code needs to be fixed.
V. Administrative Policy Support for Proposal
              Proposal Furthers Good Corporate Governance
    One of the only legitimate ways that a taxpayer currently can avoid 
the AMT application to ISOs is to sell the stock during the same tax 
year that he or she acquired it. Unfortunately though, many people who 
acquired stock through the use of ISOs also fall under insider trading 
laws and policies and must rebut a presumption of insider trading. 
Meeting that burden of proof can be very difficult because it requires 
the defendant to prove that he or she did not have any inside 
information. It is fairly difficult, if not impossible, to determine 
with foresight any period during which these individuals could sell 
stock without facing possible allegations of insider trading, 
especially when the stock subsequently declines in value; in 1999-2002, 
that problem was exacerbated through dramatic market declines. 
Moreover, corporate insiders likely are in a better position than 
shareholders to know that the stock may be overvalued in a declining 
market, and selling the stock merely shifts the losses to potentially 
unsuspecting buyers. The Government is focused on strong corporate 
governance practices, and should not require its citizens to choose 
between complying with tax laws or securities laws.
                 Proposal Protects Public Shareholders
    Taxpayers who held on to their stock over these years followed the 
incentive structure for ISOs and fully complied with applicable SEC 
restrictions. If these individuals had sold their stock to the public, 
the new and existing stockholders would have borne the significant 
decline in the stock value. The public has been outraged at insiders 
who ``dump'' their stock at its peak value, and who make off with 
millions while the public shareholders suffer the dramatic decline in 
value. Additionally, the public has filed civil suits against the 
companies and the individuals, and the SEC has pursued legal action 
against possible insider trading violations. Due to the activities 
during the 1999-2002 trading years, these actions have only increased 
in frequency. Clearly, the better public policy decision is to repair 
laws that, due to unusual circumstances, are punishing company insiders 
and other employees for holding stock and bearing potential losses 
personally, rather than foisting losses on the public. Without this 
repair, these employee-shareholders are literally in a no-win situation 
where the laws are punishing them no matter the course they take.
         Proposal Encourages Voluntary Compliance with Tax Laws
    The AMT tax system relies on honest individuals to report their ISO 
transactions, without any built-in checks to determine who has 
exercised ISOs. Currently, no relevant information is shared between 
the companies, the IRS, and the SEC or brokerage houses. In 1999-2002, 
the taxpayer who exercised ISOs was faced with the Hobson's choice of 
either (a) facing financial ruin for reporting honestly and including 
AMT calculations for ISO exercises, thereby paying punitive taxes 
imposed on phantom income at an arbitrary 26 or 28 percent tax rate, 
which in a falling market may exceed significantly the value of the 
underlying stock, or (b) illegally reporting only under the regular tax 
system.
    The Government should examine whether taxpayers who follow the law 
should be punished with an unintended tax that may approximate or 
exceed 100 percent of the value of the asset taxed, while taxpayers who 
simply ignore the law avoid paying the tax and may never be caught. 
This proposal institutes corporate reporting of ISO exercises, with no 
additional burden on the corporations. This reporting requirement, 
combined with the fairer provisions of this proposal, encourage 
voluntary compliance and generate increased collection of revenues with 
minimal enforcement efforts.
 Proposal Aligns the AMT Tax Rate with Current Tax and Business Policy
    The Government has passed laws lowering the long-term capital gains 
rate to 15 percent to encourage investment and commitment to a 
company's long-term success. It undermines that policy's purpose to 
subject people who have already lost the value of their stock to a 26 
or 28 percent prepayment tax rate on the phantom economic income 
computed on the date of exercise. This is especially true when the 
actual tax rate on that stock at a later sale is 15 percent of the 
actual gain. Worse yet, if the company dissolved, as many did, the 
underlying stock is worthless and the prepayment amounts under the AMT 
will be, in all practicality, unusable AMT credits.
    For instance, the Speltz family in Iowa has annual income of 
roughly $80,000, and had annual tax liability of less than $20,000. In 
2000, their exercise of ISOs generated a federal tax bill in excess of 
$260,000 and an AMT Credit of approximately $240,000, despite having 
received no money. To add insult to injury, their AMT Credit will only 
serve to reduce their regular taxes to the extent the regular taxes 
exceed that which would be due under the AMT system. In the best-case 
scenario, assuming the Speltzes have recurring regular tax liability of 
$20,000, and would owe $0 under the AMT system, it would take 
approximately 20 years for the Speltzes to fully recover the AMT Credit 
of $240,000. Note that this ``timing issue'' has required the Speltzes 
to effectively liquidate all of their assets to make what prepayments 
they can. Additionally, they will be forced to file for bankruptcy this 
year because they cannot pay the nearly $140,000 in federal taxes (plus 
interest and penalties, computed as of October 2003) they ``owe'' under 
the AMT, in spite of the fact that they are hard-working productive 
citizens who have currently already overpaid more than $100,000 in 
federal AMT taxes!
    The Government should consider whether taxpayers who made 
significant personal sacrifices and behaved in a manner demonstrating 
their commitment to their company's long-term growth and the economy as 
a whole, should be subject to a 26 or 28 percent tax on income they 
have not yet, and may never, receive. The Government should further 
consider whether those who ``prepaid'' taxes at a 26 or 28 percent rate 
on the unrealized income, and who will be entitled to the 15 percent 
capital gains rate on their actual gain (if any), should be reimbursed 
for their overpayment in a timelier manner than what is possible under 
the current system.
VI. Conclusion
    Congress must act now to rectify the AMT's most dangerous and 
harmful provision, the ISO rule. Without a change, the current 
application of the AMT/ISO provision will continue to cause unintended, 
egregious, and devastating tax burdens, and hobble the very 
entrepreneurial drive that made small business a powerful engine of the 
U.S. economy. The proposal addressed herein would make the AMT/ISO rule 
less complex and more fair for all involved, and would allow the 
Congressional purpose of the AMT to remain intact while providing a 
simple, principled, and equitable solution to taxpayers.
    This proposal's overarching goal is to maintain the AMT as a 
separate tax system and to tax (so-called) economic wealth on a current 
basis. It also reflects Congress's intent regarding the purpose and 
prevalence of ISOs in today's marketplace. By synchronizing the 
disconnects between the regular tax and the AMT treatments of ISOs, 
this proposal preserves the AMT's aims while helping entrepreneurs 
return to a position of bolstering this nation's economy. We urge you 
to sponsor and publicize your support of this proposal, for the good of 
the economy and to give taxpayers the fair treatment they deserve.

                                 
Statement of the Honorable Scott Garrett, a Representative in Congress 
                      from the State of New Jersey
            Municipal Lease Financing--Why it is Good Policy
    In times of economic hardship and decreased federal funding 
municipalities have had to become creative in finding ways to stretch 
their limited resources. Critical infrastructure projects and services 
such as mass transit and water and sewer systems must be built, 
maintained and improved all while trying to avoid implementing costly 
tax increases as well as fare or rate hikes. My district, like many of 
yours, has benefited from municipal lease financing in order to fund 
important projects and bypass putting an extra financial burden on our 
constituents. Extreme financial pressure and difficulty in finding 
alternative funding sources are a reality, but municipal lease 
financing has allowed public entities to improve their assets and 
provide us with the services that our daily lives have come to depend 
on.
    Over the past eight years, assets with a total value of 
approximately $22 billion have been financed through tax-exempt 
leasing. These lease transactions are based upon well-organized legal 
principals that have been developed over many years and are structured 
in compliance with current and longstanding provisions of federal law 
and regulations. Each transaction is reported in pursuant to well 
established tax laws and disclosed in compliance with IRS registration 
rules. Most importantly, all leases generate positive tax income over 
the lives of the transactions and set up neither permanent tax deferral 
nor tax avoidance.
    Many municipal leasing transactions are structured as sale-
leasebacks in accordance with the same leasing principals extensively 
used by the private sector. The municipalities convey ownership 
interests in assets to private investors for a sale price equal to the 
fair market value and then lease the asset back. Private entities are 
interested in entering into such deals because they generate earnings 
on their investment and facilitate the acquisition of equipment. 
Municipalities in return receive an up front cash benefit and an 
important tool to help make ends meet.
    I urge you to preserve the ability of municipalities and other 
domestic tax-exempt entities to enter into these lease transactions. As 
we work towards economic recovery it is crucial that we allow our 
cities and states a means to augment their financial resources. We must 
continue to foster these public/private sponsorships and do all that is 
in our power to help provide the services our constituents require.

                                 
  Statement of the Honorable Mark Green, a Representative in Congress 
                      from the State of Wisconsin
    Thank you, Mr. Chairman, for the opportunity to testify before the 
Select Revenue Measures Subcommittee on the need for the Former 
Insurance Agents Tax Equity Act which provides a legislative fix to a 
small, but important retirement tax problem that some of my 
constituents now face.
    Under current law, a small number of agents are forced to pay self-
employment taxes on their retirement payments, while their peers at 
other insurance companies do not. This is because a change in the 
Taxpayers Relief Act of 1997 (TRA) was drafted in a way that 
unintentionally excluded this small group.
    In the TRA, Congress included a provision intended to clarify that 
certain termination payments received by valued, long-term former 
insurance agents should be exempt from self-employment (SECA) tax. 
Unfortunately, the changes in 1997 provided clarification for most 
agents, but not others, depending on how insurance companies structure 
their agent agreements.
    As enacted, the 1997 provision provides that payments to a retired 
agent are exempt from self-employment tax when the agent's eligibility 
is tied to length of service, but not when the actual amounts of the 
payments are tied to the agent's length of service. Simply put, this is 
a distinction without a difference. There is no reason to provide 
different tax treatment for arrangements that are so similar just 
because the sum of an agent's termination payment is determined by 
varying the amount of compensation rather than the term of 
compensation.
    Hard-working agents whose payments are tied to their length of 
service deserve the same fair treatment accorded to their counterparts 
at other insurance companies. Both types of contract seek to satisfy 
the same goal of rewarding loyal, long-time agents with more generous 
retirement payments. (All of these payments, of course, continue to be 
subjected to income taxes.)
    I am pleased to note that my colleague from Wisconsin, Congressman 
Paul Ryan (R-WI), has introduced the Former Insurance Agents Tax Equity 
Act (H.R. 1250) to correct this problem. This legislation would simply 
strike language in the Internal Revenue Code that prevents companies 
from using a former agent's length of service in determining the amount 
of termination payment the agent will receive. In doing so, this bill 
fulfills Congress' intentions with the TRA and provides equitable tax 
treatment for all former agents. Congressman Ryan's legislation has 
solid bipartisan support among many members, including several members 
of the Ways and Means Committee, and there is no opposition to it. I 
also note that it enjoys the support of many insurance agents--not just 
in Wisconsin, but throughout the country, as well as the National 
Association of Life Underwriters, the Coalition of Exclusive Agents, 
and the National Association of Independent Insurers. In addition, the 
budget implications are minor since only a very small number of agents 
are affected.
    I hope my colleagues will join me in supporting the Former 
Insurance Agents Tax Equity Act that will ensure that termination 
payments to retired insurance agents are treated equitably under our 
tax laws.
    Thank you again, Mr. Chairman, for allowing me to testify on this 
issue.

                                 
Statement of the Honorable Michael Honda, a Representative in Congress 
                      from the State of California
    Mr. Chairman and Ranking Member McNulty, I thank you for this 
opportunity to share my concerns about the treatment of Incentive Stock 
Options under the U.S. tax code and to urge your Subcommittee to take 
timely legislative action to rescue thousands of Americans from 
financial ruin.
    For the last five years, the Alternative Minimum Tax's Incentive 
Stock Option rule has had an unintended devastating effect on hard-
working, honest taxpayers. This little known provision of the AMT 
assesses tax liabilities on private sector employees who exercise stock 
options, even when no gains have been realized. Congress certainly 
never intended for taxpayers to be liable for tens or hundreds of 
thousands of dollars on stock that became virtually worthless.
    The AMT was designed to ensure that wealthy Americans could not 
avoid taxes through excessive use of tax preferences, but in this case, 
the AMT's Incentive Stock Option rule is most injurious to average 
Americans hoping to secure a strong financial future for them and their 
families.
    The taxpayers affected by the ISO provision are desperately in need 
of help. Many of them have been subjected to tax rates in excess of 
300% of their annual income. Unable to pay, these Americans are at the 
mercy of the Internal Revenue Service, which has chosen to move these 
cases into collection status. As a result, wages have been garnished, 
retirement accounts seized, and the vehicles and homes forcibly sold. 
These measures are extreme and undeserving.
    For too long Congress has neglected this incredibly important 
issue, and I appeal to my colleagues on this Subcommittee to pursue a 
legislative and regulatory remedy to this injustice before more 
taxpayers are financially harmed.
LEGISLATIVE REMEDY
    The Congress must pass legislation to correct the AMT ISO 
provision. Our colleague, Zoe Lofgren, recently introduced H.R. 5141, 
legislation that will repeal the AMT treatment of incentive stock 
options, shifting the taxable event from the exercise of the stock 
option to the sale of stock. This same legislation was introduced 
during the 107th Congress, which adjourned without taking action on the 
bill. I was an original cosponsor of this bill, and I wholeheartedly 
support Rep. Lofgren's decision to reintroduce the bill. I hope the 
Subcommittee will give her proposal the consideration it deserves.
    I am also intrigued by a proposal now in development by Rep. Sam 
Johnson. Following the advice of four former Internal Revenue Service 
commissioners, Rep. Johnson has crafted legislation that may 
comprehensively remedy the complexity and inequity of the current ISO 
AMT system, for taxpayers, Congress, and the IRS. This new proposal 
includes measures to restore Congressional incentives that encourage 
workers to invest in their companies and retain that stock until it 
becomes a long-term capital asset. In addition, it addresses the AMT 
prepayment provision in such a way that it does not trap taxpayers 
during economic downturns, and it fairly resolves the current harm done 
to honest, hardworking Americans by the current AMT ISO rule.
REGULATORY REMEDY
    Congress has provided the IRS flexibility in the resolution of tax 
code infractions, and the IRS must employ this flexibility to hold 
harmless those unduly harmed by the AMT ISO rule. More specifically, 
the IRS should consider greater use of Offers in Compromise (OIC). 
Proper application of these provisions would give some measure of 
relief to the most pressing cases.
    AMT ISO liabilities were the subject of a Ways & Means Oversight 
Subcommittee hearing on June 15 of this year. At that hearing, taxpayer 
Nina Doherty addressed the IRS's aggressive enforcement and refusal to 
consider Offers in Compromise with respect to this issue, despite the 
power afforded it by statute and its own regulations. The IRS's 
categorical denial of Offers in Compromise ignores its own standards of 
special circumstances, hardship, public policy, and the promotion of 
effective tax administration, and ignores the advice and pleading of 
numerous practitioners, professors, the National Taxpayer Advocate, and 
Congress. The OIC program is already in place, and if properly applied 
by the IRS, can help those taxpayers suffering under this severe 
burden. Although the OIC is merely a stop-gap remedy, I encourage this 
Select Revenue Measures Subcommittee to utilize its influence to urge 
the IRS to take appropriate remedial action.
    Multiple coalitions of individuals and of companies have been 
formed to follow, address, and resolve this single issue, aided by the 
print and screen media. Unfortunately, although we've worked on this 
issue for years, the problem hasn't been solved for a single suffering 
taxpayer. I urge this Subcommittee, and the rest of Congress, to join 
in resolving this issue.
    Thank you for this opportunity to testify on the importance of 
restoring fairness in the U.S. tax code.

                                 
   Statement of the Honorable James R. Langevin, a Representative in 
                Congress from the State of Rhode Island
A Tax Incentive For Life Safety
Fire Sprinkler Incentive Act of 2003
Ad Hoc Committee Members
American Fire Sprinkler Association
Campus Firewatch
Congressional Fire Services Institute
International Association of Arson Investigators
International Association of Fire Chiefs
International Fire Service Training Association
National Fire Protection Association
National Fire Sprinkler Association
National Volunteer Fire Council
April 18, 2003

[GRAPHIC] [TIFF OMITTED] 23798A.002


The Problem
    The 2000 America Burning--Recommissioned report is an update of the 
landmark study conducted originally in 1974. Sadly, as we have seen 
once again in the past few months, not enough has been done to advance 
the level of fire safety in the country's built environment. The recent 
tragedies that have struck in West Warwick, Rhode Island and Hartford, 
Connecticut only serve to underscore the fact that we have been 
incredibly remiss in putting into action the technology and knowledge 
that we have gathered over the past century.
    Fires are tragedies that are avoidable. The consequences that we 
see, the loss of life, the extensive property damage does not have to 
happen.
    The latest data available reports that:

      Fire departments responded to 1.7 million fires in 2001.
      There were a total of 521,000 structure fires.
      There were 3,745 fire deaths in the United States in 2001 
(not including those lost on 9/11).
      Fires caused almost 21,000 civilian injuries.
      Excluding the events of 9/11, 99 firefighters were killed 
in 2001.
      Fire caused $8.9 billion in direct property damage.

    This translates to the fact that a fire department responds to a 
fire every 18 seconds in the United States. Every 60 seconds a fire 
breaks out in a structure, and in a residential structure every 80 
seconds.
    When evaluating the fire problem in the United States, it is 
important to look at where the fires are occurring as well as recognize 
major fire death potential so that a viable strategy can be developed 
to address the problem.
    Currently there are a number of programs in place that are 
aggressively addressing the fire problem through engineering, technical 
assistance and public education. However, even in this environment, the 
major hurdle to be overcome to reach the next step of fire safety is 
that of economics, or specifically the direct cost of installing fire 
sprinkler systems. All too often when making decisions on adopting 
aggressive fire safety codes, it is only these direct costs that are 
discussed with little consideration to the indirect costs of fire.
    The historically significant fires that have occurred in our 
nation, especially the large loss of life fires, have occurred in a 
variety of occupancy usages. Across the board, fires present a problem 
in different occupancies, ranging from low-rise residential occupancies 
to commercial nightclubs to high-rise structures.
    There are a number of different factors that go into making a fire-
safe structure. These factors are outline in the fire and building 
codes that are in use across the country. However, as we have seen by 
recent fire tragedies, these are by no means a guarantee that an 
existing building will meet the level of fire safety established in the 
codes.
The Solution

[GRAPHIC] [TIFF OMITTED] 23798A.003


    As stated above, there are several strategies that can be adopted 
to address the fire problem. However, one clearly stands above the 
others in terms of its immediate impact upon life safety and property 
conservation: automatic fire sprinkler systems. Sprinklers can reduce 
your chances of dying in a fire from one-half to two-thirds as 
reflected in the information below.


                   Civilian Deaths per Thousand (NFPA)
      (National estimates based on 1988-1998 NFIRS and NFPA survey)
------------------------------------------------------------------------
                                   Without      With
          Property Use           Sprinklers  Sprinklers     % Reduction
------------------------------------------------------------------------
Public Assembly                       0.8        0.0*              100%
------------------------------------------------------------------------
Health Care                           4.9         1.2               75%
------------------------------------------------------------------------
Apartments                            8.2         1.6               81%
------------------------------------------------------------------------
Hotels and motels                     9.1        0.8*               91%
------------------------------------------------------------------------
Dormitories and barracks              1.5        0.0*              100%
------------------------------------------------------------------------
Industrial                            1.1        0.0*              100%
------------------------------------------------------------------------
Manufacturing                         2.0         0.8               60%
------------------------------------------------------------------------
Storage                               1.0        0.0*              100%
------------------------------------------------------------------------
* Based on fewer than two deaths per year in the entire ten-year period.
  Results may not be significant.


    In addition to being an invaluable life-safety tool, sprinklers are 
unparalleled in reducing the property loss. As seen in the following 
table, the property loss from fires over a ten-year period shows a 
significant reduction ranging from a low of 42% to an impressive high 
of 70% in public assembly occupancies.


                             Estimated Reduction in Property Damage per Fire (NFPA)
                          (National estimates based on 1989-1998 NFIRS and NFPA survey)
----------------------------------------------------------------------------------------------------------------
                                                                   Without
                         Property Use                             Sprinklers    With Sprinklers     % Reduction
----------------------------------------------------------------------------------------------------------------
Public assembly                                                       $21,600           $6,500              70%
----------------------------------------------------------------------------------------------------------------
Educational                                                           $13,900           $4,400              68%
----------------------------------------------------------------------------------------------------------------
Residential                                                            $9,400           $5,400              42%
----------------------------------------------------------------------------------------------------------------
Stores and offices                                                    $24,000          $12,200              50%
----------------------------------------------------------------------------------------------------------------
Industrial                                                            $30,100          $17,200              43%
----------------------------------------------------------------------------------------------------------------
Manufacturing                                                         $50,200          $16,700              67%
----------------------------------------------------------------------------------------------------------------


    No one can argue against the effectiveness of sprinklers in 
controlling a fire and saving lives and property. The major impediment 
to their widespread use has simply been an economic one.
    Sprinklers can be installed in almost any occupancy today. High-
rise buildings, assisted living facilities, warehouses, assembly, even 
residential condominiums and homes--all of these occupancies will 
benefit greatly from the existence of an automatic fire sprinkler 
system.
    In terms of life safety, buildings such as high-rise residential 
and commercial buildings, dormitories, Greek housing, assisted living 
and nursing homes are among those that will have the most direct 
benefit from a sprinkler system. Other buildings, such as industrial or 
manufacturing facilities often already have sprinkler systems installed 
as part of their requirements for obtaining insurance. If not, however, 
by installing a sprinkler system they are providing a significantly 
higher level of protection to their property, ensuring continued 
business operation and continued employment. This translates into a 
stronger workforce for the community as well as a viable tax base.
    While a tax incentive may appear to be singularly a negative cash 
flow to government, it is in fact an economic stimulus. Quite frankly, 
fire sprinkler retrofit is not widespread because of the direct costs. 
With our current low interest rates, coupled with this tax incentive, 
fire sprinkler retrofit will become attractive and as a result revenue 
will be generated through increased production of products and 
services. Fire sprinkler retrofit is very labor intensive with the 
average percentage of labor costs for retrofit projects estimated at 
65%. The benefits of increased employment together with the increase 
production of materials to meet this new market must also be considered 
as an economic stimulus.
    The installation of sprinklers not only protects the occupants of 
these buildings, it also provides life safety to the responding fire 
fighters. A sprinkler system will control a fire, if not extinguish it, 
in its earliest stages. This reduces the risk to the occupants and to 
the fire fighters. This is even more critical in a high-rise building 
where fighting any fire is an extreme challenge.
    Sprinkler systems can dramatically improve the chances of survival 
of those who cannot save themselves in a timely manner, specifically 
older adults, younger children and those with disabilities.
Fiscal Impact
    In the present economy, providing some mechanism and incentive for 
building owners to install critical life-saving systems such as 
automatic fire sprinklers is paramount. The question is how to best 
accomplish this?
    Due to financial burdens many nightclub and high-rise building 
owners are reluctant to upgrade fire safety within their structure 
unless forced to do so by government. State and local governments 
recognize the financial burden that these improvements may impose and 
therefore have been reluctant to force changes to modern code 
requirements. Failure to upgrade has additional financial burdens as 
evidenced by the indirect costs of a fire that the community has to 
endure, such as increased workers' compensation for fire fighter 
injuries, lost revenue for destroyed businesses, increased litigation 
costs imposed on government, indirect loss of revenue from a decline in 
tourism when the fire occurs in a tourist driven economy, the list of 
indirect cost of fire is very long.
    A viable and reasonable solution is the use of a tax incentive. The 
use of tax incentives to stimulate the economy has been well documented 
in our country. Taxes have a major impact on a business's cash flow and 
in many cases taxes may determine a company's viability and 
survivability. For many property owners the ability to capture and 
recover expenses in the tax system is critical for economic survival, 
particularly when local government mandates fire sprinkler retrofit to 
protect its community's infrastructure and economic base.
    Currently, when installing a sprinkler system in any building, be 
it a high-rise building housing elderly citizens or a place of 
assembly, the cost of the system is expensed over its depreciable life. 
Currently, for a commercial occupancy this would represent 39 years, 
for a residential occupancy such as a high-rise apartment building, 
this would be 27.5 years. This actually provides a disincentive to 
install a system because of the long payback that can be realized for 
the investment.
    In 1986 Congress approved the Modified Accelerated Cost Recovery 
System (MACRS) that provides a reasonable alternative to the current 
straight-line depreciation method that is used.
    Under the MACRS method of depreciation, several classes of assets 
with prescribed recovery periods or class lives are defined. The major 
effect of the MACRS system is to shorten the depreciable lives of 
assets, thus giving businesses larger tax deductions. This in turn 
increases their cash flow for reinvestment.
    We are proposing the use of the MACRS system with the Five-Year 
class life be used for the installation of an automatic fire sprinkler 
system in any occupancy. This will provide a strong incentive to 
install these systems into a variety of occupancies, but especially 
into those where lives are at greatest risk, such as nursing homes, 
places of assembly and high-rise residential and commercial buildings.

[GRAPHIC] [TIFF OMITTED] 23798A.004


    The moral justification for the installation of sprinkler systems 
in these buildings has been demonstrated for many years. National fire 
codes have called for the installation of sprinklers in any new and 
existing buildings, particularly high-rise buildings, for many years. 
Following a series of horrific nursing home fires in the 1970s, most 
nursing homes across the country were equipped with sprinklers.
    Preliminary estimates suggest the cost to install the life saving 
fire sprinkler system in The Station in West Warwick would have been 
under $20,000. The average cost of retrofitting a fire sprinkler system 
in an existing high-rise can range from approximately $2.00 per square 
foot to a high of $3.00 per square foot, depending upon the area of the 
country. And the decisive factor in determining where within the price 
range a specific project will fall is that of labor costs. The cost of 
labor varies throughout our country and as previously stated that an 
average of 65% of the costs of fire sprinkler retrofit comes from labor 
costs.
Depreciation Schedule Example
    The following example is for the installation of two automatic fire 
sprinkler systems should they be installed today; one that costs 
$100,000 and another that costs $250,000. The $100,000 example is for a 
residential apartment building that would fall under the 27.5-year 
depreciation schedule while the $250,000 example is a commercial high-
rise building that would use the 39-year depreciation schedule. It is 
assumed that the systems are placed into service in the middle of the 
first year, therefore the effect of this half-year convention is to 
extend the recovery period for an additional year, resulting in the 
six-year depreciation schedule shown below. In addition, the deduction 
scenario for a $20,000 sprinkler system installed in The Station 
nightclub in West Warwick, typical of many of the occupancies targeted 
by this tax incentive, is also included.


                                           MACRS Five-Year Class Life
----------------------------------------------------------------------------------------------------------------
                                 The Station-- $20,000       $100,000 Installation       $250,000 Installation
                                     Installation            Residential Apartment       Commercial High-rise
                             -----------------------------------------------------------------------------------
                                                          Current 27.5-
            Year               Current 39-  MACRS Depre-   year Depre-  MACRS Depre-   Current 39-  MACRS Depre-
                               year Depre-     ciation       ciation       ciation     year Depre-     ciation
                                 ciation      Schedule      Schedule      Schedule       ciation      Schedule
                                Schedule                                                Schedule
----------------------------------------------------------------------------------------------------------------
1                             $256.50 \a\        $8,800    $1,667 \a\   $44,000 \b\    $3,205 \a\      $110,000
----------------------------------------------------------------------------------------------------------------
2                             $513               $4,480     $3,636       $22,400        $6,410          $56,000
----------------------------------------------------------------------------------------------------------------
3                             $513               $2,688     $3,636       $13,440        $6,410          $33,600
----------------------------------------------------------------------------------------------------------------
4                             $513               $1,614     $3,636        $8,070        $6,410          $20,175
----------------------------------------------------------------------------------------------------------------
5                             $513               $1,612     $3,636        $8,060        $6,410          $20,150
----------------------------------------------------------------------------------------------------------------
6                             $513 \c\             $806    $3,636 \c\     $4,030       $6,410 \c\       $10,075
----------------------------------------------------------------------------------------------------------------
a. First year depreciation using the \1/2\-year convention.
b. This figure is arrived at by the 30% bonus for the first year, $100,000  30% = $30,000. The
  remaining $70,000 is depreciated using the double declining balance method (0.40  $70,000 = $28,000)
  then applying the \1/2\-year convention ($28,000/2 = $14,000). Therefore, the first year bonus plus the \1/2\
  year convention is $30,000 + $14,000 = $44,000. Subsequent years are based on a standard 5-year deduction
  schedule.
c. This dollar value is continued for the remaining length of the depreciation schedule, 27.5 years or 39 years.


    Consistent with tax incentive actions provided in the Job Creation 
and Workers Assistance Act of 2002 passed by Congress, an additional 
30% deduction is figured into this tax incentive. The first year's 
depreciation is deducted on the balance after the special depreciation 
allowance of 30% is applied, again a procedure consistent with the 
established provisions applied in the Job Creation and Workers 
Assistance Act of 2002.

[GRAPHIC] [TIFF OMITTED] 23798A.005


    If a $20,000 sprinkler system had been installed in The Station 
nightclub in West Warwick, the total deductions in the first six years, 
under the current 39-year schedule, would have amounted to $2,822. 
Under the MACRS scenario, the system would have been fully deducted 
within six years.
Conclusion
    The year 2003 has been a terrible one for fire tragedies. People 
die every day in horrific fires that can be avoided. The tragic event 
at The Station nightclub where 99 people died in West Warwick, Rhode 
Island, reminds us that we have to make a change, here and now. We know 
what the answers are and have known for many years. It is time for us 
to put these solutions in place so that we are never destined to repeat 
the tragedies of West Warwick, Hartford, New York, Southgate and the 
other fires that have killed so many.

[GRAPHIC] [TIFF OMITTED] 23798A.006


    The solution proposed in this paper is one that can be applied 
across our nation, no matter how large or small a community may be. 
Residential and commercial high-rise, dormitories, Greek housing, 
privately owned student housing, public assembly--these are occupancies 
that can be found in almost any community. Our older adults, young 
children and people with disabilities, or those who statistically are 
our higher fire risk groups can be found in all of these buildings.
    By passing a tax incentive, Congress can have a critical role in 
making the places that our citizens live, work and play dramatically 
safer. This will avoid our repeating a tragic history that has been 
seen all too often over the years. This will also serve to protect our 
vital community infrastructure in these uncertain times. And this tax 
incentive will also act as an economic stimulus.
    Quite simply, the time is now.

                                 

                               National Association of Bond Lawyers
                                               Washington, DC 20005
                                                    October 8, 2004

Honorable Jim McCrery
Chairman
Subcommittee on Select Revenue Measures
1135 Longworth House Office Building
Washington, DC 20515

    I am writing on behalf of the National Association of Bond Lawyers 
(``NABL'') to offer the accompanying proposals for the simplification 
of federal tax law as it pertains to tax-exempt bonds. These proposals 
are grouped in two parts: Part I describes proposals related to 
governmental purpose bonds; Part II offers suggestions related to 
qualified private activity bonds and other tax-exempt bond matters. We 
are pleased that the Public Finance Network has commended our 
simplification proposals in their submission to the Subcommittee. 
Several of NABL's proposals in Part I pertaining to governmental bonds 
would implement the reforms the PFN advocates. We look forward to 
working closely with the PFN on these issues in the future.
    NABL is a nonprofit corporation organized for the purpose of 
educating its members and others in the law relating to state and 
municipal bonds, providing a forum for the exchange of ideas as to law 
and practice, improving the state of the art in the field, providing 
advice and comment at the federal, state and local levels with respect 
to legislation, regulations, rulings and other actions, or proposals 
therefore, affecting state and municipal obligations, and providing 
advice and comment with regard to state and municipal obligations in 
proceedings before courts and administrative bodies through briefs and 
memoranda as a friend of the court or agency. NABL currently has 
approximately 3,000 members.
    We would of course be more than happy to discuss any or all of 
these proposals further with you and your Subcommittee colleagues, and 
the staff of your Subcommittee, and to provide additional materials, 
including drafts of legislative language to implement these proposals, 
should you wish to have them. Please do not hesitate to contact me if 
you feel NABL and its members can provide you with additional 
assistance.

            Sincerely,
                                                    Monty G. Humble
                                                          President

                                 ______
                                 
                  NATIONAL ASSOCIATION OF BOND LAWYERS
       TAX SIMPLIFICATION PROPOSALS RELATING TO TAX-EXEMPT BONDS
I. Simplification Proposals Relating to Governmental Purpose Bonds
1. Permit One Additional Advance Refunding of Governmental Bonds and 
        Qualified 501(c)(3) Bonds
    Present law. In general, issuers of tax-exempt governmental bonds 
(i.e., excluding most private activity bonds) and qualified 501(c)(3) 
bonds are provided one advance refunding opportunity for tax-exempt 
bond issues issued after December 31, 1985. Here, an ``advance 
refunding'' means an issuance of refunding bonds to refund other bonds 
(``refunded bonds'') where the refunding bonds are issued more than 90 
days before the redemption of the refunded bonds.
    Example. Assume a local government issued tax-exempt bonds in 1994 
to finance the construction of a new school building. The bonds contain 
a 10-year no-call period which is standard in the municipal market. In 
1999, with the decline of interest rates, the issuer decided to advance 
refund its bonds to achieve net interest cost savings. Under current 
law, the issuer is permitted only one advance refunding. Therefore, 
when interest rates dropped to historic lows in 2003 and 2004, this 
issuer would be prevented from doing an additional advance refunding to 
achieve further net interest cost savings.
    Reason for Change. For State and local governmental issuers and 
Section 501(c)(3) exempt organizations, debt service represents one of 
the most significant elements of their operating expenses. These 
governmental and nonprofit entities must manage the burden of paying 
debt service on bonds that have been issued to finance significant 
capital investments, such as roads, schools, hospitals, universities, 
transit systems, and other types of infrastructure.
    When possible, issuers may elect to refinance their debt to take 
advantage of lower interest rates, thereby lowering their cost of 
borrowing. In addition, issuers may desire to refinance their 
outstanding debt to restructure the timing of debt service payments to 
better coincide with available revenue flows, take advantage of more 
modern financing techniques or to incorporate more flexible financial 
and legal covenants.
    Because State and local governments and Section 501(c)(3) exempt 
organizations generally have only one opportunity to advance refund 
their debt (for new money bonds issued after December 31, 1985), they 
are put in the inflexible position of having essentially to guess when 
would be the optimum time to do that advance refunding to achieve the 
lowest net borrowing costs. The declining interest rate environment 
over the past few years had provided clear circumstances in which the 
one advance refunding restriction might have caused State and local 
governments and Section 501(c)(3) nonprofit organization potentially to 
miss out on opportunities to lower their borrowing costs. As described 
in the example above, an issuer that chose to advance refund its debt 
in 1999 would be prevented from advance refunding the same debt in 2003 
or 2004 for further interest cost savings simply because it ``guessed'' 
wrong in 1999.
    Congress should amend Federal tax law requirements to permit State 
and local governments and Section 501(c)(3) nonprofit organizations one 
additional advance refunding opportunity for their tax-exempt bonds.
2. Provide a Streamlined 3-Year Spending Exception to the Arbitrage 
        Rebate Requirement in Lieu of the Present 2-Year Construction 
        Spending Exception
    Present law. Generally, interest earnings on investments of tax-
exempt bond proceeds in excess of the bond yield must be rebated to the 
Federal Government. The main existing spending exception to arbitrage 
rebate is a complex 2-year spending exception applicable only to 
governmental and qualified 501(c)(3) bonds issued to finance certain 
construction projects.
    Example. Assume bonds are issued by a local government to construct 
a courthouse. The issuer plans to use the 2-year rebate spending 
exception and has sized the issue to meet the spending benchmarks, 
including expenditure of all investment earnings. The issuer meets the 
first two semiannual spending benchmarks, but unusual inclement weather 
causes the issuer to fall short of the third benchmark. Under current 
law, the issuer looses the total benefit of the rebate exception and 
must rebate any excess investment earnings over the yield on the tax-
exempt bonds to the Federal Government, even though the issuer had 
sized the issue to spend all earnings on the project.
    Alternatively, to further illustrate some of the conditions to the 
existing exception, suppose an issuer who infrequently came to market 
planned for efficiency purposes to do a single tax-exempt bond issue to 
finance several major capital projects with a total expected spending 
period of 2\1/2\ years. Suppose further that the issuer expected to use 
about one-third of the bond proceeds to finance various land 
acquisitions and equipment purchases associated with these capital 
projects. Here, both the 2\1/2\ year spending period and the use of 
more than 25% of the bond proceeds on expenditures which were not 
technically ``construction'' expenditures would make this bond issue 
ineligible for the 2-year rebate spending exception.
    Reason for Change. The present 2-year rebate spending exception 
provides for unrealistic spending periods, complex bifurcation 
procedures, difficult and repetitive computations, and unclear 
multipart definitions. The exception should be modified to be simple in 
its application and to permit issuers and conduit borrowers three years 
(rather than two years) years to meet the applicable spending 
requirements. In addition, this exception should be expanded to include 
both private activity bonds and governmental bonds, as well as to 
include bonds for any capital project (encompassing both acquisition 
and construction purposes). Also, the election to pay a penalty in lieu 
of rebate is rarely used and should be eliminated. This streamlined 3-
year rebate spending exception should apply as broadly as possible, 
particularly given that limited arbitrage potential exists for short-
term investments in most in long-term tax-exempt bond issues. This 3-
year rebate spending period would provide meaningful administrative 
relief from complex arbitrage calculations to a broad number of tax-
exempt bond issuers. The proposed spending benchmarks should contain a 
de minimis exception to broaden the availability of the exception to 
cover many circumstances in which minor amounts of bond proceeds remain 
unspent for bona fide reasons. This spending exception should be 
limited to fixed rate tax-exempt bonds to recognize one area in which 
some arbitrage potential may exist under a 3-year spending period in 
normal yield curves, which involves tax-exempt floating rate bonds with 
short-term tender options. The new 3-year spending exception also 
should exclude bonds issued mainly for working capital and refundings.
3. Increase the Small Issuer Exception to the Arbitrage Rebate 
        Requirement from $5 Million to $25 Million and Remove the 
        General Taxing Power Condition
    Present law. Generally, interest earnings on investments of tax-
exempt bond proceeds above the yield on the tax-exempt bonds must be 
rebated to the Federal Government. Under the small issuer exception, 
the rebate requirement does not apply to governmental units with 
general taxing powers where the amount of bonds issued by the unit in 
the calendar year is not reasonably expected to exceed $5 million 
(excluding private activity bonds and most current refunding bonds with 
a principal amount not exceeding the principal amount of the refunded 
bonds).
    Example. If an issuer with general taxing powers issues bonds to 
construct a library, and if the principal amount of bonds is $5 million 
or less (taking into account other bonds issued by the issuer in the 
calendar year), then the rebate requirement does not apply to the 
bonds. If, however, the principal amount of bonds is $5.1 million, or 
if the issuer does not have general taxing powers, such as a public 
building authority which is an instrumentality of a governmental unit 
with general taxing powers, then the rebate requirement applies to the 
bonds.
    Reason for Change. With one exception, the small issuer exception 
to the rebate requirement has remained at $5 million since its 
inception in 1986. Thus, while all other costs associated with capital 
expenditures (construction, acquisition, administrative, etc.) have 
increased, the $5 million limitation has remained stagnant.
    Increasing the small issuer exception will substantially reduce the 
administrative burden imposed on a large number of small issuers by the 
rebate requirement while affecting a disproportionately smaller amount 
of tax-exempt bond dollar volume. As an illustration of this 
disproportionate effect involving larger numbers of small affected bond 
issuers and smaller amounts of affected bond dollar volume, in 2003, 
tax-exempt issuers of $10 million or less of bank purchase qualified 
bonds issued 4,700 bond issues out of 14,833 total tax-exempt bond 
issues, representing 32% of the total number of such bond issues. The 
dollar volume of those bond issues, however, was only about $15.25 
billion out of about $382.7 billion of total tax-exempt bond dollar 
volume, representing only about 4% of tax-exempt bond dollar volume. At 
the example $10 million level, the difference between the large number 
of small bond issuers who could be relieved of administrative burdens 
(32%) and the smaller affected tax-exempt bond dollar volume (4%) is 
compelling.
    Moreover, if an issuer is a governmental unit authorized to issue 
bonds, it should be eligible for the small issuer exception to the 
rebate requirement even if it does not have general taxing powers. The 
requirement for the existence of general taxing powers unfairly narrows 
the benefit of the exception. State or local governments commonly use 
public instrumentalities without general taxing powers to carry out 
tax-exempt bond programs.
4. Add An Exception to the Arbitrage Rebate Requirement for Equity-
        Funded Reserve Funds
    Present law. Although present law limits the amount of tax-exempt 
bond proceeds that may be used to fund a debt service reserve fund to 
10% of the bond proceeds, the arbitrage rebate requirement nonetheless 
continues to apply to debt service reserve funds for most bond issues.
    The rebate requirement will continue to apply to these reserve 
funds throughout the term of the bonds even if all other bond proceeds 
are spent promptly under a rebate spending exception.
    Example. Assume bonds with a term of 20 years are issued to 
construct a library. Further assume that proceeds of the bonds are used 
to fund a construction fund and a 10% debt service reserve fund. Even 
if the amounts deposited in the construction fund are spent promptly 
within 2 years in compliance with a rebate spending exception, the 
rebate requirement will nevertheless continue to apply to the reserve 
fund for the entire 20-year term of the bonds. This result will apply 
even if the issuer does not comply with a spending exception but 
nevertheless spends the bond proceeds in due course.
    Reason for Change. Except for amounts deposited in a reserve fund, 
the bond proceeds to which the rebate requirement relates are generally 
spent within 2 or 3 years of the date of issuance, whether or not a 
spending exception to the rebate requirement is satisfied. Because a 
reserve fund is not spent (except to pay debt service on the bonds in 
the event of unforeseen financial difficulties), present law mandates 
that the rebate requirement continues to apply for the entire term of 
the bonds, and imposes costly and cumbersome administrative burdens on 
issuers associated with recordkeeping and tracking investment earnings 
on the reserve funds. To relieve these administrative burdens, issuers 
should be permitted to disregard debt service reserve funds in 
complying with the rebate requirement if the issuers fund the reserve 
funds from their own funds or from the proceeds of taxable bonds. This 
change should provide an incentive to issuers to decrease the principal 
amount of bonds burdening the tax-exempt bond market, as more issuers 
would choose to fund reserve funds from equity and/or taxable 
borrowings.
5. Increase the Small Issuer Bank Purchase Exception from $10 to $25 
        Million and Conform to the Small Issuer Exception to the 
        Arbitrage Rebate Requirement
    Present law. Banks generally are prohibited from deducting interest 
on loans used to carry tax-exempt bonds. A small issuer bank purchase 
exception allows banks to deduct these carrying costs when banks 
purchase tax-exempt bonds issued by issuers whose total amount of tax-
exempt bonds issued in a calendar year does not exceed $10 million 
(excluding private activity bonds and most current refunding bonds 
having a principal amount not in excess of the principal amount of the 
refunded bonds).
    Example. If a bank purchases bonds issued to construct a city 
office building, and if the principal amount of bonds is $10 million or 
less (taking into account other bonds issued by the same issuer in the 
calendar year), then the prohibition against deduction of interest on 
loans to carry tax-exempt bonds does not apply. If, however, the 
principal amount of the bonds is $10.1 million (or if the issuer 
previously issued bonds that, together with the office building bonds, 
exceed $10 million), the issuer is less likely to be able to market the 
bonds to a financial institution because the nondeductibility 
limitation applies to the bank and makes the bonds less attractive to a 
bank as a potential purchaser.
    Reason for Change. The purpose of the small issuer bank purchase 
exception to bank nondeductibility is to preserve the ability of small 
issuers, with limited access to the capital markets, to place bonds 
with local banks. Because the cost of capital projects and, as a 
consequence, the principal amount of bonds necessary to fund capital 
projects, has increased dramatically since 1986, while the $10 million 
limitation has remained the same, the principal amount of the exception 
should be increased. Also, the eligibility requirements for the 
exception should be conformed to those for the small issuer exception 
from the rebate requirement, as the slight differences between the 
statutory language of the two provisions are a trap for the less 
sophisticated issuers for whom the provisions were designed. Here, in 
short, it would be much simpler if a single definition of a ``small'' 
issuer were used for both the rebate exception and the bank 
nondeductibility exception. In addition, for the same reasons noted 
with respect to the recommended change in the small issuer rebate 
exception, an increase in this exception would provide access to bank 
purchasers for a disproportionately large number of issuers while 
affecting a comparatively small amount of bond dollar volume. While it 
has been suggested that the small issuer bank purchase exception is no 
longer necessary because of the access to capital markets provided by 
state-level bond banks and pooled loan programs, many states have no 
such bond banks or pooled loan programs and many small issuers continue 
to rely heavily on local banks as their main source of financing. 
Finally, in the case of an issue of obligations the proceeds of which 
are to be used to make one or more loans (i.e., pooled financing 
bonds), an issuer should be permitted to elect to treat each conduit 
borrower as the issuer of a separate issue. If such an election is 
made, the bank deductibility provision would apply to each conduit 
borrower.
6. Repeal 5% Unrelated or Disproportionate Private Business Use Limit 
        on Governmental Bonds
    Present law. If private business use is not related or is 
disproportionate to the governmental use of tax-exempt bond proceeds, 
then a 5% private business use restriction applies to tax-exempt 
governmental bonds instead of the general 10% private business 
restriction on such bonds.
    Example. If a governmental bond is issued to finance a courthouse 
facility which includes a staff cafeteria operated by a private 
business, a 10% private business use restriction applies to such bond 
issue because the cafeteria use is treated as related to the courthouse 
use. If, however, a governmental bond is issued to finance a courthouse 
which includes office space for lawyers, a 5% private business use 
restriction applies to such bond issue because the law office use is 
treated as unrelated to the governmental courthouse use.
    Reason for Change. The unrelated or disproportionate use test is 
cumbersome, inappropriately intricate, and difficult to understand and 
to apply. The determination of whether a particular use is related or 
unrelated to a governmental use or whether a use is proportionate or 
disproportionate to a governmental use can be vague and arbitrary. The 
application of the test is especially complex in the case of bond 
issues financing multiple facilities. Out of an abundance of caution, 
some issuers automatically reduce their otherwise-permitted level of 
private business involvement from 10% to 5% in governmental tax-exempt 
bond issues just to avoid the interpretative difficulty of this 
requirement which seems contrary to the intent of the private business 
restrictions. The penalty for an erroneous determination is loss of 
tax-exemption for the entire bond issue. The general 10% private use 
limit effectively controls excess private business use of governmental 
tax-exempt bond issues.
7. Modify Private Loan Financing Limit on Governmental Bonds
    Present law. If more than the lesser of 5% or $5 million of the 
proceeds of a tax-exempt bond issue are used to finance a loan to a 
private person, the bonds generally are treated as private activity 
bonds (even if there is no private business use).
    Example. If tax-exempt governmental bonds are issued in the 
principal amount of $20 million to finance governmentally-used public 
housing facilities, up to $1 million (5%) of bond proceeds may be used 
to make low-interest consumer loans to low-income persons to provide 
rental assistance. If, instead, no loans were made from this bond 
issue, then up to $2 million of the proceeds (equal to 10% of the 
proceeds), could be used to finance housing units to be rented to 
private businesses without impairing the governmental, non-private 
activity status of the bonds under the general private business 
limitations.
    Reason for Change. For Federal tax purposes, the distinction 
between a ``use'' and a ``loan'' of bond proceeds is often artificial 
and is difficult to discern. The main intent of the private loan test 
was to limit the use of proceeds to make loans to persons not in a 
trade or business (e.g., consumer loans) in circumstances outside of 
the existing tax-exempt private activity bond programs, such as single-
family housing and student loans. The existing provision also can be 
interpreted to place an additional, lower private business restriction 
on loans made to private businesses. Given the complexity of the 
private loan test limit and the similar policy of controlling private 
activity bond volume, the private loan test should be modified to be a 
straight 10% limitation which corresponds to the general private 
business limitation.
8. Repeal Volume Cap Requirement For Governmental Bond Issues With a 
        Nonqualified Private Business Amount in Excess of $15 Million
    Present law. Volume cap is required for tax-exempt governmental 
bond issues that have private business use or private payment or 
security that is within the general permitted 10% threshold, but that 
has a ``nonqualified amount'' of private business involvement which 
exceeds $15 million.
    Example. Assume that an issuer issues bonds in the amount of $200 
million. Because of the $15 million limitation, without obtaining 
volume cap, the issuer would be limited to $15 million of private 
business involvement. If, however, this issuer issued two separate 
issues of tax-exempt governmental bonds in principal amounts of $100 
million each, the issuer would be permitted the full 10% amount of 
private business involvement for each bond issue under the general 
private business restrictions, which would aggregate $20 million of 
permitted private business involvement.
    Reasons for Change. Mandating that an issuer receive volume cap 
where the amount of private business use or private payments and 
security (i.e., the nonqualified amount) exceeds $15 million has no 
sound tax policy justification. The general 10% private business limits 
on tax-exempt governmental bonds adequately address the level of 
private business involvement and should serve as the exclusive 
restrictions.
9. Repeal Restriction on Governmental Acquisition of Certain Private 
        Output Facilities
    Present law. If more than the lesser of 5% or $5 million of the 
proceeds of a bond issue are used by a State or local governmental unit 
to acquire a privately-owned electric or gas facility, the bonds 
generally are impermissible private activity bonds.
    Example. Suppose a city determined that it wanted to purchase an 
existing electric generation or transmission facility to be used by the 
city to assure reliable electric service for its citizens. Under 
present law, any bonds issued by the city to finance the acquisition of 
such an existing electric generation or transmission facility from a 
seller which was a private utility would be treated as taxable private 
activity bonds, absent meeting another exception for certain local 
furnishing of electricity.
    Reason for Change. In many circumstances, State and local 
governments determine to provide electricity or natural gas services to 
their citizens for reasons which include reducing utility rates, 
assuring reliability, and assuring adequacy of supply. One appropriate 
way to accomplish these public purposes may be for the State or local 
government to acquire output facilities from a private utility. The 
acquisition may be the result of negotiations on price or the 
acquisition may be through eminent domain proceedings based on payment 
of fair market value and a finding that a more important public purpose 
will be achieved by the acquisition than can be achieved through 
continued private ownership. The prohibition on the acquisition of 
privately-owned electric or gas facilities with tax-exempt governmental 
bonds represents an impairment of the ability of local government to 
serve their citizens. From a tax policy perspective, State and local 
governments properly ought to be able to use tax-exempt governmental 
bonds to carry out these public purposes by financing either new output 
facilities or acquiring existing privately-owned output facilities.
II. Simplification Proposals Relating to Qualified Private Activity 
        Bonds and Other Matters
1. Repeal the Alternative Minimum Tax Preference on Private Activity 
        Bonds
    Present law. Although interest on qualified tax-exempt private 
activity bonds is excluded from Federal gross income, this interest is 
not tax-exempt for purposes of the Federal alternative minimum tax. 
Instead, this interest must be included in a bondholder's tax base as 
an item of tax preference for purposes of computing the bondholder's 
Federal alternative minimum tax.
    Example. If a holder of qualified tax-exempt private activity bonds 
receives $100,000 of interest on the bonds in a year, that amount is 
not included in the holder's Federal adjusted gross income for 
computing the holder's Federal regular income tax. That interest, 
however, is required to be added to the holder's Federal adjusted gross 
income base in determining whether the holder is subject to the Federal 
alternative minimum tax.
    Reason for Change. The repeal of the alternative minimum tax 
preference on tax-exempt qualified private activity bonds will simplify 
the tax-exempt interest exclusion, enhance market demand for these 
bonds, and increase market efficiency. In the municipal market, private 
activity bonds which are subject to the alternative minimum tax carry a 
punitive higher interest rate. This higher interest cost adds to 
Federal tax expenditures without a corresponding increase in Federal 
tax revenues because investors subject to the alternative minimum tax 
do not purchase these bonds. The proposed repeal of the alternative 
minimum tax preference on tax-exempt bonds will have increasing market 
significance as an increasing number of taxpayers are expected to be 
subject to this tax in future years. The increased demand for tax-
exempt private activity bonds from this proposed change should have the 
effect of lowering the interest rates on private activity bonds by an 
estimated 10 to 25 basis points. This proposed change should decrease 
the burden on the tax-exempt bond market and increase Federal revenues.
2. Complete the Repeal of the $150 Million Nonhospital Bond Limitation 
        on Qualified 501(c)(3) Bonds
    Present law. The Taxpayer Relief Act of 1997 provided for the 
partial repeal of the $150 million limitation on qualified 501(c)(3) 
bonds used to finance facilities besides hospitals for Section 
501(c)(3) nonprofit organizations. Vestiges of the $150 million 
continue to apply to qualified 501(c)(3) bonds in a number of 
circumstances, including: (i) outstanding bonds issued before August 5, 
1997 for capital expenditures; (ii) certain refundings of those bonds; 
and (iii) nonhospital bonds 5% of the net proceeds of which were used 
for working capital expenditures.
    Example. If bonds were issued in 1996 to construct a Section 
501(c)(3) university building, those bonds were, and continue to be, 
subject to the $150 million limitation. Also, certain bonds now issued 
to refund those bonds are subject to the limitation. If $50 million of 
bonds are now issued to finance a Section 501(c)(3) university 
classroom building and more than $2.5 million (5% of $50 million) of 
proceeds are used for working capital, then those bonds are also 
subject to the $150 million limitation.
    Reason for Change. The complex analysis and monitoring requirements 
associated with tracking the continuing vestiges of the $150 million 
nonhospital bond limitation undermine the tax policy inherent in the 
predominant repeal of this provision. Many universities and other 
501(c)(3) organizations have bonds outstanding which have been issued 
in furtherance of their charitable purposes in order to fulfill those 
purposes at the lowest possible cost. The continuance of a small 
portion of the $150 million limitation into the future may limit the 
ability to refund those bonds to provide cost savings (i.e., a borrower 
may not have any room under the cap to advance refund bonds subject to 
such limitation) or limit the ability to merge or combine with other 
institutions having outstanding bonds subject to the limitation (i.e., 
two unrelated organization may not be permitted to merge in the event 
the new combined entity has in excess of $150 million of bonds 
allocable to it). The bifurcation regime of having pre-August 5, 1997 
non-hospital bonds subject to this limitation, and post-August 5, 1997 
bonds exempt from this limitation creates undue tax complexity without 
any discernible benefit to the Treasury.
3. Eliminate the Specific Identification Requirement for Volume Cap 
        Carryforward for Private Activity Bonds
    Present law. Private activity bonds are subject to a statewide 
volume cap. If the full amount of the cap is not used in any year, the 
unused portion may be carried forward. To be eligible, a carryforward 
election must identify the specific purposes of the use of the bonds to 
be carried forward and must identify the carryforward amount to be used 
for each identified purpose.
    Example. If a local government has been allocated state volume cap 
in the amount of $30 million in a particular year, and only $25 million 
is applied to qualified private activity bonds issued in that year, the 
remaining $5 million may be ``carried forward'' to subsequent years if 
an appropriate election is made which specifically identifies the 
purpose for which the bonds carried forward are to be used. If, 
however, the specific identification of the carryforward purpose is not 
made, or if the purpose for which the specific identification is made 
is not financed, the volume cap is forever lost.
    Reason for Change. The complexity associated with monitoring of 
private activity bond volume cap carryforwards for particular 
facilities and tracking expirations of elections under a stacking order 
is unwarranted. Identifying the total amount of the unused private 
activity bond volume cap in a particular year should be sufficient. 
Financing circumstances will often change in terms of the facilities 
and amounts needed to be financed despite an issuer's bona fide 
expectations at the time of a carryforward election. These 
circumstances may involve anything from the discovery of environmental 
hazards on a proposed construction site to an unexpected shift in 
government priorities.
4. Repeal 25% Land Acquisition Restriction on Private Activity Bonds
    Present law. For private activity bonds, only an amount equal to 
less than 25% of the net proceeds may be used for the acquisition or 
land or an interest therein.
    Example. If private activity bonds in the amount of $10 million are 
issued by a city to finance a low-income rental housing project, only 
an amount equal to less than 25% of the net proceeds or $2.5 million 
may be used to acquire the land on which the facility is to be located, 
regardless of whether the project is in a high-cost urban redevelopment 
area or a low-cost rural area.
    Reason for Change. The cost of land continues to increase. In some 
urban areas, for example, the cost of the land may be disproportionate 
to other project costs when compared to other geographic areas, placing 
these projects at a disadvantage. There is no sound tax policy reason 
to penalize tax-exempt private activity bonds in high land-cost areas, 
such as inner cities with acute redevelopment needs. In light of other, 
more logical, restrictions on private activity bonds, including the 
state volume cap on private activity bonds, the land acquisition 
restriction seems unnecessary. In addition, the substantive 
requirements relating to the eligible uses of private activity bonds, 
including the general requirement that costs be functionally related 
and subordinate to the project purpose, limit the overall uses of 
proceeds appropriately.
5. Repeal Existing Property Acquisition Restriction on Private Activity 
        Bonds
    Present law. For private activity bonds, proceeds generally may not 
be used to finance existing property unless rehabilitation expenditures 
in an amount equal to least 15% of the portion of the acquisition costs 
of building (or 100% for certain other structures) financed with the 
net proceeds of the bonds are made within a prescribed 2-year period.
    Example. If private activity bonds in the amount of $10 million are 
to be issued by a city to finance the acquisition of an existing low-
income rental housing facility consisting of land costing $1 million 
and a building costing $9 million, then interest on the bonds is not 
tax-exempt unless $1.35 million (15% of $9 million) is spent for 
rehabilitation expenditures related to the building within a prescribed 
2-year period.
    Reason for Change. The existing property acquisition restriction 
was originally enacted to address concerns regarding accelerated 
depreciation of tax-exempt bond financed property. Such provisions no 
longer exist. Moreover, the long depreciation periods for tax-exempt 
bond-financed property under current law provide a disincentive for 
this financing. In general, the state volume cap limitation adequately 
controls the amount of private activity bonds that may be issued to 
finance existing property. Bond proceeds cannot be used to acquire used 
equipment, which can be the most cost effective method for a business. 
The definition of rehabilitation is technical and can require 
considerable legal analysis. Finally, the 15% rehabilitation 
requirement for buildings is arbitrary and the 100% rehabilitation 
expenditure requirements for other types of costs lack a sound policy 
footing and are unduly burdensome.
6. Overhaul the TEFRA Public Approval Requirement on Private Activity 
        Bonds
    Present law. All qualified tax-exempt private activity bonds must 
meet a public approval requirement prior to the issuance of the bonds. 
The public approval must be done by the applicable elected 
representative of governmental unit issuing the bonds and, with certain 
exceptions, by each governmental unit in which the bond-financed 
facility is to be located. The public approval can take place only 
after a public hearing with specified public notice.
    Example. If qualified tax-exempt private activity bonds are to be 
issued by a city to finance a nonprofit hospital located within the 
city and within another city, the governing body of both cities must 
approve the bonds after a public hearing. If bonds are to be issued by 
a state for a multifamily housing facility to be located in a city, the 
bonds must be approved by the governor of the state (or other 
designated elected official) following a public hearing.
    Reason for Change. While one cannot object in theory to a good 
government ``sunshine'' policy in favor of public hearings and public 
approval, in practice, most State and local governments believe that 
this TEFRA public approval requirement is costly, cumbersome, and 
ineffective. Members of the public rarely attend the public hearing 
required by this provision. This provision often conflicts with or is 
duplicative of state law requirements relating to the issuance of 
bonds. These state laws generally require a public hearing when the 
legislature enacting the state law has determined a hearing to be 
appropriate and useful Federal tax law should not interfere with what 
is essentially a local matter regarding the issuance of debt for the 
facility in question. In addition, this requirement has long outlived 
part of its original purpose to control private activity bond volume 
and it predates the volume cap. The private activity bond volume cap is 
sufficient to control private activity bond volume.
7. Repeal 2% Issuance Cost Limit on Private Activity Bonds
    Present law. For private activity bonds, issuance costs financed by 
the issue generally may not exceed 2% of the proceeds of the issue.
    Example. If private activity bonds in the amount of $1 million are 
issued by a health care authority on behalf of a Section 501(c)(3) 
organization to finance hospital improvements, then interest on the 
bonds is not tax-exempt if more than $20,000 of the bond proceeds is 
spent for issuance costs.
    Reason for Change. The 2% bond issuance cost limit reflects undue 
micromanagement of State and local governmental finance. Other tax-
exempt bonds restrictions already provide appropriate economic 
incentives for issuers to control issuance costs and generally limit 
tax-exempt bond financed issuance costs to 5% in any event for most 
private activity bonds. For aperiod of time in the early 1980s, issuers 
could ``recover'' the costs of issuance under the arbitrage rules. 
Thus, if issuance costs were included in the yield on tax-exempt bonds 
in the arbitrage yield calculation, the arbitrage yield would increase 
which will permit an issuer to retain more investment earnings not 
subject to rebate. Changes to the arbitrage rules in the 1986 Tax Act, 
however, now prevent issuers from ``recovering'' issuance costs of 
bonds in the arbitrage yield on their bonds. This change has the effect 
of restricting the excessive use of proceeds for issuance costs because 
the issuer must now pay the amounts back for its own funds rather than 
arbitrage profits, which makes the 2% limit unnecessary. Also, under 
the private activity bond rules, at least 95% of net bond proceeds must 
be spent for the private activity project being financed. Finally, the 
2% issuance cost limitation imposes a disproportionate burden on small 
issuers because the dollar amounts of issuance costs do not generally 
decline as the principal amount of bonds declines.
8. Repeal Special $15 Million Private Business Limit on Governmental 
        Electric and Gas Facility Bonds
    Present law. If 5% or more of the proceeds of tax-exempt 
governmental bonds will be used for an electric or gas output facility, 
the maximum amount of the bonds that may be applied to private business 
use is $15,000,000, taking into account proceeds of prior bond issues 
used for the same project.
    Example. Assume that tax-exempt bonds in the principal amount of 
$100 million are issued to finance a governmental gas generation 
facility. Under the private business tests, up to $10 million may be 
used for facilities providing for the take-or-pay sale of output to a 
private utility under the 10% private business use restriction. If, 
however, a second issue of tax-exempt governmental bonds of $100 
million is issued for the same project, then only $5 million of that 
issue may be used for such output contract facilities even though 10% 
of the proceeds otherwise would be permitted to be used for private 
business use under the general private business restrictions. If, 
further, a third issue of tax-exempt governmental bonds of any amount 
is issued for the same project, no proceeds may be used for such output 
facilities even though 10% otherwise would be permitted under the 
general private business limitations.
    Reason for Change. State and local governmental production and 
transmission electricity and gas appropriately serve governmental 
purposes of benefit to the general public. It is punitive and 
inappropriate to subject those purposes to a special limit other than 
the general 10% private business use test. Moreover, as a matter of 
federal energy policy, the existing special $15 million private 
business restriction may frustrate the Federal Energy Regulatory 
Commission's efforts to open up the nation's transmission grid to 
public access.
9. Add An Exception to the Arbitrage Rebate Requirement for All Short-
        Term Bona Fide Debt Service Funds
    Present law. A ``bona fide debt service fund'' is a fund used to 
match revenues and debt service expenses each year. These funds 
generally must be fully depleted each year, subject to certain 
reasonable carryover amounts. For this reason, bona fide debt service 
funds are constrained to invest in short-term investments. Bona fide 
debt service funds are eligible for exceptions to the arbitrage rebate 
requirement if either: (i) the bonds are governmental, fixed-rate, non-
private activity bonds with an average maturity of at least five years; 
or (ii) the gross earnings on such a fund in a year are less than 
$100,000.
    Example. If governmental tax-exempt bonds are used to construct a 
public airport runway, and revenues are deposited in a bona fide debt 
service fund to pay debt service on the bonds, the bond fund is not 
subject to the rebate requirement if the average maturity of the bonds 
is at least 5 years and the interest on the bonds is fixed (rather than 
variable). If, however, private activity bonds are issued to finance 
terminal facilities leased to airlines, the debt service fund will be 
subject to the rebate requirement if the gross earnings on the fund in 
the year are more than $100,000.
    Reason for Change. The present law exceptions to arbitrage rebate 
for bona fide debt service funds are very complex. Yet, at the same 
time, bona fide debt service fund generally must be depleted annually 
and typically are invested at yields well below the bond yield because 
of the inherently short-term nature of the investments. Moreover, bona 
fide debt service funds may actually ``blend down'' other higher-
yielding investments and thus decrease the amount of rebate owed to the 
Federal Government. The provision of a blanket exception to arbitrage 
rebate for bona fide debt service funds will simplify the law and may 
well have a positive revenue impact in terms of increased rebate 
amounts to be paid to Federal Government.

                                 

                                             Public Finance Network
                                               Washington, DC 20004
                                                    October 7, 2004

The Honorable Jim McCrery
Chairman, Subcommittee on Select Revenue Measures
Committee on Ways and Means
U.S. House of Representatives
1135 Longworth House Office Building
Washington, D.C. 20515

Dear Chairman McCrery:

    The organizations listed above, which are members of the Public 
Finance Network, appreciate the Select Revenue Subcommittee of the 
House Ways and Means Committee's invitation to submit to the record 
comments on improving and simplifying the tax code. As representatives 
of a broad coalition of state and local government officials and 
professionals, we appreciate your willingness to consider changes to 
the tax laws important to state and local governments and non-profit 
organizations who issue tax-exempt bonds. Please consider this letter 
as our submission for the record.
    Since the significant changes made to the Internal Revenue Code in 
1986, local and state governments and other government authorities have 
been tackling the complexities incorporated into Code which relate to 
tax-exempt bonds. The costs of compliance, as well as the costs 
associated with hiring professionals to assist these entities with 
their obligations is staggering. We believe that relatively simple 
changes to the tax code can be made that would save local and state 
governments billions of dollars in the years ahead.
    The burdens of compliance, as well as the sometimes inefficient 
manner in which governments may utilize the tools available to them to 
lower their debt burden and save significant amounts of taxpayer 
dollars, are startling. We believe that Congress should closely examine 
these issues when it addresses tax simplification measures and tax 
reform.
    At a time when direct aid to local and state governments is 
decreasing, finding untraditional mechanisms to assist our members has 
often been discussed by Congress, but rarely addressed in a significant 
manner. This lack of Congressional assistance, coupled with the 
struggling budgets that local and state governments have endured over 
the past few years, have created a situation where governments have had 
to cut services, delay infrastructure improvements and projects, and 
neglect joint opportunities with the private sector, all at the 
detriment of the citizens that are served by every layer of government. 
We believe that a cooperative approach to addressing these issues 
between our organizations and the federal government is key to ensure 
that better and more efficient financial opportunities will exist in 
the future.
    There are many ways in which Congress may help local and state 
governments through tax simplification and reform measures. While there 
are many items to consider, we would like to highlight four areas that 
are critical to state and local governments and other public finance 
organizations.
Arbitrage Rebate
    There is no greater burden to issuers of tax-exempt debt than 
complying with federal arbitrage rules. This is true both for smaller, 
less frequent issuers of public debt who often do not have the staff or 
the sophistication to comply with the rebate requirement and more 
regular issuers of debt who find themselves bearing enormous 
administrative costs in complying with the rebate rules as they apply 
to multiple bond issues. Moreover, these compliance costs are too often 
disproportionate to the potential arbitrage benefit involved. These 
issuers need relief from strict arbitrage restrictions that require 
governmental and non-profit issuers to incur significant compliance 
costs. Funds that are used to pay rebates and assure compliance could 
otherwise be used to reduce tax-exempt borrowing.
    Two areas in particular require remedy. First, the amount of annual 
debt exempted from arbitrage rebate restrictions should be raised from 
$5 million to $25 million. Such a simplification would significantly 
ease issuers' cost of compliance with the U.S. tax code and, while 
affecting the number of bond issues, it would not significantly affect 
the volume of bond issuance. The inflation rate alone since 1986 would 
justify a significant increase. Second, extending the spend-down 
exception from two years to three, as recommended in the 2001 Joint 
Committee on Taxation's proposal, is a simple, sensible approach to 
this perennial problem faced by issuers of all types of tax-exempt 
bonds. Where a bond issue is not issued earlier than necessary and the 
proceeds are spent within a reasonable time frame, there is no need to 
subject issuers to the arbitrage rebate requirement.
Bank Deductibility
    Targeted liberalization of tax restrictions on ``bank 
deductibility,'' or bank qualified bonds, would ensure that small 
governments and charities (e.g., health care and higher education 
facilities) have access to reasonably priced capital.
    The so-called small issuer exemption of $10 million bank eligible 
level, set in 1986, is unrealistic in the 21st Century. This exemption 
is meaningless for many small governments that have regular capital 
needs higher than $10 million and governments often defer needed 
projects until a subsequent calendar year in order to comply with the 
$10 million limit in any one year. Additionally, in the face of rising 
compliance costs that did not exist when the $10 million limit was set, 
bank eligible financing is an attractive and vastly more efficient 
vehicle for these smaller entities. We strongly recommend that the 
level be raised to $25 million and indexed for inflation thereafter.
    Furthermore, we believe the ill-fitting and out-of-date exemption 
from the general restriction on bank qualification, focused as it is on 
the total annual issuance of the issuer and not the borrowings of the 
beneficiary, and should instead apply, optionally, at the beneficiary 
level. Issuers should have the option to apply even the existing 
exemption at the beneficiary level to bank qualify the bonds. The added 
savings from this simple, yet significant, change would substantially 
assist the programs, citizens, patients and students of these 
governments and charities.
Advance Refunding
    In order to provide state and local governments with the tools and 
flexibility to face changing circumstances, we urge that additional 
opportunities to advance refund outstanding debt be provided. Issuers 
currently have only one opportunity to take advantage of favorable 
market conditions and achieve lower borrowing costs. Given current 
economic uncertainties that increasingly pinch state and local 
government budgets and the increased and unforeseen burdens of funding 
safeguards against terrorism, issuers should be permitted to benefit 
from the low interest rate environment through additional advance 
refunding opportunities. Additional opportunities may be accomplished 
by amending current Code Section 149(d)(3) or by adopting regulations 
which interpret the term ``original bond'' as provided in current Code 
Section 149(d)(3) of the Code to mean the most recent issue issued for 
a project. Attached to this letter are specific legislative and 
regulatory proposals with regard to advance refunding.
Expansion of Public-Private Partnerships
    Finally, we recommend a relaxation of tax rules related to the use 
of tax-exempt bonds in public/private partnerships. Many vital economic 
development projects require significant public commitment combined 
with private investment. The ability to fund the public share of costs 
with tax-exempt bonds allows these projects to proceed. Current tax 
laws and the prohibitions on private use create inefficiencies and 
higher costs, such that many of these types of projects become 
financially unfeasible.
    For example, publicly funded parking structures integrated with 
private retail establishments ensure safe and easy access to 
facilities. Such projects are difficult to fund with tax-exempt bonds, 
however, because of restrictive private activity bond rules.
    We recommend that the threshold test for acceptable private 
business use be increased, the list of facilities eligible for tax-
exempt government bonds be expanded, to increase the private activity 
cap, and that more flexible allocation rules be developed to facilitate 
private participation in public projects.
Conclusion
    The National Association of Bond Lawyers' (NABL) submission to the 
Subcommittee addresses many other technical concerns regarding current 
tax-exempt bond rules. We applaud NABL's extensive comments in this 
regard, and will continue to work closely with them in the future on 
these matters.
    The struggle for tax simplification, especially in such a 
specialized area as tax-exempt bonds, is an enormous task and we 
greatly appreciate your consideration of the concerns that we outlined 
in this letter. Please do not hesitate to contact Susan Gaffney, 
Director of the GFOA's Federal Liaison Center if you need further 
information. We look forward to speaking with you soon on these 
proposals.
            Sincerely,
                                                      Susan Gaffney
                            Government Finance Officers Association

                                                       Rick Farrell
                    Council of Infrastructure Financing Authorities

                                                          Rob Carty
                   International City/County Management Association

                                                 Alysoun McLaughlin
                                   National Association of Counties

                                                      Chuck Samuels
  National Association of Higher Educational Facilities Authorities

                                                 Cornelia Schneider
  National Association of State Auditors, Comptrollers & Treasurers

                                                        Chris Allen
                           National Association of State Treasurers

                                                      Chuck Samuels
          National Council of Health Facilities Finance Authorities

                                             Marilyn Mohrman-Gillis
                                          National League of Cities

                                                        Larry Jones
                                          U.S. Conference of Mayors

                                 
Statement of W. Thomas Kelly, Savers and Investors League, Mirror Lake, 
                             Hew Hampshire
    This submission pertains to the Individual Investment Account Act 
(H.R. 3397, 108th Congress) as sponsored by Representative Jim McCrery. 
This legislation's purpose is to increase our nation's personal saving 
and investing by taxing such saving and investing only once. Such 
taxation is vital and proper.
    A person can only do only two things with his or her income (e.g. 
wages): spend it or save it. If income is spent, it's taxed only once. 
If it is saved and invested, it is taxed multiple times in several 
ways. All economists agree that the existing income tax is biased 
against savings. This severe negative bias grows in a compounding 
fashion as investment durations increase.
    Individual Investment Accounts (IIAs) remove the income tax's bias 
against saving and investing in a simple, fiscally sound, and 
politically desirable way. IIAs impact every person's finances in a 
positive way. The IIA proposal can sway elections and properly so.
    IIAs operate like traditional, tax deductible IRAs thereby 
providing tax deferred saving and investing. IIAs permit anyone to 
participate regardless of age, income or employment status. Plan 
contributions are unlimited. There are no forced distributions at any 
age nor restrictions or penalties on plan withdrawals. There are no 
estate taxes at death. Participants and beneficiaries pay ordinary 
income tax upon any account withdrawal.
    Ponder the economic, fiscal and political power of this IIA 
legislation that is fully described above in just five short, easily 
understood sentences! Undoubtedly, the initial reaction of many members 
of Congress will be that the so-called ``costs'' of this legislation 
will be too high. The Joint Tax Committee staff will ``score'' IIAs as 
being a ``tax expenditure'' with a probable cost magnitude that's 
astronomical, but wrong. See comments below.
                               Commentary
      Nothing is more important to the U.S. economy now and for 
the future than creating more capital from increased personal saving 
and investing. Such an increase will reduce the cost of short and long 
term capital, create jobs, increase wages, and improve standards of 
living. These powerful increases will compound as the years go by. 
Further, IIAs will take some of the monetary pressure off of Federal 
Reserve Chairman Alan Greenspan particularly in terms of curtailing the 
increase in longer term rates.
      The simplicity of IIAs is dramatic. Multiple intricate 
sections of the tax code usually dealing with definitions of income vs. 
gain become irrelevant with IIAs to everyone's advantage. Every person 
understands IRAs and thus IIAs. The administration of IIAs is the same 
as IRAs.
      People of all ages, ethnic backgrounds, levels of income, 
family size, etc., will welcome IIAs. They can and will use investment 
choices (savings accounts, banks, stocks, mutual funds, etc.) that fit 
their needs and desires as they may change over their lives. IIAs can 
become their primary depository for savings and investing.
      IIAs provide a vital, most desirable, flexibility for 
taxpayers as to when they pay their income taxes. For example, the tax 
on a large bonus can be deferred in whole or in part by how much of it 
is contributed to the person's IIA. Professional athletes with high 
incomes over a few years can defer their taxes to later years when 
their incomes are lower. The same can be said for farmers and 
entertainers who have multiple up and down years in terms of taxable 
income. This tax deferral flexibility applies not only to income 
received but also as to when the accumulated tax deferred IIA values 
are consumed (spent) and then taxed. Roth-type IRAs provide no tax 
timing flexibility; you're fully taxed when non-plan income is 
received.
      Many large and small employers will welcome IIAs. If 
desired, they can provide higher levels of wages in lieu of some or all 
fringe benefits. Each employee can then choose the amounts of their own 
tax deductible savings. Enron-type debacles can be avoided in regards 
to company stock.
      Competition and innovation will create new fringe benefit 
plans for personal choice that can substitute for employer-provided 
plans including life insurance, health insurance and pensions. Various 
associations (work related or otherwise) or various unions will offer 
such plans, too. The cost savings and the wider breadth of benefits 
derived from group underwriting can be achieved. Employers will be able 
to focus on their core business and not have to be fringe benefit 
providers, too. Great efficiencies can flow from this realignment of 
responsibilities that flow from the use of IIAs.
      IIAs are fully portable as people proceed through life 
with various employers.
      The U.S. media is full of articles about the high levels 
of existing personal and family debt. IIAs provide the proper free 
enterprise solution that helps curtail this serious problem. Our 
existing income tax is biased in favor of spending over saving. IIAs 
are neutral (unbiased) on those ever-present spend or save decisions we 
all face as we go through life.
      The tax expenditure cost of IIAs as measured under 
existing tax expenditure budget rules will be a very large finite 
number but truly useless for rational legislative purposes. The methods 
used by staff to arrive at the alleged costs are flawed in the extreme. 
The methods produce losses when gains are occurring and vice versa. 
After studying the use of tax expenditure costs as applied to tax 
deferred pension plans, a leader in the actuarial professions concluded 
that such tax expenditure costs could only be good by accident! Other 
qualified experts have expressed similar views.

    Each member of Congress should note that tax deductions for 
contributions to all qualified plans (e.g., IRAs, IIAs, 401(k)s, etc.) 
are treated by the tax staff as an expense, i.e., a ``tax 
expenditure.'' However, each person who makes a tax deductible 
contribution has, therefore, a liability to pay a tax upon any account 
withdrawal. Thus, the government has a tax deferred asset of equal 
amounts to the taxpayer's liability. In reality then the government 
treats a governmental asset as an expense! Is it any wonder our 
government's scoring of tax legislation is so disastrously poor? Each 
member of Congress should review this assets-treated-as-an-expense 
notion with his or her accounting and economics friends within their 
state or district constituency. This subject will become one of great 
interest to all voters as the media becomes more interested in this 
extremely important matter. The enormous economic damage flowing from 
this governmental accounting error makes the recent corporate 
accounting errors look like small change.

      It is important to point out that the Administration's 
(Treasury Department's) Lifetime Savings Account (LSAs) proposal is 
virtually identical conceptually with IIAs. LSAs differ from IIAs in 
only two areas: (1) LSAs have a maximum yearly contribution of $5,000 
and (2) LSAs are Roth-type plans (no tax deduction for contributions, 
and no tax on withdrawals). LSAs are truly a valuable breakthrough in 
sound legislation except unfortunately, these two limits are self-
defeating because:
      Government should not place any limits on tax deferred 
personal saving and investing. Unimpeded by taxes investment growth 
regardless of amounts and investment duration is vital from everyone's 
perspective including the government's.
      The LSA limits cited above reduce the so called tax 
revenue ``costs'' solely for political reasons. These limits are self-
defeating for everyone concerned including the government because they 
constrain the thing needed most--more (maximum) voluntary personal 
saving and investing from all sources.
      LSAs, being a Roth-type plan, will be attacked by some 
legislators (and others) who claim that LSAs create a tax loop hole for 
the rich because the LSA after-tax saving and investing will never be 
taxed again.

    Individual Investment Accounts (IIAs) avoid the above two LSA 
problems that were derived solely from political concerns. Unlike LSAs, 
IIAs have been grass roots tested via polling among many Democrat and 
Republican oriented congressional districts and the response is 
overwhelmingly favorable.
    Having been an involved taxpayer for over thirty years on this 
vital subject of governmental taxation of personal saving and 
investing, I've often asked myself why Congresses and/or 
Administrations tax capital so harshly and in such a complex, 
irrational fashion. Conclusion: few legislators are economists, 
accountants or financial experts. Also, most legislators aren't 
directly involved in the tax analysis and tax writing process. New 
legislators soon learn to follow their party leaders with seniority. 
With the passage of time, too many legislators, while loved by their 
constituents, gradually assume (not infrequently with staff 
encouragement) an ``us vs. them'' (government vs. taxpayer) stature 
when it comes to drafting legislation. Tax legislation is constantly 
re-worked to close perceived loop holes that taxpayers might find and 
use. The net result produces legislation that (1) is virtually 
unfathomable, (2) is severely biased against everyone's interest, (3) 
curtails truly vital capital formation and growth, and (4) is worthy of 
W.C. Fields' famous line ``Never give a sucker an even break.'' Think 
about it. It's true.
    It is urged that each legislator review the League's website at 
www.savers.org. Tables, using an actual mutual fund's year by year 
investment performance since 1926, are presented therein that 
illustrate the real life impact of taxes upon personal saving and 
investing.
    It is appropriate to point out that this Subcommittee's Chairman, 
Representative Jim McCrery, has been a stalwart sponsor of the 
Individual Investment Account legislation over several Congresses. 
Others over past years have described this IIA tax proposal in most 
favorable terms. For example, Nobel Prize winning economist Dr. Milton 
Friedman has described IIA legislation as ``a great idea.'' Former 
Presidential candidate Steve Forbes has described IIAs in the same way. 
Former House Majority Leader Dick Armey (Mr. Flat Tax) and 
Representative Billy Tauzin (Mr. Sales Tax) have been co-sponsors. 
Senator John Breaux (Finance Committee and former DLC Chairman) has 
been a sponsor in prior Congresses. In short, solid, thoughtful, 
knowledgeable leaders (there are many others) have supported IIAs over 
past years. The constant impediment to enactment clearly has been the 
unrealistic staff scoring of alleged costs that scares away legislative 
support. The Treasury Department's proposal for Lifetime Savings 
Accounts (LSAs) demonstrates that fiscally sound, rational, tax 
deferred saving and investing is in the public interest. Even though 
LSA legislation is sound and good, IIA legislation is better for all 
concerned, including the government.
    The League will work to educate the grass roots public that the 
income tax as applied to their personal saving and investing is 
erroneous taxation that robs them of enormous amounts of investment 
growth that is properly theirs. This is a pocketbook issue that hits 
home with everyone.
    The League urges all House members of Congress to co-sponsor H.R. 
3397. The 109th Congress provides a major opportunity for enactment.

                                 
