[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
_____
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, JR., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York 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
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and clicking ``submit'' on the final page, an email will be sent to the
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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
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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
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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
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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
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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:
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\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.
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\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.
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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\
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\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\
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\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\
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\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.