[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




 
                PRESIDENT'S FISCAL YEAR 2007 BUDGET WITH
                    U.S. DEPARTMENT OF THE TREASURY
                          SECRETARY JOHN SNOW

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

                                HEARING

                               before the

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

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 15, 2006

                               __________

                           Serial No. 109-53

                               __________

         Printed for the use of the Committee on Ways and Means



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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

E. CLAY SHAW, JR., Florida           CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
PHIL ENGLISH, Pennsylvania           WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona               JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois               XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri           LLOYD DOGGETT, Texas
RON LEWIS, Kentucky                  EARL POMEROY, North Dakota
MARK FOLEY, Florida                  STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas                   MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York         JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin                 RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

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


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of January 31, 2006 announcing the hearing..............     2

                                WITNESS

U.S. Department of the Treasury, Hon. John Snow, Secretary.......     6

                       SUBMISSION FOR THE RECORD

Advanced Medical Technology Association (AdvaMed), statement.....    53


                PRESIDENT'S FISCAL YEAR 2007 BUDGET WITH
                    U.S. DEPARTMENT OF THE TREASURY
                          SECRETARY JOHN SNOW

                              ----------                              


                      WEDNESDAY, FEBRUARY 15, 2006

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 10:35 a.m., in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    [The advisory and revised advisories announcing the hearing 
follow:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
January 31, 2006
FC-16

                      Thomas Announces Hearing on

                President's Fiscal Year 2007 Budget with

                    U.S. Department of the Treasury

                          Secretary John Snow

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
President Bush's budget proposals for fiscal year 2007 within the 
jurisdiction of the Committee on Ways and Means. The hearing will take 
place on Tuesday, February 7, 2006, in the main Committee hearing room, 
1100 Longworth House Office Building, beginning at 1:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from the Honorable John Snow, 
Secretary of the Treasury. However, any individual or organization not 
scheduled for an oral appearance may submit a written statement for 
consideration by the Committee and for inclusion in the printed record 
of the hearing.
      

BACKGROUND:

      
    On February 6, 2006, President George W. Bush is expected to 
deliver his fiscal year 2007 budget to Congress. The President's budget 
includes numerous tax proposals and other issues that fall under the 
jurisdiction of the Department of the Treasury and the Committee.
      
    In announcing the hearing, Chairman Thomas stated, ``The 
President's budget includes tax and other issues related to the 
Department of the Treasury functions and the Committee. I look forward 
to reviewing the President's budget and discussing the relevant 
proposals with Secretary Snow.''
      

FOCUS OF THE HEARING:

      
    Secretary Snow will discuss the details of the President's budget 
proposals that are within the Committee's jurisdiction.
      

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 
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February 21, 2006. Finally, please note that due to the change in House 
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FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
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    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 
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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.

                                 

                  * * * CHANGE IN DATE AND TIME * * *

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
February 03, 2006
FC-16 Revised

                 Change in Date and Time for Hearing on

                President's Fiscal Year 2007 Budget with

                    U.S. Department of the Treasury

                          Secretary John Snow

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee hearing on President 
Bush's budget proposals for fiscal year 2007 with U.S. Department of 
the Treasury Secretary John Snow, previously scheduled for 1:00 p.m. on 
Tuesday, February 7, 2006, in the main Committee hearing room, 1100 
Longworth House Office Building, will now be held at a future date and 
time to be determined.
      
    All new details for the hearing will be announced in a subsequent 
advisory, including details for providing a submission for the record. 
All previously-received submissions will be carried over and should not 
be resubmitted. (For more information, see Full Committee Advisory No. 
FC-16, dated January 31, 2006).

                                 

                  * * * CHANGE IN DATE AND TIME * * *

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
February 06, 2006
No. FC-16 Revised #2

                 Change in Date and Time for Hearing on

                President's Fiscal Year 2007 Budget with

                    U.S. Department of the Treasury

                          Secretary John Snow

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee hearing on President 
Bush's budget proposals for fiscal year 2007 with U.S. Department of 
the Treasury Secretary John Snow, previously scheduled for 1:00 p.m. on 
Tuesday, February 7, 2006, in the main Committee hearing room, 1100 
Longworth House Office Building, will now be held on Wednesday, 
February 15, 2006, beginning at 10:30 a.m.
      
    The deadline to provide a submission for the record will now be 
close of business, Wednesday, March 1, 2006. All other details for the 
hearing remain the same. (See Full Committee Advisory No. FC-16, dated 
February 1, 2006).

                                 

    Chairman THOMAS. Good morning. This is the third in a 
series of hearings examining President Bush's proposed budget 
for fiscal year 2007. The Chair would like to welcome Secretary 
John Snow of the United States Treasury Department.
    As the Secretary knows, we were scheduled to hold this 
hearing last Tuesday, but the hearing was quite properly 
postponed due to the funeral of Coretta Scott King. Mr. 
Secretary, we thank you for accommodating our schedule and look 
forward to your testimony.
    As the President noted in his address to the Nation last 
month, the economy is growing at a very healthy rate. The 
economy created 2 million jobs last year. Average economic 
growth for the year was 3.1 percent. Unemployment is down to 
its lowest level since pre-9/11, 4-7 percent. Inflation remains 
contained.
    Due to the strong growth in the economy, tax receipts in 
the past 2 years have been increasing faster than expected. The 
Chair believes timely tax relief enacted in recent years--and I 
believe many prominent economists agree--has been an important 
contributing factor to this growth.
    While this hearing is geared to look to the future and the 
next budget, I want to note that the House and the Senate are 
now in conference on a tax reconciliation package which would 
maintain tax policies that have helped keep the United States 
economy strong. Congress is also working on a bill to 
strengthen the security of Americans' pension plans, but the 
Senate has not yet seen fit to do the necessary procedures to 
reach conferenceable level.
    The President's fiscal year 2007 budget proposal continues 
to focus on deficit reduction. Last week, the President signed 
the Deficit Reduction Act. I look forward to hearing about some 
of the President's proposals from you, Mr. Secretary, on how we 
can continue this trend of fiscal responsibility.
    Before I turn to the gentleman from New York, the Chair 
would like to advise members that immediately following this 
hearing, we will be marking up the views and estimates letter 
to the Budget Committee on aspects of the Federal budget that 
fall within the Committee's jurisdiction.
    The Chair recognizes the gentleman from New York for any 
comments he may wish to make.
    [The opening statement of Chairman Thomas follows:]

    Opening Statement of The Honorable Bill Thomas, Chairman, and a 
        Representative in Congress from the State of California

    Good morning. This is the third in a series of hearings examining 
President Bush's proposed budget for Fiscal Year 2007. The Chair would 
like to welcome Secretary John Snow of the U.S. Treasury Department. As 
the Secretary knows, we were scheduled to hold this hearing last 
Tuesday, but postponed it due to the funeral of Coretta Scott King. Mr. 
Secretary, we thank you for accommodating our schedule and look forward 
to your testimony.
    As the President noted in his address to the nation last month, the 
U.S. economy is growing at a healthy rate. This economy created two 
million jobs last year; average economic growth for the year was 3.1 
percent; and unemployment is down to its lowest level since July 2001 
at 4.7 percent and inflation remains contained.
    Due to the strong growth in the economy, tax receipts in the past 
two years have been increasing faster than expected. Timely tax relief 
enacted in recent years is, in my view and the view of many prominent 
economists, an important contributing factor to this growth.
    While this hearing is geared to look to the future and the next 
budget, I want to note that the House and Senate are [preparing for a 
conference/currently in conference] on a tax reconciliation package 
which would maintain the tax policies that have helped keep the U.S. 
economy strong. Congress is also working on a bill to strengthen the 
security of Americans' pension plans.
    The President's Fiscal Year 2007 budget proposal continues to focus 
on deficit reduction by keeping the economy strong and cutting 
unnecessary spending. Last week, the President signed the Deficit 
Reduction Act. That legislation, which reduced the deficit by almost 
$40 billion over the next five years, is part of our ongoing efforts to 
put our fiscal policies in order. I look forward to hearing about some 
of the President's proposals on how we can continue this trend of 
fiscal responsibility.
    Before I turn over the time to the Gentleman from New York, the 
Chair would like to advise Members that immediately following this 
hearing, we will be marking up the views and estimates letter to the 
Budget Committee on aspects of the Federal budget that fall within the 
Committee's jurisdiction.
    I now recognize the gentleman from New York, Mr. Rangel, for any 
opening statement he may have.

                                 

    Mr. RANGEL. Thank you, Mr. Chairman.
    Mr. Secretary, let me first publicly thank you for the many 
courtesies that you have extended to me by giving me some type 
of heads up as to things that the administration is considering 
doing. I am not used to it here in the House, and so I 
appreciated even more the fact that the President indicated 
that he was really looking forward to a less partisan approach 
to some of the programs that he was proposing. So I hope if 
time permits--and I know your schedule is limited--that you 
might go directly to the tax conference that we expect to have 
where the Senate appears to have said that they want tax cuts 
to include the alternative minimum tax as well as the corporate 
dividend and capital gain tax cuts. The President said that he 
wants that to be made permanent, and if possible, I would like 
to know what direction you might give the conferees.
    I am pretty confident that I will be selected as a 
conferee. I am not certain I will know where the conference 
will be held.
    Also, there is a concern about the report that you received 
as relates to tax reform. I hope you might include what, if 
anything, you intend to do with that.
    The President seemed to have revisited Social Security, and 
he is referring that to some type of a Committee or commission 
or something that I assume would look like it is bipartisan. To 
the extent that you can, we would like some help with that.
    Of course, everyone is concerned about the deficit, and I 
am certain that you believe that is no major problem to the 
United States. But I do not know whether you can do anything 
with this partisanship that we have. But it is abundantly clear 
that you should not expect Democrats just to support anything 
that is given to us. To the extent possible--and I know you are 
restricted, being in the executive branch--it would be helpful 
if you can make some suggestions as to those areas that we may 
have agreement how we can be supportive on at least some of the 
things that the President would want.
    Thank you once again for adjusting your schedule to meet 
with us.
    Chairman THOMAS. I thank the gentleman.
    Any member that may have a written statement can place it 
in the record, without objection.
    Mr. Secretary, we have received your written statement, and 
without objection, it will be placed in the record, and you can 
address us any way you see fit.

     STATEMENT OF THE HONORABLE JOHN SNOW, SECRETARY, U.S. 
                   DEPARTMENT OF THE TREASURY

    Secretary SNOW. Thank you very much, Mr. Chairman. I will 
be brief.
    It is always an honor and a privilege to appear before the 
Committee on Ways and Means, the Committee that has such effect 
on the lives of our country and means so much to the well-being 
of our country. I commend you for the work you do on this 
Committee.
    This is, Mr. Chairman, my fourth appearance before you. I 
thank Mr. Rangel for his comments. I would comment that 
appearing here today is far different than when I appeared 3 
years ago. Today, as you noted, Mr. Chairman, the economy is on 
a good path. Then it wasn't. Then growth was sluggish, capital 
spending was anemic, jobs were not being created at a 
sufficient rate. Today we have the other side of that. Today we 
have an economy that is growing an expanding. We have business 
confidence high. We have consumer confidence high. We have 
capital spending strong, and we have lots of good jobs being 
created, and we are seeing real wages rise. We are also seeing 
government revenues rise to the highest level in American 
history.
    I would urge you to continue to sustain the policies, 
support the policies that have made this possible, and at the 
center of those policies are the lower tax rates on capital and 
dividends that were enacted, Mr. Chairman, very much with your 
leadership back in May of 2003.
    The lower tax rates that were put in effect then have 
really put the American economy on the right path. They are at 
the center of this strong recovery we are enjoying, and it is 
awfully important to sustain that lower tax environment.
    The President's budget reflects his commitment to do just 
that, to keep the American economy growing and expanding. It 
also reflects the commitment to bringing the deficit down. We 
are all concerned about the deficit, but there are only two 
ways to deal with the deficit: one is to continue to have a 
strong, growing, expanding economy, creating more jobs and 
profitable businesses because that raises the tax receipts to 
the government; and, of course, the other side of the equation 
is to continue to be tightly attuned to controlling spending, 
spending constraint. Both of those ideas are embraced in the 
President's budget, along with the priorities of homeland 
security and prosecuting the war on terror effectively.
    With that, Mr. Chairman, I again thank you for the 
opportunity to appear before you and look forward to your 
questions.
    [The prepared statement of Secretary Snow follows:]

Statement of The Honorable John Snow, Secretary, U.S. Department of the 
                                Treasury

    Good morning. Thank you Chairman Thomas and Ranking Member Rangel 
for having me here this morning.
    I'm pleased to be here today to talk with you about the President's 
Fiscal Year 2007 budget. This budget represents the President's 
dedication to fiscal discipline, an efficient federal government and 
the continuation of a thriving U.S. economy.
    Across the board, agencies were asked by the President to look 
closely at their budgets and make tough decisions, because fiscal 
restraint is not only necessary for deficit reduction, it is a 
necessary component of government that is responsible to the people who 
employ it.
    Those tough decisions were made at all levels of government 
management, and as a result the President's budget holds the growth of 
discretionary spending below the rate of inflation and cuts spending in 
non-security discretionary programs below 2006 levels.
    The Administration has identified 141 programs that should be 
terminated or significantly reduced in size because they aren't 
performing or could perform better with consolidation; they aren't 
giving taxpayers their money's worth. The savings for the American 
taxpayer would be 14 billion dollars.
    Cutting the programs that aren't working and improving the 
efficiency of the ones that are is all part of accountability to the 
taxpayer. To assist lawmakers in this shared effort, the Administration 
launched ExpectMore.gov, a website that provides candid information 
about programs that are successful and programs that fall short, and in 
both situations, what they are doing to improve their performance next 
year. I encourage the members of this Committee and those interested in 
our programs to visit ExpectMore.gov, see how we are doing, and hold us 
accountable for improving.
    This budget, with its policies of economic growth and spending 
restraint, keeps us on track to meet the President's steadfast goal of 
cutting the deficit in half by 2009.

[GRAPHIC] [TIFF OMITTED] T1493A.001


[GRAPHIC] [TIFF OMITTED] T1493A.002


    The budget also seeks to avoid a tax increase by making the 
President's tax cuts permanent; I want to take a moment to explain why 
that is entirely consistent with our deficit-cutting goals.
    In short, lower tax rates are good for the economy and a growing 
economy is good for Treasury receipts. Indeed, our rate of economic 
growth led to record levels of Treasury receipts in 2005. And, going 
forward, we project that receipts will rise every year. In 2011 we will 
again reach, as a percentage of GDP, the levels we've seen over the 
average of the last 40 years.
    And there can be no question today that well-timed tax relief, 
combined with responsible leadership from the Federal Reserve Board, 
created an environment in which small businesses, entrepreneurs and 
workers could bring our economy back from its weakened state of just a 
few years ago. Tax relief encouraged investment, which has ultimately 
led to job growth. The American economy is now unmistakably in a trend 
of expansion, and those trend lines can clearly be traced to the 
enactment of the tax relief.

[GRAPHIC] [TIFF OMITTED] T1493A.003


[GRAPHIC] [TIFF OMITTED] T1493A.004


    Since May of 2003, the economy has created 4.7 million jobs, two 
million of them in the last year alone.

[GRAPHIC] [TIFF OMITTED] T1493A.005


    That's a lot of job growth, and there are a lot of very good jobs 
in that number. Industries with above-median hourly earnings and 
particularly large jobs gains since August 2003 include: specialty 
trade contractors (463,000 workers paying an average hourly wage of 
$19.55), ambulatory health care services (394,000 workers $17.86), and 
building construction (167,000 paying $19.05).

[GRAPHIC] [TIFF OMITTED] T1493A.006


    We found out the week before last that unemployment has fallen from 
4.9 percent to 4.7 percent, running lower than the average for the 
1970s, 1980s and 1990s. GDP growth was three and a half percent last 
year.

[GRAPHIC] [TIFF OMITTED] T1493A.007


    U.S. equity markets have risen, and household wealth is at an all-
time high.
    Additionally, real per capita disposable (after-tax) income has 
risen by 7.3 percent from 2000 to 2005 and that's very good news for 
workers.
    The U.S. is, as the President often notes, the economic envy of the 
world.
    When we look at the underlying fundamentals of the economy, its 
strength proves deep and solid, and we can see that businesses and 
workers have every reason to be optimistic about the future.
    For example, we see that productivity growth remains strong. Output 
per hour in the non-farm business sector has risen at an average annual 
rate of 3.2 percent since the end of 2000, faster than any five-year 
period in the 1970s, 1980s or 1990s.
    Household net worth--that's assets minus debts--is a record high, 
and not just because of housing. Deposits--the money in checking 
accounts, savings accounts, and money market funds--are at a record 
high and are larger as a share of disposable income than at any time 
since 1993. Defaults on residential mortgage loans at commercial banks 
are at historic lows.
    In the past two years, the economy has generated about 170,000 jobs 
per month, and that includes the two-month slowdown in job growth in 
the aftermath of Hurricanes Katrina and Rita. In the past 32 years, new 
claims for unemployment insurance have almost never been as low as they 
have been recently, the only exception being the peak of the high-tech 
bubble from November 1999 to June 2000.
    Core inflation remains low, and that's good news for everyone.
    Independent private-sector forecasts point to continuing good news, 
and inflation-adjusted hourly wages grew 1.6 percent between September 
and December and this trend should continue.
    We are, it appears, witnessing the tipping point on wages--when 
incomes rise for workers and business combined, but workers once again 
increase their incomes faster than businesses. Once businesses have 
been doing well for a while, they ultimately compete those increases in 
income away by competing harder for labor. The result is higher wages 
and higher standards of living for workers.
    Both on leading indicators and a deeper background analysis, the 
American economy proves to be on solid footing. The question that those 
of us in government must look at now is this: why is our economy 
performing so well and what can we do to continue these positive 
trends?
    It is a sweeping and important question, so today we'll ask a more 
focused question: what can our budget do, or not do, to keep the 
economy on track?
    The answer to that is twofold: first, control spending. Second, 
don't increase taxes--let taxpayers keep as much of their money as 
possible to invest and spend.
    And of course I use the term ``taxpayer'' quite broadly. I ask you 
to think of the individual and family budgets that benefit from lower 
taxes, but also of the small-business budgets. Lower marginal rates, 
for example, help small firms because they tend to file their taxes as 
individuals, not as corporations. We are proposing to allow small 
businesses to be able to deduct up to $200,000 of business-expanding 
investment as a permanent feature of the tax code, for example. This 
tax benefit encourages expansion and job creation in the sector that 
produces three-quarters of the nation's net new jobs.
    Lower rates and a degree of certainty in the system are absolutely 
critical to keeping our economy, and our excellent rate of job 
creation, on track. And I cannot say this strongly enough: we can't 
beat the budget deficit without a strong economy. Tax increases carry 
an enormous risk of economic damage and I can tell you today that the 
President will not accept that risk. He will not accept a tax increase 
on the American people.
    Fiscal discipline, combined with economic growth, is the correct 
path to deficit reduction, period, and we cannot let difficult 
decisions run us off of that path that we know is right.
    Our government does, of course, face economic demands that are 
exceptional, from fighting the war on terror to helping the victims of 
devastating hurricanes put their lives back together. These are costly 
events that lead to unwelcome, brief deficits. They should be regarded 
as temporary as they are entirely surmountable with continued economic 
strength and spending restraint in the areas where it is possible and 
appropriate.
    The second way for the budget to help keep the economy on track is 
to focus the taxpayers' precious resources on things that we know will 
make a difference.
    In order for America to continue to be a dynamic engine of growth, 
President Bush is outlining action in three key areas: healthcare, 
energy, and America's competitiveness.
    Affordable and Accessible Health Care. The President's reform 
agenda will help to make health care more affordable and accessible. 
Health Savings Accounts--putting patients in charge of their health 
care--will contribute to this goal. We need to make health insurance 
portable, make the system more efficient, and lower costs. We also need 
to level the playing field for individuals and the employees of small 
business by allowing small businesses to form Association Health Plans.
    The expansion of high deductible health plans and HSAs is something 
I'd particularly like to emphasize. Combined with a high deductible 
health plan, HSAs allow people to save for future health care expenses 
while providing immediate protection against catastrophic health 
expenses. Furthermore, by giving people more control over their health 
care spending, they offer a more affordable alternative to traditional 
health insurance.
    Today, millions of Americans--many of whom were previously 
uninsured--are enjoying access to more affordable health insurance 
because of the increased availability of HSA-qualified HD health plans. 
These plans are more available and becoming more popular, because 
saving for health care needs in an HSA now has the same tax advantages 
as a traditional health insurance plan.
    It only makes sense to expand the scope of HSA qualified health 
insurance by making their premiums deductible from income taxes and 
payroll taxes when purchased by individuals. This is an important 
innovation that will significantly reduce the cost of health insurance 
purchased by individuals, particularly important for working people who 
don't have a federal income tax liability. As many of my friends on the 
Democratic side of the aisle have pointed out to me--payroll taxes are 
one of the most significant tax burdens for the poor. This innovation 
will enable more individuals to purchase affordable health insurance. 
Expanding HSAs so that policy holders and their employers can make 
annual contributions to cover all out-of-pocket costs under their HSA 
policy will further encourage adoption of qualified HDHP plans.
    All told, the President's HSA proposals are projected to increase 
the number of HSAs from the current projected for 14 million to 21 
million.
    Advanced Energy Initiative. The President has said that the best 
way to break America's dependence on foreign sources of energy is 
through new technology. So the President announced the Advanced Energy 
Initiative, which provides for a 22 percent increase in clean-energy 
research at the Department of Energy. This initiative also builds on 
the energy legislation finally passed by the Congress last year that 
encourages and rewards energy conservation activity.
    American Competitiveness Initiative. This ambitious strategy by the 
President will significantly increase federal investment in critical 
research, ensure that the U.S. continues to lead the world in 
opportunity and innovation, and provide American children with a strong 
foundation in math and science.
    This budget also gives us an opportunity to look at the other 
ways--in addition to keeping tax rates low--that the Federal Government 
can make adjustments that add to a growth-friendly environment for the 
businesses, entrepreneurs and workers that produce that economic 
growth. Tax code reform remains a priority for this President and the 
President's Advisory Panel on Federal Tax Reform provided us this year 
with a strong foundation for a national discussion on ways to ensure 
that our tax system better meets the needs of our dynamic, 
21st century economy. I appreciate the fine work of Senators 
Mack and Breaux, for their outstanding leadership of the Panel.
    You'll notice that the budget provides for a one-year patch to 
protect the middle class from the AMT. It is a temporary fix because 
the AMT needs to be resolved through broader tax reform.
    This issue is also reflected in the budget through the proposed 
creation of a new Dynamic Analysis Division within Treasury's Office of 
Tax Policy. Understanding the full range of behavioral responses to tax 
changes, including how tax changes affect the size of the economy and, 
subsequently, tax revenues, is critical to designing meaningful, 
effective tax reform, and we believe this small expenditure will have 
an enormous pay-off for the American taxpayer.
    With a focus on these and other good policies, we'll keep America 
competitive in the world and keep our economy strong as it has been for 
some time now.
    In closing, I want to point out that a lot of good can come from a 
smart federal budget, and a considerable amount of harm can come from a 
bad one. Let's use the FY 2007 budget to make good policy--restrained 
as the circumstances dictate on spending but aggressive on the 
expansion of opportunity.
    I look forward to working with all of you on enacting this budget. 
Thank you for having me here today; I'm pleased to take your questions 
now.

                                 

    Chairman THOMAS. Thank you, Mr. Secretary, and the Chair is 
acutely aware of the truncated nature of this particular 
hearing. We usually have the privilege of an open-ended hearing 
with you. Later this afternoon we will have the U.S. Trade 
Representative, our former colleague, Mr. Portman. Because of 
that, the Chair will indicate, with the acceptance of the other 
members on the majority side, that the Chair will go in reverse 
order and that the Chair would then recognize the gentleman 
from California, Mr. Nunes.
    Mr. NUNES. Thank you, Mr. Chairman. It is a pleasure to get 
to go first for a change. Normally----
    Chairman THOMAS. The gentleman is on the clock.
    [Laughter.]
    Mr. NUNES. Normally, Mr. Secretary, by the time it gets to 
me, this Committee room is empty, and you and I would be the 
only ones left here with the Chairman.
    One of the attacks that I have heard over and over again is 
that the tax cuts have increased the budget deficit. I think it 
is important for the American people to hear this time and time 
again because I do not think they hear it enough: that, in 
fact, the numbers and the projections that you have given is 
that the tax cuts have actually decreased the size of the 
deficit. I wondered if you could talk about this again because 
I think it is important for the American people to hear this, 
that, in fact, the tax cuts have increased revenue to the 
Federal Government.
    Secretary SNOW. Congressman Nunes, when the tax cuts, the 
tax relief of 2003, were being proposed, we saw the tax 
revenues of the United States in a steep decline. Today, we see 
them in a steep ascendancy, and the tax revenues of the United 
States are today higher than they have ever been at any time in 
our history, and the reason is the economy is growing and 
expanding. The economy is performing well.
    Mr. NUNES. But despite the tax cuts, tax revenue is higher 
than it has ever been in our history.
    Secretary SNOW. I think what we have demonstrated here is 
that lower tax rates are consistent with more tax revenue.
    Mr. NUNES. How important is the extension of the capital 
gains tax cut to this continued growth in revenue?
    Secretary SNOW. It is absolutely essential. It is 
absolutely essential because what the lower rates on invested 
capital did was to promote investment. When you get higher 
investment, you get businesses hiring and creating jobs, and 
you get stronger labor market conditions.
    Mr. NUNES. I think you also have people who are making 
business decisions now based on--and I think they are worried 
about what the capital gains tax is going to be. So I think it 
is important that this Committee act on enacting these as 
quickly as possible.
    Secretary SNOW. Failure to do so can only have a negative 
effect.
    Mr. NUNES. Right. I want to talk a little bit about 
Medicare Part D because there is a lot of misnomers out there 
in the world and in my local press back home that Medicare Part 
D has been a disaster. But I have another opinion on that. I 
think if you look at it now, it is 20 percent less in terms of 
the spending that is actually taking place. We went from a 
projected $38 billion in spending on Medicare Part D to about 
$30 billion, and that is the projection for 2006. In fact, 
despite everything that you hear about Medicare Part D, my 
office in California has not received any calls with complaints 
on Medicare Part D. We have had some questions, but we have not 
taken any calls from people who had a serious problem with 
Medicare Part D.
    Could you talk about the current projections and future 
projections for Medicare Part D?
    Secretary SNOW. Yes, Congressman Nunes, I can. There were 
clearly some start-up issues in some places, but most people, 
most seniors, found that things went fairly smoothly, and they 
are now enjoying benefits they did not have before. Millions of 
Americans have access to prescription drugs through Medicare 
that did not have it before, and a testimony to the power of 
markets and competition, the cost is lower than the original--
by 20 percent, as you said, than the original estimates.
    Secretary Leavitt and his colleagues are working to clear 
up the remaining problems, but in talking to him recently, he 
was confident that the projections of reaching some 28 to 30 
million new people covered by the program would be achieved.
    Mr. NUNES. The final question that I will talk about is 
last year the President made a strong attempt to fix Social 
Security for the long term, and I was very disappointed at the 
State of the Union address when the President discussed Social 
Security and it seemed to be fixed and that the Congress had 
failed to act and you saw the minority party stand up in unison 
and cheer that, in fact, we had not fixed Social Security.
    My first Committee hearing here in the Ways and Means room, 
we sat through several people who had spoken about ideas and 
plans to fix Social Security long term, and the minority 
criticized nearly every person that was up there discussing 
possible fixed for Social Security.
    I have been disappointed in that, and I hope that the 
American people realize and I know you realize that Social 
Security is going broke. Could you just discuss the future of 
Social Security----
    Chairman THOMAS. The Chair will indicate that any questions 
that run over the time, the Chair would hope that the Secretary 
would respond in writing. It will be more difficult for members 
because our electronic timing is not working. But I can assure 
those junior members who only know digital time there are ways 
to tell time.
    [Laughter.]
    Chairman THOMAS. That is not tied to some electric 
structure.
    Mr. NUNES. Mr. Chairman, I am used to the colors, and I 
didn't see the----
    Chairman THOMAS. I understand that it just went red if that 
will help you. The Chair has the time here, and the gentleman 
from New York and I are practicing what we first learned in 
terms of the big hand and the little hand.
    [Laughter.]
    Mr. NUNES. Thank you, Mr. Secretary. Thank you, Mr. 
Chairman. I yield back.
    Chairman THOMAS. The gentleman's time has expired.
    The ranking member informs me that to facilitate movement 
on their side of the aisle, he has requested and my assumption 
is it has been cleared with his members, they will each have 
2\1/2\ minutes and we will take two members at a time so that 
we would accommodate two members within each 5-minute window.
    Does the gentleman want a show of hands?
    Mr. RANGEL. I don't think so. Then we would have the 
opportunity to come back again, but it will give us----
    Chairman THOMAS. Maybe. The gentleman from New York is 
recognized under his rules.
    Mr. RANGEL. Thank you, and we will have somebody check the 
clock, you know, to see whether or not it----
    Chairman THOMAS. We can always vote on it.
    Mr. RANGEL. Okay. Mr. Secretary, could you share how many 
people would get a tax increase this year and how much that 
would be if we did not improve the alternative minimum tax? 
Have you got any idea of the impact of not doing anything on 
the alternative minimum tax?
    Secretary SNOW. Oh, yes, Mr. Rangel. I think the number is 
very sizable. We very much support--the administration very 
much supports addressing that issue this year. It is 18 million 
or so. It is a very large number.
    Mr. RANGEL. If we don't do the capital gains cut or the 
corporate dividend cut, how many people would receive a tax 
increase?
    Secretary SNOW. The number there--let me see.
    Mr. RANGEL. I would gather it would be none since it does 
not expire until 2008.
    Secretary SNOW. Well, in that sense, yes, but----
    Mr. RANGEL. Well, that is the sense that I am talking 
about, is that I would hope that Treasury would--you see, the 
Chairman believes that I am trying to help just the rich people 
in the United States by supporting very strongly the 
alternative minimum tax and trying to give a priority over the 
others. What is your opinion about the priority, or the 
President's opinion?
    Secretary SNOW. Well, I think clearly sustaining the--
extending the dividend and cap gains cuts are critical.
    Mr. RANGEL. No question about that, but in terms of 
priority and the limited scope that we have to work with, what 
would the priority be of you and----
    Secretary SNOW. Well, I would do both. I think that both--
--
    Mr. RANGEL. You support the Senate's position that both 
should be done?
    Secretary SNOW. I think both. I think it is important to do 
both, yes.
    Mr. RANGEL. You would advise the conferees to do both?
    Secretary SNOW. Well, I would certainly think Congress 
needs to get both done this year, yes.
    Mr. RANGEL. Then you would advise the conferees--would you 
suggest to them how they could pay for it since the President 
wants these things permanent?
    Secretary SNOW. Well, these come in within the President's 
budget numbers.
    Mr. RANGEL. Okay. I don't think they do.
    Mr. Stark, I yield 2\1/2\ minutes.
    Mr. STARK. Thank you, Chair, and welcome, Mr. Secretary.
    Mr. Secretary, I wanted to follow up on an issue on health 
care. On page 8 of your testimony you herald the coming of 
health savings accounts, and you suggest that it will make 
health care more affordable, and you say we need to lower 
health care costs. You say that HSAs are an important 
innovation that will significantly reduce the cost of health 
insurance purchased by individuals.
    Now, we checked this out with Mr. Bolten and Secretary 
Leavitt, and they both concur that in your budget, you spend 
$156 billion over 10 years on health savings accounts. That is 
the lost revenue and some minor distribution on outlays.
    So, we have that in writing. You are going to spend $156 
billion over 10 years for the health savings accounts. But 
nowhere can we find any health care savings.
    You claim that it is more affordable and that the costs 
will go down, but if that were the case, it would show up in 
the budget in increased revenues because of savings to 
employers. So, can you tell me what cost savings there are and 
where you have any figures that indicate that in your budget?
    Secretary SNOW. Mr. Stark, the savings will come to 
millions of people----
    Mr. STARK. Stop. Mr. Secretary, expenses are in the budget, 
and they are clearly defined. Something, faith-based savings in 
the long-distant future you and I may not be around to see. 
What, if any, savings are in your budget as a result of the 
$156 billion expenditures?
    Secretary SNOW. Congressman, as I was saying, the savings 
show up in the improvements in the overall health care system 
in the coverage of millions of people who otherwise wouldn't 
have access to low-cost health care coverage. That is a real--
--
    Mr. STARK. That is just shifting costs, Mr. Secretary. That 
is not--where does it--if there are savings of any more than 
$100, it has to show up in your budget. Where is it?
    Secretary SNOW. Well, the savings will be for that small 
business that cannot afford to make health care available today 
who, because of the tax advantage of health savings accounts--
--
    Mr. STARK. Then he would pay more in taxes, wouldn't he, 
that small business, and it would show up in your budget. Come 
on. Where are the savings?
    Secretary SNOW. The savings, as I say, are in the budgets 
of millions of families all across----
    Mr. STARK. But they are not in your budget, are they?
    Chairman THOMAS. The gentleman's time----
    Secretary SNOW. The important thing is to improve health 
care.
    Chairman THOMAS. --has expired.
    The Chair is wondering if that is a call for dynamic 
scoring, but that will be left to other questioners to clarify 
that.
    Does the gentleman from Indiana wish to inquire?
    Mr. CHOCOLA. Yes, I do. Thank you, Mr. Chairman. Thank you, 
Mr. Secretary, for being here.
    Last week, OMB Director Josh Bolten was here testifying 
before the Committee, and he talked about the fact that the 
growth in entitlement spending is one of the greatest 
challenges our country faces in the future. I think that in 
order to solve a problem, we have to find a way to define the 
problem, and like you, I used to work for a publicly traded 
company, and we had extensive reporting and disclosure 
requirements of our unfunded long-term liabilities for 
transparency and planning purposes.
    Do you think it would be helpful for us to face up to these 
challenges by clearly stating what the unfunded liabilities of 
the Federal Government are? Some estimate it is in excess of 
$43 trillion. Do you think that the there's annual financial 
report of the Federal Government would be a good place to 
include such a statement?
    Secretary SNOW. Yes, I do. I think we need more 
transparency on these unfunded obligations going forward. They 
are reflected to some degree in the trustees' Report of Social 
Security and the trustees' Report of the Medicare and Medicaid 
systems.
    Mr. CHOCOLA. Going back to your previous life in the public 
company setting, we used to go through budget processes, and 
division managers would come in, and we would have discussions 
about actual cuts in spending. There would always be complaints 
and we were always going to lose all our customers, we were 
going to lose all our employees, the business was going to 
fail. But what we found, when we found ways to do more with 
less, we actually improved our customer service, we improved 
our products, we improved the financial shape of the business 
and the security of the employees.
    When we go through these budget discussions at the 
Government level, when we have smaller increases, we hear those 
same cries of despair.
    Do you think government is so different that we cannot 
actually spend money better, have better government at a lower 
cost, especially when it comes to entitlement spending?
    Secretary SNOW. Oh, absolutely not, Congressman. I think we 
have the capacity to manage better in government. I know we are 
trying to do that. I think these programs can be managed 
better, and that is the premise of the President's budget. It 
is to streamline and manage better and give better results to 
the taxpayers for their expenditures.
    Mr. CHOCOLA. Again, going back to OMB Director Josh 
Bolten's testimony--I think you had an op-ed in the Wall Street 
Journal today--he had one last week where he again talked about 
entitlement spending. In fact, his quote was, ``No plausible 
amount of tax increases could possibly close the enormous gap 
that will be created by the unsustainable growth in entitlement 
programs.''
    Do you agree with that?
    Secretary SNOW. Oh, absolutely. Absolutely. The 
consequences on the economy of trying to borrow our way through 
that or raise taxes to cover those expenditures would be 
devastating.
    Mr. CHOCOLA. If we do nothing to effectively address the 
growth in entitlement spending in the near future, what would 
you estimate the long-term consequences of that would be?
    Secretary SNOW. Well, Congressman, I don't think we would 
ever let that happen. As I think it was Winston Churchill once 
said, ``America always gets it right after it has tried 
everything else.''
    I think we will find a way through this. That is one reason 
for the bipartisan commission on Medicare and Medicaid and 
Social Security and aging and retirement that the President 
proposed in his State of the Union. We just have to find an 
answer to this. We cannot allow those consequences to occur.
    Mr. CHOCOLA. So, you think it is our responsibility to stay 
focused on this, and we would not be doing our responsibility 
to the American people and future generations if we don't act 
seriously with reform measures in the near future?
    Secretary SNOW. Congressman, I agree with you. All of us in 
public life, in Congress and in the administration, have that 
obligation.
    Mr. CHOCOLA. Thank you, Mr. Secretary.
    Mr. Chairman, I yield back.
    Chairman THOMAS. The gentlewoman from Pennsylvania.
    Ms. HART. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for being with us again. I want 
to commend your office for putting out information immediately 
when the health savings account law went into place. We spent a 
significant amount of time distributing information to 
employers and some small businesspeople who were looking to try 
to accommodate both themselves and some of their employees by 
providing HSAs. We saw some statistics that show that I think 
37 percent of the purchasers of HSA had previously been 
uninsured. The Employee Benefits Research Institute noted that 
a third of the people with HSAs have household incomes of less 
than $50,000. These numbers are actually flying in the face of 
what the naysayers said about HSAs.
    Could you talk to me a little bit more about what we see as 
the prospect with some of the changes the President has 
proposed for future success of the HSA and how that will help 
to impact health care costs?
    Secretary SNOW. Yes, Congresswoman Hart. The argument 
against the HSAs is that they are for the wealthy and the 
young, the healthy. The argument against the HSAs is that they 
are not fair, they somehow represent a threat to the 
established employer-based health care system, and that they 
won't be taken advantage of by lower-income people and by 
people in lower-income categories.
    The evidence just plain does not support that. All the 
evidence we have seen, in fact, points in the other direction. 
The numbers I have got indicate that some 42 percent of all the 
HSA plan purchases are with people with earnings of less than 
$50,000. That is not the rich and the wealthy of America. 
Forty-five percent are at least 40 years old. Something like 25 
percent are----
    Ms. HART. Not that 40 is old, Mr. Secretary, but----
    Secretary SNOW. No, but they are not 21.
    Ms. HART. Right, and that is what we were told by the 
naysayers when we first passed the law.
    Secretary SNOW. And 20 percent are at least 50. So, what we 
are getting here--and one-third, I think--one-third, a number 
approaching one-third or around one-third--did not have 
insurance before. So, clearly, these HSAs are meeting a real 
marketplace need.
    Ms. HART. That having been said, we are encouraged 
obviously by that because we are helping to cover some people 
who were uninsured and what we thought about sort of freeing up 
the insurance market and providing different opportunities for 
product is a good thing, obviously, for the American people. 
But the concern about--and we discussed it initially when we 
were looking at the law, when we were writing the law, that 
HSAs could also exert downward pressure on health care costs. 
Have we seen any of that at this point? Or is that something 
that we think we will see a little bit more of in the future?
    Secretary SNOW. The experience is still fairly fresh, but 
the evidence I have seen suggests that the premiums are rising 
more slowly for HSA policies than they are for general health 
care insurance policies, which does suggest that the HSAs will 
help to hold down health care costs in the future, yes.
    Ms. HART. With the changes that the President announced, 
how do you think that will improve the product and people's 
participation in purchasing them?
    Secretary SNOW. I think it is going to be very positive for 
the HSAs because what it does is raise the contribution limits. 
It is targeted--the changes are targeted on lower-income and 
middle-income people by making the payment of the premiums an 
above-the-line tax deduction, by taking payroll taxes, and 
providing a credit for payroll taxes on the HSAs. Payroll taxes 
are generally thought to be quite regressive, so if you get a 
credit for payroll taxes, you are making the system more 
progressive.
    I think it is going to lead to millions of Americans who 
today cannot afford health care, people who are working for 
small businesses where the small business employer cannot 
afford to make the policy available. Millions of self-employed 
people who cannot quite afford it will now find that it is 
affordable, and the refundability feature will make it 
available to many lower-income people.
    Ms. HART. Actually, that point you made about small 
businesspeople and entrepreneurs is the one I think that is key 
for the communities I represent. I spent all January hearing 
about that issue, so thank you for that, and we will work with 
you to make sure this happens.
    Secretary SNOW. Thank you.
    Chairman THOMAS. Does the gentleman from Michigan wish to 
inquire?
    Mr. LEVIN. Thank you.
    Welcome Mr. Secretary. On page 4, you talk about the 
increase in jobs, 4.7 million since May of 2003. Do you know 
how many manufacturing jobs have been lost in this country 
since May of 2003?
    Secretary SNOW. Yes, Congressman. We have lost 
manufacturing jobs over that period, and for a long period, 
regrettably, before that.
    Mr. LEVIN. But do you know how many?
    Secretary SNOW. Yes, I think it is well over a million.
    Mr. LEVIN. Since May of 2003? It is large.
    Secretary SNOW. It is large.
    Mr. LEVIN. I think the total loss since 2000 is about 3 
million. Of that, since May 2003, it has been about 335,000. We 
have lost that many manufacturing jobs. You described this rosy 
scenario, Mr. Secretary. I wish you would also talk about the 
less rosy scenario for families.
    In that regard, I want to ask you, earlier in your 
testimony you laud the program cuts, 141 program cuts. Let me 
just read to you a list of those that are cut or eliminated and 
ask if you support that.
    Cuts in funding for the National Cancer Institute, do you 
support those cuts?
    Secretary SNOW. I support the President's budget.
    Mr. LEVIN. Those cuts are in the budget, so you support 
those cuts.
    All right. I was at a meeting yesterday, 750 people working 
on anti-drug programs. There was reference to the elimination 
of grants for the Safe and Drug-Free Schools program, $347 
million. So, you support that because you support the 
administration's position.
    Vocational education cut $1.3 billion. You want to comment 
on that? You support that, too?
    Secretary SNOW. That is part of the President's budget.
    Mr. LEVIN. Okay. Clean Water, which is of such concern in 
our State and many others, a reduction in the revolving fund 
program by $199 million. This is for water projects. You 
support that also.
    Secretary SNOW. I support the President's budget, which has 
that, but much more in it as well, Congressman.
    Mr. LEVIN. The manufacturing education partnership, that is 
cut $55 million. You support that also. All right. I think that 
is part of the problem, Mr. Secretary. Thank you. Mr. Cardin is 
going to take the over 2\1/2\.
    Mr. CARDIN. Mr. Secretary, the Chairman indicated that 
Ambassador Portman will be with us this afternoon, and every 
time I asked him about China and currency, he says I have to 
ask you. So, let me ask you the question.
    The trade imbalance has been reported for 2005 at $726 
billion, about $200 billion with China. We know that China ties 
its currency to the U.S. dollar, which does not allow it to 
seek its true economic level.
    We know that China made a commitment on July 21st, 7 months 
ago, to allow its currency to be increased by 2.1 percent, a 
modest, very modest amount, certainly not anywhere near the 
discount that we believe is somewhere between 15 and 20 
percent--15 percent and 40 percent, excuse me, and that the 
appreciation has been but 0.6 percent since they made their 
announcement. So, U.S. producers and manufacturers and farmers 
are fighting an uphill battle based upon the value of the 
Chinese currency.
    We put on top of that the dependency upon the China 
currency ourselves. They buy U.S. dollars. They now have a 
foreign currency amount in about--the dollars I have now is 
that they are over $800 billion in holding foreign currency.
    So, the question becomes: What are we doing about it? What 
steps are we taking in order to become less dependent upon 
Chinese buying U.S. dollars? What are we doing to get the 
exchange at a fair rate?
    Secretary SNOW. Congressman, we are disappointed there has 
not been more progress in this arena. As you know, I have had a 
number of trips to Beijing, many consultations with 
counterparts in the government of the Republic of China. They 
did make the step of delinking, but since then there has been 
inadequate movement. We remain committed to getting movement. 
We need to see movement. We are disappointed in the failure to 
get movement. We are going to continue to press them. Now----
    Mr. CARDIN. I just hope we have a time schedule. You do not 
have to announce it to me today, but I do hope we have a time 
schedule as to when our patience runs out.
    Secretary SNOW. We are not satisfied.
    Chairman THOMAS. Does the gentleman from Colorado wish to 
inquire?
    Mr. BEAUPREZ. Thank you, Mr. Chairman.
    Secretary Snow, great to have you here again. I actually 
want to follow a little bit the line that was established by 
the gentleman from California, Mr. Stark. I am looking at a 
press report, National Review Online, that highlights this 
issue of capital gains, revenue receives from capital gains and 
actually going back to projections made in 2003 prior to the 
tax cuts that estimated in 2004 and 2005 we anticipated under 
the old revenue mechanism, standard, that we would have 
received at the Federal Treasury about $125 billion over those 
2 years, 2004 and 2005. We, of course, cut the tax rate, and it 
was estimated that there would be, in the gentleman from 
California's words, lost revenue of about $27 billion.
    What we actually found out, apparently, is that instead of 
the original estimate of $125 billion, the revised estimate 
downward of $98 billion, we actually have received in your 
Federal Treasury, our Federal Treasury, a combined $151 billion 
or a net gain of about $53 billion from that lost revenue 
number.
    Do you care to opine on that?
    Secretary SNOW. Well, I have learned to be modest in making 
revenue projections, but what the experience of the last 3 
years suggests is something the Chairman alluded to, and that 
is that when you get the American economy performing better, 
you get the macroeconomic variables of jobs and GDP and 
employment rising, it has a powerful effect on the Federal 
revenue stream, the government receipts stream. We have seen 
this play out, and we frankly underestimated the power of the 
strengthening of the economy on the government receipts stream.
    Mr. BEAUPREZ. Well, for purposes of this Committee and 
Congress's, I guess, obligations, it raises that whole issue of 
dynamic scoring that we talk about, and I also noticed in some 
of the materials that have come to us on behalf of this budget, 
that under your direction, under the Treasury's direction, you 
are proposing a dynamic analysis division within Treasury. I am 
intrigued by that idea and would love to hear from you about 
that.
    Secretary SNOW. Congressman, what that involves is creating 
the capacity inside the Treasury Department to understand how 
changes, big changes in the Code, like changes on marginal tax 
rates or changes in corporate tax rates or changes in cap gains 
and dividends rates, affect the whole economy. Once we can get 
a better connection between big tax changes and the whole 
economy, then we can go to what I think we all want to be and 
having a better understanding of how to score those changes for 
revenue purposes.
    I think we will find, if we do this analytically, that we 
are going to have bigger playbacks, feedbacks into the revenue 
stream of the Federal government than we have probably foreseen 
in the past.
    Mr. BEAUPREZ. Well, in the private sector, I certainly put 
together a few budgets myself in my past lives, and we always 
used something that resembled the dynamic scoring theory in 
trying to project ahead if we make investment today, what the 
revenue results of that investment might be tomorrow and in the 
out-years. So, that makes perfect sense to me.
    In the time I have got remaining I want to inquire about 
maybe another issue, and it relates really to your op-ed in the 
Wall Street Journal, which I have read, that I think is in 
today's paper. You say in there that, according to the 
Securities Industry Association, people that are actually 
investing in equities are typically middle-class persons saving 
for retirement with a household income of about $65,000 
annually. You got on later to say that about 91 million 
Americans actually own equities.
    Here is my question: I am looking at another table that 
says that about 96 percent of the income tax actually paid in 
this country is paid by 50 percent of the people that file tax 
returns, or a little over 64 million tax returns--some of those 
joint returns, I am sure--with an adjusted gross income over 
$28,000.
    I am going to guess then that most of the people that are 
paying the freight in this country also own equities.
    Secretary SNOW. Yes, you are right. You are correct.
    Chairman THOMAS. The gentleman's time has expired.
    Mr. BEAUPREZ. Thank you, Mr. Secretary.
    Chairman THOMAS. The gentleman from Georgia.
    Mr. LINDER. Thank you, Mr. Chairman.
    Mr. Secretary, nice to see you again. Thanks for coming. I 
want to move a little bit further on the dynamic scoring. On 
the weekend after Thanksgiving this past year, Wal-Mart, which 
knows something about retailing, cut their prices 10 percent 
across the board. If they had been in Government, they would 
have had everybody jumping up and down saying you are going to 
lose 10 percent of your revenues and more than percentage of 
your profits. But it didn't happen that way. Why can't you just 
call in some of those folks who have been doing this throughout 
their lives? I can just imagine a Vice President for government 
Affairs telling the chief executive officer of Wal-Mart you are 
going to lose 10 percent of your revenues, and the Wal-Mart guy 
looking at him saying, ``Son, we have been doing this a long 
time. You can go back to Washington.''
    Why can't you bring in some of those folks and see what 
they do?
    Secretary SNOW. Well, Mr. Linder, the point you are making 
is a good one. There clearly is a feedback cycle between 
investments and revenues in the private sector, and in the 
public sector there is a feedback cycle between lower tax 
rates, a larger economy, and the government revenue stream.
    What we don't yet have is the ability to quantify that 
sufficiently, and what we want to do is put ourselves in the 
position to be able to do just that. I agree with you. I agree 
with you.
    Mr. LINDER. You mentioned in your statement that Tax Code 
reform remains a priority for this President. We did not hear 
him mention in the last State of the Union address. You 
mentioned to me privately up here that there was going to be an 
aggressive pursuit. Can we have a rough idea of when that might 
happen?
    Secretary SNOW. We are not putting ourselves under any 
artificial timeline. What we are doing, though, at the Treasury 
is carefully considering all options, including, I must say, 
your well-thought-through proposal, along with others, and the 
tax panel's recommendations to us.
    You only get to do tax reform about once every 20 years. 
You know, in my lifetime it was JFK in the early 1960s, and 
then it was Ronald Reagan in the mid-1980s, and now it is 
George Bush in the first decades of the 2000s, a new century.
    We have got to make sure we do it right, and I have told 
the President and told the White House we are going to work on 
this very hard and we are going to send him our very best 
thinking, but without any artificial timeline on it.
    Mr. LINDER. China has been raised here recently during this 
hearing, and because most nations that float their currencies 
wash out the relative tax components within the price system at 
the borders in the currency exchanges, if we wanted a pure 
consumption tax with no tax on income at all, China would 
either have to float its currency or suffer a 22-percent legal 
WTO-compliant tariff vis-a-vis the United States. Are we 
looking at that?
    Secretary SNOW. Yes, we are looking at the whole idea of 
border adjustability, the relationship between flexibility of 
rates and taxes. All of that is part of this broad review that 
we are doing, very much.
    Mr. LINDER. Thank you, Mr. Secretary.
    Mr. Chairman, I yield back.
    Mr. SHAW. [Presiding.] Mr. McDermott?
    Mr. McDERMOTT. Thank you, Mr. Chairman.
    Mr. Snow, every couple years you come up here with another 
fraudulent proposal from the President. This HSA proposal is 
about as fraudulent one as I have ever seen.
    Now, you say you have evidence--at page 8, you say, ``The 
President's proposal is projected to increase the number of 
HSAs from the current projected 14 million to 21 million.'' 
Where did the study come from? Who did it? Did Treasury do it?
    Secretary SNOW. Congressman, that work is a combination of 
places inside the Executive Branch.
    Mr. McDERMOTT. Did you look at the study and okay it?
    Secretary SNOW. People----
    Mr. McDERMOTT. You are not calling it a Treasury study.
    Secretary SNOW. Right.
    Mr. McDERMOTT. You are just saying it is sort of----
    Secretary SNOW. You know, the----
    Mr. McDERMOTT. How do I get a hold of it?
    Secretary SNOW. Well, there are people--you know, the 
competence on this subject isn't entirely within the Treasury. 
There is some competence at the Department of Health and 
Human----
    Mr. McDERMOTT. But you are making the proposal, and----
    Secretary SNOW. Yes.
    Mr. McDERMOTT. --it is going to have an impact on the 
budget of this country and on the individual budgets of 
Americans.
    We watched what happened with 401(k)s, and what every 
employer did was drop his guaranteed benefit program and give 
an HSA to people--or, excuse me, a 401(k). The same is going to 
happen here. If you have read the Wall Street Journal article a 
couple of weeks ago, they say: I think what employers are 
really after is that they are moving the risk from their 
balance sheet to the employees.
    Do you disagree with that statement?
    Secretary SNOW. Oh, absolutely.
    Mr. McDERMOTT. You think--what is there that is going to 
require employers to stay giving the benefit package they are 
giving today?
    Secretary SNOW. The desire to attract and retain their 
workforce?
    Mr. McDERMOTT. But you have no studies that make any 
estimate of how many people are being moved one way or another 
in this process?
    Secretary SNOW. Well, we have--as I said, we do have an 
estimate. Treasury has done an estimate of the----
    Mr. McDERMOTT. A written estimate where I can look at the 
parameters?
    Secretary SNOW. Well, I think to make an estimate we would 
have to write it down somewhere and run the math on it.
    Mr. McDERMOTT. Why don't you make it available to us. Mr. 
Chairman, I ask that it be made available to the Committee, and 
also that we put into the record, I ask unanimous consent, the 
Wall Street Journal article.
    [The article follows:]

February 3, 2006
              Health Accounts Have Benefits For Employers

                  By THEO FRANCIS and ELLEN E. SCHULTZ
          Staff Reporters of THE WALL STREET JOURNAL; Page B1

    Amid the debate over whether health-savings accounts will fix 
America's health-care problems, another important effect has received 
less notice: The accounts are generating savings on payroll taxes for 
companies that adopt them, and they could hasten a shift of health-care 
costs from companies to employees.
    Trade groups cheered President Bush's call in his State of the 
Union address Tuesday to expand key elements of health-savings 
accounts, or HSAs. The President's proposals could make it more 
attractive for millions of people to sign up for HSAs, either on their 
own or at the growing number of companies that are adopting them.
    The growing acceptance of HSAs accelerates a transition in health-
care benefits, from employers providing a safety net to employees 
taking on more risk. The shift parallels a similar trend away from 
traditional pensions in retirement benefits. Indeed, HSAs may be poised 
to become the 401(k)s of health care: a low-cost substitute for a once-
standard workplace-provided benefit, which can offer employees greater 
flexibility but also can increase their financial burdens and risk.
    ``I think what [employers] are really after is that they're moving 
the risk from their balance sheet to the employees,'' said Richard T. 
Evans, a health-care analyst with Sanford C. Bernstein & Co. in New 
York. ``The risk is being transferred without the consumer really 
realizing it,'' he said.
    Just as the 401(k)--invented as a supplemental benefit--ended up 
supplanting pensions, HSAs could do the same to traditional employee 
health insurance. Already, companies with HSAs are enjoying savings on 
payroll taxes that mirror gains they made in the shift to 401(k)s.
    ``Employers are saying they want some certainty'' in health-care 
costs, says Daniel Halperin, a Harvard University law professor. 
Although HSAs don't place the full burden of paying for health care on 
employees, ``it's a movement in that direction,'' he said.
    But employers see this trend as simply reflecting the changing 
nature of the employment relationship, says James Klein, president of 
the American Benefits Council, a trade group for employers and the 
benefits industry. ``It's a positive trend in our view--it's not a 
panacea, but it's something that ought to be encouraged.''
    Health-savings accounts enable workers to set aside pretax pay--
sometimes combined with contributions from their employer, if the 
company chooses to contribute--to pay for certain health-care costs. 
The account can be applied to health-care costs up to a minimum 
deductible of $1,050 for an individual and $2,100 for a family in 2006. 
After that, costs are covered by a catastrophic insurance policy that 
users must purchase.
    Established in 2003, HSAs are flexible in ways many experts have 
long sought. Money in the accounts can be rolled over from year to 
year, taken with the employee to a new job and spent on non-health-
care-related items after age 65. They also are available to people who 
don't have insurance through their employers or who are unemployed. Mr. 
Bush is proposing that such people be allowed to contribute with pretax 
money.
    Business groups generally hailed Mr. Bush's proposals, including 
the National Association of Manufacturers, the insurance industry and 
the financial-services industry, which is poised to reap billions of 
dollars in fees from managing money squirreled away in HSAs. Among the 
major companies offering employees an HSA option are Wal-Mart Stores 
Inc., DaimlerChrysler AG's Chrysler Group and General Motors Corp.
    Chrysler Group says it contributes an annual $500 to single 
employees' accounts and $1,000 for families. ``Most companies do it 
because it makes sense economically for the company and the employee,'' 
says spokesman Dave Elshoff. A Wal-Mart spokesman declined to comment 
on specifics of Mr. Bush's proposals but says the company has 
``advocated that there be more latitude in HSAs.''
    About three million people have taken out the high-deductible 
insurance that qualifies them to open an HSA, about triple the number 
of a year ago, according to America's Health Insurance Plans, the 
insurance trade group. Of those, about one million consumers have 
actually opened an HSA, the group says. The White House has said it 
intends its proposals to expand the number of Americans using HSAs to 
21 million by the end of the decade.
    Proponents say HSAs will help rein in health costs because 
employees will be more careful about how they spend their money. 
Critics say HSAs are unfair because they saddle the sick with the costs 
of treating themselves, rather than spreading those costs across large 
groups.
    Employers decide whether to contribute money to the accounts. Even 
if they do contribute, the employer's total cost for each employee in 
an HSA is generally lower than for a worker in a traditional health 
plan. For example, employers typically pay $3,284 for a single employee 
in a traditional insurance plan; covering the same employee in a high-
deductible plan would cost $2,850, according to the Kaiser Family 
Foundation.
    Even if they don't contribute a cent, employers still get tax 
benefits. And the more of their own pay employees set aside each year, 
the bigger their employers' tax breaks. That's because employers 
ordinarily have to pay a variety of payroll taxes on cash income their 
employees earn; these taxes fund Social Security, Medicare and state 
and federal unemployment programs. But under at least some HSA 
arrangements, employers can skip most of those taxes on employee 
contributions to the account, bringing the employer savings of as much 
as 7% to 10%, according to some estimates.
    For example, for an employer with a thousand workers collectively 
setting aside $1.5 million, the employer would save as much as $150,000 
a year. Those savings are in addition to the income-tax deduction the 
employer gets for contributions it makes to the accounts. At a minimum, 
``the [payroll-tax] savings basically pay the administrative costs,'' 
said Rebecca Miller, a tax specialist with Minneapolis accounting firm 
McGladrey & Pullen.
    Those tax savings could give employers ``an incentive to encourage 
contributions'' from employees, said Princeton University economist Uwe 
Reinhardt.
    While payroll-tax savings do benefit employers, they are unlikely 
to be a decisive factor for employers considering HSAs, said Mr. Klein, 
the employer lobbyist. ``In the scheme of what health-care costs are, I 
doubt that would be a compelling reason to move to that kind of plan 
design.''
    Employees also enjoy payroll-tax savings, which helps make the 
accounts attractive to them. What's more, the Bush administration 
proposal also calls for allowing people to put even more money into the 
accounts, enough to cover not only deductibles, as provided by current 
law, but also the cost of premiums, copayments and amounts not covered 
by their health plan. Currently, maximum annual contributions to an 
account are limited to the lesser of the plan's deductible or a fixed 
amount: $2,700 for individuals and $5,450 for a family in 2006.

                                 

    Mr. SHAW. Mr. Lewis?
    Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman. 
Thank you, Mr. Secretary, for being here.
    Mr. Secretary, I would like to just ask you a general 
question. We continue to make the tax cut permanent. We are 
engaged in a conflict in Iraq. The tax cut helped those at the 
very top. You did not say anything in your statement and the 
administration has not said anything about shared sacrifices. 
The only people giving up something are our young men and our 
young women that are losing their lives or losing their limbs 
in this war. What are the American people, what is the 
administration asking the American people to give up, to make 
some sacrifices? We are all in this thing together. I would 
just like to hear you elaborate.
    Secretary SNOW. Well, Congressman Lewis, that is a good 
question, and the answer, of course, is this budget slows the 
growth rate of a number of programs. We think it does it in a 
responsible way. We think it does it in a way that long term 
will better serve the interests of the country. But I have a 
number of fellow Cabinet members who feel quite constrained. 
You know, they feel they have been held back on spending that 
they otherwise might want to have done.
    Mr. LEWIS OF GEORGIA. Mr. Secretary, since you raised the 
question of the Cabinet, in Cabinet meetings--maybe you are not 
free to say, but do you ever have a discussion, do you ever 
talk and say some of us should be prepared to ask the Nation, 
to ask the President, to ask the American people to give up 
something, to sacrifice?
    Secretary SNOW. What this budget, Mr. Lewis, is trying to 
do is sustain the growth of prosperity across America, 
encourage the job creation process, and raising wage levels and 
income levels across America. That is at the heart of what this 
budget is seeking to do, and that is why we are asking Congress 
to make the tax cuts permanent and----
    Mr. LEWIS OF GEORGIA. Well, how can you in God's name ask 
to make the tax cuts permanent when we are engaged in a war, we 
have men and women, our young people dying in Iraq, dying in 
Afghanistan, and then you are going to make the tax cuts 
permanent? Is that fair?
    Secretary SNOW. Well, yes, it is fair. It is important that 
we continue to focus on the well-being of people who are the 
citizens of this country. There are 4.7 million Americans that 
have jobs today who did not have them 3 years ago. I think that 
is an impressive record and something we want to continue. We 
want to see real wage rates continue to raise. We want to see 
prosperity continue to grow in America. This budget is designed 
to make that happen.
    Mr. SHAW. The time of the gentleman has expired.
    Mr. Ryan? Were you here? Okay. Mr. Cantor?
    Mr. CANTOR. Thank you, Mr. Chairman.
    Mr. Secretary, it is good to see you again.
    Secretary SNOW. Thank you.
    Mr. CANTOR. Thank you so much for being here before us, and 
just following up on the questioning just before me, you know, 
I take a different view. I look at the fact that we do see 
objective evidence that the tax rate on dividends and capital 
gains being lowered produced phenomenal results. I hear the 
gentleman from Georgia's complaint that perhaps we are not 
paying enough attention to our men and women in uniform, and I 
do know that in the budget being presented by the President, we 
are increasing the amount of funds going to defense and our 
efforts in the war on terror, including Iraq, Afghanistan, and 
other places.
    I would ask, in the form of a statement first, that we need 
to have a strong and vibrant economy at home, we need to 
continue to grow, and we need to produce prosperity so that we 
can afford to keep this country safe. I believe that there is 
irrefutable evidence that the tax cuts have produced more jobs, 
the tax cuts have produced more Federal revenue than, as was 
stated before, the CBO estimate ever even imagined.
    But on the point of health care and health savings 
accounts, we need to be concerned about our competitiveness. We 
need to make sure that American business can compete abroad and 
at the same time provide the health benefits that American 
workers have become accustomed to and, frankly, need. I believe 
from the studies that I have seen that health savings accounts 
produce a situation where individuals can have more choice at 
play in terms of their health care decisions.
    I was wondering, Mr. Secretary, if you can talk a little 
bit about the President's health savings accounts proposals and 
how they would encourage continued use by employers, because we 
know that recent studies have indicated 31 percent of those 
involved with HSAs now were uninsured previously. So, how are 
we improving the use of health savings accounts through the 
proposals.
    Secretary SNOW. Let me take a minute and go through this 
because it is very important, and I appreciate the chance to 
respond to that good question.
    As you know, there are many, many small businesses in 
America today who find it very difficult or impossible to 
afford health care. I have talked to many of these employers as 
I have traveled the country, and they like to be in a position 
to make health care available, but they just cannot afford it.
    At the same time, there are many self-employed people who 
find it difficult to afford health care, and one reason is the 
fact that there is a fundamental inequity today between those 
who seek to buy their health care in the private marketplace 
and those who get it through their employer. If you get it 
through your employer, it is enormously tax-advantaged. It is 
excluded from income taxes. It is excluded from payroll taxes. 
If you are buying it in the open market, it isn't. You pay for 
it with after-tax dollars, making it much more expensive.
    What the HSAs at their very heart do is end that inequity. 
They make contributions tax deductible. They make the premiums 
tax deductible. They give you a credit back for the payroll 
taxes. So, in effect, putting the private market, open market 
purchases on the same basis as the employer-provided health 
care, that is going to lead to a lot more health care there the 
private marketplace, and that is a good thing. It is going to 
mean lots of people who aren't covered today get coverage, and 
that is a good thing. That is showing up in these statistics. 
The new proposals the President has made are going to 
strengthen the ability of HSAs to meet the need of the 
uncovered.
    Mr. CANTOR. Thank you.
    Mr. SHAW. Does the gentleman yield back the balance of his 
time?
    Mr. CANTOR. I yield back, Mr. Chairman.
    Mr. SHAW. Mr. Neal?
    Mr. NEAL. Thank you, Mr. Chairman.
    Mr. Secretary, defense spending has gone during the last 5 
years, I believe, from about $257 billion to $439 billion. We 
have created a Department of Homeland Security, about $40 
billion. Medicare Part D was estimated initially to cost about 
$400 billion and now it is about $740 billion. We are fighting 
two wars--one in Afghanistan for a little bit more than $1 
billion a month, and about $1.5 billion a week in Iraq. We have 
Hurricane Katrina standing in front of us.
    Annually, the Congress in the past has done 13 spending 
bills, and I think it is down to 12 now, and the President 
based on your earlier comments, you said it was the priority of 
the administration to restrain spending. Now, has the President 
vetoed any spending packages during the last 5 years?
    Secretary SNOW. No.
    Mr. NEAL. Have you recommended any vetoes to the President 
during these times, during your time as Secretary of the 
Treasury?
    Secretary SNOW. Yes, several.
    Mr. NEAL. Would you wish to share with us which ones you 
have recommended for veto?
    Secretary SNOW. Well, the necessity for taking that action 
wasn't called for because the suggested changes we recommended 
were made.
    Mr. NEAL. Well, you know, Lawrence Lindsey recommend to the 
administration some time ago what the real cost of the wars in 
Afghanistan and Iraq were going to be. The Secretary of OMB, 
when he first came before the Congress, current Governor of 
Indiana, he said it was going to cost about $60 billion. We 
hear this argument that it is time to restrain spending, but 
the President has not vetoed any spending bills, right?
    Secretary SNOW. Congressman, I have acknowledged that, but 
I have also said that the Congress and the President, the White 
House, have worked together to bring bills in line with the 
President's expectations.
    Mr. SHAW. Mr. Jefferson?
    Mr. NEAL. That is 2\1/2\ minutes, sir?
    Mr. SHAW. That is 2\1/2\ minutes. If Mr. Jefferson wants to 
give you some of his minutes, he can.
    Mr. Jefferson?
    Mr. JEFFERSON. Thank you, Mr. Chairman. I wish I could.
    I want to ask, Mr. Snow, about the issues we have back home 
in the aftermath of Katrina. I appreciate the early help you 
gave us with waivers and so on, with the EITC and other issues, 
but the big issue back home is housing, how to get people back 
on a permanent basis.
    We are about now at the end of the deferral period for most 
mortgage holders and homesteads back home where we are going to 
face massive foreclosures just right about now. It is going to 
affect the banking industry, and it is going to affect the 
creditworthiness of a whole region. We have got to do something 
dramatic and creative, and we are going to recommend soon--I 
want to see if I can get your support for this sort of an 
idea--where we permit the homeowners to defer making mortgage 
payments over a period of time, up to 18 months, until sometime 
in 2007, or unless they occupy the house sooner, where we have 
the Treasury, in effect, pay the note along the way. At the end 
of this 18-month period, we would permit restructuring or 
refinancing or a solid second mortgage that permits the persons 
to pay the Treasury back from their own financing, back to the 
Government, and that way relieve both the banks and homeowners 
of the burden of foreclosure.
    Would you support such a concept?
    Secretary SNOW. Congressman, you and I have worked together 
on things in the past, and I think you know we try and keep an 
open mind. I certainly am prepared to talk to you and see if 
something along those lines would work. But I am not familiar 
enough with the proposal to be able to give an informed comment 
on it at this point. But I will certainly follow up with you. 
Of course, we have had many conversations with you and your 
colleague, Mr. Baker, on finding the right answers here, and we 
are in continuing conversations on that subject.
    Mr. JEFFERSON. This would be well short of the Baker bill 
as a solution, but it would be an immediate response to a 
crisis.
    The other thing is in this so-called high ground in the 
city that did not flood, we have about 5,000 to 8,000 blighted 
houses that can be fixed, are not in floodplains but in areas 
that did not sustain flooding. There I would like to--what we 
have done for the low-income housing tax credit for the rental 
property, we would like to do it for the single-family 
homeowners in that area. With that sort of concept, I would 
like to ask you the same consideration of this concept so we 
can attack this thing on two fronts. I hope we can get some 
real movement on these ideas.
    Secretary SNOW. Congressman, as you know, we have tried to 
work with you, put in place recommendations that Congress acted 
on for tax relief, the expensing for small business and the GO 
Zones and so on. So, clearly, we want to work with you to make 
sure that the community comes back.
    Mr. JEFFERSON. Well, thank you. We appreciate that.
    Mr. SHAW. The time of the gentleman has expired.
    Mr. Ryan?
    Mr. RYAN. Thank you.
    I have two lines of questioning I want to go to, one tax, 
then monetary, so I will try and fit it all in. Tax policy, a 
number of my colleagues have been talking about capital gains 
and realizations, dividend income and the estimates. Let me 
just quickly go through some numbers. Our estimators here in 
the House Joint Tax Committee, assured Congress in 2003 that 
the capital gains tax cut, going from 20 percent to 15 percent, 
would reduce revenues by $3 billion from 2003 to 2005, with 
bigger losses after that. According to the CBO, actual revenues 
were $62 billion higher than Joint Tax predicted over a three-
year period.
    Now, this isn't a one-time mistake. In 1997, when President 
Clinton lowered capital gains tax rates from 28 to 20 percent, 
Joint Tax mis-estimated revenue losses, which were increases by 
$84 billion.
    The track record at Treasury is basically the same. The OTA 
scoring methodology that you have has not only been wrong once, 
it has been wrong every time, and so we have a scoring 
methodology we know through fact and proof is wrong. Yet we 
have this tidal wave of taxes coming to the American taxpayer 
at the end of the decade. I don't like to really say make the 
tax cuts permanent as much as I like to say let us prevent 
large tax increases from being inflicted on our constituents in 
the American economy. If we go into tax reform or dealing with 
this tidal wave of taxes at the end of the decade, with this 
flawed scoring methodology, it is going to be very difficult to 
fix this problem.
    I understand you are doing some modeling over there. You 
are running new simulations. What specifically is Treasury 
doing to make the scoring methodology more accurate?
    Secretary SNOW. Congressman, what we are doing is 
establishing an Office of Dynamic Analysis that will develop 
the capabilities over time--and we hope soon--to get at the 
issue that you have put your finger on. I think all of us who 
have a hand, as I suggested earlier, in doing revenue 
estimates, need to be pretty humble, because we have clearly 
missed--we have underestimated here the power of lower tax 
rates on the Government's revenue stream. I am struck by the 
fact that despite--Mr. Neal asked me about all this spending, 
and certainly we have commitment and we need to spend for those 
commitments, but the January surplus was 21 billion. The 
December surplus was 11 billion. The reason, in the face of 
this spending, that we are getting this good results on the 
budget is the revenue side, the revenue piece.
    Mr. RYAN. The great thing about modeling is we can use 
hindsight to test our models to see whether they are accurate 
or not. Do you plan on taking the results of this office and 
putting them into practice? Then I have a quick question on 
monetary policy, so if you could give ma quick answer.
    Secretary SNOW. The answer is yes, sure, that is the 
purpose of it.
    Mr. RYAN. Dr. Bernanke is, I think, testifying right now, 
the new Fed Chair. It is his first time here in Congress. In 
academia, and I believe when he was at the CEA, he publicly 
endorsed the concept of inflation targeting, which I think is a 
very wise prospect. What is your take on inflation targeting? 
Should we engage in explicit inflation targeting, and if so, 
question number one, do we have to amend the Humphrey-Hawkins 
Law in order to engage in inflation targeting; and number two, 
should we endorse and adopt an inflation targeting rule?
    Secretary SNOW. Congressman, I have made a practice of not 
commenting on Fed policy.
    Mr. RYAN. I thought so.
    Secretary SNOW. There is sort of a division of labor. They 
do not talk about exchange rates, and I do not talk about 
interest rates and inflation targeting.
    I think it is important to respect that division of labor.
    Mr. RYAN. Okay.
    Secretary SNOW. Thank you.
    Mr. RYAN. Thank you. I yield back.
    Mr. SHAW. Mr. Tanner?
    Mr. TANNER. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary. Currently there is about 47 
percent of the debt held by the public is in foreign hands, and 
last year about 90 percent of our Treasury securities were 
purchased by foreigners. In your opinion, is there any level of 
foreign ownership of our debt that would have national security 
implications?
    Secretary SNOW. Mr. Tanner, I think the investment in the 
U.S. securities that we see from many foreign sources is today 
a reflection of the strength of the U.S. economy and our 
capital markets. So, I think it is really a vote of confidence 
in America, and when people invest in America, they get a stake 
in America and get a stake in seeing our institutions continue 
to do well. So, overall, I think we would have to view the 
investment in U.S. securities, equities, treasuries, fixed 
income instruments of the private sector and public sector as a 
positive thing.
    Mr. TANNER. I understand that, but is there any level of 
foreign ownership that would cause concern from the national 
security standpoint? For example, if they had a geopolitical 
interest or some long-term strategic interest for which they 
were willing to take a short-term economic hit, there is, I 
would assume, some level if we owe--do you see any level at 
which this would be of concern?
    Secretary SNOW. Congressman, we would of course monitor 
that and take action long before we saw it becoming a concern, 
but I do not think it is advisable to put any precise 
quantification on that. But I take your point.
    Mr. TANNER. Would we have any warning signs, in your 
opinion, when we were getting close to that point?
    Secretary SNOW. I think we understand those markets pretty 
well, and have capacity to deal with that, I do.
    Mr. TANNER. Let me ask you this. You said, last year in 
Iowa, that the consequences of continued deficit spending 
likely would be higher interest rates with the resulting drain 
on the economy. If financial markets lose confidence, then 
funds are made available only at higher interest rates. Do you 
still agree with that?
    Secretary SNOW. Absolutely.
    Mr. TANNER. Now, as you know----
    Mr. SHAW. The time of the gentleman has expired.
    Mr. Becerra?
    Mr. BECERRA. Thank you, Mr. Chairman.
    Mr. Secretary, thanks for being here.
    Secretary SNOW. Thank you.
    Mr. BECERRA. I wanted to talk a little bit about something 
you had said earlier about how the economic recovery has been 
good, that this economy is sending benefits to all Americans. 
That can sometimes present a deceiving picture when you talk in 
terms of averages. You talked about average growths in terms of 
wages and so forth. But a quick example, to make my point very 
clear, if we were to take the income of an average American, 
middle class American, and take the income of Bill Gates, and 
if we were to take the average of those two incomes, all of a 
sudden we have two billionaires in our midst. The reality is 
that that middle class American is no closer to being a 
millionaire than to being a billionaires. So, we have to be 
very careful when we talk about averages.
    That is why when you break down this economic recovery that 
we have seen over these last couple of years, you begin to 
realize that the benefits of that recovery have principally 
gone to folks who are very, very wealthy, while the richest 10 
percent in this country over the last 5 years has seen its 
income rise by about 4 percent. The average, the typical 
American family has actually seen its real weekly wages go down 
by about 1 percent. So, we have to be very clear to dissect 
this so we can really see how average Americans are benefiting, 
not lumping average Americans in with very wealthy Americans, 
and making it look like on average everyone is doing well.
    The other point I wanted to make--and I hope there is a 
question in here--is that when we talk about this economic 
picture being so rosy, I have to ask myself, why is it that in 
this budget, which you said you support from the President, did 
we have to cut funding for widows who are trying to bury their 
deceased spouses. There is a $255 Social Security benefit that 
widows receive, death benefit that widows receive when their 
spouse--who, by the way earned that deceased benefit--expires. 
This budget, your budget, would propose cutting the $255 
funeral cost benefit under Social Security that a widow 
receives. That saves you $2 billion when you have an over $400 
billion deficit.
    You also are using the entire $190 billion surplus in the 
Social Security Trust Fund to mask the size of the deficit. So, 
if you were not to include the Social Security Trust Fund 
surplus, the actual size of the deficit, and if you were to 
include the cost of the war----
    Mr. SHAW. Time of the gentleman has expired.
    Mr. BECERRA. --the deficit would be about $600 billion.
    Mr. BECERRA. Thank you, Mr. Chairman.
    Mr. SHAW. If there was a question there, the Secretary will 
have to answer it in writing.
    Mr. Foley?
    Mr. FOLEY. Yes. Mr. Secretary, I do have to say the tax 
policies of this administration have worked. Retail sales 
numbers are robust. We cross 11,000 on the Dow. Unemployment is 
the lowest in a generation. Tax policy is spurring investment. 
We have the greatest homeownership of our lifetime. So, those 
are proof positive these are working.
    The question though that I do have, I understand that as 
Secretary of Treasury, you chair the Committee on Foreign 
Investment in the United States. Looking over the budget, I 
could not find any line item that specifically funds the 
Committee. Recent reports have indicated the Committee has 
approved the transfer of ownership from Peninsula and Oriental 
Steam Navigation Co., a privately-owned British company, of the 
ports in this country, New York, Newark, Philadelphia, 
Baltimore, Miami, New Orleans, in other words, every major 
seaport on the Eastern seaboard, to a company owned by the 
government of the United Arab Emirates.
    Just crossing the wire this morning, United Arab Emirates 
are engaged in active negotiations with Iran to increase trade 
opportunities at a time when we are trying to deal with the 
threat Iran poses to the entire world. You recently 
acknowledged in an earlier statement that we have had a tough 
time convincing the Chinese government to adjust their 
currency. How will we get a government entity who now controls 
the major shipping points of interest in this country to do 
what we would like them to do if we cannot impact the Chinese 
on a simple currency adjustment? What was rationale, first, for 
the security risk posed by the potential sale, and are we going 
to be able to dictate to them the critical security issues?
    When I travel to Guatemala, to various and sundry places, 
one of my first questions to their officers are, what are you 
doing to secure the cargo coming to the United States of 
America? Now I have a concern that a foreign national will own 
the ports in which those goods are arriving. Could you expound?
    Secretary SNOW. Yes. Thanks, Mr. Foley, for that good 
question on the CFIUS. The Committee on Foreign Investment in 
the United States is chaired by the Treasury Department. We 
never comment on particular transactions, but what I can say is 
the Committee is made up of all of the relevant agencies of the 
U.S. Government, from Homeland Security to Defense, to 
Intelligence, to Justice, to make sure that any foreign 
purchase of a U.S. based company does not pose a threat to the 
national security of the United States. That is the job of 
CFIUS, to make sure that any acquisition of U.S. companies does 
not pose a threat. Often what happens is that the acquiring 
entity agrees to a series of conditions that are designed to 
make sure that the security interests of the United States are 
protected.
    Let me say that is a process that I have watched. I think 
it works very well, and I think it is designed to well protect 
the security interests of the United States.
    Mr. FOLEY. One of the concerns, the GAO had a report to the 
Exon-Florio, which is the presidential directive to protect the 
Nation on foreign investment. The GAO reports that there are 
weaknesses, obviously, in the Committee's implementation. It 
says specifically, ``Congress should consider amending Exon-
Florio to more clearly emphasize the factors that should be 
considered in determining potential harm to national 
security.'' I guess that is the one thing that is troubling me. 
Washington Times today says we should be improving port 
security in an age of terrorism, not outsourcing decisions to 
the highest bidder. The ports are thought to be the country's 
weakest homeland security link with good reason. Only a 
fraction of the Nation's maritime cargoes are inspected. The 
root question is this: why should the United States have to 
gamble its port security on whether a subsidiary of the 
government of the United Arab Emirates happens to remain an 
antiterrorism ally?
    I guess that is the sum and substance. They are today. What 
happens tomorrow? How do we have safeguards implemented in law?
    Secretary SNOW. Congressman, the CFIUS process--and again I 
have to be very careful not to go very far here because of 
legal restrictions I am under--but----
    Mr. SHAW. But, Mr. Secretary, if I may, according to the 
rules set out by the Chairman, you will have to respond to that 
in writing.
    Secretary SNOW. Good.
    Mr. SHAW. Mr. Doggett?
    Mr. DOGGETT. Thank you, Mr. Chairman.
    Mr. Secretary, just putting the Republican budget cuts in 
proper perspective, all of the cuts that Republicans just 
approved, student loans to Medicaid, to child support 
enforcement and other vital programs, will this year fail to 
pay for even one single month in Iraq. All of these cuts amount 
to about half of the almost $9 billion that incredible Bush 
administration mismanagement in Iraq has just lost. That is $9 
billion, not even counting all the Halliburton no-bid contracts 
of taxpayer money that the administration cannot find, can't 
keep track of.
    If we approved every single penny that you have recommended 
in this budget that you are peddling today, it would pay for 
little more than four more months in Iraq, and of course, all 
of this doesn't count the terrible cost in the lives and limbs 
of young Americans.
    The question I have for you relates to your claims that you 
are going to make us more competitive with this budget, because 
this new budget once again essentially freezes Pell grants at 
levels that students received about 30 years ago. You propose 
to eliminate most of the Perkins Loan program, which half a 
million students rely on for fixed rate low interest loans, and 
replace those with the new high interest Boehnert Loan program, 
which has these rates and fees that students don't currently 
have to pay. This will add about $5,000 on average to the debt 
that students have to pay when they are already struggling with 
debt. It would seem that the competitiveness you envision is 
more students having to scramble and compete against each other 
for more scarce Federal resources.
    Is the administration's solution here based on the idea 
that our students will be more competitive if they have more 
debt that they have to pay off and will work harder, or is this 
just consistent with your philosophy that since we are going to 
have endless national debt, it does not hurt for our students 
to have endless personal debt?
    Secretary SNOW. Congressman, if you will look at the record 
of this administration on education, what you see is something 
on the order of a 40 percent increase of spending since the 
administration took office, 40 percent----
    Mr. DOGGETT. Well, you don't disagree on the Pell grants, 
that they are frozen at a level 30 years ago?
    Mr. SHAW. Mr. Pomeroy.
    Mr. POMEROY. Mr. Secretary, we have a lot of ground to 
cover. Let's begin. Referring to your op ed piece in the Wall 
Street Journal today, you indicate fully half of all households 
benefiting from the lower tax on dividends alone, there can be 
no doubt that lower tax on investment benefited the majority of 
American people quite directly.
    Later in that same article you say: Keep in mind, the 
typical investor today, according to Securities Industry 
Association, is a middle class person saving for retirement 
with a household income of $65,000.
    Now, is that where you come up with your conclusion that 
half of all households benefit from this lower tax on 
dividends?
    Secretary SNOW. That and the fact that because of the lower 
taxes on dividends and capital gains, there are so many more 
people working in America----
    Mr. POMEROY. But the beginning of your sentence you said, 
yes, that--so yo acknowledge that. Now, how does the tax 
structure, if you say that these people are holding this money 
through the stock investments made through their retirement 
funds, as I understand the taxation of retirement funds, Mr. 
Secretary, you do not have capital gains taxes and dividends 
taxes attaching to those funds. Is that correct?
    Secretary SNOW. There will be taxes when the moneys are 
withdrawn.
    Mr. POMEROY. Correct. But that tax, Mr. Secretary, is 
figured at ordinary income tax rates, not capital gains tax 
rates or dividend tax rates. So, it is my understanding, Mr. 
Secretary, that contrary to what you are suggesting today, 
these capital gains and dividend tax issues don't relate to the 
money coming out of retirement funds when someone is retiring 
and is drawing down their IRA.
    Secretary SNOW. Everybody who participates in the equity 
markets of the United States, and that is over half of the 
households----
    Mr. POMEROY. That is a very--if you are going to say, well, 
we all benefit the----
    Secretary SNOW. Well, there were something like 36 million 
people have taxable dividends. 36 million is a pretty good 
sizable portion of the American----
    Mr. POMEROY. I have figures from North Dakota, Mr. 
Secretary, that says that basically 73 percent of the taxpayers 
across all income tax levels receive no benefit from 15 percent 
capital gains, no benefit at all. I believe you are misstating 
the taxation----
    Mr. SHAW. The time of the gentleman has expired.
    Mr. Lewis?
    Mr. LEWIS OF KENTUCKY. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary. I want to go in just a little bit 
of a different direction here, kind of a niche issue. I know 
that one of the administration's ongoing priorities is 
restructuring of the Black Lung Disability Trust Fund debt. I 
understand that both you and Secretary Chao have identified 
this as a key priority and a basic good government issue. With 
the trust fund nearly $9 billion in debt, without 
restructuring, it can never be solvent. As you may be aware, I 
have introduced a bill to take this problem on and hopefully 
solve it. I don't know if you are aware of the legislation. It 
is H.R. 3915. If you are and if you have had a chance to look 
at it, do you think this will address the problem and hopefully 
solve it?
    Secretary SNOW. Congressman, I am aware of it, but I have 
not had an opportunity to really review it. If you would like 
me to, I will look at it and give you written comments on it or 
call you and talk to you about it.
    Mr. LEWIS OF KENTUCKY. I would appreciate that. If there is 
anything else that you think we need to do to bring solvency to 
this fund, then I would appreciate your comments.
    Secretary SNOW. I would be pleased to do that, and I have 
made a note of it.
    Mr. LEWIS OF KENTUCKY. Great, thank you.
    I yield back.
    Mr. SHAW. Gentleman yields back.
    Mrs. Tubbs Jones?
    Mrs. TUBBS JONES. Mr. Chairman, thank you.
    Good afternoon, Mr. Secretary. How are you, sir?
    Secretary SNOW. Good, thank you.
    Mrs. TUBBS JONES. One of my colleagues on the Republican 
side said this was the greatest housing boom we had ever seen, 
and the dollar is--this is the greatest bankruptcy boom we have 
ever seen too. In fact, Financial Services passed some 
legislation because the financial markets didn't want to many 
people to be able to declare bankruptcy; isn't that a fact, 
sir?
    Secretary SNOW. Well, I think----
    Mrs. TUBBS JONES. Don't take too long to answer. I only 
have 2\1/2\ minutes.
    Secretary SNOW. Yes. There were reforms in the bankruptcy 
laws enacted.
    Mrs. TUBBS JONES. As a result of the high number of people 
filing bankruptcy, coming as a result of this great housing 
boom and predatory lending.
    Secretary SNOW. No. I think there was some serial 
bankruptcies declared in a way that wasn't consistent with the 
intentions of the bankruptcy laws.
    Mrs. TUBBS JONES. Some serial bankruptcies declared 
inconsistent, but that would have been--I won't argue with you 
about that, but the fact is, there are a high number of 
bankruptcies, even though you are suggesting that at this time, 
this is the greatest housing boom or economic standard that we 
have had.
    Let me move on to another subject, Mr. Secretary. The 
Social Security privatization included in the President's 
budget. The dollars that are going to be expended to privatize 
over 10 years is something around $1.1 trillion; is that 
correct, sir?
    Secretary SNOW. It is in the budget. I think it is 
something on that--I think it is a little less, like three-
quarters of a trillion, I think, is the number that I remember, 
but we can check that.
    Mrs. TUBBS JONES. But it is a big number, regardless of 
whether it is three-quarters of $1.1 trillion.
    Secretary SNOW. Right.
    Mrs. TUBBS JONES. That is money that we have to expend up 
front in order to fund privatization; is that correct, sir?
    Secretary SNOW. Yes, over that period.
    Mrs. TUBBS JONES. In fact, all of the stories, all the 
polls, all of those say that the American public does not favor 
privatization as a result of the cost, right?
    Secretary SNOW. I think it depends on what poll you look at 
and who you talk to.
    Mrs. TUBBS JONES. I mean the polls were strong enough that 
the President backed up on his decision to try and privatize in 
2006; is that a fair statement?
    Secretary SNOW. Well, it didn't happen.
    Mrs. TUBBS JONES. It didn't happen, and it did not happen 
as a result of the American public raising their arms saying, 
``Mr. President, we do not want to privatize Social Security.''
    Secretary SNOW. Well, I think it failed to garner 
bipartisan support is a fair statement.
    Mrs. TUBBS JONES. Because it didn't garner bipartisan 
support, that means there are enough Republicans, along with 
Democrats, who oppose it and you couldn't move forward.
    Thank you, Mr. Chairman.
    Mr. SHAW. Mr. Thompson?
    Mr. THOMPSON. Thank you, Mr. Chairman. Mr. Chairman, the 
budget calls for a tax increase on a very significant portion 
of agriculture that I represent. It is the second try to do 
this in the way of user fees. I have a letter that I would like 
to submit for the record, signed by 20 bipartisan members 
opposed to that.
    Mr. SHAW. Without objection.
    [The letter follows:]

                                                      July 26, 2005

The Honorable Bill Thomas
Chairman, House Ways & Means Committee
U.S. House of Representatives
Washington, DC 20515

The Honorable Charles Rangel
Ranking Member, House Ways & Means Committee
U.S. House of Representatives
Washington, DC 20515

Dear Chairman Thomas and Ranking Member Rangel:

    We urge you to strongly oppose any efforts by the Administration to 
impose greater tax burdens on the wine industry through new user fees. 
This industry is already one of the most heavily taxed and regulated in 
the country and any additional tax burden would be harmful to the 
future growth of the industry.
    As you may recall, the Administration's FY06 Budget proposal 
included a provision authorizing the Treasury Department's Alcohol and 
Tobacco Tax and Trade Bureau (TTB) to collect user fees in order to 
offset the cost of its operating budget. These proposed permit and 
application fees amount to nothing more than an additional tax on top 
of the billions of dollars in excise taxes that the alcoholic beverage 
industry already pays.
    It has come to our attention that there may be an effort to include 
such a provision in the upcoming tax reconciliation package. We urge 
you to strongly oppose any such effort. This provision would unfairly 
burden the wine industry, in particular the thousands of small, family 
owned wineries across the country, many of which have just opened in 
the last few years. Any additional tax burden would jeopardize the 
significant growth that the industry is currently experiencing.
    It is unwise and unfair to further tax an industry simply for 
complying with Federal regulations and we hope that you will join us in 
opposing any such provision. Thank you for your time and consideration 
and we look forward to working with you on this issue.
            Sincerely,
                                                      Mike Thompson
                                                  George Radanovich
                                                       Steve Israel
                                                    Maurice Hinchey
                                                       Lynn Woolsey
                                                         Lois Capps
                                                    Doris O. Matsui
                                                     Timothy Bishop
                                                          Jim Costa
                                                  John T. Doolittle
                                                   Louise Slaughter
                                                        Ken Calvert
                                                         Randy Kuhl
                                                          Mary Bono
                                                  Sherwood Boehlert
                                                           David Wu
                                                     Darlene Hooley
                                                       Doc Hastings
                                                      Richard Pombo
                                                        Greg Walden

                                 

    Mr. THOMPSON. Thank you, Mr. Secretary, for being here. I 
am concerned about a real lack of oversight, not only behalf of 
your shop, but ours as well.
    According to the GAO, 16 of 23 Federal agencies aren't in 
compliance with proper accounting standards. This week we 
learned from your own IRS that there is a huge tax gap, 
somewhere between 290 and $345 billion that we are not 
collecting. The Department of Homeland Security and Government 
Accountability Office has released a recent report on Katrina. 
We are all seeing that. We know that there has been terrible 
mismanagement in everything from the payments to the hurricane 
victims, to thousands of trailers sitting unused. Now there are 
reports of all the private sector problems associated with the 
reconstruction in Iraq. Who is watching the store, Mr. 
Secretary? Shouldn't we be having more oversight investigations 
and shouldn't we be working together to do this?
    Secretary SNOW. Congressman, there is always need for more 
attention to details in managing things. I agree with you.
    Mr. THOMPSON. I would like to see some effort, joint effort 
for greater oversight so we can get a handle on this, because 
this would go a long way in balancing our budget problems.
    Quickly, on the alternative minimum tax, the President 
stated that this should be addressed in the fundamental tax 
reform, but there is no proposal in the budget. Does that mean 
that the President doesn't want to fix the problems associated 
with alternative minimum tax?
    Secretary SNOW. No, no. Quite the contrary.
    Mr. THOMPSON. Then how do we do it?
    Secretary SNOW. You do it in the context of broad-based tax 
reform and we will----
    Mr. THOMPSON. But it is not in budget.
    Secretary SNOW. well, no, because we have not yet finalized 
our efforts to come up with recommendations to the President.
    Mr. THOMPSON. But there is not a place for it in the 
budget.
    Secretary SNOW. Well, because we have not yet come up with 
the proposals.
    Mr. THOMPSON. But in the same budget you are extending tax 
cuts that do not expire for years, but the alternative minimum 
tax has already expired and it is poised to hurt millions of 
Americans.
    Secretary SNOW. We support the patch on the alternative 
minimum tax.
    Mr. SHAW. The time of the gentleman has expired.
    Mr. Hulshof?
    Mr. HULSHOF. Thank you, Mr. Chairman.
    I cannot believe my good friend from the State of 
California would advocate tax breaks for wealthy people. I say 
that tongue in cheek.
    Mr. Secretary, welcome. I cannot let pass, however, some of 
the rhetoric that has already become part of this hearing's 
record. I have heard the terminology ``shared sacrifice.'' 
Correct me, Mr. Secretary, if I misspeak. It is my 
understanding that 5 percent of the top wage earners in this 
country pay over half of the country's bills.
    Secretary SNOW. That is correct.
    Mr. HULSHOF. More specifically, a successful professor in 
Columbia, Missouri, who may have published a book, is paying 
for welfare benefits for needy families in Columbus, Georgia. A 
wealth businesswoman in Washington, Missouri is paying for free 
housing for those in Washington State. Americans reached into 
their pockets in the aftermath of Katrina and were generous in 
providing for those victims of that tragedy. Yet now we are 
seeing that some, some of the victims of that catastrophe have 
been spending that money not to pay for the necessities of 
life. Probably most importantly, regarding shared sacrifices, 
there are families in Monroe City and Herman, Missouri and 
other small towns, whose loved ones have paid the ultimate 
sacrifice for what we are doing in Iraq, and those families 
believe those sacrifices have been worth it.
    So, that is my comment. You need not comment on my comment, 
Mr. Secretary.
    But I do want to pivot and talk about, associate myself 
with some of the remarks of Mr. Ryan, Mr. Foley, about how 
these pro-growth tax policies have in fact spurred growth and 
investment in our economy. I think any fair-minded individual 
would arrive at the conclusion that the fundamentals of our 
economy remain strong. I would exclude from the definition of 
fair-minded individuals, those that are running from political 
office. But one of the things--I am a sponsor of H.R. 8. I 
think I can say that it is a bipartisan bill because there were 
42 of my colleagues on the other side of the aisle on the death 
tax repeal, that voted for that permanent, complete and final 
repeal.
    Mr. Secretary, my question is: what is your opinion of the 
impact on taxpayers and the economy as a whole if Congress 
fails to act, and we allow the death tax to reemerge in its 
pre-2001 levels, that is an exemption of only one million 
dollar, and tax rates as high as 55 percent? If we fail to do 
our duty and act, give me your best assessment of what might 
happen to the fundamentals of our economy.
    Secretary SNOW. Well, we would return to the far less 
desirable environment we found ourselves in several years back, 
with slower growth rates, less job creation and less income 
creation across America. It would be to reverse the good path 
we are on. It would be a terrible mistake.
    Mr. HULSHOF. I applaud the idea--and I think Mr. Ryan 
touched on this, others have as well--the creation of a Dynamic 
Analysis Division within Treasury's Office of Tax Policy. I 
think this is a great idea to actually put into place real 
world economic scoring instead of, my terminology, this flat 
Earth sort of scoring that we have to deal with. It is my 
understanding that the Dynamic Analysis Division will be up and 
running hopefully by the July mid-session review. I hope that 
we can expect a dynamic analysis of the death tax repeal. Would 
you care, in the few seconds I have remaining before the 
Chairman gavels me down, would you care to venture a guess as 
to what we might expect from a dynamic analysis of the repeal 
of the death tax, sir?
    Secretary SNOW. I would rather reserve until we have that 
analysis completed, but I do think that that tax does have an 
adverse effect on entrepreneurship, and people continuing in 
businesses and continuing to put their talent to work to grow 
the American economy.
    On your broader question of the shared sacrifice, I think 
it is important to realize that because of the tax cuts that 
you approved, the Code has been made more progressive. Higher 
income people today pay a higher share of the total tax bill, 
and on the mistakes that were made, and certainly there were 
some in the context of Katrina, the error were the result of 
our commitment to try and err on the side of being as generous 
and humanitarian as possible and respond to the needs of the 
people who were devastated by that.
    Mr. HULSHOF. Thank you.
    Mr. SHAW. The time of the gentleman has expired.
    Mr. Emanuel, you are recognized for 2\1/2\ minutes.
    Mr. EMANUEL. Thank you, Mr. Chairman.
    Mr. Secretary, you had a report today about the fact that 
approximately $300 billion in net dollars goes unreported and 
uncollected, which then therefore leaves a greater burden of 
the taxes onto middle class families. There is a couple parts 
of this I would like to talk to you about. One is the fact that 
until 2003 enforcement was nonexistent at IRS. Obviously, that 
was before your time, I am well aware of that. But it let the 
cat out of the bag, so there has been a dramatic increase in 
uncollected dollars, could actually reduce the deficit by 
almost 80 percent, if in fact what people owed was actually 
paid. So, what are we going to do to do something about 
collection?
    First. If you look at your enforcement that goes on, close 
to 70 percent--let me say it this way--there has been a 70 
percent increase in the funds for cracking down on first-time 
teachers, first-year rookie police officers, and people who 
apply and use the earned income tax credit. Yet only a 3 
percent increased enforcement in all other areas.
    Second. If you happen to be making the minimum wage, you 
are 8 more times more likely to be audited by the IRS than if 
you are a million dollar investor in a partnership where only 1 
in 400 get audited.
    So, I am worried about what goes unreported, and 
uncollected, and unenforced by the IRS. Then second, when you 
do actually do the job of enforcement--and there has been an 
increase in dollars since 2003 under your watch--they don't get 
distributed equally and not everybody gets audited accordingly. 
I would trust you that the people making earned income taxes, 
that is, people making about $25,000 a year, work hard, play by 
the rules, trying to raise their kids right, that is not where 
the gap is, and you have not enforced the law equally across 
the board, and if you want to pick up $300 billion quickly that 
is owed and says that everybody will live under the law equally 
and be responsible equally, you need to enforce the law across 
the board equally, not based on whether you are a janitor, a 
teacher or a millionaire investing in a partnership. You do not 
apply the law today equally.
    Secretary SNOW. Well, let me respond. The tax gap is a 
serious problem, and we share your concern and that of the 
other Members of the Committee on that score. The 
administration, as you acknowledged, has made a serious effort 
to close the gap.
    Mr. EMANUEL. After the problem got very bad on their watch, 
right?
    Secretary SNOW. Well, you know, this is not a new problem. 
On this issue of who is getting audited, the budget calls for 
significant increase--and we have seen this in the last few 
years--audits of the high-income taxpayers, those earning 
$100,000 or more rose--I think the audits of them last year 
were some 220,000 in fiscal year 2005, the highest number in 
the past 10 years. I take your point. We need to be equitable 
and fair here----
    Mr. EMANUEL. Mr. Secretary, you and I have a friendship 
that goes way back. I am sorry there are some facts here that 
just are stubborn, as Ronald Reagan used to say.
    Mr. SHAW. Time of the gentleman has expired.
    Mr. EMANUEL. Appreciate that, Mr. Chairman. I look forward 
to an answer any time in writing, Mr. Secretary, because it is 
not true.
    Mr. SHAW. Mr. Weller? Mr. Weller is recognized for 5 
minutes. The other members will then be recognized for 2\1/2\ 
to keep the Secretary on schedule.
    Mr. WELLER. Thank you, Mr. Chairman, and I will certainly 
yield back any time I do not use, recognizing the Secretary is 
limited in his time, and give every member an opportunity who 
has patiently waited for their opportunity to ask questions of 
the Secretary.
    Mr. Secretary welcome to the Committee. Good to have you 
here today. It is always good to be with you.
    I represent a district south of Chicago with a lot of older 
communities, both rural and suburban as well as urban. I want 
to commend you for including in the President's budget 
permanency for the brownfields provision that we have worked to 
have included in the Tax Code, tax incentives, to encourage the 
environmental cleanup of essentially abandoned industrial and 
commercial sites, and I commend you for having the wisdom to do 
that. I worked with your department along with my Chairman and 
others to create this provision, and of course, I support the 
goal of permanency. I would also note, as we work through the 
reconciliation conference, with Chairman Thomas's support, we 
have worked to expand the brownfields provision to include 
petroleum products. About 40 percent of brownfield have 
petroleum products. We could always think of that abandoned gas 
station in many rural and suburban and urban communities, the 
one on the strategic corner. People always think, why doesn't 
somebody buy that? Well, there is environmental contamination 
there. This incentive I believe will help create recycling of 
those sites and put them back to work.
    I would note, since this provision became law, that the 
largest brownfield in the State of Illinois, which is located 
in the district I represent, the former Joliet arsenal, has 
attracted in its recycling $1.5 billion in private investment, 
by the end of the year should have 2,000 jobs in place, and 
frankly, now has the largest container port in North America, 
is I think the third largest container handling facility in the 
world, all because private investment attracted by brownfields 
cleanup.
    The one issue I want to address to you, Mr. Secretary, is 
dealing with the President's alternative fuels agenda that he 
talked about in the State of the Union. I commend him for his 
goal of increasing energy independence. I am one of those who 
believes it is a national security issue as well as an economic 
security issue. We were reminded in September with $3.00 
gasoline and higher, what happens when we are overly dependent 
on limited sources, particularly petroleum-based fuels.
    When he talked about biofuels--and I want to mention to 
you, as you may be aware, I have introduced, back in December, 
the Biofuels Act legislation which was nicknamed 25 by 25, sets 
a goal of providing 25 billion gallons of biofuels, ethanol, 
bio-diesel, soy-diesel in use by the year 2025. We currently 
use 4 billion gallons.
    But the legislation, I believe, will be a key part of our 
strategy to achieve the President's goal of reducing our 
dependence on Middle Eastern oil by three-fourths by the year 
2025. So, I certainly want to work with you. I would note that 
in the Biofuels Act, there are provisions which provide for 
accelerated appreciation for investment in refining capability 
for biofuels. We continue the incentives that were in the 
energy bill to encourage retailers to invest in the 
infrastructure necessary to distribute. Then we also provide 
tax credit for flexible fuels, and this is an area I would 
certainly like to work with you, Mr. Chairman.
    I just want to ask of you, in my limited amount of time, 
you know, from the administration standpoint, from the 
President's standpoint, what are the advantages of emphasizing 
biofuels reducing our energy independence, and then how do you 
see using the Tax Code to achieve that goal?
    Secretary SNOW. I was pleased, within the last month or so, 
to announce the implementation of some of the provisions in the 
Energy Act of last year, that encourage greater reliance on 
hybrid vehicles. I think the tax code can play a useful role 
here in encouraging movement in the right direction on 
alternative fuels, and on alternative technology. So, we want 
to work with you on that. I also hope 1 day to visit that port 
facility made possibly by the brownfields.
    Mr. WELLER. You have an outstanding invitation, Mr. 
Secretary. We would love to have you there.
    Secretary SNOW. I think it makes a point that is important 
about the way the tax system works. If you out certainty into 
it, you get investors coming in. That is one reason it is 
important to extent the special treatment accorded to the 
brownfields on a permanent basis. It would remove the doubt or 
the uncertainty affecting investment in facilities like that, 
and would promote to goal of encouraging not only investment, 
but environmental remediation, which is important as well. So, 
I look forward to visiting there one day.
    Mr. SHAW. Time of the gentleman has expired.
    Mr. WELLER. You have an invitation to come.
    Mr. SHAW. Time of the gentleman has expired.
    Mr. Johnson, recognized for 2\1/2\ minutes.
    Mr. JOHNSON OF TEXAS. Thank you, Mr. Chairman.
    Thanks for being here, Secretary.
    Secretary SNOW. Thank you.
    Mr. JOHNSON OF TEXAS. You have already discussed a little 
of the criticism concerning people in the lower tax brackets 
who work part time or do not get their health care through 
their employ, generally lower income. If you want to discuss 
how the President's budget helps remedy that, I would 
appreciate it. But I have one other question, and it may not be 
in your expertise, but you can get back in writing if you want 
to, the idea to allow employers to put more money into HSAs 
that belong to chronically ill employees is an interesting one. 
Does the administration have an idea as to how chronically ill 
will be defined?
    Secretary SNOW. I think that is probably a question better 
left to my able colleague, Mr. Leavitt, or Dr. McClellan.
    Mr. JOHNSON OF TEXAS. Toss the ball, huh?
    Secretary SNOW. Well, I think you might not get as informed 
an answer from me as you would from them. So, I am going to 
defer to them.
    But on your broad question of the HSAs and how they affect 
things going forward, if the HSAs are made available, and the 
broadening provisions that the President called for enacted, I 
think you are going to see greater reliance on HSAs, which can 
only be good for employees and small business and entrepreneurs 
because now they are going to have access to lower cost health 
care than is available today. It is a good option for them, not 
a panacea, but it is a good option.
    Mr. JOHNSON OF TEXAS. It gives them the advantage of 
selecting their own health care processes.
    Secretary SNOW. Exactly.
    Mr. JOHNSON OF TEXAS. Thank you, sir. I will yield back the 
balance of my time.
    Mr. SHAW. Gentleman yields back the balance of his time.
    Mr. Ramstad?
    Mr. RAMSTAD. Thank you, Mr. Chairman.
    Mr. Secretary, I want to ask you about a thorn in the side 
of many taxpayers, and I am referring to the telephone excise 
tax. As you know, this tax was first enacted--well, it was 
enacted in 1898 as a temporary tax to fund the Spanish-American 
War. It is imposed by the Federal government on long distance 
phone calls. It seems to me almost an absurdity today that the 
tax only applies to phone calls for which charges are levied 
based on the distance and the time of the phone call. But as we 
all know, most phone companies today don't base their charges 
on both distance and duration of the call. Rather, they charge 
a flat rate per minute regardless of the distance the customer 
happens to be calling.
    Now, in the past few years, a number of taxpayers, business 
taxpayers, have challenged the IRS' collection of this tax in 
Federal court. In fact, no fewer than three Federal courts and 
a host of Federal District Courts have all ruled against the 
IRS. Can you please tell me why in the world does the IRS 
continue collecting this tax, and can you give us an indication 
of how long the government will keep litigating this issue? Mr. 
Secretary, why not give it up?
    [Laughter.]
    Secretary SNOW. Well, I think the courts may require us to 
do that very soon. You know, this is pending in the Sixth 
Circuit. The Department of Justice took an appeal from the 
District Court. We are awaiting that judgment. Should the 
judgment come down in alignment with the prior three Federal 
Circuit Courts, I think the handwriting is on the wall.
    Mr. RAMSTAD. That will be the end of the temporary tax 
enacted in 1898 to fund the Spanish-American War?
    Secretary SNOW. I would think the time to bring that to an 
end would be upon us.
    Mr. RAMSTAD. That will be good news to taxpayers. Thank 
you, Mr. Secretary.
    I yield back.
    Mr. SHAW. Gentleman yields back.
    Mr. Camp?
    Mr. CAMP. Thank you, Mr. Chairman.
    Mr. Secretary, in Michigan, the issue of competitiveness is 
foremost in most people's minds, and we are facing pressure not 
only from China but India, Mexico, but also the high cost of 
health care. Can you explain what the President proposes I his 
budget with regard to helping more Americans better afford 
quality health care?
    Secretary SNOW. The key provision in the President's budget 
that would accomplish that objective, Congressman, is the 
enhancement of the HSAs by allowing larger contributions and by 
making them even more tax advantaged by allowing the purchaser 
to deduct the premiums on the policy, and to get a credit back 
on the payroll taxes.
    This should make an already very attractive vehicle even 
more attractive. In order to make it more attractive to the 
lower income and middle income people, it also has a refundable 
tax feature to it that will enable people in lower income 
categories to be able to afford it.
    The idea here is simply to make an option available for 
people who don't have health care today, largely small 
business, entrepreneurs, self-employed, to be able to get the 
option of lower-cost health care.
    Mr. CAMP. Thank you very much. Mr. Secretary, I am 
interested of your assessment of the rate of economic growth in 
the United States compared to, say, the European Union or 
Canada, and if Congress fails to extend the tax rates on 
capital gains and dividends, would that economic growth be 
potentially damaged, and if so, could you describe some of that 
for me?
    Secretary SNOW. Yes. The United States today is the envy of 
the world. Our growth rates are roughly double the growth rates 
of the other G7-G8 countries. At the heart of a strong recovery 
we are enjoying is the tax policy that Congress adopted 3 years 
ago to lower the taxes on marginal taxes on income, and to 
reduce the taxes on capital gains and dividends.
    I think it would be a terrible mistake to reverse course. I 
think it would be a terrible mistake not to do the extension, 
and I think the track record here is clear, and I would urge 
you and your fellow members of the Congress to move on to 
permanency, because lower tax rates are consistent with both 
strong revenue streams for the Federal government and better 
jobs, more jobs, in a more expensive, dynamic and growing 
economy.
    Mr. CAMP. Thank you, Mr. Secretary.
    Mr. SHAW. Gentleman yields back.
    Mr. English, you are recognized----
    Mr. ENGLISH. I will pass, Mr. Chairman. I have a number of 
questions, but in the interest of time, I will simply submit 
them for the record.
    Mr. SHAW. Mr. Herger?
    Mr. HERGER. Thank you, Mr. Chairman.
    Secretary Snow, like many here, I firmly believe Congress 
should act to permanently extend the tax relief of 2001 and 
2003. Tax relief has helped to rebound from the economic 
slowdown of a few years ago, has stimulated growth and created 
a record number of jobs, 4.7 million new jobs, has stimulated 
growth since 2003, and has also contributed to 14.5 percent 
increase in Federal receipts, the largest increase in almost a 
quarter of a century.
    One of the confirmations of these numbers has been a report 
issued by the National Federation of Independent Businesses 
that expanded section 179 expensing, where small businesses are 
able to deduct up to 100,000 of investment in machinery and 
equipment authority is helping these small businesses grow. I 
would like you to take a moment to elaborate on the President's 
proposal to double the amount a small business can currently 
expense, and make this amount permanently, and specifically, 
what benefit would this assurance by to American small 
business?
    Secretary SNOW. Congressman, thanks for the opportunity to 
address that. Small businesses are really the engine of job 
creation in America. They create two out of three new jobs. We 
saw that when the expensing under 179 was expanded from 25,000 
to 100,000, that a lot of investment was made. It really 
spurred investment because it improved the return on 
investment, it lowered the cost of investments. The evidence on 
that is very clear, and what we are saying is for small 
business, since it worked at going from 25 to 100, it is going 
to work even more raising it to the 200,000. We want to 
continue to have small business lead the job creation parade in 
America, make investments, create jobs and grow and expand, and 
this is designed to do that. I think it is one of the strengths 
of America, our vibrant small business sector.
    Mr. HERGER. Thank you, Secretary.
    I yield back.
    Chairman THOMAS. [Presiding.] The Chair thanks the 
gentleman from Florida for his courtesies, and inquires if he 
wishes to inquire?
    Mr. SHAW. I have one area that I would like to inquire 
into, and that is the question of the alternative minimum tax. 
I am not talking about just simply adjusting, I am talking 
about abolishing it entirely. It is probably the most senseless 
tax that we have on the books today. We would, I am sure, have 
rescinded it on a bipartisan basis, and the only problem is 
that the revenue figure is gigantic. have you done any analysis 
as to what effect that would have on the rates if we were able 
to rescind it on a revenue-neutral basis?
    Secretary SNOW. You are right, Congressman. The AMT, 
particularly as it goes forward, will be generating very large 
amounts of revenue. We intend to address the question of the 
AMT, not as a patch, but as a permanent fix, and to do so in 
the context of broad-based tax reform. The AMT, as you suggest, 
is such an integral part of the tax life of the American 
citizens, and will become more so in the future, such an 
integral part of the Code and the way we approach taxes, that 
it has to be thought of in terms of the whole code itself. 
There are varying estimates. I think we have one in our budget 
proposals as to what the revenue effects would be, but whatever 
they are, they are very, very sizable. We know that.
    Mr. SHAW. Thank you.
    I yield back, Mr. Chairman.
    Chairman THOMAS. Thank the gentleman.
    Mr. Secretary, thank you very much, especially for your 
willingness to accommodate, what I know is a very busy 
schedule, the opportunity for the Committee on Ways and Means 
to speak with you at the beginning of this budget process.
    Secretary SNOW. Mr. Chairman, thank you very much.
    [Whereupon, at 12:28 p.m., the Committee proceeded to other 
business.]
    [Questions submitted from Mssrs. English, Herger, Rangel, 
Stark, and McDermott to Secretary Snow, and his responses 
follow:]

              Question Submitted by Representative English

    Question: Thank you for your testimony before the Committee on Ways 
and Means today. I appreciate your providing our Committee with an 
overview of the President's FY 2007 Budget. As you recall, the hearing 
was lasting longer than anticipated, and so in the interest of time, I 
agreed to submit my questions to you in writing. Therefore, I offer to 
you the following concerns and request your prompt response.
    First, I would like to raise important issue that has arisen under 
the provision enacted in 2004 to provide an incentive for companies to 
repatriate their foreign earnings. I understand that recent Treasury 
guidance (Notice 2005-64) would undermine the intent of this provision 
(Sec. 965 of the I.R.C.) by imposing a tax penalty on companies that 
use the provision to repatriate. As you may recall, I was the House 
sponsor of the original repatriation legislation, and I have been 
following it closely to ensure the incentive is working properly. In 
September 2005, I wrote to you to ask that this guidance be revisited 
to more clearly reflect Congressional intent. I did not receive a 
response until yesterday, February 14, 2006 and despite the five-month 
delay, the response simply stated that the Office of Tax Policy is 
considering the issue. I do not consider this vacant reply to have 
addressed the concerns I laid out in my letter. However, I understand 
that Treasury is considering issuing further guidance that would allow 
taxpayers to switch to the so-called ``sales method'' of allocating R&D 
expenses for the year of repatriation without being required to stay on 
that method for 5 years. Providing such guidance would go a long way to 
help mitigate the tax increase that otherwise could arise and would be 
consistent with Congressional intent underlying the repatriation 
incentive. I request that you inform me whether Treasury will issue 
guidance to allow companies to be able to use the ``sales method'' for 
allocating R&D expenses during this repatriation incentive year without 
being bound to stay on that method for 5 years?
    Second, I would like to focus on the matter of China's currency. 
The Administration has heralded recent steps by China regarding its 
currency as important steps toward a freely market-determined Yuan. 
Yet, I find it difficult to get too excited about important steps, as 
you have called them, when there is no detail as to what those steps 
are. In July, when China revalued the yuan with a one-time adjustment 
and set the trading band to a basket of currencies from the dollar peg, 
did they announce what currencies were in the basket? If so, could you 
please provide a list of those currencies?
    Is it possible that the resulting daily value calculation of the 
yuan could vary widely based on their selection of currencies in the 
basket? Could you please explain why?
    On average, what is the daily fluctuation in value of the U.S. 
dollar in percentage form? Do you think that China's limitation of the 
change in value of the Yuan to 0.15% is overly cautious or restrictive?
    More recently, China announced that it would abandon the basket of 
currencies in favor of a system of 13 ``market-makers.'' Has the 
Central Bank announced which banks these market makers are? If so, 
could you please provide the names of these ``market-makers?''
    This system has been reported as an ``over the counter'' system, 
can you explain in greater detail how it works?
    Further, this new system was hailed by some in the financial 
markets as a major step into injecting accountability and market-forces 
to the Chinese foreign currency banking system. How can accountability 
exist where transparency is conspicuously absent? And for that matter, 
how can market forces operate effectively when access to information is 
also missing? I appreciate your consideration of and response to these 
questions as an extension of my time during the hearing. I look forward 
to your response as well as to working with you on these and other 
important issues pending before Congress during the remainder of the 
109\th\ Congress.

    Answer:

                                                       June 7, 2006
The Honorable Phil English
U.S. House of Representatives
Washington, DC 20515-3803

Dear Mr. English:

    Thank you for your letter on the section 965 ``repatriation'' 
deduction and issues related to China's currency. Because your letter 
concerns matters of tax and international economic policy, I have 
consulted with colleagues in the Office of Tax Policy and the Office of 
International Affairs.
    As we stated in our previous letter to you on the section 965 
deduction, we very much appreciate the inquiries we have received from 
your office on the interaction of the section 965 deduction and the 
rules for allocating and apportioning research and experimental 
expenditures. This is a very technical subject, and it has required 
careful consideration.
    We continue to believe that the rules set forth in Notice 2005-64, 
taken in their entirety, are the most appropriate reading of the 
statute. We view the rules in the Notice regarding expense allocation 
and apportionment as the proper effectuation of the rules of the 
section 965 deduction as set forth in the conference agreement.
    After much consideration, we have decided not to issue guidance 
that specifically authorizes taxpayers to adopt temporary methods of 
allocating and apportioning research and experimental expenditures as a 
consequence of the enactment of section 965. Of course, any taxpayer 
remains free, through normal procedures, to seek the Commissioner's 
consent to change methods before the end of the five-year period 
described in Treasury Regulation section 1.861-17(e).
    With respect to your questions concerning China, I have consulted 
colleagues in Treasury's International Affairs office. They note the 
following:
    According to public remarks by the Governor of China's central 
bank. Zhou Xiaochuan, last August, the US dollar, the Euro. the yen, 
and the South Korean won represent the main currencies in China's 
basket. The Singapore dollar, pound sterling, Malaysian ringgit, 
Russian rouble, Thai baht, and the Canadian dollar are also considered 
by the Chinese authorities. China has stated it selects the currencies 
for its basket based on their share in China's foreign trade, foreign 
debt, and foreign direct investment. China uses the basket as a 
reference; thus changes in basket currencies do not automatically 
translate into changes in the RMB. Daily fluctuations against the 
dollar have averaged 0.026 percent since last July, much lower than the 
maximum daily change (0.3 percent).
    China has approved 13 domestic and foreign banks to act as RMB 
``market makers'' on China's inter-bank foreign exchange market. 
According to press reports, these market makers include eight domestic 
lenders-the Bank of China, China Construction Bank, Agricultural Bank 
of China, Industrial and Commercial Bank of China, Bank of 
Communications, Citic Bank, China Merchants Bank, and Industrial Bank, 
as well as five foreign banks--ABN AMRO, Bank of Montreal, Citibank, 
HSBC, and Standard Chartered.
    In January 2006, China introduced an over-the-counter trading 
system that allows banks to trade RMB directly among themselves at a 
lower cost. Previously the China Foreign Exchange Trade System 
(effectively PBoC--the central bank) served as the counterparty on all 
RMB spot trades and the high fees it charged its member banks inhibited 
trading volume and volatility. The new rate setting mechanism now 
calculates a daily central parity rate based upon a weighted average of 
each morning's opening bid and the ask prices for the market makers.
    Secretary Snow recently stated that he is extremely dissatisfied 
with the slow pace of Chinese exchange rate reform. The Bush 
Administration has strongly pressed the view that major economies 
should have flexible, market based exchange rate systems. The Secretary 
has argued the case both bilaterally with foreign monetary and finance 
officials and in multilateral meetings.
    Although China has taken more steps to widen participation in the 
foreign exchange market, its movements toward a flexible, market based 
exchange rate have not been rapid, as you rightly note. This slow pace 
is neither in China's self-interest nor in the interest of the world 
economy.
    For the last 3 years, the Treasury Department has made engagement 
with China one of its top priorities. This intensive engagement has 
concentrated on exchange rate flexibility, but has also focused on the 
other steps necessary to shift the sources of growth toward domestic 
demand and consumption, reform the financial sector and build the 
foreign exchange market infrastructure. While the economy of China 
continues to evolve, we are not satisfied with the progress made on 
China's exchange rate regime, and will continue to monitor China's 
progress closely.
            Sincerely,
                                                    Kevin I. Fromer
                          Assistant Secretary (Legislative Affairs)

                                 
              Questions Submitted by Representative Herger

    Question: The President's budget includes a provision to extend the 
0.2 percent Federal Unemployment Tax Act (FUTA) surtax. This surtax was 
created in 1976 to pay for a temporary benefits program. That debt was 
paid off in 1987, yet the ``temporary'' surtax has been extended 
multiple times. It is currently set to expire at the end of 2007, and 
the Administration proposal would extend it for another 5 years, until 
December 31, 2012. The Federal unemployment trust funds now total about 
$30 billion, well more than is needed to support annual federal program 
costs. Even without the revenue attributable to the 0.2 percent surtax, 
there would be more than enough tax revenues to meet Federal 
responsibilities in any given year. Could you explain why the 
President's budget would extend this supposedly temporary payroll 
surtax yet again?

    Answer: Extending the current tax rate will support the continued 
solvency of the Federal UTF accounts and maintain the ability of the 
unemployment system to respond to future economic downturns. We also 
note that the Department of Labor projects some state trust funds will 
borrow in the next few years even though no downturn is projected. UTF 
dollars are not only used to support benefit costs. Under current law, 
they also cover the administrative costs of State Unemployment 
Compensation programs and grants to States under the Wagner-Peyser Act 
for employment services. Using current economic assumption, the Federal 
accounts in the UTF will not reach their statutory ceilings until 
Fiscal Year 2016. These ceilings may be viewed as the Federal solvency 
requirements. Extending the 0.2% means these accounts will reach their 
ceilings 3 years earlier.

    Concerning Unemployment Benefits Program: There are several 
proposals in the President's budget for the Treasury Department that 
relate to the nation's unemployment benefits program. For instance, one 
proposal would help states reduce improper unemployment benefit 
payments and recover delinquent employer taxes by giving employers new 
incentives to correctly report and pay the proper amount of taxes. Are 
you confident these changes will be beneficial to employers in terms of 
limiting red tape and reducing tax payments to only the needed levels?

    Answer: The Unemployment Compensation Program Integrity Act of 
2006, which the Department of Labor transmitted to Congress in May, 
contains several proposals, some of which are optional on the part of 
the states, which would support state ``integrity'' activities to 
prevent/detect improper payments and collect overpayments and 
delinquent taxes. The Department of Labor's data show that, for every 
dollar spent on benefit integrity activities, the unemployment fund 
gains between $4 and $5.
    These proposals will be beneficial to employers because they result 
in net gains to state unemployment funds. State UI tax rates depend in 
part on the state's fund balance; higher balances result in lower taxes 
overall for businesses.

                                 
    Joint Questions Submitted by Representatives Rangel, Stark, and 
                               McDermott

    Question: For several years we have requested information on the 
assumptions behind your budget estimates for the health tax proposals 
both during hearings and in writing. Unfortunately, previous requests 
have not yielded useful responses, despite that most of these data 
points were needed to derive your revenue estimates. Please provide a 
table with the following year-by-year estimates for 2007-2016, as 
applicable, for each HSA/high-deductible health plan (HDHP) proposal in 
the budget, as well as a cumulative column showing the total estimate 
(assuming interactions between the proposals) and data source(s) for 
each estimate----

      The number of people newly insured as a result of each 
proposal;
      The drop in employer-sponsored coverage as a result of 
each proposal, and specifically (1) the number of people who have 
shifted from employer-based coverage to the non-group market and (2) 
the number of people who became uninsured;
      The number of people in employer-based coverage who move 
from comprehensive to high-deductible coverage;
      The number of people who move from employer-based 
coverage to Medicaid or other public insurance programs (including 
high-risk pools), broken out by program type;
      The total number of new purchasers in the non-group 
market;
      The estimated take-up rate for by AGI and/or tax bracket;
      The estimated out-of-pocket costs as a percent of net 
income by AGI and/or tax bracket;
      Distribution of tax benefits. Please provide 
distributional tables showing the estimated tax benefits for each 
policy, and cumulatively, by AGI and tax brackets.

    Your testimony claims that President's health agenda will make 
health care more affordable, and implies that it will lower spending. 
However, it appears that costs are simply shifted to individuals and 
overall health spending is not reduced. Indeed, these proposals cost 
the Treasury $156 billion over the next decade. Can you quantify claims 
of system savings, e.g., how much more affordable, which costs will go 
down and by how much? Where precisely in the budget--or even in the 
underlying tables and analyses--are the savings from moving people to 
HSAs? Surely there would be interactions in public programs and tax 
benefits for employers?
    The Economic Report to the President acknowledges that high prices 
are one of the main drivers of higher premiums and overall US health 
spending. How much does the Administration expect prices for medical 
services will decrease as a result of these proposals? If actual prices 
were to go down, that would reduce spending in other Federal health 
programs, such as Medicare and Medicaid. Are these interactions 
reflected in your estimates of Federal spending? If not, why? If so, 
please detail the annual savings to each program for 2007-2016.
    Although employers can contribute to the HSA, they are not required 
to do so. In your modeling, what proportion of employers do you assume 
will contribute to the HSA? How much on average do you assume such 
employers will contribute? How much on average do you assume 
individuals or families will set aside? How much do you assume are off-
setting reductions from other savings vehicles (e.g., retirement 
accounts, education accounts, etc.) and what is the distribution across 
vehicles? If you do not assume reductions in other savings vehicles, 
why (e.g., where do you assume the additional funds come from)?
    The budget shows that you assume the HSA proposals will cost us $59 
billion over 5 years and $156 billion over 10 years in terms of lost 
revenue and new outlays. It is not clear whether this is a gross or net 
number. For example, does this estimate reflect any interaction with 
the employer exclusion for health benefits? How much additional revenue 
does the Administration expect to take in as a result of employers 
dropping or decreasing coverage for their employees (and potentially 
increasing taxable wages)?
    Previous independent analyses from the Academy of Actuaries and 
others have indicated that widespread adoption of HDHPs/HSAs or of 
other policies that could induce adverse selection (e.g., Association 
Health Plans or AHPs) would dramatically increase premiums for 
traditional insurance. For example, CBO projects that AHPs would cause 
increased premiums for 80 percent of people covered by small 
businesses. What does the Administration assume happens to premiums for 
comprehensive policies under the HSA expansion assumed in the budget? 
If you did not perform this analysis, please explain why.
    Because HSAs are exempt from all taxes, including payroll taxes 
(e.g., contributions by employers are not taxed), they reduce funding 
for the Medicare and Social Security trust funds. How much revenue is 
lost to each Trust Fund as a result of (1) your latest estimates under 
current law and (2) adoption of the President's HSA proposals in this 
budget? It is theoretically possible that you anticipate increased 
Trust Fund receipts if you assume that employer health benefit 
expenditures are reduced and wages are commensurately increased as a 
result of HDHPs/HSAs. If so, what are your estimates for increased 
payroll tax revenue as a result of these policies?
    You mentioned ``portability'' in your testimony, but I can't find 
anything in the budget or other documents to explain what you mean. 
What is the Administration's portability proposal?
    Health insurance premiums in the individual market are determined 
by age, gender, and health status among other things. Older and sicker 
individuals have to pay more than the young and healthy to get 
coverage. These practices greatly favor insurance companies, which have 
the power to deny insurance coverage altogether, or refuse to cover 
services that a patient might need, such as maternity care. What new 
proposals does the Administration have to require insurance companies 
to issue non-group policies to all applicants? What new proposals does 
the Administration have to limit the ability of non-group issuers to 
charge certain applicants higher premiums based on their age, gender, 
health status or other factors?
    Nearly all states allow health insurers in the non-group market to 
use medical underwriting to refuse to sell policies and to charge 
certain applicants higher premiums or exclude certain body parts or 
conditions, based on the applicant's health history or history of 
someone in their family. These practices mean that insurers can 
selectively enroll applicants for all policies, including high-
deductible health plans (HDHPs). Does the President propose or support 
any measures to require insurance companies to issue policies to all 
applicants without medical underwriting? If not, how do you propose to 
ensure that all people seeking HDHPs and HSAs are able to get them? If 
you suggest that certain folks turn to high-risk pools or other non-
HDHP sources, wouldn't that prohibit them from being able to open and 
maintain a health savings account?
    Do you show an increase in the number of people eligible for the 
7.5% deduction as a result of the shift to HSAs? If so, what is the 
year-by-year comparison relative to assumptions or projections under 
current law?

    Answer: The President's health care initiative is intended to 
address the rising cost of health care in several ways. First, the 
initiative gives individuals a greater stake in their health care 
decisions by emphasizing high deductible health insurance. A 
fundamental principle underlying the initiative is that when 
individuals are more involved in their health care decisions, those 
decisions will be better ones. Putting the health care consumer more in 
control of health care decisions, rather than third parties, such as 
insurance companies, employers, and the government, will help reduce 
the rise in health care costs.
    Second, the initiative fundamentally alters the tax incentives that 
underlie the current health care system. The current tax treatment of 
health care provides a tax incentive for individuals to prepay for 
their health care through employer provided health insurance. This 
results greater use of first dollar coverage and greater reliance on 
employer provided insurance simply because of the tax bias. Prepayment 
of health care through first dollar insurance coverage translates into 
less price sensitivity by the health care consumers and is a 
significant factor for why health care costs have risen roughly 2 
percent faster than the rate of growth in the economy for many decades.
    The President's health care initiative reduces the tax bias for 
first dollar coverage and the prepayment of health care through 
employer provided insurance by extending the tax subsidy available to 
health care purchased through employer sponsored insurance to health 
care purchased by individuals whether financed through health insurance 
or direct out-of-pocket spending, provided they purchase high 
deductible health plans.
    While putting the health care consumer more in control of his or 
her health care decisions and addressing important tax biases that 
underlie our current health care system, the initiative only increases 
the existing tax subsidy for health care, principally for employer-
sponsored insurance, from about $325 billion to $345 billion in 2010 
(Treasury Department estimates).
    It is important to evaluate this initiative as a package, because 
the individual provisions work in unison to address the inequity and 
the uneven treatment of health care in our current system. Accordingly, 
it is not possible to disaggregate the individual provisons in order to 
answer many of the specific questions posed. As a package, the Treasury 
Department estimates that these proposals will have a substantial 
effect on the number of HSAs, increasing their number in 2010 by 50 
percent. Under current law, the Treasury Department estimates that 
there will be about 14 million HSAs in 2010. Under the President's 
initiative, the number of HSAs is estimated to rise to about 21 million 
in 2010. That is, some 21 million taxpayers would directly benefit 
under the President's health care initiative. Of course, helping to 
lower the growth in health care costs is a central objective of the 
initiative and the anticipated rise in the number of HSAs is important 
to achieving this objective.
    The early evidence on HSAs is very promising. According to a study 
released by AHIP, by January 2006 there were about 3.2 million people 
covered by HDHPs. This is up very significantly from the roughly 
900,000 people covered by HDHPs reported by AHIP in September 2004. 
Research by AHIP also indicates that 42 percent of individuals with 
HDHPs have incomes below 50,000 indicating that a substantial number of 
lower income individuals are using HDHPs. Similarly, research by E-
Health Insurance found that roughly one-third of those with HDHPs in 
the non-group insurance market were previously uninsured. Also, recent 
research sponsored by the United Health Group has found that 
individuals with HDHPs are 5 percent more likely to seek preventive 
care than individuals with traditional PPO plans. This is important 
because preventive care may help dampens future growth in health care 
costs at the same time as improving wellness.
    Employers are playing an important role as individuals begin to 
shift toward HDHPs by making substantial contributions to individuals' 
HSAs. Recent research by Kaiser/HRET indicates that, on average, 
employers contribute roughly $600 to individuals' and $1,100 to 
families' HSAs. These contributions reflect one way that the savings 
from lower insurance premiums associated with HSAs are passed on to 
consumers. The important role played by employers in the HDHP market is 
also reflected in tax return and information reporting data. A 
preliminary Treasury analysis of these data for 2004, the first year 
HSAs were in effect, found that nearly one-half of all HSAs were funded 
exclusively by employer contributions. We expect to have an analysis of 
HSAs for tax year 2005 completed by the summer of 2007.

                                 

    [Submission for the record follows:]

     Statement of Advanced Medical Technology Association (AdvaMed)
    AdvaMed represents over 1,300 of the world's leading medical 
technology innovators and manufacturers of medical devices, diagnostic 
products and medical information systems. Our members are devoted to 
the development of new technologies that allow patients to lead longer, 
healthier, and more productive lives. Together, our members manufacture 
nearly 90 percent of the $86 billion in life-enhancing health care 
technology products purchased annually in the United States, and nearly 
50 percent of the $220 billion in medical technology products purchased 
globally. Exports in medical devices and diagnostics totaled $24.3 
billion in 2004, but imports have increased to $25.2 billion--
indicating the first negative trade balance in medical devices in over 
15 years. The medical technology industry directly employs about 
350,000 workers in the U.S.
    The medical technology industry is fueled by intensive competition 
and the innovative energy of small companies--firms that drive very 
rapid innovation cycles among products, in many cases leading new 
product iterations every 18 months. Accordingly, our US industry 
succeeds most in fair, transparent global markets where products can be 
adopted on their merits. We strongly support the Administration's 
effort to expand market access for US products abroad through new free 
trade agreements (FTAs), as well as oversight of market access barriers 
in countries with which we have strong trade relationships.
Global Challenges
    Innovative medical technologies offer an important solution for 
industrialized nations, including Japan and European Union members that 
face serious health care budget constraints and the demands of aging 
populations. Medical technologies also provide a way for emerging 
market countries, like China, India, and Korea, to improve healthcare 
to their people, who are increasingly expecting substantially better 
healthcare to accompany rapid economic development. Advanced medical 
technology can not only save and enhance patients' lives, but also 
lower health care costs, improve the efficiency of the health care 
delivery system, and increase productivity by allowing people to return 
to work sooner.
    To deliver this value to patients, our industry invests heavily in 
research and development (R&D). Today, our industry leads global 
medical technology R&D, both in terms of innovation as well as 
investment. The level of R&D spending in the medical devices and 
diagnostic industry, as a percent of sales, more than doubled during 
the 1990s--increasing from 5.4% in 1990 to 8.4% in 1995 and over 11% 
last year. In absolute terms, R&D spending has increased 20% on a 
cumulative annual basis since 1990. Our industry's level of spending on 
R&D is more than three times the overall U.S. average.
    Despite the great advances the medical technology industry has made 
in improving patient quality of life and delivering considerable value 
for its innovations, patient access to critical medical technology 
advances can be hindered by onerous government policies. Patients and 
health care systems experience much less benefit from our industry's 
R&D investment when regulatory procedures are complex, non-transparent, 
or overly burdensome--all of which can significantly delay patient 
access and drive up costs. In the future, patients will be further 
disadvantaged if reimbursement systems fail to provide appropriate 
payments for innovative products--which will subsequently affect the 
availability of R&D funds and the stream of new technologies.
    The medical technology industry is facing these challenges around 
the world as governments enact more regulations. While we support those 
regulations that ensure product safety and efficacy, many others are 
being imposed without scientific justification, and in non-transparent 
processes, which only adds to costs and delays without improving 
patient outcomes.
    As governments prioritize difficult budget decisions, they 
sometimes look to short-term decreases in health care expenditures 
without accurately assessing the long-term implications. In most cases, 
governments do not effectively measure the contributions medical 
technology makes in enhancing patient outcomes and productivity as well 
as expanding economic growth, which would more than offset the costs of 
providing these products. Instead, governments often inappropriately 
include reduced reimbursement rates as part of overall budget cuts.
    In some cases, governments seek to reduce prices of medical 
technologies in their country by comparing and referencing prices in 
other countries. By fixing ceiling prices based on the prices found in 
other countries, governments are imposing price controls on medical 
technologies that do not appropriately account for different market 
conditions and contract terms. Our industry is witnessing a spread of 
these reference pricing schemes.
    AdvaMed applauds continued progress on international trade 
initiatives, including bilateral, regional and global trade 
negotiations, such as the Central American Free Trade Agreement 
(CAFTA), and the Doha Development Agenda in the World Trade 
Organization (WTO). We support new efforts with our other trading 
partners to provide U.S. exports of medical devices duty-free 
treatment. We are hopeful that future bilateral agreements, including 
the U.S.-Korea Free Trade Agreement, can also include directives to 
knock down tariff and non-tariff barriers for medical technologies. In 
addition, the President and U.S. Trade Representative (USTR) should 
continue to pursue trade liberalization in the medical technology 
sector with our major trading partners.
    AdvaMed believes the USTR, Department of Commerce (DOC) and 
Congress should monitor regulatory, technology assessment and 
reimbursement policies in foreign health care systems and push for the 
creation or maintenance of transparent assessment processes and the 
opportunity for industry participation in decision making. We look to 
the Administration and Congress to actively oppose excessive 
regulation, government price controls, foreign reference pricing 
schemes, and arbitrary, across-the-board reimbursement cuts imposed on 
foreign medical devices and diagnostics.

Continued U.S. Leadership Needed to Fight Trade Barriers in Japan
    The Administration's efforts with Japan under the U.S.-Japan 
Partnership for Economic Growth are critical for the medical technology 
industry to maintain access to the Japanese health market.
    After the U.S., Japan is the largest global market for medical 
technologies at $25 billion. Yet the situation facing the medical 
technology industry in Japan is getting more difficult every year. 
Japan's system for approving use of new medical technologies is the 
slowest and most costly in the developed world. Although Japan is one 
of the wealthiest countries in the world--the second largest economy in 
the world--its spending on health care is among the lowest of major 
developed countries. On a per capita basis, Japan's spending of 7.8% of 
GDP is lower than 17 other Organization of Economic Cooperation and 
Development (OECD) member countries.
    In April 2005, Japan compounded the problem by imposing even more 
burdensome and costlier regulations, thereby penalizing the U.S. 
medical technology industry. Japan's latest regulations are expected to 
cost our industry over $1.5 billion just to achieve compliance to 2010.
    Even after creating a new agency in 2004 to process applications 
for medical technology products, Japan has a backlog of over 300 
applications filed before April 2004. When new applications are 
included, the backlog is reportedly much longer. A problem for this new 
agency is the number of staff reviewing applications for approval of 
medical technology products--about 40 officials, compared to over 700 
in the U.S. Due to the long approval process, the medical technologies 
patients receive in Japan are often several generations behind the 
products in the U.S., Europe, and even developing countries like China, 
India and Thailand. Lengthy approvals also translate to higher costs 
for the U.S. medical technology industry, which must maintain out-of-
date product lines just for Japan.
    At the same time, Japan has made significant reimbursement 
reductions for medical technologies that impact the medical device 
industry in many ways, including limiting the availability of funds 
that could be devoted to R&D of new and innovative products. Inventing 
products that save and enhance lives requires large investments. Deep 
cuts for medical technologies in Japan have put downward pressure on 
companies' ability to invest in R&D.
    The Japanese government sets the maximum reimbursement rates, which 
usually act as ceiling prices for all medical technology products. 
These prices are reviewed and usually reduced every two years. For the 
period April 2002 to March 2006, the total revenue loss from these 
reimbursement reductions is expected to be about $3 billion--a 
significant share of which would have gone toward R&D. Japan will 
impose additional cuts of several hundred million dollars this April.
    Before 2002, Japan adjusted prices according to a process it called 
``reasonable-zone'' or ``R-zone.'' In brief, MHLW surveys its hospitals 
for prices paid to distributors, and allows for a reasonable margin (or 
``zone'') for discounts off of the government's reimbursement rate. 
While there are some difficulties with this system--as identified in 
bilateral Market-Oriented, Sector Specific (MOSS) negotiations between 
the U.S. and Japanese governments--our industry recognizes that it is 
at least based on factors in the Japanese market.
    In 2002, however, Japan also adopted a system called Foreign 
Average Pricing (FAP). This system calls for the establishment and 
revision of reimbursement rates on the basis of prices paid for medical 
technology products in the U.S., France, Germany, and the United 
Kingdom (U.K). The prices of medical technology products in Japan are 
designed to be based not on that market's requirements, but on 
completely unrelated conditions in foreign markets.
    The U.S. medical technology industry has strong objections to this 
system for calculating reimbursement rates. As a methodology for 
setting reimbursement rates, it is not economically sound to compare 
prices in foreign markets that operate under vastly different 
conditions. Japan is a far costlier market for our industry to operate 
in compared to other countries. Additionally, Japan's FAP system is an 
attempt to compare prices for products that are not the same in Japan 
as they are in other countries. Due to Japan's regulatory delays, U.S. 
manufacturers must incur the cost of maintaining older or outmoded 
production lines for sale in Japan.
    Going forward, industry seeks U.S. Government and Congressional 
support to help ensure an open dialogue with Japan that would seek to 
identify alternatives to the current reimbursement system and 
improvements in Japan's regulatory practices. The goal would be to 
ensure that Japan's regulatory and reimbursement policies promote the 
timely introduction of innovative medical technologies and do not 
negatively and unfairly impact U.S. medical technology manufacturers.

Regulatory and Reimbursement Obstacles Impede Market Access in Asia-
        Pacific
    AdvaMed looks to the U.S. Government to pursue trade liberalization 
throughout the Asia-Pacific region, including in China, India Taiwan 
and Korea. AdvaMed and its member companies have identified a number of 
real and potential barriers to doing business in these countries. While 
most of the barriers pertain to unnecessary or redundant regulatory 
requirements, there are increasing concerns in the areas of 
reimbursement and intellectual property.
    China has quickly become an important market for the U.S. medical 
technology sector. The American Chamber of Commerce in China estimates 
that the Chinese market for medical technology exceeds $8 billion and 
is growing rapidly. It is on pace to surpass some of the key European 
markets for medical technology in a few years. As global leaders, U.S. 
medical technology firms already account for a significant portion of 
sales in China and the position of these firms underscores the 
importance of ongoing efforts with the U.S. Government to open the 
Chinese market further.
    AdvaMed looks forward to working with Congress and the 
Administration to address the following barriers:

      A Lengthy and Costly Product Registration Process
      Redundancy in the Registration Process
      Misclassification of In-Vitro Diagnostic Products
      Lack of Transparency in Decision-Making
      Inappropriate Price Controls
      Counterfeiting and piracy of Medical Technology

    For the medical technology industry, the Bush Administration's 
efforts with China under the U.S.-China Joint Commission on Commerce 
and Trade are critical for allowing U.S. medical technology firms 
broader access to the burgeoning Chinese health care market. The 
recently-launched U.S.-China Health Care Forum initiative, led by the 
U.S. Department of Commerce and supported by AdvaMed and other health 
care partners, holds great promise as another vehicle for addressing 
many of the trade-related and health policy-related barriers 
confronting U.S. medical technology firms in China.
    Korea is another important market for U.S. medical technology 
exporters. Last year, U.S. manufacturers exported more than $500 
million worth of medical technology products to Korea, an increase of 
24 percent over the previous year. However, access to this market 
remains marred by antiquated product-testing requirements; 
inappropriate requirements to re-register products following a change 
in manufacturing location; and pricing and reimbursement policies that 
discriminate against foreign manufacturers. Korea was not a party to 
the Uruguay Round zero-for-zero tariff agreement on medical technology, 
and maintains import tariffs on a range of medical technology products. 
AdvaMed recommends the fastest possible elimination of tariffs and non-
tariff measures applied to medical technology products by Korea. 
AdvaMed is also concerned that Korea's current reimbursement policies 
create incentives to re-use medical devices designated for a single-use 
in multiple procedures within several different patients, with the 
attendant risks of cross contamination and degradation of product 
quality. AdvaMed looks forward to working with Congress and the 
Administration through the U.S.-Korea Free Trade Agreement negotiations 
to address these issues.
    India, with its rapid economic growth and large population, will be 
an important market in the future. India is in the process of 
developing its regulatory system for medical technologies. The 
Department of Commerce has provide AdvaMed invaluable assistance in 
working with the government of India on its approach to regulations.

Europe: Seek Appropriate Policies That Improve Patient Access to 
        Innovative Medical Technologies
    Efforts to oversee foreign policies impacting the export and sale 
of U.S. medical technologies abroad should also focus on the European 
Union (EU). U.S. manufacturers of medical devices export nearly $8.8 
billion annually to the EU. Within the EU, Germany ($20 billion) and 
France ($8 billion) are the largest markets for medical devices.
    Despite opposition from Congress and the Administration, in 2005, 
the European Commission approved a directive to up-classify all 
shoulder, hip and knee joint implants from Class IIB to Class III. This 
directive, which is guided by 1980s data and application of the 
precautionary principle, will affect thousands of devices, many of 
which are made by U.S. manufacturers, and is expected to cost the 
average orthopedic company approximately 500,000= in fees alone for 
related Notified Body reviews. Industry now is focused on fair and 
transparent implementation of the directive, so as to minimize 
disruption of this important market.
    In addition, the industry looks forward to the implementation of 
the medical device annex of the US-EU Mutual Recognition Agreement 
(MRA). Bringing healthcare products to the market faster is an 
important priority consistent with the protection of public health and 
the reduction of regulatory costs and redundancy. We ask Congress to 
push for the full implementation of the medical device annex of the 
MRA. Moreover, the EU continues efforts towards over-regulation of 
industry through the implementation of burdensome regulatory measures 
such as the Medical Device Directive revision, the REACH chemicals 
initiative, the WEEE/ROHS, and a possible ban on the use of DEHP in 
medical devices.
    Finally, as new methods of reimbursement and health technology 
assessment (HTA) spread throughout Europe, EU Member States should be 
encouraged to adopt policies for product reimbursement and health 
technology assessment systems that are transparent, timely, and 
adequately account for the benefits of innovative technology. 
Breakthrough products available in the United States to a majority of 
patients are still available to only a small fraction of eligible 
patients in the major European markets. Industry should be allowed to 
participate in the HTA process.

Product Reimbursement in Brazil
    Recently, the Brazilian product registration authority, ANVISA, has 
issued draft Technical Regulations that would require the most sweeping 
and complex submissions of foreign reference pricing data of any market 
in the world. Consistent with U.S. policy for other foreign markets, we 
encourage Congress and the Administration to oppose this policy, as it 
will seek to artificially fix prices in the Brazilian market, stifle 
innovation and deny Brazilian patients the benefits of U.S. medical 
technologies.

Utilize Multilateral, Regional, and Bilateral Forums to Eliminate 
        Tariff and Nontariff Barriers to Trade that Unnecessarily 
        Increase the Cost of Health Care
    We encourage Congressional and Administration efforts to eliminate 
significant tariff and nontariff barriers to trade for medical 
technology maintained by many countries, particularly developing 
countries. Such barriers represent a self-imposed and unnecessary tax 
that substantially increases the cost of health care to their own 
citizens and delays the introduction of new, cost-effective, medically 
beneficial treatments. For example, the medical technology sector 
continues to face tariffs of 15-20% in Mercosur countries, 9-12% in 
Chile, Peru, and Colombia, and 6-15% in China.
    The Doha Development Agenda offers an important opportunity for the 
United States to ensure global access to medical technology by securing 
global commitments on lowering tariff and nontariff barriers for the 
medical technology sector while expanding upon the access to medicines 
goal at the heart of the Doha declaration. We encourage the U.S. 
government to build upon the zero-for-zero tariff agreement on medical 
technology achieved in the Uruguay round by expanding the product 
coverage and adding countries throughout Latin America and Asia as 
well. AdvaMed has proposed a sectoral initiative that would achieve 
this objective to the Administration. Moreover, elimination of 
nontariff barriers such as burdensome import licensing regulations and 
non-transparent government procurement policies will help developing 
countries ensure patient access to lifesaving medical technologies.

Utilize Multilateral Opportunities to Establish Basic Regulatory and 
        Reimbursement Principles to Expand Global Trade and Patient 
        Access to New Technologies
    We commend the WTO's recent efforts to ensure global access to 
medicines and medical products. While all economies seek to provide 
high quality, cost effective healthcare products and services to their 
citizens, they should also ensure timely access to state-of-the-art, 
life-saving equipment and implement compliance procedures that are 
efficient and effective. To further expand patient access to safe and 
effective medical devices and ensure cost effective regulatory 
compliance, USTR should seek to ensure that economies around the world 
make their policies and practices conform to the relevant and 
appropriate international trading rules established by the World Trade 
Organization (WTO).
    Toward that end, member economies should agree to make their 
medical device regulatory regimes conform to these guiding principles:

      Acceptance of International Standards;
      Transparency and National Treatment;
      Use of Harmonized Quality or Good Manufacturing Practice 
Inspections;
      Recognition of Others Product Approvals (or the Data Used 
for Those Approvals);
      Development of Harmonized Auditing and Vigilance 
Reporting Rules;
      Use of Non-Governmental Accredited Expert Third Parties 
Bodies for Inspections and Approvals, where possible.

    Similarly, many economies require purchases of medical technologies 
to take place through centralized and/or government-administered 
insurance reimbursement systems. To ensure timely patient access to 
advanced medical technologies supplied by foreign as well as domestic 
sources, member economies should agree to adopt these guiding 
principles regarding the reimbursement of medical technologies:

      Establish clear and transparent rules for decision-
making;
      Develop reasonable time frames for decision-making;
      Data requirements should be sensitive to the medical 
innovation process;
      Reimbursement rates should be based on conditions in each 
country;
      Ensure balanced opportunity for the primary suppliers and 
developers of technology to participate in decision-making, e.g., 
national treatment;
      Establish meaningful appeals processes.

    The medical technology industry is committed to working with 
Congress and the Administration on upcoming trade policies and 
agreements to ensure patients throughout the world have access to 
medical products.
Conclusion
    AdvaMed appreciates the shared commitment by the President and the 
Congress to expand international trade opportunities and encourage 
global trade liberalization. We look to the President and his 
Administration to aggressively combat barriers to trade throughout the 
globe, especially in Japan. AdvaMed is fully prepared to work with the 
President, USTR Ambassador Portman, the Department of Commerce, and the 
Congress to monitor, enforce and advance multilateral, regional and 
bilateral trade agreements, particularly with our key trading partners.

                                 
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