[Congressional Record Volume 141, Number 31 (Thursday, February 16, 1995)]
[Extensions of Remarks]
[Pages E362-E363]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                  CONTRIBUTIONS IN AID OF CONSTRUCTION

                                 ______


                         HON. NANCY L. JOHNSON

                             of connecticut

                    in the house of representatives

                      Wednesday, February 15, 1995
  Mrs. JOHNSON of Connecticut. Mr. Speaker, today I am introducing 
revenue neutral legislation to reinstate the exclusion from gross 
income of Contributions In Aid of Construction--known as CIAC--to a 
water or wastewater utility. Joining me as original cosponsors are 
Representatives Robert Matsui, Richard Neal, Andy Jacobs, and William 
Jefferson.
  [[Page E363]] Utilities are capital intensive industries. 
Historically, they have received the capital for the construction of a 
utility extension directly from new customers--typically through the 
developer or small municipality. The customer contributes this 
property, or a cash equivalent, equaling the cost of the extension to 
the utility. In this manner, existing customers will not face rate 
increases every time the utility gains new customers.
  Prior to enactment of the Tax Reform Act of 1986, CIAC were not 
included in the gross income of an investor-owned utility and therefore 
were not subject to Federal income tax. On the other hand, utilities 
could not take tax depreciation or investment tax credits on CIAC.
  The 1986 act repealed Internal Revenue Code section 118(b) and thus 
forced utilities to include CIAC in gross income and pay Federal income 
tax on them. Removing the exclusion from gross income of CIAC was 
intended as a tax on utilities. In practice and by regulation in most 
States, the CIAC tax is not a tax on utilities, but a tax on utility 
customers, primarily developers, home buyers, small municipalities, and 
even the Federal Government.
  State utility regulatory bodies, referred to as PUC's, generally 
require utilities to pass tax costs onto their customers. This is done 
in one of two ways. The most common approach is to require the new 
customer to pay the cost of the tax, plus the tax on the tax known as 
the gross-up. Depending on the State, a gross-up can add as much as 70 
percent to a customer's cost of the contribution. Alternatively, the 
PUC's may allow the utility to recover the tax cost over a period of 
time from the new rate base.
  Whichever method is chosen, utilities do not pay the tax, they pass 
it on. But passing the tax on has detrimental effects, not only on the 
utility's ability to bring in new business, but on the environment 
and--most significantly--on the price of new housing.
  A developer ultimately will pass the cost of the CIAC and the gross-
up on to the new home buyer. The National Association of Home Builders 
has estimated that the CIAC tax can increase the cost of new housing by 
as much as $2,000 per unit. This additional cost is enough to end the 
dream of homeownership for a young couple.
  The CIAC tax also has some important environmental effects. New 
customers can avoid paying the CIAC tax by building their own 
independent water systems. This leads to a proliferation of systems 
that may not have the financial, technical, or managerial ability to 
comply with the rigorous requirements of the Safe Drinking Water Act. 
Such systems are referred to as nonviable. According to the EPA, in 
fiscal year 1990, over 90 percent of the violations of Safe Drinking 
Water Act were made by systems serving fewer than 3,300 individuals. By 
encouraging the proliferation of nonviable systems, the CIAC tax 
frustrates the environmental policy goal of consolidating these systems 
into exiting, professionally managed systems.
  Mr. Speaker, repeal of the tax on CIAC for water and wastewater 
utilities will have a noticeable effect on both housing prices and 
environmental policy. It is supported by the National Association of 
Water Companies, the National Association of Regulatory Utility 
Commissioners, and the National Association of Home Builders. I urge my 
colleagues to cosponsor this important legislation.


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