[Congressional Record Volume 141, Number 103 (Thursday, June 22, 1995)]
[Senate]
[Pages S8945-S8954]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


          STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

      By Mr. HATCH (for himself, Mr. Gregg, Mr. Frist, Mr. Kennedy, 
        Mrs. Kassebaum, Mr. Grams, Mr. Wellstone, Mr. Chafee, Mrs. 
        Hutchison, and Mr. D'Amato):
  S. 955. A bill to clarify the scope of coverage and amount of payment 
under the Medicare Program of items and services associated with the 
use in the furnishing of inpatient hospital services of certain medical 
devices approved for investigational use; to the Committee on Finance.


       the advanced medical devices access assistance act of 1995

  Mr. HATCH. Mr. President, today I am introducing S. 955, the Advanced 
Medical Devices Access Assurance Act of 1995, which is aimed at 
addressing two serious threats to high quality health care in the 
United States: restricted access for our senior citizens to the most 
advanced medical technologies; and our country's loss of clinical 
research activities to overseas facilities.
  I am pleased to be joined in cosponsorship of this bill by Senators 
Gregg, Frist, Kennedy, Kassebaum, Grams, Wellstone, Chafee, Hutchison, 
and D'Amato.
  At the outset, I want to recognize the outstanding leadership of our 
House colleague, Chairman Bill Thomas, who introduced the companion 
measure as H.R. 1744 on June 6. Representative Thomas was the first in 
Congress to [[Page S 8946]] step forward and take steps to correct the 
problem this legislation addresses. His leadership has been--and will 
continue to be--invaluable as we seek to move this legislation forward.
  Mr. President, the Thomas-Hatch legislation was prompted as a result 
of recent changes in Health Care Financing Administration [HCFA] 
reimbursement practices for medical procedures which include the use of 
so-called next generation devices, that is, medical devices that are 
undergoing clinical trials, yet which have a precursor device which has 
been approved by the Food and Drug Administration as safe and 
effective.
  In December 1994, HCFA advised its regional administrators that 
Medicare must only reimburse for items and services that are reasonable 
and necessary; according to HCFA, reimbursement of reasonable and 
necessary procedures precludes payment for the use of experimental or 
investigational services.
  The HCFA policy change came on the heels of an HHS inspector general 
inquiry in which patient records were subpoenaed from over 100 
hospitals nationwide, including virtually all of the premier medical 
research bodies in this Nation.
  The effect of this change in HCFA policy is to deny Medicare 
contractors discretion to pay for any of a beneficiary's hospital costs 
and related services if an investigational device were being used, even 
if such a device were a refinement of a proven, FDA-approved 
technology.
  Examples might be a pacemaker which is made in a smaller version or a 
pacemaker with a new type of lead.
  This policy denies patients in the Medicare population the benefits 
of the best available medical therapies which are often life-saving and 
life-enhancing.
  In effect, in adopting such a policy, HCFA has created a two-tiered 
health care delivery system, consisting of privately insured 
individuals who can access these improved devices and Medicare 
beneficiaries who cannot. That is a situation which must be corrected.
  Although our senior citizens are the immediate victims of this unwise 
policy, all Americans will ultimately suffer.
  Medicare's position not only deprives this Nation's elderly 
population of the most advanced, efficacious care and treatment 
available, but it also significantly interferes with clinical 
advancements that might otherwise be available for generations to come.
  In addition, I wish to note there are other negative effects of the 
HCFA policy.
  First, it undermines the Food and Drug Administration's efforts to 
press for clinical trials to prove the scientific validity of device 
studies.
  Second, it delays advances in medical device technology for all 
Americans, not just those eligible for Medicare.
  Third, it has a disproportionate impact on small-to-medium medical 
device companies, those who traditionally have been the leaders in 
developing innovative technology, and who simply cannot afford millions 
of dollars for clinical trials.
  Fourth, the policy exacerbates current over-regulatory trends in the 
United States which are driving manufacturers offshore and jobs to 
other countries.
  And fifth, it runs contrary to the recent report of the Physician 
Payment Review Commission, which stated that Congress should authorize 
an additional coverage option for Medicare so that:

       For devices subject to Food and Drug Administration 
     approval, and for other services that the Health Care 
     Financing Administration has not approved for coverage, 
     Medicare should pay up to the cost of standard care when the 
     device or service is clearly substituting for an established 
     one and is being evaluated in a Food and Drug Administration-
     approved or other approved study.

  The situation giving rise to the legislation we offer today was first 
brought to my attention a year ago by officials of the LDS Hospital in 
Salt Lake City, UT.
  LDS Hospital, which ranks among the top in the Nation for cardiac 
procedures, was among the more than 100 hospitals which had received a 
subpoena from the HHS inspector general for records relating to 
Medicare reimbursement of cardiac procedures reaching as far back as 10 
years ago.
  Included on the list of devices that are affected by this policy are 
implantable cardiac defibrillators, which are devices that are 
implanted in a patient's body and assist in correcting life 
threatening, irregular heart rhythms.
  My colleagues may be aware of the problem with reimbursement for 
state-of-the-art defibrillators, as it was reported by John Carey in 
the June 12 issue of Business Week.
  In reporting on the HCFA policy and its impact on clinical research 
and patient care, Mr. Carey wrote:

       In some cases, the impact on the quality and cost of care 
     was dramatic. Cardiac arrest survivors typically need 
     defibrillators to shock their hearts back to normal whenever 
     the fragile organ races out of control. For several years, 
     the standard device was so large that it had to be implanted 
     in patients' abdomens. But Minneapolis-based Medtronic, Inc. 
     built a much smaller version that could fit in the pectoral 
     region. In trials at the Mayo Clinic, says cardiologist 
     Stephen C. Hammill, the new device reduced deaths from the 
     actual operation from 3.8% of patients to zero--and cut 
     hospital costs after implantation from $24,000 to $18,000. 
     Yet Mayo's doctors could no longer use the device for 
     Medicare patients--unless they found another way to pay the 
     bills.

  Let me put this in the words of one of Utah's preeminent 
cardiologists, Dr. Jeffrey L. Anderson, professor of medicine and chief 
of the division of cardiology at LDS Hospital in Salt Lake. Dr. 
Anderson has advised me:

       Since notification of the OIG investigation and statement 
     of the HCFA policy, the Division of Cardiology at LDS 
     Hospital has been instructed by its Counsel to avoid use of 
     any newer, incremental technologies in Medicare patients, 
     including pacemakers, defibrillators, and interventional 
     coronary devices (such as angioplasty catheters and stents) 
     that are not final market approved.
       Unquestionably, this has made our Medicare patients second 
     class citizens, as these newer devices are generally smaller, 
     more efficient and effective, last longer, and can be 
     implanted with lower operative risk.

  Dr. Anderson also notes a recent tendency for these new devices to be 
developed overseas and not readily available here. Several firms have 
indicated to him that initial research is now being done in Europe and 
elsewhere and that the devices will be only available here after final 
FDA approval, often with a delay of years.
  Or, let me put it in the words of another distinguished Utah 
cardiologist, Dr. James W. Long, attending cardiothoracic surgeon at 
LDS Hospital. Dr. Long, has related to me:

       As a cardiothoracic surgeon, I am extremely troubled by the 
     growing restrictions which are preventing us from 
     implementing great medical technologies for our patients in 
     Utah. Clearly, three major impediments exist: First, 
     reimbursement problems; second, product liability concerns; 
     and third, FDA constraints. Those barriers are exercising a 
     major chilling effect on the development and implementation 
     of medical technologies which offer the hope of improving 
     quality of life while offering cost-effectiveness.

  Dr. Long goes on to state:

       The current posture of HCFA to deny Medicare reimbursement 
     for any hospital charges when a new, ``investigational'' 
     device is used is an example of how problems with 
     reimbursement lead to discrimination against the Medicare 
     population. To illustrate, I can no longer implant a new, 
     improved heart valve undergoing clinical evaluation because 
     reimbursement for ALL hospital charges for the surgery and 
     care (not just the heart valve charges) will be denied. This 
     is even more frustrating when one considers that these 
     clinical evaluations are being conducted with the approval of 
     the FDA as well as local, hospital internal review boards or 
     medical devices whose efficacy and safety have already been 
     demonstrated in preclinical testing.

  Mr. President, as has been demonstrated, over time, increasingly 
improved devices have been developed that are far more efficient and 
efficacious than each prior version of the device. Such refinements 
have not only improved the functioning of the device from a patient 
perspective, but also have: First, increased the longevity of the 
device, thereby minimizing the need for replacement; second, improved 
the ability to monitor the device without the need for hospitalization; 
and third, minimized the invasiveness of the procedure require to 
implant the device.
  Not only have patient outcomes been greatly improved, but the overall 
costs and consumption of resources within the health care system have 
been reduced.
  My concerns about the HCFA policy were reinforced by evidence 
revealed at a recent hearing before the Finance Committee. [[Page S 
8947]] 
  During the committee's May 16 hearing on the solvency of the Medicare 
Program, Dr. John W. Rowe, president of the Mount Sinai Hospital and 
the Mount Sinai School of Medicine in New York City, shocked members by 
revealing that his medical center has virtually discontinued clinical 
research on investigational devices for Medicare beneficiaries because 
of the HCFA ruling.
  Dr. Rowe related to the committee that:

       The Inspector General of HHS has indicated that if a 
     patient is given an investigational device--that is something 
     that is not approved by the Food and Drug Administration for 
     general use--during their experience in the hospital--let me 
     be clear on this--then the entire reimbursement or payment 
     for the admission to the hospital is not allowed and the 
     hospital is liable for treble damages.

  Dr. Rowe went on to make the point that, whereas Medicare 
historically has not paid for research, there are differences between 
real research and marginal refinements of innovations.
  In subsequent correspondence to me, Dr. Rowe added another critical 
point. He said:

       Mount Sinai's decision to stop all clinical trials was made 
     after careful deliberation and with great regret and 
     consternation, but is the only rational position that can be 
     taken by an institution which, under normal circumstances, 
     performs a large number of such trials.
       This outcome is also a particularly unfortunate one given 
     our belief that the controls put in place by the FDA's IDE 
     approval process and Mount Sinai's own Institutional Review 
     Board assure that there is an appropriate level of safety, 
     efficacy, and oversight with respect to each such device. In 
     the end, we believe that Medicare's position not only 
     deprives this nation's elderly population of the most 
     advanced, efficacious care and treatment available, but 
     significantly interferes with clinical advancements that 
     might otherwise be available for generations to come.

  A survey released June 7 by the Health Industry Manufacturers 
Association reveals the problems inherent in this new HCFA policy.
  HIMA found that 71 companies have had clinical trials with their 
products brought to a halt due to the new HCFA policy. The response of 
40 percent of those companies was to limit the clinical research to 
non-Medicare patients, in other words, denying those seniors access to 
the latest medical technologies.
  Even more indicative of this policy's ill effects, 59 percent 
surveyed had moved clinical trials overseas, and 57 percent said they 
plan to move future trials overseas.
  It is clear that due the uncertainty generated by the recent change, 
clinical trials are being stopped around the country. Many medical 
technology companies are moving their life saving research technologies 
out of the United States to Europe, Canada, and Japan.
  This loss of research will erode the base of expertise in an industry 
where the United States has traditionally led the world.
  Mr. President, this policy must be changed for the benefit of our 
Nation's elderly and all Americans. The bill I am introducing today 
will accomplish this, and will do so without increasing Medicare costs.
  Under S. 955, coverage would be limited to circumstances in which the 
device in question is used in lieu of an approved device or otherwise 
covered procedure. This latter provision permits the use of devices 
that are often used in lieu of far more invasive and costly procedures. 
Because these investigational devices reduce hospital stays, mortality 
and the need for repeat procedures, it is likely that this legislation 
will reduce total treatment costs over the long term.
  In fact, the legislation specifically states that the amount of 
payment for any item or service associated with the use of an 
investigational device may not exceed the amount which would have been 
made for the approved device. This will ensure the bill's budget 
neutrality.
  Before closing, Mr. President, I want to discuss for a moment one 
other factor which led us to introduce S. 955.
  After Senator Gregg and I decided to explore legislation in this 
area, we contacted both HCFA and the OIG.
  The IG's office advised us that ``This is an open active 
investigation in the OIG. It is the policy of the OIG not to comment on 
investigations which are active.''
  HCFA officials, however, were extremely helpful, and shared with us 
the results of the considerable time they have spent on this issue.
  Two factors, however, led us to conclude that legislation is 
necessary.
  First, we were not persuaded that the agency's efforts would be 
concluded as quickly as we would like. And, second, while we agreed 
with HCFA's conclusion that Medicare should not be subsidizing pure 
research, we did not feel that these clinical investigations could be 
termed as such.
  We were, however, concerned that the concept underlying the agency's 
proposed rule-making could lead to more regulation at the Food and Drug 
Administration, in that FDA is considering a system whereby 
investigational devices would be certified as eligible for Medicare 
reimbursement. With the device approval rate lag already the subject of 
mounting congressional concern, a process which adds even more review 
is not viable.
  As I close, I would like to note the considerable support this 
legislation enjoys. It is supported by the American Academy of 
Orthopedic Surgeons, American College of Cardiology, American Hospital 
Association, American Medical Association, Association of American 
Medical Colleges, Association of Professors of Medicine, California 
Health Care Institute, Catholic Health Association, Cleveland Clinic, 
Coalition of Boston Teaching Hospitals, Federation of American Health 
Systems, Greater New York Hospital Association, Health Industry 
Manufacturers Association, Mayo Clinic, Medical Device Manufacturers' 
Association, North American Society of Pacing and Electrophysiology, 
Society of Thoracic Surgeons, and last but not least, the Utah Life 
Science Industries Association.
  In introducing this legislation today, it is our hope that the bill 
can be incorporated in this year's reconciliation legislation and moved 
swiftly to the President for signature. I urge my colleagues to support 
the Advanced Medical Devices Access Act of 1995.
  Mr. GREGG. Mr. President, I am pleased to join my colleagues, 
especially my colleague from Utah, Senator Hatch, in introducing this 
important piece of legislation. The Advanced Medical Devices Access 
Assurance Act of 1995 was developed to ensure that our senior 
population can be treated with the most advanced--and most cost-
effective--medical technology available in the United States.
  As chairman of the Aging Subcommittee in the Senate, I hear 
constantly from older individuals who are concerned about their medical 
options: They read about a breakthrough technology that is being 
explored, and want an opportunity to have access to such a product. 
Believe me, these folks are often more up-to-speed about their medical 
choices than you or I; they take the time to do their homework on their 
health care.
  As my colleague, Senator Hatch, has mentioned, this bill is designed 
to get at the heart of a problem which has arisen from a Health Care 
Financing Administration policy. HCFA has ruled that it will not 
provide Medicare reimbursement for any episode--any portion of the care 
associated with the device, including the hospital stay--which uses a 
medical device not defined as ``reasonable or necessary.'' ``Reasonable 
and necessary'' excluded medical devices which are being implanted 
under an FDA investigation device exemption, or IDE.
  In other words, if a surgeon who is performing state-of-the-art 
medicine wants to take advantage of a product which has been granted an 
IDE, he or she can only do so on their population under age 65. The 
random nature of a person's date of birth controls their ability to 
receive the most modern care, to get that technology that we are 
constantly touting as the ``best in the world.''
  A clear backlash from this policy has also been seen in the form of a 
mass exodus of clinical trials being conducted in the United States. 
The brain drain in medical device development and manufacturing in this 
country has already begun to have devastating results. Not only does 
the United States now have an atmosphere unconducive to research and 
development, but it has evolved into an environment that is 
unattractive for investment capital to be risked on medical devices. 
Not only does this relegate the citizens of this [[Page S 
8948]] country to antiquated generations of technology, it moves jobs 
and innovation overseas.
  I am hopeful that the administration will listen to the plea we are 
making here today to address this critical issue. While it may seem 
like a small item on the agenda of the day, it is probably the greatest 
accomplishment we could achieve for those individuals whose lives and 
medical care we can so easily improve.
  Mr. KENNEDY. Mr. President, it's an honor to join Senator Hatch and 
other Members of the House and Senate in sponsoring this important 
bipartisan legislation. Insurance coverage for physician and hospital 
costs in clinical trials is essential to the progress of medicine.
  The current policy under Medicare is especially counterproductive, 
because it denies reimbursement even if expensive care would be 
required if the patient does not participate in the clinical trials.
  The current rules are clearly impeding research at leading hospitals 
around the country. Needed medical care is being denied to many elderly 
patients. It's time to change the rules and take this step to enhance 
research and improve patient care.
  Mr. WELLSTONE. Mr. President, I am pleased to be a cosponsor of the 
Advanced Medical Devices Access and Assurance Act of 1995 which would 
ensure that seniors can participate in clinical trials that involve 
investigational medical devices. It signifies a bipartisan first step 
toward addressing patient concerns about access to the latest 
technologies. It also addresses the medical research community's 
concerns about its ability to continue clinical trials and keep our 
Nation at the forefront of state-of-the-art medicine, and industry's 
concerns about being forced to ship all of its resources and brainpower 
overseas.
  Minnesota's patients, researchers, and world-famous medical device 
industry have a clear stake in both the upcoming Medicare and FDA 
reform debates. Researchers and industry need to know that the 
Government will create a favorable environment for innovation, thus 
propelling this country's leadership position into the 21st century. 
And, Minnesota's patients need to know that they will have access to 
the best technologies and the latest treatments and that, when 
appropriate, these will be covered by their health insurance policies.
  Unfortunately, access to leading-edge technologies and next 
generation medical devices for seniors--the population for whom they 
are often most appropriate--has recently been jeopardized by the 
Medicare Program's refusal to pay for them in clinical trials.
  A next generation device could be a pacemaker that enables a person 
to lead a more normal life than a traditional pacemaker. It could be a 
pacemaker that would last longer than an older model and be more 
reliable. Next generation devices are medical devices which are 
undergoing clinical trials, yet which have a precursor device which has 
been approved by the Federal Food and Drug Administration [FDA] as safe 
and effective. Medical devices--unlike drugs--are continually updated 
and improved incrementally even after they are approved by the FDA.
  But currently, Medicare just flat-out denies payment for the surgery 
or illness if an investigational device is used. Medicare will pay for 
the costs associated with the hospital stay and procedure only if the 
soon-to-be-obsolete device is used and not the newest model. Therefore, 
even though the patient potentially benefits from receiving a modified 
and updated pacemaker and clinical studies are necessary to prove what 
works and what does not, hospitals and physicians are being forced to 
exclude seniors from clinical trials. Providers and manufacturers would 
rather more their studies to Europe where everybody has health 
insurance than confront reimbursement practices that discourage 
participation in clinical trials. But patients want the leading-edge 
technologies available in the United States as quickly as possible.
  Some may surmise that Medicare has refused to pay for this technology 
because of safety concerns. But any next generation device involved in 
a clinical trial has already received approval from the FDA to test the 
device in humans. During a study of an FDA-approved investigational 
device, physicians and hospitals follow strict procedures. Hospitals 
and physicians must have the informed consent of the patient in order 
for the patient to be eligible to participate in the investigational 
device studies. And the manufacturer of the device is prohibited from 
promoting or commercializing the device or charging a price that 
exceeds the amount necessary to recover its costs.
  So how much would it cost the Medicare Program to pay for the most 
advanced technologies? Currently, Medicare pays a lump sum for 
surgeries and hospitalization based on the illness of the patient. If 
you need a pacemaker and choose to be a part of an FDA-approved 
clinical trial, it shouldn't matter to the Medicare Program whether you 
get the next generation model of the pacemaker or the current model--as 
long as the FDA has approved the clinical trial and you gave your 
informed consent to participate. In other words, Medicare should pay 
the hospital a lump sum based on the illness of the patient regardless 
of which device is used.
  This legislation provides a commonsense solution that protects 
patient safety, access to high-quality health care, and Federal 
dollars. For the sake of Minnesotans, we must meet these standards 
during the broader Medicare and FDA reform debates.
                                 ______

      By Mr. HELMS:
  S. 958. A bill to provide for the termination of the Legal Services 
Corporation; to the Committee on the Judiciary.


               legal services corporation termination act

  Mr. HELMS. Mr. President, with a Federal debt of 
$4,898,068,854,045.71 as of the close of business yesterday, Wednesday, 
June 21, it is time to ask ourselves a question: Should Congress 
continue to force the American taxpayers to provide $400 million every 
year to pay the salaries of, and to otherwise fund, a cadre of liberal 
lawyers to push their social policies down the throats of local 
governments and citizens?
  I think not--and I suspect most Americans will agree, which is why I 
today offer legislation to put an end to Federal funding of the Legal 
Services Corporation.
  North Carolina has been harassed by the LSC for years and, adding 
insult to injury, LSC attorneys in my State--whose salaries are 
federally subsidized--are now demanding through the courts that the 
State of North Carolina pay them $320,000 in additional attorney's 
fees.
  Mr. President, a few details about this specific outrage may be in 
order.
  In 1975, Legal Services attorneys successfully took on the State of 
North Carolina on behalf of applicants enrolled in the Federal Aid to 
Families with Dependent Children and Medicaid programs. And what was 
the great offense by North Carolina's local Departments of Social 
Services to justify this law suit? In the arrogant judgment of the 
Legal Services lawyers, it was taking the local Departments of Social 
Services too long to process benefits.
  Since that time, the local Departments of Social Services have done 
their best to follow the numerous court-imposed requirements. In the 
meantime, the Legal Services attorneys have collected--now get this, 
Mr. President--an estimated $1 million in attorney's fees from the 
State of North Carolina. But that doesn't satisfy them. On June 14, a 
little more than a week ago, the Legal Services attorneys demanded 
another $320,000 in attorney's fees.
  So, Mr. President, these Legal Services attorneys are paid with 
Federal funds through the Legal Services Corporation and with State and 
local Legal Services agencies to sue the State of North Carolina. In 
addition to the taxpayers' money they receive to dismantle local 
government policies, the Legal Services attorneys are demanding 
additional money for themselves--out of the pockets of North Carolina's 
taxpayers.
  The legislation I introduce today will fix this costly problem--by 
ending Federal funding of Legal Services Corporation, which like most 
other social programs spawned in the 1960's, has strayed far from any 
meaningful purpose and deserves a quiet funeral. [[Page S 8949]] 
  For the record, the Legal Services Corporation was created in 1974 
ostensibly to provide legal assistance to low-income citizens in civil, 
noncriminal matters. Its first annual budget, for fiscal year 1976 was 
$92 million. It will cost the taxpayers $400 million in 1995. It does 
not provide services directly, it makes grants to local agencies which 
in turn are charged with providing legal services to those who can't 
afford a lawyer--low-income individuals, migrants and immigrants, and 
minorities.
  Mr. President, it is precisely these local agencies throughout the 
country which, instead of carrying out the mission of providing legal 
assistance to those who can't afford it, have promoted a liberal public 
policy and propaganda mechanism. It
 has unmercifully harassed law-abiding citizens and has imposed 
countless dollars in litigation costs upon hapless small businessmen, 
farmers, and so forth.

  Another example from North Carolina:
  The Department of Labor, in conjunction with local legal services 
agencies, has done its best to dismantle the H-2A Immigrant Farm Labor 
Program--a Federal program allowing small farmers to employ temporary 
immigrant workers for seasonal harvests. Since North Carolina's farmers 
have had difficulty finding citizens to work on their farms, this 
program is a must for the survival of many of these small farms.
  There is no other reason for the local legal service agency to harass 
North Carolina's farmers beyond furthering the protection and rights of 
immigrants brought in to work.
  Mr. President, the North Carolina Growers Association is today mired 
in a legal battle to protect the rights of farmers to participate in a 
program designed by Congress to assist farming production. The irony is 
that the American taxpayer is forced to fund the LSC and its liberal 
assault on law-abiding citizens, North Carolina's farmers included.
  Of course, the LSC has not limited its activities to bullying 
citizens. The corporation has set its sights on changing State laws 
through litigation and direct lobbying as well as tearing apart 
programs designed to help the poor and needy.
  For example, as the Heritage Foundation notes in its publication 
``Rolling Back Government: A budget plan to rebuild America,'' the LSC 
recently filed a lawsuit in New Jersey challenging that State's welfare 
reform initiatives. In New York City, the LSC filed suit against HELP, 
a proven nonprofit organization that assists the homeless. The LSC has 
even pursued cases to provide free public education for illegal aliens. 
The Heritage Foundation report concludes, ``rather than helping the 
poor settle landlord disputes, wills, and other common legal problems, 
the LSC increasingly is concerned with public policy.''
  Perhaps William Mellor, president of the Washington-based Institute 
for Justice, said it best in his February 1, 1995, editorial, ``Want 
Welfare Reform? First Fight Legal Services Corporation.'' Mr. Mellor 
writes:

       Instead of just helping the poor with problems such as 
     child support and rent disputes, LSC lawyers have worked for 
     years to get the courts to enshrine a constitutional right to 
     welfare.

  Mr. President, is this the kind of arrogant absurdity that was 
intended for LSC? Why should the U.S. Congress be concerned with--as 
candidate Bill Clinton put it--``changing welfare as we know it,'' when 
the taxpayers are required to pay lawyers to convince the Federal 
courts to make welfare a constitutional right?
  The American people in the 1994 election emphatically stated that 
government is running their lives. There is far more waste in 
government than the American people should be forced to pay for.
  Congress, for a half century, has been wasting billions of dollars, 
running up a Federal debt of about $4.9 trillion. Fortunately, for the 
American people, the House of Representatives has proposed eliminating 
funding for the Legal Services Corporation, the cost of which has 
exploded from $92 million in fiscal year 1976 to $400 million in fiscal 
year 1995. And according to the Heritage Foundation, despite this large 
budget and tremendous growth, only 4 percent of the Nation's poor 
directly benefited from the LSC in 1993.
  So, Mr. President, the legislation I offer today, to eliminate 
Federal funding of the Legal Services Corporation, is long past due. 
While saving the taxpayers millions of dollars, my bill will end the 
forced sponsorship by the U.S. taxpayers of an agency the purpose and 
mission of which was laid aside and forgotten long ago in its rush to 
promote a leftwing social agenda. It's time for the Legal Services 
Corporation to be discarded--forever.
                                 ______

      By Mr. HATCH (for himself, Mr. Lieberman, and Mr. Faircloth):
  S. 959. A bill to amend the Internal Revenue Code of 1986 to 
encourage capital formation through reductions in taxes on capital 
gains, and for other purposes; to the Committee on Finance.


                  capital gains formation act of 1995

  Mr. HATCH. Mr. President, on behalf of myself, Senator Lieberman, and 
Senator Faircloth, I rise today to introduce the Capital Gains 
Formation Act of 1995.
  Mr. President, reducing the high rate on capital gains has long been 
a priority of mine. Earlier this year, I joined my good friend, the 
chairman of the House Ways and Means Committee, Bill Archer, in 
introducing the Archer-Hatch capital gains bill in Congress. In the 
Senate, this was S. 182. A modified version of this bill was passed by 
the House in April.
  Now that the Congress is on the verge of passing a budget resolution 
that will almost certainly allow for some tax reductions, Senator 
Lieberman and I concluded that it is now the right time to introduce a 
bipartisan capital gains tax reduction bill that will contribute to 
economic growth and job creation. We are exceptionally pleased to be 
joined in this effort by Senator Faircloth.
  Our bill combines the best elements of the House-passed capital gains 
bill with a targeted incentive to give an extra push for newly formed 
or expanding small businesses. Like the capital gains measure the House 
passed in April, our bill would allow individual taxpayers to deduct 50 
percent of any net capital gain. This means that the top capital gains 
tax rate for individuals would be 19.8 percent. Also like the House 
bill, it grants a 25-percent maximum capital gains tax rate for 
corporations. Our bill also includes the important provision of the 
House-passed bill that would allow homeowners who sell their personal 
residences at a loss to take a capital gains deduction.
  Unlike the House measure, however, the bill we are introducing today 
does not include provisions for indexing assets. Many of our Senate 
colleagues have expressed concern that indexing capital assets would 
results in undue complexity and possibly lead to a resurgence of tax 
shelters. While I support the concept of indexing capital assets to 
prevent the taxation of inflationary gains, we felt it important to 
streamline this bill to ease its passage in the Senate. I hope that 
some form of indexing can be developed, perhaps by a Senate-House 
conference committee, that will achieve the goals of indexing without 
adding undue complexity, or the potential for abuse, to the code.
  In addition to the broad-based provisions listed above, our bill also 
includes some extra capital gains incentives targeted to individuals 
and corporations who are willing to invest in small businesses. We see 
this add-on as an inducement for investors to provide the capital 
needed to help small businesses get established and to expand.
  Mr. President, this additional targeted incentive works as follows: 
If an investor buys newly issued stock of a qualified small business, 
which is defined as one with up to $100 million in assets, and holds 
that stock for 5 or more years, he or she can deduct 75 percent of the 
gain on the sale of that stock, rather than just the 50 percent 
deduction provided for other capital gains.
  In addition, anytime after the end of the 5-year period, if the 
investor decides to sell the stock of one qualified small business and 
invest in another qualified small business, he or she can completely 
defer the gain on the sale of the first stock and not pay taxes on the 
gain until the second stock is sold. In essence, the investor is 
allowed to roll over the gain into the new stock until he or she sells 
the stock and keeps the money. We think that this additional [[Page S 
8950]] incentive will make a tremendous amount of capital available for 
new and expanding small businesses in this country.
  Let me just add, Mr. President, that these special incentives should 
really make a difference in the electronics, biotechnology, and other 
high-technology industries that are so important to our economy and to 
our future. The software and medical device industries in Utah are 
perfect examples of how these industries have transformed our economy. 
While these provisions are not limited to high-tech companies by any 
means, these are the types of businesses that are most likely to use 
them because it is so hard to attract capital for these higher risk 
ventures.
  Our economy is becoming more connected to the global marketplace 
every day. And, it is vital for us to realize that capital flows across 
national boundaries these days at the speed of light. Therefore, we 
need to be concerned with how our trading partners tax capital.
  Unfortunately, the United States has the highest rate on individual 
capital gains of all of the G-7 nations, except the United Kingdom. 
And, even in the United Kingdom, individuals can take advantage of 
indexing to alleviate capital gains caused solely by inflation. Germany 
totally exempts long-term capital gains on securities. In Japan, 
investors pay the lesser of 1 percent of the sales price or 20 percent 
of the net gain. I think it is no coincidence, Mr. President, that 
Germany's saving rate is twice ours and Japan's is three times as high 
as ours. In order to stay competitive in the world, it is vital that 
our tax laws provide the proper incentive to attract the capital we 
need here in the United States.
  We are aware that some of the opponents of capital gains tax 
reductions have asserted that such changes would inordinately benefit 
the wealthy, leaving little or no tax relief for the lower- and middle-
income classes. Nothing could be further from the truth. In fact, 
capital gains taxation affects every homeowner, every employee who 
participates in a stock purchase plan, or every senior citizen who 
relies on income from mutual funds for their basic needs during 
retirement.
  The current law treatment of capital gains only gives preferential 
treatment to those taxpayers who incomes lie in the highest tax 
brackets. Under the Capital Formation Act of 1995, the benefits will 
tilt decidedly toward the middle-income taxpayer. A married couple with 
$39,000 in taxable income who sells a capital asset would, under our 
bill, pay only a 7.5 percent tax on the capital gain. Further, this 
bill
 would slash the taxes retired seniors pay when they sell the assets 
they have accumulated for income during retirement.

  I also believe there is a misperception about the term ``capital 
asset.'' We tend to think of capital assets as something only wealthy 
persons have. In fact, a capital asset is a savings account--which we 
should all have--a piece of land, a savings bond, some stock your 
grandmother bought you, your house, your farm, your 1964 Mustang 
convertible, or any number of things that have monetary worth. It is 
misleading to imply that only the wealthy would benefit from this bill.
  I want to elaborate on this point, Mr. President. Current law already 
provides a sizeable differential between ordinary income tax rates and 
capital gains tax rates for upper income taxpayers. The wealthiest 
among us pay up to 39.6 percent on ordinary income but only 28 percent 
on capital gains. We certainly feel that this 28 percent is too high. 
But, my point is that taxpayers in the lower bracket of 28 percent and 
the lowest bracket of 15 percent enjoy no difference between their 
capital gains rate and their ordinary income rate. Our bill would 
correct this problem and give the largest percentage rate reduction to 
the lowest income taxpayers.
  Frankly, Mr. President, the introduction of a bipartisan capital 
gains bill couldn't come at a better time than now. There are currently 
some indications that our economy is slowing down. In fact, some 
experts feel we may be on the verge of a mild recession. Such a concern 
is always important, but right now, it is critical. Congress is in the 
midst of formulating a 7-year plan to balance the Federal budget. The 
elements of this plan will have consequences far beyond this year or 
even beyond 2002 when we hope to achieve our goal.
  Crucial to the achievement of a balanced budget is the underlying 
growth and strength of our economy. Small changes in the behavior of 
the economy can make or break our ability to put our fiscal house in 
order. Thus, especially right now, we can ill afford to have our 
economy slow down. Such a recession could make it impossible for us to 
balance the budget. With recession comes the fear of future job 
insecurity. Both Republicans and Democrats alike can agree that the 
creation of new and secure jobs is imperative for a vibrant and growing 
economy.
  This is where a reduction of the capital gains rate can be so 
important. By stimulating the economy and spurring job creation, a cut 
in the capital gains rate can stave off the downturn that appears to be 
on its way.
  This is not just our opinion. Senator Lieberman and I received a 
letter yesterday from Allen Sinai, a well-known and respected 
mainstream economist. In his letter, Dr. Sinai concludes that ``The 
enactment of this bipartisan Senate bill* * *could well help offset 
forces contributing to the current cooling of the U.S. economy.''
  Many Americans have expressed concern about the wisdom of a tax 
reduction while we are trying to balance the budget. However, Mr. 
President, we see this bill as a change that will help us balance the 
budget. The evidence clearly shows that a cut in the capital gains tax 
rate will increase, not decrease, revenue to the Treasury. During the 
period from 1978 to 1985, the tax rate on capital gains was cut from 
almost 50 percent to 20 percent. Over this same period, however, tax 
receipts increased from $9.1 billion to $26.5 billion. The opposite 
occurred after the 1986 Tax Reform Act raised the capital gains tax 
rate. The higher rate resulted in less revenue.
  Mr. President, the capital gains tax is really a tax on realizing the 
American dream. For those Americans who have planted seeds in savings 
accounts, small or large companies, family farms, or other investments, 
and who have been fortunate enough and worked hard enough to see them 
grow, the capital gains tax is a tax on success. It is an additional 
tax on the reward for taking risks. The American dream is not dead; 
it's just that we have been taxing it away.
  I urge my colleagues on both sides of the aisle to take a close look 
at this bill. We believe it offers a solid plan to help us achieve our 
goal of a brighter future for our children and grandchildren. When it 
comes down to it, jobs, economic growth, and entrepreneurship are not 
partisan issues. They are American issues. This bill will help us get 
there.
  Mr. President, I ask unanimous consent that the text of the bill and 
additional material be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:
                                 S. 959

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,
     SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

       (a) Short Title.--This Act may be cited as the ``Capital 
     Formation Act of 1995''.
       (b)  Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.
                     TITLE I--CAPITAL GAINS REFORM
     Subtitle A--Capital Gains Deduction for Taxpayers Other Than 
                              Corporations
     SEC. 101. CAPITAL GAINS DEDUCTION.

       (a) In General.--Part I of subchapter P of chapter 1 
     (relating to treatment of capital gains) is amended by 
     redesignating section 1202 as section 1203 and by inserting 
     after section 1201 the following new section:
     ``SEC. 1202. CAPITAL GAINS DEDUCTION.

       ``(a) General Rule.--If for any taxable year a taxpayer 
     other than a corporation has a net capital gain, 50 percent 
     of such gain shall be a deduction from gross income.
       ``(b) Estates and Trusts.--In the case of an estate or 
     trust, the deduction shall be computed by excluding the 
     portion (if any) of the gains for the taxable year from sales 
     or exchanges of capital assets which, under sections 652 and 
     662 (relating to inclusions of amounts in gross income of 
     beneficiaries of trusts), is includible by the income 
     beneficiaries as gain derived from the sale or exchange of 
     capital assets. [[Page S 8951]] 
       ``(c) Coordination With Treatment of Capital Gain Under 
     Limitation on Investment Interest.--For purposes of this 
     section, the net capital gain for any taxable year shall be 
     reduced (but not below zero) by the amount which the taxpayer 
     takes into account as investment income under section 
     163(d)(4)(B)(iii).
       ``(d) Transitional Rule.--
       ``(1) In general.--In the case of a taxable year which 
     includes January 1, 1995--
       ``(A) the amount taken into account as the net capital gain 
     under subsection (a) shall not exceed the net capital gain 
     determined by only taking into account gains and losses 
     properly taken into account for the portion of the taxable 
     year on or after January 1, 1995, and
       ``(B) if the net capital gain for such year exceeds the 
     amount taken into account under subsection (a), the rate of 
     tax imposed by section 1 on such excess shall not exceed 28 
     percent.
       ``(2) Special rules for pass-thru entities.--
       ``(A) In general.--In applying paragraph (1) with respect 
     to any pass-thru entity, the determination of when gains and 
     losses are properly taken into account shall be made at the 
     entity level.
       ``(B) Pass-thru entity defined.--For purposes of 
     subparagraph (A), the term `pass-thru entity' means--
       ``(i) a regulated investment company,
       ``(ii) a real estate investment trust,
       ``(iii) an S corporation,
       ``(iv) a partnership,
       ``(v) an estate or trust, and
       ``(vi) a common trust fund.''
       (b) Deduction Allowable in Computing Adjusted Gross 
     Income.--Subsection (a) of section 62 is amended by inserting 
     after paragraph (15) the following new paragraph:
       ``(16) Long-term capital gains.--The deduction allowed by 
     section 1202.''
       (c) Technical and Conforming Changes.--
       (1) Section 1 is amended by striking subsection (h).
       (2) Paragraph (1) of section 170(e) is amended by striking 
     ``the amount of gain'' in the material following subparagraph 
     (B)(ii) and inserting ``50 percent (\25/35\ in the case of a 
     corporation) of the amount of gain''.
       (3) Subparagraph (B) of section 172(d)(2) is amended to 
     read as follows:
       ``(B) the deduction under section 1202 and the exclusion 
     under section 1203 shall not be allowed.''
       (4) The last sentence of section 453A(c)(3) is amended by 
     striking all that follows ``long-term capital gain,'' and 
     inserting ``the maximum rate on net capital gain under 
     section 1201 or the deduction under section 1202 (whichever 
     is appropriate) shall be taken into account.''
       (5) Paragraph (4) of section 642(c) is amended to read as 
     follows:
       ``(4) Adjustments.--To the extent that the amount otherwise 
     allowable as a deduction under this subsection consists of 
     gain from the sale or exchange of capital assets held for 
     more than 1 year or gain described in section 1203(a), proper 
     adjustment shall be made for any deduction allowable to the 
     estate or trust under section 1202 (relating to deduction for 
     excess of capital gains over capital losses) or for the 
     exclusion allowable to the estate or trust under section 1203 
     (relating to exclusion for gain from certain small business 
     stock). In the case of a trust, the deduction allowed by this 
     subsection shall be subject to section 681 (relating to 
     unrelated business income).''
       (6) The last sentence of section 643(a)(3) is amended to 
     read as follows: ``The deduction under section 1202 (relating 
     to deduction of excess of capital gains over capital losses) 
     and the exclusion under section 1203 (relating to exclusion 
     for gain from certain small business stock) shall not be 
     taken into account.''
       (7) Subparagraph (C) of section 643(a)(6) is amended by 
     inserting ``(i)'' before ``there shall'' and by inserting 
     before the period ``, and (ii) the deduction under section 
     1202 (relating to capital gains deduction) and the exclusion 
     under section 1203 (relating to exclusion for gain from 
     certain small business stock) shall not be taken into 
     account''.
       (8) Paragraph (4) of section 691(c) is amended by striking 
     ``sections 1(h), 1201, 1202, and 1211'' and inserting 
     ``sections 1201, 1202, 1203, and 1211''.
       (9) The second sentence of section 871(a)(2) is amended by 
     inserting ``or 1203'' after ``section 1202''.
       (10)(A) Paragraph (2) of section 904(b) is amended by 
     striking subparagraph (A), by redesignating subparagraph (B) 
     as subparagraph (A), and by inserting after subparagraph (A) 
     (as so redesignated) the following new subparagraph:
       ``(B) Other taxpayers.--In the case of a taxpayer other 
     than a corporation, taxable income from sources outside the 
     United States shall include gain from the sale or exchange of 
     capital assets only to the extent of foreign source capital 
     gain net income.''
       (B) Subparagraph (A) of section 904(b)(2), as so 
     redesignated, is amended--
       (i) by striking all that precedes clause (i) and inserting 
     the following:
       ``(A) Corporations.--In the case of a corporation--'', and
       (ii) by striking in clause (i) ``in lieu of applying 
     subparagraph (A),''.
       (C) Paragraph (3) of section 904(b) is amended by striking 
     subparagraphs (D) and (E) and inserting the following new 
     subparagraph:
       ``(D) Rate differential portion.--The rate differential 
     portion of foreign source net capital gain, net capital gain, 
     or the excess of net capital gain from sources within the 
     United States over net capital gain, as the case may be, is 
     the same proportion of such amount as the excess of the 
     highest rate of tax specified in section 11(b) over the 
     alternative rate of tax under section 1201(a) bears to the 
     highest rate of tax specified in section 11(b).''
       (D) Clause (v) of section 593(b)(2)(D) is amended--
       (i) by striking ``if there is a capital gain rate 
     differential (as defined in section 904(b)(3)(D)) for the 
     taxable year,'', and
       (ii) by striking ``section 904(b)(3)(E)'' and inserting 
     ``section 904(b)(3)(D)''.
       (11) The last sentence of section 1044(d) is amended by 
     striking ``1202'' and inserting ``1203''.
       (12)(A) Paragraph (2) of section 1211(b) is amended to read 
     as follows:
       ``(2) the sum of--
       ``(A) the excess of the net short-term capital loss over 
     the net long-term capital gain, and
       ``(B) one-half of the excess of the net long-term capital 
     loss over the net short-term capital gain.''
       (B) So much of paragraph (2) of section 1212(b) as precedes 
     subparagraph (B) thereof is amended to read as follows:
       ``(2) Special rules.--
       ``(A) Adjustments.--
       ``(i) For purposes of determining the excess referred to in 
     paragraph (1)(A),
      there shall be treated as short-term capital gain in the 
     taxable year an amount equal to the lesser of--

       ``(I) the amount allowed for the taxable year under 
     paragraph (1) or (2) of section 1211(b), or
       ``(II) the adjusted taxable income for such taxable year.

       ``(ii) For purposes of determining the excess referred to 
     in paragraph (1)(B), there shall be treated as short-term 
     capital gain in the taxable year an amount equal to the sum 
     of--

       ``(I) the amount allowed for the taxable year under 
     paragraph (1) or (2) of section 1211(b) or the adjusted 
     taxable income for such taxable year, whichever is the least, 
     plus
       ``(II) the excess of the amount described in subclause (I) 
     over the net short-term capital loss (determined without 
     regard to this subsection) for such year.''

       (C) Subsection (b) of section 1212 is amended by adding at 
     the end the following new paragraph:
       ``(3) Transitional rule.--In the case of any amount which, 
     under this subsection and section 1211(b) (as in effect for 
     taxable years beginning before January 1, 1996), is treated 
     as a capital loss in the first taxable year beginning after 
     December 31, 1995, paragraph (2) and section 1211(b) (as so 
     in effect) shall apply (and paragraph (2) and section 1211(b) 
     as in effect for taxable years beginning after December 31, 
     1995, shall not apply) to the extent such amount exceeds the 
     total of any capital gain net income (determined without 
     regard to this subsection) for taxable years beginning after 
     December 31, 1995.''
       (13) Paragraph (1) of section 1402(i) is amended by 
     inserting ``, and the deduction provided by section 1202 and 
     the exclusion provided by section 1203 shall not apply'' 
     before the period at the end thereof.
       (14) Subsection (e) of section 1445 is amended--
       (A) in paragraph (1) by striking ``35 percent (or, to the 
     extent provided in regulations, 28 percent)'' and inserting 
     ``25 percent (or, to the extent provided in regulations, 19.8 
     percent)'', and
       (B) in paragraph (2) by striking ``35 percent'' and 
     inserting ``25 percent''.
       (15)(A) The second sentence of section 7518(g)(6)(A) is 
     amended--
       (i) by striking ``during a taxable year to which section 
     1(h) or 1201(a) applies'', and
       (ii) by striking ``28 percent (34 percent'' and inserting 
     ``19.8 percent (25 percent''.
       (B) The second sentence of section 607(h)(6)(A) of the 
     Merchant Marine Act, 1936 is amended--
       (i) by striking ``during a taxable year to which section 
     1(h) or 1201(a) of such Code applies'', and
       (ii) by striking ``28 percent (34 percent'' and inserting 
     ``19.8 percent (25 percent''.
       (d) Clerical Amendment.--The table of sections for part I 
     of subchapter P of chapter 1 is amended by striking the item 
     relating to section 1202 and by inserting after the item 
     relating to section 1201 the following new items:

``Sec. 1202. Capital gains deduction.
``Sec. 1203.  50-percent exclusion for gain from certain small business 
              stock.''

       (e) Effective Date.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to taxable years ending after December 31, 1994.
       (2) Contributions.--The amendment made by subsection (c)(2) 
     shall apply to contributions on or after January 1, 1995.
       (3) Use of long-term losses.--The amendments made by 
     subsection (c)(12) shall apply to taxable years beginning 
     after December 31, 1995.
       (4) Withholding.--The amendment made by subsection (c)(14) 
     shall apply only to amounts paid after the date of the 
     enactment of this Act.
     [[Page S 8952]]
     
          Subtitle B--Capital Gains Reduction for Corporations

     SEC. 111. REDUCTION OF ALTERNATIVE CAPITAL GAIN TAX FOR 
                   CORPORATIONS.

       (a) In General.--Section 1201 is amended to read as 
     follows:

     ``SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.

       ``(a) General Rule.--If for any taxable year a corporation 
     has a net capital gain, then, in lieu of the tax imposed by 
     sections 11, 511, and 831 (a) and (b) (whichever is 
     applicable), there is hereby imposed a tax (if such tax is 
     less than the tax imposed by such sections) which shall 
     consist of the sum of--
       ``(1) a tax computed on the taxable income reduced by the 
     amount of the net capital gain, at the rates and in the 
     manner as if this subsection had not been enacted, plus
       ``(2) a tax of 25 percent of the net capital gain.
       ``(b) Transitional Rule.--
       ``(1) In general.--In the case of any taxable year ending 
     after December 31, 1994, and beginning before January 1, 
     1996, in applying subsection (a), net capital gain for such 
     taxable year shall not exceed such net capital gain 
     determined by taking into account only gain or loss properly 
     taken into account for the portion of the taxable year after 
     December 31, 1994.
       ``(2) Special rule for pass-thru entities.--Section 
     1202(d)(2) shall apply for purposes of paragraph (1).
       ``(c) Cross References.--

  ``For computation of the alternative tax--
  ``(1) in the case of life insurance companies, see section 801(a)(2),
  ``(2) in the case of regulated investment companies and their 
shareholders, see section 852(b)(3)(A) and (D), and
  ``(3) in the case of real estate investment trusts, see section 
857(b)(3)(A).''
       (b) Technical Amendment.--Clause (iii) of section 
     852(b)(3)(D) is amended by striking ``65 percent'' and 
     inserting ``75 percent''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after December 31, 1994.

   Subpart C--Capital Loss Deduction Allowed With Respect to Sale or 
                    Exchange of Principal Residence

     SEC. 121. CAPITAL LOSS DEDUCTION ALLOWED WITH RESPECT TO SALE 
                   OR EXCHANGE OF PRINCIPAL RESIDENCE.

       (a) In General.--Subsection (c) of section 165 (relating to 
     limitation on losses of individuals) is amended by striking 
     ``and'' at the end of paragraph (2), by striking the period 
     at the end of paragraph (3) and inserting ``; and'', and by 
     adding at the end the following new paragraph:
       ``(4) losses arising from the sale or exchange of the 
     principal residence (within the meaning of section 1034) of 
     the taxpayer.''
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to sales and exchanges after December 31, 1994, 
     in taxable years ending after such date.
             TITLE II--SMALL BUSINESS VENTURE CAPITAL STOCK

     SEC. 201. MODIFICATIONS TO EXCLUSION OF GAIN ON CERTAIN SMALL 
                   BUSINESS STOCK.

       (a) Increase in Exclusion Percentage.--
       (1) In general.--Section 1203(a), as redesignated by 
     section 101, is amended--
       (A) by striking ``50 percent'' and inserting ``75 
     percent'', and
       (B) by striking ``50-Percent'' in the heading and inserting 
     ``Partial''.
       (2) Conforming amendments.--
       (A) Section 1203, as so redesignated, is amended by adding 
     at the end the following new subsection:
       ``(l) Cross Reference.--
  ``For treatment of eligible gain not excluded under subsection (a), 
see sections 1201 and 1202.''
       (B) The heading for section 1203, as so redesignated, is 
     amended by striking ``50-percent'' and inserting ``partial''.
       (C) The table of sections for part I of subchapter P of 
     chapter 1, as amended by section 101(d), is amended by 
     striking ``50-percent'' in the item relating to section 1203 
     and inserting ``Partial''.
       (b) Exclusion Available to Corporations.--
       (1) In general.--Subsection (a) of section 1203, as 
     redesignated by section 101, is amended by striking ``other 
     than a corporation''.
       (2) Technical amendment.--Subsection (c) of section 1203, 
     as so redesignated, is amended by adding at the end the 
     following new paragraph:
       ``(4) Stock held among members of controlled group not 
     eligible.--Stock of a member of a parent-subsidiary 
     controlled group (as defined in subsection (d)(3)) shall not 
     be treated as qualified small business stock while held by 
     another member of such group.''
       (c) Repeal of Minimum Tax Preference.--
       (1) In general.--Subsection (a) of section 57 is amended by 
     striking paragraph (7).
       (2) Technical amendment.--Subclause (II) of section 
     53(d)(1)(B)(ii) is amended by striking ``, (5), and (7)'' and 
     inserting ``and (5)''.
       (d) Stock of Larger Businesses Eligible for Exclusion.--
       (1) Paragraph (1) of section 1203(d), as redesignated by 
     section 101, is amended by striking ``$50,000,000'' each 
     place it appears and inserting ``$100,000,000''.
       (2) Subsection (d) of section 1203, as so redesignated, is 
     amended by adding at the end the following new paragraph:
       ``(4) Inflation adjustment of asset limitation.--In the 
     case of stock issued in any calendar year after 1996, the 
     $100,000,000 amount contained in paragraph (1) shall be 
     increased by an amount equal to--
       ``(A) such dollar amount, multiplied by
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 1995' 
     for `calendar year 1992' in subparagraph (B) thereof.

     If any amount as adjusted under the preceding sentence is not 
     a multiple of $10,000, such amount shall be rounded to the 
     nearest multiple of $10,000.''
       (e) Repeal of Per-Issuer Limitation.--Section 1203, as 
     redesignated by section 101, is amended by striking 
     subsection (b).
       (f) Other Modifications.--
       (1) Repeal of working capital limitation.--Paragraph (6) of 
     section 1203(e), as redesignated by section 101, is amended--
       (A) by striking ``2 years'' in subparagraph (B) and 
     inserting ``5 years'', and
       (B) by striking the last sentence.
       (2) Exception from redemption rules where business 
     purpose.--Paragraph (3) of section 1203(c), as so 
     redesignated, is amended by adding at the end the following 
     new subparagraph:
       ``(D) Waiver where business purpose.--A purchase of stock 
     by the issuing corporation shall be disregarded for purposes 
     of subparagraph (B) if the issuing corporation establishes 
     that there was a business purpose for such purchase and one 
     of the principal purposes of the purchase was not to avoid 
     the limitations of this section.''
       (g) Qualified Trade or Business.--Section 1203(e)(3), as 
     redesignated by section 101, is amended by inserting ``and'' 
     at the end of subparagraph (C), by striking ``, and'' at the 
     end of subparagraph (D) and inserting a period, and by 
     striking subparagraph (E).
       (h) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to stock issued 
     after the date of the enactment of this Act.
       (2) Special rule.--The amendments made by subsections (a), 
     (c), (e), and (f) shall apply to stock issued after August 
     10, 1993.

     SEC. 202. ROLLOVER OF GAIN FROM SALE OF QUALIFIED STOCK.

       (a) In General.--Part III of subchapter O of chapter 1 is 
     amended by adding at the end the following new section:

     ``SEC. 1045. ROLLOVER OF GAIN FROM QUALIFIED SMALL BUSINESS 
                   STOCK TO ANOTHER QUALIFIED SMALL BUSINESS 
                   STOCK.

       ``(a) Nonrecognition of Gain.--In the case of any sale of 
     qualified small business stock with respect to which the 
     taxpayer elects the application of this section, eligible 
     gain from such sale shall be recognized only to the extent 
     that the amount realized on such sale exceeds--
       ``(1) the cost of any qualified small business stock 
     purchased by the taxpayer during the 60-day period beginning 
     on the date of such sale, reduced by
       ``(2) any portion of such cost previously taken into 
     account under this section.

     This section shall not apply to any gain which is treated as 
     ordinary income for purposes of this title.
       ``(b) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Qualified small business stock.--The term `qualified 
     small business stock' has the meaning given such term by 
     section 1203(c).
       ``(2) Eligible gain.--The term `eligible gain' means any 
     gain from the sale or exchange of qualified small business 
     stock held for more than 5 years.
       ``(3) Purchase.--A taxpayer shall be treated as having 
     purchased any property if, but for paragraph (4), the 
     unadjusted basis of such property in the hands of the 
     taxpayer would be its cost (within the meaning of section 
     1012).''
       ``(4) Basis adjustments.--If gain from any sale is not 
     recognized by reason of subsection (a), such gain shall be 
     applied to reduce (in the order acquired) the basis for 
     determining gain or loss of any qualified small business 
     stock which is purchased by the taxpayer during the 60-day 
     period described in subsection (a).
       ``(c) Special Rules for Treatment of Replacement Stock.--
       ``(1) Holding period for accrued gain.--For purposes of 
     this chapter, gain from the disposition of any replacement 
     qualified small business stock shall be treated as gain from 
     the sale or exchange of qualified small business stock held 
     more than 5 years to the extent that the amount of such gain 
     does not exceed the amount of the reduction in the basis of 
     such stock by reason of subsection (b)(4).
       ``(2) Tacking of holding period for purposes of deferral.--
     Solely for purposes of applying this section, if any 
     replacement qualified small business stock is disposed of 
     before the taxpayer has held such stock for more than 5 
     years, gain from such stock shall be treated eligible gain 
     for purposes of subsection (a).
       ``(3) Replacement qualified small business stock.--For 
     purposes of this subsection, the term `replacement qualified 
     small business stock' means any qualified small business 
     stock the basis of which was reduced under subsection 
     (b)(4).''
       (b) Conforming Amendments.--
       (1) Section 1016(a)(23) is amended-- [[Page S 8953]] 
       (A) by striking ``or 1044'' and inserting ``, 1044, or 
     1045'', and
       (B) by striking ``or 1044(d)'' and inserting ``, 1044(d), 
     or 1045(b)(4)''.
       (2) The table of sections for part III of subchapter O of 
     chapter 1 is amended by adding at the end the following new 
     item:

``Sec. 1045. Rollover of gain from qualified small business stock to 
              another qualified small business stock.''

       (c) Effective Date.--The amendments made by this section 
     shall apply to stock sold or exchanged after the date of the 
     enactment of this Act.
                                                                    ____

                Summary of Capital Formation Act of 1995

       The Capital Formation Act of 1995 would reduce the tax rate 
     on capital gains and encourage investment in new and growing 
     business enterprises through the following provisions:


 I. Broad-Based Tax Relief (similar to provisions in House-passed H.R. 
                                 1215):

       (1) Individual taxpayers would be allowed a deduction of 50 
     percent of any net capital gain. The top effective tax rate 
     on capital gains would thus be 19.8 percent.
       (2) Corporations would be subject to a maximum capital 
     gains tax rate of 25 percent.
       (3) Capital loss treatment would be allowed with respect to 
     the sale of a taxpayer's principal residence.
       (4) Indexing of capital assets would not be included.
       (5) Would be effective for taxable years ending after 
     December 31, 1994.


     II Targeted Incentive to Invest in Small Business Enterprises:

       (1) Provides an exclusion of 75 percent of capital gains 
     from sale of investment in qualified small business stock 
     held for more than five years.
       (2) Allows 100 percent deferral of capital gains tax, after 
     the five year period, if proceeds from the sale of qualified 
     small business stock are rolled over within 60 days into 
     another qualified small business stock. Gains accrued after 
     the rollover would qualify for a 50 percent deduction if held 
     for more than one year, 75 percent exclusion if held for more 
     than another five years, or at any time, could be rolled over 
     yet again into another qualified small business stock for 100 
     percent deferral.
       (3) Would be effective upon date of enactment.
       Example: A taxpayer buys qualified small business stock in 
     1996 for $10,000. She sells the stock in 2002 for $20,000. 
     She would be allowed to exclude 75 percent of the gain, or 
     $7,500. Of, if she chose to roll over the $20,000 proceeds 
     from the sale into another qualified small business stock 
     within 60 days, she would defer all tax until she ultimately 
     sold the second stock.
       Qualified small business stock is defined as newly issued 
     stock of corporations with up to $100 million in assets and 
     is an expansion of the current law targeted small business 
     capital gains exclusion added by the 1993 tax act. The 
     changes in the targeted small business stock incentive from 
     current law would:
       (1) Allow corporations to participate.
       (2) Remove the current law per-issuer limitation.
       (3) Repeal the working capital limitation.
       (4) Expand the list of qualified businesses in which the 
     corporation may engage.
                                                                    ____

                                              Lehman Brothers,

                                                    June 21, 1995.
     Hon. Orrin Hatch,
     U.S. Senate,
     Hon. Joseph Lieberman,
     U.S. Senate,
     Washington, DC.
       Dear Senators Hatch and Lieberman: The Hatch-Lieberman 
     Capital Gains Tax Reduction Proposal would have positive 
     impacts on U.S. economic growth, employment and investment. 
     The enactment of this bipartisan Senate bill, whose main 
     features include a 50 percent exclusion for individual 
     capital gains (a top marginal rate of 19.8 percent), a 25 
     percent maximum capital gains rate for corporations, and 
     expansion of the current 50 percent exclusion for small 
     business capital stock to 75 percent, as well as other small 
     business provisions, could well help offset forces 
     contributing to the current cooling of the U.S. economy.
       Indexing capital gains, not included in the Hatch-Lieberman 
     proposal, also would help stimulate economic activity and has 
     the positive dimension of eliminating the distortion from the 
     taxation of illusory gains that come from inflation. It would 
     also be good to have. But of the two measures, capital gains 
     rate reduction and indexing under limitations set by the very 
     important first priority of moving the federal budget into 
     balance, the rate reductions and small business provisions 
     provide more ``bang-for-a-buck''.
       A stronger economy would be stimulated by the lower cost of 
     capital from a reduction in capital gains taxes, also 
     business and personal saving would rise, and more business 
     capital spending occur. This would come about, in part, from 
     increased stock prices and higher household net worth as 
     investors shifted funds away from other investments into 
     stocks. The stronger economy would lead to increased hiring 
     and new jobs. Wealth, income and profits improvement would 
     raise spending, saving, and purchases of financial assets.
       With a stronger economy and increased capital formation, 
     greater entrepreneurship, as measured by new business 
     incorporations, ought to raise productivity and thus the 
     potential output of this economy. This supply-side effect, 
     although modest, would tend to limit any potential 
     inflationary effect of the capital gains tax reductions. In 
     addition, an unlocking effect on tax receipts from the 
     unrealized capital gains that would be realized ought to 
     reduce the ex-post cost of this tax measure.
       Of all the tax reductions being considered by the Congress, 
     the most beneficial, in a balanced way, to both the demand-
     side and supply-sides of the economy, potentially at the 
     least net cost, would be the capital gains tax rate 
     reductions that are proposed.
       On several criteria for judging changes in taxes--
     allocative efficiency, economic growth, savings and 
     investment, international competition and fairness--capital 
     gains tax reduction wins on almost all. The one exception is 
     equity, because higher income families tend to hold 
     proportionately more of the assets that could be subject to 
     capital gains.
           Sincerely,
                                                      Allen Sinai.

  Mr. LIEBERMAN. Mr. President, I am delighted and proud to join 
Senator Hatch in this bipartisan introduction of the Capital Formation 
Act of 1995. As a Democrat, I have often borrowed Paul Tsongas' line 
that you can't be pro-jobs and anti-business, because the jobs we want 
for people are going to come from business. The bill we are introducing 
today is pro-jobs and pro-business. It gives people at all income 
levels a reason to put their money in places where that money will help 
businesses start and grow and that means more jobs for Americans and 
more economic prosperity for our country.
  We are introducing this bill at a time when the American economy may 
be on the verge of recession. There are those who say we are already in 
a recession. One of the most effective things Congress can do to give 
our economy a boost is to cut the capital gains tax rate.
  We also have a shortage of savings and investment in this country. 
Our personal savings rate is now about one-third of Japan's rate and 
about one-half of Germany's rate. We are ill prepared to deal with the 
effects of recession, and we are ill prepared for the economic battles 
of the global marketplace. Unlike most other industrialized nations, we 
stifle savings and investment by over-taxing it. Nations like Japan and 
Germany value capital gains. Germany exempts long-term capital gains 
from taxes for individuals and Japan taxes these gains at either 1 
percent of the sales price or 20 percent of the net gain. They reward 
investment.
  Not only have we done too little to encourage investment, too often 
it is actively discouraged. To attack capital gains tax relief as a 
bonanza for the wealthy is quite simply missing the point.
  The benefits of this capital gains tax cut will not flow just to 
people of wealth. Anyone who has stock, who has money invested in a 
mutual fund, who has investment property, who has a stock option plan 
at work has a stake in capital gains tax relief. That represents 
millions and millions of middle class American families. We have 
information on 310 major firms that offer their employees stock options 
and stock purchase plans--companies like GTE, Pfizer and Stanley Works, 
to name a few of the companies in my State.
  Each of those workers and their spouses and children stand to gain 
from what we propose today. And these firms are just the tip of the 
iceberg.
  And we're talking about direct beneficiaries--not even counting the 
many middle and lower income people who will get and keep jobs thanks 
to the investments spurred by the capital gains tax cut.
  Of course, people who are wealthy can benefit from this proposed 
capital gains cut, but that is the point. They will benefit if they 
invest more of their money in ways that help our economy and create 
jobs. That benefits everyone. Government doesn't make people rich. But 
Government can and should encourage people who have money to use that 
money in a way that helps the economy as a whole. That is what this is 
about. We are simply talking about letting people who are willing to 
risk their money keep a little bit more of it if they invest that money 
in our economy.
  People who oppose cutting the capital gains tax are treating profit 
as if it were to be avoided. I believe that we should recognize profit 
as being an advantage of the free market, and we want to encourage it, 
reward it, help it spread its benefits throughout the [[Page S 
8954]] economy to more and more of our people. Opponents also frame 
this debate in a winners-and-losers context that is totally 
inappropriate to what is at stake here. Because a rising tide of 
economic growth raises all ships, there need be no losers when capital 
gains taxes are cut by our bill.
  Finally, let me point out that this capital gains tax is broad but it 
also has a targeted element. It aims at directing investment in a way 
that maximizes the benefit for our economy. It promotes investment in 
small businesses--the firms that are driving job creation in our 
economy. It encourages people to leave their investments in small 
businesses, start-up businesses for a longer period of time, giving 
entrepreneurs the kind of predictable cash flow they need to make their 
businesses succeed.
  The targeted feature of our capital gains tax cut will be very 
helpful to the kinds of small businesses we need for our future--the 
high technology businesses that will be the source of many new jobs in 
the next century, and that will be the source of our success in global 
markets. These businesses are high risk. They require a lot of capital 
investment early on. The payoff is down the road. And the benefits for 
America are, potentially, enormous. Not just jobs and profits for 
Americans. But exciting new technological innovations. New ways to 
educate our children. New medicines and medical devices. New services, 
and new opportunities for recreation. All these positive changes need 
the kind of investment our Capital Formation Act will encourage.
  In closing, let me say that I see this bill as the first leg of a 
tripod of tax relief for the American people. The second leg is the 
President's tax credit for children and tax deduction for higher 
education costs, which I support.
  The third leg will be a research and development tax credit that is 
being developed now and I hope will be introduced in the near future.
  With these tax proposals, we can help more Americans raise their kids 
today, educate them tomorrow, and provide them with good job 
opportunities in thriving American businesses in the future.
  Mr. FAIRCLOTH. Mr. President, today I am joining with Senators Hatch 
and Lieberman to introduce the Capital Formation Act of 1995. This 
bipartisan effort sends a clear signal that there is broad-based 
support for a capital gains tax cut to stimulate job creation, foster 
sound economic growth, and enhance U.S. international competitiveness.
  Prior to my election to the Senate, I spent 45 years in the private 
sector running a small business and meeting a payroll. I learned 
firsthand that a cut in the capital gains tax rate would stimulate the 
release of billions of dollars of unproductive capital, unlock economic 
assets, and encourage new investment by both mature and new businesses. 
Moreover, a reduction in capital gains taxes would have a powerful 
impact on the entrepreneurial segment of the economy, thereby creating 
new start-up companies and new jobs.
  I commend Senators Hatch and Lieberman for working together to craft 
a bipartisan capital gains tax cut proposal. I am proud to be the first 
cosponsor of this bill, and I sincerely hope that many of our 
colleagues--Democrats and Republicans--will join this important effort 
to provide much needed tax relief and encourage further economic 
growth.


                          ____________________