[Congressional Record Volume 144, Number 77 (Monday, June 15, 1998)]
[House]
[Pages H4551-H4565]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




CONFERENCE REPORT ON H.R. 2646, EDUCATION SAVINGS AND SCHOOL EXCELLENCE 
                              ACT OF 1998

  Mr. ARMEY submitted the following conference report and statement on 
the bill (H.R. 2646) to amend the Internal Revenue Code of 1986 to 
allow tax-free expenditures from education individual retirement 
accounts for elementary and secondary school expenses, to increase the 
maximum annual amount of contributions to such accounts, and for other 
purposes:

                    Conference Report (H. Rept. 577)

       The committee of conference on the disagreeing votes of the 
     two Houses on the amendment of the Senate to the bill (H.R. 
     2646), to amend the Internal Revenue Code of 1986 to allow 
     tax-free expenditures from education individual retirement 
     accounts for elementary and secondary school expenses, to 
     increase the maximum annual amount of contributions to such 
     accounts, and for other purposes, having met, after full and 
     free conference, have agreed to recommend and do recommend to 
     their respective Houses as follows:
       That the House recede from its disagreement to the 
     amendment of the Senate and agree to the same with an 
     amendment as follows:
       In lieu of the matter proposed to be inserted by the Senate 
     amendment, insert the following:

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Education Savings and School 
     Excellence Act of 1998''.

                 TITLE I--TAX INCENTIVES FOR EDUCATION

     SEC. 100. AMENDMENT TO 1986 CODE.

       Except as otherwise expressly provided, whenever in this 
     title 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.

                Subtitle A--Tax Incentives For Education

     SEC. 101. MODIFICATIONS TO EDUCATION INDIVIDUAL RETIREMENT 
                   ACCOUNTS.

       (a) Tax-Free Expenditures for Elementary and Secondary 
     School Expenses.--
       (1) In general.--Section 530(b)(2) (defining qualified 
     higher education expenses) is amended to read as follows:
       ``(2) Qualified education expenses.--
       ``(A) In general.--The term `qualified education expenses' 
     means--
       ``(i) qualified higher education expenses (as defined in 
     section 529(e)(3)), and
       ``(ii) qualified elementary and secondary education 
     expenses (as defined in paragraph (4)).

     Such expenses shall be reduced as provided in section 
     25A(g)(2).
       ``(B) Qualified state tuition programs.--Such term shall 
     include amounts paid or incurred to purchase tuition credits 
     or certificates, or to make contributions to an account, 
     under a qualified State tuition program (as defined in 
     section 529(b)) for the benefit of the beneficiary of the 
     account.''.
       (2) Qualified elementary and secondary education 
     expenses.--Section 530(b) (relating to definitions and 
     special rules) is amended by adding at the end the following 
     new paragraph:
       ``(4) Qualified elementary and secondary education 
     expenses.--
       ``(A) In general.--The term `qualified elementary and 
     secondary education expenses' means--
       ``(i) expenses for tuition, fees, academic tutoring, 
     special needs services, books, supplies, computer equipment 
     (including related software and services), and other 
     equipment which are incurred in connection with the 
     enrollment or attendance of the designated beneficiary of the

[[Page H4552]]

     trust as an elementary or secondary school student at a 
     public, private, or religious school, or
       ``(ii) expenses for room and board, uniforms, 
     transportation, and supplementary items and services 
     (including extended day programs) which are required or 
     provided by a public, private, or religious school in 
     connection with such enrollment or attendance.
       ``(B) Special rule for homeschooling.--Such term shall 
     include expenses described in subparagraph (A)(i) in 
     connection with education provided by homeschooling if the 
     requirements of any applicable State or local law are met 
     with respect to such education.
       ``(C) School.--The term `school' means any school which 
     provides elementary education or secondary education 
     (kindergarten through grade 12), as determined under State 
     law.''.
       (3) Special rules for applying exclusion to elementary and 
     secondary expenses.--Section 530(d)(2) (relating to 
     distributions for qualified higher education expenses), as 
     amended by subsection (e), is amended by adding at the end 
     the following new subparagraph:
       ``(E) Special rules for elementary and secondary 
     expenses.--
       ``(i) In general.--The aggregate amount of qualified 
     elementary and secondary education expenses taken into 
     account for purposes of this paragraph with respect to any 
     education individual retirement account for all taxable years 
     shall not exceed the sum of the aggregate contributions to 
     such account for taxable years beginning after December 31, 
     1998, and before January 1, 2003, and earnings on such 
     contributions.
       ``(ii) Special operating rules.--For purposes of clause 
     (i)--

       ``(I) the trustee of an education individual retirement 
     account shall keep separate accounts with respect to 
     contributions and earnings described in clause (i), and
       ``(II) if there are distributions in excess of qualified 
     elementary and secondary education expenses for any taxable 
     year, such excess distributions shall be allocated first to 
     contributions and earnings not described in clause (i).''.

       (4) Conforming amendments.--Subsections (b)(1) and (d)(2) 
     of section 530 are each amended by striking ``higher'' each 
     place it appears in the text and heading thereof.
       (b) Maximum Annual Contributions.--
       (1) In general.--Section 530(b)(1)(A)(iii) (defining 
     education individual retirement account) is amended by 
     striking ``$500'' and inserting ``the contribution limit for 
     such taxable year''.
       (2) Contribution limit.--Section 530(b) (relating to 
     definitions and special rules), as amended by subsection 
     (a)(2), is amended by adding at the end the following new 
     paragraph:
       ``(5) Contribution limit.--The term `contribution limit' 
     means $500 ($2,000 in the case of any taxable year beginning 
     after December 31, 1998, and ending before January 1, 
     2003).''.
       (3) Conforming amendment.--Section 4973(e)(1)(A) is amended 
     by striking ``$500'' and inserting ``the contribution limit 
     (as defined in section 530(b)(5)) for such taxable year''.
       (c) Waiver of Age Limitations for Children With Special 
     Needs.--Section 530(b)(1) (defining education individual 
     retirement account) is amended by adding at the end the 
     following flush sentence:

     ``The age limitations in the preceding sentence shall not 
     apply to any designated beneficiary with special needs (as 
     determined under regulations prescribed by the Secretary).''.
       (d) Corporations Permitted To Contribute to Accounts.--
     Section 530(c)(1) (relating to reduction in permitted 
     contributions based on adjusted gross income) is amended by 
     striking ``The maximum amount which a contributor'' and 
     inserting ``In the case of a contributor who is an 
     individual, the maximum amount the contributor''.
       (e) Technical Corrections.--
       (1) Section 530(b)(1) is amended by inserting ``an 
     individual who is'' before ``the designated beneficiary'' in 
     the material preceding subparagraph (A).
       (2)(A) Section 530(b)(1)(E) is amended to read as follows:
       ``(E) Except as provided in subsection (d)(7), any balance 
     to the credit of the designated beneficiary on the date on 
     which the beneficiary attains age 30 shall be distributed 
     within 30 days after such date to the beneficiary or, if the 
     beneficiary dies before attaining age 30, shall be 
     distributed within 30 days after the date of death of such 
     beneficiary.''.
       (B) Section 530(d)(7) is amended by inserting at the end 
     the following new sentence: ``In applying the preceding 
     sentence, members of the family of the designated beneficiary 
     shall be treated in the same manner as the spouse under such 
     paragraph (8).''.
       (C) Section 530(d) is amended by adding at the end the 
     following new paragraph:
       ``(8) Deemed distribution on required distribution date.--
     In any case in which a distribution is required under 
     subsection (b)(1)(E), any balance to the credit of a 
     designated beneficiary as of the close of the 30-day period 
     referred to in such subsection for making such distribution 
     shall be deemed distributed at the close of such period.''.
       (3)(A) Section 530(d)(1) is amended by striking ``section 
     72(b)'' and inserting ``section 72''.
       (B) Section 72(e) is amended by inserting after paragraph 
     (8) the following new paragraph:
       ``(9) Extension of paragraph (2)(b) to qualified state 
     tuition programs and educational individual retirement 
     accounts.--Notwithstanding any other provision of this 
     subsection, paragraph (2)(B) shall apply to amounts received 
     under a qualified State tuition program (as defined in 
     section 529(b)) or under an education individual retirement 
     account (as defined in section 530(b)). The rule of paragraph 
     (8)(B) shall apply for purposes of this paragraph.''.
       (4) Section 135(d)(2) is amended to read as follows:
       ``(2) Coordination with other higher education benefits.--
     The amount of the qualified higher education expenses 
     otherwise taken into account under subsection (a) with 
     respect to the education of an individual shall be reduced 
     (before the application of subsection (b)) by--
       ``(A) the amount of such expenses which are taken into 
     account in determining the credit allowable to the taxpayer 
     or any other person under section 25A with respect to such 
     expenses, and
       ``(B) the amount of such expenses which are taken into 
     account in determining the exclusion under section 
     530(d)(2).''.
       (5) Section 530(d)(2) is amended by adding at the end the 
     following new subparagraph:
       ``(D) Disallowance of excluded amounts as credit or 
     deduction.--No deduction or credit shall be allowed to the 
     taxpayer under any other section of this chapter for any 
     qualified education expenses to the extent taken into account 
     in determining the amount of the exclusion under this 
     paragraph.''.
       (6) Section 530(d)(4)(B) is amended by striking ``or'' at 
     the end of clause (ii), by striking the period at the end of 
     clause (iii) and inserting ``, or'', and by adding at the end 
     the following new clause:
       ``(iv) an amount which is includible in gross income solely 
     because the taxpayer elected under paragraph (2)(C) to waive 
     the application of paragraph (2) for the taxable year.''.
       (7) So much of section 530(d)(4)(C) as precedes clause (ii) 
     thereof is amended to read as follows:
       ``(C) Contributions returned before due date of return.--
     Subparagraph (A) shall not apply to the distribution of any 
     contribution made during a taxable year on behalf of the 
     designated beneficiary if--
       ``(i) such distribution is made on or before the day 
     prescribed by law (including extensions of time) for filing 
     the beneficiary's return of tax for the taxable year or, if 
     the beneficiary is not required to file such a return, the 
     15th day of the 4th month of the taxable year following the 
     taxable year, and''.
       (8) Section 135(c)(2)(C) is amended--
       (A) by inserting ``and education individual retirement 
     accounts'' in the heading after ``program'', and
       (B) by striking ``section 529(c)(3)(A)'' and inserting 
     ``section 72''.
       (9) Section 4973(e)(1) is amended to read as follows:
       ``(1) In general.--In the case of education individual 
     retirement accounts maintained for the benefit of any 1 
     beneficiary, the term `excess contributions' means the sum 
     of--
       ``(A) the amount by which the amount contributed for the 
     taxable year to such accounts exceeds $500 (or, if less, the 
     sum of the maximum amounts permitted to be contributed under 
     section 530(c) by the contributors to such accounts for such 
     year),
       ``(B) if any amount is contributed during such year to a 
     qualified State tuition program for the benefit of such 
     beneficiary, any amount contributed to such accounts for such 
     taxable year, and
       ``(C) the amount determined under this subsection for the 
     preceding taxable year, reduced by the sum of--
       ``(i) the distributions out of the accounts for the taxable 
     year which are included in gross income, and
       ``(ii) the excess (if any) of the maximum amount which may 
     be contributed to the accounts for the taxable year over the 
     amount contributed to the accounts for the taxable year.''.
       (10)(A) Paragraph (5) of section 530(d) is amended by 
     striking the first sentence and inserting the following new 
     sentence: ``Paragraph (1) shall not apply to any amount paid 
     or distributed from an education individual retirement 
     account to the extent that the amount received is paid, not 
     later than the 60th day after the date of such payment or 
     distribution, into another education individual retirement 
     account for the benefit of the same beneficiary or a member 
     of the family (within the meaning of section 529(e)(2) of 
     such beneficiary who has not attained age 30 as of such 
     date.''
       (B) Paragraph (6) of section 530(d) is amended by inserting 
     before the period ``and has not attained age 30 as of the 
     date of such change''.
       (f) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     beginning after December 31, 1998.
       (2) Technical corrections.--The amendments made by 
     subsection (e) shall take effect as if included in the 
     amendments made by section 213 of the Taxpayer Relief Act of 
     1997.

     SEC. 102. EXCLUSION FROM GROSS INCOME OF EDUCATION 
                   DISTRIBUTIONS FROM QUALIFIED STATE TUITION 
                   PROGRAMS.

       (a) In General.--Section 529(c)(3)(B) (relating to 
     distributions) is amended to read as follows:
       ``(B) Distributions for qualified higher education 
     expenses.--
       ``(i) In general.--No amount shall be includible in gross 
     income under subparagraph (A) if the qualified higher 
     education expenses of the designated beneficiary during the 
     taxable year are not less than the aggregate distributions 
     during the taxable year.
       ``(ii) Distributions in excess of expenses.--If such 
     aggregate distributions exceed such expenses during the 
     taxable year, the amount otherwise includible in gross income 
     under subparagraph (A) shall be reduced by the amount which 
     bears the same ratio to the amount so includible (without 
     regard to this subparagraph) as such expenses bear to such 
     aggregate distributions.
       ``(iii) Election to waive exclusion.--A taxpayer may elect 
     to waive the application of this subparagraph for any taxable 
     year.

[[Page H4553]]

       ``(iv) In-kind distributions.--Any benefit furnished to a 
     designated beneficiary under a qualified State tuition 
     program shall be treated as a distribution to the beneficiary 
     for purposes of this paragraph.
       ``(v) Disallowance of excluded amounts as credit or 
     deduction.--No deduction or credit shall be allowed to the 
     taxpayer under any other section of this chapter for any 
     qualified higher education expenses to the extent taken into 
     account in determining the amount of the exclusion under this 
     paragraph.''.
       (b) Definition of Qualified Higher Education Expenses.--
     Section 529e)(3)(A) (defining qualified higher education 
     expenses) is amended to read as follows:
       ``(A) In general.--The term `qualified higher education 
     expenses' means expenses for tuition, fees, academic 
     tutoring, special needs services, books, supplies, computer 
     equipment (including related software and services), and 
     other equipment which are incurred in connection with the 
     enrollment or attendance of the designated beneficiary at an 
     eligible educational institution.''.
       (c) Coordination With Education Credits.--Section 25A(e)(2) 
     (relating to coordination with exclusions) is amended--
       (1) by inserting ``a qualified State tuition program or'' 
     before ``an education individual retirement account'', and
       (2) by striking ``section 530(d)(2)'' and inserting 
     ``section 529(c)(3)(B) or 530(d)(2)''.
       (d) Eligible Educational Institutions Permitted to Maintain 
     Qualified Tuition Programs.--
       (1) In general.--Section 529(b)(1) (defining qualified 
     State tuition program) is amended by inserting ``or, in the 
     case of taxable years beginning after December 31, 2005, by 1 
     or more eligible educational institutions'' after 
     ``maintained by a State or agency or instrumentality 
     thereof''.
       (2) Private qualified tuition programs limited to benefit 
     plans.--Section 529(b)(1) is amended by adding at the end the 
     following flush sentence:
     ``Clause (ii) of subparagraph (A) shall only apply to a 
     program established and maintained by a State or agency or 
     instrumentality thereof.''.
       (3) Limitation on contributions to private qualified 
     tuition programs.--Section 529(b) is amended by adding at the 
     end the following new paragraph:
       ``(8) Limitation on contributions to private qualified 
     tuition programs.--In the case of a program not established 
     and maintained by a State or agency or instrumentality 
     thereof, such program shall not be treated as a qualified 
     tuition program unless it limits the annual contribution to 
     the program on behalf of a designated beneficiary to an 
     amount equal to the lesser of--
       ``(A) $5,000, or
       ``(B) the excess of--
       ``(i) $50,000, over
       ``(ii) the aggregate amount contributed to such program on 
     behalf of such beneficiary for all prior taxable years.''.
       (4) Tax on excess contributions.--
       (A) In general.--Section 4973(a) (relating to tax imposed) 
     is amended by striking ``or'' at the end of paragraph (3), by 
     inserting ``or'' at the end of paragraph (4), and by 
     inserting after paragraph (4) the following new paragraph:
       ``(5) a private qualified tuition program (as defined in 
     subsection (g)),''.
       (B) Excess contributions defined.--Section 4973 is amended 
     by adding at the end the following new subsection:
       ``(g) Excess Contributions to Private Qualified Tuition 
     Program.--For purposes of this section--
       ``(1) In general.--In the case of private qualified tuition 
     programs, the term `excess contributions' means, with respect 
     to any 1 beneficiary--
       ``(A) the amount by which the amounts contributed for the 
     taxable year to such programs exceed the lesser of--
       ``(i) $5,000, or
       ``(ii) the excess of--

       ``(I) $50,000, over
       ``(II) the aggregate amount contributed to all private 
     qualified tuition programs on behalf of such beneficiary for 
     all prior taxable years, and

       ``(B) the amount determined under this subsection for the 
     preceding taxable year, reduced by the sum of--
       ``(i) the distributions out of such programs for the 
     taxable year which are included in gross income, and
       ``(ii) the excess (if any) of the maximum amount which may 
     be contributed to such programs for the taxable year over the 
     amount contributed to such programs for the taxable year.
       ``(2) Special rule if contributions made to a state tuition 
     program or an education individual retirement account.--
     Notwithstanding paragraph (1), with respect to any 1 
     beneficiary, the amount contributed to a private qualified 
     tuition program for any taxable year shall be treated as 
     excess contributions if any amount is contributed during such 
     year for the benefit of such beneficiary to--
       ``(A) a qualified tuition program (as defined in section 
     529) that is established and maintained by a State or any 
     agency or instrumentality thereof, or
       ``(B) an education individual retirement account (as 
     defined in section 530).
       ``(3) Special rules.--The contributions described in 
     subsection (e)(2) shall not be taken into account.
       ``(4) Private qualified tuition program.--The term `private 
     qualified tuition program' means a qualified tuition program 
     (as defined in section 529) not established and maintained by 
     a State or any agency or instrumentality thereof.''.
       (5) Technical amendments.--
       (A) The text of each of the sections 72(e)(9), 529, 
     530(b)(2)(B), and 4973(e)(1)(B) is amended by striking 
     ``qualified State tuition program'' each place it appears and 
     inserting ``qualified tuition program''.
       (B)(i) The section heading of section 529 is amended to 
     read as follows:

     ``SEC. 529. QUALIFIED TUITION PROGRAMS.''.

       (ii) The item relating to section 529 in the table of 
     sections for part VIII of subchapter F of chapter 1 is 
     amended by striking ``State''.
       (e) Technical Corrections.--
       (1) Section 135(c)(3) is amended to read as follows:
       ``(3) Eligible educational institution.--The term `eligible 
     educational institution' has the meaning given such term by 
     section 529(e)(5).''.
       (2) Section 529(c)(3)(A) is amended by striking ``section 
     72(b)'' and inserting ``section 72''.
       (3) Section 529(e)(2) is amended to read as follows:
       ``(2) Member of family.--The term `member of the family' 
     means, with respect to any designated beneficiary--
       ``(A) the spouse of such beneficiary,
       ``(B) an individual who bears a relationship to such 
     beneficiary which is described in paragraphs (1) through (8) 
     of section 152(a), and
       ``(C) the spouse of any individual described in 
     subparagraph (B).''.
       (f) Effective Dates.--
       (1) In general.--Except as provided in paragraphs (2) and 
     (3), the amendments made by this section shall apply to 
     taxable years beginning after December 31, 1998.
       (2) Eligible educational institutions permitted to maintain 
     qualified tuition programs.--The amendments made by 
     subsection (d) shall apply to taxable years beginning after 
     December 31, 2005.
       (3) Technical corrections.--The amendments made by 
     subsection (e) shall take effect as if included in the 
     amendments made by section 211 of the Taxpayer Relief Act of 
     1997.

     SEC. 103. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED 
                   EDUCATIONAL ASSISTANCE.

       Section 127(d) (relating to termination of exclusion for 
     educational assistance programs) is amended by striking ``May 
     31, 2000'' and inserting ``December 31, 2002''.

     SEC. 104. ADDITIONAL INCREASE IN ARBITRAGE REBATE EXCEPTION 
                   FOR GOVERNMENTAL BONDS USED TO FINANCE 
                   EDUCATION FACILITIES.

       (a) In General.--Section 148(f)(4)(D)(vii) (relating to 
     increase in exception for bonds financing public school 
     capital expenditures) is amended by striking ``$5,000,000'' 
     the second place it appears and inserting ``$10,000,000''.
       (b) Effective Date.--The amendment made by subsection (a) 
     shall apply to obligations issued after December 31, 1998.

     SEC. 105. EXCLUSION OF CERTAIN AMOUNTS RECEIVED UNDER THE 
                   NATIONAL HEALTH CORPS SCHOLARSHIP PROGRAM AND 
                   THE F. EDWARD HEBERT ARMED FORCES HEALTH 
                   PROFESSIONS SCHOLARSHIP AND FINANCIAL 
                   ASSISTANCE PROGRAM.

       (a) In General.--Section 117(c) (relating to the exclusion 
     from gross income amounts received as a qualified 
     scholarship) is amended--
       (1) by striking ``Subsections (a)'' and inserting the 
     following:
       ``(1) In general.--Except as provided in paragraph (2), 
     subsections (a)''; and
       (2) by adding at the end the following new paragraph:
       ``(2) Exceptions.--Paragraph (1) shall not apply to any 
     amount received by an individual under--
       ``(A) the National Health Corps Scholarship Program under 
     section 338A(g)(1)(A) of the Public Health Service Act, or
       ``(B) the Armed Forces Health Professions Scholarship and 
     Financial Assistance program under subchapter I of chapter 
     105 of title 10, United States Code.''.
       (b) Effective Date.--The amendments made by subsection (a) 
     shall apply to amounts received in taxable years beginning 
     after December 31, 1993.

                          Subtitle B--Revenue

     SEC. 111. OVERRULING OF SCHMIDT BAKING COMPANY CASE.

       (a) In General.--Section 404(a) (relating to general rule) 
     is amended by adding at the end the following new paragraph:
       ``(11) Determinations relating to deferred compensation.--
     For purposes of determining under this section--
       ``(A) whether compensation of an employee is deferred 
     compensation, and
       ``(B) when deferred compensation is paid,
     no amount shall be treated as received by the employee, or 
     paid, until it is actually received by the employee.''.
       (b) Effective Date.--
       (1) In general.--The amendment made by subsection (a) shall 
     apply to taxable years ending after December 31, 2001.
       (2) Phase-in of increase.--In the case of the first taxable 
     year of the taxpayer ending after December 31, 2001, only 60 
     percent of the amount of the increase in tax resulting from 
     the amendment made by subsection (a) shall be taken into 
     account for purposes of sections 6654 and 6655 of the 
     Internal Revenue Code of 1986 (relating to failure to pay 
     estimated income tax).
       (3) Change in method of accounting.--In the case of any 
     taxpayer required by this section to change its method of 
     accounting for its first taxable year ending after December 
     31, 2001--
       (A) such change shall be treated as initiated by the 
     taxpayer,
       (B) such change shall be treated as made with the consent 
     of the Secretary of the Treasury, and
       (C) the net amount of the adjustments required to be taken 
     into account by the taxpayer under section 481 of the 
     Internal Revenue Code

[[Page H4554]]

     of 1986 shall be taken into account in such first taxable 
     year.

Subtitle C--Identification of Limited Tax Benefits Subject To Line Item 
                                  Veto

     SEC. 121. IDENTIFICATION OF LIMITED TAX BENEFITS SUBJECT TO 
                   LINE ITEM VETO.

       Section 1021(a)(3) of the Congressional Budget and 
     Impoundment Control Act of 1974 shall only apply to section 
     104(a) (relating to additional increase in arbitrage rebate 
     exception for governmental bonds used to finance education 
     facilities).

          TITLE II--MEASURES TO ENCOURAGE RESULTS IN TEACHING

     SEC. 201. STATE INCENTIVES FOR TEACHER TESTING AND MERIT PAY.

       (a) Short Title.--This section may be cited as the 
     ``Measures to Encourage Results in Teaching Act of 1998''.
       (b) Findings.--Congress makes the following findings:
       (1) All students deserve to be taught by well-educated, 
     competent, and qualified teachers.
       (2) More than ever before, education has and will continue 
     to become the ticket not only to economic success but to 
     basic survival. Students will not succeed in meeting the 
     demands of a knowledge-based, 21st century society and 
     economy if the students do not encounter more challenging 
     work in school. For future generations to have the 
     opportunities to achieve success the future generations will 
     need to have an education and a teacher workforce second to 
     none.
       (3) No other intervention can make the difference that a 
     knowledgeable, skillful teacher can make in the learning 
     process. At the same time, nothing can fully compensate for 
     weak teaching that, despite good intentions, can result from 
     a teacher's lack of opportunity to acquire the knowledge and 
     skill needed to help students master the curriculum.
       (4) The Federal Government established the Dwight D. 
     Eisenhower Professional Development Program in 1985 to ensure 
     that teachers and other educational staff have access to 
     sustained and high-quality professional development. This 
     ongoing development must include the ability to demonstrate 
     and judge the performance of teachers and other instructional 
     staff.
       (5) States should evaluate their teachers on the basis of 
     demonstrated ability, including tests of subject matter 
     knowledge, teaching knowledge, and teaching skill. States 
     should develop a test for their teachers and other 
     instructional staff with respect to the subjects taught by 
     the teachers and staff, and should administer the test every 
     3 to 5 years.
       (6) Evaluating and rewarding teachers with a compensation 
     system that supports teachers who become increasingly expert 
     in a subject area, are proficient in meeting the needs of 
     students and schools, and demonstrate high levels of 
     performance measured against professional teaching standards, 
     will encourage teachers to continue to learn needed skills 
     and broaden teachers' expertise, thereby enhancing education 
     for all students.
       (c) Purposes.--The purposes of this section are as follows:
       (1) To provide incentives for States to establish and 
     administer periodic teacher testing and merit pay programs 
     for elementary school and secondary school teachers.
       (2) To encourage States to establish merit pay programs 
     that have a significant impact on teacher salary scales.
       (3) To encourage programs that recognize and reward the 
     best teachers, and encourage those teachers that need to do 
     better.
       (d) State Incentives for Teacher Testing and Merit Pay.--
       (1) Amendments.--Title II of the Elementary and Secondary 
     Education Act of 1965 (20 U.S.C. 6601 et seq.) is amended--
       (A) by redesignating part D as part F;
       (B) by redesignating sections 2401 and 2402 as sections 
     2601 and 2602, respectively; and
       (C) by inserting after part C the following:

      ``PART D--STATE INCENTIVES FOR TEACHER TESTING AND MERIT PAY

     ``SEC. 2401. STATE INCENTIVES FOR TEACHER TESTING AND MERIT 
                   PAY.

       ``(a) State Awards.--Notwithstanding any other provision of 
     this title, from funds described in subsection (b) that are 
     made available for a fiscal year, the Secretary shall make an 
     award to each State that--
       ``(1) administers a test to each elementary school and 
     secondary school teacher in the State, with respect to the 
     subjects taught by the teacher, every 3 to 5 years; and
       ``(2) has an elementary school and secondary school teacher 
     compensation system that is based on merit.
       ``(b) Available Funding.--The amount of funds referred to 
     in subsection (a) that are available to carry out this 
     section for a fiscal year is 50 percent of the amount of 
     funds appropriated to carry out this title that are in excess 
     of the amount so appropriated for fiscal year 1999, except 
     that no funds shall be available to carry out this section 
     for any fiscal year for which--
       ``(1) the amount appropriated to carry out this title 
     exceeds $600,000,000; or
       ``(2) each of the several States is eligible to receive an 
     award under this section.
       ``(c) Award Amount.--A State shall receive an award under 
     this section in an amount that bears the same relation to the 
     total amount available for awards under this section for a 
     fiscal year as the number of States that are eligible to 
     receive such an award for the fiscal year bears to the total 
     number of all States so eligible for the fiscal year.
       ``(d) Use of Funds.--Funds provided under this section may 
     be used by States to carry out the activities described in 
     section 2207.
       ``(e) Definition of State.--For the purpose of this 
     section, the term `State' means each of the 50 States and the 
     District of Columbia.''.
       (2) Effective Date.--The amendments made by paragraph (1) 
     shall take effect on October 2, 1999.
       (e) Teacher Testing and Merit Pay.--
       (1) In General.--Notwithstanding any other provision of 
     law, a State may use Federal education funds--
       (A) to carry out a test of each elementary school or 
     secondary school teacher in the State with respect to the 
     subjects taught by the teacher; or
       (B) to establish a merit pay program for the teachers.
       (2) Definitions.--In this subsection, the terms 
     ``elementary school'' and ``secondary school'' have the 
     meanings given the terms in section 14101 of the Elementary 
     and Secondary Education Act of 1965 (20 U.S.C. 8801).

                TITLE III--EQUAL EDUCATIONAL OPPORTUNITY

     SEC. 301. EQUAL EDUCATIONAL OPPORTUNITY.

       Subsection (b) of section 6301 of the Elementary and 
     Secondary Education Act of 1965 (20 U.S.C. 7351) is amended--
       (1) in paragraph (7), by striking ``and'' after the 
     semicolon;
       (2) in paragraph (8), by striking the period and inserting 
     ``; and''; and
       (3) by adding at the end the following:
       ``(9) education reform projects that provide same gender 
     schools and classrooms, as long as comparable educational 
     opportunities are offered for students of both sexes.''.

                      TITLE IV--SENSE OF CONGRESS

     SEC. 401. FINDINGS.

       Congress makes the following findings:
       (1) The people of the United States know that effective 
     teaching takes place when the people of the United States 
     begin (A) helping children master basic academics, (B) 
     engaging and involving parents, (C) creating safe and orderly 
     classrooms, and (D) getting dollars to the classroom.
       (2) Our Nation's children deserve an educational system 
     which will provide opportunities to excel.
       (3) States and localities must spend a significant amount 
     of Federal education tax dollars applying for and 
     administering Federal education dollars.
       (4) Several States have reported that although the States 
     receive less than 10 percent of their education funding from 
     the Federal Government, more than 50 percent of their 
     paperwork is associated with those Federal dollars.
       (5) While it is unknown exactly what percentage of Federal 
     education dollars reaches the classroom, a recent audit of 
     New York City public schools found that only 43 percent of 
     their local education budget reaches the classroom; further, 
     it is thought that only 85 percent of funds administered by 
     the Department of Education for elementary and secondary 
     education reach the school district level; and even if 65 
     percent of Federal education funds reach the classroom, it 
     still means that billions of dollars are not directly spent 
     on children in the classroom.
       (6) American students are not performing up to their full 
     academic potential, despite the more than 760 Federal 
     education programs, which span 39 Federal agencies at the 
     price of nearly $100,000,000,000 annually.
       (7) According to the Digest of Education Statistics, in 
     1993 only $141,598,786,000 out of $265,285,370,000 spent on 
     elementary and secondary education was spent on instruction.
       (8) According to the National Center for Education 
     Statistics, in 1994 only 52 percent of staff employed in 
     public elementary and secondary school systems were teachers.
       (9) Too much of our Federal education funding is spent on 
     bureaucracy, and too little is spent on our Nation's youth.
       (10) Getting 95 percent of Department of Education 
     elementary and secondary education funds to the classroom 
     could provide approximately $2,094 in additional funding per 
     classroom across the United States.
       (11) More education funding should be put in the hands of 
     someone in a child's classroom who knows the child's name.
       (12) President Clinton has stated: ``We cannot ask the 
     American people to spend more on education until we do a 
     better job with the money we've got now.''.
       (13) President Clinton and Vice President Gore agree that 
     the reinventing of public education will not begin in 
     Washington but in communities across the United States and 
     that the people of the United States must ask fundamental 
     questions about how our Nation's public school systems' 
     dollars are spent.
       (14) President Clinton and Vice President Gore agree that 
     in an age of tight budgets, our Nation should be spending 
     public funds on teachers and children, not on unnecessary 
     overhead and bloated bureaucracy.

     SEC. 402. SENSE OF CONGRESS.

       It is the sense of Congress that the Department of 
     Education, States, and local educational agencies should work 
     together to ensure that not less than 95 percent of all funds 
     appropriated for the purpose of carrying out elementary and 
     secondary education programs administered by the Department 
     of Education is spent for our Nation's children in their 
     classrooms.

                      TITLE V--READING EXCELLENCE

     SEC. 501. SHORT TITLE.

       This title may be cited as the ``Reading Excellence Act''.

                       Subtitle A--Reading Grants

     SEC. 511. AMENDMENT TO ESEA FOR READING GRANTS.

       Title II of the Elementary and Secondary Education Act of 
     1965 (20 U.S.C. 6601 et seq.) is amended further by inserting 
     after part D (as inserted by section 201(d)(1)(C) of this 
     Act) the following:

[[Page H4555]]

                        ``PART E--READING GRANTS

     ``SEC. 2501. PURPOSE.

       ``The purposes of this part are as follows:
       ``(1) To teach every child to read in their early childhood 
     years--
       ``(A) as soon as they are ready to read; or
       ``(B) as soon as possible once they enter school, but not 
     later than 3d grade.
       ``(2) To improve the reading skills of students, and the 
     in-service instructional practices for teachers who teach 
     reading, through the use of findings from reliable, 
     replicable research on reading, including phonics.
       ``(3) To expand the number of high-quality family literacy 
     programs.
       ``(4) To reduce the number of children who are 
     inappropriately referred to special education due to reading 
     difficulties.

     ``SEC. 2502. DEFINITIONS.

       ``For purposes of this part:
       ``(1) Eligible professional development provider.--The term 
     `eligible professional development provider' means a provider 
     of professional development in reading instruction to 
     teachers that is based on reliable, replicable research on 
     reading.
       ``(2) Eligible research institution.--The term `eligible 
     research institution' means an institution of higher 
     education at which reliable, replicable research on reading 
     has been conducted.
       ``(3) Family literacy services.--The term `family literacy 
     services' means services provided to participants on a 
     voluntary basis that are of sufficient intensity in terms of 
     hours, and of sufficient duration, to make sustainable 
     changes in a family (such as eliminating or reducing welfare 
     dependency) and that integrate all of the following 
     activities:
       ``(A) Interactive literacy activities between parents and 
     their children.
       ``(B) Equipping parents to partner with their children in 
     learning.
       ``(C) Parent literacy training, including training that 
     contributes to economic self-sufficiency.
       ``(D) Appropriate instruction for children of parents 
     receiving parent literacy services.
       ``(4) Reading.--The term `reading' means the process of 
     comprehending the meaning of written text by depending on--
       ``(A) the ability to use phonics skills, that is, knowledge 
     of letters and sounds, to decode printed words quickly and 
     effortlessly, both silently and aloud;
       ``(B) the ability to use previously learned strategies for 
     reading comprehension; and
       ``(C) the ability to think critically about the meaning, 
     message, and aesthetic value of the text.
       ``(5) Reading readiness.--The term `reading readiness' 
     means activities that--
       ``(A) provide experience and opportunity for language 
     development;
       ``(B) create appreciation of the written word;
       ``(C) develop an awareness of printed language, the 
     alphabet, and phonemic awareness; and
       ``(D) develop an understanding that spoken and written 
     language is made up of phonemes, syllables, and words.
       ``(6) Reliable, replicable research.--The term `reliable, 
     replicable research' means objective, valid, scientific 
     studies that--
       ``(A) include rigorously defined samples of subjects that 
     are sufficiently large and representative to support the 
     general conclusions drawn;
       ``(B) rely on measurements that meet established standards 
     of reliability and validity;
       ``(C) test competing theories, where multiple theories 
     exist;
       ``(D) are subjected to peer review before their results are 
     published; and
       ``(E) discover effective strategies for improving reading 
     skills.

     ``SEC. 2503. GRANTS TO READING AND LITERACY PARTNERSHIPS.

       ``(a) Program Authorized.--The Secretary may make grants on 
     a competitive basis to reading and literacy partnerships for 
     the purpose of permitting such partnerships to make subgrants 
     under sections 2504 and 2505.
       ``(b) Reading and Literacy Partnerships.--
       ``(1) Composition.--
       ``(A) Required participants.--In order to receive a grant 
     under this section, a State shall establish a reading and 
     literacy partnership consisting of at least the following 
     participants:
       ``(i) The Governor of the State.
       ``(ii) The chief State school officer.
       ``(iii) The chairman and the ranking member of each 
     committee of the State legislature that is responsible for 
     education policy.
       ``(iv) A representative, selected jointly by the Governor 
     and the chief State school officer, of at least 1 local 
     educational agency that has at least 1 school that is 
     identified for school improvement under section 1116(c) in 
     the geographic area served by the agency.
       ``(v) A representative, selected jointly by the Governor 
     and the chief State school officer, of a community-based 
     organization working with children to improve their reading 
     skills, particularly a community-based organization using 
     volunteers.
       ``(B) Optional participants.--A reading and literacy 
     partnership may include additional participants, who shall be 
     selected jointly by the Governor and the chief State school 
     officer, which may include--
       ``(i) State directors of appropriate Federal or State 
     programs with a strong reading component;
       ``(ii) a parent of a public or private school student or a 
     parent who educates their child or children in their home;
       ``(iii) a teacher who teaches reading; or
       ``(iv) a representative of (I) an institution of higher 
     education operating a program of teacher preparation in the 
     State; (II) a local educational agency; (III) an eligible 
     research institution; (IV) a private nonprofit or for-profit 
     eligible professional development provider providing 
     instruction based on reliable, replicable research on 
     reading; (V) a family literacy service provider; (VI) an 
     adult education provider; (VII) a volunteer organization that 
     is involved in reading programs; or (VIII) a school or a 
     public library that offers reading or literacy programs for 
     children or families.
       ``(2) Agreement.--The contractual agreement that 
     establishes a reading and literacy partnership--
       ``(A) shall specify--
       ``(i) the nature and extent of the association among the 
     participants referred to in paragraph (1); and
       ``(ii) the roles and duties of each such participant; and
       ``(B) shall remain in effect during the entire grant period 
     proposed in the partnership's grant application under 
     subsection (e).
       ``(3) Functions.--Each reading and literacy partnership for 
     a State shall prepare and submit an application under 
     subsection (e) and, if the partnership receives a grant under 
     this section--
       ``(A) shall solicit applications for, and award, subgrants 
     under sections 2504 and 2505;
       ``(B) shall oversee the performance of the subgrants and 
     submit performance reports in accordance with subsection (h);
       ``(C) if sufficient grant funds are available under this 
     part--
       ``(i) work to enhance the capacity of agencies in the State 
     to disseminate reliable, replicable research on reading to 
     schools, classrooms, and providers of early education and 
     child care;
       ``(ii) facilitate the provision of technical assistance to 
     subgrantees under sections 2504 and 2505 by providing the 
     subgrantees information about technical assistance providers; 
     and
       ``(iii) build on, and promote coordination among, literacy 
     programs in the State, in order to increase their 
     effectiveness and to avoid duplication of their efforts; and
       ``(D) shall ensure that each local educational agency to 
     which the partnership makes a subgrant under section 2504 
     makes available, upon request and in an understandable and 
     uniform format, to any parent of a student attending any 
     school selected under section 2504(a)(2) in the geographic 
     area served by the agency, information regarding the 
     qualifications of the student's classroom teacher to provide 
     instruction in reading.
       ``(4) Fiscal agent.--The State educational agency shall act 
     as the fiscal agent for the reading and literacy partnership 
     for the purposes of receipt of funds from the Secretary, 
     disbursement of funds to subgrantees under sections 2504 and 
     2505, and accounting for such funds.
       ``(c) Preexisting Partnership.--If, before the date of the 
     enactment of the Reading Excellence Act, a State established 
     a consortium, partnership, or any other similar body, that 
     includes the Governor and the chief State school officer and 
     has, as a central part of its mission, the promotion of 
     literacy for children in their early childhood years through 
     the 3d grade, but that does not satisfy the requirements of 
     subsection (b)(1), the State may elect to treat that 
     consortium, partnership, or body as the reading and literacy 
     partnership for the State notwithstanding such subsection, 
     and the consortium, partnership, or body shall be considered 
     a reading and literacy partnership for purposes of the other 
     provisions of this part.
       ``(d) Multi-State Partnership Arrangements.--A reading and 
     literacy partnership that satisfies the requirements of 
     subsection (b) may join with other such partnerships in other 
     States to develop a single application that satisfies the 
     requirements of subsection (e) and identifies which State 
     educational agency, from among the States joining, shall act 
     as the fiscal agent for the multi-State arrangement. For 
     purposes of the other provisions of this part, any such 
     multi-State arrangement shall be considered to be a reading 
     and literacy partnership.
       ``(e) Applications.--A reading and literacy partnership 
     that desires to receive a grant under this section shall 
     submit an application to the Secretary at such time, in such 
     manner, and including such information as the Secretary may 
     require. The application--
       ``(1) shall describe how the partnership will ensure that 
     95 percent of the grant funds are used to make subgrants 
     under sections 2504 and 2505;
       ``(2) shall be integrated, to the maximum extent possible, 
     with State plans and programs under this Act, the Individuals 
     with Disabilities Education Act (20 U.S.C. 1400 et seq.), 
     and, to the extent appropriate, the Adult Education Act (20 
     U.S.C. 1201 et seq.);
       ``(3) shall describe how the partnership will ensure that 
     professional development funds available at the State and 
     local levels are used effectively to improve instructional 
     practices for reading and are based on reliable, replicable 
     research on reading;
       ``(4) shall describe--
       ``(A) the contractual agreement that establishes the 
     partnership, including at least the elements of the agreement 
     referred to in subsection (b)(2);
       ``(B) how the partnership will assess, on a regular basis, 
     the extent to which the activities undertaken by the 
     partnership and the partnership's subgrantees under this part 
     have been effective in achieving the purposes of this part;
       ``(C) what evaluation instruments the partnership will use 
     to determine the success of local educational agencies to 
     whom subgrants under sections 2504 and 2505 are made in 
     achieving the purposes of this part;
       ``(D) how subgrants made by the partnership under such 
     sections will meet the requirements of this part, including 
     how the partnership will ensure that subgrantees will use 
     practices based on reliable, replicable research on reading; 
     and
       ``(E) how the partnership will, to the extent practicable, 
     make grants to subgrantees in both rural and urban areas;

[[Page H4556]]

       ``(5) shall include an assurance that each local 
     educational agency to whom the partnership makes a subgrant 
     under section 2504--
       ``(A) will carry out family literacy programs based on the 
     Even Start family literacy model authorized under part B of 
     title I to enable parents to be their child's first and most 
     important teacher, and will make payments for the receipt of 
     technical assistance for the development of such programs;
       ``(B) will carry out programs to assist those kindergarten 
     students who are not ready for the transition to 1st grade, 
     particularly students experiencing difficulty with reading 
     skills;
       ``(C) will use supervised individuals (including tutors), 
     who have been appropriately trained using reliable, 
     replicable research on reading, to provide additional 
     support, before school, after school, on weekends, during 
     non-instructional periods of the school day, or during the 
     summer, for students in grades 1 through 3 who are 
     experiencing difficulty reading; and
       ``(D) will carry out professional development for the 
     classroom teacher and other appropriate teaching staff on the 
     teaching of reading based on reliable, replicable research on 
     reading; and
       ``(6) shall describe how the partnership--
       ``(A) will ensure that a portion of the grant funds that 
     the partnership receives in each fiscal year will be used to 
     make subgrants under section 2505; and
       ``(B) will make local educational agencies described in 
     section 2505(a)(1) aware of the availability of such 
     subgrants.
       ``(f) Peer Review Panel.--
       ``(1) Composition of peer review panel.--
       ``(A) In general.--The National Institute for Literacy, in 
     consultation with the National Research Council of the 
     National Academy of Sciences, the National Institute of Child 
     Health and Human Development, and the Secretary, shall 
     convene a panel to evaluate applications under this section. 
     At a minimum the panel shall include representatives of the 
     National Institute for Literacy, the National Research 
     Council of the National Academy of Sciences, the National 
     Institute of Child Health and Human Development, and the 
     Secretary.
       ``(B) Experts.--The panel shall include experts who are 
     competent, by virtue of their training, expertise, or 
     experience, to evaluate applications under this section, and 
     experts who provide professional development to teachers of 
     reading to children and adults, based on reliable, replicable 
     research on reading.
       ``(C) Limitation.--Not more than \1/3\ of the panel may be 
     composed of individuals who are employees of the Federal 
     Government.
       ``(2) Payment of fees and expenses of certain members.--The 
     Secretary shall use funds reserved under section 2510(b)(2) 
     to pay the expenses and fees of panel members who are not 
     employees of the Federal Government.
       ``(3) Duties of panel.--
       ``(A) Model application forms.--The peer review panel shall 
     develop a model application form for reading and literacy 
     partnerships desiring to apply for a grant under this 
     section. The peer review panel shall submit the model 
     application form to the Secretary for final approval.
       ``(B) Selection of applications.--
       ``(i) Recommendations of panel.--

       ``(I) In general.--The Secretary shall receive grant 
     applications from reading and literacy partnerships under 
     this section and shall provide the applications to the peer 
     review panel for evaluation. With respect to each 
     application, the peer review panel shall initially recommend 
     the application for funding or for disapproval.
       ``(II) Priority.--In recommending applications to the 
     Secretary, the panel shall give priority to applications from 
     States that have modified, are modifying, or provide an 
     assurance that not later than 1 year after receiving a grant 
     under this section the State will modify, State teacher 
     certification in the area of reading to reflect reliable, 
     replicable research, except that nothing in this part shall 
     be construed to establish a national system of teacher 
     certification.
       ``(III) Ranking of applications.--With respect to each 
     application recommended for funding, the panel shall assign 
     the application a rank, relative to other recommended 
     applications, based on the priority described in subclause 
     (II), the extent to which the application furthers the 
     purposes of this part, and the overall quality of the 
     application.
       ``(IV) Recommendation of amount.--With respect to each 
     application recommended for funding, the panel shall make a 
     recommendation to the Secretary with respect to the amount of 
     the grant that should be made.

       ``(ii) Secretarial selection.--

       ``(I) In general.--Subject to clause (iii), the Secretary 
     shall determine, based on the peer review panel's 
     recommendations, which applications from reading and literacy 
     partnerships shall receive funding and the amounts of such 
     grants. In determining grant amounts, the Secretary shall 
     take into account the total amount of funds available for all 
     grants under this section and the types of activities 
     proposed to be carried out by the partnership.
       ``(II) Effect of ranking by panel.--In making grants under 
     this section, the Secretary shall select applications 
     according to the ranking of the applications by the peer 
     review panel, except in cases where the Secretary determines, 
     for good cause, that a variation from that order is 
     appropriate.

       ``(iii) Minimum grant amounts.--Each reading and literacy 
     partnership selected to receive a grant under this section 
     shall receive an amount for each fiscal year that is not less 
     than $100,000.
       ``(g) Limitation on Administrative Expenses.--A reading and 
     literacy partnership that receives a grant under this section 
     may use not more than 3 percent of the grant funds for 
     administrative costs.
       ``(h) Reporting.--
       ``(1) In general.--A reading and literacy partnership that 
     receives a grant under this section shall submit performance 
     reports to the Secretary pursuant to a schedule to be 
     determined by the Secretary, but not more frequently than 
     annually. Such reports shall include--
       ``(A) the results of use of the evaluation instruments 
     referred to in subsection (e)(4)(C);
       ``(B) the process used to select subgrantees;
       ``(C) a description of the subgrantees receiving funds 
     under this part; and
       ``(D) with respect to subgrants under section 2504, the 
     model or models of reading instruction, based on reliable, 
     replicable research on reading, selected by subgrantees.
       ``(2) Provision to peer review panel.--The Secretary shall 
     provide the reports submitted under paragraph (1) to the peer 
     review panel convened under subsection (f). The panel shall 
     use such reports in recommending applications for funding 
     under this section.

     ``SEC. 2504. LOCAL READING IMPROVEMENT SUBGRANTS.

       ``(a) In General.--
       ``(1) Subgrants.--A reading and literacy partnership that 
     receives a grant under section 2503 shall make subgrants, on 
     a competitive basis, to local educational agencies that have 
     at least 1 school that is identified for school improvement 
     under section 1116(c) in the geographic area served by the 
     agency.
       ``(2) Role of local educational agencies.--A local 
     educational agency that receives a subgrant under this 
     section shall use the subgrant in a manner consistent with 
     this section to advance reform of reading instruction in any 
     school selected by the agency that--
       ``(A) is identified for school improvement under section 
     1116(c) at the time the agency receives the subgrant; and
       ``(B) has a contractual association with 1 or more 
     community-based organizations that have established a record 
     of effectiveness with respect to reading readiness, reading 
     instruction for children in kindergarten through 3d grade, 
     and early childhood literacy.
       ``(b) Grant Period.--A subgrant under this section shall be 
     for a period of 3 years and may not be revoked or terminated 
     on the ground that a school ceases, during the grant period, 
     to be identified for school improvement under section 
     1116(c).
       ``(c) Applications.--A local educational agency that 
     desires to receive a subgrant under this section shall submit 
     an application to the reading and literacy partnership at 
     such time, in such manner, and including such information as 
     the partnership may require. The application--
       ``(1) shall describe how the local educational agency will 
     work with schools selected by the agency under subsection 
     (a)(2) to select 1 or more models of reading instruction, 
     developed using reliable, replicable research on reading, as 
     a model for implementing and improving reading instruction by 
     all teachers and for all children in each of the schools 
     selected by the agency under such subsection and, where 
     appropriate, their parents;
       ``(2) shall select 1 or more models described in paragraph 
     (1), for the purpose described in such paragraph, and shall 
     describe each such selected model;
       ``(3) shall demonstrate that a person responsible for the 
     development of each such model, or a person with experience 
     or expertise about such model and its implementation, has 
     agreed to work with the applicant in connection with such 
     implementation and improvement efforts;
       ``(4) shall describe--
       ``(A) how the applicant will ensure that funds available 
     under this part, and funds available for reading for grades 
     kindergarten through grade 6 from other appropriate sources, 
     are effectively coordinated and, where appropriate, 
     integrated, with funds under this Act in order to improve 
     existing activities in the areas of reading instruction, 
     professional development, program improvement, parental 
     involvement, technical assistance, and other activities that 
     can help meet the purposes of this part; and
       ``(B) the amount of funds available for reading for grades 
     kindergarten through grade 6 from appropriate sources other 
     than this part, including title I (except that such 
     description shall not be required to include funds made 
     available under part B of title I unless the applicant has 
     established a contractual association in accordance with 
     subsection (d)(2) with an eligible entity under such part B), 
     the Individuals with Disabilities Education Act (20 U.S.C. 
     1400 et seq.), and any other law providing Federal financial 
     assistance for professional development for teachers of such 
     grades who teach reading, which will be used to help achieve 
     the purposes of this part;
       ``(5) shall describe the amount and nature of funds from 
     any other public or private sources, including funds received 
     under this Act and the Individuals with Disabilities 
     Education Act (20 U.S.C. 1400 et seq.), that will be combined 
     with funds received under the subgrant;
       ``(6) shall include an assurance that the applicant--
       ``(A) will carry out family literacy programs based on the 
     Even Start family literacy model authorized under part B of 
     title I to enable parents to be their child's first and most 
     important teacher, will make payments for the receipt of 
     technical assistance for the development of such programs;
       ``(B) will carry out programs to assist those kindergarten 
     students who are not ready for the transition to 1st grade, 
     particularly students experiencing difficulty with reading 
     skills;
       ``(C) will use supervised individuals (including tutors), 
     who have been appropriately trained using reliable, 
     replicable research on reading, to provide additional 
     support, before school, after school, on weekends, during 
     non-instructional periods of the school day, or during the 
     summer, for students in grades 1 through 3 who are 
     experiencing difficulty reading; and

[[Page H4557]]

       ``(D) will carry out professional development for the 
     classroom teacher and other teaching staff on the teaching of 
     reading based on reliable, replicable research on reading;
       ``(7) shall describe how the local educational agency 
     provides instruction in reading to children who have not been 
     determined to be a child with a disability (as defined in 
     section 602 of the Individuals with Disabilities Education 
     Act (20 U.S.C. 1401)), pursuant to section 614(b)(5) of such 
     Act (20 U.S.C. 1414(a)(5)), because of a lack of instruction 
     in reading; and
       ``(8) shall indicate the amount of the subgrant funds (if 
     any) that the applicant will use to carry out the duties 
     described in section 2505(b)(2).
       ``(d) Priority.--In approving applications under this 
     section, a reading and literacy partnership shall give 
     priority to an application submitted by an applicant who 
     demonstrates that the applicant has established--
       ``(1) a contractual association with 1 or more Head Start 
     programs under the Head Start Act (42 U.S.C. 9801 et seq.) 
     under which--
       ``(A) the Head Start program agrees to select the same 
     model or models of reading instruction, as a model for 
     implementing and improving the reading readiness of children 
     participating in the program, as was selected by the 
     applicant; and
       ``(B) the applicant agrees--
       ``(i) to share with the Head Start program an appropriate 
     amount of the applicant's information resources with respect 
     to the model, such as curricula materials; and
       ``(ii) to train personnel from the Head Start program;
       ``(2) a contractual association with 1 or more State- or 
     federally-funded preschool programs, or family literacy 
     programs, under which--
       ``(A) the program agrees to select the same model or models 
     of reading instruction, as a model for implementing and 
     improving reading instruction in the program's activities, as 
     was selected by the applicant; and
       ``(B) the applicant agrees to train personnel from the 
     program who work with children and parents in schools 
     selected under subsection (a)(2); or
       ``(3) a contractual association with 1 or more public 
     libraries providing reading or literacy services to preschool 
     children, or preschool children and their families, under 
     which--
       ``(A) the library agrees to select the same model or models 
     of reading instruction, as a model for implementing and 
     improving reading instruction in the library's reading or 
     literacy programs, as was selected by the applicant; and
       ``(B) the applicant agrees to train personnel, including 
     volunteers, from such programs who work with preschool 
     children, or preschool children and their families, in 
     schools selected under subsection (a)(2).
       ``(e) Use of Funds.--
       ``(1) In general.--Subject to paragraph (2), an applicant 
     who receives a subgrant under this section may use the 
     subgrant funds to carry out activities that are authorized by 
     this part and described in the subgrant application, 
     including the following:
       ``(A) Making reasonable payments for technical and other 
     assistance to a person responsible for the development of a 
     model of reading instruction, or a person with experience or 
     expertise about such model and its implementation, who has 
     agreed to work with the recipient in connection with the 
     implementation of the model.
       ``(B) Carrying out a contractual agreement described in 
     subsection (d).
       ``(C) Professional development (including training of 
     volunteers), purchase of curricular and other supporting 
     materials, and technical assistance.
       ``(D) Providing, on a voluntary basis, training to parents 
     of children enrolled in a school selected under subsection 
     (a)(2) on how to help their children with school work, 
     particularly in the development of reading skills. Such 
     training may be provided directly by the subgrant recipient, 
     or through a grant or contract with another person. Such 
     training shall be consistent with reading reforms taking 
     place in the school setting.
       ``(E) Carrying out family literacy programs based on the 
     Even Start family literacy model authorized under part B of 
     title I to enable parents to be their child's first and most 
     important teacher, and making payments for the receipt of 
     technical assistance for the development of such programs.
       ``(F) Providing instruction for parents of children 
     enrolled in a school selected under subsection (a)(2), and 
     others who volunteer to be reading tutors for such children, 
     in the instructional practices based on reliable, replicable 
     research on reading used by the applicant.
       ``(G) Programs to assist those kindergarten students 
     enrolled in a school selected under subsection (a)(2) who are 
     not ready for the transition to 1st grade, particularly 
     students experiencing difficulty with reading skills.
       ``(H) Providing, for students who are enrolled in grades 1 
     through 3 in a school selected under subsection (a)(2) and 
     are experiencing difficulty reading, additional support 
     before school, after school, on weekends, during non-
     instructional periods of the school day, or during the 
     summer, using supervised individuals (including tutors) who 
     have been appropriately trained using reliable, replicable 
     research on reading.
       ``(I) Carrying out the duties described in section 
     2505(b)(2) for children enrolled in a school selected under 
     subsection (a)(2).
       ``(J) Providing reading assistance to children who have not 
     been determined to be a child with a disability (as defined 
     in section 602 of the Individuals with Disabilities Education 
     Act (20 U.S.C. 1401)), pursuant to section 614(b)(5) of such 
     Act (20 U.S.C. 1414(b)(5)), because of a lack of instruction 
     in reading.
       ``(2) Limitation on administrative expenses.--A recipient 
     of a subgrant under this section may use not more than 3 
     percent of the subgrant funds for administrative costs.
       ``(f) Training Nonrecipients.--A recipient of a subgrant 
     under this section may train, on a fee-for-service basis, 
     personnel who are from schools, or local educational 
     agencies, that are not receiving such a subgrant in the 
     instructional practices based on reliable, replicable 
     research on reading used by the recipient. Such a non-
     recipient school may use funds received under title I, and 
     other appropriate Federal funds used for reading instruction, 
     to pay for such training, to the extent consistent with the 
     law under which such funds were received.

     ``SEC. 2505. TUTORIAL ASSISTANCE SUBGRANTS.

       ``(a) In General.--
       ``(1) Subgrants.--A reading and literacy partnership that 
     receives a grant under section 2503 shall make subgrants on a 
     competitive basis to--
       ``(A) local educational agencies that have at least 1 
     school in the geographic area served by the agency that--
       ``(i) is located in an area designated as an empowerment 
     zone under part I of subchapter U of chapter 1 of the 
     Internal Revenue Code of 1986; or
       ``(ii) is located in an area designated as an enterprise 
     community under part I of subchapter U of chapter 1 of the 
     Internal Revenue Code of 1986; or
       ``(B) in the case of local educational agencies that do not 
     have any such empowerment zone or enterprise community in the 
     State in which the agency is located, local educational 
     agencies that have at least 1 school that is identified for 
     school improvement under section 1116(c) in the geographic 
     area served by the agency.
       ``(2) Applications.--A local educational agency that 
     desires to receive a subgrant under this section shall submit 
     an application to the reading and literacy partnership at 
     such time, in such manner, and including such information as 
     the partnership may require. The application shall include an 
     assurance that the agency will use the subgrant funds to 
     carry out the duties described in subsection (b) for children 
     enrolled in 1 or more schools selected by the agency and 
     described in paragraph (1).
       ``(b) Use of Funds.--
       ``(1) In general.--A local educational agency that receives 
     a subgrant under this section shall carry out, using the 
     funds provided under the subgrant, each of the duties 
     described in paragraph (2).
       ``(2) Duties.--The duties described in this paragraph are 
     the provision of tutorial assistance in reading to children 
     who have difficulty reading, using instructional practices 
     based on the principles of reliable, replicable research, 
     through the following:
       ``(A) The promulgation of a set of objective criteria, 
     pertaining to the ability of a tutorial assistance provider 
     successfully to provide tutorial assistance in reading, that 
     will be used to determine in a uniform manner, at the 
     beginning of each school year, the eligibility of tutorial 
     assistance providers, subject to the succeeding subparagraphs 
     of this paragraph, to be included on the list described in 
     subparagraph (B) (and thereby be eligible to enter into a 
     contract pursuant to subparagraph (F)).
       ``(B) The promulgation, maintenance, and approval of a list 
     of tutorial assistance providers eligible to enter into a 
     contract pursuant to subparagraph (F) who--
       ``(i) have established a record of effectiveness with 
     respect to reading readiness, reading instruction for 
     children in kindergarten through 3d grade, and early 
     childhood literacy;
       ``(ii) are located in a geographic area convenient to the 
     school or schools attended by the children who will be 
     receiving tutorial assistance from the providers; and
       ``(iii) are capable of providing tutoring in reading to 
     children who have difficulty reading, using instructional 
     practices based on the principles of reliable, replicable 
     research and consistent with the instructional methods used 
     by the school the child attends.
       ``(C) The development of procedures (i) for the receipt of 
     applications for tutorial assistance, from parents who are 
     seeking such assistance for their child or children, that 
     select a tutorial assistance provider from the list described 
     in subparagraph (B) with whom the child or children will 
     enroll, for tutoring in reading; and (ii) for considering 
     children for tutorial assistance who are identified under 
     subparagraph (D) and for whom no application has been 
     submitted, provided that such procedures are in accordance 
     with this paragraph and give such parents the right to select 
     a tutorial assistance provider from the list referred to in 
     subparagraph (B), and shall permit a local educational agency 
     to recommend a tutorial assistance provider from the list 
     under subparagraph (B) in a case where a parent asks for 
     assistance in the making of such selection.
       ``(D) The development of a selection process for providing 
     tutorial assistance in accordance with this paragraph that 
     limits the provision of assistance to children identified, by 
     the school the child attends, as having difficulty reading, 
     including difficulty mastering essential phonic, decoding, or 
     vocabulary skills. In the case of a child included in the 
     selection process for whom no application has been submitted 
     by a parent of the child, the child's eligibility for receipt 
     of tutorial assistance shall be determined under the same 
     procedures, timeframe, and criteria for consideration as is 
     used to determine the eligibility of a child whose parent has 
     submitted such an application. Such local educational agency 
     shall apply the provisions of subparagraphs (F) and (G) to a 
     tutorial assistance provider selected for a child whose 
     parent has not

[[Page H4558]]

     submitted an application pursuant to subparagraph (C)(i) in 
     the same manner as the provisions are applied to a provider 
     selected in an application submitted pursuant to subparagraph 
     (C)(i).
       ``(E) The development of procedures for selecting children 
     to receive tutorial assistance, to be used in cases where 
     insufficient funds are available to provide assistance with 
     respect to all children identified by a school under 
     subparagraph (D) that--
       ``(i) gives priority to children who are determined, 
     through State or local reading assessments, to be most in 
     need of tutorial assistance; and
       ``(ii) gives priority, in cases where children are 
     determined, through State or local reading assessments, to be 
     equally in need of tutorial assistance, based on a random 
     selection principle.
       ``(F) The development of a methodology by which payments 
     are made directly to tutorial assistance providers who are 
     identified and selected pursuant to subparagraphs (C), (D), 
     and (E). Such methodology shall include the making of a 
     contract, consistent with State and local law, between the 
     tutorial assistance provider and the local educational agency 
     carrying out this paragraph. Such contract--
       ``(i) shall contain specific goals and timetables with 
     respect to the performance of the tutorial assistance 
     provider;
       ``(ii) shall require the tutorial assistance provider to 
     report to the parent and the local educational agency on the 
     provider's performance in meeting such goals and timetables; 
     and
       ``(iii) shall contain provisions with respect to the making 
     of payments to the tutorial assistance provider by the local 
     educational agency.
       ``(G) The development of procedures under which the local 
     educational agency carrying out this paragraph--
       ``(i) will ensure oversight of the quality and 
     effectiveness of the tutorial assistance provided by each 
     tutorial assistance provider that is selected for funding;
       ``(ii) will remove from the list under subparagraph (B) 
     ineffective and unsuccessful providers (as determined by the 
     local educational agency based upon the performance of the 
     provider with respect to the goals and timetables contained 
     in the contract between the agency and the provider under 
     subparagraph (F));
       ``(iii) will provide to each parent of a child identified 
     under subparagraph (D) who requests such information for the 
     purpose of selecting a tutorial assistance provider for the 
     child, in a comprehensible format, information with respect 
     to the quality and effectiveness of the tutorial assistance 
     referred to in clause (i); and
       ``(iv) will ensure that each school identifying a child 
     under subparagraph (D) will provide upon request, to a parent 
     of the child, assistance in selecting, from among the 
     tutorial assistance providers who are included on the list 
     described in subparagraph (B), the provider who is best able 
     to meet the needs of the child.
       ``(c) Definition.--For the purpose of this section the term 
     `parent' includes a legal guardian.

     ``SEC. 2506. PROGRAM EVALUATION.

       ``(a) In General.--From funds reserved under section 
     2510(b)(1), the Secretary shall conduct a national assessment 
     of the programs under this part. In developing the criteria 
     for the assessment, the Secretary shall receive 
     recommendations from the peer review panel convened under 
     section 2503(f).
       ``(b) Submission to Peer Review Panel.--The Secretary shall 
     submit the findings from the assessment under subsection (a) 
     to the peer review panel convened under section 2503(f).

     ``SEC. 2507. INFORMATION DISSEMINATION.

       ``(a) In General.--From funds reserved under section 
     2510(b)(2), the National Institute for Literacy shall 
     disseminate information on reliable, replicable research on 
     reading and information on subgrantee projects under section 
     2504 or 2505 that have proven effective. At a minimum, the 
     institute shall disseminate such information to all 
     recipients of Federal financial assistance under titles I and 
     VII, the Head Start Act (42 U.S.C. 9801 et seq.), the 
     Individuals with Disabilities Education Act (20 U.S.C. 1400 
     et seq.), and the Adult Education Act (20 U.S.C. 1201 et 
     seq.).
       ``(b) Coordination.--In carrying out this section, the 
     National Institute for Literacy--
       ``(1) shall use, to the extent practicable, information 
     networks developed and maintained through other public and 
     private persons, including the Secretary, the National Center 
     for Family Literacy, and the Readline Program;
       ``(2) shall work in conjunction with any panel convened by 
     the National Institute of Child Health and Human Development 
     and the Secretary, and any panel convened by the Office of 
     Educational Research and Improvement to assess the current 
     status of research-based knowledge on reading development, 
     including the effectiveness of various approaches to teaching 
     children to read, with respect to determining the criteria by 
     which the National Institute for Literacy judges reliable, 
     replicable research and the design of strategies to 
     disseminate such information; and
       ``(3) shall assist any reading and literacy partnership 
     selected to receive a grant under section 2503, and that 
     requests such assistance--
       ``(A) in determining whether applications for subgrants 
     submitted to the partnership meet the requirements of this 
     part relating to reliable, replicable research on reading; 
     and
       ``(B) in the development of subgrant application forms.

     ``SEC. 2508. STATE EVALUATIONS.

       ``(a) In General.--Each reading and literacy partnership 
     that receives a grant under this part shall reserve not more 
     than 2 percent of such grant funds for the purpose of 
     evaluating the success of the partnership's subgrantees in 
     meeting the purposes of this part. At a minimum, the 
     evaluation shall measure the extent to which students who are 
     the intended beneficiaries of the subgrants made by the 
     partnership have improved their reading.
       ``(b) Contract.--A reading and literacy partnership shall 
     carry out the evaluation under this section by entering into 
     a contract with an eligible research institution under which 
     the institution will perform the evaluation.
       ``(c) Submission.--A reading and literacy partnership shall 
     submit the findings from the evaluation under this section to 
     the Secretary and the peer review panel convened under 
     section 2503(f). The Secretary and the peer review panel 
     shall submit a summary of the findings from the evaluations 
     under this subsection to the appropriate committees of the 
     Congress, including the Education and the Workforce Committee 
     of the House of Representatives.

     ``SEC. 2509. PARTICIPATION OF CHILDREN ENROLLED IN PRIVATE 
                   SCHOOLS.

       ``Each reading and literacy partnership that receives funds 
     under this part shall provide for, or ensure that subgrantees 
     provide for, the participation of children in private schools 
     in the activities and services assisted under this part in 
     the same manner as the children participate in activities and 
     services pursuant to sections 2503, 2504, 2505, and 2506.

     ``SEC. 2510. AUTHORIZATION OF APPROPRIATIONS; RESERVATIONS 
                   FROM APPROPRIATIONS; APPLICABILITY; SUNSET.

       ``(a) Authorization.--There are authorized to be 
     appropriated to carry out this part $210,000,000 for fiscal 
     years 1999, 2000, and 2001.
       ``(b) Reservations.--From the amount appropriated under 
     subsection (a) for each fiscal year, the Secretary--
       ``(1) shall reserve 1.5 percent to carry out section 
     2506(a);
       ``(2) shall reserve $5,075,000 to carry out sections 
     2503(f)(2) and 2507, of which $5,000,000 shall be reserved 
     for section 2507; and
       ``(3) shall reserve $10,000,000 to carry out section 
     1202(c).
       ``(c) Applicability.--Part E shall not apply to this part.
       ``(d) Sunset.--Notwithstanding section 422(a) of the 
     General Education Provisions Act (20 U.S.C. 1226a(a)), this 
     part is repealed, effective September 30, 2001, and is not 
     subject to extension under such section.''.
     Subtitle B--Amendments to Even Start Family Literacy Programs

     SEC. 521. RESERVATION FOR GRANTS.

       Section 1202(c) of the Elementary and Secondary Education 
     Act of 1965 (20 U.S.C. 6362(c)) is amended to read as 
     follows:
       ``(c) Reservation for Grants.--
       ``(1) Grants authorized.--From funds reserved under section 
     2510(b)(3), the Secretary shall award grants, on a 
     competitive basis, to States to enable such States to plan 
     and implement, statewide family literacy initiatives to 
     coordinate and integrate existing Federal, State, and local 
     literacy resources consistent with the purposes of this part. 
     Such coordination and integration shall include coordination 
     and integration of funds available under the Adult Education 
     Act (20 U.S.C. 1201 et seq.), Head Start (42 U.S.C. 9801 et 
     seq.), this part, part A of this title, and part A of title 
     IV of the Social Security Act.
       ``(2) Consortia.--
       ``(A) Establishment.--To receive a grant under this 
     subsection, a State shall establish a consortium of State-
     level programs under the following laws:
       ``(i) This title.
       ``(ii) The Head Start Act.
       ``(iii) The Adult Education Act.
       ``(iv) All other State-funded preschool programs and 
     programs providing literacy services to adults.
       ``(B) Plan.--To receive a grant under this subsection, the 
     consortium established by a State shall create a plan to use 
     a portion of the State's resources, derived from the programs 
     referred to in subparagraph (A), to strengthen and expand 
     family literacy services in such State.
       ``(C) Coordination with title ii.--The consortium shall 
     coordinate its activities with the activities of the reading 
     and literacy partnership for the State established under 
     section 2503, if the State receives a grant under such 
     section.
       ``(3) Reading instruction.--Statewide family literacy 
     initiatives implemented under this subsection shall base 
     reading instruction on reliable, replicable research on 
     reading (as such terms are defined in section 2502).
       ``(4) Technical assistance.--The Secretary shall provide, 
     directly or through a grant or contract with an organization 
     with experience in the development and operation of 
     successful family literacy services, technical assistance to 
     States receiving a grant under this subsection.
       ``(5) Matching requirement.--The Secretary shall not make a 
     grant to a State under this subsection unless the State 
     agrees that, with respect to the costs to be incurred by the 
     eligible consortium in carrying out the activities for which 
     the grant was awarded, the State will make available non-
     Federal contributions in an amount equal to not less than the 
     Federal funds provided under the grant.''.

     SEC. 522. DEFINITIONS.

       Section 1202(e) of the Elementary and Secondary Education 
     Act of 1965 (20 U.S.C. 6362(e)) is amended--
       (1) by redesignating paragraphs (3) and (4) as paragraphs 
     (4) and (5), respectively; and
       (2) by inserting after paragraph (2) the following:
       ``(3) the term `family literacy services' means services 
     provided to participants on a voluntary basis that are of 
     sufficient intensity in terms of hours, and of sufficient 
     duration, to make sustainable changes in a family (such as 
     eliminating or reducing welfare dependency) and that 
     integrate all of the following activities:

[[Page H4559]]

       ``(A) Interactive literacy activities between parents and 
     their children.
       ``(B) Equipping parents to partner with their children in 
     learning.
       ``(C) Parent literacy training, including training that 
     contributes to economic self-sufficiency.
       ``(D) Appropriate instruction for children of parents 
     receiving parent literacy services.''.

     SEC. 523. EVALUATION.

       Section 1209 of the Elementary and Secondary Education Act 
     of 1965 (20 U.S.C. 6369) is amended--
       (1) in paragraph (1), by striking ``and'' at the end;
       (2) in paragraph (2), by striking the period at the end and 
     inserting ``; and''; and
       (3) by adding at the end the following:
       ``(3) to provide States and eligible entities receiving a 
     subgrant under this part, directly or through a grant or 
     contract with an organization with experience in the 
     development and operation of successful family literacy 
     services, technical assistance to ensure local evaluations 
     undertaken under section 1205(10) provide accurate 
     information on the effectiveness of programs assisted under 
     this part.''.

     SEC. 524. INDICATORS OF PROGRAM QUALITY.

       (a) In General.--The Elementary and Secondary Education Act 
     of 1965 (20 U.S.C. 6301 et seq.) is amended--
       (1) by redesignating section 1210 as section 1212; and
       (2) by inserting after section 1209 the following:

     ``SEC. 1210. INDICATORS OF PROGRAM QUALITY.

       ``Each State receiving funds under this part shall develop, 
     based on the best available research and evaluation data, 
     indicators of program quality for programs assisted under 
     this part. Such indicators shall be used to monitor, 
     evaluate, and improve such programs within the State. Such 
     indicators shall include the following:
       ``(1) With respect to eligible participants in a program 
     who are adults--
       ``(A) achievement in the areas of reading, writing, English 
     language acquisition, problem solving, and numeracy;
       ``(B) receipt of a secondary school diploma or its 
     recognized equivalent;
       ``(C) entry into a postsecondary school, a job retraining 
     program, or employment or career advancement, including the 
     military; and
       ``(D) such other indicators as the State may develop.
       ``(2) With respect to eligible participants in a program 
     who are children--
       ``(A) improvement in ability to read on grade level or 
     reading readiness;
       ``(B) school attendance;
       ``(C) grade retention and promotion; and
       ``(D) such other indicators as the State may develop.''.
       (b) State Level Activities.--Section 1203(a) of the 
     Elementary and Secondary Education Act of 1965 (20 U.S.C. 
     6363(a)) is amended--
       (1) in paragraph (1), by striking ``and'' at the end;
       (2) in paragraph (2), by striking the period at the end and 
     inserting ``; and''; and
       (3) by adding at the end the following:
       ``(3) carrying out section 1210.''.
       (c) Award of Subgrants.--Paragraphs (3) and (4) of section 
     1208(b) of the Elementary and Secondary Education Act of 1965 
     (20 U.S.C. 6368) are amended to read as follows:
       ``(3) Continuing eligibility.--In awarding subgrant funds 
     to continue a program under this part for the second, third, 
     or fourth year, the State educational agency shall evaluate 
     the program based on the indicators of program quality 
     developed by the State under section 1210. Such evaluation 
     shall take place after the conclusion of the startup period, 
     if any.
       ``(4) Insufficient progress.--The State educational agency 
     may refuse to award subgrant funds if such agency finds that 
     the eligible entity has not sufficiently improved the 
     performance of the program, as evaluated based on the 
     indicators of program quality developed by the State under 
     section 1210, after--
       ``(A) providing technical assistance to the eligible 
     entity; and
       ``(B) affording the eligible entity notice and an 
     opportunity for a hearing.''.

     SEC. 525. RESEARCH.

       The Elementary and Secondary Education Act of 1965 (20 
     U.S.C. 6301 et seq.) is amended further by inserting after 
     section 1210 (as inserted by section 524(a)(2) of this Act) 
     the following:

     ``SEC. 1211. RESEARCH.

       ``(a) In General.--The Secretary shall carry out, through 
     grant or contract, research into the components of successful 
     family literacy services. The purpose of the research shall 
     be--
       ``(1) to improve the quality of existing programs assisted 
     under this part or other family literacy programs carried out 
     under this Act or the Adult Education Act (20 U.S.C. 1201 et 
     seq.); and
       ``(2) to develop models for new programs to be carried out 
     under this Act or the Adult Education Act.
       ``(b) Dissemination.--The National Institute for Literacy 
     shall disseminate, pursuant to section 2507, the results of 
     the research described in subsection (a) to States and 
     recipients of subgrants under this part.''.
                   TITLE VI--MISCELLANEOUS PROVISIONS

     SEC. 601. MULTILINGUALISM STUDY.

       (a) Findings.--Congress finds that--
       (1) even though all residents of the United States should 
     be proficient in English, without regard to their country of 
     birth, it is also of vital importance to the competitiveness 
     of the United States that those residents be encouraged to 
     learn other languages; and
       (2) education is the primary responsibility of State and 
     local governments and communities, and these entities are 
     responsible for developing policies in this subject area.
       (b) Resident of the United States Defined.--In this 
     section, the term ``resident of the United States'' means an 
     individual who resides in the United States, other than an 
     alien who is not lawfully present in the United States.
       (c) Study.--
       (1) In general.--Not later than 180 days after the date of 
     enactment of this Act, the Comptroller General of the United 
     States (referred to in this section as the ``Comptroller 
     General'') shall conduct a study of multilingualism in the 
     United States in accordance with this section.
       (2) Requirements.--
       (A) In general.--The study conducted under this section 
     shall ascertain--
       (i) the percentage of residents in the United States who 
     are proficient in English and at least 1 other language;
       (ii) the predominant language other than English in which 
     residents referred to in clause (i) are proficient;
       (iii) the percentage of the residents described in clause 
     (i) who were born in a foreign country;
       (iv) the percentage of the residents described in clause 
     (i) who were born in the United States;
       (v) the percentage of the residents described in clause 
     (iv) who are second-generation residents of the United 
     States; and
       (vi) the percentage of the residents described in clause 
     (iv) who are third-generation residents of the United States.
       (B) Age-specific categories.--The study under this section 
     shall, with respect to the residents described in 
     subparagraph (A)(i), determine the number of those residents 
     in each of the following categories:
       (i) Residents who have not attained the age of 12.
       (ii) Residents who have attained the age of 12, but have 
     not attained the age of 18.
       (iii) Residents who have attained the age of 18, but have 
     not attained the age of 50.
       (iv) Residents who have attained the age of 50.
       (C) Federal programs.--In conducting the study under this 
     section, the Comptroller General shall establish a list of 
     each Federal program that encourages multilingualism with 
     respect to any category of residents described in 
     subparagraph (B).
       (D) Comparisons.--In conducting the study under this 
     section, the Comptroller General shall compare the 
     multilingual population described in subparagraph (A) with 
     the multilingual populations of foreign countries--
       (i) in the Western hemisphere; and
       (ii) in Asia.
       (d) Report.--Upon completion of the study under this 
     section, the Comptroller General shall prepare, and submit to 
     Congress, a report that contains the results of the study 
     conducted under this section, and such findings and 
     recommendations as the Comptroller General determines to be 
     appropriate.

     SEC. 602. SAFER SCHOOLS.

       (a) Short Title.--This section may be cited as the ``Safer 
     Schools Act of 1998''.
       (b) Amendment.--Section 14601 of the Gun-Free Schools Act 
     of 1994 (20 U.S.C. 8921) is amended by adding at the end the 
     following new subsection:
       ``(g) For the purposes of this section, a weapon that has 
     been determined to have been brought to a school by a student 
     shall be admissible as evidence in any internal school 
     disciplinary proceeding (related to an expulsion under this 
     section).''.

     SEC. 603. STUDENT IMPROVEMENT INCENTIVE AWARDS.

       Section 6201 of the Elementary and Secondary Education Act 
     of 1965 (20 U.S.C. 7331) is amended--
       (1) in subsection (a)--
       (A) in paragraph (1)(C), by striking ``and'' after the 
     semicolon;
       (B) in paragraph (2), by striking the period and inserting 
     ``; and''; and
       (C) by adding at the end the following:
       ``(3) student improvement incentive awards described in 
     subsection (c).''; and
       (2) by adding at the end the following:
       ``(c) Student Improvement Incentive Awards.--
       ``(1) Awards.--A State educational agency may use funds 
     made available for State use under this title to make awards 
     to public schools in the State that are determined to be 
     outstanding schools pursuant to a statewide assessment 
     described in paragraph (2).
       ``(2) Statewide assessment.--The statewide assessment 
     referred to in paragraph (1)--
       ``(A) shall--
       ``(i) determine the educational progress of students 
     attending public schools within the State; and
       ``(ii) allow for an objective analysis of the assessment on 
     a school-by-school basis; and
       ``(B) may involve exit exams.''.

       And the Senate agree to the same.
     William Archer,
     Bill Goodling,
     Dick Armey,
                                Managers on the Part of the House.

     William V. Roth,
     Connie Mack,
     Dan Coats,
     Slade Gorton,
     Paul Coverdell,
                               Managers on the Part of the Senate.

       JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE

       The managers on the part of the House and the Senate at the 
     conference on the disagreeing votes of the two Houses on the 
     amendment of the Senate of the bill (H.R. 2646) to amend the 
     Internal Revenue Code of 1986 to allow tax-free expenditures 
     from education individual retirement accounts for elementary 
     and secondary school expenses, to increase the maximum annual 
     amount of contributions to such accounts, and for other

[[Page H4560]]

     purposes, submit the following joint statement to the House 
     and the Senate in explanation of the effect of the action 
     agreed upon by the managers and recommended in the 
     accompanying conference report.

                                CONTENTS

     I. Revenue Provisions
       A. Modifications to Education Individual Retirement 
         Accounts (IRAs) (sec. 2 of the House bill and sec. 101 of 
         the Senate amendment)
       B. Exclusion from Gross Income of Education Distributions 
         from Qualified Tuition Programs (sec. 104 of the Senate 
         amendment)
       C. Extension of Exclusion for Employer-Provided Educational 
         Assistance (sec. 105 of the Senate amendment)
       D. Arbitrage Rebate Exception for Governmental Bonds of 
         Certain Small Governments (sec. 106 of the Senate 
         amendment)
       E. Exclusion of Certain Amounts Received under the National 
         Health Corps Scholarship Program and the F. Edward Hebert 
         Armed Forces Health Professions Scholarship and Financial 
         Assistance Program (sec. 107 of the Senate amendment)
       F. Tax-Exempt Bonds for Privately Owned Public Schools 
         (sec. 108 of the Senate amendment)
       G. Employer Deductions for Vacation and Severance Pay (sec. 
         3(a) of the House bill and sec. 201 of the Senate 
         amendment)
       H. Modification to Foreign Tax Credit Carryback and 
         Carryover Periods (sec. 202 of the Senate amendment)
       I. Limited Tax Benefits in the Revenue Title Subject to the 
         Line Item Veto Act
     II. Non-Tax Provisions
       A. Prohibition on Federal Testing
       B. Student Improvement Incentive Awards
       C. State Incentives for Teacher Testing and Merit Pay
       D. Equal Educational Opportunity
       E. Education Block Grant
       F. Sense of the Senate on Dollars to the Classroom
       G. Reading Excellence
       H. Drop-Out Prevention Program
       I. Multilingualism Study
       J. Safe Schools

                         I. REVENUE PROVISIONS

  A. Modifications to Education Individual Retirement Accounts (IRAs) 
    (sec. 2 of the House bill and sec. 101 of the Senate amendment)

                              Present Law

       In general.--Section 530 provides tax-exempt status to 
     ``education IRAs,'' meaning certain trusts (or custodial 
     accounts) which are created or organized in the United States 
     exclusively for the purpose of paying the qualified higher 
     education expenses of a named beneficiary.1 
     Contributions to education IRAs may be made only in cash. 
     Annual contributions to education IRAs may not exceed $500 
     per designated beneficiary (except in cases involving certain 
     tax-free rollovers, as described below), and may not be made 
     after the designated beneficiary reaches age 18.2 
     Moreover, section 4973 imposes a penalty excise tax if a 
     contribution is made by any person to an education IRA 
     established on behalf of a beneficiary during any taxable 
     year in which any contributions are made by anyone to a 
     qualified State tuition program (defined under sec. 529) on 
     behalf of the same beneficiary. These provisions were enacted 
     as part of the Taxpayer Relief Act of 1997 (``1997 Act'').
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     \1\ Education IRAs generally are not subject to Federal 
     income tax, but are subject to the unrelated business income 
     tax (``UBIT'') imposed by section 511.
     \2\ An excise tax penalty may be imposed under present-law 
     section 4973 to the extent that excess contributions above 
     the $500 annual limit are made to an education IRA.
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       Phase-out of contribution limit.--The $500 annual 
     contribution limit for education IRAs is phased out ratably 
     for contributors with modified AGI between $95,000 and 
     $110,000 ($150,000 and $160,000 for joint returns). 
     Individuals with modified AGI above the phase-out range are 
     not allowed to make contributions to an education IRA 
     established on behalf of any other individual.
       Treatment of distributions.--Amounts distributed from 
     education IRAs are excludable from gross income to the extent 
     that the amounts distributed do not exceed qualified higher 
     education expenses of the designated beneficiary incurred 
     during the year the distribution is made (provided that a 
     HOPE credit or Lifetime Learning credit is not claimed under 
     sec. 25A with respect to the beneficiary for the same taxable 
     year).3 If a HOPE credit or Lifetime Learning 
     credit is claimed with respect to a student for a taxable 
     year, then a distribution from an education IRA may (at the 
     option of the taxpayer) be made during that taxable year on 
     behalf of that student, but an exclusion is not available 
     under the Act for the earnings portion of such 
     distribution.4
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     \3\ The exclusion will not be a preference item for 
     alternative minimum tax (AMT) purposes.
     \4\ If a HOPE credit or Lifetime Learning credit was claimed 
     with respect to a student for an earlier taxable year, the 
     exclusion provided for by section 530 may be claimed with 
     respect to the same student for a subsequent taxable year 
     with respect to a distribution from an education IRA made in 
     that subsequent taxable in order to cover qualified higher 
     education expenses incurred during that year. Conversely, if 
     an exclusion is claimed for a distribution from an education 
     IRA with respect to a particular student, then a HOPE credit 
     or Lifetime Learning credit will be available in a subsequent 
     taxable year with respect to that same student (provided that 
     no exclusion is claimed in such other taxable years for 
     distributions from an education IRA on behalf of that student 
     and provided that the requirements of the HOPE credit or 
     Lifetime Learning credit are satisfied in the subsequent 
     taxable year).
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       Distributions from an education IRA generally are deemed to 
     consist of distributions of principal (which, under all 
     circumstances, are excludable from gross income) and earnings 
     (which may be excludable from gross income) by applying the 
     ratio that the aggregate amount of contributions to the 
     account for the beneficiary bears to the total balance of the 
     account. If the qualified higher education expenses of the 
     student for the year are at least equal to the total amount 
     of the distribution (i.e., principal and earnings combined) 
     from an education IRA, then the earnings in their entirety 
     will be excludable from gross income. If, on the other hand, 
     the qualified higher education expenses of the student for 
     the year are less than the total amount of the distribution 
     (i.e., principal and earnings combined) from an education 
     IRA, then the qualified higher education expenses will be 
     deemed to be paid from a pro-rata share of both the principal 
     and earnings components of the distribution. Thus, in such a 
     case, only a portion of the earnings will be excludable under 
     section 530 (i.e., a portion of the earnings based on the 
     ratio that the qualified higher education expenses bear to 
     the total amount of the distribution) and the remaining 
     portion of the earnings will be includible in the 
     distributee's gross income.5 To the extent that a 
     distribution exceeds qualified higher education expenses of 
     the designated beneficiary, an additional 10-percent tax is 
     imposed on the earnings portion of such excess distribution 
     under section 530(d)(4), unless such distribution is made on 
     account of the death or disability of, or scholarship 
     received by, the designated beneficiary.
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     \5\ For example, if an education IRA has a total balance of 
     $10,000, of which $4,000 represents principal (i.e., 
     contributions) and $6,000 represents earnings, and if a 
     distribution of $2,000 is made from such an account, then 
     $800 of that distribution will be treated as a return of 
     principal (which under no event is includible in the gross 
     income of the distributee) and $1,200 of the distribution 
     will be treated as accumulated earnings. In such a case, if 
     qualified higher education expenses of the beneficiary during 
     the year of the distribution are at least equal to the $2,000 
     total amount of the distribution (i.e., principal plus 
     earnings), then the entire earnings portion of the 
     distribution will be excludable under section 530, provided 
     that a Hope credit or Lifetime Learning credit is not claimed 
     for that same taxable year on behalf of the beneficiary. If, 
     however, the qualified higher education expenses of the 
     beneficiary for the taxable year are less than the total 
     amount of the distribution, then only a portion of the 
     earnings will be excludable from gross income under section 
     530. Thus, in the example discussed above, if the beneficiary 
     incurs only $1,500 of qualified higher education expenses in 
     the year that a $2,000 distribution is made, then only $900 
     of the earnings will be excludable from gross income under 
     section 530 (i.e., an exclusion will be provided for the pro-
     rata portion of the earnings, based on the ratio that the 
     $1,500 of qualified higher education expenses bears to the 
     $2,000 distribution) and the remaining $300 of the earnings 
     portion of the distribution will be includible in the 
     distributee's gross income.
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       Section 530(d) allows tax-free (and penalty-free) transfers 
     or rollovers of account balances from one education IRA 
     benefitting one beneficiary to another education IRA 
     benefitting another beneficiary (as well as redesignations of 
     the named beneficiary), provided that the new beneficiary is 
     a member of the family of the old beneficiary.6
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     \6\ For this purpose, a ``member of the family'' means 
     persons described in paragraphs (1) through (8) of section 
     152(a)--e.g., sons, daughters, brothers, sisters, nephews and 
     nieces, certain in-laws, etc.--and any spouse of such 
     persons.
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       The legislative history to the 1997 Act indicates that any 
     balance remaining in an education IRA will be deemed to be 
     distributed within 30 days after the date that the named 
     beneficiary reaches age 30 (or, if earlier, within 30 days of 
     the date that the beneficiary dies).
       Qualified higher education expenses.--The term ``qualified 
     higher education expenses'' includes tuition, fees, books, 
     supplies, and equipment required for the enrollment or 
     attendance of the designated beneficiary at an eligible 
     education institution, regardless of whether the beneficiary 
     is enrolled at an eligible educational institution on a full-
     time, half-time, or less than half-time basis. Moreover, the 
     term ``qualified higher education expenses include room and 
     board expenses (meaning the minimum room and board allowance 
     applicable to the student as determined by the institution in 
     calculating costs of attendance for Federal financial aid 
     programs under sec. 472 of the Higher Education Act of 1965) 
     for any period during which the beneficiary is at least a 
     half-time student. Qualified higher education expenses 
     include expenses with respect to undergraduate or graduate-
     level courses. In addition, section 530(b)(2)(B) specifically 
     provides that qualified higher education expenses include 
     amounts paid or incurred to purchase tuition credits (or to 
     make contributions to an account) under a qualified State 
     tuition program, as defined in section 529, for the benefit 
     of the beneficiary of the education IRA.
       Qualified higher education expenses generally include only 
     out-of-pocket expenses. Such qualified higher education 
     expenses do not include expenses covered by educational 
     assistance for the benefit of the beneficiary that is 
     excludable from gross income. Thus, total qualified higher 
     education expenses are reduced by scholarship or fellowship 
     grants excludable from gross income under present-

[[Page H4561]]

     law section 117, as well as any other tax-free educational 
     benefits, such as employer-provided educational assistance 
     that is excludable from the employee's gross income under 
     section 127. In addition, qualified higher education expenses 
     do not include expenses paid with amounts that are excludable 
     under section 135. No reduction of qualified higher education 
     expenses is required, however, for a gift, bequest, devise, 
     or inheritance within the meaning of section 102(a).
       Eligible educational institution.--Eligible educational 
     institutions are defined by reference to section 481 of the 
     Higher Education Act of 1965. Such institutions generally are 
     accredited post-secondary educational institutions offering 
     credit toward a bachelor's degree, an associate's degree, a 
     graduate-level or professional degree, or another recognized 
     post-secondary credential. Certain proprietary institutions 
     and post-secondary vocational institutions also are eligible 
     institutions. The institution must be eligible to participate 
     in Department of Education student aid programs.

                               House Bill

       Annual contribution limit.--For the period 1998 through 
     2002, the House bill increases to $2,500 the annual 
     contribution limit that currently applies to education IRAs 
     under section 530(b)(1)(A)(iii). Thus, under the House bill, 
     aggregate contributions that may be made by all contributors 
     to one (or more) education IRAs established on behalf of any 
     particular beneficiary are limited to $2,500 for each year 
     during the period 1998 through 2002. For 2003 and later 
     years, the annual contribution limit for education IRAs is 
     $500.
       Qualified expenses.--With respect to contributions made 
     during the period 1998 through 2002 (and earnings 
     attributable to such contributions), the House bill expands 
     the definition of qualified education expenses that may be 
     paid with tax-free distributions from an education IRA. 
     Specifically, the definition of qualified education expenses 
     is expanded to include ``qualified elementary and secondary 
     education expenses'' meaning (1) tuition, fees, tutoring, 
     special needs services, books, supplies, computer equipment 
     (including related software and services) and other 
     equipment, transportation and supplementary expenses required 
     for the enrollment or attendance of the designated 
     beneficiary at a public, private, or religious school 
     (through grade 12). ``Qualified elementary and secondary 
     education expenses'' also include certain homeschooling 
     education expenses if the requirements of any applicable 
     State or local law are met with respect to such 
     homeschooling. For contributions made in 2003 or later years 
     (and for earnings attributable to such contributions), the 
     definition of qualified education expenses is limited to 
     post-secondary education expenses.
       Special needs beneficiaries.--The House bill also provides 
     that, although contributions to an education IRA generally 
     may not be made after the designated beneficiary reaches age 
     18, contributions may continue to be made to an education IRA 
     in the case of a special needs beneficiary (as defined by 
     Treasury Department regulations). In addition, under the 
     bill, in the case of a special needs beneficiary, a deemed 
     distribution of any balance in an education IRA will not be 
     required when the beneficiary reaches age 30.
       Contributions by persons other than individuals.--The House 
     bill clarifies that corporations and other entities (e.g., 
     tax-exempt entities) are permitted to make contributions to 
     education IRAs, regardless of the income of the corporation 
     or entity during the year of the contribution. As under 
     present law, the eligibility of high-income individuals to 
     make contributions to education IRAs is phased out ratably 
     for individuals with modified AGI between $95,000 and 
     $110,000 ($150,000 and $160,000 for joint returns).
       Effective date.--The provisions are effective for taxable 
     years beginning after December 31, 1997.

                            Senate Amendment

       Annual contribution limit.--The Senate amendment is the 
     same as the House bill, except that the Senate amendment 
     increases to $2,000 the annual contribution limit, and only 
     for the period 1999 through 2002.
       Qualified expenses.--With respect to contributions made 
     during the period 1999 through 2002 (and earnings 
     attributable to such contributions), the Senate amendment 
     expands the definition of qualified education expenses that 
     may be paid with tax-free distributions from an education 
     IRA. Specifically, the definition of qualified education 
     expenses is expanded to include ``qualified elementary and 
     secondary education expenses'' meaning (1) tuition, fees, 
     academic tutoring 7, special needs services, 
     books, supplies, and equipment (including computers and 
     related software and services) incurred in connection with 
     the enrollment or attendance of the designated beneficiary as 
     an elementary or secondary student at a public, private, or 
     religious school providing elementary or secondary education 
     (kindergarten through grade 12), and (2) room and board, 
     uniforms, transportation, and supplementary items and 
     services (including extended-day programs) required or 
     provided by such a school in connection with such enrollment 
     or attendance of the designated beneficiary. ``Qualified 
     elementary and secondary education expenses'' also include 
     certain homeschooling education expenses if the requirements 
     of any applicable State or local law are met with respect to 
     such homeschooling. For contributions made in 2003 or later 
     years (and for earnings attributable to such contributions), 
     the definition of qualified education expenses is limited to 
     post-secondary education expenses. 8
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     \7\ For this purpose, the Senate amendment provides that it 
     is intended that ``academic tutoring'' means additional, 
     personalized instruction provided in coordination with the 
     student's academic courses.
     \8\ To the extent a taxpayer incurs ``qualified elementary 
     and secondary expenses'' during any year that a distribution 
     is made from an education IRA, the distribution will be 
     deemed to first consist of a distribution of any 
     contributions (and earnings thereon) that were made to the 
     education IRA during the period 1999-2002 (reduced by the 
     amount of such contributions and earnings that were deemed to 
     be distributed in prior taxable years). The Senate amendment 
     requires that trustees of education IRAs keep separate 
     accounts with respect to contributions made during the period 
     1999-2002 (and earnings thereon).
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       Under the Senate amendment, no deduction or credit (such as 
     the dependent care credit under section 21) will be allowed 
     under the Internal Revenue Code for any qualified education 
     expenses taken into account in determining the amount of the 
     exclusion under section 530 for a distribution from an 
     education IRA.
       With respect to post-secondary education, qualified 
     education expenses include (1) tuition, fees, academic 
     tutoring, special needs services, books, supplies, and 
     equipment (including computers and related software and 
     services) incurred in connection with the enrollment or 
     attendance of the designated beneficiary at an eligible post-
     secondary educational institution, and (2) room and board 
     expenses (meaning the minimum room and board allowance 
     applicable to the student as determined by the institution 
     calculating costs of attendance for Federal financial aid 
     programs) for any period during which the student is at least 
     a half-time student.
       Special needs beneficiaries.--The Senate amendment is the 
     same as the House bill. 9
---------------------------------------------------------------------------
     \9\ The legislative history to the Senate amendment clarifies 
     the Committee's intention that the determination of whether a 
     beneficiary has ``special needs'' will be required to be made 
     for each year that contributions are made to an education IRA 
     after the beneficiary reaches age 18. However, if an 
     individual meets the definition of a ``special needs'' 
     beneficiary when such individual reaches age 30, then such 
     individual thereafter will be presumed to be a ``special 
     needs'' beneficiary.
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       Contributions by persons other than individuals.--The 
     Senate amendment is the same as the House bill.
       Technical corrections.--The Senate amendment provides for 
     several technical corrections to section 530 (as enacted as 
     part of the Taxpayer Relief Act of 1997), including: (1) 
     adding a provision that any balance remaining in an education 
     IRA will be deemed to be distributed within 30 days after the 
     date that the named beneficiary reaches age 30; (2) 
     clarifying that, under rules contained in present-law section 
     72, distributions from education IRAs are treated as 
     representing a pro-rata share of the principal and 
     accumulated earnings in the account; and (3) clarifying that, 
     under section 530(d)(4), the 10-percent additional tax will 
     not be imposed in cases where a distribution (although used 
     to pay for qualified higher education expenses) is includible 
     in gross income solely because the taxpayer elects the HOPE 
     or Lifetime Learning credit on behalf of the student for the 
     same taxable year.
       Effective date.--The provisions modifying education IRAs 
     under section 530 generally are effective for taxable years 
     beginning after December 31, 1998. However, the provision 
     that increases the annual contribution limit for education 
     IRAs (i.e., to $2,000 per year) applies during the period 
     January 1, 1999, through December 31, 2002, and the 
     provision that expands the definition of qualified 
     education expenses to include qualified elementary and 
     secondary education expenses applies to contributions (and 
     earnings thereon) made during the period January 1, 1999, 
     through December 31, 2002. The technical correction 
     provisions are effective as if included in the 1997 Act--
     i.e., for taxable years beginning after December 31, 1997.

                          Conference Agreement

       The conference agreement follows the Senate amendment and 
     includes certain additional technical corrections.
       The conference agreement clarifies that, in the event of 
     the death of the designated beneficiary, the balance 
     remaining in an education IRA may be distributed (without 
     imposition of the additional 10-percent tax) to any other 
     (i.e., contingent) beneficiary or to the estate of the 
     deceased designated beneficiary. If any member of the family 
     of the deceased beneficiary becomes the new designated 
     beneficiary of an education IRA, then no tax will be imposed 
     on such redesignation and the account will continue to be 
     treated as an education IRA.
       The conference agreement further provides that the 
     additional 10-percent tax will not apply to the distribution 
     of any contribution to an education IRA made during a taxable 
     year if such distribution is made on or before the date that 
     a return is required to be filed (including extensions of 
     time) by the beneficiary for the taxable year during which 
     the contribution was made (or, if the beneficiary is not 
     required to file such a return, April 15th of the year 
     following the taxable year during which the contribution was 
     made). In addition, the conference agreement amends section 
     4973(e) to provide that the excise tax penalty applies under 
     that section for each year that an excess contribution 
     remains in an education IRA (and not merely the year that the 
     excess contribution is made).

[[Page H4562]]

       The conference agreement clarifies that, in order for 
     taxpayers to establish an education IRA, the designated 
     beneficiary must be a life-in-being. Further, the conference 
     agreement clarifies that for purposes of the special rules 
     regarding tax-free rollovers and changes of designated 
     beneficiaries, the new beneficiary must be under the age of 
     30.
       The conference agreement also provides that, if any 
     qualified higher education expenses are taken into account in 
     determining the amount of the exclusion under section 530 for 
     a distribution from an education IRA, then no deduction 
     (under section 162 or any other section), or exclusion (under 
     section 135) or credit will be allowed under the Internal 
     Revenue Code with respect to such qualified higher education 
     expenses.
       In addition, because the 1997 Act allows taxpayers to 
     redeem U.S. Savings Bonds and be eligible for the exclusion 
     under present-law section 135 (as if the proceeds were used 
     to pay qualified higher education expenses) provided the 
     proceeds from the redemption are contributed to an education 
     IRA (or to a qualified State tuition program defined under 
     section 529) on behalf of the taxpayer, the taxpayer's 
     spouse, or a dependent, the conference agreement conforms the 
     definition of ``eligible educational institution'' under 
     section 135 to the broader definition of that term under 
     present-law section 530 (and section 529). Thus, for purposes 
     of section 135, as under present-law sections 529 and 530, 
     the term ``eligible educational institution'' is defined as 
     an institution which (1) is described in section 481 of the 
     Higher Education Act of 1965 (20 U.S.C. 1088) and (2) is 
     eligible to participate in Department of Education student 
     aid programs.

    B. Exclusion From Gross Income of Education Distributions From 
     Qualified Tuition Programs (sec. 104 of the Senate amendment)

                              Present Law

       Section 529 provides tax-exempt status to ``qualified State 
     tuition programs,'' meaning certain programs established and 
     maintained by a State (or agency or instrumentality thereof) 
     under which persons may (1) purchase tuition credits or 
     certificates on behalf of a designated beneficiary that 
     entitle the beneficiary to a waiver or payment of qualified 
     higher education expenses of the beneficiary, or (2) make 
     contributions to an account that is established for the 
     purpose of meeting qualified higher education expenses of the 
     designated beneficiary of the account. The term ``qualified 
     higher education expenses'' has the same meaning as does the 
     term for purposes of education IRAs (as described above) and, 
     thus, includes expenses for tuition, fees, books, supplies, 
     and equipment required for the enrollment or attendance at an 
     eligible educational institution,\10\ as well as room and 
     board expenses (meaning the minimum room and board allowance 
     applicable to the student as determined by the institution in 
     calculating costs of attendance for Federal financial aid 
     programs under sec. 472 of the Higher Education Act of 1965) 
     for any period during which the student is at least a half-
     time student.
---------------------------------------------------------------------------
     \10\ ``Eligible educational institutions'' are defined the 
     same for purposes of education IRAs (described in I.A., 
     above) and qualified State tuition programs.
---------------------------------------------------------------------------
       Section 529 also provides that no amount shall be included 
     in the gross income of a contributor to, or beneficiary of, a 
     qualified State tuition program with respect to any 
     distribution from, or earnings under, such program, except 
     that (1) amounts distributed or educational benefits provided 
     to a beneficiary (e.g., when the beneficiary attends college) 
     will be included in the beneficiary's gross income (unless 
     excludable under another Code section) to the extent such 
     amounts or the value of the educational benefits exceed 
     contributions made on behalf of the beneficiary, and (2) 
     amounts distributed to a contributor or another distributee 
     (e.g., when a parent receives a refund) will be included in 
     the contributor's/distributee's gross income to the extent 
     such amounts exceed contributions made on behalf of the 
     beneficiary.
       A qualified State tuition program is required to provide 
     that purchases or contributions only be made in cash.\11\ 
     Contributors and beneficiaries are not allowed to directly or 
     indirectly direct the investment of contributions to the 
     program (or earnings thereon). The program is required to 
     maintain a separate accounting for each designated 
     beneficiary. A specified individual must be designated as the 
     beneficiary at the commencement of participation in a 
     qualified State tuition program (i.e., when contributions are 
     first made to purchase an interest in such a program), unless 
     interests in such a program are purchased by a State or local 
     government or a tax-exempt charity described in section 
     501(c)(3) as part of a scholarship program operated by such 
     government or charity under which beneficiaries to be named 
     in the future will receive such interests as scholarships. A 
     transfer of credits (or other amounts) from one account 
     benefitting one designated beneficiary to another account 
     benefitting a different beneficiary will be considered a 
     distribution (as will a change in the designated beneficiary 
     of an interest in a qualified State tuition program), unless 
     the beneficiaries are members of the same family.\12\ 
     Earnings on an account may be refunded to a contributor or 
     beneficiary, but the State or instrumentality must impose a 
     more than de minimis monetary penalty unless the refund is 
     (1) used for qualified higher education expenses of the 
     beneficiary, (2) made on account of the death or disability 
     of the beneficiary, or (3) made on account of a scholarship 
     received by the designated beneficiary to the extent the 
     amount refunded does not exceed the amount of the scholarship 
     used for higher education expenses.
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     \11\ Sections 529(c)(2), (c)(4), and (c)(5), and section 
     530(d)(3) provide special estate and gift tax rules for 
     contributions made to, and distributions made from, qualified 
     State tuition programs and education IRAs.
     \12\ For this purpose, the term ``member of the family'' 
     means persons described in paragraphs (1) through (8) of 
     section 152(a)--e.g., sons, daughters, brothers, sisters, 
     nephews and nieces, certain in-laws, etc.--and any spouse of 
     such persons.
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       No amount is includible in the gross income of a 
     contributor to, or beneficiary of, a qualified State tuition 
     program with respect to any contribution to or earnings on 
     such a program until a distribution is made from the program, 
     at which time the earnings portion of the distribution 
     (whether made in cash or in-kind) will be includible in the 
     gross income of the distributee. However, to the extent that 
     a distribution from a qualified State tuition program is used 
     to pay for qualified tuition and related expenses (as defined 
     in sec. 25A(f))(1)), the distributee (or another taxpayer 
     claiming the distributee as a dependent) will be able to 
     claim the HOPE credit or Lifetime Learning credit under 
     section 25A with respect to such tuition and related expenses 
     (assuming that the other requirements for claiming the HOPE 
     credit or Lifetime Learning credit are satisfied and the 
     modified AGI phaseout for those credits does not apply).

                               House Bill

       No provision.

                            Senate Amendment

       Under the Senate amendment, an exclusion from gross income 
     is provided for distributions from qualified State tuition 
     programs (as defined in sec. 529) to the extent that the 
     distribution is used to pay for (1) tuition, fees, academic 
     tutoring, special needs services, books, supplies, and 
     equipment (including computers and related software and 
     services) incurred in connection with the enrollment or 
     attendance of a designated beneficiary at an eligible post-
     secondary educational institution (i.e., colleges, 
     universities, and certain vocational schools), and (2) room 
     and board expenses (meaning the minimum room and board 
     allowance applicable to the student as determined by the 
     institution calculating costs of attendance for Federal 
     financial aid programs) for any period during which the 
     student is at least a half-time student. As under present 
     law, there is no specific dollar limitation imposed under the 
     Internal Revenue Code on contributions made to qualified 
     State tuition programs, although section 529(b)(7) will 
     continue to require that the programs themselves provide 
     adequate safeguards to prevent contributions on behalf of a 
     beneficiary in excess of those necessary to provide for 
     qualified higher education expenses of the beneficiary.
       As with the present-law exclusion from gross income for 
     distributions from education IRAs, the tax-free treatment for 
     a distribution from a qualified State tuition program will be 
     allowed only if, for the taxable year during which the 
     distribution is made, a HOPE or Lifetime Learning credit 
     (under sec. 25A) is not claimed on behalf of the student. As 
     under present law, if a student is claimed as a dependent by 
     his or her parent, then the parent (if eligible) must decide 
     whether to elect to claim a HOPE or Lifetime Learning credit 
     with respect to that student for that taxable year; and, if 
     the parent elects to claim a HOPE or Lifetime Learning 
     credit, then the earnings portion of a distribution made to a 
     student from a qualified State tuition program will be 
     includible in the gross income of the student.
       Under the Senate amendment, no deduction (under section 162 
     or any other section) or credit is allowed under the Internal 
     Revenue Code for any qualified higher education expenses 
     taken into account in determining the amount of the exclusion 
     under section 529 for a distribution made to, or on behalf 
     of, a student by a qualified State tuition program.
       Technical correction.--The Senate amendment clarifies that, 
     under rules contained in present-law section 72, 
     distributions from qualified State tuition programs are 
     treated as representing a pro-rata share of the principal 
     (i.e., contributions) and accumulated earnings in the 
     account.
       Effective date.--The provision that allows an exclusion 
     from gross income for certain distributions from qualified 
     State tuition programs under section 529 (and the 
     modification to the definition of qualified higher education 
     expenses under that section) is effective for distributions 
     made in taxable years beginning after December 31, 1998.

                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except that it expands the definition of ``qualified tuition 
     program'' to include not only qualified State tuition 
     programs as defined under present-law section 529, but also 
     certain prepaid tuition programs established and maintained 
     by one or more eligible educational institutions (which may 
     be private institutions) that satisfy the requirements under 
     section 529 (other than the present-law State sponsorship 
     rule). In the case of a qualified tuition program maintained 
     by one or more private educational institutions, persons may 
     purchase tuition credits or certificates on behalf of a 
     designated beneficiary as set forth in section

[[Page H4563]]

     529(b)(1)(A)(i), but may not make contributions to an account 
     as described in section 529(b)(1)(A)(ii) (so-called ``savings 
     account plans''). In addition, contributions to any such 
     program on behalf of a named beneficiary may not exceed 
     $5,000 per year, with an aggregate limit of $50,000 for 
     contributions to all such programs on behalf of that 
     beneficiary for all years.\13\ Contributions may not be made 
     to a qualified tuition program maintained by one or more 
     private educational institutions in any year in which 
     contributions are made on behalf of the same beneficiary to 
     an education IRA or a State-sponsored qualified tuition 
     program.
---------------------------------------------------------------------------
     \13\ To the extent contributions exceed the $50,000 aggregate 
     limit, an excise tax penalty may be imposed under present-law 
     section 4973, unless the excess contributions (and any 
     earnings thereon) are returned to the contributor before the 
     due date for the return for the taxable year during which the 
     excess contribution is made.
     State-sponsored qualified tuition programs will continue to 
     be governed by the rule contained in present-law section 
     529(b)(7) that such programs provide adequate safeguards to 
     prevent contributions on behalf of a designated beneficiary 
     in excess of those necessary to provide for the qualified 
     higher education expenses of the beneficiary. State-sponsored 
     qualified tuition programs will not be subject to a specific 
     dollar cap under section 529 on annual (or aggregate) 
     contributions that can be made under the program on behalf of 
     a named beneficiary.
---------------------------------------------------------------------------
       In addition, the conference agreement includes a technical 
     correction to section 529(e)(2), clarifying that--for 
     purposes of tax-free rollovers and changes of designated 
     beneficiaries--a ``member of the family'' includes the spouse 
     of the original beneficiary.
       Effective date.--The provision providing for the 
     establishment of qualified tuition programs maintained by one 
     or more private educational institutions is effective for 
     taxable years beginning after December 31, 2005. The 
     technical corrections provision is effective for 
     distributions made after December 31, 1997.

 C. Extension of Exclusion for Employer-Provided Education Assistance 
                   (sec. 105 of the Senate amendment)

                              Present Law

       Under present-law section 127, an employee's gross income 
     and wages do not include amounts paid or incurred by the 
     employer for educational assistance provided to the employee 
     if such amounts are paid or incurred pursuant to an 
     educational assistance program that meets certain 
     requirements. This exclusion is limited to $5,250 of 
     educational assistance with respect to an individual during a 
     calendar year. The exclusion does not apply with respect to 
     graduate- level courses. The exclusion is scheduled to expire 
     with respect to courses beginning after May 31, 2000.
       In the absence of the exclusion provided by section 127, 
     educational assistance is excludable from income only if the 
     education is related to the employee's current job, meaning 
     that the education (1) maintains or improves a skill required 
     in a trade or business currently engaged in by the taxpayer, 
     or (2) meets the express requirements of the taxpayer's 
     employer, or requirements of applicable law or regulations, 
     imposed as a condition of continued employment (but not if 
     the education relates to certain minimum educational 
     requirements or enables a taxpayer to begin working in a new 
     trade or business).

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment reinstates the exclusion for graduate-
     level courses, effective with respect to courses beginning 
     after December 31, 1997. In addition, the Senate amendment 
     provides that the exclusion (as applied to both graduate and 
     undergraduate courses) expires with respect to courses 
     beginning after December 31, 2002.
       Effective date.--The extension of the exclusion for 
     employer-provided educational assistance to graduate-level 
     courses is effective for expenses with respect to courses 
     beginning after December 31, 1997. The exclusion (with 
     respect to both graduate and undergraduate courses) expires 
     with respect to courses beginning after December 31, 2002.

                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except that it does not reinstate the exclusion for graduate-
     level courses.

 D. Arbitrage Rebate Exception for Governmental Bonds of Certain Small 
             Governments (sec. 106 of the Senate amendment)

                              Present Law

       Arbitrage profits earned on tax-exempt bonds generally must 
     be rebated to the Federal Government. An exception is 
     provided for profits earned on governmental bonds issued by 
     certain governmental units that issue no more than $5 million 
     of such bonds in the year when the bonds benefitting from the 
     exception are issued. The $5 million limit is increased to 
     $10 million if bonds equal to at least the excess over $5 
     million are used to finance public schools.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment allows an additional $5 million of 
     public school bonds to be issued without loss of eligibility 
     for the small-issuer arbitrage rebate exception (for total 
     issuance of up to $15 million per year if bonds equal to at 
     least the excess over $5 million are used to finance public 
     schools).
       Effective date.--The provision is effective for bonds 
     issued after December 31, 1998.

                          Conference Agreement

       The conference agreement follows the Senate amendment.

  E. Exclusion of Certain Amounts Received Under the National Health 
Corps Scholarship Program and the F. Edward Hebert Armed Forces Health 
 Professions Scholarship and Financial Assistance Program (sec. 107 of 
                         the Senate amendment)

                              Present Law

       Section 117 excludes from gross income amounts received as 
     a qualified scholarship by an individual who is a candidate 
     for a degree and used for tuition and fees required for the 
     enrollment or attendance (or for fees, books, supplies, and 
     equipment required for courses of instruction) at a primary, 
     secondary, or post-secondary educational institution. The 
     tax-free treatment provided by section 117 does not extend to 
     scholarship amounts covering regular living expenses, such as 
     room and board. In addition to the exclusion for qualified 
     scholarship, section 117 provides an exclusion from gross 
     income for qualified tuition reductions for certain education 
     provided to employees (and their spouses and dependents) of 
     certain educational organizations.
       Section 117(c) specifically provides that the exclusion for 
     qualified scholarships and qualified tuition reductions does 
     not apply to any amount received by a student that represents 
     payment for teaching, research, or other services by the 
     student required as a condition for receiving the scholarship 
     or tuition reduction.

                               House Bill

       No provision.

                            Senate Amendment

       Under the Senate amendment, amounts received by an 
     individual under the National Health Corps Scholarship 
     Program--administered under section 338A(g)(1)(A) of the 
     Public Health Service Act--are eligible for tax-free 
     treatment as a qualified scholarship under section 117, 
     without regard to the fact that the recipient of the 
     scholarship is obligated to later provide medical services in 
     a geographic area (or to an underserved population group or 
     designated facility) identified by the Public Health Service 
     as having a shortage of health care professionals. As with 
     other qualified scholarships under section 117, the tax-free 
     treatment does not apply to amounts received by students to 
     cover regular living expenses, such as room and board.
       Effective date.--The provision applies to amounts received 
     in taxable years beginning after December 31, 1993.

                          Conference Agreement

       The conference agreement follows the Senate amendment. In 
     addition, the conference agreement provides that amounts 
     received by an individual under the F. Edward Hebert Armed 
     Forces Health Professions Scholarship and Financial 
     Assistance Program under subchapter I of chapter 105 of title 
     10 U.S.C. also are eligible for tax-free treatment as a 
     qualified scholarship under section 117, without regard to 
     the recipient's future service obligation.

F. Tax-Exempt Bonds for Privately Owned Public Schools (sec. 108 of the 
                           Senate amendment)

                              Present Law

       Interest on State and local government bonds generally is 
     tax-exempt if the bond proceeds are used to carry out 
     governmental functions of the issuer and the debt is repaid 
     with governmental funds. Interest on bonds used to finance 
     private business activities is taxable unless the Internal 
     Revenue Code includes an exception for the activity involved. 
     The Code does not include an exception for bonds to finance 
     public schools owned by for-profit private businesses.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment allows States to issue up to $10 per 
     resident ($5 million, if greater) per year in tax-exempt 
     bonds for public schools that are owned by for-profit, 
     private businesses, but that are operated by States or local 
     governments as part of the public school system. Except for 
     an amount not exceeding $5 million per year, each State could 
     use these bonds only for public elementary and secondary 
     schools located in ``high-growth'' school districts. High-
     growth school districts are defined as districts having an 
     enrollment of at least 5,000 students in the second preceding 
     academic year and having experienced student enrollment 
     increases of 20 percent or more during the 5-year period 
     ending with that second year.
       Effective date.--The provision is effective for bonds 
     issued after December 31, 1998.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

G. Employer Deductions for Vacation and Severance Pay (sec. 3(a) of the 
            House bill and sec. 201 of the Senate amendment)

                              Present Law

       For deduction purposes, any method or arrangement that has 
     the effect of a plan deferring the receipt of compensation or 
     other benefits for employees is treated as a deferred 
     compensation plan (sec. 404(b)). In general, contributions 
     under a deferred compensation plan (other than certain 
     pension, profit-sharing and similar plans) are deductible in 
     the taxable year in which an amount

[[Page H4564]]

     attributable to the contribution is includible in income of 
     the employee. However, vacation pay which is treated as 
     deferred compensation is deductible for the taxable year of 
     the employer in which the vacation pay is paid to the 
     employee (sec. 404(a)(5)).
       Temporary Treasury regulations provide that a plan, method, 
     or arrangement defers the receipt of compensation or benefits 
     to the extent it is one under which an employee receives 
     compensation or benefits more than a brief period of time 
     after the end of the employer's taxable year in which the 
     services creating the right to such compensation or benefits 
     are performed. A plan, method or arrangement is presumed to 
     defer the receipt of compensation for more than a brief 
     period of time after the end of an employer's taxable year to 
     the extent that compensation is received after the 15th day 
     of the 3rd calendar month after the end of the employer's 
     taxable year in which the related services are rendered (the 
     ``2\1/2\ month'' period). A plan, method or arrangement is 
     not considered to defer the receipt of compensation or 
     benefits for more than a brief period of time after the end 
     of the employer's taxable year to the extent that 
     compensation or benefits are received by the employee on or 
     before the end of the applicable 2\1/2\ month period. (Temp. 
     Treas. Reg. sec. 1.404(b)-1T A-2).
       The Tax Court recently addressed the issue of when vacation 
     pay and severance pay are considered deferred compensation in 
     Schmidt Baking Co., Inc., 107 T.C. 271 (1996). In Schmidt 
     Baking, the taxpayer was an accrual basis taxpayer with a 
     fiscal year that ended December 28, 1991. The taxpayer funded 
     its accrued vacation and severance pay liabilities for 1991 
     by purchasing an irrevocable letter of credit on March 13, 
     1992. The parties stipulated that the letter of credit 
     represented a transfer of substantially vested interest in 
     property to employees for purposes of section 83, and that 
     the fair market value of such interest was includible in the 
     employees'' gross incomes for 1992 as a result of the 
     transfer.14 The Tax Court held that the purchase 
     of the letter of credit, and the resulting income inclusion, 
     constituted payment of the vacation and severance pay within 
     the 2\1/2\ month period. Thus, the vacation and severance pay 
     were treated as received by the employees within the 2\1/2\ 
     month period and were not treated as deferred compensation. 
     The vacation pay and severance pay were deductible by the 
     taxpayer for its 1991 fiscal year pursuant to its normal 
     accrual method of accounting.
---------------------------------------------------------------------------
     \14\ While the rules of section 83 may govern the income 
     inclusion, section 404 governs the deduction if the amount 
     involved is deferred compensation.
---------------------------------------------------------------------------

                               House Bill

       The House bill specifically overrules the result in Schmidt 
     Baking and provides that the Internal Revenue Code will be 
     applied without regard to the result reached in that case. 
     Thus, under the House bill, the fact that an item of 
     compensation is includible in income is not taken into 
     account in determining whether or not payment has been made. 
     Thus, an item of compensation must have been actually paid or 
     received by employees within the 2\1/2\ month period in order 
     for the compensation not to be treated as deferred 
     compensation.
       While Schmidt Baking involved only vacation pay and 
     severance pay, the provision is not limited to such items of 
     compensation. In addition, arrangements similar to the letter 
     of credit approach used in Schmidt Baking do not constitute 
     actual receipt by the employee.
       Effective date.--The provision is effective for taxable 
     years ending after October 8, 1997. Any change in method of 
     accounting required by the provision is treated as initiated 
     by the taxpayer with the consent of the Secretary. Any 
     adjustment required by section 481 as a result of the change 
     is taken into account in the year of the change.

                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that the Senate amendment does not apply to severance pay. In 
     addition, the Senate amendment makes certain technical 
     modifications. Instead of providing that the Code is to be 
     applied without regard to the result in Schmidt Baking, the 
     Senate amendment explicitly provides that for purposes of 
     determining whether an item of compensation (other than 
     severance pay) is deferred compensation, the compensation is 
     not considered to be paid or received until actually received 
     by the employee. As under the House bill, similar 
     arrangements to the letter of credit approach used in Schmidt 
     Baking do not constitute actual receipt by the employee.
       Effective date.--The provision is effective for taxable 
     years ending after the date of enactment. With respect to the 
     change in method of accounting, the Senate amendment is the 
     same as the House bill.

                          Conference Agreement

       The conference agreement follows the House bill, with 
     certain technical modifications as incorporated in the Senate 
     amendment.
       As under the House bill and Senate amendment, the fact that 
     an item of compensation is includible in employees'' incomes 
     or wages within the applicable 2\1/2\ month period is not 
     relevant to determining whether an item of compensation is 
     deferred compensation.
       As under the House bill and Senate amendment, many 
     arrangements in addition to the letter of credit approach 
     used in Schmidt Baking do not constitute actual receipt by 
     employees. For example, actual receipt does not include the 
     furnishing of a note or letter or other evidence of 
     indebtedness of the taxpayer, whether or not the evidence is 
     guaranteed by any other instrument or by any third party. As 
     a further example, actual receipt does not include a promise 
     of the taxpayer to provide service or property in the future 
     (whether or not the promise is evidenced by a contract or 
     other written agreement). In addition, actual receipt does 
     not include an amount transferred as a loan, refundable 
     deposit, or contingent payment. Further, amounts set aside in 
     a trust for employees are not considered to be actually 
     received by the employee.
       Effective date.--The provision is effective for taxable 
     years ending after December 31, 2001. Under the conference 
     agreement, for the first taxable year for which the provision 
     is effective, a taxpayer is permitted to calculate estimated 
     tax liability by taking into account only 60 percent of the 
     estimated tax payments otherwise required to made on account 
     of the provision.

 H. Modification to Foreign Tax Credit Carryback and Carryover Periods 
                   (sec. 202 of the Senate amendment)

                              Present Law

       U.S. persons may credit foreign taxes against U.S. tax on 
     foreign-source income. The amount of foreign tax credits that 
     can be claimed in a year is subject to a limitation that 
     prevents taxpayers from using foreign tax credits to offset 
     U.S. tax on U.S.-source income. Separate foreign tax credit 
     limitations are applied to specific categories of income.
       The amount of creditable taxes paid or accrued (or deemed 
     paid) in any taxable year which exceeds the foreign tax 
     credit limitation is permitted to be carried back two years 
     and forward five years. The amount carried over may be used 
     as a credit in a carryover year to the extent the taxpayer 
     otherwise has excess foreign tax credit limitation for such 
     year. The separate foreign tax credit limitations apply for 
     purposes of the carryover rules.

                               House Bill

       No provision.

                            Senate Amendment

       The Senate amendment reduces the carryback period for 
     excess foreign tax credits from two years to one year. The 
     amendment also extends the excess foreign tax credit 
     carryforward period from five years to seven years.
       Effective date.--The provision applies to foreign tax 
     credits arising in taxable years beginning after December 31, 
     2000.

                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment.

 I. Limited Tax Benefits in the Revenue Title Subject to the Line Item 
                                Veto Act

                              Present Law

       The Line Item Veto Act amended the Congressional Budget and 
     Impoundment Act of 1974 to grant the President the limited 
     authority to cancel specific dollar amounts of discretionary 
     budget authority, certain new direct spending, and limited 
     tax benefits. The Line Item Veto Act provides that the Joint 
     Committee on Taxation is required to examine any revenue or 
     reconciliation bill or joint resolution that amends the 
     Internal Revenue Code of 1986 prior to its filing by a 
     conference committee in order to determine whether or not the 
     bill or joint resolution contains any ``limited tax 
     benefits,'' and to provide a statement to the conference 
     committee that either (1) identifies each limited tax benefit 
     contained in the bill or resolution, or (2) states that the 
     bill or resolution contains no limited tax benefits. The 
     conferees determine whether or not to include the Joint 
     Committee on Taxation statement in the conference report. If 
     the conference report includes the information from the Joint 
     Committee on Taxation identifying provisions that are limited 
     tax benefits, then the President may cancel one or more of 
     those, but only those, provisions that have been identified. 
     If such a conference report contains a statement from the 
     Joint Committee on Taxation that none of the provisions in 
     the conference report are limited tax benefits, then the 
     President has no authority to cancel any of the specific tax 
     provisions, because there are no tax provisions that are 
     eligible for cancellation under the Line Item Veto Act. If 
     the conference report contains no statement with respect to 
     limited tax benefits, then the President may cancel any 
     revenue provision in the conference report that he determines 
     to be a limited tax benefit.

                          Conference Statement

       The Joint Committee on Taxation has determined that the 
     revenue title to H.R. 2646 contains the following provision 
     that constitutes a limited tax benefit within the meaning of 
     the Line Item Veto Act:
       Section 104 (relating to additional increase in arbitrage 
     rebate exception for governmental bonds used to finance 
     education facilities).

                         II. NON-TAX PROVISIONS

                   A. Prohibition on Federal Testing

                               House Bill

       No provision.

                            Senate Amendment

       Section 102 of Title I of the Senate amendment prohibits 
     Federally-sponsored testing unless specifically and 
     explicitly provided

[[Page H4565]]

     for in authorizing legislation enacted into law.

                          Conference Agreement

       Senate recedes.

                B. Student Improvement Incentive Awards

                               House Bill

       No provision.

                            Senate Amendment

       Section 103 of Title I of the Senate amendment authorizes 
     student improvement incentive awards which could be used by a 
     State educational agency to make awards to public schools in 
     the State that are determined to be outstanding schools 
     pursuant to a statewide assessment.

                          Conference Agreement

       House recedes.

         C. State Incentives for Teacher Testing and Merit Pay

                               House Bill

       No provision.

                            Senate Amendment

       Section 301 of Title III of the Senate amendment authorizes 
     incentives for states to implement teacher testing and merit 
     pay programs. The Department of Education would provide 
     awards to states that test their K-12 teachers every 3-5 
     years in the subjects they teach and that have a merit pay 
     program.

                          Conference Agreement

       House recedes.

                    D. Equal Educational Opportunity

                               House Bill

       No provision.

                            Senate Amendment

       Section 401 of Title IV of the Senate amendment authorizes 
     the use of Federal education dollars to fund education reform 
     projects that provide same gender schools and classrooms, as 
     long as comparable educational opportunities are offered for 
     students of both sexes.

                          Conference Agreement

       House recedes.

                        E. Education Block Grant

                               House Bill

       No provision.

                            Senate Amendment

       Sections 501-507 of Title V of the Senate amendment provide 
     States a choice of receiving over $10 billion in Federal 
     education funds as a block grant at the state level, local 
     level, or to continue receiving funding as under current 
     categorical programs.

                          Conference Agreement

       Senate recedes. The Conferees have reluctantly agreed to 
     remove the education block grant amendment of Senator Slade 
     Gorton (R-WA) from the conference report in order to 
     expeditiously move the underlying education savings account 
     measure to the President. The Conferees believe the Gorton 
     amendment would have returned authority for decisions about 
     our children's education to where it belongs--to our parents, 
     teachers, principals, superintendents and elected school 
     board members, not bureaucrats in Washington, DC. The 
     Conferees wish to commend the diligent efforts of Senator 
     Gorton in this matter.

           F. Sense of the Senate on Dollars to the Classroom

                               House Bill

       No provision.

                            Senate Amendment

       Sections 601-602 of Title VI of the Senate amendment is a 
     Sense of the Senate resolution that 95 percent of every 
     Federal education dollar should end up in the classroom.

                          Conference Agreement

       House recedes.

                         G. Reading Excellence

                               House Bill

       No provision.

                            Senate Amendment

       Sections 701, 711, and 721-725 of Title VII of the Senate 
     amendment authorize a literacy program which focuses upon 
     training teachers to teach reading using scientifically 
     proven methods, like phonics.

                          Conference Agreement

       House recedes.

                     H. Dropout Prevention Program

                               House Bill

       No provision.

                            Senate Amendment

       Sections 801, 811-812, and 821 of Title VIII of the Senate 
     amendment authorize a National Dropout Prevention program.

                          Conference Agreement

       Senate recedes.

                        I. Multilingualism Study

                               House Bill

       No provision.

                            Senate Amendment

       Section 901 of Title IX of the Senate amendment authorizes 
     a study on multilingualism.

                          Conference Agreement

       House recedes with an amendment to add a finding to 
     indicate that education is the primary responsibility of 
     State and local governments and as such they are responsible 
     for developing policies on multilingualism.

                            J. Safe Schools

                               House Bill

       No provision.

                            Senate Amendment

       Section 902 of Title IX of the Senate amendment provides 
     that weapons brought to school are admissible as evidence in 
     any internal school disciplinary proceeding.

                          Conference Agreement

       House recedes.

     William Archer,
     Bill Goodling,
     Dick Armey,
                                Managers on the Part of the House.

     William V. Roth,
     Connie Mack,
     Dan Coats,
     Slade Gorton,
     Paul Coverdell,
     Managers on the Part of the Senate.

                          ____________________