[Congressional Record Volume 147, Number 20 (Tuesday, February 13, 2001)]
[Extensions of Remarks]
[Pages E153-E154]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


    A BILL TO CLARIFY THE TAX TREATMENT OF CONTRIBUTIONS IN AID OF 
                              CONSTRUCTION

                                 ______
                                 

                           HON. WALLY HERGER

                             of california

                    in the house of representatives

                       Tuesday, February 13, 2001

  Mr. HERGER. Mr. Speaker, I am introducing legislation today, along 
with Mr. Matsui and Mrs. Johnson, to ensure that needless Treasury 
regulation does not add unnecessarily to the cost of housing.
  The need for this legislation is brought about because the Department 
of Treasury has issued regulations to provide guidance on the 
definition of CIAC as enacted under the Small Business Job Protection 
Act of 1996. Despite the fact that Congress specifically removed 
language concerning ``customer services fees'' in its amendment in 
1996, the Department added the language back into the proposed 
regulation specifying that such fees are not CIAC. They then defined 
the term very broadly to include service laterals, which traditionally 
and under the most common state law treatment would be considered CIAC.
  Because state regulators require all of the costs of new connections 
to be paid up front, these regulations will force water and sewerage 
utilities to collect the federal tax from homeowners, builders, and 
small municipalities. Because they collect it up front, the utility is 
forced to ``gross up'' the tax by collecting a tax on the tax on the 
tax, resulting in an over 55 percent effective tax rate.
  This bill will clarify that water and sewerage service laterals are 
included in the definition of contributions in aid of construction 
(CIAC). It clarifies current law by specifically stating that 
``customer service fees'' are CIAC, but maintains current treatment of 
service charges for stopping and starting service (not CIAC). Because 
this is a clarification of current law, the effective date for the bill 
is as if included in the original legislation (Section 1613(a) of the 
Small Business Job Protection Act of 1996).
  Mr. Matsui and Mrs. Johnson along with many of our colleagues here in 
the Chamber, worked hard over the course of a number of years to 
restore the pre-1986 act tax treatment for water and sewage CIAC. In 
1996, we succeeded in passing legislation. It was identical to pre-1986 
law with three exceptions. Two of the changes were made in response to 
a Treasury Department request. The third removed the language dealing 
with ``service connection fees'' primarily because of potential 
confusion resulting from the ambiguity of the term. The sponsors of the 
legislation were concerned that the IRS would use this ambiguity to 
exclude a portion of what the state regulators consider CIAC.
  As part of our efforts, we developed a revenue raiser in cooperation 
with the industry to make up any revenue loss due to our legislation, 
including the three changes. This revenue raiser extended the life, and 
changed the method, for depreciating water utility property

[[Page E154]]

from 20 year accelerated to 25-year straight-line depreciation. As 
consequence of this sacrifice by the industry, our CIAC change made a 
net $274 million contribution toward deficit reduction.
  It is my belief that the final revenue estimate done by the Joint 
Committee on Taxation on the restoration of CIAC included all property 
treated as CIAC by the industry regulators including specifically 
service laterals. In an October 11, 1995, letter to Senator Grassley 
the Joint Committee on Taxation provided revenue estimates for the CIAC 
legislation. A footnote in this letter states, ``These estimates have 
been revisited to reflect more recent data.'' The industry had only 
recently supplied the committee with comprehensive data, which 
reflected total CIAC in the industry including service laterals.
  I urge my colleagues to join with us in sponsoring this important 
legislation in order to ensure that American homeowners do not face 
further burdens.

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