[Congressional Record Volume 149, Number 155 (Thursday, October 30, 2003)]
[Extensions of Remarks]
[Page E2162]
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

                      Wednesday, October 29, 2003

  Mr. HERGER. Mr. Speaker, I am introducing legislation today to ensure 
that burdensome 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 contributions in aid of construction, so called 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 prospectively 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).
  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 from 20-
year accelerated to 25-year straight-line depreciation. As a 
consequence of this sacrifice by the industry, our CIAC change made a 
net $274 million contribution toward deficit reduction.
  What is most important to keep in mind is that this unnecessary tax 
of over 55 percent is passed directly on to homeowners and local 
governments. 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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