[Congressional Record Volume 150, Number 67 (Thursday, May 13, 2004)]
[Senate]
[Pages S5473-S5481]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS
By Mr. STEVENS (for himself and Ms. Murkowski):
S. 2415. A bill to designate the facility of the United States Postal
Service located at 4141 Postmark Drive, Anchorage, Alaska, as the
``Robert J. Opinsky Post Office Building,'' to the Committee on
Governmental Affairs.
Mr. STEVENS. Mr. President, I send to the desk legislation to
designate the U.S. Post Office located at 4141 Postmark Drive in
Anchorage, Alaska after Robert J. Opinsky.
Bob Opinsky started his career with the Postal Service in 1956 as a
$1.50-an-hour temporary clerk. Through hard work and dedication, he was
able to work up the ranks of the Postal Service and become the District
Manager of the Postal Service in Alaska.
During his 41 years with the Postal Service, Bob has proven his
commitment to the Postal Service. In 1964 when the great earthquake hit
Alaska, the local roads were torn apart and homes and buildings were
destroyed. In addition, the earthquake created a large hole in the
Anchorage post office building. However, despite the conditions of the
Anchorage post office and roads, Bob Opinsky went to work on the Monday
morning following the Friday quake.
Bob Opinsky introduced innovative methods to run the Postal Service.
Under Bob's leadership in 1996, the Postal Service was awarded the
Green Star Award; an award given in honor of environmental
responsibility. The Postal Service in Alaska recycled more than 725,000
pounds of mixed paper and 100,000 pounds of cardboard. Not only was the
Anchorage recycling program environmentally friendly, the Postal
Service's efforts reduced their annual disposal cost by about $34,000.
After 41 years of employment with the Postal Service, Bob Opinsky
retired from his District Manager position in 1996. Bob has poured his
heart and soul into the Postal Service. It is only fitting we honor his
commitment to the Postal Service by dedicating a post office in
Anchorage, Alaska after him.
______
By Mr. COLEMAN:
S. 2417. A bill to amend title 38, United States Code, to authorize
the Secretary of Veterans Affairs to furnish care for newborn children
of
[[Page S5474]]
women veterans receiving maternity care, and for other purposes; to the
Committee on Veterans' Affairs.
Mr. COLEMAN. Mr. President, the Veterans Administration has taken
remarkable strides over the years to adapt to the increasing number of
women veterans using VA facilities. As of 2002, there were
approximately 1.5 million women in the Armed Forces and 20,000 of these
women are from Minnesota. Many of these soldiers want to start families
when they return home and will need to use their VA healthcare coverage
for obstetrics care.
Currently, a woman can use her VA coverage for prenatal care,
delivery and postnatal care. The VA will enter into a contract with a
hospital to provide these services, but the VA cannot provide any
coverage for the baby after it is born. The baby is uninsured until a
hospital social worker or the parents can arrange for private
healthcare coverage, or in most cases, for the baby to receive Medicaid
assistance. This period of time, which in some cases can reach 2 weeks,
is very stressful for all the parties involved.
Today, I have introduced a bill that will allow the VA to provide
coverage for veterans' babies for up to 14 days after delivery in a VA
hospital or VA contract facility. This will help care for these
children during the time needed to secure long-term coverage outside of
the VA system.
This bill will also make it easier for the VA to find willing
hospitals. Today, many hospitals are reluctant to offer services to an
insured mother and an uninsured baby. If both the mother and the baby
were covered by the VA, hospitals in the veterans' local community
would be more likely to accommodate them. Finally, I am hopeful that
over time this legislation will save money for VA by eliminating extra
surcharges and fees to hospitals which currently cover their liability
for delivering an uninsured baby.
I firmly believe that veterans who have gone through the traumatic
experiences of war should not have to worry about the health of their
newborn babies because of bureaucratic glitches in the system. This
bill will cut the red tape surrounding the delivery rooms and ease the
burden on our veterans who want nothing more than to bring children
into the free society which they helped protect and defend.
Mr. President, I ask unanimous consent that the text of the bill be
printed in the Record.
There being no objection, the bill was ordered to be printed in the
Record, as follows:
S. 2417
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. CARE FOR NEWBORN CHILDREN OF WOMEN VETERANS
RECEIVING MATERNITY CARE.
(a) Authority To Furnish.--Subchapter VIII of chapter 17 of
title 38, United States Code, is amended by adding at the end
the following new section:
``Sec. 1786. Care for newborn children of women veterans
receiving maternity care
``The Secretary may furnish care to a newborn child of a
woman veteran who is receiving maternity care furnished by
the Department for up to 14 days after the birth of the child
if the veteran delivered the child in a Department facility
or in a non-Department facility pursuant to a Department
contract for the delivery services.''.
(b) Clerical Amendment.--The table of sections at the
beginning of chapter 17 of such title is amended by adding at
the end following new item:
``1786. Care for newborn children of women veterans receiving maternity
care.''.
______
By Mr. CAMPBELL:
S. 2418. A bill to amend chapters 83 and 84 of title 5, United States
Code, to authorize payments to certain trusts under the Social Security
Act, and for other purposes; to the Committee on Governmental Affairs.
Mr. CAMPBELL. Mr. President, I ask unanimous consent that the text of
the bill be printed in the Record.
There being no objection, the bill was ordered to be printed in the
Record, as follows:
S. 2418
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. AUTHORIZATION OF CERTAIN PAYMENTS UNDER THE CIVIL
SERVICE RETIREMENT SYSTEM AND THE FEDERAL
EMPLOYEES RETIREMENT SYSTEM TO CERTAIN TRUSTS
UNDER THE SOCIAL SECURITY ACT.
(a) Civil Service Retirement System.--
(1) Payments.--Section 8345(e) of title 5, United States
Code, is amended--
(A) by inserting ``(1)'' after ``(e)''; and
(B) by adding at the end the following:
``(2)(A) In this paragraph, the terms `dependent' and
`child' have the meanings given under section 8441 (3) and
(4), respectively.
``(B) Payment due a minor, or an individual mentally
incompetent or under other legal disability may be made to a
trustee under a trust meeting the requirements of
subparagraph (A) or (C) of section 1917(d)(4) of the Social
Security Act (42 U.S.C. 1396p(d)(4) (A) or (C)), if--
``(i) in the case of a minor, the minor is--
``(I) a child of the person upon whom the benefit for
payment due is based; or
``(II) a dependent (who is a child) of the person upon whom
the benefit for payment due is based; or
``(ii) in the case of an individual mentally incompetent or
under legal disability--
``(I) the incompetency or disability occurred during the
period that the individual was a child or a dependent (who
was a child) of the person upon whom the benefit for payment
due is based; and
``(II) that incompetency or disability has been continuous
since that occurrence through the date of the payment due.''.
(2) Assignability of payments.--Section 8346(a) of title 5,
United States Code, is amended--
(A) by inserting ``(1)'' after ``(a)''; and
(B) by adding at the end the following:
``(2)(A) In this paragraph, the terms `dependent' and
`child' have the meanings given under section 8441 (3) and
(4), respectively.
``(B) Except as provided under paragraph (1), money payable
under this subchapter to a minor or an individual mentally
incompetent or under other legal disability is not
assignable, either in law or equity, except to a trustee
under a trust meeting the requirements of subparagraph (A) or
(C) of section 1917(d)(4) of the Social Security Act (42
U.S.C. 1396p(d)(4) (A) or (C)), if--
``(i) in the case of a minor, the minor is--
``(I) a child of the person upon whom the benefit for the
money payable is based; or
``(II) a dependent (who is a child) of the person upon whom
the benefit for the money payable is based; or
``(ii) in the case of an individual mentally incompetent or
under legal disability--
``(I) the incompetency or disability occurred during the
period that the individual was a child or a dependent (who
was a child) of the person upon whom the benefit for the
money payable is based; and
``(II) that incompetency or disability has been continuous
since that occurrence through the date of the payment of the
money.''.
(b) Federal Employees Retirement System.--
(1) Payments.--Section 8466(c) of title 5, United States
Code, is amended--
(A) by inserting ``(1)'' after ``(c)''; and
(B) by adding at the end the following:
``(2)(A) In this paragraph, the terms `dependent' and
`child' have the meanings given under section 8441 (3) and
(4), respectively.
``(B) Payment due a minor, or an individual mentally
incompetent or under other legal disability may be made to a
trustee under a trust meeting the requirements of
subparagraph (A) or (C) of section 1917(d)(4) of the Social
Security Act (42 U.S.C. 1396p(d)(4) (A) or (C)), if--
``(i) in the case of a minor, the minor is--
``(I) a child of the person upon whom the benefit for
payment due is based; or
``(II) a dependent (who is a child) of the person upon whom
the benefit for payment due is based; or
``(ii) in the case of an individual mentally incompetent or
under legal disability--
``(I) the incompetency or disability occurred during the
period that the individual was a child or a dependent (who
was a child) of the person upon whom the benefit for payment
due is based; and
``(II) that incompetency or disability has been continuous
since that occurrence through the date of the payment due.''.
(2) Assignability of payments.--Section 8470(a) of title 5,
United States Code, is amended--
(A) by inserting ``(1)'' after ``(a)''; and
(B) by adding at the end the following:
``(2)(A) In this paragraph, the terms `dependent' and
`child' have the meanings given under section 8441 (3) and
(4), respectively.
``(B) Except as provided under paragraph (1), an amount
payable under subchapter II, IV, or V to a minor or an
individual mentally incompetent or under other legal
disability is not assignable, either in law or equity, except
to a trustee under a trust meeting the requirements of
subparagraph (A) or (C) of section 1917(d)(4) of the Social
Security Act (42 U.S.C. 1396p(d)(4) (A) or (C)), if--
``(i) in the case of a minor, the minor is--
``(I) a child of the person upon whom the benefit for the
amount payable is based; or
``(II) a dependent (who is a child) of the person upon whom
the benefit for the amount payable is based; or
``(ii) in the case of an individual mentally incompetent or
under legal disability--
``(I) the incompetency or disability occurred during the
period that the individual was a child or a dependent (who
was a child) of the person upon whom the benefit for the
amount payable is based; and
``(II) that incompetency or disability has been continuous
since that occurrence through the date of the payment of the
amount.''.
[[Page S5475]]
______
By Mr. PRYOR (for himself and Mr. Baucus):
S. 2419. A bill to amend the Internal Revenue Code of 1986 to provide
additional relief for membes of the Armed Forces and their families; to
the Committee on Finance.
Mr. PRYOR. Mr. President, our men and women serving in the military
are the defenders of freedom and security around the world. The special
role they play demands that they be ``on call'' to serve our Nation at
points all over the globe.
The unique nature of their job has resulted in a unique and, I must
say, very complex compensation package. The various types of
compensation and benefits oftentimes create an especially difficult
burden, especially when it comes to filing their tax return.
Through the years, Congress has periodically passed laws that
recognize the special needs of our military and to lessen
administrative burdens on them.
During consideration of such a bill last year, I approached the
distinguished chairman of the Senate Finance Committee, Senator Chuck
Grassley, and ranking member of that committee, Senator Max Baucus, and
asked them to join me in an effort to get a fresh look at the overall
picture of how the Tax Code treats our military.
I was pleased when they agreed to join me in this work, and I was
delighted to jointly request an expedited study by the GAO. It has been
an honor to work with them and their staffs throughout this process,
and I believe our work will produce good things for our military.
Yesterday, GAO released a report as a result of our request. The
report raises many interesting findings, but there is one especially
important issue that demands our immediate attention. Mr. President, I
want to discuss the problem identified by GAO, and then I will
introduce a bill to correct the inequity that has been documented.
The problem identified by GAO is the result of complex interactions
between the combat zone exclusion under section 112 of the Internal
Revenue Code and the earned-income tax credit and the child tax credit.
Under the combat pay exclusion, a very important benefit provided by
Congress, military pay earned--including basic pay, bonuses, special
pay and allowances--is excluded from taxable income while members of
the military are serving in a designated combat zone.
That is right, Uncle Sam doesn't impose taxes on military pay for
those serving our country in combat zones--and rightfully so.
However, income excluded under the combat pay provision is also
excluded from income for the purpose of computing the earned-income tax
credit and the child care credit.
As a result of this, thousands of men and women serving in combat, in
places such as Iraq, Afghanistan, and other places around the globe,
will see a reduction or elimination of their earned-income tax credit
or the child tax credit and, in effect, because of how these interact,
will lose money. In other words, the Tax Code has the impact of
penalizing them because they are serving in combat zones. That is the
opposite effect intended by Congress.
The GAO report characterizes this result as an ``unintended
consequence.'' I call it a wrong, and I urge my colleagues to join me
in fixing this glitch as soon as possible.
The urgency of this situation is highlighted especially when you
focus on those of our troops which this affects.
We are talking about troops who tend to be in combat for more than 6
months, who are not making much money, who have families to provide for
and have little or no savings or little or no spouse income.
I am going to repeat that. We are talking about a clear wrong in the
Tax Code that takes money away from men and women serving this Nation
heroically and in dangerous places such as Iraq and Afghanistan.
The GAO analysis suggests the amount of the tax benefit loss enlisted
personnel could face is up to $4,500 and $3,200 for officers. This is
real money, make-or-break money, to many of these families who are
already under an enormous amount of stress. This money will make a real
difference and we need to get about the business of fixing this problem
as soon as possible.
To correct the unfairness of current law, I am introducing the Tax
Relief for Americans in Combat Act. The bill allows men and women in
uniform serving in combat to include combat pay for the purpose of
calculating their earned income tax credit and their child tax credit
benefits. In other words, they will be able to continue receiving their
rightful combat pay exclusions while having the ability to take full
advantage of other tax credits. I urge my colleagues to join me in this
effort. It will make a real difference for thousands of military
families across the Nation.
I thank Liz Liebschultz and Christy Mistr of the Finance Committee
staff for their advice and counsel in helping me sort through this
matter in generating this GAO report. They did the work in drafting the
provisions of this bill to make sure these provisions could be adopted
by the Senate as soon as possible.
Also I want to recognize the GAO team which put this report together,
because they did a lot of work on this: Jim White, Derek Stewart, Lori
Atkinson, Jennifer Gravelle, John Pendleton, Sonja Ware, and James
Wozny. They did a great job in preparing this report and I appreciate
their hard work.
While we found this tax breakdown in the GAO report, there is also a
lot of good news in the report regarding the compensation of our
military personnel and I hope my colleagues will take time to review
what the GAO says in all the information provided.
During a time of war, I do not want to lose sight that the Senate
Armed Services Committee chairman, Senator John Warner of Virginia, and
the ranking member, Senator Carl Levin of Michigan, are taking care of
our troops financially.
One thing we talked about in the Armed Services Committee is
recruiting and retention. Are we going to be able to meet those two
objectives for our military? Well, I think today with this bill we can
send a clear message to our youth and our enlisted personnel that a
military career is an amazing option, and the compensation is such that
it can compete with the private sector.
There is a real problem with our Tax Code that needs to be fixed
immediately and the good news is, it can be. The bill corrects a
problem and lets our troops risking life and limb know while they are
away fighting for us, fighting for freedom and democracy, we will be in
the Senate fighting for them and fighting for their families.
I urge my colleagues to consider this legislation and also to
consider cosponsoring this bill with me.
I ask unanimous consent that a GAO summary, and the text of the bill,
be printed in the Record.
There being no objection, the additional material was ordered to be
printed in the Record, as follows:
General Accounting Office,
Washington, DC, May 7, 2004
Subject: Military Personnel: Active Duty Compensation and Its
Tax Treatment.
.Hon. Charles E. Grassley,
Chairman,
Hon. Max S. Baucus,
Ranking Minority Member, Committee on Finance, U.S. Senate,
Hon. Mark Pryor,
U.S. Senate.
The Department of Defense's (DOD) total military
compensation package for active duty members consists of both
cash and noncash benefits. Since the late 1990s, Congress and
the DOD have increased military cash compensation by
increasing basic pay and allowances for housing, among other
things. Military members also receive tax breaks, which are a
part of their cash compensation. Moreover, active duty
personnel are offered substantial noncash benefits, such as
retirement, health care, commissaries, and childcare. In some
cases, these noncash benefits exceed those available to
private-sector personnel. DOD relies heavily on noncash
benefits because it views benefits as critical to morale,
retention, and the quality of life for service members and
their families.
To better understand the military compensation system, you
asked us to provide you information on active duty military
compensation and its tax treatment. At the outset of this
engagement, we agreed to keep you periodically informed of
the status of our work. In January 2004, we briefed your
staff on our preliminary observations. Because our work
identified that the combat zone tax exclusion could impact
some service members, you asked us to focus our work on
military cash compensation and to do additional work to
estimate the effect of the combat zone tax exclusion on
service members' compensation. We provided your staff
[[Page S5476]]
subsequent briefings that estimated the effect of the combat
zone exclusion. As requested, we have updated and combined
the briefings for this report to (1) summarize active duty
cash compensation and describe how military compensation
varies at different career points for officers and enlisted
members; (2) explain how military pay is taxed and any
special tax treatment of military compensation; (3)
estimate the effects of interactions between the combat
zone exclusion and certain tax credits on military
members' compensation; and (4) describe the benefits DOD
provides active duty members as well as specific programs
available to members that encourage wealth building (see
enclosure I). To provide a rough estimate of the number of
service members in 2003 who suffered a net tax loss
because of the interactions between serving in a combat
zone and certain tax credits, we used aggregate data
compiled by the Defense Manpower Data Center on the number
of members who served in a combat zone in 2003 and
aggregate data on the percentage of spouses not in the
workforce from the 2002 Active Duty Survey. We believe
that the data is sufficiently reliable to estimate within
a broad range the number of people affected. We conducted
our review from October 2003 through April 2004 in
accordance with generally accepted government auditing
standards.
Results in Brief
The foundation of military cash compensation is what the
DOD calls regular military compensation--the sum of basic
pay, nontaxable allowances for housing and subsistence, and
the associated federal tax savings. Some members also receive
additional cash compensation in the form of special pays,
incentives, and other allowances. In total, there are over 50
of these pays, incentives, and allowances, ranging from
reenlistment bonuses to clothing allowances and family
separation allowances. The annual amounts of these pays,
incentives, and allowances range from a few hundred dollars
to thousands of dollars, and some of these are also
nontaxable. In general, regular military compensation
progresses steadily with pay grade and years of service. For
example, a junior enlisted member with 3 years of service
might earn around $40,000 in cash compensation, while a
senior officer with 22 years of service could earn cash
compensation of about $130,000.
Military service brings with it significant tax advantages.
Basic pay and most other pays are generally subject to
federal income tax; however, certain allowances are not
taxed, such as the basic allowances for housing and
subsistence. DOD considers the federal tax advantage as the
additional income military members would have to earn in
order to receive their current take-home pay if their
allowances for housing and subsistence were taxable. In fact,
DOD views the federal tax advantage as part of service
members' cash compensation when it compares military pay with
civilian pay. In addition, pay earned--including basic pay,
bonuses, special pays, and allowances--while members are
serving in one of the 15 designated combat zones is excluded
from taxes.
The complex interactions between the combat zone exclusion
and certain tax credits (principally the Earned Income Tax
Credit and the Additional Child Tax Credit) appear to be
creating unintended consequences. Specifically, some low-
income- earning service members who serve in a combat zone
are worse off for tax purposes, while some higher-income-
earning members are better off because they become
eligible for a tax credit that is normally targeted to
low-income workers. Low-income members with children
qualify for refundable tax credits that can not only
offset all of their tax liability but can also leave them
with payments from the government. The combat zone
exclusion can actually cause a reduction or elimination of
these payments to some service members. For example, over
certain income ranges the amount of Earned Income Tax
Credit that a taxpayer earns increases as his or her
income increases. Service in a combat zone reduces the
amount of earned income that a member reports for tax
purposes and, thus, can reduce or eliminate the refunded
portion of the member's credit. These members actually
suffer a net loss in tax benefits because they receive no
offsetting advantage from the exclusion. Our analysis
suggests that some of the roughly 430,000 members serving
in a combat zone in 2003--between 5,000 and 10,000 members
in one-earner households--suffered a net loss of tax
benefits. Data limitations make it difficult to produce a
comprehensive estimate of the number of members who
suffered a net loss of tax benefits. In particular, it is
more difficult to make a reliable estimate of the number
of members with working spouses who had net losses of tax
benefits. However, we believe that number is not likely to
be much higher than several thousand and could be less
than that. Additionally, the number of members losing tax
benefits could be larger in 2004 depending on the how many
service members are in a combat zone and how long they are
there. The amount of the tax benefit loss varies
considerably, with a maximum of about $4,500 or $3,200,
for enlisted and officer members, respectively. In
general, the members losing tax benefits tend to be those
who are serving in a combat zone longer than 6 months; who
are in the lower pay grades; who are married with
children; and who have little to no investment or spousal
income. On the other hand, some other low-income members
earned larger earned income tax credits by serving in a
combat zone than they otherwise would have. Moreover, it
appears that a large number of service members who had
incomes exceeding the normal upper limit for Earned Income
Tax Credit eligibility and who served in a combat zone for
at least 6 months could become eligible to receive that
credit as a result of this income exclusion. DOD is aware
of service members who are disadvantaged and advantaged by
these tax provisions, and it is seeking remedies that
would require changing the rules of the tax credits so
that income earned in a combat zone would not be excluded
when calculating eligibility for the tax credits.
Benefits are a substantial portion of noncash military
compensation. DOD offers a wide range of benefits to active
duty members, including health care, retirement, education
assistance, and installation-based benefits--that is,
services found on military installations, such as
commissaries and child care. While the value of benefits to
members varies depending on the members' needs, the cost to
provide such benefits is substantial. Some of the benefits
DOD provides encourage wealth building over a service
member's career. Military retirement--a lifetime annuity
generally provided to members who serve 20 years or more--
is one of the primary wealth-building programs available
to military members. However, DOD estimates that less than
half of officers and only about 15 percent of enlisted
members will become eligible for retirement. In addition,
other savings programs are offered, such as the Thrift
Savings Plan and the Savings Deposit Program. Since 2001,
service members can contribute a percentage of their basic
pay, before taxes, to be invested in one or more of the
specific funds offered through the Thrift Savings Plan;
about 21 percent of the active duty military participate.
Service members deployed to a combat zone or other
qualified areas can contribute to the Savings Deposit
Program, earning a guaranteed 10 percent interest on their
investment. However, less than 1 percent of the active
duty force participates. Service members may also be
eligible to participate in the Department of Veterans
Affairs no-money down, mortgage-backed loan program.
Moreover, military members can take advantage of a number
of wealth-building tax provisions available to citizens,
such as deductions for mortgage interest and tax credits
for elective retirement accounts contributions.
Matter for Congressional Consideration
If the Congress wishes to remedy the unintended tax
consequences associated with the combat zone exclusion, it
should consider revising the rules of the Earned Income Tax
Credit and the Additional Child Tax Credit with respect to
income earned in a combat zone.
Scope and Methodology
Our audit work focused on military cash compensation and
its tax treatment for active duty service members. To
summarize the components of active duty military members'
compensation, we reviewed policies, publications, and
regulations governing military compensation. We interviewed
officials from the Office of the Secretary of Defense and the
Defense Manpower Data Center. We compiled 2003 data for basic
pay tables, basic allowances for housing and subsistence
rates, special pay amounts, incentive pay amounts, and
allowance pay amounts. To describe how military compensation
varies at different career points for officers and enlisted
members, we created notional junior and senior enlisted
service members and officers. We assigned these hypothetical
service members typical years of service for their pay
grades, locations across the United States, numbers of
dependents, and special pays typical of their pay grades and
locations. We discussed our examples with officials from the
Office of the Under Secretary of Defense for Personnel and
Readiness to ensure that our profiles were reasonable. We
identified benefits offered to active duty military members
and some associated values by reviewing past GAO reports, DOD
documents, and the fiscal year 2002 DOD Actuarial Valuation
Report.
To explain how military pay is taxed and any special tax
treatment of military compensation, we reviewed DOD policies
and regulations and the Internal Revenue Services' 2003 Armed
Forces Tax Guide publication. To estimate the federal tax
advantage of the exclusion of the housing and subsistence
allowances from taxation, we estimated the tax liability for
hypothetical members according to current tax rules as if the
members' housing and subsistence allowances were taxable. We
present the pre-tax value of this tax advantage--that is, the
additional income the members would have to earn in order to
receive their current take home pay if their allowances were
taxable.
To estimate certain effects of the combat zone exclusion on
military members' taxes, we estimated the number of members
negatively affected and the number who may become eligible
for Earned Income Tax Credit by the combat zone tax
exclusion. For more detailed information on how we estimated
the combat zone effect, see enclosure II.
To describe programs available to members that encourage
wealth building, we reviewed documents and interviewed
officials from the Office of the Secretary of Defense and the
Department of Veterans Affairs. In addition, we also reviewed
other documents to identify tax provisions that encourage
wealth building for citizens.
[[Page S5477]]
Agency Comments
In providing oral comments on a draft of this report, DOD
representatives from the Office of the Under Secretary of
Defense for Personnel and Readiness stated that they
generally concurred with the content of the report. Technical
comments were incorporated as appropriate. DOD officials told
us that they have been seeking to remedy the unintended tax
consequence related to the combat zone tax exclusion. We also
received comments on the tax-related sections of our draft
from Internal Revenue Service (IRS). In providing oral
comments, IRS representatives from the Office of the
Commissioner, Wage and Investment Division and the Office of
Legislative Affairs said that the IRS could administer a
change in law that would include combat pay in earned income
for purposes of computing eligibility for the Earned Income
Tax Credit. Since earned income used for computing Earned
Income Tax Credit is not reported anywhere on the IRS form
1040 or Schedule EIC, IRS would modify the Earned Income Tax
Credit worksheets and related instructions to account for the
combat zone pay. In addition, they would work with DOD to
develop a process for identifying and processing returns from
taxpayers who would be affected by this provision. The
representatives noted that, although at the outset the
process would likely be primarily manual, IRS would explore
options for automation. The IRS officials also provided
technical comments relating to the child tax credit, which we
incorporated as appropriate, and made the point that changes
to the treatment of income earned in a combat zone for the
purposes of the two credits could affect other tax benefits,
such as the dependent care credit and the exclusion for
employer-provided benefits under a dependent care assistance
program, depending on the specific wording of the changes. We
also spoke to the Department of Treasury staff about the tax-
related sections of our briefing documents and incorporated
their technical comments as appropriate.
As arranged with your office, unless you publicly announce
its contents earlier, we plan no further distribution of this
report until 30 days from its issue date. At that time, we
will send copies of this report to the Secretary of Defense
and the Commissioner of the Internal Revenue Service. We will
also make copies available to appropriate congressional
committees and to other interested parties on request. In
addition, the report will be available at no charge on our
Web site at http://www.gao.gov.
If you or your staff have any questions about this report,
please contact Derek Stewart, (202) 512-5559, or James White,
(202) 512-5594, or e-mail them at [email protected] or
[email protected], respectively. Key contributors to this report
were Lori Atkinson, Jennifer Gravelle, John Pendleton, Sonja
Ware, and James Wozny.
Derek B. Stewart,
Director, Defense Capabilities and Management.
James R. White,
Director, Strategic Issues.
____
S. 2419
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Tax Relief for Americans in
Combat Act''.
SEC. 2. EARNED INCOME INCLUDES COMBAT PAY.
(a) Child Tax Credit.--Section 24(d)(1) of the Internal
Revenue Code of 1986 (relating to portion of credit
refundable) is amended by adding at the end the following new
sentence: ``For purposes of subparagraph (B), any amount
excluded from gross income by reason of section 112 shall be
treated as earned income which is taken into account in
computing taxable income for the taxable year.''.
(b) Earned Income Tax Credit.--Subparagraph (B) of section
32(c)(2) of the Internal Revenue Code of 1986 (relating to
earned income) is amended--
(1) by striking ``and'' at the end of clause (iv),
(2) by striking the period at the end of clause (v) and
inserting ``, and'', and
(3) by adding at the end the following:
``(vi) any amount excluded from gross income by reason of
section 112 shall be treated as earned income.
Any taxpayer may elect to not apply clause (vi) with respect
to any taxable year ending after the date of the enactment of
such clause and before 2005.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years ending after the date of the
enactment of this Act.
Mr. BAUCUS. Mr. President, I rise today to join my good friend from
Arkansas, Senator Pryor, in introducing the Tax Relief for Americans in
Combat Act. I applaud Senator Pryor for his commitment to our Armed
Forces. The study and the bill that he has unveiled today provide just
one example of that commitment.
Last year, Senator Pryor asked me to join him in requesting a study
on the compensation received by our military personnel, and the tax
treatment of this compensation. This study has been completed. Many of
the results are encouraging. But the study reveals one significant
glitch in the tax law that is hurting many of our low-income military
personnel.
For the most part, the compensation packages received by our military
personnel are competitive with the private sector. And the Tax Code
provides many incentives for military service. But as the GAO study
reveals, some low-income military personnel are losing out because they
have been called to serve in a combat zone.
Now this just does not make sense. Why would we penalize those
military personnel who are serving our country in Afghanistan, Iraq,
and elsewhere around the world?
Let me explain. Under current law, compensation earned by military
personnel while they are serving in a combat zone is exempt from income
tax. This provides most military personnel in these areas with a very
significant tax benefit. Because of a glitch in the tax law, however,
certain individuals may actually end up losing money because of this
exemption.
This is because the law is preventing them from receiving the Earned
Income Tax Credit and Refundable Child Tax Credit that they would
otherwise been entitled to. These credits are based on earned income,
and the law says that combat zone income does not qualify as earned
income. GAO has found that as many as 10,000 men and women serving in
combat will see a reduction or elimination of their EITC or child
credit, they will, in effect, lose money.
This bill would fix that glitch in the law, and provide these
individuals with the tax credits to which they are entitled.
Our brave men and women in the Armed Forces put their lives on the
line for our Nation every day. It is the least we can do to ensure that
they are being properly compensated and receiving all the tax benefits
that are due to them under the law. Given the ongoing conflict in Iraq
and the war on terrorism, it is more important than ever that we
vigilantly oversee the tax system to ensure that our troops are being
treated fairly.
I applaud Senator Pryor for taking the lead. I am proud to join him
in introducing legislation to correct these errors and ensure our
service men and women receive the proper level of tax relief they
deserve. Serving our country is one of the most honorable services a
citizen can provide. Now it is up to us to provide them with the tax
compensation they are due.
I hope that the Senate will take up and pass this bill at the
earliest appropriate time, and make sure that our men and women in
uniform receive the tax relief to which they are entitled.
______
By Mr. GRAHAM of Florida:
S. 2420. A bill to amend title XXI of the Social Security Act to make
all uninsured children eligible for the State children's health
insurance program, to encourage States to increase the number of
children enrolled in the Medicaid and State children's health insurance
programs by simplifying the enrollment and renewal procedures for those
programs, and for other purposes; to the Committee on Finance.
Mr. GRAHAM of Florida. Mr. President, I rise to introduce the State
Children's Health Insurance Program, SCHIP, Expansion Act of 2004. This
Congress passed the Children's Health Insurance Program in the late
1990s. It has been a great success. There are 5 million American
children today who have quality medical insurance because of this
program; without this program there would be another 5 million
Americans uninsured.
The expansion of this legislation in 2004 would allow States to
expand health coverage under the SCHIP program to all uninsured
children, regardless of their family income. It would also provide
critical funding for this important program.
This week is Cover the Uninsured Week. This is a collaborative effort
of the Robert Wood Johnson Foundation and many other organizations
highlighting the vast number of uninsured in this country and the need
to find a solution.
Yesterday, I introduced legislation with Senators Daschle and Kennedy
which will call for the Nation to cover all Americans by the year 2006.
The goal of universal coverage is one that I believe every Member of
this Senate
[[Page S5478]]
shares. Based on the experience of the last decade, it is my judgment
that the road to achieving that goal of full coverage begins with a
first step. We have not taken a significant first step on the road to
closing the gap now in over 5 years. In that 5-year period, we have
seen a dramatic increase in the number of uninsured Americans,
including uninsured children.
We could take that first step by providing health coverage for all
children. That step will be a large one.
Today, there are an estimated 9 million American children under the
age of 19 who are uninsured for their health care. Over 640,000 of
those children live in my home State of Florida. There are other large
groups of uninsured Americans, however, and one might ask, why pick out
children from this large group of uninsured Americans? The goal is to
cover all Americans. The reality is the effort to accomplish that
objective in one giant step has proven to be without success. Uninsured
children, in my judgment, represent the group that we should start
with, for the following reasons.
We know this about uninsured children: They are four times more
likely to delay seeking care than insured children, and they are five
times more likely than insured children to use an emergency room for
regular medical care. Lack of timely treatment can turn a simple health
problem into a serious childhood illness. Covering children is cost
effective, and more important, it improves the lives of children. It
can, in fact, save the lives of children. Let me give two common
examples.
Ear infections are a very common affliction of young children and
easily treated with an inexpensive antibiotic. However, if that ear
infection is not diagnosed and not treated, the infection can mature
into deafness and learning disabilities. What happens when an
unvaccinated child is struck with bacterial meningitis? Failure to
diagnose and treat this contagious disease with an antibiotic can lead
to brain damage, even to death.
Our Nation's publicly funded health programs play a critical role in
providing access to care in order to prevent such occurrences. As I
said in the beginning, SCHIP has made an enormous difference in the
health and lives of over 5 million American children, many of whom are
from working families.
We know 8 out of 10 of the currently uninsured Americans come from a
family in which one or both parents are working.
Despite the success of SCHIP, States have taken to such tactics as
capping enrollment and placing limits on eligibility and benefits. I am
sorry to have to report some of the things that have happened in my
State, not because they are peculiar, but because they are increasingly
representative of what is happening in States across America.
Until recently, Florida had amassed a waiting list of children who
were eligible for the SCHIP program but who were not being served,
primarily because of limitations on State funds to match the Federal
funds. We had a waiting list of nearly 100,000 Florida children.
Although most of these children have since been temporarily enrolled,
the Florida SCHIP program has eliminated all outreach activities; that
is, those activities that had informed families about the availability
of these programs have been eliminated. Florida has also restricted
eligibility for children in families whose employers offer any kind of
dependent coverage, regardless of its cost.
If there is one thing we know, it is that one of the factors that is
fueling the increase in the numbers of uninsured Americans is that even
when employers provide at least the appearance of health insurance
coverage but that coverage is so expensive that it amounts to more than
5, sometimes almost 10 percent of that family's income, and as
available as it may appear, in real economic terms it is not available.
Yet in my State, I am sad to report that a child who has fallen into
that circumstance will not any longer be considered eligible for the
SCHIP program.
Florida has eliminated its SCHIP waiting list. No one in the future
will ever say that Florida has nearly 100,000 children who are eligible
for but not receiving SCHIP coverage because there will not be any list
of children who are waiting for their opportunity to be covered. This
is a means by which knowledge of the number of uninsured children who
are denied access to the program will be denied to the people of
Florida, as will, therefore, their ability to influence public policy
to increase the health care coverage of the children of Florida.
What would the legislation I introduce today do to address these
problems? First, it would allow States to expand health coverage to
uninsured children, regardless of the income, so that no child goes
without necessary care.
Second, it would provide Federal financial support to assure the
long-term stability of the SCHIP program. To meet congressional budget
limits, Federal funding for SCHIP declined by over $1 billion a year,
beginning in the fiscal year 2002, and running through the current
fiscal year of 2004. That reduction, which is referred to as the CHIP
dip, has brought the Federal funds available for children's health
insurance from $4 billion annually down to $3 billion.
The consequence of this is that many States which had a fully
operational SCHIP program--that is, they were using the full amount of
the pre-2002 Federal funds--are now facing another component of their
fiscal crisis.
The SCHIP Expansion Act would restore Federal funding allotments to
their pre-2002 level, assurance that States could continue to cover
more uninsured children.
The legislation would also invest additional resources in SCHIP,
allowing States that are currently using all of their Federal funds to
expand their programs, providing relief to many States that anticipate
a shortage of funding in the near future.
The Center on Budget and Policy Priorities estimates that by 2007, on
the current course, 39 States will have spent their entire funding
allotments. Additional funds are necessary to allow these States to
continue to reach new currently uncovered, uninsured children. Many of
our uninsured children are, in fact, already eligible for coverage
under SCHIP, but where you have limitations in Federal or State funds,
they are not enrolled. Effective outreach and streamlined enrollment
are keys to improving coverage.
SCHIP expansion will help States cover more children by increasing
funds for outreach in States. That will simplify the enrollment
process.
Finally, this legislation will prohibit States that have not
exhausted all available Federal funds from capping enrollment in their
SCHIP program. Where enrollment is capped, children are put on a
waiting list--if the State has not done what Florida has done, which is
to eliminate the waiting list, and they will go without coverage.
Without coverage, their parents must choose between paying for rent and
paying for medicine for their sick children.
Have we not reached a sad state of affairs in this Nation when many
of our elder citizens have to make a choice between paying for
prescription drugs or eating a nutritious meal three times a day, and
that many of our parents of young children who are sick and without
medical insurance must make a choice between paying the rent or paying
for the medicine for their child?
My bill assures no family faces such a choice as a result of an
arbitrary enrollment tax. States which choose to participate in SCHIP
must be willing to participate fully and cover as many children as they
can with the funds they have available. There is no reason in a nation
of unsurpassed wealth and of unsurpassed medical talent that any child
should be without health insurance coverage.
Investment in proven effective public programs is imperative.
Although our overall goal is universal coverage, assuring that all
children have access to quality health care is a crucial first step. In
my opinion, steps 2 and 3 should be to cover the working poor and the
early retirees. These steps won't achieve the goal of full coverage
even in conjunction with the full coverage of children, but they will
significantly close the gap of those Americans today who are without
health coverage.
The SCHIP expansion program represents a serious and long overdue
commitment to expanding coverage for the most vulnerable in our
society, our young boys and girls. This measure has
[[Page S5479]]
the support of the Children's Defense Fund, Catholic Charities USA, the
Association of Maternal and Child Health Programs, and Families USA.
I ask unanimous consent that a letter of support be printed in the
Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Association of Maternal and
Child Health Programs,
Washington, DC, May 13, 2004.
Hon. Bob Graham,
U.S. Senate,
Washington, DC.
Dear Senator Graham: The Association of Maternal and Child
Health Programs (AMCHP) supports your efforts to ensure that
children have access to health care coverage through the
State Children's Health Insurance Program (SCHIP). All
children deserve quality health care.
The SCHIP Expansion Act of 2004 highlights the vital
importance of the SCHIP program in assuring the health of our
nation's children. The bill provides states with financial
incentives to continue to expand the number of children
covered by SCHIP. At the same time, the bill prevents states
from rolling back coverage by capping enrollment.
AMCHP is a national, nonprofit organization that represents
state public health leaders administering family health
programs. These family health programs serve over 27 million,
children and youth, including almost 18 million children. Our
members serve insured, underinsured, and uninsured women,
children and their families.
Thank you again for your leadership on this important issue
and we look forward to working with you to address the needs
of the 8 million uninsured children in this country.
Sincerely,
Deborah Dietrich,
Director, Center for Policy and Advocacy.
Mr. GRAHAM of Florida. I call upon this Congress to act and to act
this year to pass this important legislation, and to remove from the
rolls of the uninsured for health coverage Americans, at least those
most fragile and vulnerable, those we love the most, our children.
______
By Mr. KENNEDY:
S. 2421. A bill to modernize the health care system through the use
of information technology and to reduce costs, improve quality, and
provide a new focus on prevention with respect to health care; to the
Committee on Health, Education, Labor, and Pensions.
Mr. KENNEDY. Mr. President, the Health Care Modernization, Cost
Reduction, and Quality Improvement Act addresses three serious and
related problems in our health care system that affect every American
family: Health care costs are too high and are rising too rapidly. The
quality of care received by too many patients is well below the
standard that we are capable of achieving. In fact, the gap between the
care we actually provide and the care we should be providing is so
great that the prestigious Institute of Medicine has referred to it as
a ``quality chasm.'' Our system lavishes funds on sickness care and
neglects the health promotion and disease prevention activities that
are the most effective ways of reducing health costs and assuring good
health for as many of our people as possible.
The legislation we are introducing is an effective way to modernize
and improve the health care system, by using modern information
technology, by paying for value and results and not simply for
procedures performed or patients admitted to hospitals, and by focusing
on improving quality and preventing disease.
Controlling the soaring cost of health care is essential. In the year
2000, health insurance premiums grew 8 percent--two and a half times
the cost of living. In 2001, premiums went up 11 percent--six times the
Consumer Price Index. They went up 13 percent in 2002, and 14 percent
in 2003--almost eight times the cost of living increase. By any
standard, increases like that are unsustainable.
We have to bring these costs under control--but there is a right way
and a wrong way to do it. Arbitrary cutbacks for hard-pressed hospitals
and physicians are the wrong remedy.
With emergency rooms bursting at the seams, nursing shortages
threatening the quality of care, and physicians forced to spend less
time with more patients, we have an obligation to all our health
providers as well. They're the backbone of our health care system, and
we have an obligation to help them provide the quality care that every
patient deserves.
Fortunately, the right way to control costs is also the right way to
achieve higher quality care. It's based on an emerging consensus of
health experts and practitioners. It involves four fundamental
principles--using information technology, paying for results, improving
quality, and investing in prevention.
The gap is vast and growing between information technology and the
current practice of medicine. Health care in America is the best in the
world, but it is also one of the least efficient industries in America.
We spend a staggering $480 billion a year on administration alone--more
than 30 cents of every dollar spent on care. Over a quarter of all
personnel in the health care system today are performing administrative
tasks, not providing care.
The potential savings through modern technology are immense.
Transactions in health care cost $12 to $25 apiece. Brokers and bankers
used to have similar costs, but now, a transaction in these industries
costs less than one cent.
Information technology can also improve the quality of care, at the
same time it reduces costs. Automated patient record-keeping can help
bring real coordination to what is often a frighteningly fragmented
health care system.
Today, for one in five patients with significant health problems,
various health professionals order duplicate tests and procedures. One
in four patients arrive for a doctor's appointment and find that needed
test results or records are not available. Information technology can
end this waste of time and resources and also prevent the errors that
reduce quality. Automated prescribing, for example, has reduced errors
by 95 percent, and reduced hospital costs by an amazing 13 percent.
It's time to end the disconnect between modern health care and modern
information technology, and the savings will be immense.
The gap between the best standard of care and the care that too many
patients receive is staggering. A quarter of all breast cancer patients
receive substandard care. A third of all patients diagnosed with high
blood pressure receive substandard care. Half of asthma patients
receive substandard care. Sixty percent of patients with pneumonia
receive substandard care. Almost 80 percent of patients with a hip
fracture receive substandard care.
The Midwest Business Group on Health estimates that poor quality care
costs employers $2,000 a worker every year. Improving quality can cut
costs dramatically. But more important, it can reduce unnecessary
suffering. For patients and their families, good quality care can truly
mean the difference between life and death, and between disability and
health.
One of the highest barriers to improving the quality of care is the
backward incentive system embedded in the way we pay for care. We need
to start rewarding the quality care by paying for results, and not just
for the number of procedures performed or the number of hospital
admissions. Too often, the incentives today are geared to doing more--
not doing better. It makes no sense that doing better today can
actually result in even greater financial hardship for health care
institutions. If hospitals organize patient-tracking, home visits, and
patient education to improve care for chronic diseases, they can reduce
hospitalization dramatically. But the hospitals won't get paid much, if
anything, for these improvements--and they will no longer receive the
large reimbursements they would otherwise receive for inpatient care.
Use of doctors specially trained to manage hospital intensive care
units has been shown to reduce costs and improve outcomes. But fewer
days in the ICU mean lower revenues for hospitals. That's wrong, and we
need to correct it.
Hospitals in Boston have already negotiated terms with insurers under
which they are paid for results, rather than days of care. Some
business associations, such as the Leapfrog Group, have begun to make
quality standards a condition for participation in their insurance
plans. the Department of Health and Human Services is testing the use
of incentive payments to hospitals that meet specific quality
standards. These steps are hopeful, but we need to make payment for
results the rule, rather than the exception, in all aspects of our
health care system.
[[Page S5480]]
Another key step is to assure that the typical standard of care comes
much closer to the best standard of care. We need to do far more to see
that what we know how to do for patients is actually what is done.
Opportunities are immense for improvements by targeting specific
diseases that have high incidence, high costs, and high impact on
individuals and families. Diabetes, for example, afflicts 17 million
Americans. Patients with the disease account for one in ten dollars of
overall health expenditures and one in four dollars of expenditures by
Medicare. By using proven methods of prevention and treatment, we can
save 10 million Americans from diabetes-related amputations,
disability, or blindness during their lives--and save more than 50
billion dollars a year as well.
Stroke is another example of the huge gap between what we could do
and what we actually do. Stroke is the third leading cause of death and
one of the major causes of disability. It strikes nearly 750,000
Americans each year. The economic cost is also staggering. The United
States spends almost $50 billion a year in caring for persons who have
suffered a stroke. Appropriate, timely intervention with clot-
dissolving drugs has been shown to reduce disability and death by 55
percent but only three percent of patients receive the needed
treatment.
Chronic illnesses are major costs in the current system. Medicare
beneficiaries with three or more chronic conditions account for almost
90 percent of Medicare spending. Well-organized care for patients with
chronic conditions such as congestive heart failure, diabetes, asthma,
and depression produce significant reductions in costs and significant
improvements in outcomes. But only a fraction of patients with chronic
conditions have the opportunity to benefit from such treatment.
Finally, to cut costs and promote quality, we can do much more to
stop illness before it starts. Health promotion and disease prevention
must be central to our health system as hospital and physician care.
Four hundred thousand Americans require medical treatment every year
for diseases that are fully preventable by vaccination. Lack of
exercise and poor diet cost almost $80 billion a year because of
increased heart disease, cancer, and diabetes.
The legislation being introduced today is a recipe for a peaceful
revolution in the way health care in the United States is delivered.
Building on a growing expert consensus, it provides a blueprint for a
better health care system that will be lower in cost, higher in
quality, and more closely oriented toward prevention.
To assure that modern information technology will be fully utilized
in health care, the legislation sets a goal of full implementation of a
broad-based system of electronic medical records and automated bill-
paying. It authorizes grants, loans and loan guarantees for health
providers to install and implement clinical information systems that
meet national technical standards for parameters such as security and
interoperability.
The bill also offers larger reimbursements for providers who
implement these types of information systems. Over a period of time, it
reduces payments for large health care facilities that fail to do so.
The legislation also encourages the use of information technology to
reduce the administrative costs, by requiring insurance companies to
adopt the same types of computerized transaction-processing systems
that are the norm in other industries.
In these ways, the legislation begins the needed effort to enable the
health care system to become a system that pays for value, rather than
solely for procedures performed or illnesses treated. The Secretary of
HHS is required to set quality standards for providers of services.
Public and private payers will be required, through their reimbursement
procedures, to reward the attainment of these quality standards, and
are permitted to reduce reimbursements to providers who fail to meet
the standards.
When a provider of services believes it can provide higher quality
care at lower cost, but feels that existing reimbursement procedures
will not fairly recognize these innovations, payers are required to
enter into good faith negotiations with providers to reach agreement on
an alternative payment system. The legislation also has special
provisions for payment for chronic care services in recognition of the
special role of coordination of care, patient education, tracking, and
follow-up in achieving quality care for individuals with chronic
diseases.
Finally, the legislation contains a number of important initiatives
to improve the quality of care and strengthen health promotion and
disease prevention. These include the establishment of a National
Quality Council, and specific initiatives on diabetes, stroke,
arthritis, nutrition, exercise, adult oral health, adult immunizations,
and the provision of culturally and linguistically appropriate care for
patients whose primary language is not English.
America's health care system cannot continue to lurch from crisis to
crisis. Our people deserve affordable care, and when illness strikes,
they deserve the best care our system can provide. This legislation
lays out a number of important steps to achieve this objective, and I
look forward to working with my colleagues in Congress and the broader
health community to achieve the important goals we share.
______
By Mr. SMITH (for himself and Mr. Conrad):
S. 2422. A bill to amend the Internal Revenue Code of 1986 to allow
certain modifications to be made to qualified mortgages held by a REMIC
or a grantor trust; to the Committee on Finance.
Mr. SMITH. Mr. President, I rise today to introduce the Real Estate
Mortgage Investment Conduit Modernization Act. I am pleased to join my
colleague and friend, Senator Conrad, in introducing this legislation
to accelerate economic growth for every American community.
A Real Estate Mortgage Investment Conduit (REMIC) is a tax vehicle
created by Congress in 1986 to support the housing market and
investment in real estate by making it simpler to issue real estate-
backed securities.
By pooling real estate loans into mortgage backed securities, REMICs
offer residential and commercial real estate borrowers access to large
pools of capital that would not otherwise be available. REMICs allow
commercial banks and other lenders to sell their loans in the capital
markets, thus freeing up assets for additional lending and investments.
Because they contribute to the efficiency and liquidity of the U.S.
real estate markets, REMICs help to minimize the costs of residential
and commercial real estate borrowing and to spur real estate
development and rehabilitation.
REMICs play a critical role in providing capital for residential and
commercial mortgages. As of September 30, 2003, the value of single-
family, multi-family and commercial-mortgage backed REMICs outstanding
was over $1.2 trillion. While the current volume of REMIC transactions
reflects their important role in this market, certain changes to the
tax code will eliminate impediments and unleash even greater potential.
Current rules that govern REMICs often prevent many common loan
modifications that facilitate loan administration and ensure repayment
of investors.
The legislation that created REMICs has not been updated in nearly 20
years. Our legislation will update the REMIC provisions of the tax
code. These proposed changes are simple, non-controversial, and will
greatly enhance the ability of commercial real estate interests to
obtain capital for financing new construction projects.
These changes would ultimately benefit the entire real estate
community, including local real estate owners, builders, construction
managers, the engineering, architectural and interior design firms that
provide real estate services, as well as firms that offer services to
support real estate sales. The changes would accelerate the creation of
jobs and economic activity throughout the U.S., and would have a
positive effect on federal and state tax revenues. By encouraging
property renovations and expansions, these changes would strengthen the
local property tax base in towns and cities across America.
We urge our colleagues to work with us to enact this legislation to
spur economic and employment growth in real
[[Page S5481]]
estate, the construction trades, and the building materials industry.
I ask unanimous consent that the text of the legislation be printed
in the Record.
There being no objection, the bill was ordered to be printed in the
Record, as follows:
S. 2422
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. CERTAIN MODIFICATIONS PERMITTED TO QUALIFIED
MORTGAGES HELD BY A REMIC OR A GRANTOR TRUSTS.
(a) Qualified Mortgages Held by a REMIC.--
(1) In general.--Paragraph (3) of section 860G(a) of the
Internal Revenue Code of 1986 is amended by adding at the end
the following new subparagraph:
``(C) Qualified modifications.--
``(i) In general.--An obligation shall not fail to be
treated as a qualified mortgage solely because of a qualified
modification of such obligation.
``(ii) Qualified modification.--For purposes of this
section, the term `qualified modification' means, with
respect to any obligation, any amendment, waiver, or other
modification which is treated as a disposition of such
obligation under section 1001 if such amendment, waiver or
other modification does not--
``(I) extend the final maturity date of the obligation,
``(II) increase the outstanding principal balance under the
obligation (other than the capitalization of accrued, unpaid
interest),
``(III) result in a release of an interest in real property
securing the obligation such that the obligation is not
principally secured by an interest in real property
(determined after giving effect to the release), or
``(IV) result in an instrument or property right which is
not debt for Federal income tax purposes.
``(iii) Defaults.--Under regulations prescribed by the
Secretary, any amendment, waiver, or other modification of an
obligation which is in default or with respect to which
default is reasonably foreseeable may be treated as a
qualified modification for purposes of this section.
``(iv) Defeasance with government securities.--The
requirements of clause (ii)(III) shall be treated as
satisfied if, after the release described in such clause, the
obligation is principally secured by Government securities
and the amendment, waiver, or other modification to such
obligation satisfies such requirements as the Secretary may
prescribe.''.
(2) Exception from prohibited transaction rules.--
Subparagraph (A) of section 860F(a)(2) of such Code is
amended by striking ``or'' at the end of clause (iii), by
striking the period at the end of clause (iv) and inserting
``, or'', and by adding at the end the following new clause:
``(v) a qualified modification (as defined in section
860G(a)(3)(C)).''.
(3) Conforming amendments.--
(A) Section 860G(a)(3) of such Code is amended--
(i) by redesignating clauses (i) and (ii) of subparagraph
(A) as subclauses (I) and (II), respectively,
(ii) by redesignating subparagraphs (A) through (D) as
clauses (i) through (iv), respectively,
(iii) by striking ``The term'' and inserting the following:
``(A) In general.--The term'', and
(iv) by striking ``For purposes of subparagraph (A)'' and
inserting the following:
``(B) Tenant-stockholders of cooperative housing
corporations.--For purposes of subparagraph (A)(i)''.
(B) Section 860G(a)(3)(A)(iv) of such Code (as redesignated
by subparagraph (A)) is amended--
(i) by striking ``clauses (i) and (ii) of subparagraph
(A)'' and inserting ``subclauses (I) and (II) of clause
(i)'', and
(ii) by striking ``subparagraph (A) (without regard to such
clauses)'' and inserting ``clause (i) (without regard to such
subclauses)''.
(b) Qualified Mortgages Held by a Grantor Trust.--Section
672 of the Internal Revenue Code of 1986 is amended by adding
at the end the following new subsection:
``(g) Special Rule for Certain Investment Trusts.--A
grantor shall not fail to be treated as the owner of any
portion of a trust under this subpart solely because such
portion includes one or more obligations with respect to
which a qualified modification (within the meaning of section
860G(a)(3)(C)) has been, or may be, made under the terms of
such trust.''.
(c) Effective Date.--The amendments made by this section
shall apply to amendments, waivers, and other modifications
made after the date of the enactment of this Act.
Mr. CONRAD. Mr. President, I am happy to join my friend and Finance
Committee colleague, Mr. Smith, to introduce The Real Estate Mortgage
Investment Conduit Modernization Act. This is a measure that will help
expand access to capital for real estate investment across the nation
and especially in rural areas like my home State of North Dakota.
Growth in the commercial real estate market over the last decade has
been fueled, in part, by a strong and growing secondary market for
commercial mortgages. That market is structured through real estate
mortgage investment conduits (REMICs). Created by Congress in 1986,
REMICs are critically important to U.S. real estate finance, providing
new capital and expanded access to that capital. They have proven to be
a cost-effective method for the private sector to create pools of
capital that are made available across the nation.
It is time to modernize the REMIC law because many borrowers have
been stymied in attempts to make improvements to the mortgaged
properties. For example, if a property is in a REMIC, the property
owner is effectively precluded from adding a parking garage to an
existing building. That is because the 1986 tax rules treat that
improvement as a collateral modification triggering a deemed exchange
of a new loan for the old loan thereby violating REMIC regulations.
Unlike home mortgages, which are rarely modified, commercial loans
require flexibility in dealing with changing circumstances in order to
support the borrower's ongoing business property. The bill we are
introducing today will add this needed flexibility to the tax code,
increasing the ability of property owners to invest in improvements.
I urge our colleagues to help us harness the full potential of
mortgage-backed securities to provide improved access to capital to
America's businesses--big and small. Please join us in working to enact
the Real Estate Mortgage Investment Conduit Modernization Act.
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