[Congressional Record Volume 151, Number 45 (Friday, April 15, 2005)]
[Senate]
[Pages S3736-S3753]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




          STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

      By Mr. DURBIN:
  S. 811. A bill to require the Secretary of the Treasury to mint coins 
in commemoration of the bicentennial of the birth of Abraham Lincoln; 
to the Committee on Banking, Housing, and Urban Affairs.
  Mr. DURBIN. Mr. President, today I am introducing a bill that will 
honor Abraham Lincoln with a commemorative coin and provide funds to 
the Abraham Lincoln Bicentennial Commission, which has been charged by 
Congress with planning the celebration of Lincoln's bicentennial in 
2009.
  The bill authorizes the Treasury to mint 500,000 one dollar silver 
coins. The design, which will represent the life and legacy of Abraham 
Lincoln, will be selected by the Secretary after consultation with the 
Commission of Fine Arts and the ALBC and reviewed by the Citizens 
Coinage Advisory Committee.
  The coins will be sold for face value plus a $10 surcharge and the 
cost of designing and issuing them. All funds collected by the 
surcharge will be provided to the ALBC to further its work.
  Abraham Lincoln was one of our greatest leaders, demonstrating 
enormous courage and strength of character during the Civil War, 
perhaps the greatest crisis in our Nation's history. Lincoln was born 
in Kentucky, grew to adulthood in Indiana, achieved fame in Illinois, 
and led the Nation in Washington, D.C. He rose to the Presidency 
through a combination of honesty, integrity, intelligence, and 
commitment to the United States.
  Adhering to the belief that all men are created equal, Lincoln led 
the effort to free all slaves in the United States. Despite the great 
passions aroused by the Civil War, Lincoln had a generous heart and 
acted with malice toward none and with charity for all. Lincoln made 
the ultimate sacrifice for the country he loved, dying from an 
assassin's bullet on April 15, 1865. All Americans could benefit from 
studying the life of Abraham Lincoln, As we near the bicentennial of 
Lincoln's birth, we should recognize his great achievement in ensuring 
that the United States remained one Nation, united and inseparable.
                                 ______
                                 
      By Mr. SPECTER:
  S. 812. A bill to amend the Internal Revenue Code of 1986 to impose a 
flat tax only on Individual taxable earned income and business taxable 
income, and for other purposes; to the Committee on Finance.
  Mr. SPECTER. Mr. President, this week, American taxpayers face 
another Federal income tax deadline. The date of April 15 stabs fear, 
anxiety, and unease into the hearts of millions of Americans. Every 
year during ``tax season,'' millions of Americans spend their evenings 
poring over page after page of IRS instructions, going through their 
records looking for information and struggling to find and fill out all 
the appropriate forms on the Federal tax returns. Americans are 
intimidated by the sheer number of different tax forms and their 
instructions, many of which they may be unsure whether they need to 
file. Given the approximately 325 possible forms, not to mention the 
instructions that accompany them, simply trying to determine which form 
to file can in itself be a daunting and overwhelming task. According to 
a 2002 study conducted by the Tax Foundation, American taxpayers, 
including businesses, spend more than 5.8 billion hours and $194 
billion each year in complying with tax laws. That works out to more 
than $2,400 per U.S. household. Much of this time is spent burrowing 
through IRS laws and regulations which fill 17,000 pages and have grown 
from 744,000 words in 1955 to over 6.9 million words in 2000. By 
contrast, the Pledge of Allegiance has only 31 words, the Gettysburg 
Address has 267 words, the Declaration of Independence has about 1,300 
words, and the Bible has only about 1,773,000 words.
  The majority of taxpayers still face filing tax forms that are far 
too complicated and take far too long to complete. According to the 
estimated preparation time listed on the forms by the IRS, the 2004 
Form 1040 is estimated to take 13 hours and 35 minutes to complete. 
Moreover this does not include the estimated time to complete the 
accompanying schedules, such as Schedule A, for itemized deductions, 
which carries an estimated preparation time of 5 hours, 37 minutes, or 
Schedule D, for reporting capital gains and losses, shows an estimated 
preparation time of 6 hours, 10 minutes. Moreover, this complexity is 
getting worse each year. Just from 2000 to 2004 the estimated time to 
prepare Form 1040 jumped 34 minutes.
  It is no wonder that well over half of all taxpayers, 56 percent 
according to a recent survey, now hire an outside professional to 
prepare their tax returns for them. However, the fact that only about 
30 percent of individuals itemize their deductions shows that a 
significant percentage of our taxpaying population believes that the 
tax system is too complex for them to deal with. We all understand that 
paying taxes will never be something we enjoy, but neither should it be 
cruel and unusual punishment. Further, the pace of change to the 
Internal Revenue Code is brisk--Congress made about 9,500 tax code 
changes in the past thirteen years. And we are far from being finished. 
Year after year, we continue to ask the same question--isn't there a 
better way?
  My flat tax legislation would make filing a tax return a manageable 
chore, not a seemingly endless nightmare, for most taxpayers. My flat 
tax legislation will fundamentally revise the present tax code, with 
its myriad rates, deductions, and instructions. This legislation would 
institute a simple, flat 20 percent tax rate for all individuals and 
businesses. This proposal is not cast in stone, but is intended to move 
the debate forward by focusing attention on three key principles which 
are critical to an effective and equitable taxation system: simplicity, 
fairness and economic growth.
  My flat tax plan would eliminate the kinds of frustrations I have 
outlined above for millions of taxpayers. This flat tax would enable us 
to scrap the great majority of the IRS rules, regulations and 
instructions and delete most of the 6.9 million words in the Internal 
Revenue Code. Instead of billions of hours of non-productive time spent 
in compliance with, or avoidance of, the tax code, taxpayers would 
spend only the small amount of time necessary to fill out a postcard-
sized form. Both business and individual taxpayers would thus find 
valuable hours freed up to engage in productive business activity, or 
for more time with their families, instead of poring over tax tables, 
schedules and regulations.

  My flat tax proposal is dramatic, but so are its advantages: a 
taxation system that is simple, fair and designed to maximize 
prosperity for all Americans. A summary of the key advantages are:
  Simplicity: A 10-line postcard filing would replace the myriad forms 
and attachments currently required, thus saving Americans up to 5.8 
billion hours they currently spend every year in tax compliance.
  Cuts Government: The flat tax would eliminate the lion's share of IRS 
rules, regulations and requirements, which have grown from 744,000 
words in 1955 to 6.9 million words and 17,000 pages currently. It would 
also allow us to slash the mammoth IRS bureaucracy of approximately 
117,000 employees, creating opportunities to put their expertise to use 
elsewhere in the government or in private industry.
  Promotes Economic Growth: Economists estimate a growth due to a flat 
tax of over $2 trillion in national wealth over seven years, 
representing an increase of approximately $7,500 in personal wealth for 
every man, woman and child in America. This growth would also lead to 
the creation of 6 million new jobs.
  Increases Efficiency: Investment decisions would be made on the basis 
of productivity rather than simply for tax

[[Page S3737]]

avoidance, thus leading to even greater economic expansion.
  Reduces Interest Rates: Economic forecasts indicate that interest 
rates would fall substantially, by as much as two points, as the flat 
tax removes many of the current disincentives to savings.
  Lowers compliance costs: Americans would be able to save or invert up 
to $194 billion they currently spend every year in tax compliance.
  Decreases fraud: As tax loopholes are eliminated and the tax code is 
simplified, there will be far less opportunity for tax avoidance and 
fraud, which now amounts to over $120 billion in uncollected revenue 
annually.
  Reduces IRS costs: Simplification of the tax code will allow us to 
save significantly on the $10 billion annual budget currently allocated 
to the Internal Revenue Service.
  The most dramatic way to illustrate the flat tax is to consider that 
the income tax form for the flat tax is printed on a postcard--it will 
allow all taxpayers to file their April 15 tax returns on a simple 10-
line postcard. This postcard will take 15 minutes to fill out.
  At my town hall meetings across Pennsylvania, there is considerable 
public support for fundamental tax reform.
  This is a win-win situation for America because it lowers the tax 
burden on the taxpayers in the lower brackets. For example in the 2004 
tax year, the standard deduction is $4,850 for a single taxpayer, 
$7,150 for a head of household and $9,700 for a married couple filing 
jointly, while the personal exemption for individuals and dependents is 
$3,100. Thus, under the current tax code, a family of four which does 
not itemize deductions would pay taxes on all income over $22,100--that 
is personal exemptions of$12,400 and a standard deduction of $9,700. By 
contrast, under my flat tax bill, that same family would receive a 
personal exemption of $30,000, and would pay tax on only income over 
that amount.
  The tax loopholes enable write-offs of some $393 billion a year. What 
is eliminated under the flat tax are the loopholes, the deductions in 
this complicated code which can be deciphered, interpreted, and found 
really only by the $500-an-hour lawyers. That money is lost to the 
taxpayers. $120 billion would be saved by the elimination of fraud 
because of the simplicity of the Tax Code, the taxpayer being able to 
find out exactly what they owe.

  This bill is modeled after a proposal organized and written by two 
very distinguished professors of law from Stanford University, 
Professor Hall and Professor Rabushka. Their model was first introduced 
in the Congress in the fall of 1994 by Majority Leader Richard Armey. I 
introduced the flat tax bill--the first one in the Senate--on March 2, 
1995, Senate bill 488. On October 27, 1995, I introduced a Sense of the 
Senate Resolution calling on my colleagues to expedite Congressional 
adoption of a flat tax. The Resolution, which was introduced as an 
amendment to pending legislation, was not adopted. I reintroduced my 
legislation in the 105th Congress with slight modifications to reflect 
inflation-adjusted increases in the personal allowances and dependent 
allowances. I re-reintroduced the bill on April 15, 1999--income tax 
day--in a bill denominated as S. 822. I then introduced my flat tax 
legislation as an amendment to S. 1429, the Tax Reconciliation bill; 
the amendment was not adopted. During the 108th Congress, I introduced 
my flat tax legislation once again on April 11, 2003. On May 14, 2003, 
I offered an amendment to the Tax Reconciliation legislation urging the 
Senate to hold hearings and consider legislation providing for a flat 
tax; this amendment passed by a vote of 70 to 30 on May 15, 2003. I 
then testified on this issue at a subsequent hearing held by the Joint 
Economic Committee on November 5, 2003.
  Over the years and prior to my legislative efforts on behalf of flat 
tax reform, I have devoted considerable time and attention to analyzing 
our nation's tax code and the policies which underlie it. I began the 
study of the complexities of the tax code over 40 years ago as a law 
student at Yale University. I included some tax law as part of my 
practice in my early years as an attorney in Philadelphia. In the 
spring of 1962, I published a law review article in the Villanova Law 
Review, ``Pension and Profit Sharing Plans: Coverage and Operation for 
Closely Held Corporations and Professional Associations,'' 7 Villanova 
L. Rev. 335, which in part focused on the inequity in making tax-exempt 
retirement benefits available to some kinds of businesses but not 
others. It was apparent then, as it is now, that the very complexities 
of the Internal Revenue Code could be used to give unfair advantage to 
some. Einstein himself is quoted as saying ``the hardest thing in the 
world to understand is the income tax.''
  The Hall-Rabushka model envisioned a flat tax with no deductions 
whatever. After considerable reflection, I decided to include in the 
legislation limited deductions for home mortgage interest for up to 
$100,000 in borrowing and charitable contributions up to $2,500. While 
these modifications undercut the pure principle of the flat tax by 
continuing the use of tax policy to promote home buying and charitable 
contributions, I believe that those two deductions are so deeply 
ingrained in the financial planning of American families that they 
should be retained as a matter of fairness and public policy--and also 
political practicality. With those two deductions maintained, passage 
of a modified flat tax will be difficult, but without them, probably 
impossible.
  In my judgment, an indispensable prerequisite to enactment of a 
modified flat tax is revenue neutrality. Professor Hall advised that 
the revenue neutrality ofthe Hall-Rabushka proposal, which uses a 19 
percent rate, is based on a well-documented model founded on reliable 
governmental statistics. My legislation raises that rate from 19 
percent to 20 percent to accommodate retaining limited home mortgage 
interest and charitable deductions.
  This proposal taxes business revenues fully at their source, so that 
there is no personal taxation on interest, dividends, capital gains, 
gifts or estates. Restructured in this way, the tax code can become a 
powerful incentive for savings and investment--which translates into 
economic growth and expansion, more and better jobs, and raising the 
standard of living for all Americans.
  The key advantages of this flat tax plan are threefold: First, it 
will dramatically simplify the payment of taxes. Second, it will remove 
much of the IRS regulatory morass now imposed on individual and 
corporate taxpayers, and allow those taxpayers to devote more of their 
energies to productive pursuits. Third, since it is a plan which 
rewards savings and investment, the flat tax will spur economic growth 
in all sectors of the economy as more money flows into investments and 
savings accounts.
  Professors Hall and Rabushka have projected that within seven years 
of enactment, this type of a flat tax would produce a 6 percent 
increase in output from increased total work in the U.S. economy and 
increased capital formation. The economic growth would mean a $7,500 
increase in the personal income of all Americans. No one likes to pay 
taxes. But Americans will be much more willing to pay their taxes under 
a system that they believe is fair, a system that they can understand, 
and a system that they recognize promotes rather than prevents growth 
and prosperity. My flat tax legislation will afford Americans such a 
tax system.
  I ask unanimous consent that a copy of my flat tax postcard, a 
variety of specific cases that illustrate the fairness and simplicity 
of this flat tax, and an example flat tax table be printed in the 
Record following my statement.
  I ask unanimous consent that the text of this bill be printed in the 
Record.

[[Page S3738]]

[GRAPHIC] [TIFF OMITTED] TS15AP05.001



[[Page S3739]]

[GRAPHIC] [TIFF OMITTED] TS15AP05.002



[[Page S3740]]

[GRAPHIC] [TIFF OMITTED] TS15AP05.003



[[Page S3741]]

[GRAPHIC] [TIFF OMITTED] TS15AP05.004



[[Page S3742]]

  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                 S. 812

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE; TABLE OF CONTENTS; AMENDMENT OF 1986 
                   CODE.

       (a) Short Title.--This Act may be cited as the ``Flat Tax 
     Act of 2005''.
       (b) Table of Contents.--The table of contents for this Act 
     is as follows:

Sec. 1. Short title; table of contents; amendment of 1986 Code.
Sec. 2. Flat tax on individual taxable earned income and business 
              taxable income.
Sec. 3. Repeal of estate and gift taxes.
Sec. 4. Additional repeals.
Sec. 5. Effective dates.

       (c) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.

     SEC. 2. FLAT TAX ON INDIVIDUAL TAXABLE EARNED INCOME AND 
                   BUSINESS TAXABLE INCOME.

       (a) In General.--Subchapter A of chapter 1 of subtitle A is 
     amended to read as follows:

             ``Subchapter A--Determination of Tax Liability

                     ``Part I. Tax on Individuals.

                 ``Part II. Tax on Business Activities.

                      ``PART I--TAX ON INDIVIDUALS

``Sec. 1. Tax imposed.
``Sec. 2. Standard deduction.
``Sec. 3. Deduction for cash charitable contributions.
``Sec. 4. Deduction for home acquisition indebtedness.
``Sec. 5. Definitions and special rules.
``Sec. 6. Dependent defined.

     ``SEC. 1. TAX IMPOSED.

       ``(a) Imposition of Tax.--There is hereby imposed on every 
     individual a tax equal to 20 percent of the taxable earned 
     income of such individual.
       ``(b) Taxable Earned Income.--For purposes of this section, 
     the term `taxable earned income' means the excess (if any) 
     of--
       ``(1) the earned income received or accrued during the 
     taxable year, over
       ``(2) the sum of--
       ``(A) the standard deduction,
       ``(B) the deduction for cash charitable contributions, and
       ``(C) the deduction for home acquisition indebtedness, for 
     such taxable year.
       ``(c) Earned Income.--For purposes of this section--
       ``(1) In general.--The term `earned income' means wages, 
     salaries, or professional fees, and other amounts received 
     from sources within the United States as compensation for 
     personal services actually rendered, but does not include 
     that part of compensation derived by the taxpayer for 
     personal services rendered by the taxpayer to a corporation 
     which represents a distribution of earnings or profits rather 
     than a reasonable allowance as compensation for the personal 
     services actually rendered.
       ``(2) Taxpayer engaged in trade or business.--In the case 
     of a taxpayer engaged in a trade or business in which both 
     personal services and capital are material income-producing 
     factors, under regulations prescribed by the Secretary, a 
     reasonable allowance as compensation for the personal 
     services rendered by the taxpayer, not in excess of 30 
     percent of the taxpayer's share of the net profits of such 
     trade or business, shall be considered as earned income.

     ``SEC. 2. STANDARD DEDUCTION.

       ``(a) In General.--For purposes of this subtitle, the term 
     `standard deduction' means the sum of--
       ``(1) the basic standard deduction, plus
       ``(2) the additional standard deduction.
       ``(b) Basic Standard Deduction.--For purposes of subsection 
     (a), the basic standard deduction is--
       ``(1) 200 percent of the dollar amount in effect under 
     paragraph (3) of the taxable year in the case of--
       ``(A) a joint return, or
       ``(B) a surviving spouse (as defined in section 5(a)),
       ``(2) $15,000 in the case of a head of household (as 
     defined in section 5(b)), or
       ``(3) $10,000 in any other case.
       ``(c) Additional Standard Deduction.--For purposes of 
     subsection (a), the additional standard deduction is $5,000 
     for each dependent (as defined in section 6)--
       ``(1) whose earned income for the calendar year in which 
     the taxable year of the taxpayer begins is less than the 
     basic standard deduction specified in subsection (b)(3), or
       ``(2) who is a child of the taxpayer and who--
       ``(A) has not attained the age of 19 at the close of the 
     calendar year in which the taxable year of the taxpayer 
     begins, or
       ``(B) is a student who has not attained the age of 24 at 
     the close of such calendar year.
       ``(d) Inflation Adjustment.--
       ``(1) In general.--In the case of any taxable year 
     beginning in a calendar year after 2006, each dollar amount 
     contained in subsections (b) and (c) shall be increased by an 
     amount equal to--
       ``(A) such dollar amount, multiplied by
       ``(B) the cost-of-living adjustment for the calendar year 
     in which the taxable year begins.
       ``(2) Cost-of-living adjustment.--For purposes of paragraph 
     (1), the cost-of-living adjustment for any calendar year is 
     the percentage (if any) by which--
       ``(A) the CPI for the preceding calendar year, exceeds
       ``(B) the CPI for calendar year 2005.
       ``(3) CPI for any calendar year.--For purposes of paragraph 
     (2), the CPI for any calendar year is the average of the 
     Consumer Price Index as of the close of the 12-month period 
     ending on August 31 of such calendar year.
       ``(4) Consumer price index.--For purposes of paragraph (3), 
     the term `Consumer Price Index' means the last Consumer Price 
     Index for all-urban consumers published by the Department of 
     Labor. For purposes of the preceding sentence, the revision 
     of the Consumer Price Index which is most consistent with the 
     Consumer Price Index for calendar year 1986 shall be used.
       ``(5) Rounding.--If any increase determined under paragraph 
     (1) is not a multiple of $50, such amount shall be rounded to 
     the next lowest multiple of $50.

     ``SEC. 3. DEDUCTION FOR CASH CHARITABLE CONTRIBUTIONS.

       ``(a) General Rule.--For purposes of this part, there shall 
     be allowed as a deduction any charitable contribution (as 
     defined in subsection (b)) not to exceed $2,500 ($1,250, in 
     the case of a married individual filing a separate return), 
     payment of which is made within the taxable year.
       ``(b) Charitable Contribution Defined.--For purposes of 
     this section, the term `charitable contribution' means a 
     contribution or gift of cash or its equivalent to or for the 
     use of the following:
       ``(1) A State, a possession of the United States, or any 
     political subdivision of any of the foregoing, or the United 
     States or the District of Columbia, but only if the 
     contribution or gift is made for exclusively public purposes.
       ``(2) A corporation, trust, or community chest, fund, or 
     foundation--
       ``(A) created or organized in the United States or in any 
     possession thereof, or under the law of the United States, 
     any State, the District of Columbia, or any possession of the 
     United States,
       ``(B) organized and operated exclusively for religious, 
     charitable, scientific, literary, or educational purposes, or 
     to foster national or international amateur sports 
     competition (but only if no part of its activities involve 
     the provision of athletic facilities or equipment), or for 
     the prevention of cruelty to children or animals,
       ``(C) no part of the net earnings of which inures to the 
     benefit of any private shareholder or individual, and
       ``(D) which is not disqualified for tax exemption under 
     section 501(c)(3) by reason of attempting to influence 
     legislation, and which does not participate in, or intervene 
     in (including the publishing or distributing of statements), 
     any political campaign on behalf of (or in opposition to) any 
     candidate for public office.

     A contribution or gift by a corporation to a trust, chest, 
     fund, or foundation shall be deductible by reason of this 
     paragraph only if it is to be used within the United States 
     or any of its possessions exclusively for purposes specified 
     in subparagraph (B). Rules similar to the rules of section 
     501(j) shall apply for purposes of this paragraph.
       ``(3) A post or organization of war veterans, or an 
     auxiliary unit or society of, or trust or foundation for, any 
     such post or organization--
       ``(A) organized in the United States or any of its 
     possessions, and
       ``(B) no part of the net earnings of which inures to the 
     benefit of any private shareholder or individual.
       ``(4) In the case of a contribution or gift by an 
     individual, a domestic fraternal society, order, or 
     association, operating under the lodge system, but only if 
     such contribution or gift is to be used exclusively for 
     religious, charitable, scientific, literary, or educational 
     purposes, or for the prevention of cruelty to children or 
     animals.
       ``(5) A cemetery company owned and operated exclusively for 
     the benefit of its members, or any corporation chartered 
     solely for burial purposes as a cemetery corporation and not 
     permitted by its charter to engage in any business not 
     necessarily incident to that purpose, if such company or 
     corporation is not operated for profit and no part of the net 
     earnings of such company or corporation inures to the benefit 
     of any private shareholder or individual.

     For purposes of this section, the term `charitable 
     contribution' also means an amount treated under subsection 
     (d) as paid for the use of an organization described in 
     paragraph (2), (3), or (4).
       ``(c) Disallowance of Deduction in Certain Cases and 
     Special Rules.--
       ``(1) Substantiation requirement for certain 
     contributions.--
       ``(A) General rule.--No deduction shall be allowed under 
     subsection (a) for any contribution of $250 or more unless 
     the taxpayer substantiates the contribution by a 
     contemporaneous written acknowledgment of the contribution by 
     the donee organization that meets the requirements of 
     subparagraph (B).
       ``(B) Content of acknowledgment.--An acknowledgment meets 
     the requirements of this subparagraph if it includes the 
     following information:
       ``(i) The amount of cash contributed.

[[Page S3743]]

       ``(ii) Whether the donee organization provided any goods or 
     services in consideration, in whole or in part, for any 
     contribution described in clause (i).
       ``(iii) A description and good faith estimate of the value 
     of any goods or services referred to in clause (ii) or, if 
     such goods or services consist solely of intangible religious 
     benefits, a statement to that effect.

     For purposes of this subparagraph, the term `intangible 
     religious benefit' means any intangible religious benefit 
     which is provided by an organization organized exclusively 
     for religious purposes and which generally is not sold in a 
     commercial transaction outside the donative context.
       ``(C) Contemporaneous.--For purposes of subparagraph (A), 
     an acknowledgment shall be considered to be contemporaneous 
     if the taxpayer obtains the acknowledgment on or before the 
     earlier of--
       ``(i) the date on which the taxpayer files a return for the 
     taxable year in which the contribution was made, or
       ``(ii) the due date (including extensions) for filing such 
     return.
       ``(D) Substantiation not required for contributions 
     reported by the donee organization.--Subparagraph (A) shall 
     not apply to a contribution if the donee organization files a 
     return, on such form and in accordance with such regulations 
     as the Secretary may prescribe, which includes the 
     information described in subparagraph (B) with respect to the 
     contribution.
       ``(E) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this paragraph, including regulations that 
     may provide that some or all of the requirements of this 
     paragraph do not apply in appropriate cases.
       ``(2) Denial of deduction where contribution for lobbying 
     activities.--No deduction shall be allowed under this section 
     for a contribution to an organization which conducts 
     activities to which section 11(d)(2)(C)(i) applies on matters 
     of direct financial interest to the donor's trade or 
     business, if a principal purpose of the contribution was to 
     avoid Federal income tax by securing a deduction for such 
     activities under this section which would be disallowed by 
     reason of section 11(d)(2)(C) if the donor had conducted such 
     activities directly. No deduction shall be allowed under 
     section 11(d) for any amount for which a deduction is 
     disallowed under the preceding sentence.
       ``(d) Amounts Paid to Maintain Certain Students as Members 
     of Taxpayer's Household.--
       ``(1) In general.--Subject to the limitations provided by 
     paragraph (2), amounts paid by the taxpayer to maintain an 
     individual (other than a dependent, as defined in section 6, 
     or a relative of the taxpayer) as a member of such taxpayer's 
     household during the period that such individual is--
       ``(A) a member of the taxpayer's household under a written 
     agreement between the taxpayer and an organization described 
     in paragraph (2), (3), or (4) of subsection (b) to implement 
     a program of the organization to provide educational 
     opportunities for pupils or students in private homes, and
       ``(B) a full-time pupil or student in the twelfth or any 
     lower grade at an educational organization located in the 
     United States which normally maintains a regular faculty and 
     curriculum and normally has a regularly enrolled body of 
     pupils or students in attendance at the place where its 
     educational activities are regularly carried on, shall be 
     treated as amounts paid for the use of the organization.
       ``(2) Limitations.--
       ``(A) Amount.--Paragraph (1) shall apply to amounts paid 
     within the taxable year only to the extent that such amounts 
     do not exceed $50 multiplied by the number of full calendar 
     months during the taxable year which fall within the period 
     described in paragraph (1). For purposes of the preceding 
     sentence, if 15 or more days of a calendar month fall within 
     such period such month shall be considered as a full calendar 
     month.
       ``(B) Compensation or reimbursement.--Paragraph (1) shall 
     not apply to any amount paid by the taxpayer within the 
     taxable year if the taxpayer receives any money or other 
     property as compensation or reimbursement for maintaining the 
     individual in the taxpayer's household during the period 
     described in paragraph (1).
       ``(3) Relative defined.--For purposes of paragraph (1), the 
     term `relative of the taxpayer' means an individual who, with 
     respect to the taxpayer, bears any of the relationships 
     described in subparagraphs (A) through (G) of section 
     6(d)(2).
       ``(4) No other amount allowed as deduction.--No deduction 
     shall be allowed under subsection (a) for any amount paid by 
     a taxpayer to maintain an individual as a member of the 
     taxpayer's household under a program described in paragraph 
     (1)(A) except as provided in this subsection.
       ``(e) Denial of Deduction for Certain Travel Expenses.--No 
     deduction shall be allowed under this section for traveling 
     expenses (including amounts expended for meals and lodging) 
     while away from home, whether paid directly or by 
     reimbursement, unless there is no significant element of 
     personal pleasure, recreation, or vacation in such travel.
       ``(f) Disallowance of Deductions in Certain Cases.--For 
     disallowance of deductions for contributions to or for the 
     use of Communist controlled organizations, see section 11(a) 
     of the Internal Security Act of 1950 (50 U.S.C. 790).
       ``(g) Treatment of Certain Amounts Paid to or for the 
     Benefit of Institutions of Higher Education.--
       ``(1) In general.--For purposes of this section, 80 percent 
     of any amount described in paragraph (2) shall be treated as 
     a charitable contribution.
       ``(2) Amount described.--For purposes of paragraph (1), an 
     amount is described in this paragraph if--
       ``(A) the amount is paid by the taxpayer to or for the 
     benefit of an educational organization--
       ``(i) which is described in subsection (d)(1)(B), and
       ``(ii) which is an institution of higher education (as 
     defined in section 3304(f)), and
       ``(B) such amount would be allowable as a deduction under 
     this section but for the fact that the taxpayer receives 
     (directly or indirectly) as a result of paying such amount 
     the right to purchase tickets for seating at an athletic 
     event in an athletic stadium of such institution.

     If any portion of a payment is for the purchase of such 
     tickets, such portion and the remaining portion (if any) of 
     such payment shall be treated as separate amounts for 
     purposes of this subsection.
       ``(h) Other Cross References.--
       ``(1) For treatment of certain organizations providing 
     child care, see section 501(k).
       ``(2) For charitable contributions of partners, see section 
     702.
       ``(3) For treatment of gifts for benefit of or use in 
     connection with the Naval Academy as gifts to or for the use 
     of the United States, see section 6973 of title 10, United 
     States Code.
       ``(4) For treatment of gifts accepted by the Secretary of 
     State, the Director of the International Communication 
     Agency, or the Director of the United States International 
     Development Cooperation Agency, as gifts to or for the use of 
     the United States, see section 25 of the State Department 
     Basic Authorities Act of 1956.
       ``(5) For treatment of gifts of money accepted by the 
     Attorney General for credit to the `Commissary Funds, Federal 
     Prisons' as gifts to or for the use of the United States, see 
     section 4043 of title 18, United States Code.
       ``(6) For charitable contributions to or for the use of 
     Indian tribal governments (or subdivisions of such 
     governments), see section 7871.

     ``SEC. 4. DEDUCTION FOR HOME ACQUISITION INDEBTEDNESS.

       ``(a) General Rule.--For purposes of this part, there shall 
     be allowed as a deduction all qualified residence interest 
     paid or accrued within the taxable year.
       ``(b) Qualified Residence Interest Defined.--The term 
     `qualified residence interest' means any interest which is 
     paid or accrued during the taxable year on acquisition 
     indebtedness with respect to any qualified residence of the 
     taxpayer. For purposes of the preceding sentence, the 
     determination of whether any property is a qualified 
     residence of the taxpayer shall be made as of the time the 
     interest is accrued.
       ``(c) Acquisition Indebtedness.--
       ``(1) In general.--The term `acquisition indebtedness' 
     means any indebtedness which--
       ``(A) is incurred in acquiring, constructing, or 
     substantially improving any qualified residence of the 
     taxpayer, and
       ``(B) is secured by such residence.

     Such term also includes any indebtedness secured by such 
     residence resulting from the refinancing of indebtedness 
     meeting the requirements of the preceding sentence (or this 
     sentence); but only to the extent the amount of the 
     indebtedness resulting from such refinancing does not exceed 
     the amount of the refinanced indebtedness.
       ``(2) $100,000 Limitation.--The aggregate amount treated as 
     acquisition indebtedness for any period shall not exceed 
     $100,000 ($50,000 in the case of a married individual filing 
     a separate return).
       ``(d) Treatment of Indebtedness Incurred on or Before 
     October 13, 1987.--
       ``(1) In general.--In the case of any pre-October 13, 1987, 
     indebtedness--
       ``(A) such indebtedness shall be treated as acquisition 
     indebtedness, and
       ``(B) the limitation of subsection (c)(2) shall not apply.
       ``(2) Reduction in $100,000 limitation.--The limitation of 
     subsection (c)(2) shall be reduced (but not below zero) by 
     the aggregate amount of outstanding pre-October 13, 1987, 
     indebtedness.
       ``(3) Pre-october 13, 1987, indebtedness.--The term `pre-
     October 13, 1987, indebtedness' means--
       ``(A) any indebtedness which was incurred on or before 
     October 13, 1987, and which was secured by a qualified 
     residence on October 13, 1987, and at all times thereafter 
     before the interest is paid or accrued, or
       ``(B) any indebtedness which is secured by the qualified 
     residence and was incurred after October 13, 1987, to 
     refinance indebtedness described in subparagraph (A) (or 
     refinanced indebtedness meeting the requirements of this 
     subparagraph) to the extent (immediately after the 
     refinancing) the principal amount of the indebtedness 
     resulting from the refinancing does not exceed the principal 
     amount of the refinanced indebtedness (immediately before the 
     refinancing).
       ``(4) Limitation on period of refinancing.--Subparagraph 
     (B) of paragraph (3) shall not apply to any indebtedness 
     after--
       ``(A) the expiration of the term of the indebtedness 
     described in paragraph (3)(A), or

[[Page S3744]]

       ``(B) if the principal of the indebtedness described in 
     paragraph (3)(A) is not amortized over its term, the 
     expiration of the term of the first refinancing of such 
     indebtedness (or if earlier, the date which is 30 years after 
     the date of such first refinancing).
       ``(e) Other Definitions and Special Rules.--For purposes of 
     this section--
       ``(1) Qualified residence.--For purposes of this 
     subsection--
       ``(A) In general.--Except as provided in subparagraph (C), 
     the term `qualified residence' means the principal residence 
     of the taxpayer.
       ``(B) Married individuals filing separate returns.--If a 
     married couple does not file a joint return for the taxable 
     year--
       ``(i) such couple shall be treated as 1 taxpayer for 
     purposes of subparagraph (A), and
       ``(ii) each individual shall be entitled to take into 
     account \1/2\ of the principal residence unless both 
     individuals consent in writing to 1 individual taking into 
     account the principal residence.
       ``(C) Pre-october 13, 1987, indebtedness.--In the case of 
     any pre-October 13, 1987, indebtedness, the term `qualified 
     residence' has the meaning given that term in section 
     163(h)(4), as in effect on the day before the date of 
     enactment of this subparagraph.
       ``(2) Special rule for cooperative housing corporations.--
     Any indebtedness secured by stock held by the taxpayer as a 
     tenant-stockholder in a cooperative housing corporation shall 
     be treated as secured by the house or apartment which the 
     taxpayer is entitled to occupy as such a tenant-stockholder. 
     If stock described in the preceding sentence may not be used 
     to secure indebtedness, indebtedness shall be treated as so 
     secured if the taxpayer establishes to the satisfaction of 
     the Secretary that such indebtedness was incurred to acquire 
     such stock.
       ``(3) Unenforceable security interests.--Indebtedness shall 
     not fail to be treated as secured by any property solely 
     because, under any applicable State or local homestead or 
     other debtor protection law in effect on August 16, 1986, the 
     security interest is ineffective or the enforceability of the 
     security interest is restricted.
       ``(4) Special rules for estates and trusts.--For purposes 
     of determining whether any interest paid or accrued by an 
     estate or trust is qualified residence interest, any 
     residence held by such estate or trust shall be treated as a 
     qualified residence of such estate or trust if such estate or 
     trust establishes that such residence is a qualified 
     residence of a beneficiary who has a present interest in such 
     estate or trust or an interest in the residuary of such 
     estate or trust.

     ``SEC. 5. DEFINITIONS AND SPECIAL RULES.

       ``(a) Definition of Surviving Spouse.--
       ``(1) In general.--For purposes of this part, the term 
     `surviving spouse' means a taxpayer--
       ``(A) whose spouse died during either of the taxpayer's 2 
     taxable years immediately preceding the taxable year, and
       ``(B) who maintains as the taxpayer's home a household 
     which constitutes for the taxable year the principal place of 
     abode (as a member of such household) of a dependent--
       ``(i) who (within the meaning of section 6, determined 
     without regard to subsections (b)(1), (b)(2), and (d)(1)(B)) 
     is a son, stepson, daughter, or stepdaughter of the taxpayer, 
     and
       ``(ii) with respect to whom the taxpayer is entitled to a 
     deduction for the taxable year under section 2.

     For purposes of this paragraph, an individual shall be 
     considered as maintaining a household only if over one-half 
     of the cost of maintaining the household during the taxable 
     year is furnished by such individual.
       ``(2) Limitations.--Notwithstanding paragraph (1), for 
     purposes of this part a taxpayer shall not be considered to 
     be a surviving spouse--
       ``(A) if the taxpayer has remarried at any time before the 
     close of the taxable year, or
       ``(B) unless, for the taxpayer's taxable year during which 
     the taxpayer's spouse died, a joint return could have been 
     made under the provisions of section 6013 (without regard to 
     subsection (a)(3) thereof).
       ``(3) Special rule where deceased spouse was in missing 
     status.--If an individual was in a missing status (within the 
     meaning of section 6013(f)(3)) as a result of service in a 
     combat zone and if such individual remains in such status 
     until the date referred to in subparagraph (A) or (B), then, 
     for purposes of paragraph (1)(A), the date on which such 
     individual dies shall be treated as the earlier of the date 
     determined under subparagraph (A) or the date determined 
     under subparagraph (B):
       ``(A) The date on which the determination is made under 
     section 556 of title 37 of the United States Code or under 
     section 5566 of title 5 of such Code (whichever is 
     applicable) that such individual died while in such missing 
     status.
       ``(B) Except in the case of the combat zone designated for 
     purposes of the Vietnam conflict, the date which is 2 years 
     after the date designated as the date of termination of 
     combatant activities in that zone.
       ``(b) Definition of Head of Household.--
       ``(1) In general.--For purposes of this part, an individual 
     shall be considered a head of a household if, and only if, 
     such individual is not married at the close of such 
     individual's taxable year, is not a surviving spouse (as 
     defined in subsection (a)), and either--
       ``(A) maintains as such individual's home a household which 
     constitutes for more than one-half of such taxable year the 
     principal place of abode, as a member of such household, of--
       ``(i) a qualifying child of the individual (as defined in 
     section 6(c), determined without regard to section 6(e)), but 
     not if such child--

       ``(I) is married at the close of the taxpayer's taxable 
     year, and
       ``(II) is not a dependent of such individual by reason of 
     section 6(b)(2) or 6(b)(3), or both, or

       ``(ii) any other person who is a dependent of the taxpayer, 
     if the taxpayer is entitled to a deduction for the taxable 
     year for such person under section 2, or
       ``(B) maintains a household which constitutes for such 
     taxable year the principal place of abode of the father or 
     mother of the taxpayer, if the taxpayer is entitled to a 
     deduction for the taxable year for such father or mother 
     under section 2.

     For purposes of this paragraph, an individual shall be 
     considered as maintaining a household only if over one-half 
     of the cost of maintaining the household during the taxable 
     year is furnished by such individual.
       ``(2) Determination of status.--For purposes of this 
     subsection--
       ``(A) an individual who is legally separated from such 
     individual's spouse under a decree of divorce or of separate 
     maintenance shall not be considered as married,
       ``(B) a taxpayer shall be considered as not married at the 
     close of such taxpayer's taxable year if at any time during 
     the taxable year such taxpayer's spouse is a nonresident 
     alien, and
       ``(C) a taxpayer shall be considered as married at the 
     close of such taxpayer's taxable year if such taxpayer's 
     spouse (other than a spouse described in subparagraph (B)) 
     died during the taxable year.
       ``(3) Limitations.--Notwithstanding paragraph (1), for 
     purposes of this part, a taxpayer shall not be considered to 
     be a head of a household--
       ``(A) if at any time during the taxable year the taxpayer 
     is a nonresident alien, or
       ``(B) by reason of an individual who would not be a 
     dependent for the taxable year but for--
       ``(i) subparagraph (H) of section 6(d)(2), or
       ``(ii) paragraph (3) of section 6(d).
       ``(c) Certain Married Individuals Living Apart.--For 
     purposes of this part, an individual shall be treated as not 
     married at the close of the taxable year if such individual 
     is so treated under the provisions of section 7703(b).

     ``SEC. 6. DEPENDENT DEFINED.

       ``(a) In General.--For purposes of this subtitle, the term 
     `dependent' means--
       ``(1) a qualifying child, or
       ``(2) a qualifying relative.
       ``(b) Exceptions.--For purposes of this section--
       ``(1) Dependents ineligible.--If an individual is a 
     dependent of a taxpayer for any taxable year of such taxpayer 
     beginning in a calendar year, such individual shall be 
     treated as having no dependents for any taxable year of such 
     individual beginning in such calendar year.
       ``(2) Married dependents.--An individual shall not be 
     treated as a dependent of a taxpayer under subsection (a) if 
     such individual has made a joint return with the individual's 
     spouse under section 6013 for the taxable year beginning in 
     the calendar year in which the taxable year of the taxpayer 
     begins.
       ``(3) Citizens or nationals of other countries.--
       ``(A) In general.--The term `dependent' does not include an 
     individual who is not a citizen or national of the United 
     States unless such individual is a resident of the United 
     States or a country contiguous to the United States.
       ``(B) Exception for adopted child.--Subparagraph (A) shall 
     not exclude any child of a taxpayer (within the meaning of 
     subsection (f)(1)(B)) from the definition of `dependent' if--
       ``(i) for the taxable year of the taxpayer, the child has 
     the same principal place of abode as the taxpayer and is a 
     member of the taxpayer's household, and
       ``(ii) the taxpayer is a citizen or national of the United 
     States.
       ``(c) Qualifying Child.--For purposes of this section--
       ``(1) In general.--The term `qualifying child' means, with 
     respect to any taxpayer for any taxable year, an individual--
       ``(A) who bears a relationship to the taxpayer described in 
     paragraph (2),
       ``(B) who has the same principal place of abode as the 
     taxpayer for more than one-half of such taxable year,
       ``(C) who meets the age requirements of paragraph (3), and
       ``(D) who has not provided over one-half of such 
     individual's own support for the calendar year in which the 
     taxable year of the taxpayer begins.
       ``(2) Relationship.--For purposes of paragraph (1)(A), an 
     individual bears a relationship to the taxpayer described in 
     this paragraph if such individual is--
       ``(A) a child of the taxpayer or a descendant of such a 
     child, or
       ``(B) a brother, sister, stepbrother, or stepsister of the 
     taxpayer or a descendant of any such relative.
       ``(3) Age requirements.--
       ``(A) In general.--For purposes of paragraph (1)(C), an 
     individual meets the requirements of this paragraph if such 
     individual--
       ``(i) has not attained the age of 19 as of the close of the 
     calendar year in which the taxable year of the taxpayer 
     begins, or

[[Page S3745]]

       ``(ii) is a student who has not attained the age of 24 as 
     of the close of such calendar year.
       ``(B) Special rule for disabled.--In the case of an 
     individual who is permanently and totally disabled at any 
     time during such calendar year, the requirements of 
     subparagraph (A) shall be treated as met with respect to such 
     individual.
       ``(4) Special rule relating to 2 or more claiming 
     qualifying child.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     if (but for this paragraph) an individual may be and is 
     claimed as a qualifying child by 2 or more taxpayers for a 
     taxable year beginning in the same calendar year, such 
     individual shall be treated as the qualifying child of the 
     taxpayer who is--
       ``(i) a parent of the individual, or
       ``(ii) if clause (i) does not apply, the taxpayer with the 
     highest adjusted gross income for such taxable year.
       ``(B) More than 1 parent claiming qualifying child.--If the 
     parents claiming any qualifying child do not file a joint 
     return together, such child shall be treated as the 
     qualifying child of--
       ``(i) the parent with whom the child resided for the 
     longest period of time during the taxable year, or
       ``(ii) if the child resides with both parents for the same 
     amount of time during such taxable year, the parent with the 
     highest adjusted gross income.
       ``(d) Qualifying Relative.--For purposes of this section--
       ``(1) In general.--The term `qualifying relative' means, 
     with respect to any taxpayer for any taxable year, an 
     individual--
       ``(A) who bears a relationship to the taxpayer described in 
     paragraph (2),
       ``(B) with respect to whom the taxpayer provides over one-
     half of the individual's support for the calendar year in 
     which such taxable year begins, and
       ``(C) who is not a qualifying child of such taxpayer or of 
     any other taxpayer for any taxable year beginning in the 
     calendar year in which such taxable year begins.
       ``(2) Relationship.--For purposes of paragraph (1)(A), an 
     individual bears a relationship to the taxpayer described in 
     this paragraph if the individual is any of the following with 
     respect to the taxpayer:
       ``(A) A child or a descendant of a child.
       ``(B) A brother, sister, stepbrother, or stepsister.
       ``(C) The father or mother, or an ancestor of either.
       ``(D) A stepfather or stepmother.
       ``(E) A son or daughter of a brother or sister of the 
     taxpayer.
       ``(F) A brother or sister of the father or mother of the 
     taxpayer.
       ``(G) A son-in-law, daughter-in-law, father-in-law, mother-
     in-law, brother-in-law, or sister-in-law.
       ``(H) An individual (other than an individual who at any 
     time during the taxable year was the spouse, determined 
     without regard to section 7703, of the taxpayer) who, for the 
     taxable year of the taxpayer, has the same principal place of 
     abode as the taxpayer and is a member of the taxpayer's 
     household.
       ``(3) Special rule relating to multiple support 
     agreements.--For purposes of paragraph (1)(C), over one-half 
     of the support of an individual for a calendar year shall be 
     treated as received from the taxpayer if--
       ``(A) no one person contributed over one-half of such 
     support,
       ``(B) over one-half of such support was received from 2 or 
     more persons each of whom, but for the fact that any such 
     person alone did not contribute over one-half of such 
     support, would have been entitled to claim such individual as 
     a dependent for a taxable year beginning in such calendar 
     year,
       ``(C) the taxpayer contributed over 10 percent of such 
     support, and
       ``(D) each person described in subparagraph (B) (other than 
     the taxpayer) who contributed over 10 percent of such support 
     files a written declaration (in such manner and form as the 
     Secretary may by regulations prescribe) that such person will 
     not claim such individual as a dependent for any taxable year 
     beginning in such calendar year.
       ``(4) Special rule relating to income of handicapped 
     dependents.--
       ``(A) In general.--For purposes of paragraph (1)(B), the 
     gross income of an individual who is permanently and totally 
     disabled at any time during the taxable year shall not 
     include income attributable to services performed by the 
     individual at a sheltered workshop if--
       ``(i) the availability of medical care at such workshop is 
     the principal reason for the individual's presence there, and
       ``(ii) the income arises solely from activities at such 
     workshop which are incident to such medical care.
       ``(B) Sheltered workshop defined.--For purposes of 
     subparagraph (A), the term `sheltered workshop' means a 
     school--
       ``(i) which provides special instruction or training 
     designed to alleviate the disability of the individual, and
       ``(ii) which is operated by an organization described in 
     section 501(c)(3) and exempt from tax under section 501(a), 
     or by a State, a possession of the United States, any 
     political subdivision of any of the foregoing, the United 
     States, or the District of Columbia.
       ``(5) Special rules for support.--For purposes of this 
     subsection--
       ``(A) payments to a spouse which are includible in the 
     gross income of such spouse shall not be treated as a payment 
     by the payor spouse for the support of any dependent, and
       ``(B) in the case of the remarriage of a parent, support of 
     a child received from the parent's spouse shall be treated as 
     received from the parent.
       ``(e) Special Rule for Divorced Parents.--
       ``(1) In general.--Notwithstanding subsection (c)(1)(B), 
     (c)(4), or (d)(1)(C), if--
       ``(A) a child receives over one-half of the child's support 
     during the calendar year from the child's parents--
       ``(i) who are divorced or legally separated under a decree 
     of divorce or separate maintenance,
       ``(ii) who are separated under a written separation 
     agreement, or
       ``(iii) who live apart at all times during the last 6 
     months of the calendar year, and
       ``(B) such child is in the custody of 1 or both of the 
     child's parents for more than one-half of the calendar year, 
     such child shall be treated as being the qualifying child or 
     qualifying relative of the noncustodial parent for a calendar 
     year if the requirements described in paragraph (2) are met.
       ``(2) Requirements.--For purposes of paragraph (1), the 
     requirements described in this paragraph are met if--
       ``(A) a decree of divorce or separate maintenance or 
     written separation agreement between the parents applicable 
     to the taxable year beginning in such calendar year provides 
     that the noncustodial parent shall be entitled to any 
     deduction allowable under section 2 for such child, and in 
     the case of such a decree or agreement executed before 
     January 1, 1985, the noncustodial parent provides at least 
     $600 for the support of such child during such calendar year, 
     or
       ``(B) the custodial parent signs a written declaration (in 
     such manner and form as the Secretary may prescribe) that 
     such parent will not claim such child as a dependent for such 
     taxable year.

     For purposes of subparagraph (A), amounts expended for the 
     support of a child or children shall be treated as received 
     from the noncustodial parent to the extent that such parent 
     provided amounts for such support.
       ``(3) Custodial parent and noncustodial parent.--For 
     purposes of this subsection--
       ``(A) Custodial parent.--The term `custodial parent' means 
     the parent with whom a child shared the same principal place 
     of abode for the greater portion of the calendar year.
       ``(B) Noncustodial parent.--The term `noncustodial parent' 
     means the parent who is not the custodial parent.
       ``(4) Exception for multiple-support agreements.--This 
     subsection shall not apply in any case where over one-half of 
     the support of the child is treated as having been received 
     from a taxpayer under the provision of subsection (d)(3).
       ``(f) Other Definitions and Rules.--For purposes of this 
     section--
       ``(1) Child defined.--
       ``(A) In general.--The term `child' means an individual who 
     is--
       ``(i) a son, daughter, stepson, or stepdaughter of the 
     taxpayer, or
       ``(ii) an eligible foster child of the taxpayer.
       ``(B) Adopted child.--In determining whether any of the 
     relationships specified in subparagraph (A)(i) or paragraph 
     (4) exists, a legally adopted individual of the taxpayer, or 
     an individual who is lawfully placed with the taxpayer for 
     legal adoption by the taxpayer, shall be treated as a child 
     of such individual by blood.
       ``(C) Eligible foster child.--For purposes of subparagraph 
     (A)(ii), the term `eligible foster child' means an individual 
     who is placed with the taxpayer by an authorized placement 
     agency or by judgment, decree, or other order of any court of 
     competent jurisdiction.
       ``(2) Student defined.--The term `student' means an 
     individual who during each of 5 calendar months during the 
     calendar year in which the taxable year of the taxpayer 
     begins--
       ``(A) is a full-time student at an educational organization 
     described in section 3(d)(1)(B), or
       ``(B) is pursuing a full-time course of institutional on-
     farm training under the supervision of an accredited agent of 
     an educational organization described in section 3(d)(1)(B) 
     or of a State or political subdivision of a State.
       ``(3) Determination of household status.--An individual 
     shall not be treated as a member of the taxpayer's household 
     if at any time during the taxable year of the taxpayer the 
     relationship between such individual and the taxpayer is in 
     violation of local law.
       ``(4) Brother and sister.--The terms `brother' and `sister' 
     include a brother or sister by the half blood.
       ``(5) Special support test in case of students.--For 
     purposes of subsections (c)(1)(D) and (d)(1)(C), in the case 
     of an individual who is--
       ``(A) a child of the taxpayer, and
       ``(B) a student, amounts received as scholarships for study 
     at an educational organization described in section 
     3(d)(1)(B) shall not be taken into account.
       ``(6) Treatment of missing children.--
       ``(A) In general.--Solely for the purposes referred to in 
     subparagraph (B), a child of the taxpayer--
       ``(i) who is presumed by law enforcement authorities to 
     have been kidnapped by someone who is not a member of the 
     family of such child or the taxpayer, and

[[Page S3746]]

       ``(ii) who had, for the taxable year in which the 
     kidnapping occurred, the same principal place of abode as the 
     taxpayer for more than one-half of the portion of such year 
     before the date of the kidnapping, shall be treated as 
     meeting the requirement of subsection (c)(1)(B) with respect 
     to a taxpayer for all taxable years ending during the period 
     that the child is kidnapped.
       ``(B) Purposes.--Subparagraph (A) shall apply solely for 
     purposes of determining--
       ``(i) the deduction under section 2(c), and
       ``(ii) whether an individual is a surviving spouse or a 
     head of a household (as such terms are defined in section 5).
       ``(C) Comparable treatment of certain qualifying 
     relatives.--For purposes of this section, a child of the 
     taxpayer--
       ``(i) who is presumed by law enforcement authorities to 
     have been kidnapped by someone who is not a member of the 
     family of such child or the taxpayer, and
       ``(ii) who was (without regard to this paragraph) a 
     qualifying relative of the taxpayer for the portion of the 
     taxable year before the date of the kidnapping, shall be 
     treated as a qualifying relative of the taxpayer for all 
     taxable years ending during the period that the child is 
     kidnapped.
       ``(D) Termination of treatment.--Subparagraphs (A) and (C) 
     shall cease to apply as of the first taxable year of the 
     taxpayer beginning after the calendar year in which there is 
     a determination that the child is dead (or, if earlier, in 
     which the child would have attained age 18).

                 ``PART II--TAX ON BUSINESS ACTIVITIES

``Sec. 11. Tax imposed on business activities.

     ``SEC. 11. TAX IMPOSED ON BUSINESS ACTIVITIES.

       ``(a) Tax Imposed.--There is hereby imposed on every person 
     engaged in a business activity located in the United States a 
     tax equal to 20 percent of the business taxable income of 
     such person.
       ``(b) Liability for Tax.--The tax imposed by this section 
     shall be paid by the person engaged in the business activity, 
     whether such person is an individual, partnership, 
     corporation, or otherwise.
       ``(c) Business Taxable Income.--
       ``(1) In general.--For purposes of this section, the term 
     `business taxable income' means gross active income reduced 
     by the deductions specified in subsection (d).
       ``(2) Gross active income.--For purposes of paragraph (1), 
     the term `gross active income' means gross income other than 
     investment income.
       ``(d) Deductions.--
       ``(1) In general.--The deductions specified in this 
     subsection are--
       ``(A) the cost of business inputs for the business 
     activity,
       ``(B) the compensation (including contributions to 
     qualified retirement plans but not including other fringe 
     benefits) paid for employees performing services in such 
     activity, and
       ``(C) the cost of personal and real property used in such 
     activity.
       ``(2) Business inputs.--
       ``(A) In general.--For purposes of paragraph (1)(A), the 
     term `cost of business inputs' means--
       ``(i) the actual cost of goods, services, and materials, 
     whether or not resold during the taxable year, and
       ``(ii) the actual cost, if reasonable, of travel and 
     entertainment expenses for business purposes.
       ``(B) Purchases of goods and services excluded.--Such term 
     shall not include purchases of goods and services provided to 
     employees or owners.
       ``(C) Certain lobbying and political expenditures 
     excluded.--
       ``(i) In general.--Such term shall not include any amount 
     paid or incurred in connection with--

       ``(I) influencing legislation,
       ``(II) participation in, or intervention in, any political 
     campaign on behalf of (or in opposition to) any candidate for 
     public office,
       ``(III) any attempt to influence the general public, or 
     segments thereof, with respect to elections, legislative 
     matters, or referendums, or
       ``(IV) any direct communication with a covered executive 
     branch official in an attempt to influence the official 
     actions or positions of such official.

       ``(ii) Exception for local legislation.--In the case of any 
     legislation of any local council or similar governing body--

       ``(I) clause (i)(I) shall not apply, and
       ``(II) such term shall include all ordinary and necessary 
     expenses (including, but not limited to, traveling expenses 
     described in subparagraph (A)(iii) and the cost of preparing 
     testimony) paid or incurred during the taxable year in 
     carrying on any trade or business--

       ``(aa) in direct connection with appearances before, 
     submission of statements to, or sending communications to the 
     committees, or individual members, of such council or body 
     with respect to legislation or proposed legislation of direct 
     interest to the taxpayer, or
       ``(bb) in direct connection with communication of 
     information between the taxpayer and an organization of which 
     the taxpayer is a member with respect to any such legislation 
     or proposed legislation which is of direct interest to the 
     taxpayer and to such organization, and that portion of the 
     dues so paid or incurred with respect to any organization of 
     which the taxpayer is a member which is attributable to the 
     expenses of the activities carried on by such organization.
       ``(iii) Application to dues of tax-exempt organizations.--
     Such term shall include the portion of dues or other similar 
     amounts paid by the taxpayer to an organization which is 
     exempt from tax under this subtitle which the organization 
     notifies the taxpayer under section 6033(e)(1)(A)(ii) is 
     allocable to expenditures to which clause (i) applies.
       ``(iv) Influencing legislation.--For purposes of this 
     subparagraph--

       ``(I) In general.--The term `influencing legislation' means 
     any attempt to influence any legislation through 
     communication with any member or employee of a legislative 
     body, or with any government official or employee who may 
     participate in the formulation of legislation.
       ``(II) Legislation.--The term `legislation' has the meaning 
     given that term in section 4911(e)(2).

       ``(v) Other special rules.--

       ``(I) Exception for certain taxpayers.--In the case of any 
     taxpayer engaged in the trade or business of conducting 
     activities described in clause (i), clause (i) shall not 
     apply to expenditures of the taxpayer in conducting such 
     activities directly on behalf of another person (but shall 
     apply to payments by such other person to the taxpayer for 
     conducting such activities).
       ``(II) De minimis exception.--

       ``(aa) In general.--Clause (i) shall not apply to any in-
     house expenditures for any taxable year if such expenditures 
     do not exceed $2,000. In determining whether a taxpayer 
     exceeds the $2,000 limit, there shall not be taken into 
     account overhead costs otherwise allocable to activities 
     described in subclauses (I) and (IV) of clause (i).
       ``(bb) In-house expenditures.--For purposes of provision 
     (aa), the term `in-house expenditures' means expenditures 
     described in subclauses (I) and (IV) of clause (i) other than 
     payments by the taxpayer to a person engaged in the trade or 
     business of conducting activities described in clause (i) for 
     the conduct of such activities on behalf of the taxpayer, or 
     dues or other similar amounts paid or incurred by the 
     taxpayer which are allocable to activities described in 
     clause (i).

       ``(III) Expenses incurred in connection with lobbying and 
     political activities.--Any amount paid or incurred for 
     research for, or preparation, planning, or coordination of, 
     any activity described in clause (i) shall be treated as paid 
     or incurred in connection with such activity.

       ``(vi) Covered executive branch official.--For purposes of 
     this subparagraph, the term `covered executive branch 
     official' means--

       ``(I) the President,
       ``(II) the Vice President,
       ``(III) any officer or employee of the White House Office 
     of the Executive Office of the President, and the 2 most 
     senior level officers of each of the other agencies in such 
     Executive Office, and
       ``(IV) any individual serving in a position in level I of 
     the Executive Schedule under section 5312 of title 5, United 
     States Code, any other individual designated by the President 
     as having Cabinet level status, and any immediate deputy of 
     such an individual.

       ``(vii) Special rule for indian tribal governments.--For 
     purposes of this subparagraph, an Indian tribal government 
     shall be treated in the same manner as a local council or 
     similar governing body.
       ``(viii) Cross reference.--

``For reporting requirements and alternative taxes related to this 
              subsection, see section 6033(e). 

       ``(e) Carryover of Excess Deductions.--
       ``(1) In general.--If the aggregate deductions for any 
     taxable year exceed the gross active income for such taxable 
     year, the amount of the deductions specified in subsection 
     (d) for the succeeding taxable year (determined without 
     regard to this subsection) shall be increased by the sum of--
       ``(A) such excess, plus
       ``(B) the product of such excess and the 3-month Treasury 
     rate for the last month of such taxable year.
       ``(2) 3-month treasury rate.--For purposes of paragraph 
     (1), the 3-month Treasury rate is the rate determined by the 
     Secretary based on the average market yield (during any 1-
     month period selected by the Secretary and ending in the 
     calendar month in which the determination is made) on 
     outstanding marketable obligations of the United States with 
     remaining periods to maturity of 3 months or less.''
       (b) Conforming Repeals and Redesignations.--
       (1) Repeals.--The following subchapters of chapter 1 of 
     subtitle A and the items relating to such subchapters in the 
     table of subchapters for such chapter 1 are repealed:
       (A) Subchapter B (relating to computation of taxable 
     income).
       (B) Subchapter C (relating to corporate distributions and 
     adjustments).
       (C) Subchapter D (relating to deferred compensation, etc.).
       (D) Subchapter G (relating to corporations used to avoid 
     income tax on shareholders).
       (E) Subchapter H (relating to banking institutions).
       (F) Subchapter I (relating to natural resources).
       (G) Subchapter J (relating to estates, trusts, 
     beneficiaries, and decedents).
       (H) Subchapter L (relating to insurance companies).
       (I) Subchapter M (relating to regulated investment 
     companies and real estate investment trusts).

[[Page S3747]]

       (J) Subchapter N (relating to tax based on income from 
     sources within or without the United States).
       (K) Subchapter O (relating to gain or loss on disposition 
     of property).
       (L) Subchapter P (relating to capital gains and losses).
       (M) Subchapter Q (relating to readjustment of tax between 
     years and special limitations).
       (N) Subchapter S (relating to tax treatment of S 
     corporations and their shareholders).
       (O) Subchapter T (relating to cooperatives and their 
     patrons).
       (P) Subchapter U (relating to designation and treatment of 
     empowerment zones, enterprise communities, and rural 
     development investment areas).
       (Q) Subchapter V (relating to title 11 cases).
       (R) Subchapter W (relating to District of Columbia 
     Enterprise Zone).
       (2) Redesignations.--The following subchapters of chapter 1 
     of subtitle A and the items relating to such subchapters in 
     the table of subchapters for such chapter 1 are redesignated:
       (A) Subchapter E (relating to accounting periods and 
     methods of accounting) as subchapter B.
       (B) Subchapter F (relating to exempt organizations) as 
     subchapter C.
       (C) Subchapter K (relating to partners and partnerships) as 
     subchapter D.

     SEC. 3. REPEAL OF ESTATE AND GIFT TAXES.

       Subtitle B (relating to estate, gift, and generation-
     skipping taxes) and the item relating to such subtitle in the 
     table of subtitles is repealed.

     SEC. 4. ADDITIONAL REPEALS.

       Subtitles H (relating to financing of presidential election 
     campaigns) and J (relating to coal industry health benefits) 
     and the items relating to such subtitles in the table of 
     subtitles are repealed.

     SEC. 5. EFFECTIVE DATES.

       (a) In General.--Except as provided in subsection (b), the 
     amendments made by this Act apply to taxable years beginning 
     after December 31, 2005.
       (b) Repeal of Estate and Gift Taxes.--The repeal made by 
     section 3 applies to estates of decedents dying, and 
     transfers made, after December 31, 2005.
       (c) Technical and Conforming Changes.--The Secretary of the 
     Treasury or the Secretary's delegate shall, as soon as 
     practicable but in any event not later than 90 days after the 
     date of enactment of this Act, submit to the Committee on 
     Ways and Means of the House of Representatives and the 
     Committee on Finance of the Senate a draft of any technical 
     and conforming changes in the Internal Revenue Code of 1986 
     which are necessary to reflect throughout such Code the 
     changes in the substantive provisions of law made by this 
     Act.
                                 ______
                                 
      By Mr. SPECTER:
  S. 813. A bill to amend part D of title XVIII of the Social Security 
Act to authorize the Secretary of Health and Human Services to 
negotiate for lower prices for medicare prescription drugs; to the 
Committee on Finance.
  Mr. SPECTER. Mr. President, I have sought recognition today to 
introduce the Prescription Drug and Health Improvement Act of 2005 to 
reduce the high prices of prescription drugs for Medicare 
beneficiaries. I introduced a similar version of this bill in the 108th 
Congress, S. 2766. To increase the likelihood that this bill may become 
law this bill does not include a costly provision which would have 
closed the gap in prescription drug costs for Medicare beneficiaries.
  Americans, specifically senior citizens, pay the highest prices in 
the world for brand-name prescription drugs. With 45 million uninsured 
Americans and many more senior citizens without an adequate 
prescription drug benefit, filling a doctor's prescription is 
unaffordable for many people in this country. The United States has the 
greatest health care system in the world; however, too many seniors are 
forced to make difficult choices between life-sustaining prescription 
drugs and daily necessities.
  The Centers for Medicare and Medicaid Services estimate that in 2004 
per capita spending on prescription drugs rose approximately 12 
percent, with a similar rate of growth expected for this year. Much of 
the increase in drug spending is due to higher utilization and the 
shift from older, lower cost drugs to newer, higher cost drugs. 
However, rapidly increasing drug prices are a critical component.
  High drug prices, combined with the surging older population, are 
also taking a toll on State budgets and private sector health insurance 
benefits. Medicaid spending on prescription drugs increased at an 
average annual rate of nearly 19 percent between 1998 and 2002. Until 
lower priced drugs are available, pressures will continue to squeeze 
public programs at both the State and Federal level.
  To address these problems, my legislation would reduce the high 
prices of prescription drugs to seniors by repealing the prohibition 
against interference by the Secretary of HHS with negotiations between 
drug manufacturers, pharmacies, and prescription drug plan sponsors and 
instead authorize the Secretary to negotiate contracts with 
manufacturers of covered prescription drugs. It will allow the 
Secretary of HHS to use Medicare's large beneficiary population to 
leverage bargaining power to obtain lower prescription drug prices for 
Medicare beneficiaries.
  Price negotiations between the Secretary of HHS and prescription drug 
manufacturers would be analogous to the ability of the Secretary of 
Veterans Affairs to negotiate prescription drug prices with 
manufacturers. This bargaining power enables veterans to receive 
prescription drugs at a significant cost savings. According to the 
National Association of Chain Drug Stores, the average ``cash cost'' of 
a prescription in 2001 was $40.22. The average cost in the Veterans 
Affairs (VA) health care system in fiscal year 2001 was $22.87.
  In the 108th Congress, in my capacity as chairman of the Veterans' 
Affairs Committee, I introduced the Veterans Prescription Drugs 
Assistance Act, S. 1153, which was reported out of committee, but was 
not considered before the full Senate. In the 109th Congress, I have 
again introduced the Veterans Prescription Drugs Assistance Act, S. 
614.
  This legislation will broaden the ability of veterans to access the 
Veterans Affairs' Prescription Drug Program. Under my bill, all 
Medicare-eligible veterans will be able to purchase medications at a 
tremendous price reduction through the Veterans Affairs' Prescription 
Drug Program. In many cases, this will save veterans who are Medicare 
beneficiaries up to 50 percent on the cost of prescribed medications, a 
significant savings for veterans. Similar savings may be available to 
America's seniors from the savings achieved using the HHS bargaining 
power, like the Veterans Affairs bargaining power for the benefit of 
veterans. These savings may provide America's seniors with fiscal 
relief from the increasing costs of prescription drugs.
  I believe this bill can provide desperately needed access to 
inexpensive, effective prescription drugs for America's seniors. The 
time has come for concerted action in this arena. I urge my colleagues 
to move this legislation forward promptly.
  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. 813

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. NEGOTIATING FAIR PRICES FOR MEDICARE PRESCRIPTION 
                   DRUGS.

       (a) In General.--Section 1860D-11 of the Social Security 
     Act (42 U.S.C. 1395w-111) is amended by striking subsection 
     (i) (relating to noninterference) and by inserting the 
     following:
       ``(i) Authority To Negotiate Prices With Manufacturers.--In 
     order to ensure that beneficiaries enrolled under 
     prescription drug plans and MA-PD plans pay the lowest 
     possible price, the Secretary shall have authority similar to 
     that of other Federal entities that purchase prescription 
     drugs in bulk to negotiate contracts with manufacturers of 
     covered part D drugs, consistent with the requirements and in 
     furtherance of the goals of providing quality care and 
     containing costs under this part.''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect as if included in the enactment of section 
     101 of the Medicare Prescription Drug, Improvement, and 
     Modernization Act of 2003 (Public Law 108-173; 117 Stat. 
     2066).
       (c) HHS Reports Comparing Negotiated Prescription Drug 
     Prices and Retail Prescription Drug Prices.--Beginning in 
     2007, the Secretary of Health and Human Services shall 
     regularly, but in no case less often than quarterly, submit 
     to Congress a report that compares the prices for covered 
     part D drugs (as defined in section 1860D-2(e) of the Social 
     Security Act (42 U.S.C. 1395w-102(e)) negotiated by the 
     Secretary pursuant to section 1860D-11(i) of such Act (42 
     U.S.C. 1395w-111(i)), as amended by subsection (a), with the 
     average price a retail pharmacy would charge an individual 
     who does not have health insurance coverage for purchasing 
     the same strength, quantity, and dosage form of such covered 
     part D drug.

[[Page S3748]]

                                 ______
                                 
      By Mr. THOMAS (for himself, Ms. Snowe, Mr. Enzi, Mr. Bingaman, 
        Mr. Alexander, Mr. Talent, Mr. Ensign, and Mr. Smith):
  S. 815. A bill to amend the Internal Revenue Code of 1986 to allow a 
15-year applicable recovery period for depreciation of certain electric 
transmission property; to the Commission on Finance.
  Mr. THOMAS. Mr. President, today I rise to introduce a bill to 
encourage the construction of electric transmission lines. One of the 
biggest energy problems our country faces is a lack of electric 
transmission capacity. Recently, my home State of Wyoming joined forces 
with Utah, Nevada, and California in a partnership to create a new 
transmission line--the Frontier Line--to send coal-generated 
electricity to the West Coast.
  Demand for electricity in the West has grown by 60 percent in the 
last two decades, while transmission capacity has grown by only 20 
percent. But ours is certainly not the only region affected. Energy 
production and distribution is a serious issue affecting all Americans. 
From our dependence on foreign oil and natural gas, to limited refining 
capacity and distribution ability, never mind development of non-
traditional fuels, we need to get our energy house in order. I have 
long-favored a comprehensive energy policy and will continue to 
champion that cause because it is badly needed and the right thing to 
do.
  One piece of any energy policy needs to be providing for electric 
transmission capacity. If we're producing a surplus in one area of the 
country but can't convey it to other areas that need it, it doesn't do 
anyone any good. The bill I introduce today will help alleviate the 
problem by making it less expensive to invest in electric transmission 
lines that we badly need.
  I ask unanimous consent that the text of this bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 815

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. ELECTRIC TRANSMISSION PROPERTY TREATED AS 15-YEAR 
                   PROPERTY.

       (a) In General.--Subparagraph (E) of section 168(e)(3) of 
     the Internal Revenue Code of 1986 (relating to classification 
     of certain property) is amended by striking ``and'' at the 
     end of clause (v), by striking the period at the end of 
     clause (vi) and by inserting ``, and'', and by adding at the 
     end the following new clause:
       ``(vii) any section 1245 property (as defined in section 
     1245(a)(3)) used in the transmission at 69 or more kilovolts 
     of electricity for sale the original use of which commences 
     with the taxpayer after the date of the enactment of this 
     clause.''.
       (b) Alternative System.--The table contained in section 
     168(g)(3)(B) of the Internal Revenue Code of 1986 is amended 
     by inserting after the item relating to subparagraph (E)(vi) 
     the following:

``(E)(vii).......................................................30.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after the date of 
     the enactment of this Act, in taxable years ending after such 
     date.
                                 ______
                                 
      By Mr. REID (for Mrs. Clinton):
  S. 816. A bill to establish the position of Northern Border 
Coordinator in the Department of Homeland Security; to the Committee on 
Homeland Security and Governmental Affairs.
  Mr. REID (for Mrs. Clinton). 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. 816

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. NORTHERN BORDER COORDINATOR.

       (a) In General.--Title IV of the Homeland Security Act of 
     2002 (6 U.S.C. 201 et seq.) is amended--
       (1) in section 402--
       (A) by redesignating paragraph (8) as paragraph (9); and
       (B) by inserting after paragraph (7) the following:
       ``(8) Increasing the security of the border between the 
     United States and Canada and the ports of entry located along 
     that border, and improving the coordination among the 
     agencies responsible for maintaining that security.''; and
       (2) in subtitle C, by adding at the end the following:

     ``SEC. 431. NORTHERN BORDER COORDINATOR.

       ``(a) In General.--There shall be within the Directorate of 
     Border and Transportation Security the position of Northern 
     Border Coordinator, who shall be appointed by the Secretary 
     and who shall report directly to the Under Secretary for 
     Border and Transportation Security.
       ``(b) Responsibilities.--The Northern Border Coordinator 
     shall be responsible for--
       ``(1) increasing the security of the border, including 
     ports of entry, between the United States and Canada;
       ``(2) improving the coordination among the agencies 
     responsible for the security described under paragraph (1);
       ``(3) serving as the primary liaison with State and local 
     governments and law enforcement agencies regarding security 
     along the border between the United States and Canada; and
       ``(4) serving as a liaison with the Canadian government on 
     border security.''.
       (b) Clerical Amendment.--The table of contents in section 
     1(b) of the Homeland Security Act of 2002 (6 U.S.C. 101 et 
     seq.) is amended by inserting after the item relating to 
     section 430 the following:

``Sec. 431. Northern Border Coordinator.''.
                                 ______
                                 
      By Ms. STABENOW (for herself, Mr. Graham, and Mr. Bayh):
  S. 817. A bill to amend the Trade Act of 1974 to create a Special 
Trade Prosecutor to ensure compliance with trade agreements, and for 
other purposes; to the Committee on Finance.
  Ms. STABENOW. Mr. President, I rise to introduce a bill on behalf of 
myself and Senators Graham and Bayh.
  This bill would create an ambassador-level position within the office 
of the U.S. Trade Representative entitled: Special Trade Prosecutor. 
This individual would be appointed by the President and confirmed by 
the Senate, with the authority to ensure compliance with trade 
agreements to protect our manufacturers against unfair trade practices.
  In practical terms, this prosecutor will have the authority to 
investigate and recommend prosecuting cases before the World Trade 
Organization and under trade agreements to which the United States is a 
party.
  Why this bill? At this time?
  We have an Executive Branch that is organized in such a way as to 
make prosecution of unfair trade cases unlikely at best. When you 
couple this with the fact that our government has sat idle as our 
domestic manufacturing base has eroded due to unfair trade practices, 
it becomes very clear that we have put our manufacturers in an 
impossible situation.
  Under the current structure of the office of the U.S. Trade 
Representative, we are asking our Trade Representative to do too much. 
Quite simply, the office is not able to deliver.
  The current structure demands that they negotiate trade agreements 
with foreign nations and simultaneously enforce other agreements with 
those same countries--all without damaging the U.S.'s ability to 
negotiate the next trade deal.
  It's not working. And, while significant portions of our trade 
imbalances are not caused by lax enforcement, much of it is.
  In February, the Department of Commerce reported that the merchandise 
trade deficit reached a record level of $666.2 billion in the 2004, a 
21.7 percent increase since 2003.
  If we can address any portion of this deficit we must do it. This 
bill represents a straight-forward, common-sense solution.
  There are many U.S. industries facing unfair trade practices and this 
bill represents an institutional change that will allow the U.S. to 
thoroughly and vigorously investigate and prosecute these cases.
  For instance, China is a textbook case of how a foreign government 
has used a network of illegal subsidies and government interventions in 
order to destroy foreign competition, both in the United States as well 
as in many other countries.
  According to the U.S. China Economic and Security Commission, these 
actions have gone virtually unchallenged by the U.S. government, 
despite the fact that China's actions are in clear violations of both 
U.S. trade law and WTO rules.
  These ``anti-competitive actions by China's government include 
currency manipulation (estimated to provide as much as a 40 percent 
subsidy for Chinese exporters), illegal direct government subsidies of 
its money losing state-owned textile and apparel sectors, illegal 
export tax rebates (13 percent) and the deliberate extension of

[[Page S3749]]

billions of dollars in non-performing (``free money'') loans by China's 
central banks in order to award a competitive advantage against foreign 
competition.''
  The Commission goes on to say that ``in the case of China, the 
dramatic increase in subsidies has caused Chinese prices to drop by an 
average of 58 percent over the past two years in those product areas 
where quotas have been removed. As a result, China has gained a near 
monopoly share in these products over the last 24 months, taking 60 
percent of the market.''
  However, the U.S. government has failed to file any complaints at the 
WTO, despite the Chinese government's repeated and widespread 
violations of WTO rules.
  Our government's inaction is costing us millions of American jobs, 
crippling our manufacturing sector, distorting trade and investment 
patterns globally, and leaving hundreds of millions of Chinese workers 
vulnerable and mistreated.
  Let me give you a concrete example of the violations that are 
occurring.
  Counterfeit automotive products are a big problem in my home State of 
Michigan. Not only does it kill American jobs, but it has the potential 
to kill Americans as cheap shoddy automotive products replace 
legitimate ones of higher-quality.
  The American automotive parts and components industry looses an 
estimated $12 billion in sales on a global basis to counterfeiting.
  And, we don't even keep statistics on the potential loss of life.
  As many have said, we should understand that, if left unchecked, 
penetration by counterfeit automotive products, as well as other 
manufactured goods, has the potential to undermine the public's 
confidence and trust in what they are buying. We can't let that happen.
  In Michigan, we lost 51,000 manufacturing jobs between 1989 and 2003 
due to China's unfair trade practices, according to the Economic Policy 
Institute.
  Unfortunately, the plant closings continue in Michigan and around the 
Nation. Over the past three months we see example after example of the 
damage a ``wait and see'' attitude has on workers in this country.
  We should not be shirking our responsibilities to enforce trade 
rules. This Bill helps us reverse the course upon which we find 
ourselves--it helps us save American jobs.
  I believe in trade and the benefits it can have for our 
manufacturers, farmers, and other industries. But, we need to have fair 
trade first and foremost.
  A Special Trade Prosecutor would have the power to stand up for our 
manufacturers and farmers and make sure that other countries are 
holding up their end of their trade agreements.
  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. 817

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. CREATION OF SPECIAL TRADE PROSECUTOR.

       (a) Establishment of Position.--Section 141(b)(2) of the 
     Trade Act of 1974 (19 U.S.C. 2171(b)(2)) is amended to read 
     as follows:
       ``(2) There shall be in the Office 3 Deputy United States 
     Trade Representatives, 1 Chief Agricultural Negotiator, and 1 
     Special Trade Prosecutor. The 3 Deputy United States Trade 
     Representatives, the Chief Agricultural Negotiator, and the 
     Special Trade Prosecutor shall be appointed by the President, 
     by and with the advice and consent of the Senate. As an 
     exercise of the rulemaking power of the Senate, any 
     nomination of a Deputy United States Trade Representative, 
     the Chief Agricultural Negotiator, or the Special Trade 
     Prosecutor submitted to the Senate for its advice and 
     consent, and referred to a committee, shall be referred to 
     the Committee on Finance. Each Deputy United States Trade 
     Representative, the Chief Agricultural Negotiator, and the 
     Special Trade Prosecutor shall hold office at the pleasure of 
     the President and shall have the rank of Ambassador.''.
       (b) Functions of Position.--Section 141(c) of the Trade Act 
     of 1974 (19 U.S.C. 2171(c)) is amended by adding at the end 
     the following new paragraph:
       ``(6) The principal function of the Special Trade 
     Prosecutor shall be to ensure compliance with trade 
     agreements relating to United States manufactured goods and 
     services. The Special Trade Prosecutor shall have the 
     authority to investigate and recommend prosecuting cases 
     before the World Trade Organization and under trade 
     agreements to which the United States is a party. The Special 
     Trade Prosecutor shall recommend administering United States 
     trade laws relating to foreign government barriers to United 
     States goods and services. The Special Trade Prosecutor shall 
     perform such other functions as the United States Trade 
     Representative may direct.''.
                                 ______
                                 
      By Mr. JOHNSON:
  S. 819. A bill to authorize the Secretary of the Interior to 
reallocate costs of the Pactola Dam and Reservoir, South Dakota, to 
reflect increased demands for municipal, industrial, and fish and 
wildlife purposes; to the Committee on Energy and Natural Resources.
  Mr. JOHNSON. Mr. President, I rise today to introduce legislation 
that codifies an agreement between the City of Rapid City, SD and the 
Rapid Valley Water Conservancy District for a water service contract. 
The renegotiated agreement reallocates the costs of the Pactola Dam to 
better reflect the City's growing need for municipal water supply and 
the Rapid Valley District's decreasing demand for irrigation.
  The legislation implements an agreement to improve upon the current 
municipal, industrial, irrigation, recreation, and wildlife 
requirements of Rapid City and the Rapid Valley District. It is my hope 
that this legislation can be quickly approved to facilitate the 
completion of this contract.
  I ask unanimous consent that the text of the Pactola Reservoir 
Reallocation Authorization Act be printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 819

       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 ``Pactola Reservoir 
     Reallocation Authorization Act of 2005''.

     SEC. 2. FINDINGS.

       Congress finds that--
       (1) it is appropriate to reallocate the costs of the 
     Pactola Dam and Reservoir, South Dakota, to reflect increased 
     demands for municipal, industrial, and fish and wildlife 
     purposes; and
       (2) section 302 of the Department of Energy Organization 
     Act (42 U.S.C. 7152) prohibits such a reallocation of costs 
     without congressional approval.

     SEC. 3. REALLOCATION OF COSTS OF PACTOLA DAM AND RESERVOIR, 
                   SOUTH DAKOTA.

       The Secretary of the Interior may, as provided in the 
     contract of August 2001 entered into between Rapid City, 
     South Dakota, and the Rapid Valley Conservancy District, 
     reallocate, in a manner consistent with Federal reclamation 
     law (the Act of June 17, 1902 (32 Stat. 388, chapter 1093), 
     and Acts supplemental to and amendatory of that Act (43 
     U.S.C. 371 et seq.)), the construction costs of Pactola Dam 
     and Reservoir, Rapid Valley Unit, Pick-Sloan Missouri Basin 
     Program, South Dakota, from irrigation purposes to municipal, 
     industrial, and fish and wildlife purposes.
                                 ______
                                 
      By Mr. FEINGOLD (for himself and Ms. Collins):
  S. 820. A bill to promote the development of health care cooperatives 
that will help businesses to pool the health care purchasing power of 
employers, and for other purposes; to the Committee on Health, 
Education, Labor, and Pensions.
  Mr. FEINGOLD. Mr. President, today, along with my colleague from 
Maine, Senator Collins, I am introducing legislation to help businesses 
form group-purchasing cooperatives to obtain enhanced benefits, to 
reduce health care rates, and to improve quality for their employees' 
health care.
  High health care costs are burdening businesses and employees across 
the Nation. These costs are digging into profits and preventing access 
to affordable health care. Too many patients feel trapped by the 
system, with decisions about their health dictated by costs rather than 
by what they need.
  Nationally, the annual average cost to an employer for an employee's 
health care is $6,348. In my home State of Wisconsin it is even 
higher--the average cost there is $7,618. We must curb these rapidly 
increasing health care costs. I strongly support initiatives to ensure 
that everyone has access to health care. It is crucial that we support 
successful local initiatives to reduce health care premiums and to 
improve the quality of employees' health care.
  By using group purchasing to obtain rate discounts, some employers 
have been able to reduce the cost of health

[[Page S3750]]

care premiums for their employees. According to the National Business 
Coalition on Health, there are nearly 80 employer-led coalitions across 
the United States that collectively purchase health care. Through these 
pools, businesses are able to proactively challenge high costs and 
inefficient delivery of health care and share information on quality. 
These coalitions represent over 10,000 employers nationwide.
  Improving the quality of health care will also lower the cost of 
care. By investing in the delivery of quality health care, we will be 
able to lower long term health care costs. Effective care, such as 
quality preventive services, can reduce overall health care 
expenditures. Health purchasing coalitions help promote these services 
and act as an employer forum for networking and education on health 
care cost containment strategies. They can help foster a dialogue with 
health care providers, insurers, and local HMOs.
  Health care markets are local. Problems with cost, quality, and 
access to health care are felt most intensely in the local markets. 
Health care coalitions can function best when they are formed and 
implemented locally. Local employers of large and small businesses have 
formed health care coalitions to track health care trends, create a 
demand for quality and safety, and encourage group purchasing.
  In Wisconsin, there have been various successful initiatives that 
have formed health care purchasing cooperatives to improve quality of 
care and to reduce cost. For example, the Employer Health Care Alliance 
Cooperative, an employer-owned and employer-directed not-for-profit 
cooperative, has developed a network of health care providers in Dane 
County and 12 surrounding counties on behalf of its 160 member 
employers. Through this pooling effort, employers are able to obtain 
affordable, high-quality health care for their 87,500 employees and 
dependents.
  This legislation seeks to build on successful local initiatives, such 
as the Alliance, that help businesses to join together to increase 
access to affordable and high-quality health care.
  The Promoting Health Care Purchasing Cooperatives Act would authorize 
grants to a group of businesses so that they could form group-
purchasing cooperatives to obtain enhanced benefits, reduce health care 
rates, and improve quality.
  This legislation offers two separate grant programs to help different 
types of businesses pool their resources and bargaining power. Both 
programs would aid businesses to form cooperatives. The first program 
would help large businesses that sponsor their own health plans, while 
the second program would help small businesses that purchase their 
health insurance.
  My bill would enable larger businesses to form cost-effective 
cooperatives that could offer quality health care through several ways. 
First, they could obtain health services through pooled purchasing from 
physicians, hospitals, home health agencies, and others. By pooling 
their experience and interests, employers involved in a coalition could 
better address essential issues, such as rising health insurance rates 
and the lack of comparable health care quality data. They would be able 
to share information regarding the quality of these services and to 
partner with these health care providers to meet the needs of their 
employees.
  For smaller businesses that purchase their health insurance, the 
formation of cooperatives would allow them to buy health insurance at 
lower prices through pooled purchasing. Also, the communication within 
these cooperatives would provide employees of small businesses with 
better information about the health care options that are available to 
them. Finally, coalitions would serve to promote quality improvements 
by facilitating partnerships between their group and the health care 
providers.
  By working together, the group could develop better quality insurance 
plans and negotiate better rates.
  This legislation also tries to alleviate the burden that our Nation's 
farmers face when trying to purchase health care for themselves, their 
families, and their employees. Because the health insurance industry 
looks upon farming as a high-risk profession, many farmers are priced 
out of, or simply not offered, health insurance. By helping farmers 
join cooperatives to purchase health insurance, we will help increase 
their health insurance options.
  Past health purchasing pool initiatives have focused only on cost and 
have tried to be all things for all people. My legislation creates an 
incentive to join the pools by giving grants to a group of similar 
businesses to form group-purchasing cooperatives. The pools are also 
given flexibility to find innovative ways to lower costs, such as 
enhancing benefits, for example, more preventive care, and improving 
quality. Finally, the cooperative structure is a proven model, which 
creates an incentive for businesses to remain in the pool because they 
will be invested in the organization.
  I am pleased that this bill is supported by the National Business 
Coalition on Health, an organization that already understands that 
allowing businesses to come together to increase their health care 
purchasing power can lead to an increase in health care quality, and a 
decrease in health care costs.
  We must reform health care in America and give employers and 
employees more options. This legislation, by providing for the 
formation of cost-effective coalitions that will also improve the 
quality of care, contributes to this essential reform process. I urge 
my colleagues to join me in cosponsoring this proposal to improve the 
quality and costs of health care.
  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. 820

       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 ``Promoting Health Care 
     Purchasing Cooperatives Act''.

     SEC. 2. FINDINGS AND PURPOSE.

       (a) Findings.--Congress makes the following findings:
       (1) Health care spending in the United States has reached 
     15 percent of the Gross Domestic Product of the United 
     States, yet 45,000,000 people, or 15.6 percent of the 
     population, remains uninsured.
       (2) After nearly a decade of manageable increases in 
     commercial insurance premiums, many employers are now faced 
     with consecutive years of double digit premium increases.
       (3) Purchasing cooperatives owned by participating 
     businesses are a proven method of achieving the bargaining 
     power necessary to manage the cost and quality of employer-
     sponsored health plans and other employee benefits.
       (4) The Employer Health Care Alliance Cooperative has 
     provided its members with health care purchasing power 
     through provider contracting, data collection, activities to 
     enhance quality improvements in the health care community, 
     and activities to promote employee health care consumerism.
       (5) According to the National Business Coalition on Health, 
     there are nearly 80 employer-led coalitions across the United 
     States that collectively purchase health care, proactively 
     challenge high costs and the inefficient delivery of health 
     care, and share information on quality. These coalitions 
     represent more than 10,000 employers.
       (b) Purpose.--It is the purpose of this Act to build off of 
     successful local employer-led health insurance initiatives by 
     improving the value of their employees' health care.

     SEC. 3. GRANTS TO SELF INSURED BUSINESSES TO FORM HEALTH CARE 
                   COOPERATIVES.

       (a) Authorization.--The Secretary of Health and Human 
     Services (in this Act referred to as the ``Secretary''), 
     acting through the Director of the Agency for Healthcare 
     Research and Quality, is authorized to award grants to 
     eligible groups that meet the criteria described in 
     subsection (d), for the development of health care purchasing 
     cooperatives. Such grants may be used to provide support for 
     the professional staff of such cooperatives, and to obtain 
     contracted services for planning, development, and 
     implementation activities for establishing such health care 
     purchasing cooperatives.
       (b) Eligible Group Defined.--
       (1) In general.--In this section, the term ``eligible 
     group'' means a consortium of 2 or more self-insured 
     employers, including agricultural producers, each of which 
     are responsible for their own health insurance risk pool with 
     respect to their employees.
       (2) No transfer of risk.--Individual employers who are 
     members of an eligible group may not transfer insurance risk 
     to such group.
       (c) Application.--An eligible group desiring a grant under 
     this section shall submit to the Secretary an application at 
     such time, in such manner, and accompanied by such 
     information as the Secretary may require.
       (d) Criteria.--
       (1) Feasibility study grants.--
       (A) In general.--An eligible group may submit an 
     application under subsection (c)

[[Page S3751]]

     for a grant to conduct a feasibility study concerning the 
     establishment of a health insurance purchasing cooperative. 
     The Secretary shall approve applications submitted under the 
     preceding sentence if the study will consider the criteria 
     described in paragraph (2).
       (B) Report.--After completion of a feasibility study under 
     a grant under this section, an eligible group shall submit to 
     the Secretary a report describing the results of such study.
       (2) Grant criteria.--The criteria described in this 
     paragraph include the following with respect to the eligible 
     group:
       (A) The ability of the group to effectively pool the health 
     care purchasing power of employers.
       (B) The ability of the group to provide data to employers 
     to enable such employers to make data-based decisions 
     regarding their health plans.
       (C) The ability of the group to drive quality improvement 
     in the health care community.
       (D) The ability of the group to promote health care 
     consumerism through employee education, self-care, and 
     comparative provider performance information.
       (E) The ability of the group to meet any other criteria 
     determined appropriate by the Secretary.
       (e) Cooperative Grants.--After the submission of a report 
     by an eligible group under subsection (d)(1)(B), the 
     Secretary shall determine whether to award the group a grant 
     for the establishment of a cooperative under subsection (a). 
     In making a determination under the preceding sentence, the 
     Secretary shall consider the criteria described in subsection 
     (d)(2) with respect to the group.
       (f) Cooperatives.--
       (1) In general.--An eligible group awarded a grant under 
     subsection (a) shall establish or expand a health insurance 
     purchasing cooperative that shall--
       (A) be a nonprofit organization;
       (B) be wholly owned, and democratically governed by its 
     member-employers;
       (C) exist solely to serve the membership base;
       (D) be governed by a board of directors that is 
     democratically elected by the cooperative membership using a 
     1-member, 1-vote standard; and
       (E) accept any new member in accordance with specific 
     criteria, including a limitation on the number of members, 
     determined by the Secretary.
       (2) Authorized cooperative activities.--A cooperative 
     established under paragraph (1) shall--
       (A) assist the members of the cooperative in pooling their 
     health care insurance purchasing power;
       (B) provide data to improve the ability of the members of 
     the cooperative to make data-based decisions regarding their 
     health plans;
       (C) conduct activities to enhance quality improvement in 
     the health care community;
       (D) work to promote health care consumerism through 
     employee education, self-care, and comparative provider 
     performance information; and
       (E) conduct any other activities determined appropriate by 
     the Secretary.
       (g) Review.--
       (1) In general.--Not later than 1 year after the date on 
     which grants are awarded under this section, and every 2 
     years thereafter, the Secretary shall study programs funded 
     by grants under this section and provide to the appropriate 
     committees of Congress a report on the progress of such 
     programs in improving the access of employees to quality, 
     affordable health insurance.
       (2) Sliding scale funding.--The Secretary shall use the 
     information included in the report under paragraph (1) to 
     establish a schedule for scaling back payments under this 
     section with the goal of ensuring that programs funded with 
     grants under this section are self sufficient within 10 
     years.

     SEC. 4. GRANTS TO SMALL BUSINESSES TO FORM HEALTH CARE 
                   COOPERATIVES.

       The Secretary shall carry out a grant program that is 
     identical to the grant program provided in section 3, except 
     that an eligible group for a grant under this section shall 
     be a consortium of 2 or more employers, including 
     agricultural producers, each of which--
       (1) have 99 employees or less; and
       (2) are purchasers of health insurance (are not self-
     insured) for their employees.

     SEC. 5. AUTHORIZATION OF APPROPRIATIONS.

       From the administrative funds provided to the Secretary, 
     the Secretary may use not more than a total of $60,000,000 
     for fiscal years 2006 through 2015 to carry out this Act.
                                 ______
                                 
      By Ms. MURKOWSKI (for herself and Mr. Stevens):
  S. 822. A bill to prevent the retroactive application of changes to 
Trans-Alaska Pipeline Quality Bank valuation methodologies; to the 
Committee on Energy and Natural Resources.
  Ms. MURKOWSKI. Mr. President, I rise today for myself and fellow 
Alaska Senator Ted Stevens to introduce legislation concerning a 
complex issue, the Quality Bank that is used to facilitate payments 
between shippers using the Trans-Alaska Oil Pipeline System to reflect 
variations in the value of different crude oil streams that are 
injected into the pipeline.
  Since its opening in June 1977, the Trans-Alaska Pipeline System, 
TAPS, has carried crude oil from Alaska's North Slope to Valdez where 
the oil is shipped to market. The pipeline carries crude oil from 
various sources and of varying quality--the oil injected into the line 
before the pipeline's Pump Station One near Deadhorse, AK, and 
commingled as the blended stream of oil travels south to Valdez. The 
TAPS Quality Bank was established to compensate producers of higher 
quality crude oil for the difference in the value of the crude injected 
at the North Slope and that of the lower-quality commingled stream 
received in Valdez, since each shipper receives a quantity of the 
blended stream equivalent to the amount it injected into the line.
  Companies injecting low-quality crude oil pay into the Quality Bank, 
while companies injecting high quality crude receive a payment from the 
Quality Bank. In addition, between the North Slope and Valdez, two 
refineries, Flint Hills and Petro Star, withdraw a portion of the 
common stream from TAPS, partially refine the crude oil into products 
such as gasoline, diesel and jet fuel, and reinject into TAPS the other 
components of crude left over after their refinery processes. Each fuel 
extracted from the crude is called a ``cut.'' To compensate producers 
for the loss in value of the crude oil because of what is removed by 
these refineries, refiners also pay into the Quality Bank. The 
objective of the Quality Bank is to make monetary adjustments so that 
each shipper is in the same economic position it would enjoy if it 
received the same oil in Valdez that it delivered to TAPS on the 
state's North Slope.
  The methodology used to determine Quality Bank payments has been a 
subject of controversy since the Quality Bank's creation. The problem 
arises because there is no independent market for the crude injected on 
the North Slope and thus no way to objectively determine its value. The 
methodology is set by the Federal Energy Regulatory Commission. Since 
the early 1980s, FERC-approved methodologies have been challenged in 
court and revised multiple times. In 1993, the majority of North Slope 
shippers proposed and FERC approved a settlement calling for the use of 
a ``distillation'' methodology, which would value crude oil based on 
the market price of various cuts created when the components are 
separated based on different boiling points--the distillation process. 
This methodology replaced the former ``gravity'' methodology where oil 
was valued based on its relative gravity.
  Since 1993, disputes have focused largely on the valuation of cuts at 
the highest boiling points--the ``Heavy Distillate'' cut that 
evaporates at temperatures between 350 and 650 degrees F. and the 
Resid, residual, cut, which includes the portion remaining after 
distillation of all other cuts at boiling points up to 1050 degrees F. 
Two additional cuts are also at issue, the VGO and Naptha cuts.
  In 1997, responding to a D.C. Circuit Court of Appeals ruling, FERC 
approved a settlement with a revised valuation methodology for 
Distillate and Resid. Under the FERC order, the new valuation 
methodologies were to be applied on a prospective basis only. Later, 
the D.C. Circuit in 1999 told FERC to revise some particular details of 
the Resid valuation and also held that FERC had ``failed to provide an 
adequate explanation'' as to why the new methodology should not be made 
retroactive to 1993.
  Responding to the ruling, the Administrative Law Judge, who in 1997 
had decided that all changes should only apply prospectively, reversed 
his position and released a decision in August 2004 calling for changes 
in the Resid and Heavy Distillate cuts to be applied retroactively, in 
the case of Resid to as far back as 1993. In addition, the 
administrative law judge decided to apply new valuations for VGO and 
Naptha, prospectively. Currently, the judge's decision is awaiting a 
final decision by the FERC on whether to impose the Initial Decision or 
alter it.
  There are clearly major public policy implications resulting from 
this Quality Bank issue. While the bank is a ``zero sum'' game as far 
as money paid in and out of the bank is concerned, the impacts on the 
parties and thus on the citizens of Alaska are anything but equal.

[[Page S3752]]

  For decades Alaskans suffered under the impacts of having to import 
all refined fuel products into the State from West Coast refineries. 
Besides higher prices caused by transportation, that left the State 
wholly dependent on fuel supplies that needed to travel at least 2,000 
miles on average to reach Alaska consumers--sometimes through bad 
weather and difficult sea conditions. With the construction of in-State 
refineries, Alaskans finally saw greater security of supply, less 
dependence upon weather for shipment arrivals, and the possibility of 
lower fuel prices because of potentially reduced transportation costs. 
The greater dependability of fuel supplies improved aviation freight 
shipments at the Anchorage and Fairbanks international airports, 
helping create jobs in air freight and related industries.
  But the decision of the Administrative Law Judge to apply new Quality 
Bank methodology assessments retroactively, places the economics of in-
State refineries at risk. That in turn not only impacts the job 
security for the roughly 400 Alaskans who work at the refineries, but 
also threatens the State's energy and economic security.
  The problem is that both of the refineries must make long- and short-
term business decisions based on crude costs when they process crude 
oil into product. Refineries optimize their production slates based on 
current market realities. It is difficult for them to operate, given 
low profit margins, if oil values can change years later as a result of 
Quality Bank decisions. They simply have no way to make rational 
business decisions when the value of their products can be determined 
retroactively long after they can protect themselves for perceived 
mistakes in FERC-approved valuation methodologies. This certainly 
threatens the ability of the refineries to attract capital, money 
needed for them to modernize and meet new ultra-low sulfur diesel 
``clean fuel'' requirements soon to go into effect.

  The State's Congressional Delegation last fall in report language 
added to the Federal budget expressed its concern with the equity of 
long retroactive Quality Bank valuation adjustments. Last autumn we 
urged FERC to look carefully at the justice of the Initial Decision of 
the Administrative Law Judge in this case and we encouraged all of the 
eight parties that includes the State of Alaska, to reach an out-of-
court settlement of the 1993 case to bring finality to this complex 
case before it harms instate refinery capabilities. At the time we 
avoided a legislative solution to this purely Alaskan case. We are 
renewing our pleas for action in a letter sent to FERC on Thursday.
  In the intervening six months, while one mediation session has 
occurred, the parties report little or no progress toward reaching a 
mutually agreeable settlement. While opinions may differ on whether 
Congress should intervene to settle the on-going case, there is little 
doubt that Congress should step forward to prevent such an arcane 
dispute from ever again threatening Alaska's energy industry.
  For that reason prior to the next mediation session, today we 
introduce legislation to limit the ability of FERC in the future to 
make retroactive the impacts of future Quality Bank valuation 
methodology changes. By this legislation, after December 31, 2005, FERC 
still will be able to change the methodology for determining the value 
of oil flowing through the pipeline but will not be permitted to apply 
changes to Quality Bank valuation methodologies on anything other than 
a prospective basis.
  We have proposed this provision to prevent this legal nightmare from 
happening again. This provision will first eliminate the perverse 
current incentive for all sides to promote further litigation regarding 
Quality Bank valuations based on the expectation of a retroactive 
application of changes that would result in a large economic windfall. 
The retroactive application of valuation methodology changes encourages 
the sides in a dispute to sue in hopes of gaining a larger benefit in 
the future. This is a ``lottery,'' however, that Alaskans are 
guaranteed to lose.
  By setting December 31, 2005, as the date that FERC can no longer 
apply Quality Bank valuation methodologies on a retroactive basis, the 
legislation will put the FERC and the litigants on record that the 
current dispute must be resolved by the end of this year.
  Requiring FERC to apply valuation methodology changes in connection 
with any future disputes on a prospective basis only will eliminate the 
risk and uncertainty associated with the prospect of nearly unlimited 
retroactive application of Quality Bank payment methodology changes. 
That will allow all Quality Bank participants to be able to conduct 
business with the certainty of knowing that prices received and paid 
for oil today cannot be altered years down the road. In addition, this 
will eliminate the strong incentive that currently exists for some 
parties to engage in endless litigation, in hopes of gaining windfall 
benefits from retroactive application changes.
  While we continue to call on all sides in the current dispute to 
compromise and settle this case now, this bill will discourage if not 
eliminate this type of dispute in the future--a benefit for all 
Alaskans.
  Mr. STEVENS. Mr. President, I join my colleague, Senator Lisa 
Murkowski, in introducing legislation pertaining to the Trans Alaska 
Pipeline System (TAPS) and the Quality Bank.
  The Quality Bank was created to balance accounts among oil producers 
on Alaska's North Slope who produce crude oil of different quality and 
value from different oil fields. When the oil is delivered at Pump 
Station No. 1, it is commingled and transported by TAPS to Valdez, 
Alaska, where it is shipped by tanker to the lower 48 States.
  This Quality Bank accounting concept also applies to oil refineries 
in my State who receive needed crude oil from TAPS, refine various 
petroleum products and return the balance of the crude oil to the 
pipeline. The methodology used to determine these payments has been the 
subject of dispute since the Bank's inception, creating uncertainty in 
the market and a chilling effect on business investment in Alaska.
  In 1989, a legal proceeding was initiated at the Federal Energy 
Regulatory Commission (FERC) that in 1993 changed the methodology under 
which ``Quality Banks'' in Alaska were operated. After 15 long and 
protracted years of legal proceedings before FERC, an Administrative 
Law Judge issued an Initial Decision proposing to replace the Quality 
Bank methodology that the parties assumed they were operating under 
since 1993. It proposes instead a new complex set of valuations that 
the parties could not have predicted and that have very large financial 
impacts, especially on refiners. Significantly, this decision also 
proposes to apply the most significant of these new valuations 
retroactively, all the way back to 1993.
  The Administrative Law Judge's decision to apply this new methodology 
retroactively puts Alaska's in-State refineries at risk at a time when 
the United States can ill afford to lose its limited refining capacity.
  Given the Potential impact should FERC decide to adopt the ALJ's 
decision, Congress included legislative language in the Fiscal Year 
2005 Consolidated Appropriations conference report expressing its 
concern over this issue. Congress urged FERC to carefully Consider the 
specific equities of this case to prevent special hardship, inequity, 
or an unfair distribution of burdens to any party, to assess the equity 
of assigning retroactivity, and to resolve this matter in a fair and 
equitable manner.
  In addition, the State's Congressional Delegation urged the parties 
to reach a settlement to end over 15 years of litigation and bring 
finality to this issue. Despite repeated calls for settlement, the 
parties appear to have made little or no progress towards this end.
  The issue of retroactivity and its application in the aforementioned 
case is problematic given the lack of clear Congressional action on the 
subject. Congress' silence on the subject has given the parties 
incentive to prolong litigation and pursue appeals until they receive a 
ruling which is beneficial to them.
  To remedy this situation and prevent similar disputes in the future, 
we are introducing this legislation to limit FERC's ability to assign 
retroactivity in matters pertaining to the Quality Bank. This 
legislation is necessary to limit business uncertainty associated with 
the use of the Trans Alaska Pipeline System, and to ensure continued

[[Page S3753]]

 domestic refinery activity in order to protect national fuel supplies.

                          ____________________