[Congressional Record (Bound Edition), Volume 145 (1999), Part 7]
[Senate]
[Pages 9700-9710]
[From the U.S. Government Publishing Office, www.gpo.gov]


[[Page 9700]]

          STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

      By Mr. BOND:
  S. 1053. A bill to amend the Clean Air Act to incorporate certain 
provisions of the transportation conformity regulations, as in effect 
on March 1, 1999; to the Committee on Environment and Public Works.


                        clean air act amendments

  Mr. BOND. Mr. President, on March 2, 1999, the United States Court of 
Appeals for the District of Columbia issued its decision in the 
Environmental Defense Fund versus Environmental Protection Agency 
lawsuit whereby the EDF filed suit challenging several provisions of 
the EPA's air quality conformity rule. The court ruled in favor of the 
EDF.
  This decision overturned a well-established EPA rule permitting 
previously approved transportation projects being ``grandfathered'' 
into transportation air quality conformity plans. The court decision 
eliminates any flexibility for local authorities to proceed with 
projects and protect them from disruptions caused by issues often 
beyond their control--including changes in federal regulations and 
standards. In addition, the court decision impacted use of submitted 
budgets, non-federal project flexibility, grace periods before SIP 
disapprovals, and SIP safety margins.
  As of April 19, the Federal Highway Administration had identified ten 
areas in conformity lapse where transportation projects are impacted. 
The areas are: Ashland, Kentucky; Memphis, Tennessee; Raleigh, North 
Carolina; Winston-Salem, North Carolina; Atlanta, Georgia; Monterey, 
California; Santa Barbara, California; Knoxville, Tennessee; Paducah, 
Kentucky; and South Bend, Indiana.
  Many people probably thought that would be the end of the list. To 
give another example of why this is such an important issue--one week 
ago today the United States Department of Transportation determined 
that the Kansas City metropolitan area's conformity plan had lapsed. 
The Kansas and Missouri Divisions of the Federal Highway Administration 
halted approval of transportation projects in the region. More and more 
areas could be faced with this situation.
  If we do not address this issue, it could potentially bring to a halt 
transportation improvement projects around the country--further 
jeopardizing the safety of the traveling public, hindering economic 
growth, and in my opinion, doing nothing to improve the air quality 
situation in any of these areas.
  Mr. President, I send a bill to the desk.
  Mr. President, the only thing this legislation does is amend the 
Clean Air Act to reinstate those EPA rules which were struck down or 
remanded in the Environmental Defense Fund vs. Environmental Protection 
Agency lawsuit. No more. No less. This legislation has zero impact on 
the Clean Air Act of EPA's rules.
  In 1997, in the EPA's information on the final conformity rule that 
incorporated the 1997 changes, EPA reported the following:

       The conformity rule changes promulgated today result from 
     the experience that EPA, the Department of Transportation, 
     and state and local air and transportation officials have had 
     with implementation of the rule since it was first published 
     in November of 1993. While these changes clarify the rule and 
     in some cases offer increased flexibility, they will not 
     result in any negative change in health and environmental 
     benefits.

  So the EPA got together with the stakeholders, issued a rulemaking, 
provided the public comment period, issued a final rule, practiced for 
several years, and defended the position in court. I want to take this 
position and codify it.
  Mr. President--there will be some who will argue for more or less 
restrictive changes to the underlying conformity provision in the Clean 
Air Act. Should that discussion and debate occur? Yes. I might support 
some of those changes. However, we have an immediate situation where 
transportation projects around the country are or could be impacted by 
the court's ruling. States and metropolitan areas across the country 
are needing assistance with this issue. I urge my colleagues to 
cosponsor and support this common sense legislation that simply takes 
EPA's own regulations on conformity that the court overturned and puts 
them into law.
  Mr. President, we must address the immediate situation and then 
continue the debate on conformity to address further needs.
                                 ______
                                 
      By Ms. COLLINS:
  S. 1054. A bill to amend the Internal Revenue Code of 1986 to enhance 
various tax incentives for education; to the Committee on Finance.


                        savings for scholars act

  Ms. COLLINS. Mr. President, I rise today to introduce legislation, 
the Savings for Scholars Act, to help families save for college 
expenses. This bill would make education IRAs and State tuition plans 
more effective vehicles for families to use in saving for postsecondary 
education. I want to thank Senator Roth and his staff on the Finance 
Committee for working with me and my staff in drafting this 
legislation. In the 3 years that he has chaired the Finance Committee, 
Senator Roth has been a true champion for all of us who place a 
tremendous value on educating our nation's children and young adults.
  When Congress created the education IRA 2 years ago, we took an 
important first step in the direction of encouraging families to save 
for their children's education. But, the law contains a very 
significant limitation--families cannot contribute more than $500 a 
year to these accounts. This restriction makes it difficult for a 
family to accumulate savings sufficient to pay the cost of a college 
degree. Even if parents start saving from the time their child is born, 
an investment in an education IRA of $500 a year, assuming an average 
annual return of 8 percent, will only yield about $19,000 when that 
child begins higher education. Today, the average cost of 4 years of 
higher education is about $30,000 at a public institution and about 
$75,000 at a private school. In short, the current limits are not 
nearly high enough to finance even today's college costs, much less the 
cost 18 years from now.
  Raising the maximum contribution to $2,000 will allow a family to 
accumulate at least as much as the current average cost of attending a 
private school. This is money that many middle-class families and their 
children otherwise would need to borrow; it is tens of thousands of 
dollars in student loans that would burden graduates with a mountain of 
debt. Most important, raising the education IRA contribution limit 
would make a 4-year college education more accessible and less of a 
financial challenge for middle-income families.
  In addition to increasing the education IRA contribution limit, this 
bill would make a technical change to remove a confusing inconsistently 
between the education IRA and the traditional IRA. The last date on 
which a contribution to an education IRA can be made is December 31 of 
any year. Traditional IRAs may receive contributions until April 15 of 
the year following the tax year. This bill changes the deadline for 
contributions to education IRAs to coincide with that of the 
traditional IRA. This modest change would eliminate a source of 
confusion that might cause a family planning to contribute to a child's 
IRA to inadvertently miss the deadline.
  The second part of my bill deals with qualified State tuition plans. 
These are tax-deferred plans, administered by the individual states, 
that allow families to prepay college tuition or to accumulate tax-
deferred savings for postsecondary education expenses. My bill makes 
two changes in the requirements of these plans that should make them 
more flexible and useful to families. The first is to require that all 
qualified State tuition plans allow at least three rollovers without 
any change in beneficiary. This change would guarantee that 
participants in one state's plan can transfer their assets to another 
state's plan. The need for this could be the result of a family moving 
from one state to another or of a change in a child's education plans. 
My bill will give greater flexibility in the choice of postsecondary 
education

[[Page 9701]]

institutions to the beneficiaries of these plans.
  The bill also proposes one additional change to the qualified tuition 
programs--a change that will make the plans more attractive to 
families. Under current law, the assets of a plan can be rolled over to 
specified members of a beneficiary's family. This allows the plan's 
assets to be used by a sibling if the original beneficiary cannot or 
does not use the plan. However, the definition of a family member does 
not include first cousins. Thus, a parent of a single child could not 
transfer the benefits to a niece or nephew if his or her child did not 
use the plan. Perhaps more significantly, this change would make the 
qualified state tuition plan more desirable for grandparents. They 
could be assured that a plan established for the benefit of one 
grandchild could be transferred to any of their grandchildren.
  The final part of this bill corrects an unfair consequence of the 
interaction between the HOPE tax credits and the education IRA. 
Currently, a taxpayer is prohibited from claiming the HOPE tax credit 
in any year in which a withdrawal from an education IRA is made--
regardless of the total amount the taxpayer spends on education. This 
bill allows the HOPE tax credit to be claimed to the extent that the 
cost of education exceeds the amount withdrawn from the IRA. It does 
not allow a double benefit, but it does prevent one benefit--the IRA 
withdrawal--from canceling another benefit. It also eliminates a 
potential trap for the unwary taxpayer who may accidentally claim both 
benefits and, as a result, incur a penalty.
  Mr. President, investing in education is the surest way for us to 
build our country's assets for the future. We need to ensure that 
postsecondary education is affordable and that graduates do not 
accumulate crippling debts while attending school. Adopting this bill 
will help us to accomplish both of these goals. I urge my colleagues to 
support these efforts.
                                 ______
                                 
      By Mr. BROWNBACK (for himself and Mr. Akaka):
  S. 1055. A bill to amend title 36, United States Code, to designate 
the day before Thanksgiving as ``National Day of Reconciliation''; to 
the Committee on the Judiciary.


               National Day of Reconciliation Legislation

  Mr. BROWNBACK. Mr. President, today, I, along with Senator Akaka, 
introduce the National Day of Reconciliation Bill. In this bill, the 
President will issue a yearly proclamation designating the day before 
Thanksgiving as a ``National Day of Reconciliation.'' On this day, it 
is our hope that every person in the U.S. should seek out those 
individuals who have been alienated and pursue forgiveness and 
reconciliation from them. Historically, Thanksgiving is a time when we 
put all of our differences aside and give thanks for all that we have 
achieved and shared. I cannot think of a better day in which to 
reconcile than the day before Thanksgiving.
  When considering the need for this piece of legislation, I was 
reminded of times when our nation was at war with itself, and the very 
fabric of our Constitution was held together by a few threads. The 
Civil War placed our democracy and national sovereignty in great 
jeopardy. However, Abraham Lincoln, one of our nation's greatest 
leaders, knew the importance of ``binding'' our nation together after 
civil war had ravaged our nation. It was through his wisdom and ability 
to forgive that he helped heal our nation's wounds. Once again, there 
is the absence of peace in America.
  We live in a society where there is too much alienation, from one 
another and from God. We, in too many cases, have allowed our focus to 
shift from one another to ourselves. Lincoln recognized the need to 
reconcile with one another. He also knew that reconciliation efforts 
would never be successful without looking first to the divine 
authority.
  In his second Inaugural speech, Lincoln said, ``with malice toward 
none, with charity for all, with firmness in the right as God gives us 
to see the right, let us strive on to finish the work we are in, to 
bind up the nation's wounds * * * to do all which may achieve and 
cherish a just and lasting peace among ourselves and with all 
nations.''
  The Rev. Dr. Martin Luther King, Jr. was yet another one of our 
nation's great leaders who knew the importance of focusing on a higher 
moral power to achieve peaceful reconciliation. Dr. King, through 
wisdom and sacrificial love, reconciled an entire nation with 
individuals who, through discrimination, were alienated from sections 
of our society. Dr. King said, ``It is time for all people of 
conscience to call upon America to return to her true home of 
brotherhood and peaceful pursuits. * * * We must work unceasingly to 
lift this nation that we love to a higher destiny, to a new plateau of 
compassion, to a more noble expression of humaneness.'' Mr. President, 
we need to restore peace in our nation, we need to restore charity for 
one another, and we need to return our focus to a higher moral 
authority.
  As we look at our culture today, we see images that influence not 
only our actions but the actions of young people as well. Our culture 
glorifies conflict, greed, and violence. It is no wonder that we see 
atrocities that seem impossible to imagine. It is time for our country 
to reconcile, and the ``National Day of Reconciliation'' will remind us 
of this solemn obligation.
  If Americans hope to ``bind up [our] nation's wounds,'' as Lincoln 
suggested, we must first make the commitment in the Congress. This bill 
makes that commitment by calling for a ``National Day of 
Recognition''--a day that recognizes the need to move from alienation 
to reconciliation. In a ``Letter From A Birmingham Jail,'' Dr. King 
expressed his hope for national reconciliation. I too hope ``that the 
dark clouds of [misconceptions] will soon pass away and the deep fog of 
misunderstanding will be lifted from our fear-drenched communities and 
in some not too distant tomorrow the radiant stars of love and 
brotherhood will shine over our great nation with all their 
scintillating beauty.'' I urge all of my colleagues to support this 
much needed measure and begin to foster reconciliation throughout our 
country in order for us to once again be ``one nation under God.''
                                 ______
                                 
      By Mr. CHAFEE:
  S. 1056. A bill to amend the Internal Revenue Code of 1986 to improve 
tax equity for the Highway Trust Fund and to reduce the number of 
separate taxes deposited into the Highway Trust fund, and for other 
purposes; to the Committee on Finance.


           highway tax equity and simplification act of 1999

  Mr. CHAFEE. Mr. President, I am introducing today, the Highway Tax 
Equity and Simplification Act of 1999. This bill improves the equity 
among taxpayers paying into the Highway Trust Fund. Under current law, 
some users pay too much into the trust fund relative to the costs they 
impose on the nation's highway system, while other pay too little. This 
proposal more fairly apportions the tax burden to those who impose the 
greatest costs to our highway infrastructure.
  In my statement today, I plan to briefly describe:
  (1) Who pays too much and too little?
  (2) Why the current tax structure fails?
  (3) Why the current tax structure can't be just tinkered with and 
therefore needs radical change?
  (4) A description of the plan I am introducing today.
  Who pays too much and who pays too little?
  If we look at the U.S. Department of Transportation's (DOT) latest 
cost allocation study of the highway system, it is clear that the 
current system does not fairly apportion the relative burden of taxes 
paid compared to costs imposed. At this time, I will submit for the 
Record a table which summarizes the relative burden among users based 
on analysis provided by the U.S. Department of Transportation.
  As this table shows, some users are paying 150 percent of their share 
while some of the heaviest trucks are paying as low as 40 percent of 
their share. This is simply unfair and needs to be changed.

[[Page 9702]]

  Another way to look at the unfairness of the current situation is to 
look at the per vehicle subsidies for heavy trucks that the U.S. DOT 
provided in their latest report to the Congress. In determining these 
subsidies, DOT simply subtracted what these vehicles should have paid 
in taxes, based on the costs they impose, from the amount of taxes they 
do pay. These subsidies are thousands of dollars per vehicle annually, 
with several above $5,000 per vehicle. At the end of my statement, I 
would like to enter into the Record a table showing a few examples of 
the subsidies summarized in the DOT report.
  One of the reasons that the current tax structure fails so miserably 
at properly allocated costs is because neither the Congress nor the 
U.S. DOT has looked seriously at this issue for a very long time. The 
last significant cost allocation study was completed in 1982, more than 
17 years ago. Without up-to-date analysis, it has been virtually 
impossible for the Congress to address this significant problem. I want 
to commend Secretary Slater for taking the initiative to have his 
Department provide an up-to-date analysis to the Congress. It is my 
understanding that DOT plans on keeping its analytical capability 
current regarding cost allocation so that the Congress doesn't have to 
wait every 17 years to address this issue.
  Lack of good information is one of the reasons we have this unfair 
situation. The other reason deals more directly with basic engineering 
concepts. Highway pavement wear and tear imposed by a vehicle is 
related to two primary factors: how much you drive on the road and the 
weight of the vehicle.
  Now, why is the weight of a vehicle so important?
  It is important because pavement damage increases dramatically 
(actually exponentially) with weight. At this time, I will submit for 
the record information which shows the relationship between weight and 
pavement damage.
  This chart shows that on a rural Interstate Highway, a single 100,000 
pound standard tractor-trailer wears the equivalent of more than 1,700 
automobiles. But, that truck certainly does not pay 1,700 times the 
amount of taxes.
  On a rural arterial road, not built to Interstate standards, this 
dynamic is even worse, wearing the equivalent of 3,500 cars.
  The problem with the current tax system is that it does not attempt 
to recover from trucks the dramatic pavement damage costs that are 
incurred as the weight of these vehicles increases. Until we address 
this fundamental principle, we will not have an equitable tax system.
  Now, let's briefly look at each of the current taxes and how well 
they contribute to tax equity.
  Excise Tax--Under current law, we impose a 12 percent excise tax on 
the purchase of new trucks. This tax raises more than $2 billion 
annually. However, it has no relationship to either road usage or 
pavement damage and therefore does not contribute to tax equity.
  Tire Tax--the exist tax imposed on tires is moderately helpful for 
improving tax equity because it varies by miles driven and, to some 
extend by weight. However, it raises a relatively small amount of money 
(about $400 million per year or less than 5 percent of truck taxes) and 
therefore has a small effect on cost allocation.
  Diesel Tax--currently, diesel fuel is taxed at 24 cents per gallon. 
Although diesel taxes paid do vary by mileage, diesel taxes do a poor 
job of recovering pavement damage related to the weight of the vehicle. 
When the weight of a truck is increased, fuel use increases only 
marginally. However, the pavement damage imposed by that same vehicle 
goes up exponentially. Increasing diesel tax rates does not resolve 
this fundamental problem and actually exacerbates the unfairness of the 
current system. I would submit for the Record information which 
illustrates the problem.
  Heavy Vehicle Use Tax--this tax sounds like it might be the right 
place to address concerns related to weight, but it also falls well 
short of the mark. Even the name is deceiving. First, this tax does not 
vary by use. A truck that travels 10,000 miles annually and another 
that travels 100,000 miles pay the same tax. Secondly, although the 
name implies it applies to Heavy Vehicles, this tax is capped at 75,000 
pounds, the point at which pavement damage goes up dramatically. I will 
also submit information which compares pavement damage and the Heavy 
Vehicle Use tax.
  In summary, our review of the current taxes led me to conclude that 
they do a poor job of aligning taxes paid with road damage. In other 
words, they just can't get the job done. We need a new mechanism.
  The bill I introduce today eliminates 3 of the separate taxes and 
replaces them with a straightforward tax that more fairly distributes 
the tax burden among highway users.
  Specifically, the bill eliminates the tire tax, the 12 percent excise 
tax on new trucks, and the Heavy Vehicle Use Tax. It also eliminates 
the so-called ``diesel differential,'' the additional 6 cents per 
gallon imposed on diesel fuel compared to gasoline, which is taxed at 
18.33 cents per gallon.
  To replace the lost revenue from these repeals and tax reductions, 
and to improve the equity of the truck taxes paid, the bill establishes 
a new user fee, an axle-weight distance tax. This new tax varies based 
on the truck's axle-weight loads and the distance traveled, the exact 
same concepts that affect pavement damage.
  The bill collects the same amount of tax revenue from trucks overall 
as current law, about $11 billion annually.
  Overall, there are more winners than losers under this bill. The vast 
majority of trucks--more than 5.9 million--will see a tax reduction. 
This compares to roughly 1.5 million who will see an increase.
  The bill also reduces double taxation on toll roads by allowing a 
credit against the axle-weight distance tax for travel on a toll 
facility such as the Oklahoma or Florida Turnpikes.
  This new axle-weight tax has long been recognized in the 
transportation community as the best way to tax trucks. As an example, 
the American Association of State Highway Transportation Officials, the 
association representing State Transportation Departments, policy 
resolution on this matter finds:

       . . . truck taxes based upon a combination of the weight of 
     vehicles and the distance they travel more equitably 
     distribute financing responsibility proportional to costs 
     imposed on the system than other tax alternatives.

  In fact, AASHTO policy calls for substituting a weight-distance tax 
for the heavy vehicle use tax and all other federal user fees on trucks 
except for a federal fuel tax--a perfect description of the proposal we 
are introducing today.
  Now, I would like to briefly touch upon a few areas where I expect 
opponents of this effort may focus.
  Some may argue that this is an anti-truck proposal and will impose 
new costs on consumers. My response to this assertion is that overall 
truck taxes are held constant and most of the trucking industry 
benefits from this proposal. Unfortunately, this benefit is at the 
expense of the portion of the industry that is doing damage to our 
nation's roadways without paying for it, and they will probably fight 
hard to keep their undeserved subsidies. The trick for the rest of the 
industry and for all roadway users is to recognize that virtually all 
of these arguments are attempts to distract us from the real issue--
should heavy trucks pay their fair share?
  Heavy truck operators will try to argue about all sorts of ancillary 
items to distracts us from this fundamental issue. They will argue 
about tax evasion, administrative burden, additional record keeping and 
the like. Anything but the core issue of whether these trucks should 
pay their fair share.
  As the Congress considers, this issue, I hope we can remain focused 
on this fundamental question and not be distracted by arguments that 
are not intended to squash efforts to address the unfair system we have 
today.
  I urge my colleagues to support this effort.

[[Page 9703]]

  Mr. President, I ask unanimous consent that the text of the bill, a 
summary of the legislation, and the materials previously cited be 
printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 1056

       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 ``Highway Tax Equity and 
     Simplification Act of 1999''.

     SEC. 2. FINDINGS AND PURPOSES.

       (a) Findings.--Congress finds that--
       (1) Congress should enact legislation to correct the 
     distribution of the tax burden among the various classes of 
     persons using the Federal-aid highways, or otherwise deriving 
     benefits from such highways;
       (2) the most recent highway cost allocation study by the 
     Department of Transportation found that owners of heavy 
     trucks significantly underpay Federal highway user fees 
     relative to the costs such vehicles impose on such highways, 
     while owners of lighter trucks and cars overpay such fees;
       (3) pavement wear and tear is directly correlated with 
     axle-weight loads and distance traveled, and to the maximum 
     extent possible, Federal highway user fees should be 
     structured based on this fundamental fact of use and 
     resulting cost;
       (4) the current Federal highway user fee structure is not 
     based on this fundamental fact of use and resulting cost; to 
     the contrary--
       (A) the 12-percent excise tax applied to the sales of new 
     trucks has no significant relationship to pavement damage or 
     road use and does the poorest job of improving tax equity,
       (B) the heavy vehicle use tax does not equitably apply to 
     heavy trucks (such tax is capped with respect to trucks 
     weighing over 75,000 pounds) and does not vary by annual 
     mileage, thus 2 heavy trucks traveling 10,000 miles and 
     100,000 miles, respectively, pay the same heavy vehicle use 
     tax, and
       (C) diesel fuel taxes do a poor job recovering pavement 
     costs because such taxes only increase marginally with weight 
     increases while pavement damage increases exponentially with 
     weight, and increasing the rates for diesel fuel will not 
     resolve this fundamental flaw;
       (5) truck taxes based on a combination of the weight of 
     vehicles and the distance such trucks travel provide greater 
     equity than a tax based on either of these 2 factors alone; 
     and
       (6) the States generally have in place mechanisms for 
     verifying the registered weight of trucks and the miles such 
     trucks travel.
       (b) Purposes.--The purposes of this Act are--
       (1) to replace the heavy vehicle use tax and all other 
     Federal highway user charges (except fuel taxes) with a 
     Federal weight-distance tax which is designed to yield at 
     least equal revenues for highway purposes and to provide 
     equity among highway users; and
       (2) to provide that such a tax be administered in 
     cooperation with the States.

     SEC. 3. REPEAL AND REDUCTION OF CERTAIN HIGHWAY TRUST FUND 
                   TAXES.

       (a) Repeal of Heavy Vehicle Use Tax.--Subchapter D of 
     chapter 36 of the Internal Revenue Code of 1986 (relating to 
     tax on use of certain vehicles) is repealed.
       (b) Repeal of Tax on Heavy Trucks and Trailers Sold at 
     Retail.--Section 4051(c) of the Internal Revenue Code of 1986 
     (relating to termination) is amended by striking ``October 1, 
     2005'' and inserting ``July 1, 2000''.
       (c) Repeal of Tax on Tires.--Section 4071(d) of the 
     Internal Revenue Code of 1986 (relating to termination) is 
     amended by striking ``October 1, 2005'' and inserting ``July 
     1, 2000''.
       (d) Reduction of Tax Rate on Diesel Fuel to Equal Rate on 
     Gasoline.--Section 4081(a)(2)((A)(iii) of the Internal 
     Revenue Code of 1986 (relating to rates of tax) is amended by 
     striking ``24.3 cents'' and inserting ``18.3 cents''.
       (e) Conforming Amendments.--
       (1) Section 4221(a) of the Internal Revenue Code of 1986 
     (relating to certain tax-free sales) is amended by striking 
     ``October 1, 2005'' and inserting ``July 1, 2000''.
       (2) Subchapter A of chapter 62 of such Code (relating to 
     place and due date for payment of tax) is amended by striking 
     section 6156.
       (3) The table of sections for subchapter A of chapter 62 of 
     such Code is amended by striking the item relating to section 
     6156.
       (4) Section 9503(b)(1) of such Code (relating to transfer 
     to Highway Trust Fund of amounts equivalent to certain taxes) 
     is amended by striking subparagraphs (B) and (C) and by 
     redesignating subparagraphs (D) and (E) as subparagraphs (B) 
     and (C), respectively.

     SEC. 4. TAX ON USE OF CERTAIN VEHICLES BASED ON WEIGHT-
                   DISTANCE RATE.

       (a) In General.--Chapter 36 of the Internal Revenue Code of 
     1986, as amended by section 3(a), is amended by adding at the 
     end the following:

             ``Subchapter D--Tax on Use of Certain Vehicles

``Sec. 4481. Imposition of tax.
``Sec. 4482. Definitions.
``Sec. 4483. Exemptions.
``Sec. 4484. Cross references.

     ``SEC. 4481. IMPOSITION OF TAX.

       ``(a) Imposition of Tax.--
       ``(1) In general.--A tax is hereby imposed on the use of 
     any highway motor vehicle (either in a single unit or 
     combination configuration) which, together with the 
     semitrailers and trailers customarily used in connection with 
     highway vehicles of the same type as such highway motor 
     vehicle, has a taxable gross weight of over 25,000 pounds at 
     the rate of--
       ``(A) the cents per mile rate specified in the table 
     contained in paragraph (2), or
       ``(B) in the case of a highway motor vehicle with a taxable 
     gross weight in excess of the weight for the highest rate 
     specified in such table for such vehicle, the cents per mile 
     rate specified in paragraph (3).
       ``(2) Rate specified in table.--The table contained in this 
     paragraph is as follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                        Cents Per Mile
 Taxable Gross Weight in Thousands  --------------------------------------------------------------------------------------------------------------------
             of Pounds                  2-axle       3-axle      4-axle+       3-axle       4-axle       5-axle       6-axle       7-axle      8-axle+
                                     single unit  single unit  single unit  combination  combination  combination  combination  combination  combination
--------------------------------------------------------------------------------------------------------------------------------------------------------
Over 25 to 30......................         0.50         0.00         0.00         0.00         0.00         0.00         0.00         0.00         0.00
Over 30 to 35......................         1.00         0.25         0.00         0.00         0.00         0.00         0.00         0.00         0.00
Over 35 to 40......................         3.00         0.50         0.00         0.50         0.00         0.00         0.00         0.00         0.00
Over 40 to 45......................         5.00         1.50         0.50         1.00         0.00         0.00         0.00         0.00         0.00
Over 45 to 50......................         8.00         3.00         1.00         1.50         0.25         0.00         0.00         0.00         0.00
Over 50 to 55......................        12.00         6.00         2.00         2.50         0.50         0.25         0.00         0.00         0.00
Over 55 to 60......................        21.00        10.00         4.00         3.50         1.00         0.50         0.00         0.00         0.00
Over 60 to 65......................        30.00        17.00         7.00         5.00         2.50         1.00         0.25         0.00         0.00
Over 65 to 70......................  ...........        25.00        10.00         7.50         4.00         2.00         0.50         0.00         0.00
Over 70 to 75......................  ...........        33.00        14.00        11.00         5.50         3.00         1.25         0.00         0.00
Over 75 to 80......................  ...........        41.00        19.00        17.00         7.50         3.75         2.00         0.00         0.00
Over 80 to 85......................  ...........        50.00        24.00        25.00        13.00         7.00         4.00         0.50         0.00
Over 85 to 90......................  ...........  ...........        30.00  ...........        19.00        11.00         6.00         1.00         0.00
Over 90 to 95......................  ...........  ...........        36.00  ...........        25.00        15.00         8.50         1.50         0.25
Over 95 to 100.....................  ...........  ...........        42.00  ...........  ...........        20.00        11.00         2.00         0.50
Over 100 to 105....................  ...........  ...........        50.00  ...........  ...........        25.00        14.00         3.50         1.00
Over 105 to 110....................  ...........  ...........  ...........  ...........  ...........        30.00        17.00         5.00         2.00
Over 110 to 115....................  ...........  ...........  ...........  ...........  ...........        35.00        20.00         7.00         3.00
Over 115 to 120....................  ...........  ...........  ...........  ...........  ...........  ...........        23.00         9.00         4.00
Over 120 to 125....................  ...........  ...........  ...........  ...........  ...........  ...........        26.00        11.00         6.00
Over 125 to 130....................  ...........  ...........  ...........  ...........  ...........  ...........        29.00        13.00         8.00
Over 130 to 135....................  ...........  ...........  ...........  ...........  ...........  ...........        32.00        15.00        10.00
Over 135 to 140....................  ...........  ...........  ...........  ...........  ...........  ...........        35.00        17.00        12.00
Over 140 to 145....................  ...........  ...........  ...........  ...........  ...........  ...........  ...........        19.00        14.00
Over 145 to 150....................  ...........  ...........  ...........  ...........  ...........  ...........  ...........        21.00        16.00
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 9704]]

       ``(3) Rate specified in paragraph.--The cents per mile rate 
     specified in this paragraph is as follows:
       ``(A) In the case of any single unit highway motor vehicle 
     with 2 or more axles or any combination highway motor vehicle 
     with 3 or 4 axles, the highest rate specified in the table 
     contained in paragraph (2) for such vehicle, plus 10 cents 
     per mile for each 5000 pounds (or fraction thereof) in excess 
     of the taxable gross weight for such highest rate.
       ``(B) In the case of any combination highway motor vehicle 
     with 5 or 6 axles, the highest rate specified in the table 
     contained in paragraph (2) for such vehicle, plus 5 cents per 
     mile for each 5000 pounds (or fraction thereof) in excess of 
     the taxable gross weight for such highest rate.
       ``(C) In the case of any combination highway motor vehicle 
     with 7 or more axles, the highest rate specified in the table 
     contained in paragraph (2) for such vehicle, plus 2 cents per 
     mile for each 5000 pounds (or fraction thereof) in excess of 
     the taxable gross weight for such highest rate.
       ``(b) Determination of Number of Axles.--For purposes of 
     this section--
       ``(1) In general.--The total number of axles with respect 
     to any highway motor vehicle shall be determined without 
     regard to any variable load suspension axle, except if such 
     axle meets the requirements of paragraph (2).
       ``(2) Eligibility requirements.--The requirements of this 
     paragraph are as follows:
       ``(A) All controls with respect to the variable load 
     suspension axle are located outside of and inaccessible from 
     the driver's compartment of the highway motor vehicle.
       ``(B) The gross axle weight rating of all such axles with 
     respect to the highway motor vehicle shall conform to the 
     greater of--
       ``(i) the expected loading of the suspension of such 
     vehicle, or
       ``(ii) 9,000 pounds.
       ``(3) Variable load suspension axle defined.--The term 
     `variable load suspension axle' means an axle upon which a 
     load may be varied voluntarily while the highway motor 
     vehicle is enroute, whether by air, hydraulic, mechanical, or 
     any combination of such means.
       ``(4) Termination of exception.--The exception under 
     paragraph (1) shall not apply after June 30, 2004.
       ``(c) Determination of Miles.--
       ``(1) Use of certain toll facilities excluded.--For 
     purposes of this section, the number of miles any highway 
     motor vehicle is used shall be determined without regard to 
     the miles involved in the use of a facility described in 
     paragraph (2).
       ``(2) Toll facility.--A facility is described in this 
     paragraph if such facility is a highway, bridge, or tunnel, 
     the use of which is subject to a toll.
       ``(d) By Whom Paid.--The tax imposed by this section shall 
     be paid by the person in whose name the highway motor vehicle 
     is, or is required to be, registered under the law of the 
     State or contiguous foreign country in which such vehicle is, 
     or is required to be, registered, or, in case the highway 
     motor vehicle is owned by the United States, by the agency or 
     instrumentality of the United States operating such vehicle.
       ``(e) Time for Paying Tax.--The time for paying the tax 
     imposed by subsection (a) shall be the time prescribed by the 
     Secretary by regulations.
       ``(f) Period Tax in Effect.--The tax imposed by this 
     section shall apply only to use before October 1, 2005.

     ``SEC. 4482. DEFINITIONS.

       ``(a) Highway Motor Vehicle.--For purposes of this 
     subchapter, the term `highway motor vehicle' means any motor 
     vehicle which is a highway vehicle.
       ``(b) Taxable Gross Weight.--For purposes of this 
     subchapter--
       ``(1) In general.--Except as provided in paragraph (2), the 
     term `taxable gross weight' means, when used with respect to 
     any highway motor vehicle, the maximum weight at which the 
     highway motor vehicle is legally authorized to operate under 
     the laws of the State in which it is registered.
       ``(2) Special permits.--If a State allows a highway motor 
     vehicle to be operated for any period at a maximum weight 
     which is greater than the weight determined under paragraph 
     (1), its taxable gross weight for such period shall be such 
     greater weight.
       ``(c) Other Definitions and Special Rule.--For purposes of 
     this subchapter--
       ``(1) State.--The term `State' means a State and the 
     District of Columbia.
       ``(2) Use.--The term `use' means use in the United States 
     on the public highways.

     ``SEC. 4483. EXEMPTIONS.

       ``(a) State and Local Government Exemption.--Under 
     regulations prescribed by the Secretary, no tax shall be 
     imposed by section 4481 on the use of any highway motor 
     vehicle by any State or any political subdivision of a State.
       ``(b) Exemption for United States.--The Secretary may 
     authorize exemption from the tax imposed by section 4481 as 
     to the use by the United States of any particular highway 
     motor vehicle, or class of highway motor vehicles, if the 
     Secretary determines that the imposition of such tax with 
     respect to such use will cause substantial burden or expense 
     which can be avoided by granting tax exemption and that full 
     benefit of such exemption, if granted, will accrue to the 
     United States.
       ``(c) Certain Transit-Type Buses.--Under regulations 
     prescribed by the Secretary, no tax shall be imposed by 
     section 4481 on the use of any bus which is of the transit 
     type (rather than of the intercity type) by a person who, for 
     the last 3 months of the preceding year (or for such other 
     period as the Secretary may by regulations prescribe for 
     purposes of this subsection), met the 60-percent passenger 
     fare revenue test set forth in section 6421(b)(2) (as in 
     effect on the day before the day of the enactment of the 
     Energy Tax Act of 1978) as applied to the period prescribed 
     for the purposes of this subsection.
       ``(d) Termination of Exemptions.--Subsections (a) and (c) 
     shall not apply on and after October 1, 2005.

     ``SEC. 4484. CROSS REFERENCES.

       ``(1) For penalties and administrative provisions 
     applicable to this subchapter, see subtitle F.
       ``(2) For exemption for uses by Indian tribal governments 
     (or their subdivisions), see section 7871.''
       (b) Administration of Tax.--To the maximum extent possible, 
     the Secretary of the Treasury shall administer the tax 
     imposed by section 4481 of the Internal Revenue Code of 1986 
     (as added by this section)--
       (1) in cooperation with the States and in coordination with 
     State administrative and reporting mechanisms, and
       (2) through the use of the International Registration Plan 
     and the International Fuel Tax Agreement.

     SEC. 5. COOPERATIVE TAX EVASION EFFORTS.

       The Secretary of Transportation is authorized to use funds 
     authorized for expenditure under section 143 of title 23, 
     United States Code, and administrative funds deducted under 
     104(a) of such title 23, to develop automated data processing 
     tools and other tools or processes to reduce evasion of the 
     tax imposed by section 4481 of the Internal Revenue Code of 
     1986 (as added by section 4(a)). These funds may be allocated 
     to the Internal Revenue Service, States, or other entities.

     SEC. 6. STUDY.

       (a) In General.--The Secretary of Transportation, in 
     consultation with the Secretary of the Treasury, shall 
     conduct a study of--
       (1) the tax equity of the various Federal taxes deposited 
     into the Highway Trust Fund,
       (2) any modifications to the tax rates specified in section 
     4481 of the Internal Revenue Code of 1986 (as added by 
     section 4(a)) to improve tax equity, and
       (3) the administration and enforcement under subsection (e) 
     of the tax imposed by section 4481 of the Internal Revenue 
     Code of 1986 (as so added).
       (b) Report.--Not later than July 1, 2002, and July 1 of 
     every fourth year thereafter, the Secretary of Transportation 
     shall submit to the Committee on Ways and Means of the House 
     of Representatives and the Committee on Finance of the Senate 
     a report on the study conducted under subsection (a) together 
     with--
       (1) recommended tax rate schedules developed under 
     subsection (a)(2), and
       (2) such recommendations as the Secretary may deem 
     advisable to make the administration and enforcement 
     described in subsection (a)(3) more equitable.

     SEC. 7. EFFECTIVE DATE AND FLOOR STOCK REFUNDS.

       (a) Effective Date.--The amendments made by this Act shall 
     take effect on July 1, 2000.
       (b) Floor Stock Refunds.--
       (1) In general.--If--
       (A) before July 1, 2000, tax has been imposed under section 
     4071 or 4081 of the Internal Revenue Code of 1986 on any 
     article, and
       (B) on such date such article is held by a dealer and has 
     not been used and is intended for sale,

     there shall be credited or refunded (without interest) to the 
     person who paid such tax (hereafter in this subsection 
     referred to as the ``taxpayer'') an amount equal to the 
     excess of the tax paid by the taxpayer over the amount of 
     such tax which would be imposed on such article had the 
     taxable event occurred on such date.
       (2) Time for filing claims.--No credit or refund shall be 
     allowed or made under this subsection unless--
       (A) claim therefore is filed with the Secretary of the 
     Treasury before January 1, 2001, and
       (B) in any case where an article is held by a dealer (other 
     than the taxpayer) on July 1, 2000--
       (i) the dealer submits a request for refund or credit to 
     the taxpayer before October 1, 2000, and
       (ii) the taxpayer has repaid or agreed to repay the amount 
     so claimed to such dealer or has obtained the written consent 
     of such dealer to the allowance of the credit or the making 
     of the refund.
       (3) Exception for articles held in retail stocks.--No 
     credit or refund shall be allowed under this subsection with 
     respect to any article in retail stocks held at the place 
     where intended to be sold at retail.
       (4) Definitions.--For purposes of this subsection, the 
     terms ``dealer'' and ``held by a dealer'' have the respective 
     meanings given to such terms by section 6412 of such Code;

[[Page 9705]]

     except that the term ``dealer'' includes a producer.
       (5) Certain rules to apply.--Rules similar to the rules of 
     subsections (b) and (c) of section 6412 of such Code shall 
     apply for purposes of this subsection.

       Highway Tax Equity and Simplification Act (HTESA) of 1999


                              bill summary

       The Highway Tax Equity and Simplification Act of 1999 is 
     designed to improve the equity among taxpayers paying into 
     the Highway Trust Fund. In doing so, it eliminates 3 of the 
     separate taxes paid into the Highway Trust Fund and replaces 
     them with a straightforward tax that more fairly distributes 
     the tax burden among highway users.
       TEA 21 restructured the Highway Trust Fund's budgetary 
     treatment to ensure that transportation taxes would be spent 
     for transportation purposes. Congress did not, however, take 
     any steps to improve the allocation of transportation taxes 
     among highway users. Under current law, some users pay too 
     much into the trust fund relative to the costs they impose on 
     the nation's highway system while others pay too little. This 
     proposal more fairly apportions the tax burden to those who 
     impose the greatest costs to our highway infrastructure.


                            specific points

     Tax Simplification--3 Taxes Replaced with 1.
       This bill eliminates three taxes (the 12% sales tax on new 
     trucks, the tire tax, and the Heavy Vehicle Use Tax) and 
     replaces it with a straightforward and fair axle-weight 
     distance tax. The taxes that are eliminated are either poor 
     surrogates for user impact or raise relatively small amounts 
     of money and are duplicative of the new axle-weight distance 
     tax.
     Direct Correlation Between Taxes and Road Damage.
       Pavement and bridge damage imposed by trucks is directly 
     correlated to axle-weight loads and distance traveled. This 
     bill recognizes this clear and direct relationship and 
     imposes user fees based on this principle.
     No Tax Increase for Trucks Overall.
       The bill collects the same amount of tax revenue from 
     trucks overall as current law. The U.S. Department of 
     Transportation estimates that transportation taxes paid by 
     trucks total $11 billion annually, the same as under the 
     bill.
     Overwhelming More Winner than Losers.
       Under the bill, the vast majority of trucks--more than 5.9 
     million trucks--will see a tax reduction. This compares to 
     roughly 1.5 million who will see an increase.
     Eliminates ``Corporate Welfare'' for Heavy Trucks.
       By reforming the Highway Trust Fund taxes, this legislation 
     substantially reduces the subsidy provided to the heaviest 
     trucks using our nation's roadways. Most heavy trucks pay 
     less into the Highway Trust Fund than the costs they impose 
     on roads. The heaviest trucks pay less than half of the costs 
     of damage they inflict.
     Eliminates Perverse Provisions in Current Law.
       The Heavy Vehicle Use Tax (HVUT) under current law doesn't 
     apply to ``heavy trucks''. The HVUT is capped at 75,000 
     pounds--meaning that ``heavy trucks'' don't pay any more in 
     taxes as their weight increases even though the extra weight 
     does exponentially more damage to the nation's roads and 
     bridges.
       Secondly, the HVUT has no mileage component meaning that a 
     truck registered at 70,000 lbs traveling 10,000 miles per 
     year pays the same HVUT tax as an identical 70,000 pound 
     truck traveling 100,000 miles per year--not a fair or 
     sensible result.
     Administrative Burden.
       Under the bill, taxes are paid according to the distance 
     you traveled and your registered weight. The process is no 
     more complicated than reading your odometer and your truck 
     registration.
     Current Mileage Filing Requirements for Interstate Carriers.
       Under current law, all Interstate trucks are required to 
     file with their ``base state'' mileage logs that report 
     mileage driven in individual states. This existing 
     requirement of the International Fuel Tax Agreement (IFTA) is 
     more detailed than what is required for the axle-weight tax 
     included in this bill, which only requires the aggregate 
     total of all mileage driven.
     Reduces Double Taxation on Toll Roads.
       This bill reduces double taxation on toll roads by allowing 
     a credit against the axle-weight distance tax for travel on a 
     toll facility. (e.g., the Oklahoma Turnpike, the Pennsylvania 
     Turnpike, Ohio Turnpike, Florida Turnpike, etc.).
     Eliminates ``Diesel Differential''.
       The bill also eliminates the so-called ``diesel 
     differential'', where diesel is taxed at a higher rate than 
     gasoline. Under this proposal, the diesel fuel tax is lowered 
     from 24.3 cents to 18.3 cents, the same rate as gasoline.
     Overall Tax Equity Still Short by $4 Billion Annually.
       Proposal does not achieve perfect equity among all 
     contributors to the Highway Trust Fund. Although the bill 
     equalizes the relative tax burden among trucks, the trucking 
     sector as a whole will still underpay its fair share of 
     transportation taxes by $4 billion annually.
     State Transportation Departments Support Weight-Distance 
         Taxes.
       The American Association of State Highway and 
     Transportation Officials (AASHTO), the association 
     representing State Transportation Departments, supports 
     weight-distance taxes. AASHTO's policy resolution on this 
     matter finds:
       ``Truck taxes based upon a combination of the weight of the 
     vehicles and the distance they travel more equitably 
     distribute financing responsibility proportional to costs 
     imposed on the system than other tax alternatives.''
       AASHTO policy call for substituting a weight-distance tax 
     for the heavy vehicle use tax and all other federal user fees 
     on trucks except for a federal fuel tax--(the HTESA 
     proposal).
                                  ____



                  Cost allocation for cars and trucks

                  [Revenue to cost ratio--Current law]

Automobiles.........................................................1.0
Pickups/Vans........................................................1.5
Single-unit trucks:
    <25,000 lbs.....................................................1.5
    25,001-50,000 lbs...............................................0.7
    >50,000 lbs.....................................................0.4
Combination trucks:
    <50,000 lbs.....................................................1.5
    50,000-70,000 lbs...............................................1.0
    70,001-75,000 lbs...............................................0.9
    75,001-80,000 lbs...............................................0.8
    80,001-100,000 lbs..............................................0.5
    >100,000 lbs....................................................0.4

                      ANNUAL PER VEHICLE SUBSIDIES
            [Comparing taxes paid to pavement costs imposed]
------------------------------------------------------------------------
                                                   5-axle       6-axle
                                                semitrailer  semitrailer
------------------------------------------------------------------------
Registered weight:
     90,000...................................      -$3,864      -$2,188
    100,000...................................       -5,176       -4,985
    110,000...................................       -6,022       -7,746
------------------------------------------------------------------------

                    Pavement Damage--Cars vs. Trucks

       Underlying Principle--Pavement damage goes up dramatically 
     with weight.
       On a rural Interstate highway, a 100,000 lb standard 
     tractor-trailer wears the equivalent of more than 1,700 cars.
       On a rural arterial road, the same truck is equivalent to 
     3,500 cars.
                                  ____


                            Diesel Fuel Tax

       Diesel Tax meets one of the two guiding principles 
     discussed earlier, because the amount paid by trucks varies 
     by mileage.
       However, because diesel fuel usage only rises marginally 
     with weight increases, while pavement damage increases 
     exponentially, it also is a poor mechanism to align costs and 
     payments.
       Increasing rates for diesel, as is sometimes advocated by 
     the trucking industry in reaction to concerns about truck 
     underpayment, will not resolve this fundamental flaw.
                                  ____


                      Heavy Vehicle Use Tax (HVUT)


           heavy vehicle use tax doesn't live up to its name

       1. The HVUT is a poor surrogate for cost responsibility as 
     shown by the widening gap between the red and blue lines to 
     the right. HVUT taxes go up slightly with weight while 
     pavement damage goes up dramatically.
       2. Although the word use is in its name--this tax does not 
     vary by use or mileage. A truck traveling 100,000 miles per 
     year and another of the same weight traveling 10,000 per year 
     will pay the same tax.
       3. Although, the name implies it is targeted at heavy 
     vehicles, it does not increase with truck weight. Incredibly, 
     the tax is capped at 75,000 lbs, the point at which pavement 
     damage goes up dramatically.
                                 ______
                                 
      By Mr. MACK (for himself, Mr. Graham, Mr. Hatch, Mr. Conrad, Mr. 
        Nickles, Mr. Kerrey, Mr. Gramm, Mr. Bryan, Mr. Chafee, Mr. 
        Baucus, Mr. Murkowski, Mr. Breaux, Mr. Jeffords, Mr. Robb, Mr. 
        Coverdell, Mr. Rockefeller, Mr. Helms, Mr. Torricelli, and Mrs. 
        Hutchison):
  S. 1057. A bill to amend the Internal Revenue Code of 1986 to 
simplify certain provisions applicable to real estate investment 
trusts; to the Committee on Finance.


         real estate investment trust modernization act of 1999

  Mr. MACK. Mr. President, today Senator Bob Graham and I, along with 
17 of our colleagues, are introducing legislation to modernize the tax 
rules that apply to real estate investment trusts (``REITs'').
  This legislation is designed to remove barriers in the tax laws that 
impose unnecessary administrative burdens and make it more difficult 
for

[[Page 9706]]

REITs to compete in an evolving marketplace. Our bill is similar to a 
proposal included in the President's Fiscal Year 2000 budget that 
permits REITs to establish a new type of subsidiary called a ``taxable 
REIT subsidiary'' (``TRS''). As with the President's proposal, the 
legislation we introduce today would permit REITs to establish a TRS to 
provide non-customary services to their tenants and to provide services 
to third parties. In return for these new rules, the TRS would be 
subject to a number of rules designed to prevent any income from being 
shifted out of the taxable subsidiary to the REIT.
  Congress created REITs in 1960 to enable small investors to invest in 
real estate. The REIT provisions were modeled after the rules that 
applied to mutual funds. If a number of requirements are met, a 
corporation electing to be a REIT may deduct all dividends paid to its 
shareholders. One of the major requirements for REIT status is that 
REITs must distribute virtually all of their taxable income to their 
shareholders. Thus, unlike other C corporations that tend to retain 
most of their earnings, the income tax burden for REITs is shifted to 
the shareholder level. Unlike partnerships, REITs cannot pass losses 
through to their investors.
  REITs are subject to a number of rules to ensure their primary focus 
is real estate activities. For example, at least 75% of a REIT's assets 
must be comprised of rental real estate, mortgages, cash items and 
government securities. A REIT also must satisfy two income tests. 
First, at least 75% of a REIT's annual gross income must consist of 
real property rents, mortgage interest, gain from the sale of a real 
estate asset and certain other real estate-related sources. Second, at 
least 95% of a REIT's annual gross income must be derived from the 
income items from the above 75% test plus other ``passive income'' 
sources such as dividends and any type of interest. In addition, a REIT 
cannot own more than 10% of the voting securities of a non-REIT 
corporation, and the securities of a single non-REIT corporation cannot 
be worth more than 5% of the REIT's assets.
  Although REITs were created in 1960, they did not really become a 
significant part of the real estate marketplace until the 1990s--partly 
because the original legislation did not permit REITs to manage their 
own property. The Tax Reform Act of 1986 changed this, by permitting 
REITs to manage their own properties through the provision of 
``customary services'' to tenants.
  The market capitalization of REITs grew from about $13 billion at the 
end of 1991 to over $140 billion today. The taxes generated from REITs 
similarly have increased, with dividends from public REITs increasing 
from about $1 billion in 1991 to more than $8 billion today. While 
REITs remain a small portion of the entire real estate sector--in the 
range of 10% nationally--they account for as much as half of some 
sectors that require immense amounts of capital, such as shopping 
centers. While the REIT industry has come a long way in recent years, 
it continues to fulfill its original mission: permitting small 
investors access to attractive real estate investments. Almost 90% of 
REIT shareholders are individuals either investing directly or through 
mutual funds.
  Although REITs have seen remarkable growth in the 1990s, their 
ability to meet new competitive pressures in the real estate sector is 
in question as a result of tax law limitations on their activities. 
These rules limit the ability of REITs to provide full services to 
their tenants and to third parties. In general, REITs may only provide 
services to their tenants which the IRS has determined to be 
``customary'' in the business, meaning services already provided by the 
typical real estate company in the market. REITs may only provide real 
estate-related services to third parties through preferred stock 
subsidiaries which they can own but not control. REITs are thus 
prohibited from offering leading edge, full service options to their 
tenants and limited in the use of their expertise to serve third 
parties. This presents competitive problems for REITs as the real 
estate marketplace has evolved and property owners have sought to 
provide a range of services to their tenants and other customers.
  As a result, REITs increasingly have been unable to compete with 
privately-held partnerships and other more exclusive forms of 
ownership. Today, the rules prevent REITs from offering the same types 
of customer services as their competitors, even as such services are 
becoming more central to marketing efforts. Examples abound: (1) 
offering concierge services to office and apartment tenants to pick up 
tickets or dry cleaning, to walk pets, etc.; (2) offering a branded 
credit card at shopping malls, with rebates to be used as store credits 
at stores in the mall; (3) high speed Internet hook-ups, including 
enhanced telecommunications services (e.g., creating and maintaining a 
website) offered by a landlord's partner; (4) partnering with an office 
supply provider to offer reduced prices on office supplies; and (5) 
pick-up and delivery services at self-storage rentals.
  Without greater flexibility to provide competitive services to 
tenants and other customers, REITs will become less and less 
competitive with others in the real estate marketplace. REITs will have 
to wait for services to be deemed ``customary.'' As a practical matter, 
that means a REIT must wait until the IRS concludes that almost 
everybody else has been providing the service. If a REIT is forced to 
lag the market, it can be neither competitive nor provide its investors 
with a satisfactory return on their investment. Certainly, this is not 
consistent with what Congress intended when it created REITs, and when 
it modified the REIT rules over the years. In keeping with the 
Congressional mandate to provide a sensible and effective way for the 
average investor to benefit from ownership of income-producing real 
estate, REITs should be able to provide a range of services through 
taxable subsidiaries.
  The Administration's proposed Fiscal Year 2000 Budget acknowledges 
this problem. The Administration proposes modernizing REIT rules to 
permit REITs, on a limited basis, to use taxable subsidiaries to 
provide the services necessary to compete in the evolving real estate 
marketplace. The Administration proposal is a good start, but I believe 
additional refinements would further promote competitiveness. The 
legislation that we are introducing today builds upon the 
Administration proposal. Our bill addresses the appropriate needs of 
the REIT industry and its investors in a manner consistent with the 
underlying rationale for REITs and the requirements of the highly 
competitive, evolving real estate marketplace.
  This legislation would give greater flexibility to REITs by 
permitting them to establish ``taxable REIT subsidiaries'' (``TRSs'') 
that could provide non-customary services to tenants and services to 
third parties. The 5% and 10% asset tests would not apply to the TRS. 
REITs would continue to be subject to the 75% asset tests so the value 
of their TRS, together with the value of other non-real estate assets, 
could not exceed 25% of the total value of a REIT's assets. In 
addition, the REIT would have to continue to satisfy the 95% and 75% 
income tests, with dividends or interest from a TRS to a REIT counting 
towards the 95% test, but not the 75% test. Accordingly, at least 75% 
of a REIT's gross income would continue to consist of rents, mortgage 
interest, real estate capital gains and the other miscellaneous real 
estate-related items already listed in the Code. The income a TRS would 
receive from both third parties and REIT tenants would be fully subject 
to corporate tax.
  To ensure that a TRS could not inappropriately reduce its corporate 
tax liability by shifting income to the REIT, the bill includes a 
number of stringent rules that limit the relationship between the REIT 
and the TRS. To prevent the TRS from making excessive intra-party 
interest payments to its affiliated REIT, the proposal contains two 
safeguards. One, it would apply the current anti-earnings stripping 
provisions of Code section 163(j) to payments between a REIT and its 
TRS. This

[[Page 9707]]

would prevent the TRS from deducting intra-party interest beyond a 
modest amount regulated by objective criteria in the Code. Two, a 100% 
excise tax would be imposed on any interest payments by a TRS to its 
affiliated REIT to the extent the interest rate was above a 
commercially-reasonable rate.
  Also, to be certain that a TRS could not reduce its tax obligations 
by deducting rents to its affiliated REIT, our legislation would retain 
the current rules under which any payments to a REIT by a related party 
would not be considered qualified rents for purposes of the REIT gross 
income tests. The only exception would be when a TRS rents less than 
10% of a REIT-owned property and pays rents to the REIT comparable to 
the rents the REIT charges to its unrelated tenants at the same 
property. Under this exception, any rents paid to the REIT that turn 
out to be above comparable rents would be subject to a 100% excise tax.
  Under our bill, a 100% excise tax is also imposed on any rents a REIT 
charges its tenants that are inflated to disguise charges for services 
rendered to the tenant by its affiliated TRS. Limited exceptions would 
be made when: (1) the TRS charges the same amounts for its services to 
both REIT tenants and third parties; (2) rents for comparable space are 
the same regardless of whether the TRS provides a service to the 
tenant; and (3) the TRS recognizes income for its services at least 
equal to 150% of its direct costs of providing the service to an 
affiliated REIT's tenants.
  To discourage a REIT from allocating its expenses to its TRS (which 
would reduce the TRS's corporate tax obligation), the proposal would 
impose a 100% excise tax on any improper cost allocations between a 
REIT and its TRS. The Treasury Department would issue guidance on 
proper ways to allocate such costs.
  Finally, the bill proposes to eliminate the use of preferred stock 
subsidiaries by REITs. These subsidiaries, which have been established 
pursuant to IRS letter rulings since 1988, allow a REIT to provide 
services to third parties. While the asset test rules prevent a REIT 
from owning more than 10% of the voting securities of these 
subsidiaries, they typically own more than 95% of the value of the 
subsidiary. We propose to eliminate these subsidiaries by prohibiting 
REITs from owning more than 10% of the vote or the value in another 
corporation other than a TRS. REITs would be given three years to 
convert, tax-free, their preferred stock subsidiaries to taxable REIT 
subsidiaries.
  In addition, the bill includes some miscellaneous changes to the REIT 
rules that were under consideration when Congress approved a REIT 
simplification package a few years ago. The first provision deals with 
health care property. Under current law, a REIT can conduct a trade or 
business using property acquired through foreclosure for 90 days after 
it acquired such property, if it makes a ``foreclosure property'' 
election. After this period, the REIT can only conduct the trade or 
business through an independent contractor from whom the REIT does not 
derive any income. A health care REIT faces special challenges in using 
these rules when its lease of a nursing home or other health care 
property expires.
  To remedy these challenges and to ensure that care to patients 
remains uninterrupted, the proposal would make two technical changes to 
the REIT foreclosure rules. First, the foreclosure property rules would 
be extended to include leases that terminate (they already apply to 
leases that are breached). Second, for purposes of the foreclosure 
rules, a health care provider would not be disqualified as an 
independent contractor solely because the REIT receives rental income 
from the provider with respect to one or more other properties. For 
this purpose, other rules would be made to ensure that the terms of 
leases of other properties could not be manipulated to circumvent this 
rule.
  Another provision deals with the 95% distribution rule. From 1960 
through 1980, REITs and mutual funds shared a requirement to distribute 
at least 90% of their taxable income. Since 1980, REITs have had to 
distribute 95% of their taxable income. The proposal would restore the 
90% distribution requirement.
  Mr. President, I believe this is a major improvement in the REIT 
rules that preserves the original intent of Congress when it first 
created REITs in 1960, while permitting the industry to adapt to a 
changing marketplace. Most importantly, these REIT modernization rules 
would not expand the activities that can be conducted within the REIT, 
they simply give the REIT greater flexibility to establish fully-
taxable subsidiaries that will enable the REIT to better serve its 
customers.
  This legislation is supported by the American Resort Development 
Association, the International Council of Shopping Centers, the 
National Apartment Association, the National Association of Real Estate 
Investment Trusts, the American Seniors Housing Association, the 
Mortgage Bankers Association of America, the National Association of 
Industrial and Office Properties, the National Association of Realtors, 
the National Multi Housing Council, and the National Realty Committee.
  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. 1057

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

     SECTION 1. SHORT TITLE.

       (a) Short Title.--This Act may be cited as the ``Real 
     Estate Investment Trust Modernization Act of 1999''.
       (b) 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.
  TITLE I--TREATMENT OF INCOME AND SERVICES PROVIDED BY TAXABLE REIT 
                              SUBSIDIARIES

     SEC. 101. MODIFICATIONS TO ASSET DIVERSIFICATION TEST.

       Subparagraph (B) of section 856(c)(4) is amended to read as 
     follows:
       ``(B)(i) not more than 25 percent of the value of its total 
     assets is represented by securities (other than those 
     includible under subparagraph (A)), and
       ``(ii) except with respect to a taxable REIT subsidiary and 
     securities includible under subparagraph (A)--
       ``(I) not more than 5 percent of the value of its total 
     assets is represented by securities of any 1 issuer,
       ``(II) the trust does not hold securities possessing more 
     than 10 percent of the total voting power of the outstanding 
     securities of any 1 issuer, and
       ``(III) the trust does not hold securities having a value 
     of more than 10 percent of the total value of the outstanding 
     securities of any 1 issuer.''

     SEC. 102. TREATMENT OF INCOME AND SERVICES PROVIDED BY 
                   TAXABLE REIT SUBSIDIARIES.

       (a) Income From Taxable REIT Subsidiaries Not Treated as 
     Impermissible Tenant Service Income.--Clause (i) of section 
     856(d)(7)(C) (relating to exceptions to impermissible tenant 
     service income) is amended by inserting ``or through a 
     taxable REIT subsidiary of such trust'' after ``income''.
       (b) Certain Income From Taxable REIT Subsidiaries Not 
     Excluded From Rents From Real Property.--
       (1) In general.--Subsection (d) of section 856 (relating to 
     rents from real property defined) is amended by adding at the 
     end the following new paragraphs:
       ``(8) Special rule for taxable reit subsidiaries.--For 
     purposes of this subsection, amounts paid to a real estate 
     investment trust by a taxable REIT subsidiary of such trust 
     shall not be excluded from rents from real property by reason 
     of paragraph (2)(B) if the requirements of subparagraph (A) 
     or (B) are met.
       ``(A) Limited rental exception.--The requirements of this 
     subparagraph are met with respect to any property if at least 
     90 percent of the leased space of the property is rented to 
     persons other than taxable REIT subsidiaries of such trust 
     and other than persons described in section 856(d)(2)(B). The 
     preceding sentence shall apply only to the extent that the 
     amounts paid to the trust as rents from real property (as 
     defined in paragraph (1) without regard to paragraph (2)(B)) 
     from such property are substantially comparable to such rents 
     made by the other tenants of the trust's property for 
     comparable space.
       ``(B) Exception for certain lodging facilities.--The 
     requirements of this subparagraph are met with respect to an 
     interest in

[[Page 9708]]

     real property which is a qualified lodging facility leased by 
     the trust to a taxable REIT subsidiary of the trust if the 
     property is operated on behalf of such subsidiary by a person 
     who is an eligible independent contractor.
       ``(9) Eligible independent contractor.--For purposes of 
     paragraph (8)(B)--
       ``(A) In general.--The term `eligible independent 
     contractor' means, with respect to any qualified lodging 
     facility, any independent contractor if, at the time such 
     contractor enters into a management agreement or other 
     similar service contract with the taxable REIT subsidiary to 
     operate the facility, such contractor (or any related person) 
     is actively engaged in the trade or business of operating 
     qualified lodging facilities for any person who is not a 
     related person with respect to the real estate investment 
     trust or the taxable REIT subsidiary.
       ``(B) Special rules.--Solely for purposes of this paragraph 
     and paragraph (8)(B), a person shall not fail to be treated 
     as an independent contractor with respect to any qualified 
     lodging facility by reason of any of the following:
       ``(i) The taxable REIT subsidiary bears the expenses for 
     the operation of the facility pursuant to the management 
     agreement or other similar service contract.
       ``(ii) The taxable REIT subsidiary receives the revenues 
     from the operation of such facility, net of expenses for such 
     operation and fees payable to the operator pursuant to such 
     agreement or contract.
       ``(iii) The real estate investment trust receives income 
     from such person with respect to another property that is 
     attributable to a lease of such other property to such person 
     that was in effect as on the later of--

       ``(I) January 1, 1999, or
       ``(II) the earliest date that any taxable REIT subsidiary 
     of such trust entered into a management agreement or other 
     similar service contract with such person with respect to 
     such qualified lodging facility.

       ``(C) Renewals, etc., of existing leases.--For purposes of 
     subparagraph (B)(iii)--
       ``(i) a lease shall be treated as in effect on January 1, 
     1999, without regard to its renewal after such date, so long 
     as such renewal is pursuant to the terms of such lease as in 
     effect on whichever of the dates under subparagraph (B)(iii) 
     is the latest, and
       ``(ii) a lease of a property entered into after whichever 
     of the dates under subparagraph (B)(iii) is the latest shall 
     be treated as in effect on such date if--

       ``(I) on such date, a lease of such property from the trust 
     was in effect, and
       ``(II) under the terms of the new lease, such trust 
     receives a substantially similar or lesser benefit in 
     comparison to the lease referred to in subclause (I).

       ``(D) Qualified lodging facility.--For purposes of this 
     paragraph--
       ``(i) In general.--The term `qualified lodging facility' 
     means any lodging facility unless wagering activities are 
     conducted at or in connection with such facility by any 
     person who is engaged in the business of accepting wagers and 
     who is legally authorized to engage in such business at or in 
     connection with such facility.
       ``(ii) Lodging facility.--The term `lodging facility' means 
     a hotel, motel, or other establishment more than one-half of 
     the dwelling units in which are used on a transient basis.
       ``(iii) Customary amenities and facilities.--The term 
     `lodging facility' includes customary amenities and 
     facilities operated as part of, or associated with, the 
     lodging facility so long as such amenities and facilities are 
     customary for other properties of a comparable size and class 
     owned by other owners unrelated to such real estate 
     investment trust.
       ``(E) Operate includes manage.--References in this 
     paragraph to operating a property shall be treated as 
     including a reference to managing the property.
       ``(F) Related person.--Persons shall be treated as related 
     to each other if such persons are treated as a single 
     employer under subsection (a) or (b) of section 52.''.
       (2) Conforming amendment.--Subparagraph (B) of section 
     856(d)(2) is amended by inserting ``except as provided in 
     paragraph (8),'' after ``(B)''.

     SEC. 103. TAXABLE REIT SUBSIDIARY.

       (a) In General.--Section 856 is amended by adding at the 
     end the following new subsection:
       ``(l) Taxable Reit Subsidiary.--For purposes of this part--
       ``(1) In general.--The term `taxable REIT subsidiary' 
     means, with respect to a real estate investment trust, a 
     corporation (other than a real estate investment trust) if--
       ``(A) such trust directly or indirectly owns stock in such 
     corporation, and
       ``(B) such trust and such corporation jointly elect that 
     such corporation shall be treated as a taxable REIT 
     subsidiary of such trust for purposes of this part.

     Such an election, once made, shall be irrevocable unless both 
     such trust and corporation consent to its revocation. Such 
     election, and any revocation thereof, may be made without the 
     consent of the Secretary.
       ``(2) 35 percent ownership in another taxable reit 
     subsidiary.--The term `taxable REIT subsidiary' includes, 
     with respect to any real estate investment trust, any 
     corporation (other than a real estate investment trust) with 
     respect to which a taxable REIT subsidiary of such trust owns 
     directly or indirectly--
       ``(A) securities possessing more than 35 percent of the 
     total voting power of the outstanding securities of such 
     corporation, or
       ``(B) securities having a value of more than 35 percent of 
     the total value of the outstanding securities of such 
     corporation.
     The preceding sentence shall not apply to a qualified REIT 
     subsidiary (as defined in subsection (i)(2)).
       ``(3) Exceptions.--The term `taxable REIT subsidiary' shall 
     not include--
       ``(A) any corporation which directly or indirectly operates 
     or manages a lodging facility or a health care facility, and
       ``(B) any corporation which directly or indirectly provides 
     to any other person (under a franchise, license, or 
     otherwise) rights to any brand name under which any lodging 
     facility or health care facility is operated.

     Subparagraph (B) shall not apply to rights provided to an 
     eligible independent contractor to operate or manage a 
     lodging facility if such rights are held by such corporation 
     as a franchisee, licensee, or in a similar capacity and such 
     lodging facility is either owned by such corporation or is 
     leased to such corporation from the real estate investment 
     trust.
       ``(4) Definitions.--For purposes of paragraph (3)--
       ``(A) Lodging facility.--The term `lodging facility' has 
     the meaning given to such term by paragraph (9)(D)(ii).
       ``(B) Health care facility.--The term `health care 
     facility' has the meaning given to such term by subsection 
     (e)(6)(D)(ii).''.
       (b) Conforming Amendment.--Paragraph (2) of section 856(i) 
     is amended by adding at the end the following new sentence: 
     ``Such term shall not include a taxable REIT subsidiary.''

     SEC. 104. LIMITATION ON EARNINGS STRIPPING.

       Paragraph (3) of section 163(j) (relating to limitation on 
     deduction for interest on certain indebtedness) is amended by 
     striking ``and'' at the end of subparagraph (A), by striking 
     the period at the end of subparagraph (B) and inserting ``, 
     and'', and by adding at the end the following new 
     subparagraph:
       ``(C) any interest paid or accrued (directly or indirectly) 
     by a taxable REIT subsidiary (as defined in section 856(l)) 
     of a real estate investment trust to such trust.''.

     SEC. 105. 100 PERCENT TAX ON IMPROPERLY ALLOCATED AMOUNTS.

       (a) In General.--Subsection (b) of section 857 (relating to 
     method of taxation of real estate investment trusts and 
     holders of shares or certificates of beneficial interest) is 
     amended by redesignating paragraphs (7) and (8) as paragraphs 
     (8) and (9), respectively, and by inserting after paragraph 
     (6) the following new paragraph:
       ``(7) Income from redetermined rents, redetermined 
     deductions, and excess interest.--
       ``(A) Imposition of tax.--There is hereby imposed for each 
     taxable year of the real estate investment trust a tax equal 
     to 100 percent of redetermined rents, redetermined 
     deductions, and excess interest.
       ``(B) Redetermined rents.--
       ``(i) In general.--The term `redetermined rents' means 
     rents from real property (as defined in subsection 856(d)) 
     the amount of which would (but for subparagraph (E)) be 
     reduced on distribution, apportionment, or allocation under 
     section 482 to clearly reflect income as a result of services 
     furnished or rendered by a taxable REIT subsidiary of the 
     real estate investment trust to a tenant of such trust.
       ``(ii) Exception for certain services.--Clause (i) shall 
     not apply to amounts received directly or indirectly by a 
     real estate investment trust for services described in 
     paragraph (1)(B) or (7)(C)(i) of section 856(d).
       ``(iii) Exception for de minimis amounts.--Clause (i) shall 
     not apply to amounts described in section 856(d)(7)(A) with 
     respect to a property to the extent such amounts do not 
     exceed the one percent threshold described in section 
     856(d)(7)(B) with respect to such property.
       ``(iv) Exception for comparably priced services.--Clause 
     (i) shall not apply to any service rendered by a taxable REIT 
     subsidiary of a real estate investment trust to a tenant of 
     such trust if--

       ``(I) such subsidiary renders a significant amount of 
     similar services to persons other than such trust and tenants 
     of such trust who are unrelated (within the meaning of 
     section 856(d)(8)(F)) to such subsidiary, trust, and tenants, 
     but
       ``(II) only to the extent the charge for such service so 
     rendered is substantially comparable to the charge for the 
     similar services rendered to persons referred to in subclause 
     (I).

       ``(v) Exception for certain separately charged services.--
     Clause (i) shall not apply to any service rendered by a 
     taxable REIT subsidiary of a real estate investment trust to 
     a tenant of such trust if--

       ``(I) the rents paid to the trust by tenants (leasing at 
     least 25 percent of the net leasable space in the trust's 
     property) who are not receiving such service from such 
     subsidiary are substantially comparable to the rents paid by 
     tenants leasing comparable

[[Page 9709]]

     space who are receiving such service from such subsidiary, 
     and
       ``(II) the charge for such service from such subsidiary is 
     separately stated.

       ``(vi) Exception for certain services based on subsidiary's 
     income from the services.--Clause (i) shall not apply to any 
     service rendered by a taxable REIT subsidiary of a real 
     estate investment trust to a tenant of such trust if the 
     gross income of such subsidiary from such service is not less 
     than 150 percent of such subsidiary's direct cost in 
     furnishing or rendering the service.
       ``(vii) Exceptions granted by secretary.--The Secretary may 
     waive the tax otherwise imposed by subparagraph (A) if the 
     trust establishes to the satisfaction of the Secretary that 
     rents charged to tenants were established on an arms' length 
     basis even though a taxable REIT subsidiary of the trust 
     provided services to such tenants.
       ``(viii) No inference with respect to rents not within 
     exceptions.--In determining whether rents are subject to 
     reduction upon distribution, apportionment, or allocation 
     under section 482 for purposes of subparagraph (B), the fact 
     that rents from real property do not meet the requirements of 
     clauses (ii) through (vii) shall not be taken into account; 
     and such determination, in the case of rents not meeting such 
     requirements, shall be made as if such clauses had not been 
     enacted.
       ``(ix) No inference as to whether redetermined rent is rent 
     from real property.--Rent received by a real estate 
     investment trust shall not fail to qualify as rents from real 
     property under section 856(d) by reason of the fact that all 
     or any portion of such rent is determined to be redetermined 
     rent.
       ``(C) Redetermined deductions.--The term `redetermined 
     deductions' means deductions (other than redetermined rents) 
     of a taxable REIT subsidiary of a real estate investment 
     trust if the amount of such deductions would (but for 
     subparagraph (E)) be increased on distribution, 
     apportionment, or allocation under section 482 to clearly 
     reflect income as between such subsidiary and such trust.
       ``(D) Excess interest.--The term `excess interest' means 
     any deductions for interest payments by a taxable REIT 
     subsidiary of a real estate investment trust to such trust to 
     the extent that the interest payments are in excess of a rate 
     that is commercially reasonable.
       ``(E) Coordination with section 482.--The imposition of tax 
     under subparagraph (A) shall be in lieu of any distribution, 
     apportionment, or allocation under section 482.
       ``(F) Regulatory authority.--The Secretary shall prescribe 
     such regulations as may be necessary or appropriate to carry 
     out the purposes of this paragraph. Until the Secretary 
     prescribes such regulations, real estate investment trusts 
     and their taxable REIT subsidiaries may base their 
     allocations on any reasonable method.''.
       (b) Amount Subject to Tax Not Required To Be Distributed.--
     Subparagraph (E) of section 857(b)(2) (relating to real 
     estate investment trust taxable income) is amended by 
     striking ``paragraph (5)'' and inserting ``paragraphs (5) and 
     (7)''.

     SEC. 106. EFFECTIVE DATE.

       (a) In General.--The amendments made by this title shall 
     apply to taxable years beginning after the date of enactment 
     of this Act.
       (b) Transitional Rules Related to Section 101.--
       (1) Existing arrangements.--
       (A) In general.--Except as otherwise provided in this 
     paragraph, the amendment made by section 101 shall not apply 
     to a real estate investment trust with respect to--
       (i) securities of a corporation held directly or indirectly 
     by such trust on April 28, 1999,
       (ii) securities received by such trust (or a successor) in 
     exchange for, or with respect to, securities described in 
     clause (i) in a transaction in which gain or loss is not 
     recognized, and
       (iii) securities acquired directly or indirectly by such 
     trust as part of a reorganization (as defined in section 
     368(a)(1) of the Internal Revenue Code of 1986) with respect 
     to such trust if such securities are described in clause (i) 
     or (ii) with respect to any other real estate investment 
     trust.
       (B) New trade or business or substantial new assets.--
     Subparagraph (A) shall cease to apply to securities of a 
     corporation as of the first day after April 28, 1999, on 
     which such corporation engages in a substantial new line of 
     business, or acquires any substantial asset, other than--
       (i) pursuant to a binding contract in effect on such date 
     and at all times thereafter before the acquisition of such 
     asset,
       (ii) in a transaction in which gain or loss is not 
     recognized by reason of section 1031 or 1033 of the Internal 
     Revenue Code of 1986, or
       (iii) in a reorganization (as so defined) with another 
     corporation the securities of which are described in 
     paragraph (1)(A) of this subsection.
       (2) Tax-free conversion.--If--
       (A) at the time of an election for a corporation to become 
     a taxable REIT subsidiary, the amendment made by section 101 
     does not apply to such corporation by reason of paragraph 
     (1), and
       (B) such election first takes effect during the 3-year 
     period beginning on the date of the enactment of this Act,

     such election shall be treated as a reorganization qualifying 
     under section 368(a)(1)(A) of such Code.
                      TITLE II--HEALTH CARE REITS

     SEC. 201. HEALTH CARE REITS.

       (a) Special Foreclosure Rule for Health Care Properties.--
     Subsection (e) of section 856 (relating to special rules for 
     foreclosure property) is amended by adding at the end the 
     following new paragraph:
       ``(6) Special rule for qualified health care properties.--
     For purposes of this subsection--
       ``(A) Acquisition at expiration of lease.--The term 
     `foreclosure property' shall include any qualified health 
     care property acquired by a real estate investment trust as 
     the result of the termination of a lease of such property 
     (other than a termination by reason of a default, or the 
     imminence of a default, on the lease).
       ``(B) Grace period.--In the case of a qualified health care 
     property which is foreclosure property solely by reason of 
     subparagraph (A), in lieu of applying paragraphs (2) and 
     (3)--
       ``(i) the qualified health care property shall cease to be 
     foreclosure property as of the close of the second taxable 
     year after the taxable year in which such trust acquired such 
     property, and
       ``(ii) if the real estate investment trust establishes to 
     the satisfaction of the Secretary that an extension of the 
     grace period in clause (i) is necessary to the orderly 
     leasing or liquidation of the trust's interest in such 
     qualified health care property, the Secretary may grant 1 or 
     more extensions of the grace period for such qualified health 
     care property.

     Any such extension shall not extend the grace period beyond 
     the close of the 6th year after the taxable year in which 
     such trust acquired such qualified health care property.
       ``(C) Income from independent contractors.--For purposes of 
     applying paragraph (4)(C) with respect to qualified health 
     care property which is foreclosure property by reason of 
     subparagraph (A) or paragraph (1), income derived or received 
     by the trust from an independent contractor shall be 
     disregarded to the extent such income is attributable to--
       ``(i) any lease of property in effect on the date the real 
     estate investment trust acquired the qualified health care 
     property (without regard to its renewal after such date so 
     long as such renewal is pursuant to the terms of such lease 
     as in effect on such date), or
       ``(ii) any lease of property entered into after such date 
     if--

       ``(I) on such date, a lease of such property from the trust 
     was in effect, and
       ``(II) under the terms of the new lease, such trust 
     receives a substantially similar or lesser benefit in 
     comparison to the lease referred to in subclause (I).

       ``(D) Qualified health care property.--
       ``(i) In general.--The term `qualified health care 
     property' means any real property (including interests 
     therein), and any personal property incident to such real 
     property, which--

       ``(I) is a health care facility, or
       ``(II) is necessary or incidental to the use of a health 
     care facility.

       ``(ii) Health care facility.--For purposes of clause (i), 
     the term `health care facility' means a hospital, nursing 
     facility, assisted living facility, congregate care facility, 
     qualified continuing care facility (as defined in section 
     7872(g)(4)), or other licensed facility which extends medical 
     or nursing or ancillary services to patients and which, 
     immediately before the termination, expiration, default, or 
     breach of the lease of or mortgage secured by such facility, 
     was operated by a provider of such services which was 
     eligible for participation in the medicare program under 
     title XVIII of the Social Security Act with respect to such 
     facility.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after the date of 
     enactment of this Act.
     TITLE III--CONFORMITY WITH REGULATED INVESTMENT COMPANY RULES

     SEC. 301. CONFORMITY WITH REGULATED INVESTMENT COMPANY RULES.

       (a) Distribution Requirement.--Clauses (i) and (ii) of 
     section 857(a)(1)(A) (relating to requirements applicable to 
     real estate investment trusts) are each amended by striking 
     ``95 percent (90 percent for taxable years beginning before 
     January 1, 1980)'' and inserting ``90 percent''.
       (b) Imposition of Tax.--Clause (i) of section 857(b)(5)(A) 
     (relating to imposition of tax in case of failure to meet 
     certain requirements) is amended by striking ``95 percent (90 
     percent in the case of taxable years beginning before January 
     1, 1980)'' and inserting ``90 percent''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of 
     enactment of this Act.
    TITLE IV--CLARIFICATION OF DEFINITION OF INDEPENDENT CONTRACTOR

     SEC. 401. CLARIFICATION OF DEFINITION OF INDEPENDENT 
                   CONTRACTOR.

       (a) In General.--Paragraph (3) of section 856(d) (relating 
     to independent contractor defined) is amended by adding at 
     the end the following flush sentence:


[[Page 9710]]


     ``In the event that any class of stock of either the real 
     estate investment trust or such person is regularly traded on 
     an established securities market, only persons who own, 
     directly or indirectly, more than 5 percent of such class of 
     stock shall be taken into account as owning any of the stock 
     of such class for purposes of applying the 35 percent 
     limitation set forth in subparagraph (B) (but all of the 
     outstanding stock of such class shall be considered 
     outstanding in order to compute the denominator for purpose 
     of determining the applicable percentage of ownership).''
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.
          TITLE V--MODIFICATION OF EARNINGS AND PROFITS RULES

     SEC. 501. MODIFICATION OF EARNINGS AND PROFITS RULES.

       (a) Rules for Determining Whether Regulated Investment 
     Company Has Earnings and Profits From Non-RIC Year.--
     Subsection (c) of section 852 is amended by adding at the end 
     the following new paragraph:
       ``(3) Distributions to meet requirements of subsection 
     (a)(2)(B).--Any distribution which is made in order to comply 
     with the requirements of subsection (a)(2)(B)--
       ``(A) shall be treated for purposes of this subsection and 
     subsection (a)(2)(B) as made from the earliest earnings and 
     profits accumulated in any taxable year to which the 
     provisions of this part did not apply rather than the most 
     recently accumulated earnings and profits, and
       ``(B) to the extent treated under subparagraph (A) as made 
     from accumulated earnings and profits, shall not be treated 
     as a distribution for purposes of subsection (b)(2)(D) and 
     section 855.''.
       (b) Clarification of Application of REIT Spillover Dividend 
     Rules to Distributions To Meet Qualification Requirement.--
     Subparagraph (B) of section 857(d)(3) is amended by inserting 
     before the period ``and section 858''.
       (c) Application of Deficiency Dividend Procedures.--
     Paragraph (1) of section 852(e) is amended by adding at the 
     end the following new sentence: ``If the determination under 
     subparagraph (A) is solely as a result of the failure to meet 
     the requirements of subsection (a)(2), the preceding sentence 
     shall also apply for purposes of applying subsection (a)(2) 
     to the non-RIC year.''
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning before, on, or after 
     the date of the enactment of this Act.

  Mr. GRAHAM. Mr. President, I am pleased to join my colleague, Senator 
Mack, in the introduction of the REIT Modernization Act, legislation 
that would modernize the tax rules that apply to real estate investment 
trusts (``REITs'').
  REITs were created in 1960 to give small investors the ability to 
invest in income producing real estate. But it was not until the early 
part of this decade that REITs emerged as a significant factor in real 
estate finance. Their repid growth then contributed in a major way to 
the development of real estate markets. The real estate industry is 
experiencing change today as owners seek to maximize returns by taking 
greater advantage of their employee expertise and tenant base. This 
bill will better enable REITS to expand their services to tenants and 
customers.
  The Administration's Fiscal Year 2000 budget includes a proposal to 
change the rules governing REITs. The legislation that we are 
introducing today is largely based on that proposal. It would permit 
REITs to establish taxable subsidiaries to offer services that a REIT 
cannot offer directly to tenants and third parties. Stringent rules are 
included to ensure that the subsidiary would be fully subject to 
taxation. Current rules designed to ensure that REIT income is 
primarily earned from real estate activities would continue to apply. 
The bill also modifies the tratment of health care facilities to ensure 
that patients' lives are not disrupted in the event of an expired 
lease, and restores the 90% distribution rule that had previously 
applied to REITs.
  REITs play a positive role in the real estate economy that has helped 
to stabilize property values and provide liquidity to the market. As 
long as the basic limitations on REIT activities are preserved, those 
tax rules which impose restraints on REIT activities must be modified. 
In my own state of Florida, REITs have invested more than $13 billion 
in the Florida economy, and are an important source of investment 
capital that has reinvigorated real estate markets.
  I want to thank Senator  Mack  for his leadership on this issue and I 
welcome the bipartisan support this measure has received from members 
of the Senate Finance Committee, along with others, who have joined as 
cosponsors of the bill. I look forward to working with them in the 
months ahead.
  Mr. MOYNIHAN. Mr. President: I commend the efforts of my respected 
colleagues from Florida, Senator Mack and Senator Graham, as they work 
to modernize the tax rules that apply to Real Estate Investment Trusts 
(REITs). I have worked with the REIT industry over the years and have 
seen it grow to be a major contributor to the strength of the real 
estate sector in New York and nationally.
  Congress first authorized REITs in 1960 so that investors of modest 
means could invest in income producing real estate assets. During the 
last four decades, REITs have provided not only real estate ownership 
opportunities for individual investors, but also an important source of 
capital for real estate investment.
  As tax policy makers we have the responsibility to make sure that tax 
laws governing REITs are updated to reflect the realities of a dynamic 
market and to maintain a proper competitive balance between real estate 
owned through the REIT structure and through more traditional corporate 
and partnership structures. But because REITs are pass-through 
entities, we also have a responsibility to ensure that they are not 
used as vehicles for sheltering corporate taxes in a manner 
inconsistent with Congressional intent. In fact, twice in the last 
Congress the Finance Committee crafted legislation, later signed into 
law, to stop inappropriate use of the REIT structure in the case of so-
called ``stapled entities'' and liquidating subsidiaries.
  The Administration has included a proposal in its FY 2000 budget that 
would, among other things, allow REITs to own a taxable REIT 
subsidiary. The legislation introduced by Senators Mack and Graham 
builds on the Administration proposal, and would expand the permissible 
business activities of REITs.
  The approach taken in the proposals advanced by the Administration 
and by Senators Mack and Graham warrant consideration. I have asked my 
staff to review the legislation and work with the authors of the bill. 
It is my hope that Congress can enact REIT modernization legislation 
this year.

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