[Congressional Record (Bound Edition), Volume 150 (2004), Part 7]
[Senate]
[Pages 9458-9466]
[From the U.S. Government Publishing Office, www.gpo.gov]




          STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

      By Mr. STEVENS (for himself and Ms. Murkowski):
  S. 2415. A bill to designate the facility of the United States Postal 
Service located at 4141 Postmark Drive, Anchorage, Alaska, as the 
``Robert J. Opinsky Post Office Building,'' to the Committee on 
Governmental Affairs.
  Mr. STEVENS. Mr. President, I send to the desk legislation to 
designate the U.S. Post Office located at 4141 Postmark Drive in 
Anchorage, Alaska after Robert J. Opinsky.
  Bob Opinsky started his career with the Postal Service in 1956 as a 
$1.50-an-hour temporary clerk. Through hard work and dedication, he was 
able to work up the ranks of the Postal Service and become the District 
Manager of the Postal Service in Alaska.
  During his 41 years with the Postal Service, Bob has proven his 
commitment to the Postal Service. In 1964 when the great earthquake hit 
Alaska, the local roads were torn apart and homes and buildings were 
destroyed. In addition, the earthquake created a large hole in the 
Anchorage post office building. However, despite the conditions of the 
Anchorage post office and roads, Bob Opinsky went to work on the Monday 
morning following the Friday quake.
  Bob Opinsky introduced innovative methods to run the Postal Service. 
Under Bob's leadership in 1996, the Postal Service was awarded the 
Green Star Award; an award given in honor of environmental 
responsibility. The Postal Service in Alaska recycled more than 725,000 
pounds of mixed paper and 100,000 pounds of cardboard. Not only was the 
Anchorage recycling program environmentally friendly, the Postal 
Service's efforts reduced their annual disposal cost by about $34,000.
  After 41 years of employment with the Postal Service, Bob Opinsky 
retired from his District Manager position in 1996. Bob has poured his 
heart and soul into the Postal Service. It is only fitting we honor his 
commitment to the Postal Service by dedicating a post office in 
Anchorage, Alaska after him.
                                 ______
                                 
      By Mr. COLEMAN:
  S. 2417. A bill to amend title 38, United States Code, to authorize 
the Secretary of Veterans Affairs to furnish care for newborn children 
of women veterans receiving maternity care, and for other purposes; to 
the Committee on Veterans' Affairs.
  Mr. COLEMAN. Mr. President, the Veterans Administration has taken 
remarkable strides over the years to adapt to the increasing number of 
women veterans using VA facilities. As of 2002, there were 
approximately 1.5 million women in the Armed Forces and 20,000 of these 
women are from Minnesota. Many of these soldiers want to start families 
when they return home and will need to use their VA healthcare coverage 
for obstetrics care.
  Currently, a woman can use her VA coverage for prenatal care, 
delivery and postnatal care. The VA will enter into a contract with a 
hospital to provide these services, but the VA cannot provide any 
coverage for the baby after it is born. The baby is uninsured until a 
hospital social worker or the parents can arrange for private 
healthcare coverage, or in most cases, for the baby to receive Medicaid 
assistance. This period of time, which in some cases can reach 2 weeks, 
is very stressful for all the parties involved.
  Today, I have introduced a bill that will allow the VA to provide 
coverage for veterans' babies for up to 14 days after delivery in a VA 
hospital or VA contract facility. This will help care for these 
children during the time needed to secure long-term coverage outside of 
the VA system.
  This bill will also make it easier for the VA to find willing 
hospitals. Today, many hospitals are reluctant to offer services to an 
insured mother and an uninsured baby. If both the mother and the baby 
were covered by the VA, hospitals in the veterans' local community 
would be more likely to accommodate them. Finally, I am hopeful that 
over time this legislation will save money for VA by eliminating extra 
surcharges and fees to hospitals which currently cover their liability 
for delivering an uninsured baby.
  I firmly believe that veterans who have gone through the traumatic 
experiences of war should not have to worry about the health of their 
newborn babies because of bureaucratic glitches in the system. This 
bill will cut the red tape surrounding the delivery rooms and ease the 
burden on our veterans who want nothing more than to bring children 
into the free society which they helped protect and defend.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2417

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

     SECTION 1. CARE FOR NEWBORN CHILDREN OF WOMEN VETERANS 
                   RECEIVING MATERNITY CARE.

       (a) Authority To Furnish.--Subchapter VIII of chapter 17 of 
     title 38, United States Code, is amended by adding at the end 
     the following new section:

     ``Sec. 1786. Care for newborn children of women veterans 
       receiving maternity care

       ``The Secretary may furnish care to a newborn child of a 
     woman veteran who is receiving maternity care furnished by 
     the Department for up to 14 days after the birth of the child 
     if the veteran delivered the child in a Department facility 
     or in a non-Department facility pursuant to a Department 
     contract for the delivery services.''.
       (b) Clerical Amendment.--The table of sections at the 
     beginning of chapter 17 of such title is amended by adding at 
     the end following new item:

``1786. Care for newborn children of women veterans receiving maternity 
              care.''.
                                 ______
                                 
      By Mr. CAMPBELL:
  S. 2418. A bill to amend chapters 83 and 84 of title 5, United States 
Code, to authorize payments to certain trusts under the Social Security 
Act, and for other purposes; to the Committee on Governmental Affairs.
  Mr. CAMPBELL. Mr. President, I ask unanimous consent that the text of 
the bill be printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2418

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

     SECTION 1. AUTHORIZATION OF CERTAIN PAYMENTS UNDER THE CIVIL 
                   SERVICE RETIREMENT SYSTEM AND THE FEDERAL 
                   EMPLOYEES RETIREMENT SYSTEM TO CERTAIN TRUSTS 
                   UNDER THE SOCIAL SECURITY ACT.

       (a) Civil Service Retirement System.--
       (1) Payments.--Section 8345(e) of title 5, United States 
     Code, is amended--
       (A) by inserting ``(1)'' after ``(e)''; and
       (B) by adding at the end the following:
       ``(2)(A) In this paragraph, the terms `dependent' and 
     `child' have the meanings given under section 8441 (3) and 
     (4), respectively.
       ``(B) Payment due a minor, or an individual mentally 
     incompetent or under other

[[Page 9459]]

     legal disability may be made to a trustee under a trust 
     meeting the requirements of subparagraph (A) or (C) of 
     section 1917(d)(4) of the Social Security Act (42 U.S.C. 
     1396p(d)(4) (A) or (C)), if--
       ``(i) in the case of a minor, the minor is--
       ``(I) a child of the person upon whom the benefit for 
     payment due is based; or
       ``(II) a dependent (who is a child) of the person upon whom 
     the benefit for payment due is based; or
       ``(ii) in the case of an individual mentally incompetent or 
     under legal disability--
       ``(I) the incompetency or disability occurred during the 
     period that the individual was a child or a dependent (who 
     was a child) of the person upon whom the benefit for payment 
     due is based; and
       ``(II) that incompetency or disability has been continuous 
     since that occurrence through the date of the payment due.''.
       (2) Assignability of payments.--Section 8346(a) of title 5, 
     United States Code, is amended--
       (A) by inserting ``(1)'' after ``(a)''; and
       (B) by adding at the end the following:
       ``(2)(A) In this paragraph, the terms `dependent' and 
     `child' have the meanings given under section 8441 (3) and 
     (4), respectively.
       ``(B) Except as provided under paragraph (1), money payable 
     under this subchapter to a minor or an individual mentally 
     incompetent or under other legal disability is not 
     assignable, either in law or equity, except to a trustee 
     under a trust meeting the requirements of subparagraph (A) or 
     (C) of section 1917(d)(4) of the Social Security Act (42 
     U.S.C. 1396p(d)(4) (A) or (C)), if--
       ``(i) in the case of a minor, the minor is--
       ``(I) a child of the person upon whom the benefit for the 
     money payable is based; or
       ``(II) a dependent (who is a child) of the person upon whom 
     the benefit for the money payable is based; or
       ``(ii) in the case of an individual mentally incompetent or 
     under legal disability--
       ``(I) the incompetency or disability occurred during the 
     period that the individual was a child or a dependent (who 
     was a child) of the person upon whom the benefit for the 
     money payable is based; and
       ``(II) that incompetency or disability has been continuous 
     since that occurrence through the date of the payment of the 
     money.''.
       (b) Federal Employees Retirement System.--
       (1) Payments.--Section 8466(c) of title 5, United States 
     Code, is amended--
       (A) by inserting ``(1)'' after ``(c)''; and
       (B) by adding at the end the following:
       ``(2)(A) In this paragraph, the terms `dependent' and 
     `child' have the meanings given under section 8441 (3) and 
     (4), respectively.
       ``(B) Payment due a minor, or an individual mentally 
     incompetent or under other legal disability may be made to a 
     trustee under a trust meeting the requirements of 
     subparagraph (A) or (C) of section 1917(d)(4) of the Social 
     Security Act (42 U.S.C. 1396p(d)(4) (A) or (C)), if--
       ``(i) in the case of a minor, the minor is--
       ``(I) a child of the person upon whom the benefit for 
     payment due is based; or
       ``(II) a dependent (who is a child) of the person upon whom 
     the benefit for payment due is based; or
       ``(ii) in the case of an individual mentally incompetent or 
     under legal disability--
       ``(I) the incompetency or disability occurred during the 
     period that the individual was a child or a dependent (who 
     was a child) of the person upon whom the benefit for payment 
     due is based; and
       ``(II) that incompetency or disability has been continuous 
     since that occurrence through the date of the payment due.''.
       (2) Assignability of payments.--Section 8470(a) of title 5, 
     United States Code, is amended--
       (A) by inserting ``(1)'' after ``(a)''; and
       (B) by adding at the end the following:
       ``(2)(A) In this paragraph, the terms `dependent' and 
     `child' have the meanings given under section 8441 (3) and 
     (4), respectively.
       ``(B) Except as provided under paragraph (1), an amount 
     payable under subchapter II, IV, or V to a minor or an 
     individual mentally incompetent or under other legal 
     disability is not assignable, either in law or equity, except 
     to a trustee under a trust meeting the requirements of 
     subparagraph (A) or (C) of section 1917(d)(4) of the Social 
     Security Act (42 U.S.C. 1396p(d)(4) (A) or (C)), if--
       ``(i) in the case of a minor, the minor is--
       ``(I) a child of the person upon whom the benefit for the 
     amount payable is based; or
       ``(II) a dependent (who is a child) of the person upon whom 
     the benefit for the amount payable is based; or
       ``(ii) in the case of an individual mentally incompetent or 
     under legal disability--
       ``(I) the incompetency or disability occurred during the 
     period that the individual was a child or a dependent (who 
     was a child) of the person upon whom the benefit for the 
     amount payable is based; and
       ``(II) that incompetency or disability has been continuous 
     since that occurrence through the date of the payment of the 
     amount.''.
                                 ______
                                 
      By Mr. PRYOR (for himself and Mr. Baucus):
  S. 2419. A bill to amend the Internal Revenue Code of 1986 to provide 
additional relief for membes of the Armed Forces and their families; to 
the Committee on Finance.
  Mr. PRYOR. Mr. President, our men and women serving in the military 
are the defenders of freedom and security around the world. The special 
role they play demands that they be ``on call'' to serve our Nation at 
points all over the globe.
  The unique nature of their job has resulted in a unique and, I must 
say, very complex compensation package. The various types of 
compensation and benefits oftentimes create an especially difficult 
burden, especially when it comes to filing their tax return.
  Through the years, Congress has periodically passed laws that 
recognize the special needs of our military and to lessen 
administrative burdens on them.
  During consideration of such a bill last year, I approached the 
distinguished chairman of the Senate Finance Committee, Senator Chuck 
Grassley, and ranking member of that committee, Senator Max Baucus, and 
asked them to join me in an effort to get a fresh look at the overall 
picture of how the Tax Code treats our military.
  I was pleased when they agreed to join me in this work, and I was 
delighted to jointly request an expedited study by the GAO. It has been 
an honor to work with them and their staffs throughout this process, 
and I believe our work will produce good things for our military.
  Yesterday, GAO released a report as a result of our request. The 
report raises many interesting findings, but there is one especially 
important issue that demands our immediate attention. Mr. President, I 
want to discuss the problem identified by GAO, and then I will 
introduce a bill to correct the inequity that has been documented.
  The problem identified by GAO is the result of complex interactions 
between the combat zone exclusion under section 112 of the Internal 
Revenue Code and the earned-income tax credit and the child tax credit.
  Under the combat pay exclusion, a very important benefit provided by 
Congress, military pay earned--including basic pay, bonuses, special 
pay and allowances--is excluded from taxable income while members of 
the military are serving in a designated combat zone.
  That is right, Uncle Sam doesn't impose taxes on military pay for 
those serving our country in combat zones--and rightfully so.
  However, income excluded under the combat pay provision is also 
excluded from income for the purpose of computing the earned-income tax 
credit and the child care credit.
  As a result of this, thousands of men and women serving in combat, in 
places such as Iraq, Afghanistan, and other places around the globe, 
will see a reduction or elimination of their earned-income tax credit 
or the child tax credit and, in effect, because of how these interact, 
will lose money. In other words, the Tax Code has the impact of 
penalizing them because they are serving in combat zones. That is the 
opposite effect intended by Congress.
  The GAO report characterizes this result as an ``unintended 
consequence.'' I call it a wrong, and I urge my colleagues to join me 
in fixing this glitch as soon as possible.
  The urgency of this situation is highlighted especially when you 
focus on those of our troops which this affects.
  We are talking about troops who tend to be in combat for more than 6 
months, who are not making much money, who have families to provide for 
and have little or no savings or little or no spouse income.
  I am going to repeat that. We are talking about a clear wrong in the 
Tax Code that takes money away from men and women serving this Nation 
heroically and in dangerous places such as Iraq and Afghanistan.
  The GAO analysis suggests the amount of the tax benefit loss enlisted 
personnel could face is up to $4,500 and $3,200 for officers. This is 
real money, make-or-break money, to many of these families who are 
already under an enormous amount of stress. This money will make a real 
difference and

[[Page 9460]]

we need to get about the business of fixing this problem as soon as 
possible.
  To correct the unfairness of current law, I am introducing the Tax 
Relief for Americans in Combat Act. The bill allows men and women in 
uniform serving in combat to include combat pay for the purpose of 
calculating their earned income tax credit and their child tax credit 
benefits. In other words, they will be able to continue receiving their 
rightful combat pay exclusions while having the ability to take full 
advantage of other tax credits. I urge my colleagues to join me in this 
effort. It will make a real difference for thousands of military 
families across the Nation.
  I thank Liz Liebschultz and Christy Mistr of the Finance Committee 
staff for their advice and counsel in helping me sort through this 
matter in generating this GAO report. They did the work in drafting the 
provisions of this bill to make sure these provisions could be adopted 
by the Senate as soon as possible.
  Also I want to recognize the GAO team which put this report together, 
because they did a lot of work on this: Jim White, Derek Stewart, Lori 
Atkinson, Jennifer Gravelle, John Pendleton, Sonja Ware, and James 
Wozny. They did a great job in preparing this report and I appreciate 
their hard work.
  While we found this tax breakdown in the GAO report, there is also a 
lot of good news in the report regarding the compensation of our 
military personnel and I hope my colleagues will take time to review 
what the GAO says in all the information provided.
  During a time of war, I do not want to lose sight that the Senate 
Armed Services Committee chairman, Senator John Warner of Virginia, and 
the ranking member, Senator Carl Levin of Michigan, are taking care of 
our troops financially.
  One thing we talked about in the Armed Services Committee is 
recruiting and retention. Are we going to be able to meet those two 
objectives for our military? Well, I think today with this bill we can 
send a clear message to our youth and our enlisted personnel that a 
military career is an amazing option, and the compensation is such that 
it can compete with the private sector.
  There is a real problem with our Tax Code that needs to be fixed 
immediately and the good news is, it can be. The bill corrects a 
problem and lets our troops risking life and limb know while they are 
away fighting for us, fighting for freedom and democracy, we will be in 
the Senate fighting for them and fighting for their families.
  I urge my colleagues to consider this legislation and also to 
consider cosponsoring this bill with me.
  I ask unanimous consent that a GAO summary, and the text of the bill, 
be printed in the Record.
  There being no objection, the additional material was ordered to be 
printed in the Record, as follows:

                                    General Accounting Office,

                                       Washington, DC, May 7, 2004
     Subject: Military Personnel: Active Duty Compensation and Its 
         Tax Treatment.

     .Hon. Charles E. Grassley,
     Chairman,
     Hon. Max S. Baucus,
     Ranking Minority Member, Committee on Finance, U.S. Senate,
     Hon. Mark Pryor,
     U.S. Senate.
       The Department of Defense's (DOD) total military 
     compensation package for active duty members consists of both 
     cash and noncash benefits. Since the late 1990s, Congress and 
     the DOD have increased military cash compensation by 
     increasing basic pay and allowances for housing, among other 
     things. Military members also receive tax breaks, which are a 
     part of their cash compensation. Moreover, active duty 
     personnel are offered substantial noncash benefits, such as 
     retirement, health care, commissaries, and childcare. In some 
     cases, these noncash benefits exceed those available to 
     private-sector personnel. DOD relies heavily on noncash 
     benefits because it views benefits as critical to morale, 
     retention, and the quality of life for service members and 
     their families.
       To better understand the military compensation system, you 
     asked us to provide you information on active duty military 
     compensation and its tax treatment. At the outset of this 
     engagement, we agreed to keep you periodically informed of 
     the status of our work. In January 2004, we briefed your 
     staff on our preliminary observations. Because our work 
     identified that the combat zone tax exclusion could impact 
     some service members, you asked us to focus our work on 
     military cash compensation and to do additional work to 
     estimate the effect of the combat zone tax exclusion on 
     service members' compensation. We provided your staff 
     subsequent briefings that estimated the effect of the combat 
     zone exclusion. As requested, we have updated and combined 
     the briefings for this report to (1) summarize active duty 
     cash compensation and describe how military compensation 
     varies at different career points for officers and enlisted 
     members; (2) explain how military pay is taxed and any 
     special tax treatment of military compensation; (3) estimate 
     the effects of interactions between the combat zone exclusion 
     and certain tax credits on military members' compensation; 
     and (4) describe the benefits DOD provides active duty 
     members as well as specific programs available to members 
     that encourage wealth building (see enclosure I). To provide 
     a rough estimate of the number of service members in 2003 who 
     suffered a net tax loss because of the interactions between 
     serving in a combat zone and certain tax credits, we used 
     aggregate data compiled by the Defense Manpower Data Center 
     on the number of members who served in a combat zone in 2003 
     and aggregate data on the percentage of spouses not in the 
     workforce from the 2002 Active Duty Survey. We believe that 
     the data is sufficiently reliable to estimate within a broad 
     range the number of people affected. We conducted our review 
     from October 2003 through April 2004 in accordance with 
     generally accepted government auditing standards.

                            Results in Brief

       The foundation of military cash compensation is what the 
     DOD calls regular military compensation--the sum of basic 
     pay, nontaxable allowances for housing and subsistence, and 
     the associated federal tax savings. Some members also receive 
     additional cash compensation in the form of special pays, 
     incentives, and other allowances. In total, there are over 50 
     of these pays, incentives, and allowances, ranging from 
     reenlistment bonuses to clothing allowances and family 
     separation allowances. The annual amounts of these pays, 
     incentives, and allowances range from a few hundred dollars 
     to thousands of dollars, and some of these are also 
     nontaxable. In general, regular military compensation 
     progresses steadily with pay grade and years of service. For 
     example, a junior enlisted member with 3 years of service 
     might earn around $40,000 in cash compensation, while a 
     senior officer with 22 years of service could earn cash 
     compensation of about $130,000.
       Military service brings with it significant tax advantages. 
     Basic pay and most other pays are generally subject to 
     federal income tax; however, certain allowances are not 
     taxed, such as the basic allowances for housing and 
     subsistence. DOD considers the federal tax advantage as the 
     additional income military members would have to earn in 
     order to receive their current take-home pay if their 
     allowances for housing and subsistence were taxable. In fact, 
     DOD views the federal tax advantage as part of service 
     members' cash compensation when it compares military pay with 
     civilian pay. In addition, pay earned--including basic pay, 
     bonuses, special pays, and allowances--while members are 
     serving in one of the 15 designated combat zones is excluded 
     from taxes.
       The complex interactions between the combat zone exclusion 
     and certain tax credits (principally the Earned Income Tax 
     Credit and the Additional Child Tax Credit) appear to be 
     creating unintended consequences. Specifically, some low-
     income- earning service members who serve in a combat zone 
     are worse off for tax purposes, while some higher-income-
     earning members are better off because they become eligible 
     for a tax credit that is normally targeted to low-income 
     workers. Low-income members with children qualify for 
     refundable tax credits that can not only offset all of their 
     tax liability but can also leave them with payments from the 
     government. The combat zone exclusion can actually cause a 
     reduction or elimination of these payments to some service 
     members. For example, over certain income ranges the amount 
     of Earned Income Tax Credit that a taxpayer earns increases 
     as his or her income increases. Service in a combat zone 
     reduces the amount of earned income that a member reports for 
     tax purposes and, thus, can reduce or eliminate the refunded 
     portion of the member's credit. These members actually suffer 
     a net loss in tax benefits because they receive no offsetting 
     advantage from the exclusion. Our analysis suggests that some 
     of the roughly 430,000 members serving in a combat zone in 
     2003--between 5,000 and 10,000 members in one-earner 
     households--suffered a net loss of tax benefits. Data 
     limitations make it difficult to produce a comprehensive 
     estimate of the number of members who suffered a net loss of 
     tax benefits. In particular, it is more difficult to make a 
     reliable estimate of the number of members with working 
     spouses who had net losses of tax benefits. However, we 
     believe that number is not likely to be much higher than 
     several thousand and could be less than that. Additionally, 
     the number of members losing tax benefits could be larger in 
     2004 depending on the how many service members are in a

[[Page 9461]]

     combat zone and how long they are there. The amount of the 
     tax benefit loss varies considerably, with a maximum of about 
     $4,500 or $3,200, for enlisted and officer members, 
     respectively. In general, the members losing tax benefits 
     tend to be those who are serving in a combat zone longer than 
     6 months; who are in the lower pay grades; who are married 
     with children; and who have little to no investment or 
     spousal income. On the other hand, some other low-income 
     members earned larger earned income tax credits by serving in 
     a combat zone than they otherwise would have. Moreover, it 
     appears that a large number of service members who had 
     incomes exceeding the normal upper limit for Earned Income 
     Tax Credit eligibility and who served in a combat zone for at 
     least 6 months could become eligible to receive that credit 
     as a result of this income exclusion. DOD is aware of service 
     members who are disadvantaged and advantaged by these tax 
     provisions, and it is seeking remedies that would require 
     changing the rules of the tax credits so that income earned 
     in a combat zone would not be excluded when calculating 
     eligibility for the tax credits.
       Benefits are a substantial portion of noncash military 
     compensation. DOD offers a wide range of benefits to active 
     duty members, including health care, retirement, education 
     assistance, and installation-based benefits--that is, 
     services found on military installations, such as 
     commissaries and child care. While the value of benefits to 
     members varies depending on the members' needs, the cost to 
     provide such benefits is substantial. Some of the benefits 
     DOD provides encourage wealth building over a service 
     member's career. Military retirement--a lifetime annuity 
     generally provided to members who serve 20 years or more--is 
     one of the primary wealth-building programs available to 
     military members. However, DOD estimates that less than half 
     of officers and only about 15 percent of enlisted members 
     will become eligible for retirement. In addition, other 
     savings programs are offered, such as the Thrift Savings Plan 
     and the Savings Deposit Program. Since 2001, service members 
     can contribute a percentage of their basic pay, before taxes, 
     to be invested in one or more of the specific funds offered 
     through the Thrift Savings Plan; about 21 percent of the 
     active duty military participate. Service members deployed to 
     a combat zone or other qualified areas can contribute to the 
     Savings Deposit Program, earning a guaranteed 10 percent 
     interest on their investment. However, less than 1 percent of 
     the active duty force participates. Service members may also 
     be eligible to participate in the Department of Veterans 
     Affairs no-money down, mortgage-backed loan program. 
     Moreover, military members can take advantage of a number of 
     wealth-building tax provisions available to citizens, such as 
     deductions for mortgage interest and tax credits for elective 
     retirement accounts contributions.

                 Matter for Congressional Consideration

       If the Congress wishes to remedy the unintended tax 
     consequences associated with the combat zone exclusion, it 
     should consider revising the rules of the Earned Income Tax 
     Credit and the Additional Child Tax Credit with respect to 
     income earned in a combat zone.

                         Scope and Methodology

       Our audit work focused on military cash compensation and 
     its tax treatment for active duty service members. To 
     summarize the components of active duty military members' 
     compensation, we reviewed policies, publications, and 
     regulations governing military compensation. We interviewed 
     officials from the Office of the Secretary of Defense and the 
     Defense Manpower Data Center. We compiled 2003 data for basic 
     pay tables, basic allowances for housing and subsistence 
     rates, special pay amounts, incentive pay amounts, and 
     allowance pay amounts. To describe how military compensation 
     varies at different career points for officers and enlisted 
     members, we created notional junior and senior enlisted 
     service members and officers. We assigned these hypothetical 
     service members typical years of service for their pay 
     grades, locations across the United States, numbers of 
     dependents, and special pays typical of their pay grades and 
     locations. We discussed our examples with officials from the 
     Office of the Under Secretary of Defense for Personnel and 
     Readiness to ensure that our profiles were reasonable. We 
     identified benefits offered to active duty military members 
     and some associated values by reviewing past GAO reports, DOD 
     documents, and the fiscal year 2002 DOD Actuarial Valuation 
     Report.
       To explain how military pay is taxed and any special tax 
     treatment of military compensation, we reviewed DOD policies 
     and regulations and the Internal Revenue Services' 2003 Armed 
     Forces Tax Guide publication. To estimate the federal tax 
     advantage of the exclusion of the housing and subsistence 
     allowances from taxation, we estimated the tax liability for 
     hypothetical members according to current tax rules as if the 
     members' housing and subsistence allowances were taxable. We 
     present the pre-tax value of this tax advantage--that is, the 
     additional income the members would have to earn in order to 
     receive their current take home pay if their allowances were 
     taxable.
       To estimate certain effects of the combat zone exclusion on 
     military members' taxes, we estimated the number of members 
     negatively affected and the number who may become eligible 
     for Earned Income Tax Credit by the combat zone tax 
     exclusion. For more detailed information on how we estimated 
     the combat zone effect, see enclosure II.
       To describe programs available to members that encourage 
     wealth building, we reviewed documents and interviewed 
     officials from the Office of the Secretary of Defense and the 
     Department of Veterans Affairs. In addition, we also reviewed 
     other documents to identify tax provisions that encourage 
     wealth building for citizens.

                            Agency Comments

       In providing oral comments on a draft of this report, DOD 
     representatives from the Office of the Under Secretary of 
     Defense for Personnel and Readiness stated that they 
     generally concurred with the content of the report. Technical 
     comments were incorporated as appropriate. DOD officials told 
     us that they have been seeking to remedy the unintended tax 
     consequence related to the combat zone tax exclusion. We also 
     received comments on the tax-related sections of our draft 
     from Internal Revenue Service (IRS). In providing oral 
     comments, IRS representatives from the Office of the 
     Commissioner, Wage and Investment Division and the Office of 
     Legislative Affairs said that the IRS could administer a 
     change in law that would include combat pay in earned income 
     for purposes of computing eligibility for the Earned Income 
     Tax Credit. Since earned income used for computing Earned 
     Income Tax Credit is not reported anywhere on the IRS form 
     1040 or Schedule EIC, IRS would modify the Earned Income Tax 
     Credit worksheets and related instructions to account for the 
     combat zone pay. In addition, they would work with DOD to 
     develop a process for identifying and processing returns from 
     taxpayers who would be affected by this provision. The 
     representatives noted that, although at the outset the 
     process would likely be primarily manual, IRS would explore 
     options for automation. The IRS officials also provided 
     technical comments relating to the child tax credit, which we 
     incorporated as appropriate, and made the point that changes 
     to the treatment of income earned in a combat zone for the 
     purposes of the two credits could affect other tax benefits, 
     such as the dependent care credit and the exclusion for 
     employer-provided benefits under a dependent care assistance 
     program, depending on the specific wording of the changes. We 
     also spoke to the Department of Treasury staff about the tax-
     related sections of our briefing documents and incorporated 
     their technical comments as appropriate.
       As arranged with your office, unless you publicly announce 
     its contents earlier, we plan no further distribution of this 
     report until 30 days from its issue date. At that time, we 
     will send copies of this report to the Secretary of Defense 
     and the Commissioner of the Internal Revenue Service. We will 
     also make copies available to appropriate congressional 
     committees and to other interested parties on request. In 
     addition, the report will be available at no charge on our 
     Web site at http://www.gao.gov.
       If you or your staff have any questions about this report, 
     please contact Derek Stewart, (202) 512-5559, or James White, 
     (202) 512-5594, or e-mail them at [email protected] or 
     [email protected], respectively. Key contributors to this report 
     were Lori Atkinson, Jennifer Gravelle, John Pendleton, Sonja 
     Ware, and James Wozny.
     Derek B. Stewart,
       Director, Defense Capabilities and Management.
     James R. White,
       Director, Strategic Issues.
                                  ____


                                S. 2419

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

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Tax Relief for Americans in 
     Combat Act''.

     SEC. 2. EARNED INCOME INCLUDES COMBAT PAY.

       (a) Child Tax Credit.--Section 24(d)(1) of the Internal 
     Revenue Code of 1986 (relating to portion of credit 
     refundable) is amended by adding at the end the following new 
     sentence: ``For purposes of subparagraph (B), any amount 
     excluded from gross income by reason of section 112 shall be 
     treated as earned income which is taken into account in 
     computing taxable income for the taxable year.''.
       (b) Earned Income Tax Credit.--Subparagraph (B) of section 
     32(c)(2) of the Internal Revenue Code of 1986 (relating to 
     earned income) is amended--
       (1) by striking ``and'' at the end of clause (iv),
       (2) by striking the period at the end of clause (v) and 
     inserting ``, and'', and
       (3) by adding at the end the following:
       ``(vi) any amount excluded from gross income by reason of 
     section 112 shall be treated as earned income.

     Any taxpayer may elect to not apply clause (vi) with respect 
     to any taxable year ending

[[Page 9462]]

     after the date of the enactment of such clause and before 
     2005.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after the date of the 
     enactment of this Act.

  Mr. BAUCUS. Mr. President, I rise today to join my good friend from 
Arkansas, Senator Pryor, in introducing the Tax Relief for Americans in 
Combat Act. I applaud Senator Pryor for his commitment to our Armed 
Forces. The study and the bill that he has unveiled today provide just 
one example of that commitment.
  Last year, Senator Pryor asked me to join him in requesting a study 
on the compensation received by our military personnel, and the tax 
treatment of this compensation. This study has been completed. Many of 
the results are encouraging. But the study reveals one significant 
glitch in the tax law that is hurting many of our low-income military 
personnel.
  For the most part, the compensation packages received by our military 
personnel are competitive with the private sector. And the Tax Code 
provides many incentives for military service. But as the GAO study 
reveals, some low-income military personnel are losing out because they 
have been called to serve in a combat zone.
  Now this just does not make sense. Why would we penalize those 
military personnel who are serving our country in Afghanistan, Iraq, 
and elsewhere around the world?
  Let me explain. Under current law, compensation earned by military 
personnel while they are serving in a combat zone is exempt from income 
tax. This provides most military personnel in these areas with a very 
significant tax benefit. Because of a glitch in the tax law, however, 
certain individuals may actually end up losing money because of this 
exemption.
  This is because the law is preventing them from receiving the Earned 
Income Tax Credit and Refundable Child Tax Credit that they would 
otherwise been entitled to. These credits are based on earned income, 
and the law says that combat zone income does not qualify as earned 
income. GAO has found that as many as 10,000 men and women serving in 
combat will see a reduction or elimination of their EITC or child 
credit, they will, in effect, lose money.
  This bill would fix that glitch in the law, and provide these 
individuals with the tax credits to which they are entitled.
  Our brave men and women in the Armed Forces put their lives on the 
line for our Nation every day. It is the least we can do to ensure that 
they are being properly compensated and receiving all the tax benefits 
that are due to them under the law. Given the ongoing conflict in Iraq 
and the war on terrorism, it is more important than ever that we 
vigilantly oversee the tax system to ensure that our troops are being 
treated fairly.
  I applaud Senator Pryor for taking the lead. I am proud to join him 
in introducing legislation to correct these errors and ensure our 
service men and women receive the proper level of tax relief they 
deserve. Serving our country is one of the most honorable services a 
citizen can provide. Now it is up to us to provide them with the tax 
compensation they are due.
  I hope that the Senate will take up and pass this bill at the 
earliest appropriate time, and make sure that our men and women in 
uniform receive the tax relief to which they are entitled.
                                 ______
                                 
      By Mr. GRAHAM of Florida:
  S. 2420. A bill to amend title XXI of the Social Security Act to make 
all uninsured children eligible for the State children's health 
insurance program, to encourage States to increase the number of 
children enrolled in the Medicaid and State children's health insurance 
programs by simplifying the enrollment and renewal procedures for those 
programs, and for other purposes; to the Committee on Finance.
  Mr. GRAHAM of Florida. Mr. President, I rise to introduce the State 
Children's Health Insurance Program, SCHIP, Expansion Act of 2004. This 
Congress passed the Children's Health Insurance Program in the late 
1990s. It has been a great success. There are 5 million American 
children today who have quality medical insurance because of this 
program; without this program there would be another 5 million 
Americans uninsured.
  The expansion of this legislation in 2004 would allow States to 
expand health coverage under the SCHIP program to all uninsured 
children, regardless of their family income. It would also provide 
critical funding for this important program.
  This week is Cover the Uninsured Week. This is a collaborative effort 
of the Robert Wood Johnson Foundation and many other organizations 
highlighting the vast number of uninsured in this country and the need 
to find a solution.
  Yesterday, I introduced legislation with Senators Daschle and Kennedy 
which will call for the Nation to cover all Americans by the year 2006. 
The goal of universal coverage is one that I believe every Member of 
this Senate shares. Based on the experience of the last decade, it is 
my judgment that the road to achieving that goal of full coverage 
begins with a first step. We have not taken a significant first step on 
the road to closing the gap now in over 5 years. In that 5-year period, 
we have seen a dramatic increase in the number of uninsured Americans, 
including uninsured children.
  We could take that first step by providing health coverage for all 
children. That step will be a large one.
  Today, there are an estimated 9 million American children under the 
age of 19 who are uninsured for their health care. Over 640,000 of 
those children live in my home State of Florida. There are other large 
groups of uninsured Americans, however, and one might ask, why pick out 
children from this large group of uninsured Americans? The goal is to 
cover all Americans. The reality is the effort to accomplish that 
objective in one giant step has proven to be without success. Uninsured 
children, in my judgment, represent the group that we should start 
with, for the following reasons.
  We know this about uninsured children: They are four times more 
likely to delay seeking care than insured children, and they are five 
times more likely than insured children to use an emergency room for 
regular medical care. Lack of timely treatment can turn a simple health 
problem into a serious childhood illness. Covering children is cost 
effective, and more important, it improves the lives of children. It 
can, in fact, save the lives of children. Let me give two common 
examples.
  Ear infections are a very common affliction of young children and 
easily treated with an inexpensive antibiotic. However, if that ear 
infection is not diagnosed and not treated, the infection can mature 
into deafness and learning disabilities. What happens when an 
unvaccinated child is struck with bacterial meningitis? Failure to 
diagnose and treat this contagious disease with an antibiotic can lead 
to brain damage, even to death.
  Our Nation's publicly funded health programs play a critical role in 
providing access to care in order to prevent such occurrences. As I 
said in the beginning, SCHIP has made an enormous difference in the 
health and lives of over 5 million American children, many of whom are 
from working families.
  We know 8 out of 10 of the currently uninsured Americans come from a 
family in which one or both parents are working.
  Despite the success of SCHIP, States have taken to such tactics as 
capping enrollment and placing limits on eligibility and benefits. I am 
sorry to have to report some of the things that have happened in my 
State, not because they are peculiar, but because they are increasingly 
representative of what is happening in States across America.
  Until recently, Florida had amassed a waiting list of children who 
were eligible for the SCHIP program but who were not being served, 
primarily because of limitations on State funds to match the Federal 
funds. We had a waiting list of nearly 100,000 Florida children. 
Although most of these children have since been temporarily enrolled, 
the Florida SCHIP program has eliminated all outreach activities; that

[[Page 9463]]

is, those activities that had informed families about the availability 
of these programs have been eliminated. Florida has also restricted 
eligibility for children in families whose employers offer any kind of 
dependent coverage, regardless of its cost.
  If there is one thing we know, it is that one of the factors that is 
fueling the increase in the numbers of uninsured Americans is that even 
when employers provide at least the appearance of health insurance 
coverage but that coverage is so expensive that it amounts to more than 
5, sometimes almost 10 percent of that family's income, and as 
available as it may appear, in real economic terms it is not available. 
Yet in my State, I am sad to report that a child who has fallen into 
that circumstance will not any longer be considered eligible for the 
SCHIP program.
  Florida has eliminated its SCHIP waiting list. No one in the future 
will ever say that Florida has nearly 100,000 children who are eligible 
for but not receiving SCHIP coverage because there will not be any list 
of children who are waiting for their opportunity to be covered. This 
is a means by which knowledge of the number of uninsured children who 
are denied access to the program will be denied to the people of 
Florida, as will, therefore, their ability to influence public policy 
to increase the health care coverage of the children of Florida.
  What would the legislation I introduce today do to address these 
problems? First, it would allow States to expand health coverage to 
uninsured children, regardless of the income, so that no child goes 
without necessary care.
  Second, it would provide Federal financial support to assure the 
long-term stability of the SCHIP program. To meet congressional budget 
limits, Federal funding for SCHIP declined by over $1 billion a year, 
beginning in the fiscal year 2002, and running through the current 
fiscal year of 2004. That reduction, which is referred to as the CHIP 
dip, has brought the Federal funds available for children's health 
insurance from $4 billion annually down to $3 billion.
  The consequence of this is that many States which had a fully 
operational SCHIP program--that is, they were using the full amount of 
the pre-2002 Federal funds--are now facing another component of their 
fiscal crisis.
  The SCHIP Expansion Act would restore Federal funding allotments to 
their pre-2002 level, assurance that States could continue to cover 
more uninsured children.
  The legislation would also invest additional resources in SCHIP, 
allowing States that are currently using all of their Federal funds to 
expand their programs, providing relief to many States that anticipate 
a shortage of funding in the near future.
  The Center on Budget and Policy Priorities estimates that by 2007, on 
the current course, 39 States will have spent their entire funding 
allotments. Additional funds are necessary to allow these States to 
continue to reach new currently uncovered, uninsured children. Many of 
our uninsured children are, in fact, already eligible for coverage 
under SCHIP, but where you have limitations in Federal or State funds, 
they are not enrolled. Effective outreach and streamlined enrollment 
are keys to improving coverage.
  SCHIP expansion will help States cover more children by increasing 
funds for outreach in States. That will simplify the enrollment 
process.
  Finally, this legislation will prohibit States that have not 
exhausted all available Federal funds from capping enrollment in their 
SCHIP program. Where enrollment is capped, children are put on a 
waiting list--if the State has not done what Florida has done, which is 
to eliminate the waiting list, and they will go without coverage. 
Without coverage, their parents must choose between paying for rent and 
paying for medicine for their sick children.
  Have we not reached a sad state of affairs in this Nation when many 
of our elder citizens have to make a choice between paying for 
prescription drugs or eating a nutritious meal three times a day, and 
that many of our parents of young children who are sick and without 
medical insurance must make a choice between paying the rent or paying 
for the medicine for their child?
  My bill assures no family faces such a choice as a result of an 
arbitrary enrollment tax. States which choose to participate in SCHIP 
must be willing to participate fully and cover as many children as they 
can with the funds they have available. There is no reason in a nation 
of unsurpassed wealth and of unsurpassed medical talent that any child 
should be without health insurance coverage.
  Investment in proven effective public programs is imperative.
  Although our overall goal is universal coverage, assuring that all 
children have access to quality health care is a crucial first step. In 
my opinion, steps 2 and 3 should be to cover the working poor and the 
early retirees. These steps won't achieve the goal of full coverage 
even in conjunction with the full coverage of children, but they will 
significantly close the gap of those Americans today who are without 
health coverage.
  The SCHIP expansion program represents a serious and long overdue 
commitment to expanding coverage for the most vulnerable in our 
society, our young boys and girls. This measure has the support of the 
Children's Defense Fund, Catholic Charities USA, the Association of 
Maternal and Child Health Programs, and Families USA.
  I ask unanimous consent that a letter of support be printed in the 
Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                       Association of Maternal and


                                        Child Health Programs,

                                     Washington, DC, May 13, 2004.
     Hon. Bob Graham,
     U.S. Senate,
     Washington, DC.
       Dear Senator Graham: The Association of Maternal and Child 
     Health Programs (AMCHP) supports your efforts to ensure that 
     children have access to health care coverage through the 
     State Children's Health Insurance Program (SCHIP). All 
     children deserve quality health care.
       The SCHIP Expansion Act of 2004 highlights the vital 
     importance of the SCHIP program in assuring the health of our 
     nation's children. The bill provides states with financial 
     incentives to continue to expand the number of children 
     covered by SCHIP. At the same time, the bill prevents states 
     from rolling back coverage by capping enrollment.
       AMCHP is a national, nonprofit organization that represents 
     state public health leaders administering family health 
     programs. These family health programs serve over 27 million, 
     children and youth, including almost 18 million children. Our 
     members serve insured, underinsured, and uninsured women, 
     children and their families.
       Thank you again for your leadership on this important issue 
     and we look forward to working with you to address the needs 
     of the 8 million uninsured children in this country.
           Sincerely,
                                                 Deborah Dietrich,
                         Director, Center for Policy and Advocacy.

  Mr. GRAHAM of Florida. I call upon this Congress to act and to act 
this year to pass this important legislation, and to remove from the 
rolls of the uninsured for health coverage Americans, at least those 
most fragile and vulnerable, those we love the most, our children.
                                 ______
                                 
      By Mr. KENNEDY:
  S. 2421. A bill to modernize the health care system through the use 
of information technology and to reduce costs, improve quality, and 
provide a new focus on prevention with respect to health care; to the 
Committee on Health, Education, Labor, and Pensions.
  Mr. KENNEDY. Mr. President, the Health Care Modernization, Cost 
Reduction, and Quality Improvement Act addresses three serious and 
related problems in our health care system that affect every American 
family: Health care costs are too high and are rising too rapidly. The 
quality of care received by too many patients is well below the 
standard that we are capable of achieving. In fact, the gap between the 
care we actually provide and the care we should be providing is so 
great that the prestigious Institute of Medicine has referred to it as 
a ``quality chasm.'' Our system lavishes funds on sickness care and 
neglects the health promotion and disease prevention activities that 
are the most effective

[[Page 9464]]

ways of reducing health costs and assuring good health for as many of 
our people as possible.
  The legislation we are introducing is an effective way to modernize 
and improve the health care system, by using modern information 
technology, by paying for value and results and not simply for 
procedures performed or patients admitted to hospitals, and by focusing 
on improving quality and preventing disease.
  Controlling the soaring cost of health care is essential. In the year 
2000, health insurance premiums grew 8 percent--two and a half times 
the cost of living. In 2001, premiums went up 11 percent--six times the 
Consumer Price Index. They went up 13 percent in 2002, and 14 percent 
in 2003--almost eight times the cost of living increase. By any 
standard, increases like that are unsustainable.
  We have to bring these costs under control--but there is a right way 
and a wrong way to do it. Arbitrary cutbacks for hard-pressed hospitals 
and physicians are the wrong remedy.
  With emergency rooms bursting at the seams, nursing shortages 
threatening the quality of care, and physicians forced to spend less 
time with more patients, we have an obligation to all our health 
providers as well. They're the backbone of our health care system, and 
we have an obligation to help them provide the quality care that every 
patient deserves.
  Fortunately, the right way to control costs is also the right way to 
achieve higher quality care. It's based on an emerging consensus of 
health experts and practitioners. It involves four fundamental 
principles--using information technology, paying for results, improving 
quality, and investing in prevention.
  The gap is vast and growing between information technology and the 
current practice of medicine. Health care in America is the best in the 
world, but it is also one of the least efficient industries in America. 
We spend a staggering $480 billion a year on administration alone--more 
than 30 cents of every dollar spent on care. Over a quarter of all 
personnel in the health care system today are performing administrative 
tasks, not providing care.
  The potential savings through modern technology are immense. 
Transactions in health care cost $12 to $25 apiece. Brokers and bankers 
used to have similar costs, but now, a transaction in these industries 
costs less than one cent.
  Information technology can also improve the quality of care, at the 
same time it reduces costs. Automated patient record-keeping can help 
bring real coordination to what is often a frighteningly fragmented 
health care system.
  Today, for one in five patients with significant health problems, 
various health professionals order duplicate tests and procedures. One 
in four patients arrive for a doctor's appointment and find that needed 
test results or records are not available. Information technology can 
end this waste of time and resources and also prevent the errors that 
reduce quality. Automated prescribing, for example, has reduced errors 
by 95 percent, and reduced hospital costs by an amazing 13 percent. 
It's time to end the disconnect between modern health care and modern 
information technology, and the savings will be immense.
  The gap between the best standard of care and the care that too many 
patients receive is staggering. A quarter of all breast cancer patients 
receive substandard care. A third of all patients diagnosed with high 
blood pressure receive substandard care. Half of asthma patients 
receive substandard care. Sixty percent of patients with pneumonia 
receive substandard care. Almost 80 percent of patients with a hip 
fracture receive substandard care.
  The Midwest Business Group on Health estimates that poor quality care 
costs employers $2,000 a worker every year. Improving quality can cut 
costs dramatically. But more important, it can reduce unnecessary 
suffering. For patients and their families, good quality care can truly 
mean the difference between life and death, and between disability and 
health.
  One of the highest barriers to improving the quality of care is the 
backward incentive system embedded in the way we pay for care. We need 
to start rewarding the quality care by paying for results, and not just 
for the number of procedures performed or the number of hospital 
admissions. Too often, the incentives today are geared to doing more--
not doing better. It makes no sense that doing better today can 
actually result in even greater financial hardship for health care 
institutions. If hospitals organize patient-tracking, home visits, and 
patient education to improve care for chronic diseases, they can reduce 
hospitalization dramatically. But the hospitals won't get paid much, if 
anything, for these improvements--and they will no longer receive the 
large reimbursements they would otherwise receive for inpatient care. 
Use of doctors specially trained to manage hospital intensive care 
units has been shown to reduce costs and improve outcomes. But fewer 
days in the ICU mean lower revenues for hospitals. That's wrong, and we 
need to correct it.
  Hospitals in Boston have already negotiated terms with insurers under 
which they are paid for results, rather than days of care. Some 
business associations, such as the Leapfrog Group, have begun to make 
quality standards a condition for participation in their insurance 
plans. the Department of Health and Human Services is testing the use 
of incentive payments to hospitals that meet specific quality 
standards. These steps are hopeful, but we need to make payment for 
results the rule, rather than the exception, in all aspects of our 
health care system.
  Another key step is to assure that the typical standard of care comes 
much closer to the best standard of care. We need to do far more to see 
that what we know how to do for patients is actually what is done.
  Opportunities are immense for improvements by targeting specific 
diseases that have high incidence, high costs, and high impact on 
individuals and families. Diabetes, for example, afflicts 17 million 
Americans. Patients with the disease account for one in ten dollars of 
overall health expenditures and one in four dollars of expenditures by 
Medicare. By using proven methods of prevention and treatment, we can 
save 10 million Americans from diabetes-related amputations, 
disability, or blindness during their lives--and save more than 50 
billion dollars a year as well.
  Stroke is another example of the huge gap between what we could do 
and what we actually do. Stroke is the third leading cause of death and 
one of the major causes of disability. It strikes nearly 750,000 
Americans each year. The economic cost is also staggering. The United 
States spends almost $50 billion a year in caring for persons who have 
suffered a stroke. Appropriate, timely intervention with clot-
dissolving drugs has been shown to reduce disability and death by 55 
percent but only three percent of patients receive the needed 
treatment.
  Chronic illnesses are major costs in the current system. Medicare 
beneficiaries with three or more chronic conditions account for almost 
90 percent of Medicare spending. Well-organized care for patients with 
chronic conditions such as congestive heart failure, diabetes, asthma, 
and depression produce significant reductions in costs and significant 
improvements in outcomes. But only a fraction of patients with chronic 
conditions have the opportunity to benefit from such treatment.
  Finally, to cut costs and promote quality, we can do much more to 
stop illness before it starts. Health promotion and disease prevention 
must be central to our health system as hospital and physician care. 
Four hundred thousand Americans require medical treatment every year 
for diseases that are fully preventable by vaccination. Lack of 
exercise and poor diet cost almost $80 billion a year because of 
increased heart disease, cancer, and diabetes.
  The legislation being introduced today is a recipe for a peaceful 
revolution in the way health care in the United States is delivered. 
Building on a growing expert consensus, it provides

[[Page 9465]]

a blueprint for a better health care system that will be lower in cost, 
higher in quality, and more closely oriented toward prevention.
  To assure that modern information technology will be fully utilized 
in health care, the legislation sets a goal of full implementation of a 
broad-based system of electronic medical records and automated bill-
paying. It authorizes grants, loans and loan guarantees for health 
providers to install and implement clinical information systems that 
meet national technical standards for parameters such as security and 
interoperability.
  The bill also offers larger reimbursements for providers who 
implement these types of information systems. Over a period of time, it 
reduces payments for large health care facilities that fail to do so. 
The legislation also encourages the use of information technology to 
reduce the administrative costs, by requiring insurance companies to 
adopt the same types of computerized transaction-processing systems 
that are the norm in other industries.
  In these ways, the legislation begins the needed effort to enable the 
health care system to become a system that pays for value, rather than 
solely for procedures performed or illnesses treated. The Secretary of 
HHS is required to set quality standards for providers of services. 
Public and private payers will be required, through their reimbursement 
procedures, to reward the attainment of these quality standards, and 
are permitted to reduce reimbursements to providers who fail to meet 
the standards.
  When a provider of services believes it can provide higher quality 
care at lower cost, but feels that existing reimbursement procedures 
will not fairly recognize these innovations, payers are required to 
enter into good faith negotiations with providers to reach agreement on 
an alternative payment system. The legislation also has special 
provisions for payment for chronic care services in recognition of the 
special role of coordination of care, patient education, tracking, and 
follow-up in achieving quality care for individuals with chronic 
diseases.
  Finally, the legislation contains a number of important initiatives 
to improve the quality of care and strengthen health promotion and 
disease prevention. These include the establishment of a National 
Quality Council, and specific initiatives on diabetes, stroke, 
arthritis, nutrition, exercise, adult oral health, adult immunizations, 
and the provision of culturally and linguistically appropriate care for 
patients whose primary language is not English.
  America's health care system cannot continue to lurch from crisis to 
crisis. Our people deserve affordable care, and when illness strikes, 
they deserve the best care our system can provide. This legislation 
lays out a number of important steps to achieve this objective, and I 
look forward to working with my colleagues in Congress and the broader 
health community to achieve the important goals we share.
                                 ______
                                 
      By Mr. SMITH (for himself and Mr. Conrad):
  S. 2422. A bill to amend the Internal Revenue Code of 1986 to allow 
certain modifications to be made to qualified mortgages held by a REMIC 
or a grantor trust; to the Committee on Finance.
  Mr. SMITH. Mr. President, I rise today to introduce the Real Estate 
Mortgage Investment Conduit Modernization Act. I am pleased to join my 
colleague and friend, Senator Conrad, in introducing this legislation 
to accelerate economic growth for every American community.
  A Real Estate Mortgage Investment Conduit (REMIC) is a tax vehicle 
created by Congress in 1986 to support the housing market and 
investment in real estate by making it simpler to issue real estate-
backed securities.
  By pooling real estate loans into mortgage backed securities, REMICs 
offer residential and commercial real estate borrowers access to large 
pools of capital that would not otherwise be available. REMICs allow 
commercial banks and other lenders to sell their loans in the capital 
markets, thus freeing up assets for additional lending and investments. 
Because they contribute to the efficiency and liquidity of the U.S. 
real estate markets, REMICs help to minimize the costs of residential 
and commercial real estate borrowing and to spur real estate 
development and rehabilitation.
  REMICs play a critical role in providing capital for residential and 
commercial mortgages. As of September 30, 2003, the value of single-
family, multi-family and commercial-mortgage backed REMICs outstanding 
was over $1.2 trillion. While the current volume of REMIC transactions 
reflects their important role in this market, certain changes to the 
tax code will eliminate impediments and unleash even greater potential. 
Current rules that govern REMICs often prevent many common loan 
modifications that facilitate loan administration and ensure repayment 
of investors.
  The legislation that created REMICs has not been updated in nearly 20 
years. Our legislation will update the REMIC provisions of the tax 
code. These proposed changes are simple, non-controversial, and will 
greatly enhance the ability of commercial real estate interests to 
obtain capital for financing new construction projects.
  These changes would ultimately benefit the entire real estate 
community, including local real estate owners, builders, construction 
managers, the engineering, architectural and interior design firms that 
provide real estate services, as well as firms that offer services to 
support real estate sales. The changes would accelerate the creation of 
jobs and economic activity throughout the U.S., and would have a 
positive effect on federal and state tax revenues. By encouraging 
property renovations and expansions, these changes would strengthen the 
local property tax base in towns and cities across America.
  We urge our colleagues to work with us to enact this legislation to 
spur economic and employment growth in real estate, the construction 
trades, and the building materials industry.
  I ask unanimous consent that the text of the legislation be printed 
in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2422

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

     SECTION 1. CERTAIN MODIFICATIONS PERMITTED TO QUALIFIED 
                   MORTGAGES HELD BY A REMIC OR A GRANTOR TRUSTS.

       (a) Qualified Mortgages Held by a REMIC.--
       (1) In general.--Paragraph (3) of section 860G(a) of the 
     Internal Revenue Code of 1986 is amended by adding at the end 
     the following new subparagraph:
       ``(C) Qualified modifications.--
       ``(i) In general.--An obligation shall not fail to be 
     treated as a qualified mortgage solely because of a qualified 
     modification of such obligation.
       ``(ii) Qualified modification.--For purposes of this 
     section, the term `qualified modification' means, with 
     respect to any obligation, any amendment, waiver, or other 
     modification which is treated as a disposition of such 
     obligation under section 1001 if such amendment, waiver or 
     other modification does not--

       ``(I) extend the final maturity date of the obligation,
       ``(II) increase the outstanding principal balance under the 
     obligation (other than the capitalization of accrued, unpaid 
     interest),
       ``(III) result in a release of an interest in real property 
     securing the obligation such that the obligation is not 
     principally secured by an interest in real property 
     (determined after giving effect to the release), or
       ``(IV) result in an instrument or property right which is 
     not debt for Federal income tax purposes.

       ``(iii) Defaults.--Under regulations prescribed by the 
     Secretary, any amendment, waiver, or other modification of an 
     obligation which is in default or with respect to which 
     default is reasonably foreseeable may be treated as a 
     qualified modification for purposes of this section.
       ``(iv) Defeasance with government securities.--The 
     requirements of clause (ii)(III) shall be treated as 
     satisfied if, after the release described in such clause, the 
     obligation is principally secured by Government securities 
     and the amendment, waiver, or other modification to such 
     obligation satisfies such requirements as the Secretary may 
     prescribe.''.
       (2) Exception from prohibited transaction rules.--
     Subparagraph (A) of section

[[Page 9466]]

     860F(a)(2) of such Code is amended by striking ``or'' at the 
     end of clause (iii), by striking the period at the end of 
     clause (iv) and inserting ``, or'', and by adding at the end 
     the following new clause:
       ``(v) a qualified modification (as defined in section 
     860G(a)(3)(C)).''.
       (3) Conforming amendments.--
       (A) Section 860G(a)(3) of such Code is amended--
       (i) by redesignating clauses (i) and (ii) of subparagraph 
     (A) as subclauses (I) and (II), respectively,
       (ii) by redesignating subparagraphs (A) through (D) as 
     clauses (i) through (iv), respectively,
       (iii) by striking ``The term'' and inserting the following:
       ``(A) In general.--The term'', and
       (iv) by striking ``For purposes of subparagraph (A)'' and 
     inserting the following:
       ``(B) Tenant-stockholders of cooperative housing 
     corporations.--For purposes of subparagraph (A)(i)''.
       (B) Section 860G(a)(3)(A)(iv) of such Code (as redesignated 
     by subparagraph (A)) is amended--
       (i) by striking ``clauses (i) and (ii) of subparagraph 
     (A)'' and inserting ``subclauses (I) and (II) of clause 
     (i)'', and
       (ii) by striking ``subparagraph (A) (without regard to such 
     clauses)'' and inserting ``clause (i) (without regard to such 
     subclauses)''.
       (b) Qualified Mortgages Held by a Grantor Trust.--Section 
     672 of the Internal Revenue Code of 1986 is amended by adding 
     at the end the following new subsection:
       ``(g) Special Rule for Certain Investment Trusts.--A 
     grantor shall not fail to be treated as the owner of any 
     portion of a trust under this subpart solely because such 
     portion includes one or more obligations with respect to 
     which a qualified modification (within the meaning of section 
     860G(a)(3)(C)) has been, or may be, made under the terms of 
     such trust.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to amendments, waivers, and other modifications 
     made after the date of the enactment of this Act.

  Mr. CONRAD. Mr. President, I am happy to join my friend and Finance 
Committee colleague, Mr. Smith, to introduce The Real Estate Mortgage 
Investment Conduit Modernization Act. This is a measure that will help 
expand access to capital for real estate investment across the nation 
and especially in rural areas like my home State of North Dakota.
  Growth in the commercial real estate market over the last decade has 
been fueled, in part, by a strong and growing secondary market for 
commercial mortgages. That market is structured through real estate 
mortgage investment conduits (REMICs). Created by Congress in 1986, 
REMICs are critically important to U.S. real estate finance, providing 
new capital and expanded access to that capital. They have proven to be 
a cost-effective method for the private sector to create pools of 
capital that are made available across the nation.
  It is time to modernize the REMIC law because many borrowers have 
been stymied in attempts to make improvements to the mortgaged 
properties. For example, if a property is in a REMIC, the property 
owner is effectively precluded from adding a parking garage to an 
existing building. That is because the 1986 tax rules treat that 
improvement as a collateral modification triggering a deemed exchange 
of a new loan for the old loan thereby violating REMIC regulations.
  Unlike home mortgages, which are rarely modified, commercial loans 
require flexibility in dealing with changing circumstances in order to 
support the borrower's ongoing business property. The bill we are 
introducing today will add this needed flexibility to the tax code, 
increasing the ability of property owners to invest in improvements.
  I urge our colleagues to help us harness the full potential of 
mortgage-backed securities to provide improved access to capital to 
America's businesses--big and small. Please join us in working to enact 
the Real Estate Mortgage Investment Conduit Modernization Act.

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