[House Report 105-577]
[From the U.S. Government Publishing Office]



105th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 2d Session                                                     105-577
_______________________________________________________________________


 
          EDUCATION SAVINGS AND SCHOOL EXCELLENCE ACT OF 1998

                                _______
                                

                  June 15, 1998. Ordered to be printed

_______________________________________________________________________


 Mr. Archer, from the committee of conference, submitted the following

                           CONFERENCE REPORT

                       [To accompany H.R. 2646 ]

    The committee of conference on the disagreeing votes of the 
two Houses on the amendment of the Senate to the bill (H.R. 
2646), to amend the Internal Revenue Code of 1986 to allow tax-
free expenditures from education individual retirement accounts 
for elementary and secondary school expenses, to increase the 
maximum annual amount of contributions to such accounts, and 
for other purposes, having met, after full and free conference, 
have agreed to recommend and do recommend to their respective 
Houses as follows:
    That the House recede from its disagreement to the 
amendment of the Senate and agree to the same with an amendment 
as follows:
    In lieu of the matter proposed to be inserted by the Senate 
amendment, insert the following:

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Education Savings and School 
Excellence Act of 1998''.

                 TITLE I--TAX INCENTIVES FOR EDUCATION

SEC. 100. AMENDMENT TO 1986 CODE.

    Except as otherwise expressly provided, whenever in this 
title 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.

                Subtitle A--Tax Incentives For Education

SEC. 101. MODIFICATIONS TO EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.

    (a) Tax-Free Expenditures for Elementary and Secondary 
School Expenses.--
            (1) In general.--Section 530(b)(2) (defining 
        qualified higher education expenses) is amended to read 
        as follows:
            ``(2) Qualified education expenses.--
                    ``(A) In general.--The term `qualified 
                education expenses' means--
                            ``(i) qualified higher education 
                        expenses (as defined in section 
                        529(e)(3)), and
                            ``(ii) qualified elementary and 
                        secondary education expenses (as 
                        defined in paragraph (4)).
                Such expenses shall be reduced as provided in 
                section 25A(g)(2).
                    ``(B) Qualified state tuition programs.--
                Such term shall include amounts paid or 
                incurred to purchase tuition credits or 
                certificates, or to make contributions to an 
                account, under a qualified State tuition 
                program (as defined in section 529(b)) for the 
                benefit of the beneficiary of the account.''.
            (2) Qualified elementary and secondary education 
        expenses.--Section 530(b) (relating to definitions and 
        special rules) is amended by adding at the end the 
        following new paragraph:
            ``(4) Qualified elementary and secondary education 
        expenses.--
                    ``(A) In general.--The term `qualified 
                elementary and secondary education expenses' 
                means--
                            ``(i) expenses for tuition, fees, 
                        academic tutoring, special needs 
                        services, books, supplies, computer 
                        equipment (including related software 
                        and services), and other equipment 
                        which are incurred in connection with 
                        the enrollment or attendance of the 
                        designated beneficiary of the trust as 
                        an elementary or secondary school 
                        student at a public, private, or 
                        religious school, or
                            ``(ii) expenses for room and board, 
                        uniforms, transportation, and 
                        supplementary items and services 
                        (including extended day programs) which 
                        are required or provided by a public, 
                        private, or religious school in 
                        connection with such enrollment or 
                        attendance.
                    ``(B) Special rule for homeschooling.--Such 
                term shall include expenses described in 
                subparagraph (A)(i) in connection with 
                education provided by homeschooling if the 
                requirements of any applicable State or local 
                law are met with respect to such education.
                    ``(C) School.--The term `school' means any 
                school which provides elementary education or 
                secondary education (kindergarten through grade 
                12), as determined under State law.''.
            (3) Special rules for applying exclusion to 
        elementary and secondary expenses.--Section 530(d)(2) 
        (relating to distributions for qualified higher 
        education expenses), as amended by subsection (e), is 
        amended by adding at the end the following new 
        subparagraph:
                    ``(E) Special rules for elementary and 
                secondary expenses.--
                            ``(i) In general.--The aggregate 
                        amount of qualified elementary and 
                        secondary education expenses taken into 
                        account for purposes of this paragraph 
                        with respect to any education 
                        individual retirement account for all 
                        taxable years shall not exceed the sum 
                        of the aggregate contributions to such 
                        account for taxable years beginning 
                        after December 31, 1998, and before 
                        January 1, 2003, and earnings on such 
                        contributions.
                            ``(ii) Special operating rules.--
                        For purposes of clause (i)--
                                    ``(I) the trustee of an 
                                education individual retirement 
                                account shall keep separate 
                                accounts with respect to 
                                contributions and earnings 
                                described in clause (i), and
                                    ``(II) if there are 
                                distributions in excess of 
                                qualified elementary and 
                                secondary education expenses 
                                for any taxable year, such 
                                excess distributions shall be 
                                allocated first to 
                                contributions and earnings not 
                                described in clause (i).''.
            (4) Conforming amendments.--Subsections (b)(1) and 
        (d)(2) of section 530 are each amended by striking 
        ``higher'' each place it appears in the text and 
        heading thereof.
    (b) Maximum Annual Contributions.--
            (1) In general.--Section 530(b)(1)(A)(iii) 
        (defining education individual retirement account) is 
        amended by striking ``$500'' and inserting ``the 
        contribution limit for such taxable year''.
            (2) Contribution limit.--Section 530(b) (relating 
        to definitions and special rules), as amended by 
        subsection (a)(2), is amended by adding at the end the 
        following new paragraph:
            ``(5) Contribution limit.--The term `contribution 
        limit' means $500 ($2,000 in the case of any taxable 
        year beginning after December 31, 1998, and ending 
        before January 1, 2003).''.
            (3) Conforming amendment.--Section 4973(e)(1)(A) is 
        amended by striking ``$500'' and inserting ``the 
        contribution limit (as defined in section 530(b)(5)) 
        for such taxable year''.
    (c) Waiver of Age Limitations for Children With Special 
Needs.--Section 530(b)(1) (defining education individual 
retirement account) is amended by adding at the end the 
following flush sentence:

        ``The age limitations in the preceding sentence shall 
        not apply to any designated beneficiary with special 
        needs (as determined under regulations prescribed by 
        the Secretary).''.
    (d) Corporations Permitted To Contribute to Accounts.--
Section 530(c)(1) (relating to reduction in permitted 
contributions based on adjusted gross income) is amended by 
striking ``The maximum amount which a contributor'' and 
inserting ``In the case of a contributor who is an individual, 
the maximum amount the contributor''.
    (e) Technical Corrections.--
            (1) Section 530(b)(1) is amended by inserting ``an 
        individual who is'' before ``the designated 
        beneficiary'' in the material preceding subparagraph 
        (A).
            (2)(A) Section 530(b)(1)(E) is amended to read as 
        follows:
                    ``(E) Except as provided in subsection 
                (d)(7), any balance to the credit of the 
                designated beneficiary on the date on which the 
                beneficiary attains age 30 shall be distributed 
                within 30 days after such date to the 
                beneficiary or, if the beneficiary dies before 
                attaining age 30, shall be distributed within 
                30 days after the date of death of such 
                beneficiary.''.
            (B) Section 530(d)(7) is amended by inserting at 
        the end the following new sentence: ``In applying the 
        preceding sentence, members of the family of the 
        designated beneficiary shall be treated in the same 
        manner as the spouse under such paragraph (8).''.
            (C) Section 530(d) is amended by adding at the end 
        the following new paragraph:
            ``(8) Deemed distribution on required distribution 
        date.--In any case in which a distribution is required 
        under subsection (b)(1)(E), any balance to the credit 
        of a designated beneficiary as of the close of the 30-
        day period referred to in such subsection for making 
        such distribution shall be deemed distributed at the 
        close of such period.''.
            (3)(A) Section 530(d)(1) is amended by striking 
        ``section 72(b)'' and inserting ``section 72''.
            (B) Section 72(e) is amended by inserting after 
        paragraph (8) the following new paragraph:
            ``(9) Extension of paragraph (2)(b) to qualified 
        state tuition programs and educational individual 
        retirement accounts.--Notwithstanding any other 
        provision of this subsection, paragraph (2)(B) shall 
        apply to amounts received under a qualified State 
        tuition program (as defined in section 529(b)) or under 
        an education individual retirement account (as defined 
        in section 530(b)). The rule of paragraph (8)(B) shall 
        apply for purposes of this paragraph.''.
            (4) Section 135(d)(2) is amended to read as 
        follows:
            ``(2) Coordination with other higher education 
        benefits.--The amount of the qualified higher education 
        expenses otherwise taken into account under subsection 
        (a) with respect to the education of an individual 
        shall be reduced (before the application of subsection 
        (b)) by--
                    ``(A) the amount of such expenses which are 
                taken into account in determining the credit 
                allowable to the taxpayer or any other person 
                under section 25A with respect to such 
                expenses, and
                    ``(B) the amount of such expenses which are 
                taken into account in determining the exclusion 
                under section 530(d)(2).''.
            (5) Section 530(d)(2) is amended by adding at the 
        end the following new subparagraph:
                    ``(D) Disallowance of excluded amounts as 
                credit or deduction.--No deduction or credit 
                shall be allowed to the taxpayer under any 
                other section of this chapter for any qualified 
                education expenses to the extent taken into 
                account in determining the amount of the 
                exclusion under this paragraph.''.
            (6) Section 530(d)(4)(B) is amended by striking 
        ``or'' at the end of clause (ii), by striking the 
        period at the end of clause (iii) and inserting ``, 
        or'', and by adding at the end the following new 
        clause:
                            ``(iv) an amount which is 
                        includible in gross income solely 
                        because the taxpayer elected under 
                        paragraph (2)(C) to waive the 
                        application of paragraph (2) for the 
                        taxable year.''.
            (7) So much of section 530(d)(4)(C) as precedes 
        clause (ii) thereof is amended to read as follows:
                    ``(C) Contributions returned before due 
                date of return.--Subparagraph (A) shall not 
                apply to the distribution of any contribution 
                made during a taxable year on behalf of the 
                designated beneficiary if--
                            ``(i) such distribution is made on 
                        or before the day prescribed by law 
                        (including extensions of time) for 
                        filing the beneficiary's return of tax 
                        for the taxable year or, if the 
                        beneficiary is not required to file 
                        such a return, the 15th day of the 4th 
                        month of the taxable year following the 
                        taxable year, and''.
            (8) Section 135(c)(2)(C) is amended--
                    (A) by inserting ``and education individual 
                retirement accounts'' in the heading after 
                ``program'', and
                    (B) by striking ``section 529(c)(3)(A)'' 
                and inserting ``section 72''.
            (9) Section 4973(e)(1) is amended to read as 
        follows:
            ``(1) In general.--In the case of education 
        individual retirement accounts maintained for the 
        benefit of any 1 beneficiary, the term `excess 
        contributions' means the sum of--
                    ``(A) the amount by which the amount 
                contributed for the taxable year to such 
                accounts exceeds $500 (or, if less, the sum of 
                the maximum amounts permitted to be contributed 
                under section 530(c) by the contributors to 
                such accounts for such year),
                    ``(B) if any amount is contributed during 
                such year to a qualified State tuition program 
                for the benefit of such beneficiary, any amount 
                contributed to such accounts for such taxable 
                year, and
                    ``(C) the amount determined under this 
                subsection for the preceding taxable year, 
                reduced by the sum of--
                            ``(i) the distributions out of the 
                        accounts for the taxable year which are 
                        included in gross income, and
                            ``(ii) the excess (if any) of the 
                        maximum amount which may be contributed 
                        to the accounts for the taxable year 
                        over the amount contributed to the 
                        accounts for the taxable year.''.
            (10)(A) Paragraph (5) of section 530(d) is amended 
        by striking the first sentence and inserting the 
        following new sentence: ``Paragraph (1) shall not apply 
        to any amount paid or distributed from an education 
        individual retirement account to the extent that the 
        amount received is paid, not later than the 60th day 
        after the date of such payment or distribution, into 
        another education individual retirement account for the 
        benefit of the same beneficiary or a member of the 
        family (within the meaning of section 529(e)(2) of such 
        beneficiary who has not attained age 30 as of such 
        date.''
            (B) Paragraph (6) of section 530(d) is amended by 
        inserting before the period ``and has not attained age 
        30 as of the date of such change''.
    (f) Effective Dates.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        taxable years beginning after December 31, 1998.
            (2) Technical corrections.--The amendments made by 
        subsection (e) shall take effect as if included in the 
        amendments made by section 213 of the Taxpayer Relief 
        Act of 1997.

SEC. 102. EXCLUSION FROM GROSS INCOME OF EDUCATION DISTRIBUTIONS FROM 
                    QUALIFIED STATE TUITION PROGRAMS.

    (a) In General.--Section 529(c)(3)(B) (relating to 
distributions) is amended to read as follows:
                    ``(B) Distributions for qualified higher 
                education expenses.--
                            ``(i) In general.--No amount shall 
                        be includible in gross income under 
                        subparagraph (A) if the qualified 
                        higher education expenses of the 
                        designated beneficiary during the 
                        taxable year are not less than the 
                        aggregate distributions during the 
                        taxable year.
                            ``(ii) Distributions in excess of 
                        expenses.--If such aggregate 
                        distributions exceed such expenses 
                        during the taxable year, the amount 
                        otherwise includible in gross income 
                        under subparagraph (A) shall be reduced 
                        by the amount which bears the same 
                        ratio to the amount so includible 
                        (without regard to this subparagraph) 
                        as such expenses bear to such aggregate 
                        distributions.
                            ``(iii) Election to waive 
                        exclusion.--A taxpayer may elect to 
                        waive the application of this 
                        subparagraph for any taxable year.
                            ``(iv) In-kind distributions.--Any 
                        benefit furnished to a designated 
                        beneficiary under a qualified State 
                        tuition program shall be treated as a 
                        distribution to the beneficiary for 
                        purposes of this paragraph.
                            ``(v) Disallowance of excluded 
                        amounts as credit or deduction.--No 
                        deduction or credit shall be allowed to 
                        the taxpayer under any other section of 
                        this chapter for any qualified higher 
                        education expenses to the extent taken 
                        into account in determining the amount 
                        of the exclusion under this 
                        paragraph.''.
    (b) Definition of Qualified Higher Education Expenses.--
Section 529e)(3)(A) (defining qualified higher education 
expenses) is amended to read as follows:
                    ``(A) In general.--The term `qualified 
                higher education expenses' means expenses for 
                tuition, fees, academic tutoring, special needs 
                services, books, supplies, computer equipment 
                (including related software and services), and 
                other equipment which are incurred in 
                connection with the enrollment or attendance of 
                the designated beneficiary at an eligible 
                educational institution.''.
    (c) Coordination With Education Credits.--Section 25A(e)(2) 
(relating to coordination with exclusions) is amended--
            (1) by inserting ``a qualified State tuition 
        program or'' before ``an education individual 
        retirement account'', and
            (2) by striking ``section 530(d)(2)'' and inserting 
        ``section 529(c)(3)(B) or 530(d)(2)''.
    (d) Eligible Educational Institutions Permitted to Maintain 
Qualified Tuition Programs.--
            (1) In general.--Section 529(b)(1) (defining 
        qualified State tuition program) is amended by 
        inserting ``or, in the case of taxable years beginning 
        after December 31, 2005, by 1 or more eligible 
        educational institutions'' after ``maintained by a 
        State or agency or instrumentality thereof''.
            (2) Private qualified tuition programs limited to 
        benefit plans.--Section 529(b)(1) is amended by adding 
        at the end the following flush sentence:
        ``Clause (ii) of subparagraph (A) shall only apply to a 
        program established and maintained by a State or agency 
        or instrumentality thereof.''.
            (3) Limitation on contributions to private 
        qualified tuition programs.--Section 529(b) is amended 
        by adding at the end the following new paragraph:
            ``(8) Limitation on contributions to private 
        qualified tuition programs.--In the case of a program 
        not established and maintained by a State or agency or 
        instrumentality thereof, such program shall not be 
        treated as a qualified tuition program unless it limits 
        the annual contribution to the program on behalf of a 
        designated beneficiary to an amount equal to the lesser 
        of--
                    ``(A) $5,000, or
                    ``(B) the excess of--
                            ``(i) $50,000, over
                            ``(ii) the aggregate amount 
                        contributed to such program on behalf 
                        of such beneficiary for all prior 
                        taxable years.''.
            (4) Tax on excess contributions.--
                    (A) In general.--Section 4973(a) (relating 
                to tax imposed) is amended by striking ``or'' 
                at the end of paragraph (3), by inserting 
                ``or'' at the end of paragraph (4), and by 
                inserting after paragraph (4) the following new 
                paragraph:
            ``(5) a private qualified tuition program (as 
        defined in subsection (g)),''.
                    (B) Excess contributions defined.--Section 
                4973 is amended by adding at the end the 
                following new subsection:
    ``(g) Excess Contributions to Private Qualified Tuition 
Program.--For purposes of this section--
            ``(1) In general.--In the case of private qualified 
        tuition programs, the term `excess contributions' 
        means, with respect to any 1 beneficiary--
                    ``(A) the amount by which the amounts 
                contributed for the taxable year to such 
                programs exceed the lesser of--
                            ``(i) $5,000, or
                            ``(ii) the excess of--
                                    ``(I) $50,000, over
                                    ``(II) the aggregate amount 
                                contributed to all private 
                                qualified tuition programs on 
                                behalf of such beneficiary for 
                                all prior taxable years, and
                    ``(B) the amount determined under this 
                subsection for the preceding taxable year, 
                reduced by the sum of--
                            ``(i) the distributions out of such 
                        programs for the taxable year which are 
                        included in gross income, and
                            ``(ii) the excess (if any) of the 
                        maximum amount which may be contributed 
                        to such programs for the taxable year 
                        over the amount contributed to such 
                        programs for the taxable year.
            ``(2) Special rule if contributions made to a state 
        tuition program or an education individual retirement 
        account.--Notwithstanding paragraph (1), with respect 
        to any 1 beneficiary, the amount contributed to a 
        private qualified tuition program for any taxable year 
        shall be treated as excess contributions if any amount 
        is contributed during such year for the benefit of such 
        beneficiary to--
                    ``(A) a qualified tuition program (as 
                defined in section 529) that is established and 
                maintained by a State or any agency or 
                instrumentality thereof, or
                    ``(B) an education individual retirement 
                account (as defined in section 530).
            ``(3) Special rules.--The contributions described 
        in subsection (e)(2) shall not be taken into account.
            ``(4) Private qualified tuition program.--The term 
        `private qualified tuition program' means a qualified 
        tuition program (as defined in section 529) not 
        established and maintained by a State or any agency or 
        instrumentality thereof.''.
            (5) Technical amendments.--
                    (A) The text of each of the sections 
                72(e)(9), 529, 530(b)(2)(B), and 4973(e)(1)(B) 
                is amended by striking ``qualified State 
                tuition program'' each place it appears and 
                inserting ``qualified tuition program''.
                    (B)(i) The section heading of section 529 
                is amended to read as follows:

``SEC. 529. QUALIFIED TUITION PROGRAMS.''.

                    (ii) The item relating to section 529 in 
                the table of sections for part VIII of 
                subchapter F of chapter 1 is amended by 
                striking ``State''.
    (e) Technical Corrections.--
            (1) Section 135(c)(3) is amended to read as 
        follows:
            ``(3) Eligible educational institution.--The term 
        `eligible educational institution' has the meaning 
        given such term by section 529(e)(5).''.
            (2) Section 529(c)(3)(A) is amended by striking 
        ``section 72(b)'' and inserting ``section 72''.
            (3) Section 529(e)(2) is amended to read as 
        follows:
            ``(2) Member of family.--The term `member of the 
        family' means, with respect to any designated 
        beneficiary--
                    ``(A) the spouse of such beneficiary,
                    ``(B) an individual who bears a 
                relationship to such beneficiary which is 
                described in paragraphs (1) through (8) of 
                section 152(a), and
                    ``(C) the spouse of any individual 
                described in subparagraph (B).''.
    (f) Effective Dates.--
            (1) In general.--Except as provided in paragraphs 
        (2) and (3), the amendments made by this section shall 
        apply to taxable years beginning after December 31, 
        1998.
            (2) Eligible educational institutions permitted to 
        maintain qualified tuition programs.--The amendments 
        made by subsection (d) shall apply to taxable years 
        beginning after December 31, 2005.
            (3) Technical corrections.--The amendments made by 
        subsection (e) shall take effect as if included in the 
        amendments made by section 211 of the Taxpayer Relief 
        Act of 1997.

SEC. 103. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED EDUCATIONAL 
                    ASSISTANCE.

    Section 127(d) (relating to termination of exclusion for 
educational assistance programs) is amended by striking ``May 
31, 2000'' and inserting ``December 31, 2002''.

SEC. 104. ADDITIONAL INCREASE IN ARBITRAGE REBATE EXCEPTION FOR 
                    GOVERNMENTAL BONDS USED TO FINANCE EDUCATION 
                    FACILITIES.

    (a) In General.--Section 148(f)(4)(D)(vii) (relating to 
increase in exception for bonds financing public school capital 
expenditures) is amended by striking ``$5,000,000'' the second 
place it appears and inserting ``$10,000,000''.
    (b) Effective Date.--The amendment made by subsection (a) 
shall apply to obligations issued after December 31, 1998.

SEC. 105. EXCLUSION OF CERTAIN AMOUNTS RECEIVED UNDER THE NATIONAL 
                    HEALTH CORPS SCHOLARSHIP PROGRAM AND THE F. EDWARD 
                    HEBERT ARMED FORCES HEALTH PROFESSIONS SCHOLARSHIP 
                    AND FINANCIAL ASSISTANCE PROGRAM.

    (a) In General.--Section 117(c) (relating to the exclusion 
from gross income amounts received as a qualified scholarship) 
is amended--
            (1) by striking ``Subsections (a)'' and inserting 
        the following:
            ``(1) In general.--Except as provided in paragraph 
        (2), subsections (a)''; and
            (2) by adding at the end the following new 
        paragraph:
            ``(2) Exceptions.--Paragraph (1) shall not apply to 
        any amount received by an individual under--
                    ``(A) the National Health Corps Scholarship 
                Program under section 338A(g)(1)(A) of the 
                Public Health Service Act, or
                    ``(B) the Armed Forces Health Professions 
                Scholarship and Financial Assistance program 
                under subchapter I of chapter 105 of title 10, 
                United States Code.''.
    (b) Effective Date.--The amendments made by subsection (a) 
shall apply to amounts received in taxable years beginning 
after December 31, 1993.

                          Subtitle B--Revenue

SEC. 111. OVERRULING OF SCHMIDT BAKING COMPANY CASE.

    (a) In General.--Section 404(a) (relating to general rule) 
is amended by adding at the end the following new paragraph:
            ``(11) Determinations relating to deferred 
        compensation.--For purposes of determining under this 
        section--
                    ``(A) whether compensation of an employee 
                is deferred compensation, and
                    ``(B) when deferred compensation is paid,
        no amount shall be treated as received by the employee, 
        or paid, until it is actually received by the 
        employee.''.
    (b) Effective Date.--
            (1) In general.--The amendment made by subsection 
        (a) shall apply to taxable years ending after December 
        31, 2001.
            (2) Phase-in of increase.--In the case of the first 
        taxable year of the taxpayer ending after December 31, 
        2001, only 60 percent of the amount of the increase in 
        tax resulting from the amendment made by subsection (a) 
        shall be taken into account for purposes of sections 
        6654 and 6655 of the Internal Revenue Code of 1986 
        (relating to failure to pay estimated income tax).
            (3) Change in method of accounting.--In the case of 
        any taxpayer required by this section to change its 
        method of accounting for its first taxable year ending 
        after December 31, 2001--
                    (A) such change shall be treated as 
                initiated by the taxpayer,
                    (B) such change shall be treated as made 
                with the consent of the Secretary of the 
                Treasury, and
                    (C) the net amount of the adjustments 
                required to be taken into account by the 
                taxpayer under section 481 of the Internal 
                Revenue Code of 1986 shall be taken into 
                account in such first taxable year.

Subtitle C--Identification of Limited Tax Benefits Subject To Line Item 
                                  Veto

SEC. 121. IDENTIFICATION OF LIMITED TAX BENEFITS SUBJECT TO LINE ITEM 
                    VETO.

    Section 1021(a)(3) of the Congressional Budget and 
Impoundment Control Act of 1974 shall only apply to section 
104(a) (relating to additional increase in arbitrage rebate 
exception for governmental bonds used to finance education 
facilities).

          TITLE II--MEASURES TO ENCOURAGE RESULTS IN TEACHING

SEC. 201. STATE INCENTIVES FOR TEACHER TESTING AND MERIT PAY.

    (a) Short Title.--This section may be cited as the 
``Measures to Encourage Results in Teaching Act of 1998''.
    (b) Findings.--Congress makes the following findings:
            (1) All students deserve to be taught by well-
        educated, competent, and qualified teachers.
            (2) More than ever before, education has and will 
        continue to become the ticket not only to economic 
        success but to basic survival. Students will not 
        succeed in meeting the demands of a knowledge-based, 
        21st century society and economy if the students do not 
        encounter more challenging work in school. For future 
        generations to have the opportunities to achieve 
        success the future generations will need to have an 
        education and a teacher workforce second to none.
            (3) No other intervention can make the difference 
        that a knowledgeable, skillful teacher can make in the 
        learning process. At the same time, nothing can fully 
        compensate for weak teaching that, despite good 
        intentions, can result from a teacher's lack of 
        opportunity to acquire the knowledge and skill needed 
        to help students master the curriculum.
            (4) The Federal Government established the Dwight 
        D. Eisenhower Professional Development Program in 1985 
        to ensure that teachers and other educational staff 
        have access to sustained and high-quality professional 
        development. This ongoing development must include the 
        ability to demonstrate and judge the performance of 
        teachers and other instructional staff.
            (5) States should evaluate their teachers on the 
        basis of demonstrated ability, including tests of 
        subject matter knowledge, teaching knowledge, and 
        teaching skill. States should develop a test for their 
        teachers and other instructional staff with respect to 
        the subjects taught by the teachers and staff, and 
        should administer the test every 3 to 5 years.
            (6) Evaluating and rewarding teachers with a 
        compensation system that supports teachers who become 
        increasingly expert in a subject area, are proficient 
        in meeting the needs of students and schools, and 
        demonstrate high levels of performance measured against 
        professional teaching standards, will encourage 
        teachers to continue to learn needed skills and broaden 
        teachers' expertise, thereby enhancing education for 
        all students.
    (c) Purposes.--The purposes of this section are as follows:
            (1) To provide incentives for States to establish 
        and administer periodic teacher testing and merit pay 
        programs for elementary school and secondary school 
        teachers.
            (2) To encourage States to establish merit pay 
        programs that have a significant impact on teacher 
        salary scales.
            (3) To encourage programs that recognize and reward 
        the best teachers, and encourage those teachers that 
        need to do better.
    (d) State Incentives for Teacher Testing and Merit Pay.--
            (1) Amendments.--Title II of the Elementary and 
        Secondary Education Act of 1965 (20 U.S.C. 6601 et 
        seq.) is amended--
                    (A) by redesignating part D as part F;
                    (B) by redesignating sections 2401 and 2402 
                as sections 2601 and 2602, respectively; and
                    (C) by inserting after part C the 
                following:

      ``PART D--STATE INCENTIVES FOR TEACHER TESTING AND MERIT PAY

``SEC. 2401. STATE INCENTIVES FOR TEACHER TESTING AND MERIT PAY.

    ``(a) State Awards.--Notwithstanding any other provision of 
this title, from funds described in subsection (b) that are 
made available for a fiscal year, the Secretary shall make an 
award to each State that--
            ``(1) administers a test to each elementary school 
        and secondary school teacher in the State, with respect 
        to the subjects taught by the teacher, every 3 to 5 
        years; and
            ``(2) has an elementary school and secondary school 
        teacher compensation system that is based on merit.
    ``(b) Available Funding.--The amount of funds referred to 
in subsection (a) that are available to carry out this section 
for a fiscal year is 50 percent of the amount of funds 
appropriated to carry out this title that are in excess of the 
amount so appropriated for fiscal year 1999, except that no 
funds shall be available to carry out this section for any 
fiscal year for which--
            ``(1) the amount appropriated to carry out this 
        title exceeds $600,000,000; or
            ``(2) each of the several States is eligible to 
        receive an award under this section.
    ``(c) Award Amount.--A State shall receive an award under 
this section in an amount that bears the same relation to the 
total amount available for awards under this section for a 
fiscal year as the number of States that are eligible to 
receive such an award for the fiscal year bears to the total 
number of all States so eligible for the fiscal year.
    ``(d) Use of Funds.--Funds provided under this section may 
be used by States to carry out the activities described in 
section 2207.
    ``(e) Definition of State.--For the purpose of this 
section, the term `State' means each of the 50 States and the 
District of Columbia.''.
            (2) Effective Date.--The amendments made by 
        paragraph (1) shall take effect on October 2, 1999.
    (e) Teacher Testing and Merit Pay.--
            (1) In General.--Notwithstanding any other 
        provision of law, a State may use Federal education 
        funds--
                    (A) to carry out a test of each elementary 
                school or secondary school teacher in the State 
                with respect to the subjects taught by the 
                teacher; or
                    (B) to establish a merit pay program for 
                the teachers.
            (2) Definitions.--In this subsection, the terms 
        ``elementary school'' and ``secondary school'' have the 
        meanings given the terms in section 14101 of the 
        Elementary and Secondary Education Act of 1965 (20 
        U.S.C. 8801).

                TITLE III--EQUAL EDUCATIONAL OPPORTUNITY

SEC. 301. EQUAL EDUCATIONAL OPPORTUNITY.

    Subsection (b) of section 6301 of the Elementary and 
Secondary Education Act of 1965 (20 U.S.C. 7351) is amended--
            (1) in paragraph (7), by striking ``and'' after the 
        semicolon;
            (2) in paragraph (8), by striking the period and 
        inserting ``; and''; and
            (3) by adding at the end the following:
            ``(9) education reform projects that provide same 
        gender schools and classrooms, as long as comparable 
        educational opportunities are offered for students of 
        both sexes.''.

                      TITLE IV--SENSE OF CONGRESS

SEC. 401. FINDINGS.

    Congress makes the following findings:
            (1) The people of the United States know that 
        effective teaching takes place when the people of the 
        United States begin (A) helping children master basic 
        academics, (B) engaging and involving parents, (C) 
        creating safe and orderly classrooms, and (D) getting 
        dollars to the classroom.
            (2) Our Nation's children deserve an educational 
        system which will provide opportunities to excel.
            (3) States and localities must spend a significant 
        amount of Federal education tax dollars applying for 
        and administering Federal education dollars.
            (4) Several States have reported that although the 
        States receive less than 10 percent of their education 
        funding from the Federal Government, more than 50 
        percent of their paperwork is associated with those 
        Federal dollars.
            (5) While it is unknown exactly what percentage of 
        Federal education dollars reaches the classroom, a 
        recent audit of New York City public schools found that 
        only 43 percent of their local education budget reaches 
        the classroom; further, it is thought that only 85 
        percent of funds administered by the Department of 
        Education for elementary and secondary education reach 
        the school district level; and even if 65 percent of 
        Federal education funds reach the classroom, it still 
        means that billions of dollars are not directly spent 
        on children in the classroom.
            (6) American students are not performing up to 
        their full academic potential, despite the more than 
        760 Federal education programs, which span 39 Federal 
        agencies at the price of nearly $100,000,000,000 
        annually.
            (7) According to the Digest of Education 
        Statistics, in 1993 only $141,598,786,000 out of 
        $265,285,370,000 spent on elementary and secondary 
        education was spent on instruction.
            (8) According to the National Center for Education 
        Statistics, in 1994 only 52 percent of staff employed 
        in public elementary and secondary school systems were 
        teachers.
            (9) Too much of our Federal education funding is 
        spent on bureaucracy, and too little is spent on our 
        Nation's youth.
            (10) Getting 95 percent of Department of Education 
        elementary and secondary education funds to the 
        classroom could provide approximately $2,094 in 
        additional funding per classroom across the United 
        States.
            (11) More education funding should be put in the 
        hands of someone in a child's classroom who knows the 
        child's name.
            (12) President Clinton has stated: ``We cannot ask 
        the American people to spend more on education until we 
        do a better job with the money we've got now.''.
            (13) President Clinton and Vice President Gore 
        agree that the reinventing of public education will not 
        begin in Washington but in communities across the 
        United States and that the people of the United States 
        must ask fundamental questions about how our Nation's 
        public school systems' dollars are spent.
            (14) President Clinton and Vice President Gore 
        agree that in an age of tight budgets, our Nation 
        should be spending public funds on teachers and 
        children, not on unnecessary overhead and bloated 
        bureaucracy.

SEC. 402. SENSE OF CONGRESS.

    It is the sense of Congress that the Department of 
Education, States, and local educational agencies should work 
together to ensure that not less than 95 percent of all funds 
appropriated for the purpose of carrying out elementary and 
secondary education programs administered by the Department of 
Education is spent for our Nation's children in their 
classrooms.

                      TITLE V--READING EXCELLENCE

SEC. 501. SHORT TITLE.

    This title may be cited as the ``Reading Excellence Act''.

                       Subtitle A--Reading Grants

SEC. 511. AMENDMENT TO ESEA FOR READING GRANTS.

    Title II of the Elementary and Secondary Education Act of 
1965 (20 U.S.C. 6601 et seq.) is amended further by inserting 
after part D (as inserted by section 201(d)(1)(C) of this Act) 
the following:

                        ``PART E--READING GRANTS

``SEC. 2501. PURPOSE.

    ``The purposes of this part are as follows:
            ``(1) To teach every child to read in their early 
        childhood years--
                    ``(A) as soon as they are ready to read; or
                    ``(B) as soon as possible once they enter 
                school, but not later than 3d grade.
            ``(2) To improve the reading skills of students, 
        and the in-service instructional practices for teachers 
        who teach reading, through the use of findings from 
        reliable, replicable research on reading, including 
        phonics.
            ``(3) To expand the number of high-quality family 
        literacy programs.
            ``(4) To reduce the number of children who are 
        inappropriately referred to special education due to 
        reading difficulties.

``SEC. 2502. DEFINITIONS.

    ``For purposes of this part:
            ``(1) Eligible professional development provider.--
        The term `eligible professional development provider' 
        means a provider of professional development in reading 
        instruction to teachers that is based on reliable, 
        replicable research on reading.
            ``(2) Eligible research institution.--The term 
        `eligible research institution' means an institution of 
        higher education at which reliable, replicable research 
        on reading has been conducted.
            ``(3) Family literacy services.--The term `family 
        literacy services' means services provided to 
        participants on a voluntary basis that are of 
        sufficient intensity in terms of hours, and of 
        sufficient duration, to make sustainable changes in a 
        family (such as eliminating or reducing welfare 
        dependency) and that integrate all of the following 
        activities:
                    ``(A) Interactive literacy activities 
                between parents and their children.
                    ``(B) Equipping parents to partner with 
                their children in learning.
                    ``(C) Parent literacy training, including 
                training that contributes to economic self-
                sufficiency.
                    ``(D) Appropriate instruction for children 
                of parents receiving parent literacy services.
            ``(4) Reading.--The term `reading' means the 
        process of comprehending the meaning of written text by 
        depending on--
                    ``(A) the ability to use phonics skills, 
                that is, knowledge of letters and sounds, to 
                decode printed words quickly and effortlessly, 
                both silently and aloud;
                    ``(B) the ability to use previously learned 
                strategies for reading comprehension; and
                    ``(C) the ability to think critically about 
                the meaning, message, and aesthetic value of 
                the text.
            ``(5) Reading readiness.--The term `reading 
        readiness' means activities that--
                    ``(A) provide experience and opportunity 
                for language development;
                    ``(B) create appreciation of the written 
                word;
                    ``(C) develop an awareness of printed 
                language, the alphabet, and phonemic awareness; 
                and
                    ``(D) develop an understanding that spoken 
                and written language is made up of phonemes, 
                syllables, and words.
            ``(6) Reliable, replicable research.--The term 
        `reliable, replicable research' means objective, valid, 
        scientific studies that--
                    ``(A) include rigorously defined samples of 
                subjects that are sufficiently large and 
                representative to support the general 
                conclusions drawn;
                    ``(B) rely on measurements that meet 
                established standards of reliability and 
                validity;
                    ``(C) test competing theories, where 
                multiple theories exist;
                    ``(D) are subjected to peer review before 
                their results are published; and
                    ``(E) discover effective strategies for 
                improving reading skills.

``SEC. 2503. GRANTS TO READING AND LITERACY PARTNERSHIPS.

    ``(a) Program Authorized.--The Secretary may make grants on 
a competitive basis to reading and literacy partnerships for 
the purpose of permitting such partnerships to make subgrants 
under sections 2504 and 2505.
    ``(b) Reading and Literacy Partnerships.--
            ``(1) Composition.--
                    ``(A) Required participants.--In order to 
                receive a grant under this section, a State 
                shall establish a reading and literacy 
                partnership consisting of at least the 
                following participants:
                            ``(i) The Governor of the State.
                            ``(ii) The chief State school 
                        officer.
                            ``(iii) The chairman and the 
                        ranking member of each committee of the 
                        State legislature that is responsible 
                        for education policy.
                            ``(iv) A representative, selected 
                        jointly by the Governor and the chief 
                        State school officer, of at least 1 
                        local educational agency that has at 
                        least 1 school that is identified for 
                        school improvement under section 
                        1116(c) in the geographic area served 
                        by the agency.
                            ``(v) A representative, selected 
                        jointly by the Governor and the chief 
                        State school officer, of a community-
                        based organization working with 
                        children to improve their reading 
                        skills, particularly a community-based 
                        organization using volunteers.
                    ``(B) Optional participants.--A reading and 
                literacy partnership may include additional 
                participants, who shall be selected jointly by 
                the Governor and the chief State school 
                officer, which may include--
                            ``(i) State directors of 
                        appropriate Federal or State programs 
                        with a strong reading component;
                            ``(ii) a parent of a public or 
                        private school student or a parent who 
                        educates their child or children in 
                        their home;
                            ``(iii) a teacher who teaches 
                        reading; or
                            ``(iv) a representative of (I) an 
                        institution of higher education 
                        operating a program of teacher 
                        preparation in the State; (II) a local 
                        educational agency; (III) an eligible 
                        research institution; (IV) a private 
                        nonprofit or for-profit eligible 
                        professional development provider 
                        providing instruction based on 
                        reliable, replicable research on 
                        reading; (V) a family literacy service 
                        provider; (VI) an adult education 
                        provider; (VII) a volunteer 
                        organization that is involved in 
                        reading programs; or (VIII) a school or 
                        a public library that offers reading or 
                        literacy programs for children or 
                        families.
            ``(2) Agreement.--The contractual agreement that 
        establishes a reading and literacy partnership--
                    ``(A) shall specify--
                            ``(i) the nature and extent of the 
                        association among the participants 
                        referred to in paragraph (1); and
                            ``(ii) the roles and duties of each 
                        such participant; and
                    ``(B) shall remain in effect during the 
                entire grant period proposed in the 
                partnership's grant application under 
                subsection (e).
            ``(3) Functions.--Each reading and literacy 
        partnership for a State shall prepare and submit an 
        application under subsection (e) and, if the 
        partnership receives a grant under this section--
                    ``(A) shall solicit applications for, and 
                award, subgrants under sections 2504 and 2505;
                    ``(B) shall oversee the performance of the 
                subgrants and submit performance reports in 
                accordance with subsection (h);
                    ``(C) if sufficient grant funds are 
                available under this part--
                            ``(i) work to enhance the capacity 
                        of agencies in the State to disseminate 
                        reliable, replicable research on 
                        reading to schools, classrooms, and 
                        providers of early education and child 
                        care;
                            ``(ii) facilitate the provision of 
                        technical assistance to subgrantees 
                        under sections 2504 and 2505 by 
                        providing the subgrantees information 
                        about technical assistance providers; 
                        and
                            ``(iii) build on, and promote 
                        coordination among, literacy programs 
                        in the State, in order to increase 
                        their effectiveness and to avoid 
                        duplication of their efforts; and
                    ``(D) shall ensure that each local 
                educational agency to which the partnership 
                makes a subgrant under section 2504 makes 
                available, upon request and in an 
                understandable and uniform format, to any 
                parent of a student attending any school 
                selected under section 2504(a)(2) in the 
                geographic area served by the agency, 
                information regarding the qualifications of the 
                student's classroom teacher to provide 
                instruction in reading.
            ``(4) Fiscal agent.--The State educational agency 
        shall act as the fiscal agent for the reading and 
        literacy partnership for the purposes of receipt of 
        funds from the Secretary, disbursement of funds to 
        subgrantees under sections 2504 and 2505, and 
        accounting for such funds.
    ``(c) Preexisting Partnership.--If, before the date of the 
enactment of the Reading Excellence Act, a State established a 
consortium, partnership, or any other similar body, that 
includes the Governor and the chief State school officer and 
has, as a central part of its mission, the promotion of 
literacy for children in their early childhood years through 
the 3d grade, but that does not satisfy the requirements of 
subsection (b)(1), the State may elect to treat that 
consortium, partnership, or body as the reading and literacy 
partnership for the State notwithstanding such subsection, and 
the consortium, partnership, or body shall be considered a 
reading and literacy partnership for purposes of the other 
provisions of this part.
    ``(d) Multi-State Partnership Arrangements.--A reading and 
literacy partnership that satisfies the requirements of 
subsection (b) may join with other such partnerships in other 
States to develop a single application that satisfies the 
requirements of subsection (e) and identifies which State 
educational agency, from among the States joining, shall act as 
the fiscal agent for the multi-State arrangement. For purposes 
of the other provisions of this part, any such multi-State 
arrangement shall be considered to be a reading and literacy 
partnership.
    ``(e) Applications.--A reading and literacy partnership 
that desires to receive a grant under this section shall submit 
an application to the Secretary at such time, in such manner, 
and including such information as the Secretary may require. 
The application--
            ``(1) shall describe how the partnership will 
        ensure that 95 percent of the grant funds are used to 
        make subgrants under sections 2504 and 2505;
            ``(2) shall be integrated, to the maximum extent 
        possible, with State plans and programs under this Act, 
        the Individuals with Disabilities Education Act (20 
        U.S.C. 1400 et seq.), and, to the extent appropriate, 
        the Adult Education Act (20 U.S.C. 1201 et seq.);
            ``(3) shall describe how the partnership will 
        ensure that professional development funds available at 
        the State and local levels are used effectively to 
        improve instructional practices for reading and are 
        based on reliable, replicable research on reading;
            ``(4) shall describe--
                    ``(A) the contractual agreement that 
                establishes the partnership, including at least 
                the elements of the agreement referred to in 
                subsection (b)(2);
                    ``(B) how the partnership will assess, on a 
                regular basis, the extent to which the 
                activities undertaken by the partnership and 
                the partnership's subgrantees under this part 
                have been effective in achieving the purposes 
                of this part;
                    ``(C) what evaluation instruments the 
                partnership will use to determine the success 
                of local educational agencies to whom subgrants 
                under sections 2504 and 2505 are made in 
                achieving the purposes of this part;
                    ``(D) how subgrants made by the partnership 
                under such sections will meet the requirements 
                of this part, including how the partnership 
                will ensure that subgrantees will use practices 
                based on reliable, replicable research on 
                reading; and
                    ``(E) how the partnership will, to the 
                extent practicable, make grants to subgrantees 
                in both rural and urban areas;
            ``(5) shall include an assurance that each local 
        educational agency to whom the partnership makes a 
        subgrant under section 2504--
                    ``(A) will carry out family literacy 
                programs based on the Even Start family 
                literacy model authorized under part B of title 
                I to enable parents to be their child's first 
                and most important teacher, and will make 
                payments for the receipt of technical 
                assistance for the development of such 
                programs;
                    ``(B) will carry out programs to assist 
                those kindergarten students who are not ready 
                for the transition to 1st grade, particularly 
                students experiencing difficulty with reading 
                skills;
                    ``(C) will use supervised individuals 
                (including tutors), who have been appropriately 
                trained using reliable, replicable research on 
                reading, to provide additional support, before 
                school, after school, on weekends, during non-
                instructional periods of the school day, or 
                during the summer, for students in grades 1 
                through 3 who are experiencing difficulty 
                reading; and
                    ``(D) will carry out professional 
                development for the classroom teacher and other 
                appropriate teaching staff on the teaching of 
                reading based on reliable, replicable research 
                on reading; and
            ``(6) shall describe how the partnership--
                    ``(A) will ensure that a portion of the 
                grant funds that the partnership receives in 
                each fiscal year will be used to make subgrants 
                under section 2505; and
                    ``(B) will make local educational agencies 
                described in section 2505(a)(1) aware of the 
                availability of such subgrants.
    ``(f) Peer Review Panel.--
            ``(1) Composition of peer review panel.--
                    ``(A) In general.--The National Institute 
                for Literacy, in consultation with the National 
                Research Council of the National Academy of 
                Sciences, the National Institute of Child 
                Health and Human Development, and the 
                Secretary, shall convene a panel to evaluate 
                applications under this section. At a minimum 
                the panel shall include representatives of the 
                National Institute for Literacy, the National 
                Research Council of the National Academy of 
                Sciences, the National Institute of Child 
                Health and Human Development, and the 
                Secretary.
                    ``(B) Experts.--The panel shall include 
                experts who are competent, by virtue of their 
                training, expertise, or experience, to evaluate 
                applications under this section, and experts 
                who provide professional development to 
                teachers of reading to children and adults, 
                based on reliable, replicable research on 
                reading.
                    ``(C) Limitation.--Not more than \1/3\ of 
                the panel may be composed of individuals who 
                are employees of the Federal Government.
            ``(2) Payment of fees and expenses of certain 
        members.--The Secretary shall use funds reserved under 
        section 2510(b)(2) to pay the expenses and fees of 
        panel members who are not employees of the Federal 
        Government.
            ``(3) Duties of panel.--
                    ``(A) Model application forms.--The peer 
                review panel shall develop a model application 
                form for reading and literacy partnerships 
                desiring to apply for a grant under this 
                section. The peer review panel shall submit the 
                model application form to the Secretary for 
                final approval.
                    ``(B) Selection of applications.--
                            ``(i) Recommendations of panel.--
                                    ``(I) In general.--The 
                                Secretary shall receive grant 
                                applications from reading and 
                                literacy partnerships under 
                                this section and shall provide 
                                the applications to the peer 
                                review panel for evaluation. 
                                With respect to each 
                                application, the peer review 
                                panel shall initially recommend 
                                the application for funding or 
                                for disapproval.
                                    ``(II) Priority.--In 
                                recommending applications to 
                                the Secretary, the panel shall 
                                give priority to applications 
                                from States that have modified, 
                                are modifying, or provide an 
                                assurance that not later than 1 
                                year after receiving a grant 
                                under this section the State 
                                will modify, State teacher 
                                certification in the area of 
                                reading to reflect reliable, 
                                replicable research, except 
                                that nothing in this part shall 
                                be construed to establish a 
                                national system of teacher 
                                certification.
                                    ``(III) Ranking of 
                                applications.--With respect to 
                                each application recommended 
                                for funding, the panel shall 
                                assign the application a rank, 
                                relative to other recommended 
                                applications, based on the 
                                priority described in subclause 
                                (II), the extent to which the 
                                application furthers the 
                                purposes of this part, and the 
                                overall quality of the 
                                application.
                                    ``(IV) Recommendation of 
                                amount.--With respect to each 
                                application recommended for 
                                funding, the panel shall make a 
                                recommendation to the Secretary 
                                with respect to the amount of 
                                the grant that should be made.
                            ``(ii) Secretarial selection.--
                                    ``(I) In general.--Subject 
                                to clause (iii), the Secretary 
                                shall determine, based on the 
                                peer review panel's 
                                recommendations, which 
                                applications from reading and 
                                literacy partnerships shall 
                                receive funding and the amounts 
                                of such grants. In determining 
                                grant amounts, the Secretary 
                                shall take into account the 
                                total amount of funds available 
                                for all grants under this 
                                section and the types of 
                                activities proposed to be 
                                carried out by the partnership.
                                    ``(II) Effect of ranking by 
                                panel.--In making grants under 
                                this section, the Secretary 
                                shall select applications 
                                according to the ranking of the 
                                applications by the peer review 
                                panel, except in cases where 
                                the Secretary determines, for 
                                good cause, that a variation 
                                from that order is appropriate.
                            ``(iii) Minimum grant amounts.--
                        Each reading and literacy partnership 
                        selected to receive a grant under this 
                        section shall receive an amount for 
                        each fiscal year that is not less than 
                        $100,000.
    ``(g) Limitation on Administrative Expenses.--A reading and 
literacy partnership that receives a grant under this section 
may use not more than 3 percent of the grant funds for 
administrative costs.
    ``(h) Reporting.--
            ``(1) In general.--A reading and literacy 
        partnership that receives a grant under this section 
        shall submit performance reports to the Secretary 
        pursuant to a schedule to be determined by the 
        Secretary, but not more frequently than annually. Such 
        reports shall include--
                    ``(A) the results of use of the evaluation 
                instruments referred to in subsection 
                (e)(4)(C);
                    ``(B) the process used to select 
                subgrantees;
                    ``(C) a description of the subgrantees 
                receiving funds under this part; and
                    ``(D) with respect to subgrants under 
                section 2504, the model or models of reading 
                instruction, based on reliable, replicable 
                research on reading, selected by subgrantees.
            ``(2) Provision to peer review panel.--The 
        Secretary shall provide the reports submitted under 
        paragraph (1) to the peer review panel convened under 
        subsection (f). The panel shall use such reports in 
        recommending applications for funding under this 
        section.

``SEC. 2504. LOCAL READING IMPROVEMENT SUBGRANTS.

    ``(a) In General.--
            ``(1) Subgrants.--A reading and literacy 
        partnership that receives a grant under section 2503 
        shall make subgrants, on a competitive basis, to local 
        educational agencies that have at least 1 school that 
        is identified for school improvement under section 
        1116(c) in the geographic area served by the agency.
            ``(2) Role of local educational agencies.--A local 
        educational agency that receives a subgrant under this 
        section shall use the subgrant in a manner consistent 
        with this section to advance reform of reading 
        instruction in any school selected by the agency that--
                    ``(A) is identified for school improvement 
                under section 1116(c) at the time the agency 
                receives the subgrant; and
                    ``(B) has a contractual association with 1 
                or more community-based organizations that have 
                established a record of effectiveness with 
                respect to reading readiness, reading 
                instruction for children in kindergarten 
                through 3d grade, and early childhood literacy.
    ``(b) Grant Period.--A subgrant under this section shall be 
for a period of 3 years and may not be revoked or terminated on 
the ground that a school ceases, during the grant period, to be 
identified for school improvement under section 1116(c).
    ``(c) Applications.--A local educational agency that 
desires to receive a subgrant under this section shall submit 
an application to the reading and literacy partnership at such 
time, in such manner, and including such information as the 
partnership may require. The application--
            ``(1) shall describe how the local educational 
        agency will work with schools selected by the agency 
        under subsection (a)(2) to select 1 or more models of 
        reading instruction, developed using reliable, 
        replicable research on reading, as a model for 
        implementing and improving reading instruction by all 
        teachers and for all children in each of the schools 
        selected by the agency under such subsection and, where 
        appropriate, their parents;
            ``(2) shall select 1 or more models described in 
        paragraph (1), for the purpose described in such 
        paragraph, and shall describe each such selected model;
            ``(3) shall demonstrate that a person responsible 
        for the development of each such model, or a person 
        with experience or expertise about such model and its 
        implementation, has agreed to work with the applicant 
        in connection with such implementation and improvement 
        efforts;
            ``(4) shall describe--
                    ``(A) how the applicant will ensure that 
                funds available under this part, and funds 
                available for reading for grades kindergarten 
                through grade 6 from other appropriate sources, 
                are effectively coordinated and, where 
                appropriate, integrated, with funds under this 
                Act in order to improve existing activities in 
                the areas of reading instruction, professional 
                development, program improvement, parental 
                involvement, technical assistance, and other 
                activities that can help meet the purposes of 
                this part; and
                    ``(B) the amount of funds available for 
                reading for grades kindergarten through grade 6 
                from appropriate sources other than this part, 
                including title I (except that such description 
                shall not be required to include funds made 
                available under part B of title I unless the 
                applicant has established a contractual 
                association in accordance with subsection 
                (d)(2) with an eligible entity under such part 
                B), the Individuals with Disabilities Education 
                Act (20 U.S.C. 1400 et seq.), and any other law 
                providing Federal financial assistance for 
                professional development for teachers of such 
                grades who teach reading, which will be used to 
                help achieve the purposes of this part;
            ``(5) shall describe the amount and nature of funds 
        from any other public or private sources, including 
        funds received under this Act and the Individuals with 
        Disabilities Education Act (20 U.S.C. 1400 et seq.), 
        that will be combined with funds received under the 
        subgrant;
            ``(6) shall include an assurance that the 
        applicant--
                    ``(A) will carry out family literacy 
                programs based on the Even Start family 
                literacy model authorized under part B of title 
                I to enable parents to be their child's first 
                and most important teacher, will make payments 
                for the receipt of technical assistance for the 
                development of such programs;
                    ``(B) will carry out programs to assist 
                those kindergarten students who are not ready 
                for the transition to 1st grade, particularly 
                students experiencing difficulty with reading 
                skills;
                    ``(C) will use supervised individuals 
                (including tutors), who have been appropriately 
                trained using reliable, replicable research on 
                reading, to provide additional support, before 
                school, after school, on weekends, during non-
                instructional periods of the school day, or 
                during the summer, for students in grades 1 
                through 3 who are experiencing difficulty 
                reading; and
                    ``(D) will carry out professional 
                development for the classroom teacher and other 
                teaching staff on the teaching of reading based 
                on reliable, replicable research on reading;
            ``(7) shall describe how the local educational 
        agency provides instruction in reading to children who 
        have not been determined to be a child with a 
        disability (as defined in section 602 of the 
        Individuals with Disabilities Education Act (20 U.S.C. 
        1401)), pursuant to section 614(b)(5) of such Act (20 
        U.S.C. 1414(a)(5)), because of a lack of instruction in 
        reading; and
            ``(8) shall indicate the amount of the subgrant 
        funds (if any) that the applicant will use to carry out 
        the duties described in section 2505(b)(2).
    ``(d) Priority.--In approving applications under this 
section, a reading and literacy partnership shall give priority 
to an application submitted by an applicant who demonstrates 
that the applicant has established--
            ``(1) a contractual association with 1 or more Head 
        Start programs under the Head Start Act (42 U.S.C. 9801 
        et seq.) under which--
                    ``(A) the Head Start program agrees to 
                select the same model or models of reading 
                instruction, as a model for implementing and 
                improving the reading readiness of children 
                participating in the program, as was selected 
                by the applicant; and
                    ``(B) the applicant agrees--
                            ``(i) to share with the Head Start 
                        program an appropriate amount of the 
                        applicant's information resources with 
                        respect to the model, such as curricula 
                        materials; and
                            ``(ii) to train personnel from the 
                        Head Start program;
            ``(2) a contractual association with 1 or more 
        State- or federally-funded preschool programs, or 
        family literacy programs, under which--
                    ``(A) the program agrees to select the same 
                model or models of reading instruction, as a 
                model for implementing and improving reading 
                instruction in the program's activities, as was 
                selected by the applicant; and
                    ``(B) the applicant agrees to train 
                personnel from the program who work with 
                children and parents in schools selected under 
                subsection (a)(2); or
            ``(3) a contractual association with 1 or more 
        public libraries providing reading or literacy services 
        to preschool children, or preschool children and their 
        families, under which--
                    ``(A) the library agrees to select the same 
                model or models of reading instruction, as a 
                model for implementing and improving reading 
                instruction in the library's reading or 
                literacy programs, as was selected by the 
                applicant; and
                    ``(B) the applicant agrees to train 
                personnel, including volunteers, from such 
                programs who work with preschool children, or 
                preschool children and their families, in 
                schools selected under subsection (a)(2).
    ``(e) Use of Funds.--
            ``(1) In general.--Subject to paragraph (2), an 
        applicant who receives a subgrant under this section 
        may use the subgrant funds to carry out activities that 
        are authorized by this part and described in the 
        subgrant application, including the following:
                    ``(A) Making reasonable payments for 
                technical and other assistance to a person 
                responsible for the development of a model of 
                reading instruction, or a person with 
                experience or expertise about such model and 
                its implementation, who has agreed to work with 
                the recipient in connection with the 
                implementation of the model.
                    ``(B) Carrying out a contractual agreement 
                described in subsection (d).
                    ``(C) Professional development (including 
                training of volunteers), purchase of curricular 
                and other supporting materials, and technical 
                assistance.
                    ``(D) Providing, on a voluntary basis, 
                training to parents of children enrolled in a 
                school selected under subsection (a)(2) on how 
                to help their children with school work, 
                particularly in the development of reading 
                skills. Such training may be provided directly 
                by the subgrant recipient, or through a grant 
                or contract with another person. Such training 
                shall be consistent with reading reforms taking 
                place in the school setting.
                    ``(E) Carrying out family literacy programs 
                based on the Even Start family literacy model 
                authorized under part B of title I to enable 
                parents to be their child's first and most 
                important teacher, and making payments for the 
                receipt of technical assistance for the 
                development of such programs.
                    ``(F) Providing instruction for parents of 
                children enrolled in a school selected under 
                subsection (a)(2), and others who volunteer to 
                be reading tutors for such children, in the 
                instructional practices based on reliable, 
                replicable research on reading used by the 
                applicant.
                    ``(G) Programs to assist those kindergarten 
                students enrolled in a school selected under 
                subsection (a)(2) who are not ready for the 
                transition to 1st grade, particularly students 
                experiencing difficulty with reading skills.
                    ``(H) Providing, for students who are 
                enrolled in grades 1 through 3 in a school 
                selected under subsection (a)(2) and are 
                experiencing difficulty reading, additional 
                support before school, after school, on 
                weekends, during non-instructional periods of 
                the school day, or during the summer, using 
                supervised individuals (including tutors) who 
                have been appropriately trained using reliable, 
                replicable research on reading.
                    ``(I) Carrying out the duties described in 
                section 2505(b)(2) for children enrolled in a 
                school selected under subsection (a)(2).
                    ``(J) Providing reading assistance to 
                children who have not been determined to be a 
                child with a disability (as defined in section 
                602 of the Individuals with Disabilities 
                Education Act (20 U.S.C. 1401)), pursuant to 
                section 614(b)(5) of such Act (20 U.S.C. 
                1414(b)(5)), because of a lack of instruction 
                in reading.
            ``(2) Limitation on administrative expenses.--A 
        recipient of a subgrant under this section may use not 
        more than 3 percent of the subgrant funds for 
        administrative costs.
    ``(f) Training Nonrecipients.--A recipient of a subgrant 
under this section may train, on a fee-for-service basis, 
personnel who are from schools, or local educational agencies, 
that are not receiving such a subgrant in the instructional 
practices based on reliable, replicable research on reading 
used by the recipient. Such a non-recipient school may use 
funds received under title I, and other appropriate Federal 
funds used for reading instruction, to pay for such training, 
to the extent consistent with the law under which such funds 
were received.

``SEC. 2505. TUTORIAL ASSISTANCE SUBGRANTS.

    ``(a) In General.--
            ``(1) Subgrants.--A reading and literacy 
        partnership that receives a grant under section 2503 
        shall make subgrants on a competitive basis to--
                    ``(A) local educational agencies that have 
                at least 1 school in the geographic area served 
                by the agency that--
                            ``(i) is located in an area 
                        designated as an empowerment zone under 
                        part I of subchapter U of chapter 1 of 
                        the Internal Revenue Code of 1986; or
                            ``(ii) is located in an area 
                        designated as an enterprise community 
                        under part I of subchapter U of chapter 
                        1 of the Internal Revenue Code of 1986; 
                        or
                    ``(B) in the case of local educational 
                agencies that do not have any such empowerment 
                zone or enterprise community in the State in 
                which the agency is located, local educational 
                agencies that have at least 1 school that is 
                identified for school improvement under section 
                1116(c) in the geographic area served by the 
                agency.
            ``(2) Applications.--A local educational agency 
        that desires to receive a subgrant under this section 
        shall submit an application to the reading and literacy 
        partnership at such time, in such manner, and including 
        such information as the partnership may require. The 
        application shall include an assurance that the agency 
        will use the subgrant funds to carry out the duties 
        described in subsection (b) for children enrolled in 1 
        or more schools selected by the agency and described in 
        paragraph (1).
    ``(b) Use of Funds.--
            ``(1) In general.--A local educational agency that 
        receives a subgrant under this section shall carry out, 
        using the funds provided under the subgrant, each of 
        the duties described in paragraph (2).
            ``(2) Duties.--The duties described in this 
        paragraph are the provision of tutorial assistance in 
        reading to children who have difficulty reading, using 
        instructional practices based on the principles of 
        reliable, replicable research, through the following:
                    ``(A) The promulgation of a set of 
                objective criteria, pertaining to the ability 
                of a tutorial assistance provider successfully 
                to provide tutorial assistance in reading, that 
                will be used to determine in a uniform manner, 
                at the beginning of each school year, the 
                eligibility of tutorial assistance providers, 
                subject to the succeeding subparagraphs of this 
                paragraph, to be included on the list described 
                in subparagraph (B) (and thereby be eligible to 
                enter into a contract pursuant to subparagraph 
                (F)).
                    ``(B) The promulgation, maintenance, and 
                approval of a list of tutorial assistance 
                providers eligible to enter into a contract 
                pursuant to subparagraph (F) who--
                            ``(i) have established a record of 
                        effectiveness with respect to reading 
                        readiness, reading instruction for 
                        children in kindergarten through 3d 
                        grade, and early childhood literacy;
                            ``(ii) are located in a geographic 
                        area convenient to the school or 
                        schools attended by the children who 
                        will be receiving tutorial assistance 
                        from the providers; and
                            ``(iii) are capable of providing 
                        tutoring in reading to children who 
                        have difficulty reading, using 
                        instructional practices based on the 
                        principles of reliable, replicable 
                        research and consistent with the 
                        instructional methods used by the 
                        school the child attends.
                    ``(C) The development of procedures (i) for 
                the receipt of applications for tutorial 
                assistance, from parents who are seeking such 
                assistance for their child or children, that 
                select a tutorial assistance provider from the 
                list described in subparagraph (B) with whom 
                the child or children will enroll, for tutoring 
                in reading; and (ii) for considering children 
                for tutorial assistance who are identified 
                under subparagraph (D) and for whom no 
                application has been submitted, provided that 
                such procedures are in accordance with this 
                paragraph and give such parents the right to 
                select a tutorial assistance provider from the 
                list referred to in subparagraph (B), and shall 
                permit a local educational agency to recommend 
                a tutorial assistance provider from the list 
                under subparagraph (B) in a case where a parent 
                asks for assistance in the making of such 
                selection.
                    ``(D) The development of a selection 
                process for providing tutorial assistance in 
                accordance with this paragraph that limits the 
                provision of assistance to children identified, 
                by the school the child attends, as having 
                difficulty reading, including difficulty 
                mastering essential phonic, decoding, or 
                vocabulary skills. In the case of a child 
                included in the selection process for whom no 
                application has been submitted by a parent of 
                the child, the child's eligibility for receipt 
                of tutorial assistance shall be determined 
                under the same procedures, timeframe, and 
                criteria for consideration as is used to 
                determine the eligibility of a child whose 
                parent has submitted such an application. Such 
                local educational agency shall apply the 
                provisions of subparagraphs (F) and (G) to a 
                tutorial assistance provider selected for a 
                child whose parent has not submitted an 
                application pursuant to subparagraph (C)(i) in 
                the same manner as the provisions are applied 
                to a provider selected in an application 
                submitted pursuant to subparagraph (C)(i).
                    ``(E) The development of procedures for 
                selecting children to receive tutorial 
                assistance, to be used in cases where 
                insufficient funds are available to provide 
                assistance with respect to all children 
                identified by a school under subparagraph (D) 
                that--
                            ``(i) gives priority to children 
                        who are determined, through State or 
                        local reading assessments, to be most 
                        in need of tutorial assistance; and
                            ``(ii) gives priority, in cases 
                        where children are determined, through 
                        State or local reading assessments, to 
                        be equally in need of tutorial 
                        assistance, based on a random selection 
                        principle.
                    ``(F) The development of a methodology by 
                which payments are made directly to tutorial 
                assistance providers who are identified and 
                selected pursuant to subparagraphs (C), (D), 
                and (E). Such methodology shall include the 
                making of a contract, consistent with State and 
                local law, between the tutorial assistance 
                provider and the local educational agency 
                carrying out this paragraph. Such contract--
                            ``(i) shall contain specific goals 
                        and timetables with respect to the 
                        performance of the tutorial assistance 
                        provider;
                            ``(ii) shall require the tutorial 
                        assistance provider to report to the 
                        parent and the local educational agency 
                        on the provider's performance in 
                        meeting such goals and timetables; and
                            ``(iii) shall contain provisions 
                        with respect to the making of payments 
                        to the tutorial assistance provider by 
                        the local educational agency.
                    ``(G) The development of procedures under 
                which the local educational agency carrying out 
                this paragraph--
                            ``(i) will ensure oversight of the 
                        quality and effectiveness of the 
                        tutorial assistance provided by each 
                        tutorial assistance provider that is 
                        selected for funding;
                            ``(ii) will remove from the list 
                        under subparagraph (B) ineffective and 
                        unsuccessful providers (as determined 
                        by the local educational agency based 
                        upon the performance of the provider 
                        with respect to the goals and 
                        timetables contained in the contract 
                        between the agency and the provider 
                        under subparagraph (F));
                            ``(iii) will provide to each parent 
                        of a child identified under 
                        subparagraph (D) who requests such 
                        information for the purpose of 
                        selecting a tutorial assistance 
                        provider for the child, in a 
                        comprehensible format, information with 
                        respect to the quality and 
                        effectiveness of the tutorial 
                        assistance referred to in clause (i); 
                        and
                            ``(iv) will ensure that each school 
                        identifying a child under subparagraph 
                        (D) will provide upon request, to a 
                        parent of the child, assistance in 
                        selecting, from among the tutorial 
                        assistance providers who are included 
                        on the list described in subparagraph 
                        (B), the provider who is best able to 
                        meet the needs of the child.
    ``(c) Definition.--For the purpose of this section the term 
`parent' includes a legal guardian.

``SEC. 2506. PROGRAM EVALUATION.

    ``(a) In General.--From funds reserved under section 
2510(b)(1), the Secretary shall conduct a national assessment 
of the programs under this part. In developing the criteria for 
the assessment, the Secretary shall receive recommendations 
from the peer review panel convened under section 2503(f).
    ``(b) Submission to Peer Review Panel.--The Secretary shall 
submit the findings from the assessment under subsection (a) to 
the peer review panel convened under section 2503(f).

``SEC. 2507. INFORMATION DISSEMINATION.

    ``(a) In General.--From funds reserved under section 
2510(b)(2), the National Institute for Literacy shall 
disseminate information on reliable, replicable research on 
reading and information on subgrantee projects under section 
2504 or 2505 that have proven effective. At a minimum, the 
institute shall disseminate such information to all recipients 
of Federal financial assistance under titles I and VII, the 
Head Start Act (42 U.S.C. 9801 et seq.), the Individuals with 
Disabilities Education Act (20 U.S.C. 1400 et seq.), and the 
Adult Education Act (20 U.S.C. 1201 et seq.).
    ``(b) Coordination.--In carrying out this section, the 
National Institute for Literacy--
            ``(1) shall use, to the extent practicable, 
        information networks developed and maintained through 
        other public and private persons, including the 
        Secretary, the National Center for Family Literacy, and 
        the Readline Program;
            ``(2) shall work in conjunction with any panel 
        convened by the National Institute of Child Health and 
        Human Development and the Secretary, and any panel 
        convened by the Office of Educational Research and 
        Improvement to assess the current status of research-
        based knowledge on reading development, including the 
        effectiveness of various approaches to teaching 
        children to read, with respect to determining the 
        criteria by which the National Institute for Literacy 
        judges reliable, replicable research and the design of 
        strategies to disseminate such information; and
            ``(3) shall assist any reading and literacy 
        partnership selected to receive a grant under section 
        2503, and that requests such assistance--
                    ``(A) in determining whether applications 
                for subgrants submitted to the partnership meet 
                the requirements of this part relating to 
                reliable, replicable research on reading; and
                    ``(B) in the development of subgrant 
                application forms.

``SEC. 2508. STATE EVALUATIONS.

    ``(a) In General.--Each reading and literacy partnership 
that receives a grant under this part shall reserve not more 
than 2 percent of such grant funds for the purpose of 
evaluating the success of the partnership's subgrantees in 
meeting the purposes of this part. At a minimum, the evaluation 
shall measure the extent to which students who are the intended 
beneficiaries of the subgrants made by the partnership have 
improved their reading.
    ``(b) Contract.--A reading and literacy partnership shall 
carry out the evaluation under this section by entering into a 
contract with an eligible research institution under which the 
institution will perform the evaluation.
    ``(c) Submission.--A reading and literacy partnership shall 
submit the findings from the evaluation under this section to 
the Secretary and the peer review panel convened under section 
2503(f). The Secretary and the peer review panel shall submit a 
summary of the findings from the evaluations under this 
subsection to the appropriate committees of the Congress, 
including the Education and the Workforce Committee of the 
House of Representatives.

``SEC. 2509. PARTICIPATION OF CHILDREN ENROLLED IN PRIVATE SCHOOLS.

    ``Each reading and literacy partnership that receives funds 
under this part shall provide for, or ensure that subgrantees 
provide for, the participation of children in private schools 
in the activities and services assisted under this part in the 
same manner as the children participate in activities and 
services pursuant to sections 2503, 2504, 2505, and 2506.

``SEC. 2510. AUTHORIZATION OF APPROPRIATIONS; RESERVATIONS FROM 
                    APPROPRIATIONS; APPLICABILITY; SUNSET.

    ``(a) Authorization.--There are authorized to be 
appropriated to carry out this part $210,000,000 for fiscal 
years 1999, 2000, and 2001.
    ``(b) Reservations.--From the amount appropriated under 
subsection (a) for each fiscal year, the Secretary--
            ``(1) shall reserve 1.5 percent to carry out 
        section 2506(a);
            ``(2) shall reserve $5,075,000 to carry out 
        sections 2503(f)(2) and 2507, of which $5,000,000 shall 
        be reserved for section 2507; and
            ``(3) shall reserve $10,000,000 to carry out 
        section 1202(c).
    ``(c) Applicability.--Part E shall not apply to this part.
    ``(d) Sunset.--Notwithstanding section 422(a) of the 
General Education Provisions Act (20 U.S.C. 1226a(a)), this 
part is repealed, effective September 30, 2001, and is not 
subject to extension under such section.''.

     Subtitle B--Amendments to Even Start Family Literacy Programs

SEC. 521. RESERVATION FOR GRANTS.

    Section 1202(c) of the Elementary and Secondary Education 
Act of 1965 (20 U.S.C. 6362(c)) is amended to read as follows:
    ``(c) Reservation for Grants.--
            ``(1) Grants authorized.--From funds reserved under 
        section 2510(b)(3), the Secretary shall award grants, 
        on a competitive basis, to States to enable such States 
        to plan and implement, statewide family literacy 
        initiatives to coordinate and integrate existing 
        Federal, State, and local literacy resources consistent 
        with the purposes of this part. Such coordination and 
        integration shall include coordination and integration 
        of funds available under the Adult Education Act (20 
        U.S.C. 1201 et seq.), Head Start (42 U.S.C. 9801 et 
        seq.), this part, part A of this title, and part A of 
        title IV of the Social Security Act.
            ``(2) Consortia.--
                    ``(A) Establishment.--To receive a grant 
                under this subsection, a State shall establish 
                a consortium of State-level programs under the 
                following laws:
                            ``(i) This title.
                            ``(ii) The Head Start Act.
                            ``(iii) The Adult Education Act.
                            ``(iv) All other State-funded 
                        preschool programs and programs 
                        providing literacy services to adults.
                    ``(B) Plan.--To receive a grant under this 
                subsection, the consortium established by a 
                State shall create a plan to use a portion of 
                the State's resources, derived from the 
                programs referred to in subparagraph (A), to 
                strengthen and expand family literacy services 
                in such State.
                    ``(C) Coordination with title ii.--The 
                consortium shall coordinate its activities with 
                the activities of the reading and literacy 
                partnership for the State established under 
                section 2503, if the State receives a grant 
                under such section.
            ``(3) Reading instruction.--Statewide family 
        literacy initiatives implemented under this subsection 
        shall base reading instruction on reliable, replicable 
        research on reading (as such terms are defined in 
        section 2502).
            ``(4) Technical assistance.--The Secretary shall 
        provide, directly or through a grant or contract with 
        an organization with experience in the development and 
        operation of successfulfamily literacy services, 
technical assistance to States receiving a grant under this subsection.
            ``(5) Matching requirement.--The Secretary shall 
        not make a grant to a State under this subsection 
        unless the State agrees that, with respect to the costs 
        to be incurred by the eligible consortium in carrying 
        out the activities for which the grant was awarded, the 
        State will make available non-Federal contributions in 
        an amount equal to not less than the Federal funds 
        provided under the grant.''.

SEC. 522. DEFINITIONS.

    Section 1202(e) of the Elementary and Secondary Education 
Act of 1965 (20 U.S.C. 6362(e)) is amended--
            (1) by redesignating paragraphs (3) and (4) as 
        paragraphs (4) and (5), respectively; and
            (2) by inserting after paragraph (2) the following:
            ``(3) the term `family literacy services' means 
        services provided to participants on a voluntary basis 
        that are of sufficient intensity in terms of hours, and 
        of sufficient duration, to make sustainable changes in 
        a family (such as eliminating or reducing welfare 
        dependency) and that integrate all of the following 
        activities:
                    ``(A) Interactive literacy activities 
                between parents and their children.
                    ``(B) Equipping parents to partner with 
                their children in learning.
                    ``(C) Parent literacy training, including 
                training that contributes to economic self-
                sufficiency.
                    ``(D) Appropriate instruction for children 
                of parents receiving parent literacy 
                services.''.

SEC. 523. EVALUATION.

    Section 1209 of the Elementary and Secondary Education Act 
of 1965 (20 U.S.C. 6369) is amended--
            (1) in paragraph (1), by striking ``and'' at the 
        end;
            (2) in paragraph (2), by striking the period at the 
        end and inserting ``; and''; and
            (3) by adding at the end the following:
            ``(3) to provide States and eligible entities 
        receiving a subgrant under this part, directly or 
        through a grant or contract with an organization with 
        experience in the development and operation of 
        successful family literacy services, technical 
        assistance to ensure local evaluations undertaken under 
        section 1205(10) provide accurate information on the 
        effectiveness of programs assisted under this part.''.

SEC. 524. INDICATORS OF PROGRAM QUALITY.

    (a) In General.--The Elementary and Secondary Education Act 
of 1965 (20 U.S.C. 6301 et seq.) is amended--
            (1) by redesignating section 1210 as section 1212; 
        and
            (2) by inserting after section 1209 the following:

``SEC. 1210. INDICATORS OF PROGRAM QUALITY.

    ``Each State receiving funds under this part shall develop, 
based on the best available research and evaluation data, 
indicators of program quality for programs assisted under this 
part. Such indicators shall be used to monitor, evaluate, and 
improve such programs within the State. Such indicators shall 
include the following:
            ``(1) With respect to eligible participants in a 
        program who are adults--
                    ``(A) achievement in the areas of reading, 
                writing, English language acquisition, problem 
                solving, and numeracy;
                    ``(B) receipt of a secondary school diploma 
                or its recognized equivalent;
                    ``(C) entry into a postsecondary school, a 
                job retraining program, or employment or career 
                advancement, including the military; and
                    ``(D) such other indicators as the State 
                may develop.
            ``(2) With respect to eligible participants in a 
        program who are children--
                    ``(A) improvement in ability to read on 
                grade level or reading readiness;
                    ``(B) school attendance;
                    ``(C) grade retention and promotion; and
                    ``(D) such other indicators as the State 
                may develop.''.
    (b) State Level Activities.--Section 1203(a) of the 
Elementary and Secondary Education Act of 1965 (20 U.S.C. 
6363(a)) is amended--
            (1) in paragraph (1), by striking ``and'' at the 
        end;
            (2) in paragraph (2), by striking the period at the 
        end and inserting ``; and''; and
            (3) by adding at the end the following:
            ``(3) carrying out section 1210.''.
    (c) Award of Subgrants.--Paragraphs (3) and (4) of section 
1208(b) of the Elementary and Secondary Education Act of 1965 
(20 U.S.C. 6368) are amended to read as follows:
            ``(3) Continuing eligibility.--In awarding subgrant 
        funds to continue a program under this part for the 
        second, third, or fourth year, the State educational 
        agency shall evaluate the program based on the 
        indicators of program quality developed by the State 
        under section 1210. Such evaluation shall take place 
        after the conclusion of the startup period, if any.
            ``(4) Insufficient progress.--The State educational 
        agency may refuse to award subgrant funds if such 
        agency finds that the eligible entity has not 
        sufficiently improved the performance of the program, 
        as evaluated based on the indicators of program quality 
        developed by the State under section 1210, after--
                    ``(A) providing technical assistance to the 
                eligible entity; and
                    ``(B) affording the eligible entity notice 
                and an opportunity for a hearing.''.

SEC. 525. RESEARCH.

    The Elementary and Secondary Education Act of 1965 (20 
U.S.C. 6301 et seq.) is amended further by inserting after 
section 1210 (as inserted by section 524(a)(2) of this Act) the 
following:

``SEC. 1211. RESEARCH.

    ``(a) In General.--The Secretary shall carry out, through 
grant or contract, research into the components of successful 
family literacy services. The purpose of the research shall 
be--
            ``(1) to improve the quality of existing programs 
        assisted under this part or other family literacy 
        programs carried out under this Act or the Adult 
        Education Act (20 U.S.C. 1201 et seq.); and
            ``(2) to develop models for new programs to be 
        carried out under this Act or the Adult Education Act.
    ``(b) Dissemination.--The National Institute for Literacy 
shall disseminate, pursuant to section 2507, the results of the 
research described in subsection (a) to States and recipients 
of subgrants under this part.''.

                   TITLE VI--MISCELLANEOUS PROVISIONS

SEC. 601. MULTILINGUALISM STUDY.

    (a) Findings.--Congress finds that--
            (1) even though all residents of the United States 
        should be proficient in English, without regard to 
        their country of birth, it is also of vital importance 
        to the competitiveness of the United States that those 
        residents be encouraged to learn other languages; and
            (2) education is the primary responsibility of 
        State and local governments and communities, and these 
        entities are responsible for developing policies in 
        this subject area.
    (b) Resident of the United States Defined.--In this 
section, the term ``resident of the United States'' means an 
individual who resides in the United States, other than an 
alien who is not lawfully present in the United States.
    (c) Study.--
            (1) In general.--Not later than 180 days after the 
        date of enactment of this Act, the Comptroller General 
        of the United States (referred to in this section as 
        the ``Comptroller General'') shall conduct a study of 
        multilingualism in the United States in accordance with 
        this section.
            (2) Requirements.--
                    (A) In general.--The study conducted under 
                this section shall ascertain--
                            (i) the percentage of residents in 
                        the United States who are proficient in 
                        English and at least 1 other language;
                            (ii) the predominant language other 
                        than English in which residents 
                        referred to in clause (i) are 
                        proficient;
                            (iii) the percentage of the 
                        residents described in clause (i) who 
                        were born in a foreign country;
                            (iv) the percentage of the 
                        residents described in clause (i) who 
                        were born in the United States;
                            (v) the percentage of the residents 
                        described in clause (iv) who are 
                        second-generation residents of the 
                        United States; and
                            (vi) the percentage of the 
                        residents described in clause (iv) who 
                        are third-generation residents of the 
                        United States.
                    (B) Age-specific categories.--The study 
                under this section shall, with respect to the 
                residents described in subparagraph (A)(i), 
                determine the number of those residents in each 
                of the following categories:
                            (i) Residents who have not attained 
                        the age of 12.
                            (ii) Residents who have attained 
                        the age of 12, but have not attained 
                        the age of 18.
                            (iii) Residents who have attained 
                        the age of 18, but have not attained 
                        the age of 50.
                            (iv) Residents who have attained 
                        the age of 50.
                    (C) Federal programs.--In conducting the 
                study under this section, the Comptroller 
                General shall establish a list of each Federal 
                program that encourages multilingualism with 
                respect to any category of residents described 
                in subparagraph (B).
                    (D) Comparisons.--In conducting the study 
                under this section, the Comptroller General 
                shall compare the multilingual population 
                described in subparagraph (A) with the 
                multilingual populations of foreign countries--
                            (i) in the Western hemisphere; and
                            (ii) in Asia.
    (d) Report.--Upon completion of the study under this 
section, the Comptroller General shall prepare, and submit to 
Congress, a report that contains the results of the study 
conducted under this section, and such findings and 
recommendations as the Comptroller General determines to be 
appropriate.

SEC. 602. SAFER SCHOOLS.

    (a) Short Title.--This section may be cited as the ``Safer 
Schools Act of 1998''.
    (b) Amendment.--Section 14601 of the Gun-Free Schools Act 
of 1994 (20 U.S.C. 8921) is amended by adding at the end the 
following new subsection:
    ``(g) For the purposes of this section, a weapon that has 
been determined to have been brought to a school by a student 
shall be admissible as evidence in any internal school 
disciplinary proceeding (related to an expulsion under this 
section).''.

SEC. 603. STUDENT IMPROVEMENT INCENTIVE AWARDS.

    Section 6201 of the Elementary and Secondary Education Act 
of 1965 (20 U.S.C. 7331) is amended--
            (1) in subsection (a)--
                    (A) in paragraph (1)(C), by striking 
                ``and'' after the semicolon;
                    (B) in paragraph (2), by striking the 
                period and inserting ``; and''; and
                    (C) by adding at the end the following:
            ``(3) student improvement incentive awards 
        described in subsection (c).''; and
            (2) by adding at the end the following:
    ``(c) Student Improvement Incentive Awards.--
            ``(1) Awards.--A State educational agency may use 
        funds made available for State use under this title to 
        make awards to public schools in the State that are 
        determined to be outstanding schools pursuant to a 
        statewide assessment described in paragraph (2).
            ``(2) Statewide assessment.--The statewide 
        assessment referred to in paragraph (1)--
                    ``(A) shall--
                            ``(i) determine the educational 
                        progress of students attending public 
                        schools within the State; and
                            ``(ii) allow for an objective 
                        analysis of the assessment on a school-
                        by-school basis; and
                    ``(B) may involve exit exams.''.

    And the Senate agree to the same.
                                   William Archer,
                                   Bill Goodling,
                                   Dick Armey,
                                 Managers on the Part of the House.

                                   William V. Roth,
                                   Connie Mack,
                                   Dan Coats,
                                   Slade Gorton,
                                   Paul Coverdell,
                                Managers on the Part of the Senate.
       JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE

      The managers on the part of the House and the Senate at 
the conference on the disagreeing votes of the two Houses on 
the amendment of the Senate to the bill (H.R. 2646) to amend 
the Internal Revenue Code of 1986 to allow tax-free 
expenditures from education individual retirement accounts for 
elementary and secondary school expenses, to increase the 
maximum annual amount of contributions to such accounts, and 
for other purposes, submit the following joint statement to the 
House and the Senate in explanation of the effect of the action 
agreed upon by the managers and recommended in the accompanying 
conference report.

                                CONTENTS

                                                                   Page
 I. Revenue Provisions...............................................36
          A. Modifications to Education Individual Retirement 
            Accounts (IRAs) (sec. 2 of the House bill and sec. 
            101 of the Senate amendment).........................    36
          B. Exclusion from Gross Income of Education 
            Distributions from Qualified Tuition Programs (sec. 
            104 of the Senate amendment).........................    42
          C. Extension of Exclusion for Employer-Provided 
            Educational Assistance (sec. 105 of the Senate 
            amendment)...........................................    45
          D. Arbitrage Rebate Exception for Governmental Bonds of 
            Certain Small Governments (sec. 106 of the Senate 
            amendment)...........................................    46
          E. Exclusion of Certain Amounts Received under the 
            National Health Corps Scholarship Program and the F. 
            Edward Hebert Armed Forces Health Professions 
            Scholarship and Financial Assistance Program (sec. 
            107 of the Senate amendment).........................    47
          F. Tax-Exempt Bonds for Privately Owned Public Schools 
            (sec. 108 of the Senate amendment)...................    48
          G. Employer Deductions for Vacation and Severance Pay 
            (sec. 3(a) of the House bill and sec. 201 of the 
            Senate amendment)....................................    49
          H. Modification to Foreign Tax Credit Carryback and 
            Carryover Periods (sec. 202 of the Senate amendment).    51
          I. Limited Tax Benefits in the Revenue Title Subject to 
            the Line Item Veto Act...............................    52
II. Non-Tax Provisions...............................................53
          A. Prohibition on Federal Testing......................    53
          B. Student Improvement Incentive Awards................    53
          C. State Incentives for Teacher Testing and Merit Pay..    53
          D. Equal Educational Opportunity.......................    54
          E. Education Block Grant...............................    54
          F. Sense of the Senate on Dollars to the Classroom.....    54
          G. Reading Excellence..................................    55
          H. Drop-Out Prevention Program.........................    55
          I. Multilingualism Study...............................    55
          J. Safe Schools........................................    55

                         I. REVENUE PROVISIONS

  A. Modifications to Education Individual Retirement Accounts (IRAs) 
    (sec. 2 of the House bill and sec. 101 of the Senate amendment)

                              Present Law

      In general.--Section 530 provides tax-exempt status to 
``education IRAs,'' meaning certain trusts (or custodial 
accounts) which are created or organized in the United States 
exclusively for the purpose of paying the qualified higher 
education expenses of a named beneficiary.1 
Contributions to education IRAs may be made only in cash. 
Annual contributions to education IRAs may not exceed $500 per 
designated beneficiary (except in cases involving certain tax-
free rollovers, as described below), and may not be made after 
the designated beneficiary reaches age 18.2 
Moreover, section 4973 imposes a penalty excise tax if a 
contribution is made by any person to an education IRA 
established on behalf of a beneficiary during any taxable year 
in which any contributions are made by anyone to a qualified 
State tuition program (defined under sec. 529) on behalf of the 
same beneficiary. These provisions were enacted as part of the 
Taxpayer Relief Act of 1997 (``1997 Act'').
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    \1\ Education IRAs generally are not subject to Federal income tax, 
but are subject to the unrelated business income tax (``UBIT'') imposed 
by section 511.
    \2\ An excise tax penalty may be imposed under present-law section 
4973 to the extent that excess contributions above the $500 annual 
limit are made to an education IRA.
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      Phase-out of contribution limit.--The $500 annual 
contribution limit for education IRAs is phased out ratably for 
contributors with modified AGI between $95,000 and $110,000 
($150,000 and $160,000 for joint returns). Individuals with 
modified AGI above the phase-out range are not allowed to make 
contributions to an education IRA established on behalf of any 
other individual.
      Treatment of distributions.--Amounts distributed from 
education IRAs are excludable from gross income to the extent 
that the amounts distributed do not exceed qualified higher 
education expenses of the designated beneficiary incurred 
during the year the distribution is made (provided that a HOPE 
credit or Lifetime Learning credit is not claimed under sec. 
25A with respect to the beneficiary for the same taxable 
year).3 If a HOPE credit or Lifetime Learning credit 
is claimed with respect to a student for a taxable year, then a 
distribution from an education IRA may (at the option of the 
taxpayer) be made during that taxable year on behalf of that 
student, but an exclusion is not available under the Act for 
the earnings portion of such distribution.4
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    \3\ The exclusion will not be a preference item for alternative 
minimum tax (AMT) purposes.
    \4\ If a HOPE credit or Lifetime Learning credit was claimed with 
respect to a student for an earlier taxable year, the exclusion 
provided for by section 530 may be claimed with respect to the same 
student for a subsequent taxable year with respect to a distribution 
from an education IRA made in that subsequent taxable year in order to 
cover qualified higher education expenses incurred during that year. 
Conversely, if an exclusion is claimed for a distribution from an 
education IRA with respect to a particular student, then a HOPE credit 
or Lifetime Learning credit will be available in a subsequent taxable 
year with respect to that same student (provided that no exclusion is 
claimed in such other taxable years for distributions from an education 
IRA on behalf of that student and provided that the requirements of the 
HOPE credit or Lifetime Learning credit are satisfied in the subsequent 
taxable year).
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      Distributions from an education IRA generally are deemed 
to consist of distributions of principal (which, under all 
circumstances, are excludable from gross income) and earnings 
(which may be excludable from gross income) by applying the 
ratio that the aggregate amount of contributions to the account 
for the beneficiary bears to the total balance of the account. 
If the qualified higher education expenses of the student for 
the year are at least equal to the total amount of the 
distribution (i.e., principal and earnings combined) from an 
education IRA, then the earnings in their entirety will be 
excludable from gross income. If, on the other hand, the 
qualified higher education expenses of the student for the year 
are less than the total amount of the distribution (i.e., 
principal and earnings combined) from an education IRA, then 
the qualified higher education expenses will be deemed to be 
paid from a pro-rata share of both the principal and earnings 
components of the distribution. Thus, in such a case, only a 
portion of the earnings will be excludable under section 530 
(i.e., a portion of the earnings based on the ratio that the 
qualified higher education expenses bear to the total amount of 
the distribution) and the remaining portion of the earnings 
will be includible in the distributee's gross 
income.5 To the extent that a distribution exceeds 
qualified higher education expenses of the designated 
beneficiary, an additional 10-percent tax is imposed on the 
earnings portion of such excess distribution under section 
530(d)(4), unless such distribution is made on account of the 
death or disability of, or scholarship received by, the 
designated beneficiary.
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    \5\ For example, if an education IRA has a total balance of 
$10,000, of which $4,000 represents principal (i.e., contributions) and 
$6,000 represents earnings, and if a distribution of $2,000 is made 
from such an account, then $800 of that distribution will be treated as 
a return of principal (which under no event is includible in the gross 
income of the distributee) and $1,200 of the distribution will be 
treated as accumulated earnings. In such a case, if qualified higher 
education expenses of the beneficiary during the year of the 
distribution are at least equal to the $2,000 total amount of the 
distribution (i.e., principal plus earnings), then the entire earnings 
portion of the distribution will be excludable under section 530, 
provided that a Hope credit or Lifetime Learning credit is not claimed 
for that same taxable year on behalf of the beneficiary. If, however, 
the qualified higher education expenses of the beneficiary for the 
taxable year are less than the total amount of the distribution, then 
only a portion of the earnings will be excludable from gross income 
under section 530. Thus, in the example discussed above, if the 
beneficiary incurs only $1,500 of qualified higher education expenses 
in the year that a $2,000 distribution is made, then only $900 of the 
earnings will be excludable from gross income under section 530 (i.e., 
an exclusion will be provided for the pro-rata portion of the earnings, 
based on the ratio that the $1,500 of qualified higher education 
expenses bears to the $2,000 distribution) and the remaining $300 of 
the earnings portion of the distribution will be includible in the 
distributee's gross income.
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      Section 530(d) allows tax-free (and penalty-free) 
transfers or rollovers of account balances from one education 
IRA benefitting one beneficiary to another education IRA 
benefitting another beneficiary (as well as redesignations of 
the named beneficiary), provided that the new beneficiary is a 
member of the family of the old beneficiary.6
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    \6\ For this purpose, a ``member of the family'' means persons 
described in paragraphs (1) through (8) of section 152(a)--e.g., sons, 
daughters, brothers, sisters, nephews and nieces, certain in-laws, 
etc.--and any spouse of such persons.
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      The legislative history to the 1997 Act indicates that 
any balance remaining in an education IRA will be deemed to be 
distributed within 30 days after the date that the named 
beneficiary reaches age 30 (or, if earlier, within 30 days of 
the date that the beneficiary dies).
      Qualified higher education expenses.--The term 
``qualified higher education expenses'' includes tuition, fees, 
books, supplies, and equipment required for the enrollment or 
attendance of the designated beneficiary at an eligible 
education institution, regardless of whether the beneficiary is 
enrolled at an eligible educational institution on a full-time, 
half-time, or less than half-time basis. Moreover, the term 
``qualified higher education expenses'' include room and board 
expenses (meaning the minimum room and board allowance 
applicable to the student as determined by the institution in 
calculating costs of attendance for Federal financial aid 
programs under sec. 472 of the Higher Education Act of 1965) 
for any period during which the beneficiary is at least a half-
time student. Qualified higher education expenses include 
expenses with respect to undergraduate or graduate-level 
courses. In addition, section 530(b)(2)(B) specifically 
provides that qualified higher education expenses include 
amounts paid or incurred to purchase tuition credits (or to 
make contributions to an account) under a qualified State 
tuition program, as defined in section 529, for the benefit of 
the beneficiary of the education IRA.
      Qualified higher education expenses generally include 
only out-of-pocket expenses. Such qualified higher education 
expenses do not include expenses covered by educational 
assistance for the benefit of the beneficiary that is 
excludable from gross income. Thus, total qualified higher 
education expenses are reduced by scholarship or fellowship 
grants excludable from gross income under present-law section 
117, as well as any other tax-free educational benefits, such 
as employer-provided educational assistance that is excludable 
from the employee's gross income under section 127. In 
addition, qualified higher education expenses do not include 
expenses paid with amounts that are excludable under section 
135. No reduction of qualified higher education expenses is 
required, however, for a gift, bequest, devise, or inheritance 
within the meaning of section 102(a).
      Eligible educational institution.--Eligible educational 
institutions are defined by reference to section 481 of the 
Higher Education Act of 1965. Such institutions generally are 
accredited post-secondary educational institutions offering 
credit toward a bachelor's degree, an associate's degree, a 
graduate-level or professional degree, or another recognized 
post-secondary credential. Certain proprietary institutions and 
post-secondary vocational institutions also are eligible 
institutions. The institution must be eligible to participate 
in Department of Education student aid programs.

                               House Bill

      Annual contribution limit.--For the period 1998 through 
2002, the House bill increases to $2,500 the annual 
contribution limit that currently applies to education IRAs 
under section 530(b)(1)(A)(iii). Thus, under the House bill, 
aggregate contributions that may be made by all contributors to 
one (or more) education IRAs established on behalf of any 
particular beneficiary are limited to $2,500 for each year 
during the period 1998 through 2002. For 2003 and later years, 
the annual contribution limit for education IRAs is $500.
      Qualified expenses.--With respect to contributions made 
during the period 1998 through 2002 (and earnings attributable 
to such contributions), the House bill expands the definition 
of qualified education expenses that may be paid with tax-free 
distributions from an education IRA. Specifically, the 
definition of qualified education expenses is expanded to 
include ``qualified elementary and secondary education 
expenses'' meaning (1) tuition, fees, tutoring, special needs 
services, books, supplies, computer equipment (including 
related software and services) and other equipment, 
transportation and supplementary expenses required for the 
enrollment or attendance of the designated beneficiary at a 
public, private, or religious school (through grade 12). 
``Qualified elementary and secondary education expenses'' also 
include certain homeschooling education expenses if the 
requirements of any applicable State or local law are met with 
respect to such homeschooling. For contributions made in 2003 
or later years (and for earnings attributable to such 
contributions), the definition of qualified education expenses 
is limited to post-secondary education expenses.
      Special needs beneficiaries.--The House bill also 
provides that, although contributions to an education IRA 
generally may not be made after the designated beneficiary 
reaches age 18, contributions may continue to be made to an 
education IRA in the case of a special needs beneficiary (as 
defined by Treasury Department regulations). In addition, under 
the bill, in the case of a special needs beneficiary, a deemed 
distribution of any balance in an education IRA will not be 
required when the beneficiary reaches age 30.
      Contributions by persons other than individuals.--The 
House bill clarifies that corporations and other entities 
(e.g., tax-exempt entities) are permitted to make contributions 
to education IRAs, regardless of the income of the corporation 
or entity during the year of the contribution. As under present 
law, the eligibility of high-income individuals to make 
contributions to education IRAs is phased out ratably for 
individuals with modified AGI between $95,000 and $110,000 
($150,000 and $160,000 for joint returns).
      Effective date.--The provisions are effective for taxable 
years beginning after December 31, 1997.

                            Senate Amendment

      Annual contribution limit.--The Senate amendment is the 
same as the House bill, except that the Senate amendment 
increases to $2,000 the annual contribution limit, and only for 
the period 1999 through 2002.
      Qualified expenses.--With respect to contributions made 
during the period 1999 through 2002 (and earnings attributable 
to such contributions), the Senate amendment expands the 
definition of qualified education expenses that may be paid 
with tax-free distributions from an education IRA. 
Specifically, the definition of qualified education expenses is 
expanded to include ``qualified elementary and secondary 
education expenses'' meaning (1) tuition, fees, academic 
tutoring 7, special needs services, books, supplies, 
and equipment (including computers and related software and 
services) incurred in connection with the enrollment or 
attendance of the designated beneficiary as an elementary or 
secondary student at a public, private, or religious school 
providing elementary or secondary education (kindergarten 
through grade 12), and (2) room and board, uniforms, 
transportation, and supplementary items and services (including 
extended-day programs) required or provided by such a school in 
connection with such enrollment or attendance of the designated 
beneficiary. ``Qualified elementary and secondary education 
expenses'' also include certain homeschooling education 
expenses if the requirements of any applicable State or local 
law are met with respect to such homeschooling. For 
contributions made in 2003 or later years (and for earnings 
attributable to such contributions), the definition of 
qualified education expenses is limited to post-secondary 
education expenses. 8
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    \7\ For this purpose, the Senate amendment provides that it is 
intended that ``academic tutoring'' means additional, personalized 
instruction provided in coordination with the student's academic 
courses.
    \8\ To the extent a taxpayer incurs ``qualified elementary and 
secondary expenses'' during any year that a distribution is made from 
an education IRA, the distribution will be deemed to first consist of a 
distribution of any contributions (and earnings thereon) that were made 
to the education IRA during the period 1999-2002 (reduced by the amount 
of such contributions and earnings that were deemed to be distributed 
in prior taxable years). The Senate amendment requires that trustees of 
education IRAs keep separate accounts with respect to contributions 
made during the period 1999-2002 (and earnings thereon).
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      Under the Senate amendment, no deduction or credit (such 
as the dependent care credit under section 21) will be allowed 
under the Internal Revenue Code for any qualified education 
expenses taken into account in determining the amount of the 
exclusion under section 530 for a distribution from an 
education IRA.
      With respect to post-secondary education, qualified 
education expenses include (1) tuition, fees, academic 
tutoring, special needs services, books, supplies, and 
equipment (including computers and related software and 
services) incurred in connection with the enrollment or 
attendance of the designated beneficiary at an eligible post-
secondary educational institution, and (2) room and board 
expenses (meaning the minimum room and board allowance 
applicable to the student as determined by the institution 
calculating costs of attendance for Federal financial aid 
programs) for any period during which the student is at least a 
half-time student.
      Special needs beneficiaries.--The Senate amendment is the 
same as the House bill. 9
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    \9\ The legislative history to the Senate amendment clarifies the 
Committee's intention that the determination of whether a beneficiary 
has ``special needs'' will be required to be made for each year that 
contributions are made to an education IRA after the beneficiary 
reaches age 18. However, if an individual meets the definition of a 
``special needs'' beneficiary when such individual reaches age 30, then 
such individual thereafter will be presumed to be a ``special needs'' 
beneficiary.
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      Contributions by persons other than individuals.--The 
Senate amendment is the same as the House bill.
      Technical corrections.--The Senate amendment provides for 
several technical corrections to section 530 (as enacted as 
part of the Taxpayer Relief Act of 1997), including: (1) adding 
a provision that any balance remaining in an education IRA will 
be deemed to be distributed within 30 days after the date that 
the named beneficiary reaches age 30; (2) clarifying that, 
under rules contained in present-law section 72, distributions 
from education IRAs are treated as representing a pro-rata 
share of the principal and accumulated earnings in the account; 
and (3) clarifying that, under section 530(d)(4), the 10-
percent additional tax will not be imposed in cases where a 
distribution (although used to pay for qualified higher 
education expenses) is includible in gross income solely 
because the taxpayer elects the HOPE or Lifetime Learning 
credit on behalf of the student for the same taxable year.
      Effective date.--The provisions modifying education IRAs 
under section 530 generally are effective for taxable years 
beginning after December 31, 1998. However, the provision 
thatincreases the annual contribution limit for education IRAs (i.e., 
to $2,000 per year) applies during the period January 1, 1999, through 
December 31, 2002, and the provision that expands the definition of 
qualified education expenses to include qualified elementary and 
secondary education expenses applies to contributions (and earnings 
thereon) made during the period January 1, 1999, through December 31, 
2002. The technical correction provisions are effective as if included 
in the 1997 Act--i.e., for taxable years beginning after December 31, 
1997.

                          Conference Agreement

      The conference agreement follows the Senate amendment and 
includes certain additional technical corrections.
      The conference agreement clarifies that, in the event of 
the death of the designated beneficiary, the balance remaining 
in an education IRA may be distributed (without imposition of 
the additional 10-percent tax) to any other (i.e., contingent) 
beneficiary or to the estate of the deceased designated 
beneficiary. If any member of the family of the deceased 
beneficiary becomes the new designated beneficiary of an 
education IRA, then no tax will be imposed on such 
redesignation and the account will continue to be treated as an 
education IRA.
      The conference agreement further provides that the 
additional 10-percent tax will not apply to the distribution of 
any contribution to an education IRA made during a taxable year 
if such distribution is made on or before the date that a 
return is required to be filed (including extensions of time) 
by the beneficiary for the taxable year during which the 
contribution was made (or, if the beneficiary is not required 
to file such a return, April 15th of the year following the 
taxable year during which the contribution was made). In 
addition, the conference agreement amends section 4973(e) to 
provide that the excise tax penalty applies under that section 
for each year that an excess contribution remains in an 
education IRA (and not merely the year that the excess 
contribution is made).
      The conference agreement clarifies that, in order for 
taxpayers to establish an education IRA, the designated 
beneficiary must be a life-in-being. Further, the conference 
agreement clarifies that for purposes of the special rules 
regarding tax-free rollovers and changes of designated 
beneficiaries, the new beneficiary must be under the age of 30.
      The conference agreement also provides that, if any 
qualified higher education expenses are taken into account in 
determining the amount of the exclusion under section 530 for a 
distribution from an education IRA, then no deduction (under 
section 162 or any other section), or exclusion (under section 
135) or credit will be allowed under the Internal Revenue Code 
with respect to such qualified higher education expenses.
      In addition, because the 1997 Act allows taxpayers to 
redeem U.S. Savings Bonds and be eligible for the exclusion 
under present-law section 135 (as if the proceeds were used to 
pay qualified higher education expenses) provided the proceeds 
from the redemption are contributed to an education IRA (or to 
a qualified State tuition program defined under section 529) on 
behalf of the taxpayer, the taxpayer's spouse, or a dependent, 
the conference agreement conforms the definition of ``eligible 
educational institution'' under section 135 to the broader 
definition of that term under present-law section 530 (and 
section 529). Thus, for purposes of section 135, as under 
present-law sections 529 and 530, the term ``eligible 
educational institution'' is defined as an institution which 
(1) is described in section 481 of the Higher Education Act of 
1965 (20 U.S.C. 1088) and (2) is eligible to participate in 
Department of Education student aid programs.

    B. Exclusion From Gross Income of Education Distributions From 
     Qualified Tuition Programs (sec. 104 of the Senate amendment)

                              Present Law

      Section 529 provides tax-exempt status to ``qualified 
State tuition programs,'' meaning certain programs established 
and maintained by a State (or agency or instrumentality 
thereof) under which persons may (1) purchase tuition credits 
or certificates on behalf of a designated beneficiary that 
entitle the beneficiary to a waiver or payment of qualified 
higher education expenses of the beneficiary, or (2) make 
contributions to an account that is established for the purpose 
of meeting qualified higher education expenses of the 
designated beneficiary of the account. The term ``qualified 
higher education expenses'' has the same meaning as does the 
term for purposes of education IRAs (as described above) and, 
thus, includes expenses for tuition, fees, books, supplies, and 
equipment required for the enrollment or attendance at an 
eligible educational institution,\10\ as well as room and board 
expenses (meaning the minimum room and board allowance 
applicable to the student as determined by the institution in 
calculating costs of attendance for Federal financial aid 
programs under sec. 472 of the Higher Education Act of 1965) 
for any period during which the student is at least a half-time 
student.
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    \10\ ``Eligible educational institutions'' are defined the same for 
purposes of education IRAs (described in I.A., above) and qualified 
State tuition programs.
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      Section 529 also provides that no amount shall be 
included in the gross income of a contributor to, or 
beneficiary of, a qualified State tuition program with respect 
to any distribution from, or earnings under, such program, 
except that (1) amounts distributed or educational benefits 
provided to a beneficiary (e.g., when the beneficiary attends 
college) will be included in the beneficiary's gross income 
(unless excludable under another Code section) to the extent 
such amounts or the value of the educational benefits exceed 
contributions made on behalf of the beneficiary, and (2) 
amounts distributed to a contributor or another distributee 
(e.g., when a parent receives a refund) will be included in the 
contributor's/distributee's gross income to the extent such 
amounts exceed contributions made on behalf of the beneficiary.
      A qualified State tuition program is required to provide 
that purchases or contributions only be made in cash.\11\ 
Contributors and beneficiaries are not allowed to directly or 
indirectly direct the investment of contributions to the 
program (or earnings thereon). The program is required to 
maintain a separate accounting for each designated beneficiary. 
A specified individual must be designated as the beneficiary at 
the commencement of participation in a qualified State tuition 
program (i.e., when contributions are first made to purchase an 
interest in such a program), unless interests in such a program 
are purchased by a State or local government or a tax-exempt 
charity described in section 501(c)(3) as part of a scholarship 
program operated by such government or charity under which 
beneficiaries to be named in the future will receive such 
interests as scholarships. A transfer of credits (or other 
amounts) from one account benefitting one designated 
beneficiary to another account benefitting a different 
beneficiary will be considered a distribution (as will a change 
in the designated beneficiary of an interest in a qualified 
State tuition program), unless the beneficiaries are members of 
the same family.\12\ Earnings on an account may be refunded to 
a contributor or beneficiary, but the State or instrumentality 
must impose a more than de minimis monetary penalty unless the 
refund is (1) used for qualified higher education expenses of 
the beneficiary, (2) made on account of the death or disability 
of the beneficiary, or (3) made on account of a scholarship 
received by the designated beneficiary to the extent the amount 
refunded does not exceed the amount of the scholarship used for 
higher education expenses.
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    \11\ Sections 529(c)(2), (c)(4), and (c)(5), and section 530(d)(3) 
provide special estate and gift tax rules for contributions made to, 
and distributions made from, qualified State tuition programs and 
education IRAs.
    \12\ For this purpose, the term ``member of the family'' means 
persons described in paragraphs (1) through (8) of section 152(a)--
e.g., sons, daughters, brothers, sisters, nephews and nieces, certain 
in-laws, etc.--and any spouse of such persons.
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      No amount is includible in the gross income of a 
contributor to, or beneficiary of, a qualified State tuition 
program with respect to any contribution to or earnings on such 
a program until a distribution is made from the program, at 
which time the earnings portion of the distribution (whether 
made in cash or in-kind) will be includible in the gross income 
of the distributee. However, to the extent that a distribution 
from a qualified State tuition program is used to pay for 
qualified tuition and related expenses (as defined in sec. 
25A(f))(1)), the distributee (or another taxpayer claiming the 
distributee as a dependent) will be able to claim the HOPE 
credit or Lifetime Learning credit under section 25A with 
respect to such tuition and related expenses (assuming that the 
other requirements for claiming the HOPE credit or Lifetime 
Learning credit are satisfied and the modified AGI phaseout for 
those credits does not apply).

                               House Bill

      No provision.

                            Senate Amendment

      Under the Senate amendment, an exclusion from gross 
income is provided for distributions from qualified State 
tuition programs (as defined in sec. 529) to the extent that 
the distribution is used to pay for (1) tuition, fees, academic 
tutoring, special needs services, books, supplies, and 
equipment (including computers and related software and 
services) incurred in connection with the enrollment or 
attendance of a designated beneficiary at an eligible post-
secondary educational institution (i.e., colleges, 
universities, and certain vocational schools), and (2) room and 
board expenses (meaning the minimum room and board allowance 
applicable to the student as determined by the institution 
calculating costs of attendance for Federal financial aid 
programs) for any period during which the student is at least a 
half-time student. As under present law, there is no specific 
dollar limitation imposed under the Internal Revenue Code on 
contributions made to qualified State tuition programs, 
although section 529(b)(7) will continue to require that the 
programs themselves provide adequate safeguards to prevent 
contributions on behalf of a beneficiary in excess of those 
necessary to provide for qualified higher education expenses of 
the beneficiary.
      As with the present-law exclusion from gross income for 
distributions from education IRAs, the tax-free treatment for a 
distribution from a qualified State tuition program will be 
allowed only if, for the taxable year during which the 
distribution is made, a HOPE or Lifetime Learning credit (under 
sec. 25A) is not claimed on behalf of the student. As under 
present law, if a student is claimed as a dependent by his or 
her parent, then the parent (if eligible) must decide whether 
to elect to claim a HOPE or Lifetime Learning credit with 
respect to that student for that taxable year; and, if the 
parent elects to claim a HOPE or Lifetime Learning credit, then 
the earnings portion of a distribution made to a student from a 
qualified State tuition program will be includible in the gross 
income of the student.
      Under the Senate amendment, no deduction (under section 
162 or any other section) or credit is allowed under the 
Internal Revenue Code for any qualified higher education 
expenses taken into account in determining the amount of the 
exclusion under section 529 for a distribution made to, or on 
behalf of, a student by a qualified State tuition program.
      Technical correction.--The Senate amendment clarifies 
that, under rules contained in present-law section 72, 
distributions from qualified State tuition programs are treated 
as representing a pro-rata share of the principal (i.e., 
contributions) and accumulated earnings in the account.
      Effective date.--The provision that allows an exclusion 
from gross income for certain distributions from qualified 
State tuition programs under section 529 (and the modification 
to the definition of qualified higher education expenses under 
that section) is effective for distributions made in taxable 
years beginning after December 31, 1998.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
except that it expands the definition of ``qualified tuition 
program'' to include not only qualified State tuition programs 
as defined under present-law section 529, but also certain 
prepaid tuition programs established and maintained by one or 
more eligible educational institutions (which may be private 
institutions) that satisfy the requirements under section 529 
(other than the present-law State sponsorship rule). In the 
case of a qualified tuition program maintained by one or more 
private educational institutions, persons may purchase tuition 
credits or certificates on behalf of a designated beneficiary 
as set forth in section 529(b)(1)(A)(i), but may not make 
contributions to an account as described in section 
529(b)(1)(A)(ii) (so-called ``savings account plans''). In 
addition, contributions to any such program on behalf of a 
named beneficiary may not exceed $5,000 per year, with an 
aggregate limit of $50,000 for contributions to all such 
programs on behalf of that beneficiary for all years.\13\ 
Contributions may not be made to a qualified tuition program 
maintained by one or more private educational institutions in 
any year in which contributions are made on behalf of the same 
beneficiary to an education IRA or a State-sponsored qualified 
tuition program.
---------------------------------------------------------------------------
    \13\ To the extent contributions exceed the $50,000 aggregate 
limit, an excise tax penalty may be imposed under present-law section 
4973, unless the excess contributions (and any earnings thereon) are 
returned to the contributor before the due date for the return for the 
taxable year during which the excess contribution is made.
    State-sponsored qualified tuition programs will continue to be 
governed by the rule contained in present-law section 529(b)(7) that 
such programs provide adequate safeguards to prevent contributions on 
behalf of a designated beneficiary in excess of those necessary to 
provide for the qualified higher education expenses of the beneficiary. 
State-sponsored qualified tuition programs will not be subject to a 
specific dollar cap under section 529 on annual (or aggregate) 
contributions that can be made under the program on behalf of a named 
beneficiary.
---------------------------------------------------------------------------
      In addition, the conference agreement includes a 
technical correction to section 529(e)(2), clarifying that--for 
purposes of tax-free rollovers and changes of designated 
beneficiaries--a ``member of the family'' includes the spouse 
of the original beneficiary.
      Effective date.--The provision providing for the 
establishment of qualified tuition programs maintained by one 
or more private educational institutions is effective for 
taxable years beginning after December 31, 2005. The technical 
corrections provision is effective for distributions made after 
December 31, 1997.

 C. Extension of Exclusion for Employer-Provided Education Assistance 
                   (sec. 105 of the Senate amendment)

                              Present Law

      Under present-law section 127, an employee's gross income 
and wages do not include amounts paid or incurred by the 
employer for educational assistance provided to the employee if 
such amounts are paid or incurred pursuant to an educational 
assistance program that meets certain requirements. This 
exclusion is limited to $5,250 of educational assistance with 
respect to an individual during a calendar year. The exclusion 
does not apply with respect to graduate- level courses. The 
exclusion is scheduled to expire with respect to courses 
beginning after May 31, 2000.
      In the absence of the exclusion provided by section 127, 
educational assistance is excludable from income only if the 
education is related to the employee's current job, meaning 
that the education (1) maintains or improves a skill required 
in a trade or business currently engaged in by the taxpayer, or 
(2) meets the express requirements of the taxpayer's employer, 
or requirements of applicable law or regulations, imposed as a 
condition of continued employment (but not if the education 
relates to certain minimum educational requirements or enables 
a taxpayer to begin working in a new trade or business).

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment reinstates the exclusion for 
graduate-level courses, effective with respect to courses 
beginning after December 31, 1997. In addition, the Senate 
amendment provides that the exclusion (as applied to both 
graduate and undergraduate courses) expires with respect to 
courses beginning after December 31, 2002.
      Effective date.--The extension of the exclusion for 
employer-provided educational assistance to graduate-level 
courses is effective for expenses with respect to courses 
beginning after December 31, 1997. The exclusion (with respect 
to both graduate and undergraduate courses) expires with 
respect to courses beginning after December 31, 2002.

                          Conference Agreement

      The conference agreement follows the Senate amendment, 
except that it does not reinstate the exclusion for graduate-
level courses.

 D. Arbitrage Rebate Exception for Governmental Bonds of Certain Small 
             Governments (sec. 106 of the Senate amendment)

                              Present Law

      Arbitrage profits earned on tax-exempt bonds generally 
must be rebated to the Federal Government. An exception is 
provided for profits earned on governmental bonds issued by 
certain governmental units that issue no more than $5 million 
of such bonds in the year when the bonds benefitting from the 
exception are issued. The $5 million limit is increased to $10 
million if bonds equal to at least the excess over $5 million 
are used to finance public schools.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment allows an additional $5 million of 
public school bonds to be issued without loss of eligibility 
for the small-issuer arbitrage rebate exception (for total 
issuance of up to $15 million per year if bonds equal to at 
least the excess over $5 million are used to finance public 
schools).
      Effective date.--The provision is effective for bonds 
issued after December 31, 1998.

                          Conference Agreement

      The conference agreement follows the Senate amendment.

  E. Exclusion of Certain Amounts Received Under the National Health 
Corps Scholarship Program and the F. Edward Hebert Armed Forces Health 
 Professions Scholarship and Financial Assistance Program (sec. 107 of 
                         the Senate amendment)

                              Present Law

      Section 117 excludes from gross income amounts received 
as a qualified scholarship by an individual who is a candidate 
for a degree and used for tuition and fees required for the 
enrollment or attendance (or for fees, books, supplies, and 
equipment required for courses of instruction) at a primary, 
secondary, or post-secondary educational institution. The tax-
free treatment provided by section 117 does not extend to 
scholarship amounts covering regular living expenses, such as 
room and board. In addition to the exclusion for qualified 
scholarship, section 117 provides an exclusion from gross 
income for qualified tuition reductions for certain education 
provided to employees (and their spouses and dependents) of 
certain educational organizations.
      Section 117(c) specifically provides that the exclusion 
for qualified scholarships and qualified tuition reductions 
does not apply to any amount received by a student that 
represents payment for teaching, research, or other services by 
the student required as a condition for receiving the 
scholarship or tuition reduction.

                               House Bill

      No provision.

                            Senate Amendment

      Under the Senate amendment, amounts received by an 
individual under the National Health Corps Scholarship 
Program--administered under section 338A(g)(1)(A) of the Public 
Health Service Act--are eligible for tax-free treatment as a 
qualified scholarship under section 117, without regard to the 
fact that the recipient of the scholarship is obligated to 
later provide medical services in a geographic area (or to an 
underserved population group or designated facility) identified 
by the Public Health Service as having a shortage of health 
care professionals. As with other qualified scholarships under 
section 117, the tax-free treatment does not apply to amounts 
received by students to cover regular living expenses, such as 
room and board.
      Effective date.--The provision applies to amounts 
received in taxable years beginning after December 31, 1993.

                          Conference Agreement

      The conference agreement follows the Senate amendment. In 
addition, the conference agreement provides that amounts 
received by an individual under the F. Edward Hebert Armed 
Forces Health Professions Scholarship and Financial Assistance 
Program under subchapter I of chapter 105 of title 10 U.S.C. 
also are eligible for tax-free treatment as a qualified 
scholarship under section 117, without regard to the 
recipient's future service obligation.

F. Tax-Exempt Bonds for Privately Owned Public Schools (sec. 108 of the 
                           Senate amendment)

                              Present Law

      Interest on State and local government bonds generally is 
tax-exempt if the bond proceeds are used to carry out 
governmental functions of the issuer and the debt is repaid 
with governmental funds. Interest on bonds used to finance 
private business activities is taxable unless the Internal 
Revenue Code includes an exception for the activity involved. 
The Code does not include an exception for bonds to finance 
public schools owned by for-profit private businesses.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment allows States to issue up to $10 per 
resident ($5 million, if greater) per year in tax-exempt bonds 
for public schools that are owned by for-profit, private 
businesses, but that are operated by States or local 
governments as part of the public school system. Except for an 
amount not exceeding $5 million per year, each State could use 
these bonds only for public elementary and secondary schools 
located in ``high-growth'' school districts. High-growth school 
districts are defined as districts having an enrollment of at 
least 5,000 students in the second preceding academic year and 
having experienced student enrollment increases of 20 percent 
or more during the 5-year period ending with that second year.
      Effective date.--The provision is effective for bonds 
issued after December 31, 1998.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.

G. Employer Deductions for Vacation and Severance Pay (sec. 3(a) of the 
            House bill and sec. 201 of the Senate amendment)

                              Present Law

      For deduction purposes, any method or arrangement that 
has the effect of a plan deferring the receipt of compensation 
or other benefits for employees is treated as a deferred 
compensation plan (sec. 404(b)). In general, contributions 
under a deferred compensation plan (other than certain pension, 
profit-sharing and similar plans) are deductible in the taxable 
year in which an amount attributable to the contribution is 
includible in income of the employee. However, vacation pay 
which is treated as deferred compensation is deductible for the 
taxable year of the employer in which the vacation pay is paid 
to the employee (sec. 404(a)(5)).
      Temporary Treasury regulations provide that a plan, 
method, or arrangement defers the receipt of compensation or 
benefits to the extent it is one under which an employee 
receives compensation or benefits more than a brief period of 
time after the end of the employer's taxable year in which the 
services creating the right to such compensation or benefits 
are performed. A plan, method or arrangement is presumed to 
defer the receipt of compensation for more than a brief period 
of time after the end of an employer's taxable year to the 
extent that compensation is received after the 15th day of the 
3rd calendar month after the end of the employer's taxable year 
in which the related services are rendered (the ``2\1/2\ 
month'' period). A plan, method or arrangement is not 
considered to defer the receipt of compensation or benefits for 
more than a brief period of time after the end of the 
employer's taxable year to the extent that compensation or 
benefits are received by the employee on or before the end of 
the applicable 2\1/2\ month period. (Temp. Treas. Reg. sec. 
1.404(b)-1T A-2).
      The Tax Court recently addressed the issue of when 
vacation pay and severance pay are considered deferred 
compensation in Schmidt Baking Co., Inc., 107 T.C. 271 (1996). 
In Schmidt Baking, the taxpayer was an accrual basis taxpayer 
with a fiscal year that ended December 28, 1991. The taxpayer 
funded its accrued vacation and severance pay liabilities for 
1991 by purchasing an irrevocable letter of credit on March 13, 
1992. The parties stipulated that the letter of credit 
represented a transfer of substantially vested interest in 
property to employees for purposes of section 83, and that the 
fair market value of such interest was includible in the 
employees'' gross incomes for 1992 as a result of the 
transfer.14 The Tax Court held that the purchase of 
the letter of credit, and the resulting income inclusion, 
constituted payment of the vacation and severance pay within 
the 2\1/2\ month period. Thus, the vacation and severance pay 
were treated as received by the employees within the 2\1/2\ 
month period and were not treated as deferred compensation. The 
vacation pay and severance pay were deductible by the taxpayer 
for its 1991 fiscal year pursuant to its normal accrual method 
of accounting.
---------------------------------------------------------------------------
    \14\ While the rules of section 83 may govern the income inclusion, 
section 404 governs the deduction if the amount involved is deferred 
compensation.
---------------------------------------------------------------------------

                               House Bill

      The House bill specifically overrules the result in 
Schmidt Baking and provides that the Internal Revenue Code will 
be applied without regard to the result reached in that case. 
Thus, under the House bill, the fact that an item of 
compensation is includible in income is not taken into account 
in determining whether or not payment has been made. Thus, an 
item of compensation must have been actually paid or received 
by employees within the 2\1/2\ month period in order for the 
compensation not to be treated as deferred compensation.
      While Schmidt Baking involved only vacation pay and 
severance pay, the provision is not limited to such items of 
compensation. In addition, arrangements similar to the letter 
of credit approach used in Schmidt Baking do not constitute 
actual receipt by the employee.
      Effective date.--The provision is effective for taxable 
years ending after October 8, 1997. Any change in method of 
accounting required by the provision is treated as initiated by 
the taxpayer with the consent of the Secretary. Any adjustment 
required by section 481 as a result of the change is taken into 
account in the year of the change.

                            Senate Amendment

      The Senate amendment is the same as the House bill, 
except that the Senate amendment does not apply to severance 
pay. In addition, the Senate amendment makes certain technical 
modifications. Instead of providing that the Code is to be 
applied without regard to the result in Schmidt Baking, the 
Senate amendment explicitly provides that for purposes of 
determining whether an item of compensation (other than 
severance pay) is deferred compensation, the compensation is 
not considered to be paid or received until actually received 
by the employee. As under the House bill, similar arrangements 
to the letter of credit approach used in Schmidt Baking do not 
constitute actual receipt by the employee.
      Effective date.--The provision is effective for taxable 
years ending after the date of enactment. With respect to the 
change in method of accounting, the Senate amendment is the 
same as the House bill.

                          Conference Agreement

      The conference agreement follows the House bill, with 
certain technical modifications as incorporated in the Senate 
amendment.
      As under the House bill and Senate amendment, the fact 
that an item of compensation is includible in employees' 
incomes or wages within the applicable 2\1/2\ month period is 
not relevant to determining whether an item of compensation is 
deferred compensation.
      As under the House bill and Senate amendment, many 
arrangements in addition to the letter of credit approach used 
in Schmidt Baking do not constitute actual receipt by 
employees. For example, actual receipt does not include the 
furnishing of a note or letter or other evidence of 
indebtedness of the taxpayer, whether or not the evidence is 
guaranteed by any other instrument or by any third party. As a 
further example, actual receipt does not include a promise of 
the taxpayer to provide service or property in the future 
(whether or not the promise is evidenced by a contract or other 
written agreement). In addition, actual receipt does not 
include an amount transferred as a loan, refundable deposit, or 
contingent payment. Further, amounts set aside in a trust for 
employees are not considered to be actually received by the 
employee.
      Effective date.--The provision is effective for taxable 
years ending after December 31, 2001. Under the conference 
agreement, for the first taxable year for which the provision 
is effective, a taxpayer is permitted to calculate estimated 
tax liability by taking into account only 60 percent of the 
estimated tax payments otherwise required to made on account of 
the provision.

 H. Modification to Foreign Tax Credit Carryback and Carryover Periods 
                   (sec. 202 of the Senate amendment)

                              Present Law

      U.S. persons may credit foreign taxes against U.S. tax on 
foreign-source income. The amount of foreign tax credits that 
can be claimed in a year is subject to a limitation that 
prevents taxpayers from using foreign tax credits to offset 
U.S. tax on U.S.-source income. Separate foreign tax credit 
limitations are applied to specific categories of income.
      The amount of creditable taxes paid or accrued (or deemed 
paid) in any taxable year which exceeds the foreign tax credit 
limitation is permitted to be carried back two years and 
forward five years. The amount carried over may be used as a 
credit in a carryover year to the extent the taxpayer otherwise 
has excess foreign tax credit limitation for such year. The 
separate foreign tax credit limitations apply for purposes of 
the carryover rules.

                               House Bill

      No provision.

                            Senate Amendment

      The Senate amendment reduces the carryback period for 
excess foreign tax credits from two years to one year. The 
amendment also extends the excess foreign tax credit 
carryforward period from five years to seven years.
      Effective date.--The provision applies to foreign tax 
credits arising in taxable years beginning after December 31, 
2000.

                          Conference Agreement

      The conference agreement does not include the Senate 
amendment.

 I. Limited Tax Benefits in the Revenue Title Subject to the Line Item 
                                Veto Act

                              Present Law

      The Line Item Veto Act amended the Congressional Budget 
and Impoundment Act of 1974 to grant the President the limited 
authority to cancel specific dollar amounts of discretionary 
budget authority, certain new direct spending, and limited tax 
benefits. The Line Item Veto Act provides that the Joint 
Committee on Taxation is required to examine any revenue or 
reconciliation bill or joint resolution that amends the 
Internal Revenue Code of 1986 prior to its filing by a 
conference committee in order to determine whether or not the 
bill or joint resolution contains any ``limited tax benefits,'' 
and to provide a statement to the conference committee that 
either (1) identifies each limited tax benefit contained in the 
bill or resolution, or (2) states that the bill or resolution 
contains no limited tax benefits. The conferees determine 
whether or not to include the Joint Committee on Taxation 
statement in the conference report. If the conference report 
includes the information from the Joint Committee on Taxation 
identifying provisions that are limited tax benefits, then the 
President may cancel one or more of those, but only those, 
provisions that have been identified. If such a conference 
report contains a statement from the Joint Committee on 
Taxation that none of the provisions in the conference report 
are limited tax benefits, then the President has no authority 
to cancel any of the specific tax provisions, because there are 
no tax provisions that are eligible for cancellation under the 
Line Item Veto Act. If the conference report contains no 
statement with respect to limited tax benefits, then the 
President may cancel any revenue provision in the conference 
report that he determines to be a limited tax benefit.

                          Conference Statement

      The Joint Committee on Taxation has determined that the 
revenue title to H.R. 2646 contains the following provision 
that constitutes a limited tax benefit within the meaning of 
the Line Item Veto Act:
      Section 104 (relating to additional increase in arbitrage 
rebate exception for governmental bonds used to finance 
education facilities).

                         II. NON-TAX PROVISIONS

                   A. Prohibition on Federal Testing

                               House Bill

      No provision.

                            Senate Amendment

      Section 102 of Title I of the Senate amendment prohibits 
Federally-sponsored testing unless specifically and explicitly 
provided for in authorizing legislation enacted into law.

                          Conference Agreement

      Senate recedes.

                B. Student Improvement Incentive Awards

                               House Bill

      No provision.

                            Senate Amendment

      Section 103 of Title I of the Senate amendment authorizes 
student improvement incentive awards which could be used by a 
State educational agency to make awards to public schools in 
the State that are determined to be outstanding schools 
pursuant to a statewide assessment.

                          Conference Agreement

      House recedes.

         C. State Incentives for Teacher Testing and Merit Pay

                               House Bill

      No provision.

                            Senate Amendment

      Section 301 of Title III of the Senate amendment 
authorizes incentives for states to implement teacher testing 
and merit pay programs. The Department of Education would 
provide awards to states that test their K-12 teachers every 3-
5 years in the subjects they teach and that have a merit pay 
program.

                          Conference Agreement

      House recedes.

                    D. Equal Educational Opportunity

                               House Bill

      No provision.

                            Senate Amendment

      Section 401 of Title IV of the Senate amendment 
authorizes the use of Federal education dollars to fund 
education reform projects that provide same gender schools and 
classrooms, as long as comparable educational opportunities are 
offered for students of both sexes.

                          Conference Agreement

      House recedes.

                        E. Education Block Grant

                               House Bill

      No provision.

                            Senate Amendment

      Sections 501-507 of Title V of the Senate amendment 
provide States a choice of receiving over $10 billion in 
Federal education funds as a block grant at the state level, 
local level, or to continue receiving funding as under current 
categorical programs.

                          Conference Agreement

      Senate recedes. The Conferees have reluctantly agreed to 
remove the education block grant amendment of Senator Slade 
Gorton (R-WA) from the conference report in order to 
expeditiously move the underlying education savings account 
measure to the President. The Conferees believe the Gorton 
amendment would have returned authority for decisions about our 
children's education to where it belongs--to our parents, 
teachers, principals, superintendents and elected school board 
members, not bureaucrats in Washington, DC. The Conferees wish 
to commend the diligent efforts of Senator Gorton in this 
matter.

           F. Sense of the Senate on Dollars to the Classroom

                               House Bill

      No provision.

                            Senate Amendment

      Sections 601-602 of Title VI of the Senate amendment is a 
Sense of the Senate resolution that 95 percent of every Federal 
education dollar should end up in the classroom.

                          Conference Agreement

      House recedes.

                         G. Reading Excellence

                               House Bill

      No provision.

                            Senate Amendment

      Sections 701, 711, and 721-725 of Title VII of the Senate 
amendment authorize a literacy program which focuses upon 
training teachers to teach reading using scientifically proven 
methods, like phonics.

                          Conference Agreement

      House recedes.

                     H. Drop-out Prevention Program

                               House Bill

      No provision.

                            Senate Amendment

      Sections 801, 811-812, and 821 of Title VIII of the 
Senate amendment authorize a National Dropout Prevention 
program.

                          Conference Agreement

      Senate recedes.

                        I. Multilingualism Study

                               House Bill

      No provision.

                            Senate Amendment

      Section 901 of Title IX of the Senate amendment 
authorizes a study on multilingualism.

                          Conference Agreement

      House recedes with an amendment to add a finding to 
indicate that education is the primary responsibility of State 
and local governments and as such they are responsible for 
developing policies on multilingualism.

                            J. Safe Schools

                               House Bill

      No provision.

                            Senate Amendment

      Section 902 of Title IX of the Senate amendment provides 
that weapons brought to school are admissible as evidence in 
any internal school disciplinary proceeding.

                          Conference Agreement

      House recedes.

                                   William Archer,
                                   Bill Goodling,
                                   Dick Armey,
                                 Managers on the Part of the House.

                                   William V. Roth,
                                   Connie Mack,
                                   Dan Coats,
                                   Slade Gorton,
                                   Paul Coverdell,
                                Managers on the Part of the Senate.

                                
