[House Report 106-546]
[From the U.S. Government Publishing Office]



106th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     106-546

======================================================================



 
          EDUCATION SAVINGS AND SCHOOL EXCELLENCE ACT OF 2000

                                _______
                                

 March 24, 2000.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

    Mr. Archer, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                         [To accompany H.R. 7]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Ways and Means, to whom was referred the 
bill (H.R. 7) 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 
considered the same, report favorably thereon with an amendment 
and recommend that the bill as amended do pass.

                                CONTENTS

                                                                   Page
 I. Summary and Background............................................9
          A. Purpose and Summary.................................     9
          B. Background and Need for Legislation.................    10
          C. Legislative History.................................    10
II. Explanation of the Bill..........................................11
          A. Expand Education Savings Accounts...................    11
          B. Allow Tax-Free Distributions From State and Private 
              Education Programs.................................    16
          C. Eliminate Tax on Awards under the National Health 
              Service Corps Scholarship Program, the F. Edward 
              Hebert Armed Forces Health Professions Scholarship 
              and Financial Assistance Program, the National 
              Institutes of Health Undergraduate Scholarship 
              Program, and Certain State-Sponsored Scholarship 
              Programs...........................................    19
          D. Liberalize Tax-Exempt Bond Arbitrage Rebate 
              Exceptions for Public School Construction Bonds....    20
          E. Student Loan Interest Deduction.....................    22
          F. Two-Percent Floor Not to Apply to Professional 
              Development Expenses of Teachers...................    24
          G. Extension of Deduction for Computer Donations to 
              Schools............................................    24
III.Vote of the Committee............................................26

IV. Budget Effects of the Bill.......................................26
          A. Committee Estimates of Budgetary Effects............    26
          B. Statement Regarding New Budget Authority and Tax 
              Expenditures.......................................    29
          C. Cost Estimate Prepared by the Congressional Budget 
              Office.............................................    29
 V. Other Matters To Be Discussed Under the Rules of the House.......30
          A. Committee Oversight Findings and Recommendations....    30
          B. Summary of Findings and Recommendations of the 
              Committee on Government Reform and Oversight.......    31
          C. Constitutional Authority Statement..................    31
          D. Information Relating to Unfunded Mandates...........    31
          E. Applicability of House Rule XXI5(b).................    31
          F. Tax Complexity Analysis.............................    31
VI. Changes in Existing Law Made by the Bill, as Reported............32
VII. Dissenting Views................................................52
  The amendment is as follows:
  Strike out all after the enacting clause and insert in lieu 
thereof the following:

SECTION 1. SHORT TITLE; ETC.

  (a) Short Title.--This Act may be cited as the ``Education Savings 
and School Excellence Act of 2000''.
  (b) Amendment of 1986 Code.--Except as otherwise expressly provided, 
whenever in this Act an amendment or repeal is expressed in terms of an 
amendment to, or repeal of, a section or other provision, the reference 
shall be considered to be made to a section or other provision of the 
Internal Revenue Code of 1986.

SEC. 2. MODIFICATIONS TO EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.

  (a) Maximum Annual Contributions.--
          (1) In general.--Section 530(b)(1)(A)(iii) (defining 
        education individual retirement account) is amended by striking 
        ``$500'' and inserting ``$2,000''.
          (2) Conforming amendment.--Section 4973(e)(1)(A) is amended 
        by striking ``$500'' and inserting ``$2,000''.
  (b) 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)).
                  ``(B) Qualified state tuition programs.--Such term 
                shall include any contribution to a qualified State 
                tuition program (as defined in section 529(b)) on 
                behalf of the designated beneficiary (as defined in 
                section 529(e)(1)); but there shall be no increase in 
                the investment in the contract for purposes of applying 
                section 72 by reason of any portion of such 
                contribution which is not includible in gross income by 
                reason of subsection (d)(2).''.
          (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, and
                          ``(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) Conforming amendments.--Section 530 is amended--
                  (A) by striking ``higher'' each place it appears in 
                subsections (b)(1) and (d)(2), and
                  (B) by striking ``higher'' in the heading for 
                subsection (d)(2).
  (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 subparagraphs (A)(ii) and (E) and 
        paragraphs (5) and (6) of subsection (d) shall not apply to any 
        designated beneficiary with special needs (as determined under 
        regulations prescribed by the Secretary).''.
  (d) Entities 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) Time When Contributions Deemed Made.--
          (1) In general.--Section 530(b) (relating to definitions and 
        special rules), as amended by subsection (b)(2), is amended by 
        adding at the end the following new paragraph:
          ``(5) Time when contributions deemed made.--An individual 
        shall be deemed to have made a contribution to an education 
        individual retirement account on the last day of the preceding 
        taxable year if the contribution is made on account of such 
        taxable year and is made not later than the time prescribed by 
        law for filing the return for such taxable year (not including 
        extensions thereof).''.
          (2) Extension of time to return excess contributions.--
        Subparagraph (C) of section 530(d)(4) (relating to additional 
        tax for distributions not used for educational expenses) is 
        amended--
                  (A) by striking clause (i) and inserting the 
                following new clause:
                          ``(i) such distribution is made before the 
                        first day of the sixth month of the taxable 
                        year following the taxable year, and'', and
                  (B) by striking ``due date of return'' in the heading 
                and inserting ``certain date''.
  (f) Coordination With Hope and Lifetime Learning Credits and 
Qualified Tuition Programs.--
          (1) In general.--Section 530(d)(2)(C) is amended to read as 
        follows:
                  ``(C) Coordination with hope and lifetime learning 
                credits and qualified tuition programs.--For purposes 
                of subparagraph (A)--
                          ``(i) Credit coordination.--The total amount 
                        of qualified higher education expenses with 
                        respect to an individual for the taxable year 
                        shall be reduced--
                                  ``(I) as provided in section 
                                25A(g)(2), and
                                  ``(II) by the amount of such expenses 
                                which were taken into account in 
                                determining the credit allowed to the 
                                taxpayer or any other person under 
                                section 25A.
                          ``(ii) Coordination with qualified tuition 
                        programs.--If, with respect to an individual 
                        for any taxable year--
                                  ``(I) the aggregate distributions 
                                during such year to which subparagraph 
                                (A) and section 529(c)(3)(B) apply, 
                                exceed
                                  ``(II) the total amount of qualified 
                                education expenses (after the 
                                application of clause (i)) for such 
                                year,
                        the taxpayer shall allocate such expenses among 
                        such distributions for purposes of determining 
                        the amount of the exclusion under subparagraph 
                        (A) and section 529(c)(3)(B).''.
          (2) Conforming amendments.--
                  (A) Subsection (e) of section 25A is amended to read 
                as follows:
  ``(e) Election Not To Have Section Apply.--A taxpayer may elect not 
to have this section apply with respect to the qualified tuition and 
related expenses of an individual for any taxable year.''.
                  (B) Section 135(d)(2)(A) is amended by striking 
                ``allowable'' and inserting ``allowed''.
                  (C) Section 530(d)(2)(D) is amended--
                          (i) by striking ``or credit'', and
                          (ii) by striking ``credit or'' in the 
                        heading.
                  (D) Section 4973(e)(1) is amended by adding ``and'' 
                at the end of subparagraph (A), by striking 
                subparagraph (B), and by redesignating subparagraph (C) 
                as subparagraph (B).
  (g) Renaming Education Individual Retirement Accounts as Education 
Savings Accounts.--
          (1) In general.--
                  (A) Section 530 (as amended by the preceding 
                provisions of this section) is amended by striking 
                ``education individual retirement account'' each place 
                it appears and inserting ``education savings account''.
                  (B) The heading for paragraph (1) of section 530(b) 
                is amended by striking ``Education individual 
                retirement account'' and inserting ``Education savings 
                account''.
                  (C) The heading for section 530 is amended to read as 
                follows:

``SEC. 530. EDUCATION SAVINGS ACCOUNTS.''.

                  (D) The item in the table of contents for part VII of 
                subchapter F of chapter 1 relating to section 530 is 
                amended to read as follows:
                              ``Sec. 530. Education savings 
                                        accounts.''.
          (2) Conforming amendments.--
                  (A) The following provisions are each amended by 
                striking ``education individual retirement'' each place 
                it appears and inserting ``education savings'':
                          (i) Section 25A(e)(2).
                          (ii) Section 26(b)(2)(E).
                          (iii) Section 72(e)(9).
                          (iv) Section 135(c)(2)(C).
                          (v) Subsections (a) and (e) of section 4973.
                          (vi) Subsections (c) and (e) of section 4975.
                          (vii) Section 6693(a)(2)(D).
                  (B) The headings for each of the following provisions 
                are amended by striking ``education individual 
                retirement accounts'' each place it appears and 
                inserting ``education savings accounts''.
                          (i) Section 72(e)(9).
                          (ii) Section 135(c)(2)(C).
                          (iii) Section 4973(e).
                          (iv) Section 4975(c)(5).
  (h) 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, 2000.
          (2) Subsection (g).--The amendments made by subsection (g) 
        shall take effect on the date of the enactment of this Act.

SEC. 3. MODIFICATIONS TO QUALIFIED TUITION PROGRAMS.

  (a) Short Title.--This section may be cited as the ``Collegiate 
Learning and Student Savings (CLASS) Act''.
  (b) 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 by one or more 
        eligible educational institutions'' after ``maintained by a 
        State or agency or instrumentality thereof ''.
          (2) Private qualified tuition programs limited to benefit 
        plans.--Clause (ii) of section 529(b)(1)(A) is amended by 
        inserting ``in the case of a program established and maintained 
        by a State or agency or instrumentality thereof,'' before ``may 
        make''.
          (3) Conforming amendments.--
                  (A) Sections 72(e)(9), 135(c)(2)(C), 135(d)(1)(D), 
                529, 530(b)(2)(B), 4973(e), and 6693(a)(2)(C) are each 
                amended by striking ``qualified State tuition'' each 
                place it appears and inserting ``qualified tuition''.
                  (B) The headings for sections 72(e)(9) and 
                135(c)(2)(C) are each amended by striking ``qualified 
                state tuition'' and inserting ``qualified tuition''.
                  (C) The headings for sections 529(b) and 530(b)(2)(B) 
                are each amended by striking ``Qualified state 
                tuition'' and inserting ``Qualified tuition''.
                  (D) The heading for section 529 is amended by 
                striking ``STATE''.
                  (E) 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''.
  (c) Exclusion From Gross Income of Education Distributions From 
Qualified Tuition Programs.--
          (1) In general.--Section 529(c)(3)(B) (relating to 
        distributions) is amended to read as follows:
                  ``(B) Distributions for qualified higher education 
                expenses.--For purposes of this paragraph--
                          ``(i) In-kind distributions.--No amount shall 
                        be includible in gross income under 
                        subparagraph (A) by reason of a distribution 
                        which consists of providing a benefit to the 
                        distributee which, if paid for by the 
                        distributee, would constitute payment of a 
                        qualified higher education expense.
                          ``(ii) Cash distributions.--In the case of 
                        distributions not described in clause (i), if--
                                  ``(I) such distributions do not 
                                exceed the qualified higher education 
                                expenses (reduced by expenses described 
                                in clause (i)), no amount shall be 
                                includible in gross income, and
                                  ``(II) in any other case, the amount 
                                otherwise includible in gross income 
                                shall be reduced by an amount which 
                                bears the same ratio to such amount as 
                                such expenses bear to such 
                                distributions.
                          ``(iii) Treatment as distributions.--Any 
                        benefit furnished to a designated beneficiary 
                        under a qualified tuition program shall be 
                        treated as a distribution to the beneficiary 
                        for purposes of this paragraph.
                          ``(iv) Coordination with hope and lifetime 
                        learning credits.--The total amount of 
                        qualified higher education expenses with 
                        respect to an individual for the taxable year 
                        shall be reduced--
                                  ``(I) as provided in section 
                                25A(g)(2), and
                                  ``(II) by the amount of such expenses 
                                which were taken into account in 
                                determining the credit allowed to the 
                                taxpayer or any other person under 
                                section 25A.
                          ``(v) Coordination with education individual 
                        retirement accounts.--If, with respect to an 
                        individual for any taxable year--
                                  ``(I) the aggregate distributions to 
                                which clauses (i) and (ii) and section 
                                530(d)(2)(A) apply, exceed
                                  ``(II) the total amount of qualified 
                                higher education expenses otherwise 
                                taken into account under clauses (i) 
                                and (ii) (after the application of 
                                clause (iv)) for such year,
                        the taxpayer shall allocate such expenses among 
                        such distributions for purposes of determining 
                        the amount of the exclusion under clauses (i) 
                        and (ii) and section 530(d)(2)(A).''.
          (2) Conforming amendments.--
                  (A) Section 135(d)(2)(B) is amended by striking ``the 
                exclusion under section 530(d)(2)'' and inserting ``the 
                exclusions under sections 529(c)(3)(B)(i) and 
                530(d)(2)''.
                  (B) Section 221(e)(2)(A) is amended by inserting 
                ``529,'' after ``135,''.
  (d) Rollover to Different Program for Benefit of Same Designated 
Beneficiary.--Section 529(c)(3)(C) (relating to change in 
beneficiaries) is amended--
          (1) by striking ``transferred to the credit'' in clause (i) 
        and inserting ``transferred--
                                  ``(I) to another qualified tuition 
                                program for the benefit of the 
                                designated beneficiary, or
                                  ``(II) to the credit'',
          (2) by adding at the end the following new clause:
                          ``(iii) Limitation on certain rollovers.--
                        Clause (i)(I) shall not apply to any amount 
                        transferred with respect to a designated 
                        beneficiary if, at any time during the 1-year 
                        period ending on the day of such transfer, any 
                        other amount was transferred with respect to 
                        such beneficiary which was not includible in 
                        gross income by reason of clause (i)(I).'', and
          (3) by inserting ``or programs'' after ``beneficiaries'' in 
        the heading.
  (e) Member of Family Includes First Cousin.--Section 529(e)(2) 
(defining member of family) is amended by striking ``and'' at the end 
of subparagraph (B), by striking the period at the end of subparagraph 
(C) and by inserting ``; and'', and by adding at the end the following 
new subparagraph:
                  ``(D) any first cousin of such beneficiary.''.
  (f) Definition of Qualified Higher Education Expenses.--
          (1) In general.--Subparagraph (A) of section 529(e)(3) 
        (relating to definition of qualified higher education expenses) 
        is amended to read as follows:
                  ``(A) In general.--The term `qualified higher 
                education expenses' means--
                          ``(i) tuition and fees required for the 
                        enrollment or attendance of a designated 
                        beneficiary at an eligible educational 
                        institution for courses of instruction of such 
                        beneficiary at such institution, and
                          ``(ii) expenses for books, supplies, and 
                        equipment which are incurred in connection with 
                        such enrollment or attendance, but not to 
                        exceed the allowance for books and supplies 
                        included in the cost of attendance (as defined 
                        in section 472 of the Higher Education Act of 
                        1965 (20 U.S.C. 1087ll), as in effect on the 
                        date of the enactment of the Education Savings 
                        and School Excellence Act of 2000 as determined 
                        by the eligible educational institution.''.
          (2) Exception for education involving sports, etc.--Paragraph 
        (3) of section 529(e) (relating to qualified higher education 
        expenses) is amended by adding at the end the following new 
        subparagraph:
                  ``(C) Exception for education involving sports, 
                etc.--The term `qualified higher education expenses' 
                shall not include expenses with respect to any course 
                or other education involving sports, games, or hobbies 
                unless such course or other education is part of the 
                beneficiary's degree program or is taken to acquire or 
                improve job skills of the beneficiary.''.
  (g) Effective Dates.--
          (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 2000.
          (2) Qualified higher education expenses.--The amendments made 
        by subsection (f) shall apply to amounts paid for courses 
        beginning after December 31, 2000.

SEC. 4. EXCLUSION OF CERTAIN AMOUNTS RECEIVED UNDER THE NATIONAL HEALTH 
                    SERVICE CORPS SCHOLARSHIP PROGRAM, THE F. EDWARD 
                    HEBERT ARMED FORCES HEALTH PROFESSIONS SCHOLARSHIP 
                    AND FINANCIAL ASSISTANCE PROGRAM, AND CERTAIN OTHER 
                    PROGRAMS.

  (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 Service Corps Scholarship 
                program under section 338A(g)(1)(A) of the Public 
                Health Service Act,
                  ``(B) the Armed Forces Health Professions Scholarship 
                and Financial Assistance program under subchapter I of 
                chapter 105 of title 10, United States Code,
                  ``(C) the National Institutes of Health Undergraduate 
                Scholarship program under section 487D of the Public 
                Health Service Act, or
                  ``(D) any State program determined by the Secretary 
                to have substantially similar objectives as such 
                programs.''.
  (b) Effective Dates.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by subsection (a) shall apply to amounts 
        received in taxable years beginning after December 31, 1993.
          (2) State programs.--Section 117(c)(2)(D) of the Internal 
        Revenue Code of 1986 (as added by the amendments made by 
        subsection (a)) shall apply to amounts received in taxable 
        years beginning after December 31, 1999.

SEC. 5. ADDITIONAL INCREASE IN ARBITRAGE REBATE EXCEPTION FOR 
                    GOVERNMENTAL BONDS USED TO FINANCE EDUCATIONAL 
                    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 in calendar years beginning after December 31, 
2000.

SEC. 6. MODIFICATION OF ARBITRAGE REBATE RULES APPLICABLE TO PUBLIC 
                    SCHOOL CONSTRUCTION BONDS.

  (a) In General.--Subparagraph (C) of section 148(f)(4) is amended by 
adding at the end the following new clause:
                          ``(xviii) 4-year spending requirement for 
                        public school construction issue.--
                                  ``(I) In general.--In the case of a 
                                public school construction issue, the 
                                spending requirements of clause (ii) 
                                shall be treated as met if at least 10 
                                percent of the available construction 
                                proceeds of the construction issue are 
                                spent for the governmental purposes of 
                                the issue within the 1-year period 
                                beginning on the date the bonds are 
                                issued, 30 percent of such proceeds are 
                                spent for such purposes within the 2-
                                year period beginning on such date, 60 
                                percent of such proceeds are spent for 
                                such purposes within the 3-year period 
                                beginning on such date, and 100 percent 
                                of such proceeds are spent for such 
                                purposes within the 4-year period 
                                beginning on such date.
                                  ``(II) Public school construction 
                                issue.--For purposes of this clause, 
                                the term `public school construction 
                                issue' means any construction issue if 
                                no bond which is part of such issue is 
                                a private activity bond and all of the 
                                available construction proceeds of such 
                                issue are to be used for the 
                                construction (as defined in clause 
                                (iv)) of public school facilities to 
                                provide education or training below the 
                                postsecondary level or for the 
                                acquisition of land that is 
                                functionally related and subordinate to 
                                such facilities.
                                  ``(III) Other rules to apply.--Rules 
                                similar to the rules of the preceding 
                                provisions of this subparagraph which 
                                apply to clause (ii) also apply to this 
                                clause.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to obligations issued after December 31, 2000.

SEC. 7. ELIMINATION OF 60-MONTH LIMIT AND INCREASE IN INCOME LIMITATION 
                    ON STUDENT LOAN INTEREST DEDUCTION.

  (a) Elimination of 60-Month Limit.--
          (1) In general.--Section 221 (relating to interest on 
        education loans) is amended by striking subsection (d) and by 
        redesignating subsections (e), (f), and (g) as subsections (d), 
        (e), and (f), respectively.
          (2) Conforming amendment.--Section 6050S(e) is amended by 
        striking ``section 221(e)(1)'' and inserting ``section 
        221(d)(1)''.
          (3) Effective date.--The amendments made by this subsection 
        shall apply with respect to any loan interest paid after 
        December 31, 2000, in taxable years ending after such date.
  (b) Increase in Income Limitation.--
          (1) In general.--Section 221(b)(2)(B) (relating to amount of 
        reduction) is amended by striking clauses (i) and (ii) and 
        inserting the following:
                          ``(i) the excess of--
                                  ``(I) the taxpayer's modified 
                                adjusted gross income for such taxable 
                                year, over
                                  ``(II) $45,000 ($90,000 in the case 
                                of a joint return), bears to
                          ``(ii) $15,000.''.
          (2) Conforming amendment.--Section 221(g)(1) is amended by 
        striking ``$40,000 and $60,000 amounts'' and inserting 
        ``$45,000 and $90,000 amounts''.
          (3) Effective date.--The amendments made by this subsection 
        shall apply to taxable years ending after December 31, 2000.

SEC. 8. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS NOT TO 
                    APPLY TO QUALIFIED PROFESSIONAL DEVELOPMENT 
                    EXPENSES OF ELEMENTARY AND SECONDARY SCHOOL 
                    TEACHERS.

  (a) In General.--Section 67(b) (defining miscellaneous itemized 
deductions) is amended by striking ``and'' at the end of paragraph 
(11), by striking the period at the end of paragraph (12) and inserting 
``, and'', and by adding at the end the following new paragraph:
          ``(13) any deduction allowable for the qualified professional 
        development expenses of an eligible teacher.''.
  (b) Definitions.--Section 67 (relating to 2-percent floor on 
miscellaneous itemized deductions) is amended by adding at the end the 
following new subsection:
  ``(g) Qualified Professional Development Expenses of Eligible 
Teachers.--For purposes of subsection (b)(13)--
          ``(1) Qualified professional development expenses.--
                  ``(A) In general.--The term `qualified professional 
                development expenses' means expenses in an amount not 
                to exceed $1,000 for any taxable year--
                          ``(i) for tuition, fees, books, supplies, 
                        equipment, and transportation required for the 
                        enrollment or attendance of an individual in a 
                        qualified course of instruction, and
                          ``(ii) with respect to which a deduction is 
                        allowable under section 162 (determined without 
                        regard to this section).
                  ``(B) Qualified course of instruction.--The term 
                `qualified course of instruction' means a course of 
                instruction which--
                          ``(i) is--
                                  ``(I) at an institution of higher 
                                education (as defined in section 481 of 
                                the Higher Education Act of 1965 (20 
                                U.S.C. 1088), as in effect on the date 
                                of the enactment of this subsection), 
                                or
                                  ``(II) a professional conference, and
                          ``(ii) is part of a program of professional 
                        development which is approved and certified by 
                        the appropriate local educational agency as 
                        furthering the individual's teaching skills.
          ``(C) Local educational agency.--The term `local educational 
        agency' has the meaning given such term by section 14101 of the 
        Elementary and Secondary Education Act of 1965, as so in 
        effect.
          ``(2) Eligible teacher.--
                  ``(A) In general.--The term `eligible teacher' means 
                an individual who is a kindergarten through grade 12 
                classroom teacher, instructor, counselor, aide, or 
                principal in an elementary or secondary school.
                  ``(B) Elementary or secondary school.--The terms 
                `elementary school' and `secondary school' have the 
                meanings given such terms by section 14101 of the 
                Elementary and Secondary Education Act of 1965 (20 
                U.S.C. 8801), as so in effect.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2000.

SEC. 9. EXTENSION OF SPECIAL RULE FOR CHARITABLE CONTRIBUTIONS OF 
                    COMPUTER TECHNOLOGY AND EQUIPMENT FOR ELEMENTARY 
                    AND SECONDARY SCHOOL PURPOSES.

  Subparagraph (F) of section 170(e)(6) (relating to termination) is 
amended by striking ``2000'' and inserting ``2001''.

                       I. SUMMARY AND BACKGROUND


                         A. Purpose and Summary

    H.R. 7, as amended, expands and modifies the education IRAs 
enacted in the Taxpayer Relief Act of 1997 (``1997 Act'') to 
include elementary and secondary education expenses and provide 
other tax incentives for education.
    Expand Education Savings Accounts.--The bill increases the 
annual contribution limit to education IRAs (renamed 
``Education Savings Accounts'') from $500 to $2,000 per 
beneficiary, and expands the definition of qualified education 
expenses to include qualified elementary and secondary expenses 
(including certain homeschooling expenses). Further, the bill 
allows contributions to be made on behalf of special needs 
beneficiaries after they reach age 18. The bill also allows: 
(1) contributions for a taxable year to be made until April 15 
of the following year; (2) coordination of distributions from 
Education Savings Accounts with the HOPE and Lifetime Learning 
credits; and (3) contributions by corporations and other 
entities. The provisions are effective for taxable years 
beginning after December 31, 2000.
    Allow tax-free distributions from state and private 
education programs.--The bill expands the definition of 
``qualified tuition program'' to include certain prepaid 
tuition programs established and maintained by one or more 
eligible educational institutions (which may be private 
institutions). In the case of a qualified tuition program 
maintained by one or more private educational institutions, 
persons will be able to purchase tuition credits or 
certificates on behalf of a designated beneficiary, but will 
not be able to make contributions to a savings account plan. 
Under the bill, an exclusion from gross income is provided for 
distributions made from qualified tuition programs. The bill 
allows a taxpayer to claim a HOPE credit or Lifetime Learning 
credit for a taxable year and to exclude from gross income 
amounts distributed from a qualified tuition program on behalf 
of the same student as long as the distributions are not used 
for the same expenses for which a credit was claimed. The 
provisions are effective for taxable years beginning after 
December 31, 2000.
    Eliminate tax on awards Under National Health Service Corps 
(``NHSC'') Scholarship Program, F. Edward Hebert Armed Forces 
Health Professions Scholarship and Financial Assistance 
Program, National Institutes of Health (``NIH'') Undergraduate 
Scholarship Program and Certain State-Sponsored Scholarship 
Programs.--The bill provides that amounts received by an 
individual under certain programs are excludable from income as 
qualified scholarships under section 117, without regard to any 
service obligation by the recipient. The provision is effective 
for education awards received under the NHSC Scholarship 
Program, the F. Edward Hebert Armed Forces Scholarship Program, 
and the NIH Undergraduate Scholarship Program after December 
31, 1993. The provision is effective for awards received under 
State-sponsored programs designated by the Secretary after 
December 31, 1999.
    Liberalize tax-exempt financing rules for public school 
construction.--The bill increases from $10 million to $15 
million the maximum annual issuance of governmental bonds by 
small State or local governments eligible for a special 
exception from the tax-exempt bond arbitrage rebate rules. The 
increase applies only with respect to bonds issued for public 
school construction. The provision is effective obligations 
issued in calendar years beginning after December 31, 2000.
    The bill extends from 24 months to 48 months the period 
during which proceeds of tax-exempt bonds to finance public 
school construction may be spent without losing eligibility for 
an exception from the tax-exempt bond arbitrage rebate rules. 
The provision is effective for bonds issued after December 31, 
2000.
    Student loan interest deduction.--The bill increases the 
beginning point of the income phaseout for the student loan 
interest deduction for individual taxpayers from $40,000 to 
$45,000. For taxpayers filing joint returns, the bill increases 
the beginning point of the income phaseout to twice the 
beginning point of the income phaseouts applicable to single 
taxpayers. The bill also repeals both the limit on the number 
of months during which interest paid on a qualified education 
loan is deductible and the restriction that nonmandatory 
payments of interest are not deductible. The provisions 
generally are effective for taxable years beginning after 
December 31, 2000.
    Two-percent floor not to apply to professional development 
expenses of teachers.--The bill provides an exception to the 
two-percent floor on itemized deductions for the professional 
development expenses (not to exceed $1,000) of elementary and 
secondary school teachers. The provision is effective for 
taxable years beginning after December 31, 2000.
    Extension of deduction for computer donations to schools.--
The bill extends for one year, through December 31, 2001, the 
enhanced deduction for computer donations to schools under 
section 170(e)(6).

                 B. Background and Need for Legislation

    The bill, as amended, expands the opportunity for use of 
education savings accounts to include elementary and secondary 
school expenses and increases the amount that may be 
contributed to such accounts. The bill, as amended, also 
expands the tax incentives for education by modifying the rules 
relating to qualified tuition programs, the coordination of the 
HOPE and Lifetime Learning credit with education savings 
accounts and qualified tuition programs, the tax treatment of 
certain scholarship programs, school construction bonds, the 
student loan interest deduction, deductibility of teachers' 
professional development expenses, and the enhanced charitable 
deduction for computer equipment.

                         C. Legislative History

    H.R. 7 was introduced by Mr. Hulshof and Mr. Lipinski on 
March 1, 1999, and was amended by the Committee in a markup on 
March 22, 2000. An amendment in the nature of a substitute 
(offered by Chairman Archer) was adopted by a voice vote, with 
a quorum present. The bill, as amended, was ordered favorably 
reported by a roll call of 21 yeas and 16 nays on March 22, 
2000, with a quorum present.

                      II. EXPLANATION OF THE BILL


 A. Expand Education Savings Accounts (Sec. 2 of the Bill and Sec. 530 
                              of the Code)


                              Present Law

In general

    Section 530 provides tax-exempt status to education 
individual retirement accounts (``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, an excise tax is imposed 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.
---------------------------------------------------------------------------
    \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 may be imposed under present law to the extent 
that excess contributions above the $500 annual limit are made to an 
education IRA.
---------------------------------------------------------------------------

Phaseout of contribution limit

    The $500 annual contribution limit for education IRAs is 
phased out ratably for contributors with modified adjusted 
gross income (``AGI'') between $95,000 and $110,000 (between 
$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 
individual.

Treatment of distributions

    Amounts distributed from an education IRA 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 with respect to the beneficiary 
for the same taxable year). Distributions from an education IRA 
are generally 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 are 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 are 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 are excludable (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 is includible in the 
distributee's gross income.
    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, unless such distribution is made on 
account of the death or disability of, or scholarship received 
by, the designated beneficiary. The additional 10-percent tax 
also does not apply to the distribution of any contribution to 
an education IRA made during the 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), provided that such 
distribution is accompanied by the amount of income allocable 
to the contribution.
    Present law allows tax-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. 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--and any spouse of 
such persons or of the original beneficiary.
    Any balance remaining in an education IRA is 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'' 
includes certain room and board expenses for any period during 
which the beneficiary is at least a half-time student. 
Qualified higher education expensesinclude expenses with 
respect to undergraduate or graduate-level courses. In addition, 
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.\3\
---------------------------------------------------------------------------
    \3\ No reduction of qualified higher education expenses is 
required, however, for a gift, bequest, devise, or inheritance.
---------------------------------------------------------------------------
    Present law also provides that, if any qualified higher 
education expenses are taken into account in determining the 
amount of the exclusion for a distribution from an education 
IRA, then no deduction (e.g., for trade or business expenses 
deductible under sec. 162), or exclusion (e.g., for expenses 
paid with interest on education savings bonds excludable under 
sec. 135), or credit is allowed with respect to such expenses.

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.

                           Reasons for Change

    The Committee believes that the present-law rules governing 
education IRAs should be expanded to provide a greater 
incentive for families (and other persons) to save for 
educational purposes, including for expenses related to 
elementary and secondary school education. The Committee also 
believes that more flexible rules are needed for education IRAs 
(e.g., for education IRAs established for the benefit of 
special needs students). The Committee further believes that 
the benefits of education IRAs should be coordinated with other 
education tax provisions so as to maximize the potential 
benefit of all the education tax incentives.

                        Explanation of Provision

Annual contribution limit

    The bill increases the annual education IRA contribution 
limit to $2,000. Thus, aggregate contributions that may be made 
by all contributors to one (or more) education IRAs established 
on behalf of any particular beneficiary is limited to $2,000 
for each year.

Qualified expenses

    The 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, 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 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.\4\ ``Qualified elementary and 
secondary education expenses'' also includes certain 
homeschooling education expenses if the requirements of any 
applicable State or local law are met with respect to such 
homeschooling.
---------------------------------------------------------------------------
    \4\ Contributions made to education IRAs prior to the effective 
date of the provision (and earnings thereon) may be used for 
distributions for qualified elementary and secondary education expenses 
made after January 1, 2001. Thus, it is not necessary for trustees of 
education IRAs to keep separate accounts with respect to contributions 
made prior to the effective date of the provision and earnings thereon.
---------------------------------------------------------------------------
    Under the bill, the definition of ``qualified higher 
education expenses'' is modified to mean: (1) tuition and fees 
required for the enrollment or attendance of a designated 
beneficiary at an eligible education institution; and (2) 
expenses for books, supplies, and equipment incurred in 
connection with such enrollment or attendance (but not in 
excess of the allowance for books and supplies determined by 
the educational institution for purposes of Federal financial 
assistance programs).\5\ The bill provides that ``qualified 
higher education expenses'' does not include expenses for 
education involving sports, games, or hobbies unless this 
education is part of the student's degree program or is taken 
to acquire or improve job skills of the individual. The bill 
does not change the definition of ``qualified higher education 
expenses'' with respect to expenses for room and board.
---------------------------------------------------------------------------
    \5\ ``Qualified higher education expenses'' for purposes of 
education IRAs are defined by reference to the definition of such 
expenses for purposes of qualified State tuition programs (sec. 
530(b)(2)(A)). Because the bill modifies the definition of ``qualified 
higher education expenses'' for purposes of qualified State tuition 
programs (sec. 529(e)(3)), the definition of ``qualified higher 
education expenses'' for education IRAs is also modified.
---------------------------------------------------------------------------

Special needs beneficiaries

    The 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 does not occur when the beneficiary reaches age 
30.

Contributions by persons other than individuals

    The bill clarifies that corporations and other entities 
(including tax-exempt organizations) are permitted to make 
contributions to education IRAs regardless of the income of the 
corporation or entity during the year of the contribution.

Contributions permitted until April 15

    Under the bill, individual contributors to education IRAs 
are deemed to have made a contribution on the last day of the 
preceding taxable year if the contribution is made on account 
of such taxable year and is made not later than the time 
prescribed by law for filing the return for such taxable year 
(not including extensions), generally April 15.\6\ The bill 
also provides that the additional 10-percent tax on 
distributions not used for qualified higher education expenses 
does not apply to the distribution of any contribution to an 
education IRA made during the taxable year if such distribution 
is made on or before the first day of the sixth month 
(generally June 1) of the taxable year following the taxable 
year during which the contribution was or was deemed made, 
provided the distribution is accompanied by the amount of net 
income attributable to the contribution.
---------------------------------------------------------------------------
    \6\ It is expected that trustees of education IRAs will require 
documentation from a contributor (whether an individual, corporation, 
or other entity) indicating the taxable year to which the contribution 
should be allocated.
---------------------------------------------------------------------------

Coordination with HOPE and Lifetime Learning credits

    The bill allows a taxpayer to claim a HOPE credit or 
Lifetime Learning credit for a taxable year and to exclude from 
gross income amounts distributed (both the principal and the 
earnings portions) from an education IRA on behalf of the same 
student as long as the distribution is not used for the same 
educational expenses for which a credit is claimed.

Coordination with qualified tuition programs

    The bill repeals the excise tax on contributions made by 
any person to an education IRA on behalf of a beneficiary 
during any taxable year in which any contributions are made by 
anyone to a qualified State tuition program on behalf of the 
same beneficiary (sec. 4973(e)(1)(B)).

Change name to ``Education Savings Accounts''

    The bill changes the name of education IRAs to ``Education 
Savings Accounts.''

                             Effective Date

    The provisions relating to education IRAs are effective 
with respect to taxable years beginning after December 31, 
2000, except that the provision changing the name of education 
IRAs to Education Savings Accounts is effective on the date of 
enactment.

   B. Allow Tax-Free Distributions From State and Private Education 
         Programs (Sec. 3 of the Bill and Sec. 529 of the Code)


                              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 (a ``savings account 
plan''). The term ``qualified higher education expenses'' 
generally 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,\7\ as well as certain room and board 
expenses for any period during which the student is at least a 
half-time student.
---------------------------------------------------------------------------
    \7\ ``Eligible educational institutions'' are defined the same for 
purposes of education IRAs and qualified State tuition programs.
---------------------------------------------------------------------------
    No amount is 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) are 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 (e.g., when a parent 
receives a refund) are included in the contributor's gross 
income to the extent such amounts exceed contributions made on 
behalf of the beneficiary.\8\
---------------------------------------------------------------------------
    \8\ 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.
---------------------------------------------------------------------------
    A qualified State tuition program is required to provide 
that purchases or contributions only be made in cash.\9\ 
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 is considered a distribution (as is a change in the 
designated beneficiary of an interest in a qualified State 
tuition program), unless the beneficiaries are members of the 
same family. 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--and any spouse of such 
persons or of the original beneficiary. 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.
---------------------------------------------------------------------------
    \9\ 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.
---------------------------------------------------------------------------
    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) may 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).

                           Reasons for Change

    The Committee believes that distributions from qualified 
tuition programs should not be subject to Federal income tax to 
the extent that such distributions are used to pay for 
qualifiedhigher education expenses of undergraduate or graduate 
students who are attending institutions of higher education or certain 
vocational schools. In addition, the Committee believes that the 
present-law rules governing qualified tuition programs should be 
expanded to permit private educational institutions to maintain certain 
prepaid tuition programs.

                        explanation of provision

Qualified tuition program

    The bill expands the definition of ``qualified tuition 
program'' to include 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 are able to purchase tuition credits or 
certificates on behalf of a designated beneficiary (as 
described in section 529(b)(1)(A)(i)), but are not able to make 
contributions to a savings account plan (described in section 
529(b)(1)(A)(ii)).

Exclusion from gross income

    Under the bill, distributions from qualified State tuition 
programs and from qualified tuition programs established and 
maintained by an entity other than a State or agency or 
instrumentality thereof are excludable from gross income to the 
extent that the distribution is used to pay for qualified 
higher education expenses.

Coordination with HOPE and Lifetime Learning credits

    The bill allows a taxpayer to claim a HOPE credit or 
Lifetime Learning credit for a taxable year and to exclude from 
gross income amounts distributed (both the principal and the 
earnings portions) from a qualified tuition program on behalf 
of the same student as long as the distribution is not used for 
the same expenses for which a credit is claimed.

Definition of qualified higher education expenses

    Under the bill, the definition of ``qualified higher 
education expenses'' is modified to mean: (1) tuition and fees 
required for the enrollment or attendance of a designated 
beneficiary at an eligible educational institution; and (2) 
expenses for books, supplies, and equipment incurred in 
connection with such enrollment or attendance (but not in 
excess of the allowance for books and supplies determined by 
the educational institution for purposes of Federal financial 
assistance programs).\10\ The bill provides that ``qualified 
higher education expenses'' do not include expenses for 
education involving sports, games, or hobbies unless this 
education is part of the student's degree program or is taken 
to acquire or improve job skills of the individual. The bill 
does not change the definition of ``qualified higher education 
expenses'' with respect to expenses for room and board.
---------------------------------------------------------------------------
    \10\ It is intended that, with respect to a distribution made from 
a qualified tuition program that does not exceed the allowance for 
books and supplies determined for purposes of Federal financial 
assistance by the eligible educational institution where the 
beneficiary is enrolled, Treasury regulations will provide that 
beneficiaries need not substantiate actual purchases of books, 
supplies, and equipment.
---------------------------------------------------------------------------

Rollovers for benefit of same beneficiary

    The bill provides that a transfer of credits (or other 
amounts) from one qualified tuition program for the benefit of 
a designated beneficiary to another qualified tuition program 
for the benefit of the same beneficiary is not considered a 
distribution for a maximum of one such transfer in each 1-year 
period.

Member of family

    The bill provides that, for purposes of tax-free rollovers 
and changes of designated beneficiaries, a ``member of the 
family'' includes first cousins of such beneficiary.

Short title

    The bill provides that the section of the bill relating to 
qualified tuition plans may be cited as the ``Collegiate 
Learning and Student Savings (CLASS) Act.''

                             effective date

    The provision is generally effective for taxable years 
beginning after December 31, 2000. The provision modifying the 
definition of qualified higher education expenses is effective 
for amounts paid for education furnished after December 31, 
2000.

  C. Eliminate Tax on Awards under the National Health Service Corps 
     Scholarship Program, the F. Edward Hebert Armed Forces Health 
Professions Scholarship and Financial Assistance Program, the National 
  Institutes of Health Undergraduate Scholarship Program, and Certain 
 State-Sponsored Scholarship Programs (Sec. 4 of the Bill and Sec. 117 
                              of the Code)


                              Present Law

    Section 117 excludes from gross income qualified 
scholarships received 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 
scholarships, 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.
    The National Health Service Corps Scholarship Program (the 
``NHSC Scholarship Program'') and the F. Edward Hebert Armed 
Forces Health Professions Scholarship and Financial Assistance 
Program (the ``Armed Forces Scholarship Program'') provide 
education awards to participants on condition that the 
participants provide certain services. In the case of the NHSC 
Scholarship Program, the recipient of the scholarship is 
obligated to 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. In the case of the Armed Forces 
Scholarship Program, the recipient of the scholarship is 
obligated to serve a certain number of years in the military at 
an armed forces medical facility. The National Institutes of 
Health Undergraduate Scholarship Program (the ``NIH'' 
Scholarship Program) awards scholarships to students from 
disadvantaged backgrounds interested in pursuing a career in 
biomedical research. In exchange, the recipients must work for 
the National Institutes of Health after graduation. Several 
States provide a limited number of scholarships to students in 
health professions who are obligated to work in underserved 
areas for a period of time after graduation. Because the 
recipients of scholarships in these programs are required to 
perform services in exchange for the education awards, the 
awards used to pay higher education expenses are taxable income 
to the recipient.

                           reasons for change

    To improve health care services in underserved areas, the 
Committee believes that it is appropriate to provide tax-free 
treatment for scholarships received by students under the NHSC 
Scholarship Program, Armed Forces Scholarship Program, NIH 
Scholarship Program, and State-sponsored programs with similar 
objectives.

                        explanation of provision

    The bill provides that amounts received by an individual 
under the NHSC Scholarship Program and the Armed Forces 
Scholarship Program, the NIH Scholarship Program and any State-
sponsored health scholarship program determined by the 
Secretary of the Treasury to have substantially similar 
objectives to these programs are eligible for tax-free 
treatment as qualified scholarships under section 117, without 
regard to any service obligation by the recipient. As with 
other qualified scholarships under section 117, the tax-free 
treatment does not apply to amounts received for regular living 
expenses, including room and board.

                             Effective Date

    The provision is generally effective for amounts received 
in taxable years beginning after December 31, 1993. The 
provision for education awards received under a State-sponsored 
health scholarship program is effective for amounts received in 
taxable years beginning after December 31, 1999.

 D. Liberalize Tax-Exempt Bond Arbitrage Rebate Exceptions for Public 
 School Construction Bonds (Secs. 5-6 of the Bill and Sec. 148 of the 
                                 Code)


                              present law

    Interest on debt incurred by State or local governments is 
excluded from income if the proceeds of the borrowing are used 
to carry out governmental functions of those entities or the 
debt is repaid with governmental funds (sec. 103). Like other 
activities carried out and paid for by State and local 
governments, the construction, renovation, and operation of 
public schools is an activity eligible for financing with the 
proceeds of tax-exempt bonds.
    The Federal income tax does not apply to the income of 
State and local governments that is derived from the exercise 
of an essential governmental function. To prevent these tax-
exempt entities from issuing more tax-exempt bonds than is 
necessary for the activity being financed or from issuing such 
bonds earlier than necessary, the Code includes arbitrage 
restrictions limiting the ability to profit from investment of 
tax-exempt bond proceeds. In general, arbitrage profits may be 
earned only during specified periods (e.g., defined ``temporary 
periods'') before funds are needed for the purpose of the 
borrowing or on specified types of investments (e.g., 
``reasonably required reserve or replacement funds''). Subject 
to limited exceptions, profits that are earned during these 
periods or on such investments must be rebated to the Federal 
Government.
    Present law includes three exceptions applicable to 
education-related bonds. First, issuers of all types of tax-
exempt bonds are not required to rebate arbitrage profits if 
all of the proceeds of the bonds are spent for the purpose of 
the borrowing within six months after issuance. In the case of 
governmental bonds (including bonds to finance public schools), 
the six-month expenditure exception is treated as satisfied if 
at least 95 percent of the proceeds is spent within six months 
and the remaining five percent is spent within 12 months after 
the bonds are issued.
    Second, in the case of bonds issued to finance certain 
construction activities, including school construction and 
renovation, the six-month period is extended to 24 months for 
construction proceeds. Arbitrage profits earned on construction 
proceeds are not required to be rebated if all such proceeds 
(other than certain retainage amounts) are spent by the end of 
the 24-month period and prescribed intermediate spending 
percentages are satisfied.
    Third, governmental bonds issued by ``small'' governments 
are not subject to the rebate requirement. Small governments 
are defined as general purpose governmental units that issue no 
more than $5 million of tax-exempt governmental bonds in a 
calendar year. The $5 million limit is increased to $10 million 
if at least $5 million of the bonds are used to finance 
construction of public schools.

                           reasons for change

    The policy underlying the arbitrage rebate exception for 
bonds of small governmental units is to reduce complexity for 
these entities because they may not have in-house financial 
staff to engage in the expenditure and investment tracking 
necessary for rebate compliance. The exception further is 
justified by the limited potential for arbitrage profits at 
small issuance levels and limitation of the provision to 
governmental bonds, which typically require voter approval 
before issuance. The Committee believes that a limited increase 
of $5 million per year for public school construction bonds 
will more accurately conform this present-law exception to 
current school construction costs.
    The Committee is aware that a great need exists for 
construction and renovation of public schools if American 
educational excellence is to be maintained. The Committee has 
determined that a more liberal spend-down exception for public 
school construction bonds is appropriate to allow issuers 
greater flexibility in the timing of bond issuance for this 
limited purpose to meet actual construction needs.

                        explanation of provision

Increase amount of bonds that may be issued by governments qualifying 
        for the ``small governmental unit'' arbitrage rebate exception

    The additional amount of governmental bonds for public 
schools construction that small governmental units may issue 
without being subject to the arbitrage rebate requirement is 
increased from $5 million to $10 million. Thus, these 
governmental units may issue up to $15 million of governmental 
bonds in a calendar year, provided that at least $10 million of 
the bonds are used to finance construction of public schools.

Liberalize construction bond expenditure rule for governmental bonds 
        for public schools

    The present-law 24-month expenditure exception to the 
arbitrage rebate requirement is liberalized for certain public 
school bonds. Under the bill, no rebate is required with 
respect to earnings on available construction proceeds of 
public school bonds if the proceeds are spent within 48 months 
after the bonds were issued and the following intermediate 
spending levels were satisfied:

12 months--At least 10 percent
24 months--At least 30 percent
36 months--At least 60 percent
48 months--100 percent (less present-law retainage amounts 
        which must be spent within 60 months of issuance)

                             effective date

    The increase in the small governmental unit arbitrage 
rebate exception is effective for obligations issued in 
calendar years beginning after December 31, 2000. The 
liberalized expenditure exception for public school 
construction bonds is effective for obligations issued after 
December 31, 2000.

E. Student Loan Interest Deduction (Sec. 7 of the Bill and Sec. 221 of 
                               the Code)


                              present law

    Certain individuals who have paid interest on qualified 
education loans may claim an above-the-line deduction for such 
interest expenses, subject to a maximum annual deduction limit 
(sec. 221). The deduction is allowed only with respect to 
interest paid on a qualified education loan during the first 60 
months in which interest payments are required. Required 
payments of interest generally do not include nonmandatory 
payments, such as interest payments made during a period of 
loan forbearance. Months during which interest payments are not 
required because the qualified education loan is in deferral or 
forbearance do not count against the 60-month period. No 
deduction is allowed to an individual if that individual is 
claimed as a dependent on another taxpayer's return for the 
taxable year.
    A qualified education loan generally is defined as any 
indebtedness incurred solely to pay for certain costs of 
attendance (including room and board) of a student (who may be 
the taxpayer,taxpayer's spouse, or any dependent of the 
taxpayer as of the time the indebtedness was incurred) who is enrolled 
in a degree program on at least a half-time basis at (1) an accredited 
post-secondary educational institution defined by reference to section 
481 of the Higher Education Act of 1965, or (2) an institution 
conducting an internship or residency program leading to a degree or 
certificate from an institution of higher education, a hospital, or a 
health care facility conducting postgraduate training.
    The maximum allowable deduction per taxpayer return is 
$2,000 in 2000, and $2,500 in 2001 and thereafter.\11\ The 
deduction is phased out ratably for individual taxpayers with 
modified adjusted gross income (``AGI'') of $40,000-$55,000 
($60,000-$75,000 for married couples filing joint returns). The 
income ranges will be indexed for inflation after 2002.
---------------------------------------------------------------------------
    \11\ The maximum allowable deduction was $1,000 for 1998 and $1,500 
for 1999.
---------------------------------------------------------------------------

                           reasons for change

    The Committee believes that the income phaseouts for the 
student loan interest deduction are too low and should be 
raised. In addition, the Committee is concerned about the 
inequity of the marriage penalty resulting from the phase-out 
provisions of the student loan interest deduction. The 
Committee believes that relief from the marriage penalty is 
appropriate.
    The Committee understands that many students incur 
considerable debt in the course of obtaining undergraduate and 
graduate education. The Committee believes that it is 
appropriate to expand the deduction for individuals who have 
paid interest on qualified education loans by repealing the 
limitation that the deduction is allowed only with respect to 
interest paid during the first 60 months in which interest 
payments are required. In addition, the repeal of the 60-month 
limitation lessens complexity and administrative burdens for 
taxpayers, lenders, loan servicing agencies, and the Internal 
Revenue Service.

                        explanation of provision

    The bill increases the beginning point of the income 
phaseout for the student loan interest deduction for individual 
taxpayers to $45,000. The bill also increases the beginning 
point of the income phaseout for taxpayers filing joint returns 
to twice the beginning point of the income phaseouts applicable 
to single taxpayers. Thus, the phase-out ranges are $45,000 to 
$60,000 for individual taxpayers and $90,000 to $105,000 for 
married couples filing joint returns.
    The bill also repeals both the limit on the number of 
months during which interest paid on a qualified education loan 
is deductible and the restriction that nonmandatory payments of 
interest are not deductible.

                             Effective Date

    The provisions relating to the income phaseout are 
effective for taxable years beginning after December 31, 2000. 
The provision repealing the 60-month limit on deductible 
student loan interest and the restriction on nonmandatory 
payments is effective for interest paid on qualified education 
loans after December 31, 2000.

F. Two-Percent Floor Not to Apply to Professional Development Expenses 
       of Teachers (Sec. 8 of the Bill and Sec. 162 of the Code)


                              present law

    In general, taxpayers are not permitted to deduct education 
expenses. However, employees may deduct the cost of certain 
work-related education. For costs to be deductible, the 
education must either be required by the taxpayer's employer or 
by law to retain taxpayer's current job or be necessary to 
maintain or improve skills required in the taxpayer's current 
job. Expenses incurred for education that is necessary to meet 
minimum education requirements of an employee's present trade 
or business or that can qualify an employee for a new trade or 
business are not deductible.
    An employee is allowed to deduct work-related education and 
other business expenses only to the extent such expenses 
(together with other miscellaneous itemized deductions) exceed 
two percent of the taxpayer's adjusted gross income.

                           reasons for change

    The Committee recognizes the importance of teachers 
receiving continuing education and remaining up to date. The 
Committee believes that the tax law should facilitate such 
education of teachers who want to maintain and improve their 
academic and professional skills.

                        explanation of provision

    The bill provides that qualified professional development 
expenses not in excess of $1,000 incurred by an elementary or 
secondary school teacher (including instructors, aides, 
counselors and principals) with respect to certain courses of 
instruction would not be subject to the two-percent floor on 
miscellaneous itemized deductions. Qualified professional 
development expenses are expenses for tuition, fees, books, 
supplies, equipment, and transportation required for enrollment 
or attendance in a qualified course of instruction, provided 
that such expenses are otherwise deductible under present law. 
A qualified course of instruction means a professional 
conference or a course of instruction at an institution of 
higher education (as defined in sec. 481 of the Higher 
Education Act of 1965), which is part of a program of 
professional development that is approved and certified by the 
appropriate local educational agency as furthering the 
individual's teaching skills.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2000.

G. Extension of Deduction for Computer Donations to Schools (Sec. 9 of 
                the Bill and Sec. 170(e)(6) of the Code)


                              Present Law

    The maximum charitable contribution deduction that may be 
claimed by a corporation for any one taxable year is limited to 
10 percent of the corporation's taxable income for that year 
(disregarding charitable contributions and with certain other 
modifications) (sec. 170(b)(2)). Corporations also are subject 
to certain limitations based on the type of property 
contributed. In the case of a charitable contribution of short-
term gain property, inventory, or other ordinary income 
property, the amount of the deduction generally is limited to 
the taxpayer's basis (generally, cost) in the property. 
However, special rules in the Code provide an augmented 
deduction for certain corporate contributions. Under these 
special rules, the amount of the augmented deduction is equal 
to the lesser of (1) the basis of the donated property plus 
one-half of the amount of ordinary income that would have been 
realized if the property had been sold, or (2) twice basis.
    Section 170(e)(6) allows corporate taxpayers an augmented 
deduction for qualified contributions of computer technology 
and equipment (i.e., computer software, computer or peripheral 
equipment, and fiber optic cable related to computer use) to be 
used within the United States for educational purposes in 
grades K-12. Eligible donees are: (1) any educational 
organization that normally maintains a regular faculty and 
curriculum and has a regularly enrolled body of pupils in 
attendance at the place where its educational activities are 
regularly carried on; and (2) tax-exempt charitable 
organizations that are organized primarily for purposes of 
supporting elementary and secondary education. A private 
foundation also is an eligible donee, provided that, within 30 
days after receipt of the contribution, the private foundation 
contributes the property to an eligible donee described above.
    Qualified contributions are limited to gifts made no later 
than two years after the date the taxpayer acquired or 
substantially completed the construction of the donated 
property. In addition, the original use of the donated property 
must commence with the donor or the donee. Accordingly, 
qualified contributions generally are limited to property that 
is no more than two years old. Such donated property could be 
computer technology or equipment that is inventory or 
depreciable trade or business property in the hands of the 
donor.
    Donee organizations are not permitted to transfer the 
donated property for money or services (e.g., a donee 
organization cannot sell the computers). However, a donee 
organization may transfer the donated property in furtherance 
of its exempt purposes and be reimbursed for shipping, 
installation, and transfer costs. For example, if a corporation 
contributes computers to a charity that subsequently 
distributes the computers to several elementary schools in a 
given area, the charity could be reimbursed by the elementary 
schools for shipping, transfer, and installation costs.
    The special treatment applies only to donations made by C 
corporations. Thus, S corporations, personal holding companies, 
and service organizations are not eligible donors.
    The provision is scheduled to expire for contributions made 
in taxable years beginning after December 31, 2000.

                           Reasons for Change

    The enhanced deduction for certain donations of computer 
equipment was enacted to provide an incentive for businesses to 
invest their computer equipment and software for the benefit of 
primary and secondary school students, thereby helping to 
provide America's schools with the technological resources 
necessary to prepare both teachers and students for a 
technologically advanced present and future. The Committee 
believes that the incentive provided by the enhanced deduction 
should be continued.

                        Explanation of Provision

    The bill extends the present-law augmented deduction under 
section 170(e)(6) for one year, so that it expires for 
contributions made in taxable years beginning after December 
31, 2001.

                             Effective Date

    The provision is effective on the date of enactment.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the following statements are made 
concerning the votes of the Committee on Ways and Means in its 
consideration of the bill, H.R. 7.

                       MOTION TO REPORT THE BILL

    The bill, H.R. 7, as amended, was ordered favorably 
reported by a roll call vote of 21 yeas to 16 nays (with a 
quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
        Representatives             Yea       Nay     Present     Representatives      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Archer.....................        X   ........  .........  Mr. Rangel........  ........        X   ........
Mr. Crane......................  ........  ........  .........  Mr. Stark.........  ........        X   ........
Mr. Thomas.....................        X   ........  .........  Mr. Matsui........  ........        X   ........
Mr. Shaw.......................        X   ........  .........  Mr. Coyne.........  ........        X   ........
Mrs. Johnson...................  ........        X   .........  Mr. Levin.........  ........        X   ........
Mr. Houghton...................        X   ........  .........  Mr. Cardin........  ........        X   ........
Mr. Herger.....................        X   ........  .........  Mr. McDermott.....  ........  ........  ........
Mr. McCrery....................        X   ........  .........  Mr. Kleczka.......  ........        X   ........
Mr. Camp.......................        X   ........  .........  Mr. Lewis (GA)....  ........        X   ........
Mr. Ramstad....................        X   ........  .........  Mr. Neal..........  ........        X   ........
Mr. Nussle.....................        X   ........  .........  Mr. McNulty.......  ........        X   ........
Mr. Johnson....................        X   ........  .........  Mr. Jefferson.....  ........        X   ........
Ms. Dunn.......................        X   ........  .........  Mr. Tanner........  ........        X   ........
Mr. Collins....................        X   ........  .........  Mr. Becerra.......  ........        X   ........
Mr. Portman....................        X   ........  .........  Mrs. Thurman......  ........        X   ........
Mr. English....................        X   ........  .........  Mr. Doggett.......  ........        X   ........
Mr. Watkins....................        X   ........  .........
Mr. Hayworth...................        X   ........  .........
Mr. Weller.....................        X   ........  .........
Mr. Hulshof....................        X   ........  .........
Mr. McInnis....................        X   ........  .........
Mr. Lewis (KY).................        X   ........  .........
Mr. Foley......................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

                     IV. BUDGET EFFECTS OF THE BILL


                         A. Committee Estimates

    In compliance with clause 3(d)(2) of rule XIII of the Rules 
of the House of Representatives, the following statement is 
made concerning the estimated budget effects of H.R. 7 as 
reported.
    The bill, as reported, is estimated to have the following 
effect on the budget:

                         ESTIMATED BUDGET EFFECTS OF H.R. 7, THE ``EDUCATION SAVINGS AND SCHOOL EXCELLENCE ACT OF 2000,'' AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS
                                                                        [Fiscal years 2000-2010, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                                              2000-      2000-
               Provision                        Effective            2000     2001     2002     2003     2004     2005      2006      2007      2008      2009      2010       2005       2010
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1. Education savings accounts           tyba 12/31/00............  .......      -53     -175     -267     -356      -447      -543      -645      -749      -856      -965     -1,298     -5,057
 (formerly ``Education IRSs'')--
 increase the annual contribution
 limit to $2,000; expand the
 definition of qualified education
 expenses to include elementary and
 secondary education expenses (and
 after-school programs); allow ESAs to
 be used for special needs
 beneficiaries; allow corporations and
 other entities to contribute to ESAs;
 allow contributions until April 15 of
 following year; and allow taxpayer to
 exclude ESA distribution from gross
 income and claim HOPE or Lifetime
 Learning credit as long as they are
 not used for same expenses.
2. Prepaid Savings Plans--State-        tyba 12/31/00............  .......      -11      -35      -53      -75      -100      -129      -158      -185      -213      -236       -275     -1,196
 sponsored plans: exclusions for
 distributions for education expenses;
 private plans: tax deferral on income
 and exclusion for distributions for
 education expenses; allow tax-free
 education withdrawals from prepaid
 savings plans as long as they are not
 used for the same expenses for which
 HOPE or Lifetime Learning credits are
 claimed; miscellaneous other changes
 (clarify definition; one rollover per
 year).
3. Exclude from tax awards under the    -tyba 12/31/93 & tyba 12/       -1       -5       -3       -3       -3        -3        -4        -4        -4        -5        -5        -20        -41
 following programs: National Health     31/99.
 Corps Scholarship program, beginning
 in 1994; F. Edward Hebert Armed
 Forces Health Professions Scholarship
 program, beginning in 1994; National
 Institutes of Health Undergraduate
 Scholarship Program, beginning in
 1994; and similar State-sponsored
 scholarship programs, beginning in
 2000.
4. Increase the school construction     oii cyba 2000............  .......    (\1\)       -3       -5       -6       -11       -14       -15       -16       -17       -18        -24       -104
 small issuer arbitrage rebate
 exception from $10 million to $15
 million.
5. Provide new 4-year expenditure       bia 12/31/00.............  .......      -16     -139     -262     -296      -312      -328      -331      -326      -320      -312     -1,027     -2,644
 schedule for bonds for public school
 construction under the arbitrage
 rebate rules.
6. Increase student loan deduction      tyba 12/31/00............  .......      -52     -211     -226     -240      -253      -262      -272      -282      -291      -301       -981     -2,389
 income limits for single taxpayers by
 $5,000 and adjust the income limits
 for married couples filing joint
 returns to twice that of a single
 taxpayer, phase-out range of $15,000
 for both; repeal 60-month rule.
7. 2% floor on miscellaneous itemized   tyba 12/31/00............  .......       -5      -10      -10      -11       -11       -11       -12       -12       -12       -12        -47       -106
 deductions not to apply to qualified
 professional development expenses;
 with $1,000 cap.
8. Corporate contributions of computer  1/1/01...................  .......      -43      -37       -2  .......  ........  ........  ........  ........  ........  ........        -82        -82
 equipment to primary and secondary
 schools (one-year extension through
 12/31/01.
                                       ---------------------------------------------------------------------------------------------------------------------------------------------------------
      Net total.......................  .........................       -1     -185     -613     -828     -987    -1,137    -1,291    -1,437    -1,574    -1,714    -1,849     -3,754    -11,619
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Loss of less than $500,000.

Legend for ``Effective'' column: bia=bonds issued after; cyba=calendar years beginning after; oil=obligations issued in; tyba=taxable years beginning after.

Note.--Details may not add to totals due to rounding.

Source: Joint Committee on Taxation.

    B. Statement Regarding New Budget Authority and Tax Expenditures


Budget authority

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee states that the 
bill involves no new or increased budget authority.

Tax expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee states that the 
revenue-reducing income tax provisions involve increased tax 
expenditures. (See amounts in table in Part IV.A., above.)

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, requiring cost estimate 
prepared by the Congressional Budget Office, the Committee 
advises that the Congressional Budget Office has submitted the 
following statement on this bill.

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, March 23, 2000.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 7, the Education 
Savings and Schools Excellence Act of 1999.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Hester 
Grippando.
            Sincerely, Barry B. Anderson
                                    (For Dan L. Crippen, Director).
    Enclosure.

H.R. 7--Education Savings and School Excellence Act of 1999

    Summary: H.R. 7 would expand the definition of a qualified 
education expense under an Education Savings Account (formally 
known as an education IRA) and increases its annual 
contribution limit. The bill would also liberalize the 
exemptions from the rules for arbitrage rebates from certain 
tax-exempt bonds; increase the income limits and repeal the 60-
month limit for deductibility of student loan interest; allow 
tax-free distributions from state and private education 
programs; amend the two-percent floor rule on miscellaneous 
deductions as it applies to qualified professional development 
expenses; extend for one year enhanced deductions for corporate 
contributions of computer equipment to schools; and eliminate 
the tax on certain scholarship awards. The Joint Committee on 
Taxation (JCT) estimates that H.R. 7 would reduce governmental 
receipts by about $4 billion over the 2000-2005 period and by 
about $12 billion over the 2000-2010 period. Because the bill 
would affect receipts, pay-as-you-go procedures would apply.
    H.R. 7 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would impose no costs on state, local, or tribal 
governments.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of H.R. 7 is shown in the following table.

----------------------------------------------------------------------------------------------------------------
                                                            By fiscal year, in millions of dollars--
                                               -----------------------------------------------------------------
                                                   2000       2001       2002       2003       2004       2005
----------------------------------------------------------------------------------------------------------------
                                               CHANGES IN REVENUES

Estimated Revenues:
    On-Budget.................................         -1       -182       -612       -826       -985     -1,135
    Off-Budget................................      (\1\)         -3         -1         -2         -2         -2
                                               -----------------------------------------------------------------
      Total Change in Revenues................         -1       -185       -613       -828       -987     -1,137
----------------------------------------------------------------------------------------------------------------
\1\ Less than $500,000.

Source: Joint Committee on Taxation.

    Basis of estimate: Estimates of H.R. 7 are provided by JCT.
    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act sets up pay-as-you-go procedures 
for legislation affecting direct spending or receipts. The net 
changes in outlays and governmental receipts that are subject 
to pay-as-you-go procedures are shown in the following table. 
For the purposes of enforcing pay-as-you-go procedures, only 
the effects in the current year, the budget year, and the 
succeeding four years are counted.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               By fiscal year, in millions of dollars--
                                            ------------------------------------------------------------------------------------------------------------
                                              2000    2001     2002     2003     2004      2005       2006       2007       2008       2009       2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in receipts........................     -1     -182     -612     -826     -985     -1,135     -1,289     -1,435     -1,572     -1,712     -1,847
Changes in outlays.........................                                                 not applicable
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Intergovernmental and private-sector impact: H.R. 7 
contains no intergovernmental or private-sector mandates as 
defined in the Unfunded Mandates Reform Act (UMRA) and would 
impose no costs on state, local, or tribal governments.
    Estimate prepared by: Federal Costs: Hester Grippando.
    Estimate approved by: G. Thomas Woodward, Assistant 
Director for Tax Analysis.

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE


          A. Committee Oversight Findings and Recommendations

    With respect to clause 3(c)(c)(1) of rule XIII of the Rules 
of the House of Representatives (relating to oversight 
findings), the Committee advises that it was the result of the 
Committee's oversight activities concerning the expansion of 
the education savings provisions to elementary and secondary 
education expenses that the Committee concluded that it is 
appropriate to enact the provisions contained in the bill as 
reported.

    B. Summary of Findings and Recommendations of the Committee on 
                    Government Reform and Oversight

    With respect to clause 3(c)(4) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that no 
oversight findings or recommendations have been submitted to 
this Committee by the Committee on Government Reform and 
Oversight with respect to the provisions contained in the bill.

                 C. Constitutional Authority Statement

    With respect to clause 3(d)(1) of rule XIII of the Rules of 
the House of Representatives (relating to Constitutional 
Authority), the Committee states that the Committee's action in 
reporting this bill is derived from Article I of the 
Constitution, Section 7 (``All bills for raising revenue shall 
originate in the House of Representatives'') and Section 8 
(``The Congress shall have power to lay and collect taxes, 
duties, imposts and excises, to pay the debts . . . of the 
United States''), and from the 16th Amendment to the 
Constitution.

              D. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, and tribal 
governments.

                 E. Applicability of House Rule XXI5(b)

    Rule XXI5(b) of the Rules of the House of Representatives 
provides, in part, that ``No bill or joint resolution, 
amendment, or conference report carrying a Federal income tax 
rate increase shall be considered as passed or agreed to unless 
so determined by a vote of not less than three-fifths of the 
Members.'' The Committee has carefully reviewed the provisions 
of the bill, and states that the provisions of the bill do not 
involve any Federal income tax rate increase within the meaning 
of the rule.

                       F. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the 
Joint Committee on Taxation (in consultation with the Internal 
Revenue Service and the Department of the Treasury) to provide 
a tax complexity analysis. The complexity analysis is required 
for all legislation reported by the House Committee on Ways and 
Means, the Senate Committee on Finance, or any committee of 
conference if the legislation includes a provision that 
directly or indirectly amends the Internal Revenue Code and has 
widespread applicability to individuals or small businesses.
    The staff of the Joint Committee on Taxation has determined 
that a complexity analysis is not required under section 
4022(b) of the IRS Reform Act because the bill contains no 
provisions that amend the Internal Revenue Code and that have 
``widespread applicability'' to individuals or small 
businesses.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

      In compliance with clause 3(e) of rule XIII of the Rules 
of the House of Representatives, changes in existing law made 
by the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

                        INTERNAL REVENUE CODE

           *       *       *       *       *       *       *



                       Subtitle A--Income Taxes

           *       *       *       *       *       *       *


                 CHAPTER 1--NORMAL TAXES AND SURTAXES

           *       *       *       *       *       *       *


              Subchapter A--Determination of Tax Liability

           *       *       *       *       *       *       *


                       PART I--TAX ON INDIVIDUALS

           *       *       *       *       *       *       *


SEC. 25A. HOPE AND LIFETIME LEARNING CREDITS.

  (a) Allowance of Credit.--

           *       *       *       *       *       *       *

  (e) Election To Have Section Apply.--
          (1) In general.--No credit shall be allowed under 
        subsection (a) for a taxable year with respect to the 
        qualified tuition and related expenses of an individual 
        unless the taxpayer elects to have this section apply 
        with respect to such individual for such year.
          (2) Coordination With Exclusions.--An election under 
        this subsection shall not take effect with respect to 
        an individual for any taxable year if any portion of 
        any distribution during such taxable year from an 
        [education individual retirement] education savings 
        account is excluded from gross income under section 
        530(d)(2).

           *       *       *       *       *       *       *


SEC. 26. LIMITATION BASED ON TAX LIABILITY; DEFINITION OF TAX 
                    LIABILITY.

  (a) * * *
  (b) Regular Tax Liability.--For purposes of this part--
          (1) * * *
          (2) Exception for certain taxes.--For purposes of 
        paragraph (1), any tax imposed by any of the following 
        provisions shall not be treated as tax imposed by this 
        chapter:
                  (A) * * *

           *       *       *       *       *       *       *

                  (E) section 530(d)(3) (relating to additional 
                tax on certain distributions from [education 
                individual retirement] education savings 
                accounts),

           *       *       *       *       *       *       *


              Subchapter B--Computation of Taxable Income

           *       *       *       *       *       *       *


  PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE 
                             INCOME, ETC.

           *       *       *       *       *       *       *


SEC. 67. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS.

  (a)  * * *

           *       *       *       *       *       *       *

  (b) Miscellaneous Itemized Deductions.--For purposes of this 
section, the term ``miscellaneous itemized deductions'' means 
the itemized deductions other than--
          (1)  * * *

           *       *       *       *       *       *       *

          (11) the deduction under section 171 (relating to 
        deduction for amortizable bond premium), [and]
          (12) the deduction under section 216 (relating to 
        deductions in connection with cooperative housing 
        corporations)[.], and
          (13) any deduction allowable for the qualified 
        professional development expenses of an eligible 
        teacher.

           *       *       *       *       *       *       *

  (g) Qualified Professional Development Expenses of Eligible 
Teachers.--For purposes of subsection (b)(13)--
          (1) Qualified professional development expenses.--
                  (A) In general.--The term ``qualified 
                professional development expenses'' means 
                expenses in an amount not to exceed $1,000 for 
                any taxable year--
                          (i) for tuition, fees, books, 
                        supplies, equipment, and transportation 
                        required for the enrollment or 
                        attendance of an individual in a 
                        qualified course of instruction, and
                          (ii) with respect to which a 
                        deduction is allowable under section 
                        162 (determined without regard to this 
                        section).
                  (B) Qualified course of instruction.--The 
                term ``qualified course of instruction'' means 
                a course of instruction which--
                          (i) is--
                                  (I) at an institution of 
                                higher education (as defined in 
                                section 481 of the Higher 
                                Education Act of 1965 (20 U.S.C. 
                                1088), as in effect on the date of 
                                the enactment of this subsection), or
                                  (II) a professional 
                                conference, and
                          (ii) is part of a program of 
                        professional development which is 
                        approved and certified by the 
                        appropriate local educational agency as 
                        furthering the individual's teaching 
                        skills.
          (C) Local educational agency.--The term ``local 
        educational agency'' has the meaning given such term by 
        section 14101 of the Elementary and Secondary Education 
        Act of 1965, as so in effect.
          (2) Eligible teacher.--
                  (A) In general.--The term ``eligible 
                teacher'' means an individual who is a 
                kindergarten through grade 12 classroom 
                teacher, instructor, counselor, aide, or 
                principal in an elementary or secondary school.
                  (B) Elementary or secondary school.--The 
                terms ``elementary school'' and ``secondary 
                school'' have the meanings given such terms by 
                section 14101 of the Elementary and Secondary 
                Education Act of 1965 (20 U.S.C. 8801), as so 
                in effect.

           *       *       *       *       *       *       *


SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE 
                    CONTRACTS.

  (a)  * * *

           *       *       *       *       *       *       *

  (e) Amounts Not Received As Annuities.--
          (1)  * * *

           *       *       *       *       *       *       *

          (9) Extension of paragraph (2)(b) to qualified 
        [state] tuition programs and [educational individual 
        retirement accounts] education savings 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] education savings account (as defined in 
        section 530(b)). The rule of paragraph (8)(B) shall 
        apply for purposes of this paragraph.

           *       *       *       *       *       *       *


        PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME

           *       *       *       *       *       *       *


SEC. 117. QUALIFIED SCHOLARSHIPS.

  (a)  * * *

           *       *       *       *       *       *       *

  (c) Limitation.--[Subsections (a)]
          (1) In general.--Except as provided in paragraph (2), 
        subsections (a) and (d) shall not apply to that portion 
        of any amount received which represents payment for 
        teaching, research, or other services by the student 
        required as a condition for receiving the qualified 
        scholarship or qualified tuition reduction.
          (2) Exceptions.--Paragraph (1) shall not apply to any 
        amount received by an individual under--
                  (A) the National Health Service Corps 
                Scholarship program under section 338A(g)(1)(A) 
                of the Public Health Service Act,
                  (B) the Armed Forces Health Professions 
                Scholarship and Financial Assistance program 
                under subchapter I of chapter 105 of title 10, 
                United States Code,
                  (C) the National Institutes of Health 
                Undergraduate Scholarship program under section 
                487D of the Public Health Service Act, or
                  (D) any State program determined by the 
                Secretary to have substantially similar 
                objectives as such programs.

           *       *       *       *       *       *       *


SEC. 135. INCOME FROM UNITED STATES SAVINGS BONDS USED TO PAY HIGHER 
                    EDUCATION TUITION AND FEES.

  (a)  * * *

           *       *       *       *       *       *       *

  (c) Definitions.--For purposes of this section--
          (1)  * * *

           *       *       *       *       *       *       *

          (2) Qualified higher education expenses.--
                  (A)  * * *

           *       *       *       *       *       *       *

                  (C) Contributions to qualified [state] 
                tuition program and [education individual 
                retirement accounts] education savings 
                accounts.--Such term shall include any 
                contribution to a qualified [State] tuition 
                program (as defined in section 529 on behalf of 
                a designated beneficiary (as defined in such 
                section), or to an [education individual 
                retirement] education savings account (as 
                defined in section 530 on behalf of an account 
                beneficiary, who is an individual described in 
                subparagraph (A); but there shall be no 
                increase in the investment in the contract for 
                purposes of applying section 72 by reason of 
                any portion of such contribution which is not 
                includible in gross income by reason of this 
                subparagraph.

           *       *       *       *       *       *       *

  (d) Special Rules.--
          (1) Adjustment for certain scholarships and veterans 
        benefits.--The amount of 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 the sum of the amounts received with respect to 
        such individual for the taxable year as--
                  (A)  * * *

           *       *       *       *       *       *       *

                  (D) a payment, waiver, or reimbursement of 
                qualified higher education expenses under a 
                qualified [State] tuition program (within the 
                meaning of section 529(b).
          (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] allowed 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)] the 
                exclusions under sections 529(c)(3)(B)(i) and 
                530(d)(2).

           *       *       *       *       *       *       *


      PART IV--TAX EXEMPTION REQUIREMENTS FOR STATE AND LOCAL BONDS

           *       *       *       *       *       *       *


                   Subpart B--Private Activity Bonds

           *       *       *       *       *       *       *


SEC. 148. ARBITRAGE.

  (a)  * * *

           *       *       *       *       *       *       *

  (f) Required Rebate to the United States.--
          (1)  * * *

           *       *       *       *       *       *       *

          (4) Special rules for applying paragraph (2).--
                  (A)  * * *

           *       *       *       *       *       *       *

                  (C) Exception from rebate for certain 
                proceeds to be used to finance construction 
                expenditures.--
                          (i)  * * *

           *       *       *       *       *       *       *

                          (xviii) 4-year spending requirement 
                        for public school construction issue.--
                                  (I) In general.--In the case 
                                of a public school construction 
                                issue, the spending 
                                requirements of clause (ii) 
                                shall be treated as met if at 
                                least 10 percent of the 
                                available construction proceeds 
                                of the construction issue are 
                                spent for the governmental 
                                purposes of the issue within 
                                the 1-year period beginning on 
                                the date the bonds are issued, 
                                30 percent of such proceeds are 
                                spent for such purposes within 
                                the 2-year period beginning on 
                                such date, 60 percent of such 
                                proceeds are spent for such 
                                purposes within the 3-year 
                                period beginning on such date, 
                                and 100 percent of such proceeds are spent for such purposes within the 
4-year period beginning on such date.
                                  (II) Public school 
                                construction issue.--For 
                                purposes of this clause, the 
                                term ``public school 
                                construction issue'' means any 
                                construction issue if no bond 
                                which is part of such issue is 
                                a private activity bond and all 
                                of the available construction 
                                proceeds of such issue are to 
                                be used for the construction 
                                (as defined in clause (iv)) of 
                                public school facilities to 
                                provide education or training 
                                below the postsecondary level 
                                or for the acquisition of land 
                                that is functionally related 
                                and subordinate to such 
                                facilities.
                                  (III) Other rules to apply.--
                                Rules similar to the rules of 
                                the preceding provisions of 
                                this subparagraph which apply 
                                to clause (ii) also apply to 
                                this clause.
                  (D) Exception for governmental units issuing 
                $5,000,000 or less of bonds.--
                          (i)  * * *

           *       *       *       *       *       *       *

                          (vii) Increase in exception for bonds 
                        financing public school capital 
                        expenditures.--Each of the $5,000,000 
                        amounts in the preceding provisions of 
                        this subparagraph shall be increased by 
                        the lesser of [$5,000,000] $10,000,000 
                        or so much of the aggregate face amount 
                        of the bonds as are attributable to 
                        financing the construction (within the 
                        meaning of subparagraph (C)(iv)) of 
                        public school facilities.

           *       *       *       *       *       *       *


      PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS

           *       *       *       *       *       *       *


SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.

  (a)  * * *

           *       *       *       *       *       *       *

  (e) Certain Contributions of Ordinary Income and Capital Gain 
Property.--
          (1)  * * *

           *       *       *       *       *       *       *

          (6) Special rule for contributions of computer 
        technology and equipment for elementary or secondary 
        school purposes.--
                  (A)  * * *

           *       *       *       *       *       *       *

                  (F) Termination.--This paragraph shall not 
                apply to any contribution made during any 
                taxable year beginning after December 31, 
                [2000] 2001.

           *       *       *       *       *       *       *


        PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS

           *       *       *       *       *       *       *


SEC. 221. INTEREST ON EDUCATION LOANS.

  (a)  * * *

           *       *       *       *       *       *       *

  (b) Maximum Deduction.--
          (1)  * * *

           *       *       *       *       *       *       *

          (2) Limitation based on modified adjusted gross 
        income.--
                  (A)  * * *
                  (B) Amount of reduction.--The amount 
                determined under this subparagraph is the 
                amount which bears the same ratio to the amount 
                which would be so taken into account as--
                          [(i) the excess of--
                                  [(I) the taxpayer's modified 
                                adjusted gross income for such 
                                taxable year, over
                                  [(II) $40,000 ($60,000 in the 
                                case of a joint return), bears 
                                to
                          [(ii) $15,000.]
                          (i) the excess of--
                                  (I) the taxpayer's modified 
                                adjusted gross income for such 
                                taxable year, over
                                  (II) $45,000 ($90,000 in the 
                                case of a joint return), bears 
                                to
                          (ii) $15,000.

           *       *       *       *       *       *       *

  [(d) Limit on Period Deduction Allowed.--A deduction shall be 
allowed under this section only with respect to interest paid 
on any qulified education loan during the first 60 months 
(whether or not consecutive) in which interest payments are 
required. For purposes of this paragraph, any loan and all 
refinancings of such loan shall be treated as 1 loan. Such 60 
months shall be determined in the manner prescribed by the 
Secretary in the case of multiple loans which are refinanced 
by, or serviced as, a single loan and in the case of loans 
incurred before the date of the enactment of this section.]
  [(e)] (d) Definitions.--For purposes of this section--
          (1)  * * *
          (2) Qualified higher education expenses.--The term 
        ``qualified higher education expenses'' means the cost 
        of attendance (as defined in section 472 of the Higher 
        Education Act of 1965, 20 U.S.C. 1087ll, as in effect 
        on the day before the dateof the enactment of this Act) 
at an eligible educational institution, reduced by the sum of--
                  (A) the amount excluded from gross income 
                under section 127, 135, 529, or 530 by reason 
                of such expenses, and

           *       *       *       *       *       *       *

  [(f)] (e) Special Rules.--
          (1) Denial of double benefit.--No deduction shall be 
        allowed under this section for any amount for which a 
        deduction is allowable under any other provision of 
        this chapter.
          (2) Married couples must file joint return.--If the 
        taxpayer is married at the close of the taxable year, 
        the deduction shall be allowed under subsection (a) 
        only if the taxpayer and the taxpayer's spouse file a 
        joint return for the taxable year.
          (3) Marital status.--Marital status shall be 
        determined in accordance with section 7703.
  [(g)] (f) Inflation Adjustments.--
          (1) In general.--In the case of a taxable year 
        beginning after 2002, the [$40,000 and $60,000 amounts] 
        $45,000 and $90,000 amounts in subsection (b)(2) shall 
        each be increased by an amount equal to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, determined by 
                substituting ``calendar year 2001'' for 
                ``calendar year 1992'' in subparagraph (B) 
                thereof.

           *       *       *       *       *       *       *


Subchapter F--Exempt Organizations

           *       *       *       *       *       *       *


              PART VIII--HIGHER EDUCATION SAVINGS ENTITIES

        Sec. 529. Qualified [state] tuition programs.
        [Sec. 530. Education individual retirement accounts.]
        Sec. 530. Education savings accounts.

           *       *       *       *       *       *       *


SEC. 529. QUALIFIED [STATE] TUITION PROGRAMS.

  (a) General Rule.--A qualified [State] tuition program shall 
be exempt from taxation under this subtitle. Notwithstanding 
the preceding sentence, such program shall be subject to the 
taxes imposed by section 511 (relating to imposition of tax on 
unrelated business income of charitable organizations).
  (b) Qualified [State] Tuition Program.--For purposes of this 
section--
          (1) In general.--The term ``qualified [State] tuition 
        program'' means a program established and maintained by 
        a State or agency or instrumentality thereof or by one 
        or more eligible educational institutions--
                  (A) under which a person--
                          (i)  * * *
                          (ii) in the case of a program 
                        established and maintained by a State 
                        or agency or instrumentality thereof, 
                        may make contributions to an account 
                        which is established for the purpose of 
                        meeting the qualified higher education 
                        expenses of the designated beneficiary 
                        of the account, and
                  (B) which meets the other requirements of 
                this subsection.
          (2) Cash contributions.--A program shall not be 
        treated as a qualified [State] tuition program unless 
        it provides that purchases or contributions may only be 
        made in cash.
          (3) Refunds.--A program shall not be treated as a 
        qualified [State] tuition program unless it imposes a 
        more than de minimis penalty on any refund of earnings 
        from the account which are not--

           *       *       *       *       *       *       *

          (4) Separate accounting.--A program shall not be 
        treated as a qualified [State] tuition program unless 
        it provides separate accounting for each designated 
        beneficiary.
          (5) No investment direction.--A program shall not be 
        treated as a qualified [State] tuition program unless 
        it provides that any contributor to, or designated 
        beneficiary under, such program may not directly or 
        indirectly direct the investment of any contributions 
        to the program (or any earnings thereon).
          (6) No pledging of interest as security.--A program 
        shall not be treated as a qualified [State] tuition 
        program if it allows any interest in the program or any 
        portion thereof to be used as security for a loan.
          (7) Prohibition on excess contributions.--A program 
        shall not be treated as a qualified [State] tuition 
        program unless it provides 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.
  (c) Tax Treatment of Designated Beneficiaries and 
Contributors.--
          (1) In general.--Except as otherwise provided in this 
        subsection, no amount shall be includible in gross 
        income of--
                  (A) a designated beneficiary under a 
                qualified [State] tuition program, or
                  (B) a contributor to such program on behalf 
                of a designated beneficiary,

           *       *       *       *       *       *       *

          (3) Distributions.--
                  (A) In general.--Any distribution under a 
                qualified [State] tuition program shall be 
                includible in the gross income of the 
                distributee in the manner as provided under 
                section 72 to the extent not excluded from 
                gross income under any other provision of this 
                chapter.
                  [(B) In-kind distributions.--Any benefit 
                furnished to a designated beneficiary under a 
                qualified State tuitionprogram shall be treated 
as a distribution to the beneficiary.]
                  (B) Distributions for qualified higher 
                education expenses.--For purposes of this 
                paragraph--
                          (i) In-kind distributions.--No amount 
                        shall be includible in gross income 
                        under subparagraph (A) by reason of a 
                        distribution which consists of 
                        providing a benefit to the distributee 
                        which, if paid for by the distributee, 
                        would constitute payment of a qualified 
                        higher education expense.
                          (ii) Cash distributions.--In the case 
                        of distributions not described in 
                        clause (i), if--
                                  (I) such distributions do not 
                                exceed the qualified higher 
                                education expenses (reduced by 
                                expenses described in clause 
                                (i)), no amount shall be 
                                includible in gross income, and
                                  (II) in any other case, the 
                                amount otherwise includible in 
                                gross income shall be reduced 
                                by an amount which bears the 
                                same ratio to such amount as 
                                such expenses bear to such 
                                distributions.
                          (iii) Treatment as distributions.--
                        Any benefit furnished to a designated 
                        beneficiary under a qualified tuition 
                        program shall be treated as a 
                        distribution to the beneficiary for 
                        purposes of this paragraph.
                          (iv) Coordination with hope and 
                        lifetime learning credits.--The total 
                        amount of qualified higher education 
                        expenses with respect to an individual 
                        for the taxable year shall be reduced--
                                  (I) as provided in section 
                                25A(g)(2), and
                                  (II) by the amount of such 
                                expenses which were taken into 
                                account in determining the 
                                credit allowed to the taxpayer 
                                or any other person under 
                                section 25A.
                          (v) Coordination with education 
                        individual retirement accounts.--If, 
                        with respect to an individual for any 
                        taxable year--
                                  (I) the aggregate 
                                distributions to which clauses 
                                (i) and (ii) and section 
                                530(d)(2)(A) apply, exceed
                                  (II) the total amount of 
                                qualified higher education 
                                expenses otherwise taken into 
                                account under clauses (i) and 
                                (ii) (after the application of 
                                clause (iv)) for such year,
                        the taxpayer shall allocate such 
                        expenses among such distributions for 
                        purposes of determining the amount of 
                        the exclusion under clauses (i) and 
                        (ii) and section 530(d)(2)(A).
                  (C) Change in beneficiaries or programs.--
                          (i) Rollovers.--Subparagraph (A) 
                        shall not apply to that portion of any 
                        distribution which, within 60 days of 
                        such distribution, is [transferred to 
                        the credit] transferred--
                                  (I) to another qualified 
                                tuition program for the benefit 
                                of the designated beneficiary, 
                                or
                                  (II) to the credit of another 
                                designated beneficiary under a 
                                qualified [State] tuition 
                                program who is a member of the 
                                family of the designated 
                                beneficiary with respect to 
                                which the distribution was 
                                made.
                          (ii) Change in designated 
                        beneficiaries.--Any change in the 
                        designated beneficiary of an interest 
                        in a qualified [State] tuition program 
                        shall not be treated as a distribution 
                        for purposes of subparagraph (A) if the 
                        new beneficiary is a member of the 
                        family of the old beneficiary.
                          (iii) Limitation on certain 
                        rollovers.--Clause (i)(I) shall not 
                        apply to any amount transferred with 
                        respect to a designated beneficiary if, 
                        at any time during the 1-year period 
                        ending on the day of such transfer, any 
                        other amount was transferred with 
                        respect to such beneficiary which was 
                        not includible in gross income by 
                        reason of clause (i)(I).
                  (D) Operating rules.--For purposes of 
                applying section 72--
                          (i) to the extent provided by the 
                        Secretary, all qualified [State] 
                        tuition programs of which an individual 
                        is a designated beneficiary shall be 
                        treated as one program,

           *       *       *       *       *       *       *

  (d) Reports.--Each officer or employee having control of the 
qualified [State] tuition program or their designee shall make 
such reports regarding such program to the Secretary and to 
designated beneficiaries with respect to contributions, 
distributions, and such other matters as the Secretary may 
require. The reports required by this subsection shall be filed 
at such time and in such manner and furnished to such 
individuals at such time and in such manner as may be required 
by the Secretary.
  (e) Other definitions and special rules.--For purposes of 
this section--
          (1) Designated beneficiary.--The term ``designated 
        beneficiary'' means--
                  (A) the individual designated at the 
                commencement of participation in the qualified 
                [State] tuition program as the beneficiary of 
                amounts paid (or to be paid) to the program,
                  (B) in the case of a change in beneficiaries 
                described in subsection (c)(3)(C), the 
                individual who is the new beneficiary, and
                  (C) in the case of an interest in a qualified 
                [State] tuition program purchased by a State or 
                local government (or agency or instrumentality 
                thereof) or an organization described in 
                section 501(c)(3) and exempt from taxation 
                under section 501(a) as part of a scholarship 
                program operated by such government or 
                organization, the individual receiving such 
                interest as a scholarship.
          (2) Member of family.--The term ``member of the 
        family'' means, with respect to any designated 
        beneficiary--
                  (A)  * * *
                  (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)[.]; and
                  (D) any first cousin of such beneficiary.
          (3) Qualified higher education expenses.--
                  [(A) In general.--The term ``qualified higher 
                education expenses'' means tuition, fees, 
                books, supplies, and equipment required for the 
                enrollment or attendance of a designated 
                beneficiary at an eligible educational 
                institution.]
                  (A) In general.--The term ``qualified higher 
                education expenses'' means--
                          (i) tuition and fees required for the 
                        enrollment or attendance of a 
                        designated beneficiary at an eligible 
                        educational institution for courses of 
                        instruction of such beneficiary at such 
                        institution, and
                          (ii) expenses for books, supplies, 
                        and equipment which are incurred in 
                        connection with such enrollment or 
                        attendance, but not to exceed the 
                        allowance for books and supplies 
                        included in the cost of attendance (as 
                        defined in section 472 of the Higher 
                        Education Act of 1965 (20 U.S.C. 
                        1087ll), as in effect on the date of 
                        the enactment of the Education Savings 
                        and School Excellence Act of 2000 as 
                        determined by the eligible educational 
                        institution.
                  (B) Room and board included for students 
                under guaranteed plans who are at least half-
                time.--
                          (i) In general.--In the case of an 
                        individual who is an eligible student 
                        (as defined in section 25A(b)(3)) for 
                        any academic period, such term shall 
                        also include reasonable costs for such 
                        period (as determined under the 
                        qualified [State] tuition program) 
                        incurred by the designated beneficiary 
                        for room and board while attending such 
                        institution. For purposes of subsection 
                        (b)(7), a designated beneficiary shall 
                        be treated as meeting the requirements 
                        of this clause.
                          (ii) Limitation.--The amount treated 
                        as qualified higher education expenses 
                        by reason of the preceding sentence 
                        shall not exceed the minimum amount 
                        (applicable to the student) included 
                        for room and board for such period in 
                        the cost of attendance (as defined in 
                        section 472 of the Higher Education Act 
                        of 1965, 20 U.S.C. 1087ll, as in effect 
                        on the date of the enactment of this 
                        paragraph) for the eligible educational 
                        institution for such period.
                  (C) Exception for education involving sports, 
                etc.--The term ``qualified higher education 
                expenses'' shall not include expenses with 
                respect to any course or other education 
                involving sports, games, or hobbies unless such 
                course or other education is part of the 
                beneficiary's degree program or is taken to 
                acquire or improve job skills of the 
                beneficiary.
          (4) Application of section 514.--An interest in a 
        qualified [State] tuition program shall not be treated 
        as debt for purposes of section 514.

           *       *       *       *       *       *       *


[SEC. 530. EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.]

SEC. 530. EDUCATION SAVINGS ACCOUNTS.

  (a) General Rule.--An [education individual retirement 
account] education savings account shall be exempt from 
taxation under this subtitle. Notwithstanding the preceding 
sentence, the [education individual retirement account] 
education savings account shall be subject to the taxes imposed 
by section 511 (relating to imposition of tax on unrelated 
business income of charitable organizations).
  (b) Definitions and Special Rules.--For purposes of this 
section--
          (1) [Education individual retirement account] 
        Education savings account.--The term ``[education 
        individual retirement account] education savings 
        account'' means a trust created or organized in the 
        United States exclusively for the purpose of paying the 
        qualified [higher] education expenses of an individual 
        who is the designated beneficiary of the trust (and 
        designated as an [education individual retirement 
        account] education savings account at the time created 
        or organized), but only if the written governing 
        instrument creating the trust meets the following 
        requirements:
                  (A) No contribution will be accepted--
                          (i) unless it is in cash,
                          (ii) after the date on which such 
                        beneficiary attains age 18, or
                          (iii) except in the case of rollover 
                        contributions, if such contribution 
                        would result in aggregate contributions 
                        for the taxable year exceeding [$500] 
                        $2,000.

           *       *       *       *       *       *       *

        The age limitations in subparagraphs (A)(ii) and (E) 
        and paragraphs (5) and (6) of subsection (d) shall not 
        apply to any designated beneficiary with special needs 
        (as determined under regulations prescribed by the 
        Secretary).
          [(2) Qualified higher education expenses.--
                  [(A) In general.--The term ``qualified higher 
                education expenses'' has the meaning given such 
                term by section 529(e)(3), 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 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)).
                  (B) Qualified state tuition programs.--Such 
                term shall include any contribution to a 
                qualified State tuition program (as defined in 
                section 529(b)) on behalf of the designated 
                beneficiary (as defined in section 529(e)(1)); 
                but there shall be no increase in the 
                investment in the contract for purposes of 
                applying section 72 by reason of any portion of 
                such contribution which is not includible in 
                gross income by reason of subsection (d)(2).
          (3) Eligible educational institution.--The term 
        ``eligible educational institution'' has the meaning 
        given such term by section 529(e)(5).
          (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, and
                          (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.
          (5) Time when contributions deemed made.--An 
        individual shall be deemed to have made a contribution 
        to an education savings account on the last day of the 
        preceding taxable year if the contribution is made on 
        account of such taxable year and is made not later than 
        the time prescribed by law for filing the return for 
        such taxable year (not including extensions thereof).
  (c) Reduction in Permitted Contributions Based on Adjusted 
Gross Income.--
          (1) In general.--[The maximum amount which a 
        contributor] In the case of a contributor who is an 
        individual, the maximum amount the contributor could 
        otherwise make to an account under this section shall 
        be reduced by an amount which bears the same ratio to 
        such maximum amount as--
                  (A)  * * *

           *       *       *       *       *       *       *

  (d) Tax Treatment of Distributions.--
          (1) In general.--Any distribution shall be includible 
        in the gross income of the distributee in the manner as 
        provided in section 72.
          (2) Distributions for qualified [higher] education 
        expenses.--
                  (A) In general.--No amount shall be 
                includible in gross income under paragraph (1) 
                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.
                  (B) Distributions in excess of expenses.--If 
                such aggregate distributions exceed such 
                expenses during the taxable year, the amount 
                otherwise includible in gross income under 
                paragraph (1) shall be reduced by the amount 
                which bears the same ratio to the amount which 
                would be includible in gross income under 
                paragraph (1) (without regard to this 
                subparagraph) as the qualified [higher] 
                education expenses bear to such aggregate 
                distributions.
                  [(C) Election to waive exclusion.--A taxpayer 
                may elect to waive the application of this 
                paragraph for any taxable year.]
                  (C) Coordination with hope and lifetime 
                learning credits and qualified tuition 
                programs.--For purposes of subparagraph (A)--
                          (i) Credit coordination.--The total 
                        amount of qualified higher education 
                        expenses with respect to an individual 
                        for the taxable year shall be reduced--
                                  (I) as provided in section 
                                25A(g)(2), and
                                  (II) by the amount of such 
                                expenses which were taken into 
                                account in determining the 
                                credit allowed to the taxpayer 
                                or any other person under 
                                section 25A.
                          (ii) Coordination with qualified 
                        tuition programs.--If, with respect to 
                        an individual for any taxable year--
                                  (I) the aggregate 
                                distributions during such year 
                                to which subparagraph (A) and 
                                section 529(c)(3)(B) apply, 
                                exceed
                                  (II) the total amount of 
                                qualified education expenses 
                                (after the application of 
                                clause (i)) for such year,
                        the taxpayer shall allocate such 
                        expenses among such distributions for 
                        purposes of determining the amount of 
                        the exclusion under subparagraph (A) 
                        and section 529(c)(3)(B).
                  (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.
          (3) Special rules for applying estate and gift taxes 
        with respect to account.--Rules similar to the rules of 
        paragraphs (2), (4), and (5) of section 529(c) shall 
        apply for purposes of this section.
          (4) Additional tax for distributions not used for 
        educational expenses.--
                  (A) In general.--The tax imposed by this 
                chapter for any taxable year on any taxpayer 
                who receives a payment or distribution from an 
                [education individual retirement account] 
                education savings account which is includible 
                in gross income shall be increased by 10 
                percent of the amount which is so includible.
                  (B) Exceptions.--Subparagraph (A) shall not 
                apply if the payment or distribution is--
                          (i) made to a beneficiary (or to the 
                        estate of the designated beneficiary) 
                        on or after the death of the designated 
                        beneficiary,
                          (ii) attributable to the designated 
                        beneficiary's being disabled (within 
                        the meaning of section 72(m)(7)),
                          (iii) made on account of a 
                        scholarship, allowance, or payment 
                        described in section 25A(g)(2) received 
                        by the account holder to the extent the 
                        amount of the payment or distribution 
                        does not exceed the amount of the 
                        scholarship, allowance, or payment; or
                          (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.
                  (C) Contributions returned before [due date 
                of return] certain date.--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]
                          (i) such distribution is made before 
                        the first day of the sixth month of the 
                        taxable year following the taxable 
                        year, and
                          (ii) such distribution is accompanied 
                        by the amount of net income 
                        attributable to such excess 
                        contribution. Any net income described 
                        in clause (ii) shall be included in 
                        gross income for the taxable year in 
                        which such excess contribution was 
                        made.
          (5) Rollover contributions.--Paragraph (1) shall not 
        apply to any amount paid or distributed from an 
        [education individual retirement account] education 
         savings 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] education savings 
        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. The preceding sentence shall not 
        apply to any payment or distribution if it applied to 
        any prior payment or distribution during the 12-month 
        period ending on the date of the payment or 
        distribution.
          (6) Change in beneficiary.--Any change in the 
        beneficiary of an [education individual retirement 
        account] education savings account shall not be treated 
        as a distribution for purposes of paragraph (1) if the 
        new beneficiary is a member of the family (as so 
        defined) of the old beneficiary and has not attained 
        age 30 as of the date of such change.
          (7) Special rules for death and divorce.--Rules 
        similar to the rules of paragraphs (7) and (8) of 
        section 220(f) shall apply. In applying the preceding 
        sentence, members of the family (as so defined) of the 
        designated beneficiary shall be treated in the same 
        manner as the spouse under such paragraph (8).
          (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.
  (e) Tax treatment of accounts.--Rules similar to the rules of 
paragraphs (2) and (4) of section 408(e) shall apply to any 
[education individual retirement account] education savings 
account.
  (f) Community property laws.--This section shall be applied 
without regard to any community property laws.
  (g) Custodial accounts.--For purposes of this section, a 
custodial account shall be treated as a trust if the assets of 
such account are held by a bank (as defined in section 408(n) 
or another person who demonstrates, to the satisfaction of the 
Secretary, that the manner in which he will administer the 
account will be consistent with the requirements of this 
section, and if the custodial account would, except for the 
fact that it is not a trust, constitute an account described in 
subsection (b)(1). For purposes of this title, in the case of a 
custodial account treated as a trust by reason of the preceding 
sentence, the custodian of such account shall be treated as the 
trustee thereof.
  (h) Reports.--The trustee of an [education individual 
retirement account] education savings account shall make such 
reports regarding such account to the Secretary and to the 
beneficiary of the account with respect to contributions, 
distributions, and such other matters as the Secretary may 
require. The reports required by this subsection shall be filed 
at such time and in such manner and furnished to such 
individuals at such time and in such manner as may be required.

           *       *       *       *       *       *       *


                Subtitle D--Miscellaneous Excise Taxes

           *       *       *       *       *       *       *


               CHAPTER 43--QUALIFIED PENSION, ETC., PLANS

           *       *       *       *       *       *       *


SEC. 4973. TAX ON EXCESS CONTRIBUTIONS TO CERTAIN TAX-FAVORED ACCOUNTS 
                    AND ANNUITIES.

  (a) Tax imposed.--In the case of--
          (1)  * * *

           *       *       *       *       *       *       *

          (4) an [education individual retirement] education 
        savings account (as defined in section 530, there is 
        imposed for each taxable year a tax in an amount equal 
        to 6 percent of the amount of the excess contributions 
        to such individual's accounts or annuities (determined 
        as of the close of the taxable year). The amount of 
        such tax for any taxable year shall not exceed 6 
        percent of the value of the account or annuity 
        (determined as of the close of the taxable year). In 
        the case of an endowment contract described in section 
        408(b), the tax imposed by this section does not apply 
        to any amount allocable to life, health, accident, or 
        other insurance under such contract. The tax imposed by 
        this subsection shall be paid by such individual.
  (e) Excess Contributions to [Education Individual Retirement 
Accounts] Education Savings Accounts.--For purposes of this 
section--
          (1) In general.--In the case of [education individual 
        retirement] education savings accounts maintained for 
        the benefit of any one 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] $2,000 (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); 
                and
                  [(B) if any amount is contributed (other than 
                a contribution described in section 
                530(b)(2)(B)) 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)] (B) 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 (other 
                        than rollover distributions); 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.
          (2) Special rules.--For purposes of paragraph (1), 
        the following contributions shall not be taken into 
        account:
                  (A) Any contribution which is distributed out 
                of the [education individual retirement] 
                education savings account in a distribution to 
                which section 530(d)(4)(C) applies.
                  (B) Any rollover contribution.

           *       *       *       *       *       *       *


SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Prohibited Transaction.--
          (1) * * *

           *       *       *       *       *       *       *

          (5) Special rule for education [individual 
        retirement] savings accounts.--An individual for whose 
        benefit an education [individual retirement] savings 
        account is established and any contributor to such 
        account shall be exempt from the tax imposed by this 
        section with respect to any transaction concerning such 
        account (which would otherwise be taxable under this 
        section) if section 530(d) applies with respect to such 
        transaction.

           *       *       *       *       *       *       *

  (e) Definitions.--
          (1) Plan.--For purposes of this section, the term 
        ``plan'' means--
                  (A)  * * *

           *       *       *       *       *       *       *

                  (E) an education [individual retirement] 
                savings account described in section 530, or

           *       *       *       *       *       *       *


                Subtitle F--Procedure and Administration

           *       *       *       *       *       *       *


                 CHAPTER 61--INFORMATION AND RETURNS

           *       *       *       *       *       *       *


                  Subchapter A--Returns and Records

           *       *       *       *       *       *       *


                     PART III--INFORMATION RETURNS

           *       *       *       *       *       *       *



Subpart A--Information Concerning Persons Subject to Special Provisions

           *       *       *       *       *       *       *



SEC. 6050S. RETURNS RELATING TO HIGHER EDUCATION TUITION AND RELATED 
                    EXPENSES.

  (a) * * *

           *       *       *       *       *       *       *

  (e) Definitions.--For purposes of this section, the terms 
``eligible educational institution'' and ``qualified tuition 
and related expenses'' have the meanings given such terms by 
section 25A (without regard to subsection (g)(2) thereof), and 
except as provided in regulations, the term ``qualified 
education loan'' has the meaning given such term by section 
[221(e)(1)] 221(d)(1).

           *       *       *       *       *       *       *


 CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE 
                               PENALTIES

           *       *       *       *       *       *       *


                  Subchapter B--Assessable Penalties

           *       *       *       *       *       *       *


                       PART I--GENERAL PROVISIONS

           *       *       *       *       *       *       *



SEC. 6693. FAILURE TO PROVIDE REPORTS ON CERTAIN TAX-FAVORED ACCOUNTS 
                    OR ANNUITIES; PENALTIES RELATING TO DESIGNATED 
                    NONDEDUCTIBLE CONTRIBUTIONS.

  (a) Reports.--
          (1) * * *
          (2) Provisions.--The provisions referred to in this 
        paragraph are--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) section 529(d) (relating to qualified 
                [State] tuition programs), and
                  (D) section 530(h) (relating to education 
                [individual retirement] savings accounts).

           *       *       *       *       *       *       *


                         VII. DISSENTING VIEWS

    It had been our hope that expanding educational 
opportunities for our children is an issue where the Committee 
could set aside its partisan differences and work together. 
There are many other issues on which we can campaign this fall. 
The fact that Congressman Rangel and Congresswoman Nancy 
Johnson reached across the partisan divide to formulate a 
bipartisan school construction bill gave credence to those 
hopes. The Committee markup on this bill and the fact that the 
markup was called by the Chairman under orders from the 
Republican House Leadership indicates that those hopes were 
unrealistic. The House Republican Leadership's strategy is 
clear. In the area of expanding educational opportunities, they 
will seek partisan confrontation and vetoes rather than 
bipartisan accomplishment.
    The Committee bill contains several provisions for which 
there is broad bipartisan support. Those provisions include 
liberalizing the student loan interest deduction and expanding 
access to prepaid tuition programs for higher education. Rather 
than include those provisions in a bill designed to become law, 
the Committee voted to include those provisions in legislation 
deliberately designed to be vetoed.
    The President is correct in his adamant opposition to the 
so-called ``Coverdell'' provision included in the Committee 
bill. He has vetoed it twice before and will do so again if 
presented to him in future legislation. It is a diversion of 
scarce resources that could be used to improve the public 
schools--where 90 percent of our students are educated. It does 
nothing for families currently struggling with the cost of 
educating their children. It will benefit only a few wealthy 
families with income available to save after meeting the costs 
of their children's education. The Joint Committee on 
Taxation's analysis indicates how small the benefit will be 
under this provision. It estimates that after 5 years the 
average family with children in public schools will receive an 
annual benefit of $7 and the average family with children in 
private schools would receive an annual benefit of $37.
    The Committee bill is deficient in its failure to include 
meaningful school construction and modernization provisions. 
The Republicans have made two seemingly inconsistent arguments 
against bipartisan school construction and modernization 
legislation sponsored by Congressman Rangel and Congresswoman 
Nancy Johnson. First, they argue that public school 
construction and modernization is strictly a local 
responsibility. Then they argue that their bill has meaningful 
subsidies to assist state and local governments in meeting the 
cost of school construction. Those arguments are actually not 
inconsistent. The school construction provision in the 
Committee bill will do nothing for school districts with 
students in trailers or in unsafe school buildings. The 
Committee bill provision modifies the current law arbitrage 
rules and provides tax benefits to school districts that are 
able to delay school construction and renovation for more than 
2 years. The longer those districts delay school construction, 
the greater the benefit they would receive under the Committee 
bill. It is difficult to conceive of a proposal that is less 
responsive to the real need that exists.
Benefits limited to families with wealth
    We recognize that opposing a proposal advertised as 
promoting school choice is not an easy vote for some Members. 
Those Members should examine the substance of the Committee 
bill. If the Committee bill promotes school choice, it does so 
only for a small category of wealthy families.
    1. The only families who would benefit from the legislation 
are families with sufficient investment assets to enable them 
to accumulate income on those assets over a long period of 
time. Families paying educational expenses out of wage and 
salary income would receive no benefit under the Committee 
bill--no matter where those children were schooled.
    2. Families with school-age children would receive little 
benefit. If a family currently has a child in private school, 
that family would receive the full benefit of the Committee 
bill only if it could contribute $2,000 to an investment 
account after paying the current-year costs of the private 
school. With private-school costs averaging over $3,000 per 
year, only a few very fortunate families could afford to make 
such a contribution. In addition, the Committee bill would 
provide substantial benefits only if the money were allowed to 
accumulate in the account over a period of years. Therefore, 
even the few fortunate families able to save for next year's 
tuition costs would receive little benefit.
    3. To receive the maximum benefit, a family would need to 
have both young children (so that there is time to accumulate 
income in the account) and substantial investment assets. The 
following table indicates that few families meet the second 
requirement. The table is based on data collected by the 
Federal Reserve Board in its 1998 Survey of Consumer Finances. 
It shows the median amount of non-retirement investment assets 
held by families in various income categories. Non-retirement 
investment assets include checking accounts, savings accounts, 
and all other financial assets not held in a retirement plan. 
Not surprisingly, it shows that young families and families 
with children have relatively small amounts of non-retirement 
investment assets.

----------------------------------------------------------------------------------------------------------------
                                                                       Median amount of non-
                                                                   retirement investment assets
                                                    Percent of   --------------------------------  Families with
                                                    families in                      Families     children under
                 Income category                      income                         headed by      18 years of
                                                     category      All families     individual          age
                                                                                  under 35 years
                                                                                      of age
----------------------------------------------------------------------------------------------------------------
Less than $10,000...............................            12.9            $300            $400            $100
$10,000 to 20,000...............................            16.4           1,800             510             400
$20,000 to 30,000...............................            15.5           4,330             950           1,200
$30,000 to 40,000...............................            12.6           6,520           1,800           2,690
$40,000 to 50,000...............................             9.1           9,500           4,100           4,600
$50,000 to 75,000...............................            17.4          17,000           7,750          11,820
$75,000 to 100,000..............................             7.6          31,850          13,900          24,000
$100,000 to 200,000.............................             6.1          96,630          49,300          83,000
Over $200,000...................................             2.3         520,000          78,050         372,500
----------------------------------------------------------------------------------------------------------------

    We believe that the table above amply demonstrates which 
families will benefit from the Committee bill. The amount of 
non-retirement investment assets is a very good measure of a 
family's ability to take advantage of the Committee bill. 
Without those assets, a family would have to save out of 
current-year wages $2,000 per year, per child to take full 
advantage. We all know how few families can afford to do this.

Administerability

    From a technical standpoint, the Committee bill is so 
flawed that it is an embarrassment. The committee bill is based 
largely on a Senate Floor amendment that was offered by Senator 
Coverdell during the consideration of the recently enacted 
Taxpayer Relief Act of 1997. Like many Senate Floor amendments, 
Senator Coverdell's amendment appears to have been developed 
with some haste, largely for political purposes, and with 
little regard to whether it actually could be administered. 
Notwithstanding the fact that almost three years have passed 
since the original consideration of Senator Coverdell's 
amendment, that still is an accurate characterization of the 
bill reported by the Committee.
    The Committee bill would permit taxpayers to contribute 
$2,000 per year, per beneficiary to education savings accounts. 
Income from assets in those accounts would accumulate on a tax-
free basis and that income would be exempt from tax if used to 
pay qualified elementary and secondary education expenses of 
the designated beneficiary. The bill defines qualified expenses 
as being (1) expenses for tuition, fees, academic tutoring, 
special needs services, books, supplies, computer equipment 
(including related software and services) and other equipment, 
incurred in connection with the enrollment or attendance of a 
child at an elementary or secondary school, and (2) expenses 
for room and board, uniforms, transportation, and supplementary 
items and services required or provided by an elementary or 
secondary school in connection with enrollment or attendance at 
such school. The bill provides no hint as to how to how the 
Internal Revenue Service is to administer such a provision or 
what specifically is included in the broad definition of 
qualified expenses. The technical flaws of the bill were 
convincingly demonstrated during the Committee markup.
    The Committee bill appears to provide a long list of 
potentially tax deductible Christmas presents for the children 
of wealthy families, including computers, computer software 
(hopefully not including games), books, educational videos, 
backpacks, art supplies, athletic equipment, and many other 
items. A parent could realize tax benefits by paying one child 
to tutor another child as long as the parent contends that the 
tutoring is academic. Even after 3 years of working on the 
bill, the issue of whether taxicabs or other transportation 
expenses are covered could not be explained by the staff during 
the Committee markup.
    The bill purports to limit the availability of education 
savingsaccounts to taxpayers with annual incomes of less than 
$95,000 ($160,000 for joint returns). However, a wealthy taxpayer 
easily could avoid this limitation through the simple expedient of 
making a gift to the taxpayer's child, who would then make the 
contribution to the education savings account. In a prior markup, the 
staff of the Joint Committee responded that the bill would permit such 
an avoidance technique as long as the child earned less than $95,000. 
In a classic understatement that created laughter in the audience, the 
staff described the bill's income limitation as being ``porous.''

Bipartisan School Construction Alternative

    We believe that we cannot expect our children to learn or 
our teachers to effectively teach unless they are provided with 
a safe and modern school building. Forcing students to go to 
school in trailers or dilapidated school buildings is a clear 
message to them that they and their education do not matter.
    Currently, our public school system has extraordinary unmet 
needs for funds to construct and modernize schools. New 
estimates, based on data collected by the State Departments of 
Education, indicate that more than $300 billion will be needed 
to repair or replace existing public school facilities and to 
construct new schools for the so-called ``baby boom echo'' 
effect. That $300 billion need cannot be met without a 
significant commitment of funds from all levels of government, 
including the Federal government.
    Congressman Rangel and Congresswoman Nancy Johnson, working 
together, have developed bipartisan legislation that would make 
a meaningful down payment for school construction and 
modernization. Their proposal would provide $24.8 billion in 
interest-free funds over the next two years for school 
construction and renovation projects.
    The bipartisan school construction proposal would in no way 
impede on local control of the public school system. All 
decisions regarding what schools to build or renovate would be 
left to local school districts. The Federal contribution under 
the proposal would be provided under procedures similar to 
those utilized in providing the current law tax-exempt bond 
subsidy. The Federal role in the proposal would be limited to 
making an initial allocation of the volume limitations among 
the States.
    The bipartisan compromise is a cost-effective approach that 
would leverage nearly $25 billion in school repairs and new 
construction, while avoiding the creation of any new level of 
bureaucracy. The cost of the bipartisan compromise is less than 
the cost of the Coverdell provisions and the meaningless school 
construction proposal contained in the Committee bill.
    It is our hope that the bipartisan compromise will be made 
in order when the Committee bill is considered on the Floor. 
Adopting the bipartisan compromise, would be a first step in 
enacting bipartisan legislation to expand educational 
opportunities.
                                   Charles B. Rangel.
                                   Ben Cardin.
                                   John Lewis.
                                   Richard E. Neal.
                                   William J. Jefferson.
                                   Karen L. Thurman.
                                   Xavier Becerra.
                                   Michael R. McNulty.
                                   Pete Stark.
                                   Robert T. Matsui.
                                   William J. Coyne.
                                   Sander M. Levin.
                                   John Tanner.
                                   Jerry Kleczka.
                                   Jim McDermott.

                                  
