59

when it is combined with other government and private resources,
such as the low-income housing tax credit. In fact, rental housing
has been the single most important use for buildings rehabbed
under the investment tax credit. But older neighborhoods, neigh-
borhoods of residential homeowners, still need the tools to address
the blight and abandonment that threaten entire communities.

For 30 years, from milltowns in New England and the South, to
the industrial cities in the Midwest, historic communities have
been in a spiral of decline and decay. Left behind in the surge to
the suburbs and exurbs is an inventory of sound housing stock and
older commercial buildings, much of which has historical or archi-
tectural significance.

And while this disinvestment continues to occur, while we con-
tinue to abandon quality buildings and already paid for infrastruc-
ture, the surrounding countryside is fast disappearing under new
tract housing development.

The back-to-the-city movement of the seventies and eighties was
really a back-to-the-historic-neighborhood movement. Today, more
than ever, historic cities, towns, and communities need an incen-
tive for home ownership. As we saw with the commercial rehab tax
credit, when the incentives are in place, the response can be tre-
mendous.

To my right are a couple of charts which we brought just to indi-
cate the breadth of the historic resources in the country. The one
is the cumulative number of National Register listings, which is
64,000, and then a chart that shows contributing resources in his-
toric districts, 8,700 historic districts throughout the country and
in each State.

[The following was subsequently received:]


25

Chairman JOHNSON. I thank you all for your thoughtful testi-
mony and for your legislative initiatives, and I believe that this
Committee has given too little attention to how tax policy affects
matters in both rural and urban areas.

A number of you have talked about changing the Tax Code to
make it easier to preserve land for conservation or to develop ease-
ments across land. In looking at those issues, have any of you
looked at the IRS’ requirement that we value parcels at their high-
est_and best use?

One of the possibilities would be to require the IRS to value land
at its current use if its current use is going to continue, and only
when its use changes, to then tax accordingly. Have any of you
looked into that or have any reason to believe that that would
be—.

Mr. HouGHTon. Well, Madam Chairman, I think that is really
the basic thrust of the bill which Mr. Payne and I are suggesting.
Rather than forcing our land to be at the highest and best value,
which many times is in development of housing or things like that,
that the tax, if sold, would be based on current use, which is not
the case now.

Chairman JOHNSON. Thank you, Mr. Houghton. I wasn’t clear on
that from your testimony, whether that is the way your bill oper-
ates.

Mr. Payne. Let me just, I guess, reiterate what Amo has said,
and that is that for estate tax purposes, when someone has placed
their land in a conservation easement and when that easement is
approved, then the purpose is that the value of the property would
not be the highest investor use, that is, in the example I mentioned
in Philadelphia, as a developed property, but, rather, that they
would carry forward the basis of the property that they would cur-
rently have in lieu of that. That then would provide the kind of re-
lief that they would need to be able to continue to provide this as
open space or allow that conservation easement to actually work.
But that is an integral part of making this bill a viable and work-
able bill.

Chairman JOHNSON. Are conservation easements broad enough?
When you put something under a conservation easement, can you
continue to farm it?

Mr. ZIMMER. In New Jersey, you can. That is the essence of the
farmland preservation legislation. The easement is sold to a county
agriculture development board.

In theory, it should be sold for the difference between the fair
market value of the land and the land’s value as restricted to agri-
culture, along with a residence that would be on the agricultural
parcel. And then from then on, there is a restriction recorded with
the deed which says that the land can be used only for farming,
and that is the restriction of perpetuity. But the point is to restrict
it for that purpose.

Other conservation easements can be crafted to reflect the pur-
pose for which the conservation easement has been given; for in-
stance, the protection of flood plain along a stream or other natural
areas.

Chairman JOHNSON. But these are generally given, not pur-
chased, like development rights?


COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois SAM M. GIBBONS, Florida

BILL THOMAS, California CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ANDY JACOBS, Jr., Indiana

JIM BUNNING, Kentucky HAROLD E. FORD, Tennessee
AMO HOUGHTON, New York ROBERT T. MATSUI, California
WALLY HERGER, California BARBARA B. KENNELLY, Connecticut
JIM McCRERY, Louisiana WILLIAM J. COYNE, Pennsylvania
MEL HANCOCK, Missouri SANDER M. LEVIN, Michigan
DAVE CAMP, Michigan BENJAMIN L. CARDIN, Maryland
JIM RAMSTAD, Minnesota JIM McDERMOTT, Washington
DICK ZIMMER, New Jersey GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia

SAM JOHNSON, Texas LF. PAYNE, Virginia

JENNIFER DUNN, Washington RICHARD E. NEAL, Massachusetts
MAC COLLINS, Georgia MICHAEL R. MCNULTY, New York

ROB PORTMAN, Ohio
JIMMY HAYES, Louisiana
GREG LAUGHLIN, Texas
PHILIP 8. ENGLISH, Pennsylvania
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
PHILLIP D. MOSELEY, Chief of Staff
JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON OVERSIGHT
NANCY L. JOHNSON, Connecticut, Chairman

WALLY HERGER, California ROBERT T. MATSUI, California
MEL HANCOCK, Missouri GERALD D. KLECZKA, Wisconsin
ROB PORTMAN, Ohio BENJAMIN L. CARDIN, Maryland
JIM RAMSTAD, Minnesota JIM McDERMOTT, Washington
DICK ZIMMER, New Jersey MICHAEL R. MCNULTY, New York

GREG LAUGHLIN, Texas
JIMMY HAYES, Louisiana

ap


119

Statement of the Hon. Bill Thomas
HON. WILLIAM M. THOMAS,
Subcommittee on Oversight
Suly 29, 1996

| appreciate this opportunity to comment on the ways in which federal taxes influence
and use in the country. One million acres of farm land in the United States will be eaten up by
parking lots, freeways, and suburban growth this year. In fact, within the hour, one acre of
precious farm land in the Central Valley of California will be taken out of production. The
Central Valley of California currently produces over $13 billion in agriculture produce and feeds
‘millions in the U.S. and around the world.

‘This rural ground also provides vital habitat for thousands of animal species that range
from kangaroo rats to white tailed deer. Farm land provides for a much better habitat for animals
than a parking lot does. It is equally important that we provide incentives to people to keep their
Jand in a natural state so that animal habitat can be preserved. Farm land in areas surrounding
cities is being displaced by urban development at one of the fastest rates in history, and for this
reason our farmers have been placed under new pressures.

‘When the great cities of our country were settled, they were developed near rich
agricultural land to assure an adequate food supply. As urban areas continued to sprawl, many
fertile acres were consumed and many more were placed at risk. Over the past ten years urban
sprawl has eaten up over 26 million acres of productive farmland. In relative terms this equates
‘to an area the size of the entire state of Kentucky displaced by urban development. Most of the
farmland lost in the country has been located in urban-influenced counties where the density is at
least 25 persons per Square mile. A recent study by the American Farmland Trust estimated that
the farm land in the urban-influenced counties was 2.7 times more productive than the remaining,
United States counties. 87% of our domestic fruit and nut production is also grown in these
susceptible counties.

Farming is a capital intensive business and we can use that knowledge to design tax
incentives to ensure farmland preservation. For example, farmers putting in a wine grape
vineyard will encounter four year development costs of over $17,000 dollars per acre. Pistachio
farmers should expect at least $7,000 dollars in preproductive costs per acte, and olive growers
‘$5,000 dollars an acre. These costs could literally double or triple dependent on the value of the
land.

‘Aside from the high start up costs of orchards and vineyards, U.S. farm real estate values
also continue to rise. According to statistics compiled by the U.S. Department of Agriculture the
value U.S. farm teal estate has risen 6.4% over the past year to $832. This $832 figure may be
rising, but it still does not nearly reflect the cost of acquiring a prime piece of farmland in highly
productive, urban-influenced states like California and Florida. An average piece of farm land in
California and Florida is worth over $2,000 and can be worth as much as $17,000.

Along with high costs, farmers are also plagued with storms, disease, and pests that
destroy many acres of orchards and vineyards annually. Some of this costly acreage has not even
reached a productive state. Crops like tangerines and cherries can take five to six years to reach
productivity. In a natural disaster a farmer with a vineyard or an orchard still in its preproductive
state may have trouble sustaining large losses because he has not even begun to receive a return
‘on his investment.

‘After considering land use in California, I have developed two incentives that would
‘amend the tax code and keep families in farming and land in rural uses.

1 recently introduced H.R. 3749 to promote replacement of crops destroyed by casualty.
This bill will provide an incentive to replant by allowing farmers to deduct the cost of replanting
their destroyed crop in the event of freezing temperatures, disease, drought, or pests, all events
that cannot be controlled. It also allows farmers to deduct the costs of replacing key
infrastructure.


68

tracts targeted as distressed for Mortgage Revenue Bond purposes under LR.C. Section 143G)(1)
and Enterprise and Empowerment Zones, where the minimum would be $5,000, At least five
percent of the qualified rehabilitation expenditures would have to be spent on the exterior of the
building, In the event that the taxpayer fails to maintain his principal residence in the building for

five years, the credit would be subject to ratable recapture.

‘Homeownership and Historic Preservation

Central to the American dream is the desire to own one’s own home. But home
‘ownership is more than just a personal goal; by giving residents a true stake in their community, it
promotes the qualities of neighborliness needed to heal and revive threatened and decaying
residential areas.

The existing federal tax credit for historic rehabilitation is not available to homeowners,
but applies only 10 commercial property or other property held for the production of income.

HER. 1662 fills that gap. Moreover, because the tax credit that HLR. 1662 would create is limited
to persons who occupy the building for which the tax eredit is claimed as their personal residence,
there are no tax shelters, no “passive losses" and no syndications. Further, since the proposed
legislation is intended not only to foster homeownership and encourage rehabilitation of
deteriorated buildings, but also to promote economic diversity among residents and increase local
ad valorem real property, income, and sales tax revenues, individual taxpayers would be eligible
for the credit without regard to income.

‘Opportunities for Low and Moderate Income Home Buyers

There is a widespread misperception that historic districts are places where only rich
people live. While itis true that some of the better known districts on the National Register have
been rehabilitated by or for affluent people, itis equally true that the older housing stock in the
United States tends far more to be occupied by the poor than by the rich. Indeed, according to an
analysis of 1990 census data, 29% of the 8,700 National Register historic districts lie within or
contain tracts with poverty rates greater than 20%, a proportion found among Connecticut's 300
historic districts as wel

This legistation has been drafted to provide homeownership opportunities in rehabilitated
historic buildings to Americans at all income levels. For those who do not have sufficient income
to be able to use a tax credit, the bill creates a Historic Rehabilitation Mortgage Credit Certificate
that can be used to reduce the interest rate on their mortgage loan. Instead of a tax credit that he
could not use, « homebuyer could receive a certificate in the face amount of the credit. The
homebuyer would transfer the certificate to the mortgage lender in exchange for a reduced
interested rate on the mortgage loan. The bank could then use the certificate to reduce its own
federal income tax liability, subject to Alternative Minimum Tax restrictions, passing along the
benefits to the home buyer by reducing the interest rate.

A Hypothetical Example

Consider, as an example, a hypothetical home rehabilitated by a developer which qualifies
for the credit. Assume that the home has a selling price of $150,000 and contains $100,000 in
qualified rehabilitation expenditures, The credit on this home is $20,000 (20% of $100,000),
This would more than cover a down payment of 10 percent on the home. In this case the credit
‘would have the effect of reimbursing the home purchaser for the down payment. Although this
‘example involves a developer, the credit could also be used by an individual homeowner to help
defray the cost of rehabilitating his current or newly-purchased residence.

Costs and Benefits

‘The revenue implications of H.R. 1662 would be modest. The Joint Committee on
Taxation has estimated the revenue loss to the treasury at $446 million over a seven year period
‘Nevertheless the National Trust believes this proposal can make a real difference in communit
all across the county--from decaying small towns to threatened big.city neighborhoods. This view



79

STATEMENT OF THE NATIONAL REALTY COMMITTEE
TO THE SUBCOMMITTEE ON OVERSIGHT
OF THE COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
REGARDING
TAX LAW AND LAND USE

Bruce W. MacEwen
Vice Chairman
Tax Policy Advisory Committee
‘National Realty Committee

July 16, 1996

Introduction

woman Johnson, members ofthe Subcommittee on Oversight ofthe Committee
‘on Ways and Means, good afternoon. My name is Bruce W. MacEwen, and I am Vice Chair of
the Tax Policy Advisory Committee of Navona! Realty Committee (NRC).

NRC serves as Real Estate’s Roundtable in Washington on national policy issues
affecting real estate. NRC’s members are America’s principal commercial and multifamily real
estate owmers, advisors, builders, investors, lenders and managers. Portman Holdings, [.P..
where I serve as vice president of taxation, owns, manages and develops office, retail, residential
and hotel properties throughout the United Stats ax well sin several foreign counties. Its

of NRC’s significant concern with policies that affect our nation’s communities and

« Biien and because Sf Portman's vast expenence in. committing substantial investment

America’s cities (primarily downtown centers), that I am here today to present testimony
regarding the impact of the federal tax law on land use.

‘As noted in your release announcing these hearings, there presently exists a number of
tax provisions which may have unintended consequences for land use. In particular, I'd like to
offer NRC’s views and recommendations on that aspect of your Committee announcement that
‘concerns those provisions of current tax law that may act to discourage businesses from investing
in urban areas — not only in vacant urban land, but in developing or redeveloping any structure
‘on such land necessary for job and economic growth to occur.

Clearly, business investment decisions concerning urban areas are not driven by federal
tax policy alone. A more complete picture also would require inquiry into a number of other
major sets of circumstances including efforts to control crime as well as the interplay of local

govemnance, transportation issues, and the role of independent public authorities in regional
development. Nonetheless, federal tax policy can play a significant role in affecting business
investment in ou ation’ cies. We therefore welcome the opportunity to explore this interplay
the Subcommittee; and, we look forward to working with you, Congresswoman Johnson,

tnd members of the Subeommitte, a you continue your work in this area

Summary

National Realty Committee believes that federal tax policies should serve as neither an
incentive to unjustifiable, excessive real estate investment, nor as a disincentive to prudent,
investment which would benefit our nation’s communities, including urban areas.
Indeed, as we all witnessed during the drastic decline in real estate values in the early 1990s,
‘America’ cities, taxpayers, and savers all have a stake in rational, growth-oriented real estate tax
policy and sound real estate asset values. Today, commercial and multifamily real estate asset
‘values generally continue to rebound slowly from the substantial real estate asset devaluation that
occurred earlier this decade. Notwithstanding these national market conditions, in many local
markets the real estate recovery is still fragile, if not precarious, leaving many cities and counties
with less than optimum land use as well as reduced property tax revenues and public services.



15

Statement of Rep. L-F. Payne
Subcommittee On Oversight
‘Committee on Ways and Means
July 16, 1996

‘Thank you, Amo, for your remarks, and thank you, Madam Chairman, for this
‘opportunity to testify before the Subcommittee on oversight on these important land issues. 1
have had the privilege of working with Amo this Congress on the American Farm Protection Act,
which T had introduced last Congress as the Open Spaces Preservation Act. I truly believe this is
‘one of the most important pieces of tax legislation that we could enact this year. I also want to
thank alt of my colleagues who have cosponsored this bill, and I would urge others to join us in
this effort.

Every day this country loses over 4 square miles of farmland to development. The
reasons are multiple, but the Federal estate tax plays a significant role in this phenomenon. To
‘understand why, take the case of Bob Lange, a full-time farmer in Malvern, a small town 24
miles west of Philadelphia in Chester County, Pennsylvania.

Bob testified before the Ways and Means Committee on this issue during the last
‘Congress. He operates his family's farm, which is currently owned by his 93-year-old
grandmother, and has been in the family since 1896. ‘The farm is 226 acres. It is an active
working farm. Bob grows everything from com to strawberries and pumpkins. Because of its
proximity to Philadelphia, however, the fair market value of his farmland is 10 to 20 times higher
than typical farmland in Pennsylvania. This is because fair market value means the value of the
land when developed for residential or commercial purposes, not the value at its current farm use.
‘This is a crucial point, because when the owner of the farm dies, the federal estate tax law
requires that the fair market value of the farm as developed land be included in the decedent's
estate,

Most heirs cannot afford the estate tax bill when the farm is valued in this manner. Even
taking full advantage of the limited relief provisions in the tax law, including the unified credit
and the deduction for the donation of qualified conservation easements, farm families typically
do not have the liquid assets to pay an estate tax of as much as 55% of the estate’s value.

‘The tax law's special valuation rules for farmland appear intended to reduce this burden.
However, the complexity of the section makes it very difficult for most farm families to
understand or use. Also, there is a cap on the amount by which the value of the estate can be
reduced. Moreover, the fact that a Federal tax lien remains on the property during the recapture
period makes this relief unworkable for farm families, whose need for operating loans to farm
continues. Thus, the heirs are forced to sell some or large portions of the farm to meet their tax
obligations. Sale of even a portion of the farm may make the remainder uneconomical as a
farming unit.

‘That is why Amo and I, along with you, Madam Chairman, and, as Amo noted, 3 other
‘members of this Subcommittee, as well as 8 of our colleagues on the full Committee, in a bi-
partisan effort, have introduced H.R. 864, the American Farm Protection Act.

‘There are some who persist in criticizing any kind of meaningful estate tax relief as a
special interest provision for the wealthy. Bob Lange is not a wealthy man. He holds an asset
that is valuable only if tis put to a use other than the one itis currently serving -- a use,
moreover, that would destroy everything Bob and his family have labored for three generations to
preserve. Ido not believe that Congress could have intended the estate tax laws to force the
break-up and sale of this country’s family farms, ranches, and environmentally significant forests
and wetlands because there is a hypothetical chance that these landowners could be wealthy.

believe we will have missed a priceless opportunity to leave something other than a
huge federal debt to our children and grandchildren if we fail to get this bill enacted. By offering
people an incentive to conserve America’s increasingly threatened rural lands, while at the same
time enabling them to keep their family homesteads intact, we will have given our children and
grandchildren a better chance of enjoying a healthy environment and a comparable standard of
living,

‘As you know, Madam Chairman, a more limited version of our legislation was included
in the vetoed Balanced Budget Act of 1995. T urge my colleagues to support our efforts to
inctude our original bill in the next viable tax vehicle that comes through this Committee.

Later today, you will hear from one of my constituents, the Piedmont Environmental
Couneil, who will give you a more detailed and technical explanation of the effects of present
Taw on family farms, ranches, forests and other rural and environmentally sensitive land. I
appreciate the opportunity to testify with my good friend Amo Houghton today.


14

Additional clarification is needed as to the definition of the term “unimproved”. The
legislative history of the Tax Reform Act of 1986 provides that, with respect to determining whether
land is unimproved “a parcel of land is not to be considered improved or developed if it merely has
been provided with the benefits of common infrastructure items such as roads and sewers.” Tax
Reform Act of 1986, section 811; See also... Temp. Treas. Reg. section 1.453C-8T. From the
available guidance, land developers find it difficult to determine which common amenities and
infrastructure items would cause an individual lot to no longer be considered “unimproved. For
example, would the front gate or fencing of a “gated community” be considered a common element?
Would the construction of a golf course or community club house in a development cause the
undeveloped lots to be considered “improved”, within the meaning of the statute? Without
legislative clarification, these questions will undoubtedly lead to increased controversy and
litigation.

‘The union of existing land owners with home builders and developers reduces the amount
of borrowed funds that must be tied up, sometimes for years, while develapment proceeds. The
reductions in borrowing costs can be passed on to home buyers. However. land owners are often
reluctant to partner with developers and home builders because of the installment sale rules.
Payment to the original land owner is often contingent upon final sales to the home buyers. which
can delay actual receipt of funds for years. However. the installment sales restrictions can require
land owners to pay taxes on funds not yet received and discourage them from participating in
otherwise efficient transactions,

Asaresult, landowners are less likely to sell to builders on an installment basis. Landowners
also seek higher land sale prices to compensate for the additional tax burden. Higher land costs and
‘ewer willing land owner partners in new home building increases the cost of new homes and creates
affordability problems for potential home buyers. Clarification and relaxation of these cules will lead
to more efficient land use as land owners have greater flexibility in paying taxes on income to the
yeat in which itis received.

‘Tax Treatment of Environmental Remediation Costs

The costs incurred in remediation of environmental contamination should be deductible in
the same year they are paid and should not be required to be capitalized. We believe that Internal
Revenue Service rulings in this area indicate that the proper tax treatment of environmental cleanup
costs must be clarified legislatively.

Generally. the cost of incidental repairs that neither materially add to the value of property
nor prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as a
business expense in the year paid, The Intemal Revenue Code requites that costs that materially add
to the value, or substantially prolong the useful life. of property owned by the taxpayer, or that adapt
property to a new or different use. must be capitalized and writen off over a period of time.

Cleanup costs can be considered as expenses necessary to maintain a property in ordinary
efficient operating condition. If a property is contaminated sufficiently to require significant cleanup
costs, the effective value of the property during the cleanup phase is zero. The costs incurred to
remove the contaminants are necessary to bring the property into an ordinary efficient operating
condition, The cleanup costs do not materially increase the value of the property. but bring the
property into a condition in which it can be marketed.

‘The current tax law does not provide for the deductibility of cleaning up property that is
already contaminated when purchased. Property owners who were unaware of contamination or who
are subject to new regulations or restrictions after purchase, may not be able to deduct clean-up costs
in the year the costs are paid and may very well be required by the IRS to capitalize such costs and
recoup them through amortization. Requiring cost amortization discourages holding property for
sufficient time to plan and develop the property to its full potential. Also, requiring amortized costs
‘encourages land owners to sell quickly in order to record the cost against income which further
delays careful planning and orderly developments. NAHB believes thatthe tax law should stimulate
and encourage abatement of health hazards in the Nation's housing stock.

We urge you to amend the Internal Revenue Code to allow environmental cleanup costs, such
as for contaminated soil and groundwater, to be deductible in the year in which they are incurred and
allow a current year deduction of costs for clean up of property that is already contaminated when
purchased,


32

eral Government. The second bill is designed to encourage a system
which continues private ownership of land, and in New Jersey, at
least, the taxes paid by that landowner are in no way diminished
once the easement is sold, because our farmland is typically taxed
at its agricultural value, not at its highest and best use for prop-
erty tax purposes.

So there is no diminishment of property tax revenue to the local
government, and, as I said, the land is owned—subject to the deed
restriction—by the family. The family can will it to its heirs or it
can sell it to another landowner who will buy it subject to the ease-
ment.

Mr. LAUGHLIN. Madam Chairman, I have taken enough time, but
I think all of this truly points out why we need some tax reform
passed by our Congress.

Chairman JOHNSON. I think your questions do point directly to
that, and the quality of this panel’s thinking on this subject not
only bespeaks the urgency that Members feel about this but also
the amount of work that has been done on it.

Mr. LAUGHLIN. Well, it also points out that the danger is maybe
not to the generation of anybody on the panel or sitting up here
looking down at Mr. Shaw, but it certainly will be to my grand-
children—and I have none at this stage, but my grandchildren’s
generation. How are they going to have ownership of any real es-
tate to farm and ranch to help clothe and feed our citizens, 75, 100
years from now? I think this is a very important question for this
Committee to consider, and I commend everybody on this panel for
the important work you have done in that direction.

hairman JOHNSON. Yes. I thank you, and I thank the panel
very much.

I think one of the things we need to think about is that, as we
constrain costs, we also create inequitable rights across the Nation,
and we have to be very careful about that, and we may need to
fight for a bigger package so that we have the same rights for peo-
ple in a lot of different circumstances.

Mr. Payne.

Mr. PayNE. Madam Chairman, before we leave, one of the people
who will testify on the next panel is one of my constituents, Tim
Lindstrom, who is testifying on behalf of the Piedmont Environ-
mental Council. Tim is a very thoughtful person. The Piedmont En-
vironmental Council is a very thoughtful conservation group, and
I am pleased that they are able to be here to talk about our bill
today.

Thank you.

Chairman JOHNSON. Thank you very much. I thank the panel for
their excellent testimony.

The next panel will consist of Tim Lindstrom, Charlottesville of-
fice of the Piedmont Environmental Council, Charlottesville, Vir-
ginia; Jean Hocker, the president of the Land Trust Alliance from
Washington, DC; and Irv Bell, the president of the Ohio Farm Bu-
reau Federation, on behalf of the American Farm Bureau Federa-
tion.

Mr. ZIMMER [presiding]. Mr. Lindstrom, can you begin with your
testimony, please.


103

California Farm Bureau Federation

11601 Exposition Boulevard * Sacramento, CA 95815 * Telephone (916) 924-4000

Statements of the
California Farm Bureau Federation

To
‘The House Ways and Means
Subcommittee on Oversight
The Honorable Nancy L. Johnson, Chair

Regarding
IMPACT OF TAX LAW ON LAND USE

July 16, 1996

The California Farm Bureau Federation (CFBF) is the largest general farm organization in the
state, We have more than 42,000 member farm families and more than 72,000 member families in
total. Nationwide our views are reflected by the American Farm Bureau Federation, which
represents more than four million members, We appreciate the opportunity to provide a
statement in support of changes that are needed in the tax code to ensure that the business of
family farming may continue for generations to come. This subcommittee and Congress have an
excellent window of opportunity to address the implications of federal tax policy on land use in a
very constructive and meaningful way.

FEDERAL ESTATE TAXES

Often under current tax laws a farm must be sold in part or total to satisfy estate taxes. Many of
these farms are multi-generation family businesses. The agriculture industry is dependent on the
ability to pass the family farm down from generation to generation. Without changes in the estate
tax law, it will be difficult to maintain family farming as we know today. Federal estate tax law
has the ability to close family farm operations and shift agriculture land into other uses.

Last updated in 1987, the per person exemption for assets under federal estate tax law is
$600,000 for the value of an estate. CFBF has long called for the elimination of the estate tax, or
at least, an increase in the exemption to $2 million along with future indexing. Years of inflation
have outdated existing estate tax laws. Estate tax relief would encourage new investment,
increased savings, and the removal of disincentives to pass on family farming and small business
operations,


39

As my written testimony points out, there are already incentives
in the Tax Code for donations of land and gifts of conservation
easements. No landowner that I know has protected land solely be-
cause of tax benefits. If there is a market for development, it is al-
ways, always more lucrative to develop the land. But the incentive
is to help tip the balance for those landowners who have a con-
servation ethic, and provide tax incentives to encourage land pro-
tection at a public cost far lower than public land acquisition and
management.

My written testimony addresses six new incentives for private
voluntary land conservation. Some are significant changes. At least
one is a minor adjustment to correct an existing impediment to
easement gifts.

First, I would urge Congress to enact the American Farm Protec-
tion Act that is sponsored by Congressman Houghton and which
Tim Lindstrom and others have talked about and will talk about
more.

I would urge you to enact legislation advocated by Congressman
Zimmer to permit an executor to donate land or a conservation
easement as a credit against estate taxes, a very important issue
to enable the heirs to make decisions that the decedent perhaps
didn’t make or was unable to make.

Enact also Congressman Zimmer’s proposal to change the way
land is calculated in order to encourage more below-market-rate
sales.

Make tax incentives apply to people of modest income by increas-
ing the percentage of income that can be deducted in any tax year
for r gifts of appreciated land or easements for conservation.

ange the current Tax Code provision that inhibits donations of
conservation easements on land with severed mineral rights. This
is a very little-known provision that is holding up a lot of easement
donations, donations of people who would like to protect their land
with conservation easements and cannot do it because of the provi-
sion on severed mineral rights.

And explore incentives to encourage good conservation manage-
ment practices on private lands.

All of these proposals are consistent with a chapter I wrote in a
book called “Land Use In America,” which I would like to make
available to the Committee. We also offer you our assistance in
learning more about how conservation easements work, because we
have done a good deal of work on that as well and have literature
on it. We are pleased to make our assistance available.

Thank you, Madam Chair.

(The prepared statement follows:]


‘The National Trust for Historic Preservation
Department of Pubic Policy, 202-588-6255
1785 Massachusetts Ave., NW, Washington, DC 20036

‘TEL: 202-588-6000, TTY. 202-588-6200, FAX: 202-588-6038

Testimony of
‘Tamar Osterman, Director of Government Affairs
National Trust for Historic Preservation
before the
Subcommittee on Oversight
House Committee on Ways and Means
Tuly 16, 1996

Madame Chairman, Members of the subcommittee, thank you for the opportunity to
appear today to testify on the impact of federal tax law on land use. The National Trust for
Historic Preservation is a non-profit organization with more than 265,000 members, chartered by
‘Congress to promote public participation and education in historic preservation and to engage the
private sector in preserving our nation’s heritage. As the leader of the national historic
Preservation movement, the National Trust is committed to saving America’s diverse historic
resources and to preserving and revitalizing communities nationwide

The Internal Revenue Code contains numerous provisions that directly and indirectly
affect land use, Therefore, 1 will focus my testimony on those provisions which are particularly
relevant to historic resources and historic communities.

also want to present the National Trust for Historic Preservation’s views on a very
important historic preservation tax proposal, of which the Chair and 14 other members of the
‘Ways and Means Committee are co-sponsors: HR. 1662, legislation to provide a tax credit for
‘qualified rehabilitation expenditures of a historic property as an owner-occupied home.

Background

Over the decades'since World War IL, a combination of social and economic forces,
abetted in no small measure by government policies and programs, has produced a steady
‘migration of population and business activity from large and small urban areas. Left behind in the
surge to the suburbs and exurbs is an enormous (but dwindling) inventory of sound housing stock
and older commercial buildings, much of which has historic of architectural importance, or both
Investment decisions have been greatly influenced by substantial subsidies provided for low-
density, land consumptive development, particularly in the form of highway construction, and the
demolition of existing building stock through the well-intentioned, but ultimately catastrophic
bulldozing of established urban centers and neighborhoods under federal urban renewal and
highway construction programs. The result has been a spiraling cycle of blight, crime, and decline
‘in urban tax base and services.

‘Tax incentives cannot reverse demographic trends, restore fiscal solvency to cities and
towns fight crime, or improve education. What they can do is provide, at the margin, a salutary
corrective to the institutionalized bias toward out-migration of population and business activity
‘and the consumption of open space at the expense of reinvestment in declining
already equipped with buildings and infrastructure. In addition, where incent
‘appropriate rehabilitation and reuse of buildings of historic or architectural value, the benefits of
historic preservation-both tangible and intangible~can also be realized

The economic benefits of reclaiming these buildings and the euisiog infrastructure which
supports them are impressive, According Donovan D. Rypkems, author of The Economics of
Historic Preservation, for every one million dollars spent on rehabilitation instead of on new


35

STATEMENT BEFORE THE SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
ON BEHALF OF
THE PIEDMONT ENVIRONMENTAL COUNCIL
BY C. TIMOTHY LINDSTROM
JULY 16, 1996

Thank you, Madam Chairman, and members of the
Subcommittee for giving me this opportunity to speak to you
today regarding the impact of federal tax law on land use in
the United States. My name is Tim Lindstrom, and I am an
attorney with over 24 years of experience in estate tax

land use, and conservation law. 1 currently serve as staff
attorney to the Piedmont Environmental Council.

The Piedmont Environmental Council (PEC) is a not-for-
profit land conservation organization working in the
Northern Piedmont region of Virginia. We have worked with
land owners for over 20 years advising them on estate tax
matters and encouraging them to take steps to conserve their
land - primarily through conservation easements. We have
extensive experience with conservation easements. I should
add that the PEC itself does not hold any easements because
Virginia has a very excellent state agency, the Virginia
Outdoors Foundation, which holds most of the conservation
easements in Virginia.

The PEC became involved in H.R. 864, the legislation
now known as the American Farm Protection Act, when
Congressman Richard Schulze first introduced it in the 101°
Congress as the Open Space Land Act. I would like to thank
the Chairman, Mrs. Johnson, for being a co-sponsor of this
legislation ever Since it was first proposed by Congressman
Schulze.

Congressman Schulze became interested in this issue
because he had constituents who were being forced out of
farming by federal estate tax on farmland ranging in value
from $20,000 to $40,000 an acre. We became involved because
of that concern, and because our experience with
conservation easements convinced us that a more predictable
and compelling incentive was needed if voluntary land
conservation were to become a significant source of land
conservation in the United States. It was to address these
two goals: estate tax relief for the owners of rural land
and the provision of a stronger incentive for voluntary land
conservation, that this legislation was introduced.

The Piedmont region of Virginia, like many urbanizing
areas, is characterized by dramatically inflating real
estate values. Farmland which once sold for $500 an acre in
the 1960s now sells for $10,000 to $15,000 an acre. It is
also characterized in many counties by intense pressure for
development which sprawls across open country at low
densities, wasting land and further increasing the pressure
for farm conversion.

Loss of farmland and sprawl is, of course, not limited
to Virginia. During the 1980s, for example, while the
population of the state of Michigan grew by only 33,000
people, developed land area increased by over 40%. A 1995


67

‘government programs which might or might not be successful in helping to preserve these
resources, What is needed is an incentive which will involve a minimum of government
involvement and a maximum of individual initiative, one that is modest in cost and limited in
scope but that can spark broad private activity. The National Trust believes that H.R. 1662,
introduced by Representatives Clay Shaw and Barbara Kennelly, and co-sponsored by 74 House
members, is afar, feasible and effective answer

HR. 1662 is designed to work in a broad range of contexts; each community is likely to
find its own applications. For example, in many of the small towns of New England and the
‘Midwest, older housing that would qualify for the credit has suffered from blight and
abandonment as the mills and retail businesses upon which those communities depended declined
‘and closed. Enterprising developers could buy up abandoned homes, rehabilitate them so as to
qualify them for the credit, and sell them to young families, passing on the credit to the purchaser.
‘These families might prefer living in a renovated older home in town, with the amenities of an
earlier era and the convenience of in-town living The result would be new life for the town, new
customers for the town’s small businesses, and new tax revenues for the town’s hard-pressed
treasury.

At the other end of the spectrum, many cities, large and small, possess older office
buildings that would qualify for the credit, but which can no longer attract commercial tenants.
Many of these buildings are architectural assets, but without an economic function they are targets
for the wrecking ball. However, a federal homeownership credit could make these buildings
‘economically attractive to a developer who could rehabilitate them as residential condominiums.
‘The developer would, in effect, be selling the unit along with the credit. In this way these
buildings could be saved, and the homeowners attracted to them would provide new customers
for local merchants and new taxpayers for the city,

‘Major Provisions of H.R. 1662

Rate of Credit.

‘The credit, which would equal 20% of qualified rehabilitation expenditures, would be
available to homeowners in condominiums and cooperatives as well as single-family homes. It
could be used by the do-it-yourself rehabber, or someone who purchases a home rehabilitated by a
non-profit or for-profit developer. In the latter case, the credit would accrue not to the

developer, but to the purchaser of the home.

‘Eligible Structures

The universe of buildings eligible for the tax credit isa limited one. Only buildings that are
listed in the National Register of Historic Places, ere contributing buildings in National Register
Historic Districts or in nationally-certified state or local districts, or are individually listed on a
nationally-certified state or local register would qualify. The National Park Service has estimated
that slightly in excess of 800,000 buildings nationwide presently fallin those categories,

To insure that their historic character is preserved, buildings receiving the credit would
have to be rehabilitated in accordance with the Secretary of the Interior's Standards for
Rehabilitation, However, the bill provides that certification of compliance may be performed by
states or even localities under cooperative agreements entered into with the Secretary of the
Interior. In addition, the bill authorizes the states to charge processing fees, the proceeds of
which would be used to fund the costs of processing the applications for cenifcation.

Maximum Credit, Minimum Expenditures

‘The maximum credit allowable would be $50,000 for each principal residence, subject to
Alternative Minimum Tax provisions, Any unused portions of the credit could be carried forward
until exhausted. As with the current credit, rehabilitation must be substant
$5,000 or the adjusted basis of an eligible building, with an excepti on for buil



104

CEBF policy supports an increase in the ceiling allowed in determining the existing exemption
under Internal Revenue Service Code 2032-A for agriculture productive value. This provision
allows for land to be valued for estate tax purposes at its agricultural value rather than its market
value, Due to the nature of California land values, the current limitation of $750,000 is not
adequate. Removing the limit would reduce the potential for land to change uses to meet the cost
of estate taxes.

CAPITAL GAINS TAXES

Many farmers and ranchers nearing retirement are interested in selling land to younger farmers
and ranchers, including family members, but are inhibited by current capital gains tax law.
Farmers pay capital gains taxes when they sell their land, Farmers typically hold their land for
long periods of time. The national average is 28.6 years and over this period the value of total
farms real estate in the U.S. has increased 4.27 times. The increase has been due to nothing more
than inflationary gains. For tax purposes, the gain from the sale or exchange of an asset held
more than one year is characterized as a long-term capital gain. For individuals, current law taxes
capital gains as ordinary income at 28 percent. The current capital gains tax treatment results in
an inordinately high level of farm lands held by absentee land owners -- widows and retirees,

In California, many farm commodities such as timber, Christmas trees, breeding livestock, dairy
cows, and equine have extended production cycles making them subject to capital gains
treatment. The capital gains tax creates a disincentive for farmers to upgrade farm operations
because taxes must be paid on farm assets sold to finance improvements. Unimproved farm
businesses are less efficient and less profitable.

‘The United States has among the highest capital gains tax rates in the world. We support
climination of the capital gains tax, or at the very least, a maximum tax rate of 15 percent, indexed
for inflation. ‘This much needed reform would facilitate land transfers and the movement of
capital assets to beginning farmers and ranchers. Capital gains tax relief would allow many older
farmers and ranchers who are delaying selling their assets because of the tax, which results in the
reduction of land available to new producers, to do so.

The capital gains tax is a direct obstacle to better land management because it discourages infill
development and redevelopment of abandoned or under-utilized property in urban areas. Capital
‘gains relief would provide an incentive to landowners to either sell, develop, or improve urban
property so that it can be used more intensively

‘A major hurdle to greater utilization of existing urban infrastructures and more efficient use of
land is the tax disincentive to sell or improve real estate holdings. Owners of real property with
low capital gains basis have litte desire to sell their land. By providing a substantial shelter for
capital gains income derived from the sale of qualified property, infill and redevelopment could be
enhanced.



45

I grow crops and raise livestock on the farm next door to ours
which is owned by my 90-year-old uncle. Both he and I would like
to see that ground remain as farmland, but he is reluctant to sell
it to me because of the capital gains tax. He purchased the ground
during the thirties for around §i00 an acre, and today it would be
worth several times that if it were sold for development. Unless
capital gains taxes are reduced, it is very likely that my uncle will
hold his farm until he dies. I do not know if my cousins will be
willing to rent or sell the land to me for farmland when they can
sell it to a developer for much more.

As with the estate and gift tax, Farm Bureau supports eliminat-
ing the capital gains tax. If that cannot be done, we recommend a
maximum rate of 15 percent and indexing assets for inflation. An-
other good option would be to allow retiring farmers and ranchers
to sell land and put the money into a pretaxed IRA-type account.

Farm Bureau recommends several additional tax law changes
that we believe would help maintain adequate farmland for future
generations. Tax incentives should be provided for expenses re-
quired to meet mandated environmental policies. There should be
tax deductions for contributions of voluntary easements. Bond rules
should be changed to localize the definition of a first-time farmer
and to allow loans to those purchasing farmland from family mem-

rs.

More information on these proposals is contained in my written
statement.

Finally, it is important to point out that the amount of taxes that
farmers and ranchers pay in operating their businesses has an in-
direct impact on land use. The larger the business tax burden, the
more likely farmers are to stop farming and that farmland will be
converted to other uses.

In conclusion, Farm Bureau recommends that the Tax Code
should be changed to minimize the impact on land use decisions
made by farmers and ranchers. Farm Bureav’s priorities are repeal
or modification, if repeal is impossible, of estate taxes and capital
gains taxes.

Thank you.

[The prepared statement and attachment follow:]


87

This doesn’t necessarily suggest a legislative fix, but we think the
Congress should consider this and look into it.

As far as demolition costs are concerned, these were changed in
1984. Prior to that, you could deduct the cost of a building you de-
molished. We think a return to pre-1984 tax policy is appropriate
and would be particularly helpful in revitalizing America’s urban
centers, which, as we know, as they deteriorate, tend to be a cata-
lyst for crime, it exacerbates the homeless problem, and we all be-
lieve that the revitalization and the maintenance of vital urban
centers benefits our communities as a whole.

Chairman JOHNSON. Thank you very much.

Mr. KELLEY. We homebuilders could offer a lot of assistance in
this areas because that is one of our issues. The contribution in aid
of construction, in the old heydays, when you could go out to a
bank and borrow money for any rehabilitation you wanted to do,
wasn’t so bad over a number of years. But when you are coming
up with your own money, aiding someone else’s expenditures, it
makes a big difference. We could offer a lot of assistance. We have
done a lot of work on this aspect. We could participate in that with
you if you wish.

Chairman JOHNSON. Thank you.

Mr. MacEwen. I would like to thank the Members of your Sub-
committee as well as the entire Ways and Means Committee for
the support of the leasehold provisions, in particular Congressman
Shaw who introduced the bill and had several cosponsors.

Chairman JOHNSON. In preparing for this hearing, I think it is
fair to say all the Members who testified, and the Members of the
Subcommittee, have been impressed with how many provisions
there are in the Tax Code, what a scatter shot pattern they have
in terms of a public policy, how important it is to really understand
far better the implications of the current impact of tax law on land
use decisions and land preservation decisions as well as proper de-
velopment decisions.

It is interesting that you could even work with the farmer to de-
velop land in a way that would be respectful of our conservation
needs as well as his economic needs, because of a variety of prob-
Jems in the tax law.

So we do hope to straighten out some of the problems in the tax
law and support some of the initiatives that the Members have of-
fered. And then there are a number of other areas that you sug-
gested and brought to our attention that we appreciate.

Our goal overall, not all to be accomplished this term certainly,
is to provide a better comprehensive structure within which to look
at land use proposals, but also to develop a more integrated land
use policy for the Nation.

Thank you very much for your participation, I appreciate your
preparation, and for your help at this point in the process, and I
know for your continuing help as we move through this. Thank you
very much.

(Whereupon, at 1:30 p.m., the hearing was adjourned.)

[Submissions for the record follow:]


OPENING STATEMENT OF CONGRESSMAN MATSUI
HEARING ON THE IMPACT OF FEDERAL TAX LAWS ON LAND USE.
SUBCOMMITTEE ON OVERSIGHT

JULY 16, 1996

At today’s hearing, the Oversight Subcommittee will receive
testimony from Members of Congress and the public about the
impact of the Federal tax laws on land use.

I commend Chairwoman Johnson for scheduling this hearing.
and look forward to hearing the witnesses’ suggestions about
proposals the Congress should consider to preserve this Nation's
environment, to enhance our preservation of open space, and to
revitalize our distressed communities

The Subcommittee will receive testimony about: the tax
credit for rehabilitation expenditures; incentives for locating
businesses in empowerment zones and enterprise communities;
initiatives for "brownfield" redevelopment and the tax treatment
of environmental remediation costs; preservation easements to
minimize estate taxes; and, estate tax preferences for farms and
small businesses.

I should note that officials from the Department of the
Treasury were unable to appear at today’s hearing, due to the
disruption resulting from the recent fire at main Treasury
However, the Administration has provided the Subcommittee with
extensive information about their fiscal year 1997 budget
proposals and will submit a written statement for the
Subcommittee’s hearing record

In summary, the Administration proposes (as contained in
H.R. 3747, introduced by Congressman Rangel) tax incentives for
the clean-up of environmentally-contaminated urban and rural
areas (known as "brownfields"), the designation of two additional
urban empowerment zones within 180 days of enactment,
authorization of 40 additional empowerment zones and 65
additional enterprise communities, and various enhanced tax
benefits (including the availability of tax-exempt bond
financing) .

In a time of decreased Federal resources, we all must find
new ways to address these important issues, and to revitalize our
vural and urban areas in the process of decay

I welcome the insight of the witnesses testifying before us
today, and look forward to our discussion of the impact the
Federal tax laws have on land use decisions


IMPACT OF TAX LAW ON LAND USE

TUESDAY, JULY 16, 1996

HOUSE OF REPRESENTATIVES,
COMMITTEE ON WayYS AND MEANS,
SUBCOMMITTEE ON OVERSIGHT,
Washington, DC.
The Subcommittee met, pursuant to call, at 11:10 a.m., in room
1100, Longworth House Office Building, Hon. Nancy L. Johnson
(Chairman of the Subcommittee) presiding.
{The advisories announcing the hearing follow:]

qd)


42

Recommended changes. The Land Trust Alliance supports six changes to the tax
code that would strengthen incentives for land conservation.

1, We endorse the estate tax incentive in H.R. 864, the American Farm
Protection Act, sponsored by Congressman Houghton, This legislation would exempt from
estate tax the value of certain land subject to a qualified conservation easement. The
legislation targets the benefit to land adjacent to metropolitan areas and national parks. where
development pressure and land values tend to be greatest, and where the need to protect open
space is particularly keen

2. We endorse H.R. 522, the Federal Open Space Acquisition and Preservation
Act. sponsored by Congressman Zimmer. This bill would permit an executor to donate land
or a conservation easement to a government agency and credit the value of the donation
against estate taxes owed. This provision would go far to diminish forced sales of
conservation land by heirs in order to pay estate taxes. We recommend that this proposed
benefit be extended to gifts of land and conservation easements made to any “qualified
organization," as described in Section 170(h)(3) of the ILR.C., which includes both public
agencies and nonprofit conservation organizations.

3. We endorse H.R. 523, the Land Preservation Tax Fairness Act, also sponsored
by Congressman Zimmer. This bill would change the way that the gain on bargain sales of
Jand or conservation easements is calculated for tax purposes. It would allow the entire basis
in the property to be deducted from the gain realized, instead of requiring allocation of basis
between the sale and gift portions of the transaction.

4, We recommend that the limitations on deductibility of gifts of land or
conservation easements be liberalized. Because these gifis tend to be large. one-time gifts,
and serve a high priority public purpose, incentives for such gifts should be strengthened and
should apply to people of modest incomes as well as to the wealthy. We recommend that the
deduction for conservation gifts of appreciated land or easements be increased to 50% of the
taxpayer's contribution base, and that the portion of the donation not deductible in the year of
the gift be deductible in subsequent tax years without limitation, until it is used up.

5. We endorse Title 5 of S. 910, which lifts an unnecessary exclusion from
qualified conservation easements of land on which the surface and mineral estates are
separated. Current tax law unnecessarily restricts the deduction for conservation easement
donations that protect land on which the mineral estate was first separated from the surface
estate after June 13, 1976. If the estates were separated before that date, the owner can make
a deductible easement gifi, as long as he can demonstrate that the probability of surface
mining on the land is "so remote as to be negligible” However, when the surface and
mineral estates were first separated after June 13, 1976, an easement donation generally does
not qualify as a deductible charitable donation, even if the remoteness test can be met. This
provision is already discouraging the protection of some environmentally significant properties
and its negative impact will only increase as time passes. It is our view that the burden of
proof placed imposed by the "so remote as to be negligible” test is adequate and appropriate
to all property on which the mineral and surface estates are separated. There has been no
abuse in 20 years under this law, and no instance in which land meeting the remoteness test
was subsequently subject to surface mining. Title 5 of S. 910 (the Senate version of H.R
864) would correct this problem by permitting deductible conservation easements on
properties with severed mineral estates without regard to the date of separation, as long as the
remoteness test can be met.

6. We endorse incentives that would encourage good conservation management
practices. The incentives described above would go far to encourage voluntary conservation
through gifts of land and easements to conservation organizations and agencies. However, we
know that acquisition of land and easements -- by purchase or gift, by land trusts or
government -- cannot adequately protect entire watersheds, habitats and other key open lands
Land conservation will continue to depend upon the management practices of private property



73

STATEMENT OF THE
NATIONAL ASSOCIATION OF HOME BUILDERS

Madam Chairman and Members of the Subcommittee:

My name is Richard Kelley and I head RSK Contractors, Inc., a family-run business in
operation for more than twenty-five years in South Windsor, Connecticut. We build all types of
housing ranging from entry level homes to “move-up” and luxury homes in the immediate Hartford
suburban area, Our company is involved in every aspect of the development process from the
purchase of raw land to the development of property for both residential and commercial uses.

On behalf of the National Association of Home Builders (NAHB) and our 185,000 members,
1 congratulate you for holding this hearing and appreciate the opportunity to present our views
before your Subcommittee. We are particularly pleased that this hearing will address a number of
provisions of the Internal Revenue Code which impede land development and lessen housing
affordability.

In this regerd, my testimony will address several issues ~- the installment sales rules. the tax
treatment of environmental remediation costs, the tax credit for rehabilitation expenditures, and an
estate tax preference for small business. At the outset, Madam Chairman, I would like to commend
‘you for your steadfast support in removing tax policy barriers to housing affordability as evidenced
by your introduction of H.R. 957 to modify the tax treatment of contributions in aid of construction
(CIAC). The Senate approved version of H.R. 3448, the Small Business Job Protection Act would
repeal CIAC with respect to water and sewerage companies. Although this proposal was not
included in the House approved version of H.R. 3448, we would ask that the House conferees recede
to the Senate position on this issue when it is brought to conference. I note that this provision was
passed by the House as a part of the vetoed 1995 Budget Act.

Installment Sates Treatment for Unimproved Residential Lots

Allowing the sale of unimproved land to be taxed incrementally as payments are received
rather than entirely when a contract is signed allows land owners, developers and builders to plan
land use more efficiently and to reduce the ultimate cost of homes to the customer. Land
development has become a time consuming and expensive operation for many of the members of
NAHB. Local regulations, anti-growth sentiments, environmental concems, and difficult and
complex financing arrangements have increased the cost of developing land into lots for home
building. Many of our members are turing to the original land owner as a partner in financing, and
developing, large subdivisions, planned communities and mixed-use developments.

NAHB believes the installment sales rules add undue complexity to land development and
add significantly to the cost of housing. This is particularly evident with respect to the installment
sale treatment of unimproved residential lots. As you are aware, dealers in real estate are generally
prohibited from using the installment method for reporting sales or other dispositions. An exception
to this prohibition applies to the installment sales of residential lots. Under LR.C. section
453(1)(2)(B) dealers selling residential lots to individuals in the ordinary course of business may use
the installment method to report gain from such sales if neither the seller nor any person related to
the seller makes any improvements on the lot. A residential lot has been defined as a parce! of
unimproved land upon which the purchaser intends to construct a dwelling unit for use as a residence
by the purchaser,


82

‘+ Section 263A, relating to the capitalization of construction period expenses (e.g., interest,
taxes, insurance), was added to the Code in 1986 and final regulations were promulgated in
1994. In general the effect of these rules is to greatly increase the amount of interest and
taxes which are required to be capitalized (and recovered on a stright ine basi, generally 29
years). For example, commencement of construction of common improvements
Feeder roads are deemed to start the capitalization “clock” as to all pases of construction
benefited by such i ents — even if construction of a given phase of development is
years off. This provision also adopts the “avoid cost” method of capitalizing interest which
Tequires a taxpayer to reallocate interest expense to construction from loans used for
Unrelated purposes — even when itcan clearly be demonstrated that a given land purchase or
construction activity was funded with equity not de debt In effec, the rule requires a txpayer
to impute interest expense to construction expendit ed by his own equity if his
balance sheet has any Gebt-—- whether or not Such debt ‘cat to development.

‘+ Beginning in 1981, and revised in 1984 and 1986, land improvement costs such as those
incurred for I ing and surface parking lots were required to be recovered over an
arbitrary period much longer than their economic useful life — currently the statu
is 15 years. In a commercial context, such improvements as roads and surface parking have
much shorter useful lives — generally between 5 and 7 years.

‘We would urge a comprehensive review of the tax iaws concerning the capitalization of
land development pense including demolition expenses (which at a minimum should be
added to the basis of the replacement structure and not to the nondepreciable land).

Leasehold Improvements

Today’s tax policy governing the recovery of costs associated with constructing leasehold
improvements, intemal walls, clings pattions, plumbing, lighting and finish) misstates
economic reality, and as such’ inhibits employment opportunities, environmentally
efficient building improvements and discourages the revitalization of amonca's cites, stead
ofa building owner recovering the expenses incurred 10 construct leasehold improvements over
the life of the constructed leasehold improvement, today's rules dictate that such expenses be
Reovere over ine if ofthe overall bung, whch snow depreciated over 39 yeas,

Compounding one problem (regarding the unrealistic time period over which leaschold
improvement costs are required to be recovered) is another problem — significant ambiguity
surrounding how a real estate owner accounts for leaschold improvements that are demolished
before the end of the prescribed recovery period, in order to make way for a new tenant. Prior to
1981 it was clear that an owner could deduct the remaining unrecovered cost in the year in which
the improvement was demolished. Beginning in, 981, and cenainly sins 1986, whether the
‘owner has retained this ability is unclear in many circumstances.

‘Whats the fallout of today’s flawed policy in this area? To begin with, the after-tax cost
of reconfiguring, or "building-out", space to accommodate a new tenant is artificially high,
Because the owner is unable to fully deduct the economic costs expended on leasehold
improvements over the improvements’ useful life, the ower’ income i, anisicialy inflated for
tax purposes, To make matters worse, the current policy hinders urban renewal and construction
4b opportunities as improvements ae delayed or not undertaken al Like factories in need of

ing so they can produce the most advanced kinds of products, many buildings today need
to be retooled to provide the environment necessary to house and grow businesses of the

Historically speaking, the concept of economic cost recovery is fundamental to the
integrity of America’s tax system. True net income is determined ‘by recovering the costs
expended on an investment over the same period of time as the investment cams income. This
“matching” precept has long been embedded in the tax code. Prior to the Economic Recovery
Tax Act of 1981 ("1981 Act"), a building owner was generally entitled to recover the costs
associated with constructing leasehold improvements over their useful lives, such as the term of
the lease for which they were constructed. Appropriately, this policy reflected the fact that
improvements constructed for one tenant are rarely suitable for another, and that when a tenant
leaves, the space is typically built-out all over again (or atleast substantially renovated) for 8
new tenant, With the 1981 Act, however, the concept of matching income from the lease with
the costs of leaschold improvements was set aside asthe system of component depreciation for
real estate was aband.

In an effort to simplify depreciation laws, a single depreciation life of 15 years was
cstablished for buildings and leasehold improvements made to them by owners.

Since the 1981 Act, however, the recovery period for nonresidential real property has
been lengthened to 39 years. With these depreciation changes, however, has come no distinction
between the capital ost recovery of buildings themselves and the period intemal improvements
made to accommodate specific tenants.


IMPACT OF TAX LAW ON LAND USE

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
SECOND SESSION

JULY 16, 1996

Serial 104-57

Printed for the use of the Committee on Ways and Means

cs

U.S. GOVERNMENT PRINTING OFFICE
95-671 CC WASHINGTON : 1996

For sale by the U.S. Government Printing Office
‘Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-053943-9



108

The Federal Tax Code and Resource Use Incentives

Various provisions of the Federal tax code create incentives and
disincentives that have encouraged or attempted to compensate for the historic,
inefficient use of our land and other resources. These are not limited in their
applicability to the activities of any one economic sector, such as housing
construction and finance, They are myriad in their application to different
parties.

Federal Budgetary and Revenue Gains Through Location Efficiency

Location efficiency encourages a more efficient utilization of the capital
investment that already has been made in urban utilities and infrastructure
necessary to household and business activities. A more efficient realization of
the benefits of existing investment in turn reduces the demand for capital to
finance the creation of new infrastructure, where communities do not now exist.
The Federal Government would realize a major reduction in its expenditures
through a decline in interest rates associated with a reduced capital demand for
new urban infrastructure and utilities.

Hospitals and medical care facilities are among the urban service
infrastructure that is not efficiently utilized, when development occurs
inefficiently. Location efficiency would reduce the demand to create new medical
care facilities in greenfields locations.

Location efficiency facilitates transportation efficiency--both for
households and commercial entities. Location efficiency, therefore, helps reduce
regulated air emissions and improves public health. An improvement in public
health would reduce the demand for tax revenues for public health protection and
medical care.

Location efficiency contemplates greater proximity of household residences
to places of employnent, This encourages greater accessibility of all persons,
including lower incone households, to job opportunities and reduces costs to
employers of employee turnover, absenteeism, and late reporting for work. An
increased participation of lower income households in the work force would reduce
the demand for Federal and State welfare support expenditures.

An increase in location efficiency in this country would reduce the tax
cost of proposals before your Committee to protect undeveloped “greenfields” and
to remediate contaminated "Brownfields." Continued inefficient use of Land will
limit market demand for Brovnfields and maintain market. demand for the conversion
of greenfields to urban uses. The tax cost of proposals to protect greenfields
and remediate Brownfields will be greater, if market demand for greenfields does
not decline and demand for Brownfields does not increase. On the other hand,
increased efficiency in land use would help relieve market demand for greenfields
aud improve demand for Brownfields and thereby reduce the tax cost of greenfields
protection proposals and Brownfields remediation proposals.




109

4n increase in location efficiency, also, would enhance the ability of more
Anerican households to increase their financial wealth and gain access to private
sector financial resources. The location-efficient mortgage progran is prenised
upon the ability of households in location-efficient communities to reallocate
their disposable income from transportation to housing expenditures. The program
is designed to facilitate household access to mortgage credit and acquisition of
an equity interest in residential real estate. As real estate values improve
over time, that equity enables households to increase their wealth and gain
access to greater credit for other purposes, such as education. Improvement: in
the financial well-being of American households in turn would reduce the demand
for Federal tax revenues to finance household expenditures--health, education,
retirement, or other.

Many of the financial incentives in the Federal tax code attempt to
compensate for private markets’ inattention or inadequate financing of the costs
of publicly desired goods and services. If we were able to create new, non-tax
incentives for creating communities with greater location efficiency, we would
hope that, as these incentives gained market acceptance and enhanced the
feasibility of delivering housing to more households at less cost, we could begin
to reduce certain tax incentives that support financing shelter costs that are
inflated by the inefficient use of land and building materials. Tax revenues
would increase, as the tax subsidy was reduced,

Conclusion

We encourage your Committee’s continued review of the Federal tax code for
provisions that discourage the efficient organization of the economic, physical,
and human environments of American communities. We will be happy to contribute
to the Committee's analysis and suggest tax code modifications.

‘Through non-tax financial incentives we mean to reward American households
that choose to live in communities that enable them to conduct their daily lives
in an efficient manner. We encourage the Committee to consider how non-tax
incentives may be substituted for tax incentives to achieve policy objectives.

The inefficiency of the physical environment that we have created in this
country imposes economic, social, personal, and environmental costs upon our
citizens, Many of these costs now are apparent. Our citizens’ economic
opportunities are limited, their tax burden is aggravated, and their physical and
enotional health is impaired by the inefficient use of our natural, human, and
financial resources.

Sincerely,

Cbg Ado

Clement. Dinsaore on behalf of
The Location-Efficient Mortgage
Partnership
Enclosures
cc: Honorable Nancy Johnson
Honorable Robert Matsui


30

As Mr. Zimmer accurately observed in his opening statement, not
only Mr. Herger and I, but there are a number of other Members
who have substantially large geographic districts, and they go way
beyond this 50-mile radius from an MSA.

The concern I have is, just using the 14th District of Texas that
I represent as an example, most of it is more than 50 miles from
an MSA. But we have at least two interstates that go through my
district, and within a short distance of every inch of that interstate
the real estate values are unreasonably high because of developers
and speculation, and you go 500 yards away, and the property
drops in value substantially.

So I have a real problem with that 50-mile radius not taking into
consideration some other factors, and then when you look at the
national parks, there is not a national park that I am aware of
within 50 miles of the 14th District, yet there are seven wildlife
refuges within the district I represent, and those have as much
value to the citizens and the Nation, and probably more value on
the wildlife side, than the national parks do, yet we are not taking
those into consideration, and in some of these the landowner has
some restrictions.

So I would certainly ask you to consider adding wildlife refuges,
because these are all under the control of the Federal Government.
But I wonder how you would address this 50-mile phenomenon,
and I know it is an arbitrary figure at this point, recognizing these
interstates, and there is probably some other examples that artifi-
cially inflate the dollar value on ranch- and farmland.

Mr. Payne. Greg, I understand that in your district between San
Antonio and Victoria—

Mr. LAUGHLIN. San Antonio and Houston, to give two large met-
ropolitan areas, and that is 200 miles, so you come out——

Mr. PAYNE. It is not only the larger metropolitan areas. I under-
stand that in your district, a substantial part of your district is cov-
ered by this, which I assume is one of the reasons that you are a
cosponsor of this legislation. While I think it would be perhaps
positive if we could find ways to expand its definition, one of the
considerations is the cost, and the more we expand the definition,
the more difficult it is to enact this legislation, as we have worked
at it for several years.

But we would like very much to continue to work with you to
find ways to accommodate the kinds of things that you have just
mentioned.

Mr. LAUGHLIN. Well, that is the point I was making. I like the
thrust of all of the bills, but sitting here listening to you, I have
that concern that I mentioned.

Mr. Zimmer, I commend you for your legislation and certainly
you are addressing issues that are important outside of the metro-
politan areas, and particularly in districts that have a lot of farm-
jJand and ranchland.

The concern I have—and I would wish you to address it specifi-
cally in your bill—as I understand it, in every instance the land-
owner, to preserve that property for a well-intended use, must ei-
ther sell or donate the property to the Federal Government. And
if that is the case, why have you not considered the State govern-


89

Background

Under the President's brownfields tax incentive, environmental cleanup costs would be
fully deductible in the year in which they are incurred —- a significant incentive that would
reduce the cost of capital for these types of investment by more than half, The $2 billion
incentive is expected to leverage $10 billion in private investment, returning an estimated
30,000 brownfields to productive use. The incentive would be available in 40 of the existing
EPA Brownfields pilot areas, in areas with a poverty rate of 20 percent or more, in adjacent
industrial or commercial areas, and in Empowerment Zones and Enterprise Communities, both
existing ones and those that would be designated in the second round.

‘The Clinton Administration's Empowerment Zone and Enterprise Community program
was authorized by Congress in the Omnibus Budget Reconciliation Bill of 1993. This
program was designed as a competitive demonstration program for revitalizing distressed
‘communities pursuant to a strategic plan developed at the community level and supported by
local and state governments, the federal government, and the private sector. Over 500
communities that satisfied various poverty, population, and size criteria were nominated for
designation, with many communities hailing the application process itself for producing
tremendous benefits. On December 21, 1994, nine Empowerment Zones and 95 Enterprise
Communities were designated. Qualifying businesses in all of the designated areas became
eligible for a new category of tax-exempt financing, and businesses in Empowerment Zones
also became eligible for a significant federal wage credit and a capital investment incentive.

The Empowerment Zone and Enterprise Community proposal, which is an important
component of the President’s Community Empowerment agenda, would authorize a second
round of designations, adding another 100 distressed urban and rural communities to the 104
designated in December 1994. The second round would build upon the solid successes of the
first round, and would also strengthen the tax incentives available to businesses in the
designated communities (including the brownfields tax incentive, additional section 179
expensing for small businesses, and new tax exempt bonds).

The Treasury Department will be submitting written testimony to the Subcommittee on
these matters.


84

Chairman JOHNSON. I thank the panel for your excellent testi-
mony.

We are very concerned with the tax impact of some of these
things, the cleanup costs. I was not aware of the demolition issue
on urban areas and on land use in urban areas. There are many
appropriate areas in our cities that should be used again for com-
mercial purposes rather than commerce moving out to some of the
more rural areas, and part of protecting our rural areas is enabling
land in inner cities to be used for its historic commercial purposes.
I appreciate your testimony on these issues.

There is broad bipartisan interest in enterprise zones, as now
both the administration and Mr. Rangel have proposed and a num-
ber of Republicans have proposed and are supporting the Talent-
Watts bill. I would like your thoughts on the impact of selective
benefits for specific areas as opposed to tax changes that are more
comprehensive. In other words, do you have any thoughts on those
enterprise zones?

Mr. MacEwen. I think my position would be that we certainly
favor the enterprise zone concept. The benefits, I think, are well di-
rected. I also think that the enterprise zone concept can be ex-
panded into a broader perspective to address some of the issues
that my comments addressed.

Chairman JOHNSON. Thank you.

Anyone else? Any comment on enterprise zones?

Mr. KELLEY. I think the history of the enterprise zone is a good
format, Congresswoman. It could be expanded into other areas,
using that as a base for experience. It does work around the coun-
try, no question about it.

Chairman JOHNSON. Ms. Osterman, your testimony mentions
that the passive loss and income restrictions imposed in the 1986
tax reform act have limited the impact of the rehabilitation credit.
Could you enlarge on that?

Ms. OSTERMAN. The 1986 act severely restricts the ability of in-
vestors to utilize real estate losses to offset taxes on ordinary in-
come. That has been the principal effect on the desirability of uti-
lizing the existing rehabilitation tax credit.

Other changes in the tax act that are important are the reduc-
tion of the credit from 25 to 20 percent and also income restrictions
that basically make it very difficult for individuals with incomes
above $250,000 to utilize the credit as investors.

I would like to point out to the Chairman, to the Subcommittee,
that the passive loss limitations and income caps and other provi-
sions that currently prevail over the existing rehabilitation tax
credit would not apply under the proposed historic home ownership
tax credit, because that would not be an investor tax credit but
would be used for a principal residence. This would not be subject
to any of those kinds of limitations.

Chairman JOHNSON. I understand. Thank you.

Mr. Kelley, in your presentation you talked extensively about in-
stallment sales treatment of unimproved residential lots. You make
the point very effectively that rules can be very costly and com-
plicated, What impact do these rules have on decisions about where
to build?


12

and state tax rolls, and without imposing on the American taxpayer the costs of acquisition,
‘administration, or maintenance of the land. ‘The legislation provides an entirely voluntary
apptoach for a rural landowner to use to preserve the land for rural purposes.

1 believe our bill can be an important tool for America's farm and ranch families, It will
permit them to preserve their homesteads, and at the same time make a significant contribution
10 the larger public good of conserving America's increasingly threatened rural lands.

‘As you know, Madam Chairman, a more limited version of our legislation was included
in the vetoed Balanced Budget Act of 1995. We look forward to sesing our original bill included
in the next viable tax vehicle that comes through this Committee.

‘Thank you for the opportunity to testify. I now defer to my colleague and an original
sponsor of this important legislation, Congressman Payne,


54

Mr. LAUGHLIN. Thank you, Madam Chairwoman.

Mr. Lindstrom, I appreciate your explanation. It does dem-
onstrate the broad expanse of the bill, and I understood that, other
than just San Antonio or Houston or the very large cities. But
again, we have some land that has artificial values along our inter-
states that would not, and I can think of one county along Inter-
state 10 that none of these definitions would reach, and it concerns
me. That is why I mention it.

The staff gave me a question for you, Mr. Lindstrom, but appar-
ently an answer was given earlier about the types of property that
are eligible for exclusion under the American Farm Protection Act,
that apparently the answer should have been broader. Is it broader
than just farm- and ranchland, or is it confined to just farm- and
ranchland?

Mr. LinpstRoM. No, Congressman. It is broader than that. The
American Farm Protection Act qualifies the land under an existing
section of the Tax Code, which is section 170(h), which lists a num-
ber of categories that, if you have land which falls under one of
those categories, it will qualify not only for a tax deduction under
existing law but also for the exclusion provided by this proposal.

It would include certainly prime farmland and ranchland and
forestland, but also it would include environmentally sensitive
land, land that was a particularly important habitat for endan-
gered species or for other flora and fauna. And so it is much broad-
er than simply actively farmed land or forested land.

Ms. Hocker may want to add to that.

Ms. Hocker. I think you have covered it.

Mr. LauGHLIN. Ms. Hocker, I appreciate your comments about
the separation of property. It reminds me, when I met with some
members of the Russian duma, they did not understand the owner-
ship being different from the surface and below the surface.

Madam Chairwoman, we do in Texas, and all I can say is, I wish
I owned a lot more of the under-the-surface than the surface, since
I don’t own much of either.

Ms. Hocker, tell us what the problem is, and how extensive you
view it to be, and what you recommend to change that.

Let me just say to you that while I come from an area that pri-
marily is oil and gas production and some sulfur—and that has just
about gone away—coal mining has become more prevalent in re-
cent years in my part of Texas, and, frankly, the strip mining that
we think about being so horrible, there are requirements now by
some landowners that that land be rehabilitated. And I have a
friend who has one of those ranches that they have taken the coal
out. Frankly, the surface looks better and he thinks it is better
than it was before the coal miners.

Can you elaborate some on what the problems are from your
viewpoint and some solutions?

Ms. Hocker. Yes. Thank you, Congressman, for the opportunity
to do that, because a very obscure point of the law is holding up
a number of donated conservation easements currently. The law
governing the deductibility of conservation easements allows for
the donation of an easement over land where the surface and sub-
surface rights have been separated, where the owner of the surface
doesn’t own all of the mineral rights.


‘Statement of the
American Institute of Architects

‘The American Institute of Architects (AIA) is the professional society representing this nation’s
architects. On behalf of its members, the Institute submits the following comments on land use
and tax reform to the U.S. House Ways and Means Subcommittee on Oversight.

It is an architect's challenge to envision the "big picture” and to attain it by piecing together many
‘components in a manner that maximizes form, function, and value. Architecture is a balance of
poetics and pragmatics,

As our country has grown, the issue of wise land use and development has become increasingly
difficult to address. Now, more then ever, when fiscal resources are scarce and open spaces are
dwindling itis imperative that the nation and our localities make decisions about the
development of neighborhoods, commercial areas, schools, recreation facilities, and infrastructure.
‘Urban sprawl has become the norm, and low-density development has overtaken the landscape,
imposing enormous and inefficient dollar and resource costs for water, sewer, and power
infrastructure.

‘One way to slow urban sprawl and control the mass exodus from this nation’s cities is to provide
incentives for businesses to remain in urban areas. Businesses serve as community anchors,
offering employment opportunities, generating tax revenue and local spending, providing services,
and attracting residents and more businesses in turn.

‘The Commercial Revitalization Tax Credit (CRTC), H.R. 2138/S. 743, introduced by U.S.
Congressman Phil English in the House and U.S. Senator Kay Bailey Hutchison in the Senate,
‘would provide such an incentive to businesses, encouraging investment in economically distressed
areas, ‘Similar credits already in effect for related purposes such as housing and historic
preservation bear this out.

‘We urge the Members of this Subcommittee to join the 44 House cosponsors of H.R. 2138 in
‘endorsing this bill.

‘The legislation permits a choice between two available tax credits that may be carried forward or
backward against tax obligations. The first choice is a credit equal to 20 percent of eligible
construction and related expenses. The entire credit may be used in a single tax year.

‘The second option allows a taxpayer to apply five percent of eligible expenses to the annual tax

‘maintenance would not be an eligible expense, nor any expenditure less than 25 percent of the
tax basis of the building or project. Creditable expenses would have a lifetime limit of $10 million
per project. Total available credits would be $1.5 billion over five years following enactment.

It would be paid for in three ways-claiming a small slice of tax reductions that Congress has
decided to enact; generating economic activity that returns money into the Treasury; and shifting
resources from untargeted programs such as the 10 percent rehabi tax credit

Monies would be allocated direct tothe states acording to a formula, based on population
‘The states would have the freedom to establish their own programs, although the

anticipates that projects awarded credis would be chosen based on thei fulfillment of strategic
plans developed under a public participation process, and their potential to create permanent
jobs.

Businesses eligible for the commercial tax credit could be located in existing federal
Empowerment Communities/Enterprise Zones (EC/EZs), state EC/EZ’s or theit equivalent, or
any revitalization area established by federal, state, or local law that contains a population of
‘which at least 50 percent ear less than 60 percent of the median atca income. About 500
communities that applied for EC/EZ designation from the federal government were not selected.
Most of these places have quality revitalization programs ready to implement, given sufficient
incentives to attract private capital.


15

Tax Credit for Rebal

tation Expenditures

‘We would like to thank you. once again, Madam Chairman along with Representatives Clay
Shaw (R-FL), Barbara Kennelly (D-CT), Jim MeCrery (R-LA), Richard Neal (D-MA), and Richard
Zimmer (R-NJ) for introducing H.R. 1662. the Historic Homeownership Assistance Act, which
would provide for a 20 percent tax credit, up to a maximum of $50,000 or, ifthe taxpayer should
choose. a transferable mortgage credit certificate for the rehabilitation of certified historic structures
used as a principal residence by the owner. We commend you for your unwavering support for
affordable housing and eliminating tax impediments to its creation,

NAHB believes that this proposal would enhance the historic rehabilitation credit and benefit
those who wish to restore their historic homes. It would provide much needed homeownership
‘opportunities and stimulate the revival of decaying neighborhoods and communities by expanding
the current historic rehabilitation credit to include buildings owned and occupied as a principal
residence. Not including an income cap with respect to principal residences would foster economic
diversity within the buildings. By providing for a transferable mortgage credit certificate the bill
‘would allow lower income taxpayers to use the credit to facilitate payment of acquisition costs. H.R.
1662 is a needed step in the right direction.

Promoting the re-use of existing homes will decrease the need for more development at the
fringe of our urban areas. Encouraging rehabilitation of historically significant homes through the
proposed tax credit will increase the preservation of the current stock of homes. Rehabilitation will
also increase employment in the places where the historic homes are located, which are often easier
‘work destinations for disadvantaged workers than the locations of new residential construction.

Estate tax preference for Small Business

‘The current estate and gift tax laws operate to destroy family-owned businesses by imposing
‘tax upon the inter-generational transfer of the business. Moreover, the economic impact of the tax
increases from year to year because of inflation. Home building is dominated by small firms which
very often are family owned and operated (79% percent of NAHB membership are classified as
‘small builders and 91% are either principal owners or sole owners. NAHB Housing Economics, July
1995 p. 12), NAHB fully supports estate tax reform for small businesses.

The federal estate tax is imposed on the value of property passing at death. The estate tax
rates begin at 18 percent on the first $10,000 in taxable transfers at death and reach 55 percent on
taxable transfers over $3 million. The amount of estate and gift tax is calculated by multiplying the
tax rate by the taxable transfers at death and subtracting the estate and gift tax credit which is
currently $192,800. This effectively exempts estates less than $600,000 from taxation.

‘We commend Representatives Jim MeCrery (R-LA), Jennifer Dunn (R-WA), Wally Herger
(R-CA), LF. Payne (D-VA), Mel Hancock (R-MO). Jon Christensen (R-NE), Greg Laughlin (R-
‘TX). Jim Hayes (R-LA), John Ensign (R-NV). Jim Nussle (R-IA), Rob Portman (R-OH) and Mac
Collins (R-GA) for having introduced legislation (H.R. 2190) which would eliminate the estate tax
for each ownership interest of a family-owned business Worth up to $1.5 million. For business
ownership interests over $1.5 million, only one-half of the excess (the monies over $1.5 million)
would be taxed. That is. for an estate worth $2.0 million, the first $1.5 million given at death would
bbe tax-free and only $250,000 would be taxed.

‘An alternative to H.R. 2190 would be to retain the existing unified estate and gift tax rate
schedule, but to increase the unified estate and gift tax exemption amount to $655.800 for each
‘ownership interest of a family-owned business. This would effectively eliminate estate taxes on
family-owned businesses valued at less than $1,500,000, The existing rate structure and credit would
be applied to assets that are not part of the business interest (as shown in the following diagram).


36

review of the USDA Census of Agriculture for the 32
Congressional Districts then represented on the Ways and
Means Committee showed that nearly 4 million acres of
actively farmed land had been lost in those districts alone
since 1974, This represents over 20,000 farms. During the
same period the average value per acre of farmland increased
by nearly 2008 so that nearly 26,000 farms were exposed to
the federal estate tax in those districts. In

Mrs. Johnson’s district alone values have increased by 280%
since 1974 and nearly 46,000 acres have been lost to
farming. In 1992 the average farm value in Mrs. Johnson's
district was $670,000.

As a 12 year veteran of the Albemarle County Board of
Supervisors in Virginia, I am personally aware of the legal
and political difficulties involved in trying to regulate
the effective protection of farm land and open space. I
also know that, while the purchase of development rights has
an important role to play in protecting farm land and open
space, the cost of these programs prohibits their being
applied on the broad scale needed to protect a meaningful
base of open land.

That is why we support the American Farm Protection
Act. We believe that it is @ very practical approach to
protecting farm land and other land of conservation value
that is under development pressure. It is voluntary and
does not involve government regulation. It also avoids the
huge costs of acquisition which include taking land off
local tax rolls and requirements for maintenance.

Current estate tax law contains three provisions which
are relevant to the protection of rural land. Section
2032A, which provides for special use valuation of certain
farmland, ranch land and forest land; Section 6166, which
allows certain estates containing farm or ranch assets to
pay estates taxes in installments; and Section 2055, which
allows a deduction for a testamentary bequest of a
“qualified conservation contribution” as defined in Section
170(h) of the Internal Revenue Code of 1986. (A “qualified
conservation contribution” is a conservation easement.} In
addition, land subject to a “qualified conservation
contribution” donated during a decedent's lifetime will be
valued for estate tax purposes by taking into consideration
the extent to which the conservation easement reduces the
value of the land in the decedent's estate.

The problem is that these provisions of the current law
are not effective. They are far too complex to be practical
and too limited to provide effective relief. The provisions
directed at conservation easements are too unpredictable in
their effect and also too limited to provide a real
incentive for voluntary land conservation.

A 1981 Government Accounting Office (GAO) study of
Section 2032A concluded that “..special use valuation is
difficult to administer and comply with, its complexity has
tended to restrict its use to wealthy estates..” More
recently, in her statement to the Senate Finance Committee
on June 7 of last year, Deputy Assistant Treasury Secretary
Cynthia Beerbower reported that she had informally surveyed
practitioners and others familiar with the difficulties
facing farmers and other family businesses and found that
both Sections 2032A and 6166 were complex and difficult to
utilize.


48

taxes when the money is withdrawn from the account. This would be a positive economic
incentive leading to a positive intended outcome.

All of these approaches would allow for an orderly transition from one owner to another and
increase the potential for land to remain in production agriculture rather than be shifted to other

‘Tax Policies With Positive Intended Consequences

Chairwoman Johnson, as you noted in your comments in announcing this hearing, you are also
interested in exploring tax policies that would have a positive impact on maintaining current land
uses. There are several policies that would have a positive impact on farm and ranch lands.

‘TAX INCENTIVES FOR ENVIRONMENTAL MANDATES:

Tax incentives should be provided for expenses required to meet mandated environmental
policies. For farms and ranches with slim operating margins, mandated environmental expenses
can turn operating profits into operating losses. If these losses continue for a few years, selling
the land may be the only option for survival. Other farmers and ranchers are reluctant to assume
the tisk of expenses to meet the environmental mandates on the land. Thus, selling for non-
production agriculture uses may be the only viable option. Providing tax incentives should help
meet environmental policy goals while keeping land in agriculture, a positive intended
consequence.

INCENTIVES FOR VOLUNTARY CONSERVATION EASEMENTS:

‘Tax deductions for contributions of voluntary easements is another way to meet environmental
policy goals while keeping land in agricultural uses. The easement could be to a public agency or
a private conservation group.

PRIVATE ACTIVITY “AGGIE” BONDS

Several state governments have provided programs for “aggie bonds” that are used to help
beginning farmers and ranchers purchase existing operations, Because of current federal rules
for tax status of the bonds, they cannot be used for sales from one family member to another. AS
noted earlier, multi-generational family farms are common and transferring assets from one
_generation to the next is a big problem under the current tax code, This change would allow
ore land to stay in the family and lessen the chance that the land would become available for
purchase for non-agricultural use.

RISK MANAGEMENT ISSUES

Farmers and ranchers must deal with volatile income swings that result from unpredictable
‘weather and markets. Tax code provisions that allow the matching of expenses with income are
of great help. Cash accounting is an important financial management tool. Income averaging
and IRA-type accounts that allow farmers and ranchers to defer income would aso be of benefit.
‘Also helpful would be changes in the tax treatment of disaster losses and control over the timing.
of tax payments during and after periods of natural disasters. Repeal of the alternative minimum,
tax would simplify the tax system for farmers and ranchers and allow them to more effectively
‘manage their tax burden.

Many other tax Jaw changes would help to maintain farmers and ranchers on the land and reduce
the potential for the land to shift to other uses, Two Farm Bureau priorities are allowing for the
full deductibility of health insurance premiums paid by the self-employed and increasing the
‘amount that small businesses can expense each year. Annual expensing of preproduction
expenses should also be allowed,

Implications for Future Tax Policy

This subcommittee faces a major challenge in considering the impact of federal tax policy on


117

by Representative Rangel (D-NY), embody the Administration's
Proposal to encourage economic redevelopment through utilization
of tax code amendments. These bills would include new tax

incentives to encourage brownfields clean-up. However, only two

xeceive wage tax credita.

Rep. Foglietta (D-PA) has introduced a bill, H.R, 3241, that
would allow an additional 9 areas to be designated as Empowerment
Zones and receive the wage tax credit, along with other tax
incentives for growth, including a credit for brownfields
remediation costs. Other measures, including bille introduced by
Senator Abraham (R-MI) and Senator Lieberman (D-CT), would expand
the incentives available to distressed communities but would not
specifically provide a wage tax credit or brownfields clean-up
deduction/credit to businesses and developers.

We believe that the expansion of wage tax credits to more
distressed communities and the adoption of brownfields clean-up
incentives are crucial to the creation of jobs and the
revitalization of deteriorated neighborhoods. We hope that you
will support legislation to enact these important incentives so
that the City of Houston and other inner cities can bring jobs
and businesses back to the communities where they are so deeply
needed. On behalf of the City of Houston, I thank the
Subcommittee for the opportunity to testify on this issue that is
0 crucial to our nation’s cities. Please do not hesitate to
contact us if we can provide you with any additional information
on this important matter.


53

Chairman JOHNSON. Thank you.

Mr. Zimmer.

Mr. ZIMMER. Thank you, Madam Chair.

I would like to ask the panel, starting with Ms. Hocker, whether,
based on your practical experience in land preservation, you think
that the two pieces of legislation that I have introduced, one to
allow the payment of land in lieu of cash for estate tax liabilities
and the other to eliminate the bargain sale treatment of below-
market sales of conservation easements, would have a practical im-
pact on the behavior of individuals and would actually result in a
substantial preservation of open space.

Ms. Hocker. The answer to both questions—the answer for both
pieces of legislation is yes. The ability of heirs to make decisions
about the land that the decedent was unable or didn’t know enough
to make is absolutely critical, and I know of situations where heirs
would have probably made the decision to protect the land or to do-
nate an easement to protect the land if that option had been avail-
able.

I would add that not only would your proposal for a tax credit
for land that is donated or easements that are donated after death
be critical for lands that are the highest value, but even if it were
a tax deduction—the ability of an heir to make a donation of land
or an easement for conservation and get a tax deduction, rather
than a credit from the taxable estate—it would be a benefit; heirs
would make that change.

Your piece of legislation on bargain sales will be increasingly im-
portant, I believe, because as those landowners who are in a posi-
tion to make a donation of land or an easement have done so or
decided not to and have made their decision, there are more and
more landowners who cannot necessarily afford to make an entire
gift wanting to protect their land. For them, the bargain sale is a
very good compromise. They make a partial gift, they get a partial
donation, they also get some income; and I think that tool will be
increasingly important to land protection. So that bill is also ex-
tremely important.

Thank you for introducing both.

Mr. ZIMMER. Thank you.

Mr. Lindstrom.

Mr. LINDSTROM. Congressman Zimmer, I agree with Ms. Hocker,
and I would add that the region that the Piedmont Environmental
Council serves is bordered almost along its entire nine-county
length on the west by the Shenandoah National Park, which is one
of the most heavily used parks in the United States, closer to more
people than probably most any other national park, and I think
that one of the concerns of the Park Service is how to protect that
park. I think that the legislation that you have introduced, it cer-
tainly will be a significant additional tool for them.

Ironically, I will have to tell you that there is legislation afoot
in the Congress that would freeze the boundaries of the park so
that it could not even be expanded by the gift of land, and obvi-
ously that would be counterproductive to the effort that you have
been very appropriately pursuing.

Mr. ZIMMER. Thank you.

Chairman JOHNSON. Mr. Laughlin.


49

fand use. Current tax law has a major impact on land use because the overall tax load is large
‘enough to cause land owners to seek legal means to reduce that tax load. Farmers and ranchers
‘whose families have worked hard to accumulate assets in land do not want to pay confiscatory
tax rates. Thus, they seek alternatives that may directly impact land use.

‘Two choices are available to deal with these problems. One option is to continue to add features
to the current tax system to try to offset the negatives in the system. We have proposed some
ways to do that for issues of particular concerns to farmers and ranchers.

The other option is to give up the idea of applying another batch of bandages to a troubled system
and to start working toward reform of the entire federal tax system. We have made some
suggestions for that approach as well

We applaud the subcommittee for recognizing that inactivity is not a realistic option and
encourage changes that will lead to either more positive intended consequences or less
unintended consequences.

‘Thank you.


78

some rapid writeoff period should be established for nontargeted
areas, perhaps 5 years.

The second area I want to highlight concerns the demolition and
redevelopment of abandoned nonhistoric structures, a situation
more likely to occur in urban rather than suburban areas. Since
1984, all demolition costs for nonhistoric buildings must be added
to the basis of land rather than deducted. This discourages the ac-
quisition of land on which there is a building which must be demol-
ished in order to use the land more productively. We propose a re-
turn to pre-1984 treatment of demolition costs.

Finally, the long cost recovery period associated with the mod-
ernization and reconfiguring of existing commercial space in urban
areas discourages the revitalization of buildings and the reuse of
land in America’s cities. Instead of the building owner recovering
the expenses incurred to construct so-called leasehold improve-
ments over the life of the improvement, today’s rules dictate that
such expenses must be recovered over the life of the overall build-
ing which is now depreciated over 39 years. Seldom do tenants sign
leases of 39 years or more.

Compounding this, significant ambiguity surrounds how a real
estate owner accounts for leasehold improvements that are demol-
ished before the end of the recovery period in order to make way
for a new tenant. To address this so-called closeout problem, we are
supporting a provision first introduced by Congressman Shaw and
other distinguished Members of your Committee and included in
the Senate version of the Small Business Jobs Protection Act. We
strongly urge House support of this provision in conference with
the Senate.

Let me state in closing, we believe that a more reasonable policy
must be establishec:- “or the costs of cleaning up contaminated land,
perhaps a more generous incentive in targeted areas, but an incen-
tive in nontargeted areas as well. We believe the tax treatment of
demolition expenses should be revised.

Finally, we urge the House to accept the leasehold improvements
provision contained in the Senate version of the Small Business
Jobs Protection Act. These actions would, without a doubt, help
generate jobs and maintain commercial real estate asset values
and, as a result, help restore and stabilize the health of our urban
centers.

Thank you very much.

[The prepared statement follows:]


88

“OFFICE OF PUBLIC AFFAIRS + 1500 PENNSYLVANIA AVENUE, N.W. ¢ WASHINGTON, D.C. « 20899 ¢ (202) 6222960

FOR IMMEDIATE RELEASE
July 16, 1996

STATEMENT BY TREASURY SECRETARY ROBERT RUBIN
ON THE PRESIDENT’S BROWNFIELDS TAX INCENTIVE
‘AND EMPOWERMENT ZONE PROPOSALS

‘Today, the Ways and Means Oversight Subcommittee will be considering tax
incentives to encourage cleanup and redevelopment of contaminated and economically
distressed sites. Earlier this year, President Clinton called for such an incentive in his State of
the Union address and included this initiative, fully paid for, in his FY 1997 budget.

‘The President's brownfields tax incentive will spur the cleanup and redevelopment of
thousands of contaminated sites, and together with the new Empowerment Zone and
Entesprise Community proposal, will help to rebuild neighborhoods, create jobs, and restore
hope to our nation’s cities and distressed rural areas,

T thank Congressman Range! for introducing H.R. 3747, containing the President's
brownfields tax incentive and Empowerment Zone proposals, and Senators Moseley-Braun,
Jeffords and D'Amato for introducing a companion measure, S. 1911, in the Senate, The
‘Administration strongly urges the Oversight Subcommittee to favorably consider these
proposals.

RR-1I73

For press releases, speeches, public schedules and official biographies, call our 24-hour fax line at (202) 622-2040



43

‘owners, Thus we endorse the concept of rewarding. through additional income and estate tax
incentives, those property owners whose management practices significantly advance public
conservation policy goals -- for example, landowners who enter into binding agreements to
‘manage for protection of endangered species habitat. To ensure that the public investment in
such incentives is sound, their scale should be consistent with the public benefit received. the
greatest incentives being offered for the longest term agreements.

Tax reform proposals. Finally, | would like to note the impact that the various
proposals for a "flat tax" would have on land conservation. Like other members of the
nonprofit sector, land trusts have serious concerns about any proposal that would end the
charitable deduction. Unlike most other charities, however, land trusts rely on gifts not only
for operating income, but also to carry out the basic function for which they are established
and upon which their tax-exempt status is generally based. Without gifts of conservation land
and easements, land trusts would have limited ability to carry out their missions. Flat tax
proposals that allow deductions for a limited amount of annual giving do not address the
matter of significant land and easement gifts, most of which are large, one-time donations
‘whose value is far above the charitable deduction limits discussed in any of the flat tax
proposals, We urge the committee, when evaluating such proposals in this and future
Congresses, to give special consideration to their impact on the ability of private landowners
to conserve their property through voluntary gifts of land and conservation easements.

The Land Trust Alliance is pleased to offer our assistance and expertise on the effect
of the tax code on land conservation, and we encourage the Subcommittee to call on us.
Thank you for devoting your time and attention to this important matter.


113

Testimony Submitted by the
Edison Electric Institute
on
Deductibility of Asbestos Removal Costs

July 16, 1996

The Edison Electric institute (EE!) appreciates the opportunity to submit testimony (for the
Record) for the July 16 hearing on the tax code provisions that have an impact on land
use. EE! is the association of our country’s shareholder-owned electric utilities which
serve 76% of all ultimate electric customers in the nation. EE! commends the
Subcommittee on holding a hearing that addresses a number of provisions in the Internal
Revenue Code which impact land use. We believe that the hearing is particularly
appropriate in light of the continued uncertainty that exists with respect to deductibility of
environmental remediation costs, specifically the deductibility of asbestos removal costs.

INDUSTRY PRACTICE

EEI is very concemed about the tax treatment of ascestos removal costs because electric
utilities have used asbestos extensively as an insulator for steam generation electric
equipment. In an electric generating plant, steam boilers produce high-temperature steam,
In order to reduce heat loss, asbestos insulation is attached to the walls of the boiler and
turbine electric generator, and is wrapped around all associated piping. Asbestos
insulation is removed during routine inspections of the piping and turbine. Once removed,
the asbestos is not reused. It is also possible that, with age, insulation will begin to
disintegrate, thereby requiring total removal or encapsulation. It is generally with respect
to this latter use of asbestos as insulation that federal and state occupational safety and
health laws require safe removal and replacement of the material.

TREASURYI/IRS POSITION

On February 10, 1994, 22 members of the House Ways and Means Committee sent a
letter to the Honorable Lloyd Bentsen, Secretary of the Treasury, expressing their interest
and concern regarding the appropriate treatment of environmental remediation
expenditures. The letter was sent in response to two Technical Advice Memoranda (PLR
9240004 and PLR 9315004) that required taxpayers to capitalize a substantial portion of
these costs. The letter emphasized that the federal tax treatment of environmental
remediation expenditures is a key component to this nation’s commitment to cleanup and
preserve the environment. The letter also emphasized that government policy should
encourage taxpayers to promptly initiate remediation activities and that the IRS


CONTENTS

Advisories announcing the hearing ...

WITNESSES

American Farm Bureau Federation, AI. (Irv) Bell...
English, Hon, Philip S., a Representative in Congress from the State of
ennsylvania ..
Houghton, Hon, ‘Amo, a Representative in Congress from the State of New
ork
Land T)
National Association of Home Builders,
National Realty Committee, Bruce W. MacEwen
National Trust for Historie Preservation, Tamar Osterman
Payne, Hon. L.F., a Representative in Congress from the State of Virginia
Piedmont Environmental Council, C. Timothy Lindstrom .
Shaw, Hon. E. Clay, Jr a Representative in Congress from the State of
orida ...
Zimmer, Hon. Dick, a Representative
Jersey

Congress from the State of New

SUBMISSIONS FOR THE RECORD

U.S. Department of the Treasury:
Hon. Robert Rubin, Secretary, statement
Donald C. Lubick, Acting Assistant Secretary,

‘ax Policy, statement

‘American Forest & Paper Association, and Forest Industries Council on Tax-
ation, Bartow S. Shaw, Jr., joint statement .
American Institute of Architects, statement
American Vintners Association, Simon Siegl, statement
Bier, Thomas, Cleveland State University, statement ..
California Farm Bureau Federation, Sacramento, CA, statement
Center for Neighborhood Technology, Chicago, IL, Clement Dinsmore, joint
letter and attachments (see listing for Clement Dinsmore) ..
Center for the Study of Economics, Columbia, MD, Steven Cord, statement
Dinsmore, Clement, Surface Transportation Policy Project; Natural Resour
Defense Council; and Center for Neighborhood Technology, Chicago, IL;
joint letter and attachments ..
Edison Electric Institute, statement
Forest Industries Council on Taxation, and American Forest & Paper Associa-
tion, Bartow S. Shaw, Jr., joint statement ....
Houston, TX, City of, Hon. Bob Lanier, Mayor, statement
Natural Resources Defense Council, Clement Dinsmore, joint letter and at-
tachments (see listing for Clement Dinsmore)
Rangel, Hon. Charles B., a Representative in Congress from the State of
New York, statement ..
Shaw, Bartow S, Jr., pe
Industries Council on Taxation, joint statement
Siegi, Simon, American Vintners Association, statement .
Surface Transportation Policy Project, Clement Dinsmore, joint letter and
attachments (see listing for Clement Dinsmore) .....
Thomas, Hon. William M., a Representative in Congress from the State
of California, statement

107
113

94
115
107
118

94
98

107
119


106

‘STEVEN B. CORD, President ALBERT S. HARTHEIMER, Vice President FRED KARN, JR. Treasurer JOSHUA VINCENT. Secretary

Center for the Study of Economics

‘2000 Century Plaza, #238 + Columbia, MD 21044-3210
‘Tel. (410) 740-1177 Fax (410) 740-3279

STATEMENT BY DR. STEVEN CORD FOR CSE, ON THE
IMPACT OF FEDERAL TAX LAW ON LAND USE
BEFORE THE H.R. COMMITTEE ON WAYS & MEANS, 7/11/96

‘The federal government should encourage state & local governments to shift as many of their
taxes as possible to the assessed value of land, for these reasons:

(1) State & local governments penalize building ownership, retail sales and income when they
ax such desirable things. Such taxes hurt the economy and cause the federal government to levy high
income taxes to fund government programs,

2) Governments should get their revenue by taxing land assessments instead. Such a tax
encourages land owners to develop ther sites in order to obtain an income From the improvement
‘which con pay the higher land value tax as well as for the improvement also, thereby creating jobs
and economic growth). Here isa revenue source that actually promotes economic growth at no extra
tax cost to the taxpayer (“no extra tax cost” because only a tax shift from buildings to land is
involved). By promoting tax-free urban rejuvenation, we will be containing urban spraw! into the
clean-and-green countryside.

In the 21st century, the payment of the general budget debt and Social Security benefits will
absolutely requite such a tax (since it promotes land development), but these are ways by which the
federal government can encourage slate & local governments to levy such a tax now:

‘0H.U.D. and D.0.T. can condition state & local grants on adoption of a land value

tax (but this must be done gradually).

© HU.D. can require enterprise zones and a new city to levy a land value tax.

‘oH.U.D. can promote the benefits of land value taxation to states and cities.

© The federal government can levy an income tax on anqual fand rent; we ean advise on this,
having received much experience by working with all 17 land-value-taxing cities and a school district
in the U.S. And there are other ways by which the federal government can promote better land use
through land valve taxation.

‘We have performed many studies substantiating all the claims made above. About
700 cities throughout the world use land value taxation, and all studies indicate it works wel.

Many well-known authorities have endorsed this proposal, including seven recent American
‘Nobel Prize winners in economics.

Now is the time for our federal government to promote better land use.

#4330

‘A norprott educational foundation


66

‘government control over private property nor does it preclude demolition of historic properties by
the federal government or private or other governmental owners. Register listing confers benefits
‘and opportunities, such as eligibility for the historic rehabilitation investment tax credit.

From 1981, when the historic rehabilitation investment tax credit was adopted, until 1987,
‘when changes made under the Tax Reform Act of 1986 took effect, the historic resources of older
communities, particularly in urban areas, experienced a renaissance. Nationwide, the historic
rehabilitation tax credit stimulated nearly $12 billion during that seven year period in the
rehabilitation of historic buildings. As a result of this remarkable incentive, citizens across the
‘country rescued landmark railroad stations (including Washington's Union Station), hotels (such
as the Willard Hotel), schools and office buildings from decay and demolition. ‘These restorations
frequently catalyzed reinvestment in the surrounding neighborhood, thus adding value beyond that
of the rehabilitation itself. Historic preservation fueled the “back to the city” movement of the
1970s and 1980s, bringing new life to abandoned and deteriorated warehouse districts,
‘waterfronts, downtowns, and other remnants of an area’s history and settlement which had
previously been in tatters.

Connecticut has been one of the greatest beneficiaries of the historic rehabilitation tax
credits. For the four years from Fiscal Year 1982 through Fiscal Year 1985, Connecticut ranked
ith in the number of approved rehab projects, and 12th in the amount of investment. In that
time, 371 projects generated an estimated $213 million in investment, creating over 8,000 jobs
and the rehal ‘of 2,300 housing units. Hartford was among the top 50 cities in the nation.
in the number of tax incentive projects. However, the impact ofthe historic rehabilitation tax
credit was greatly reduced by the passive-loss and income restrictions imposed on it by the Tax
Reform Act of 1986. Today, private investment in preservation projects under the credit amounts
to less than one-fifth of what it had been in its heyday. Connecticut experienced a drop of 76
percent in use of the credit, with investment declining from $65.6 million in FY86 to $11.9 million
in FY88.

‘Nonetheless, the historic rehabilitation investment tax credit continues to be an important
tool for historic preservation, particularly when itis combined with other government and private
resources. According to the National Park Service, in FY 1994 the program leveraged $483
million in private development activity nationwide at a cost to the federal treasury of
approximately $97 milion.

Many of these rehabilitations involve the conversion of historic structures, particularly
schools and office buildings, into residential rental buildings, creating affordable housing in
downtown areas, In fact, housing has been the single most important use for rehabilitated historic
buildings under the preservation tax credit program. Since the program began, over 131,000
housing units have been rehabilitated and over 66,000 have been newly created. And with the
reduced incentive to utilize the credit post-tax reform, many developers have generated necessary
leverage by combining the Historic Rehabilitation Tax Credit with the Low Income Housing Tax
Credit, which was created in the Tax Reform Act of 1986,

For example, the Dunbar Hotel was built as a first class hotel for African-Americans who
had no comparable place to stay in Los Angeles in the 1920s. For the next thirty years, the
Dunbar flourished, but by the 1970s decline and disinvestment in downtown Los Angeles had
taken its toll and the historic hotel housed only a few transients. Using the Low Income and
Housing Rehabilitation Tax Credits, the Dunbar Hotel was restored in 1989 as the anchor for
revitalization of the larger neighborhood. Today, it consists of 73 low-income apartments, four
commercial spaces, 2 museum, and a senior center.

‘The Need for a Historic Homeowner Tax Credit

Despite being significantly undercut by the Tax Reform Act of 1986, the existing historic
rehabilitation tax credit is presently the most valuable tool available for incentivizing historic
preservation. What we still lack are the tools to address the problems of blight and abandonment
that threaten entire older neighborhoods and communities. Clearly this is no time for massive



52

Chairman JOHNSON. Thank you very much, Mr. Bell.

This is to the whole panel. Is the loss of open space a national
problem, or is it a regional problem?

Ms. Hocker. Madam Chair, I would be glad to take a first crack
at that. I think it is clear that it is a national problem. It isn’t lim-
ited to regions alone.

We are seeing, for example, the growth of land trusts in response
to the loss of open space happening all across the country. They
used to be limited to the Northeast and the east coast. Now we are
seeing land trusts growing rapidly in the Southeast, in the upper
Midwest, Northwest, in the west coast, Southwest, everywhere, and
I think that that is because—I know that is because—the loss of
open space is a national problem.

Chairman JOHNSON. I am thinking about the restrictions in the
Houghton-Payne bill and other such ways of targeting the benefits,
and I am wondering if the land trust mechanism is capable of han-
dling the problem in some areas, but not in others; whether a tar-
geted bill would clearly be a step forward, but would it be an ade-
quate response?

Ms. HOcCKER. Well, the answer is that the kinds of incentives
that we are talking about ought to apply, in an ideal world, to
every piece of land that is valuable to the public for conservation
and is in danger of being lost to that purpose. In the real world,
unfortunately, you do what you think can best be done and apply
limitations accordingly.

Chairman JOHNSON. Mr. Lindstrom.

Mr. Linpstrom. Madam Chairman, I would agree with what Ms.
Hocker said. I would add, though, I think in our conversations with
a number of people, there is somewhat of a misconception about
the extent to which the American Farm Protection Act actually
does apply.

If you take a look at a map that has been produced by the De-
partment of Commerce, it shows metropolitan statistical areas, and
then you take—and basically a metropolitan statistical area is an
area that has an urbanized area of roughly 50,000 or more people,
and it includes the entire county boundary surrounding that area.

So you can imagine, if you took that outer boundary and added
50 miles to it, that you pick up a considerable amount of land, and
I know in Congressman Laughlin’s district, while it looks as though
he is pretty far removed from metropolitan areas, because of the
way that “metropolitan area” is defined by the Department of Com-
merce, and then adding the 50-mile radius really picks up a consid-
erable amount of land. And certainly studies done by the American
Farmland Trust had indicated that some of the best farmland in
the country, and that which is under the most significant pressure,
is within those radiuses that have been proposed in the bill.

So while it would be ideal to cover the entire country, we think
that the metropolitan statistical area is a reasonable basis to start
rom.

Ms. Hocker. Madam Chairman, if I may add, these limitations
apply in the American Farm Protection Act, but many of the other
incentives that we have proposed would not be so limited, and this
is among the reasons that we are proposing them. We think that
land conservationists need a whole range of tools to protect land.


101

Submission to
‘The Committee on Ways and Means
‘Subcommittee on Oversight
Hearing on
Impact of Tax Law on Land Use
By Thomas Bier

My name is Thomas Bier. 1 am director of the Housing Policy Research Program at Cleveland
State University, Cleveland, Ohio, a position | have held for 14 years. Since | am unable to
attend the hearing on July 16, 1996, I wish to submit the following statement.

Research | have done indicates that Section 1034 of the IRS Code promotes movement of
homesellers out and away from central cities and obstructs movement inward. The effect of that
is to promote the outward sprawl of metropolitan areas, and to undermine the fiscal strength of
central cities.

Sec. 1034 concems capital gain realized through home-ownership. [fa home increases in value
the gain is taxable at the time of sale ~ unless the seller purchases another home of equal or
greater Value. In that case tax liability is postponed (or rolled over).

‘The postponement can extend through any number of moves as long as the price of each home
that is purchased at east equals the price of the home sold.

‘At age 55 the homeowner qualifies for a one-time tax exemption. The owner can then sell, not
purchase anctter home of equal or greater value and not have to pay tax on up to $125,000 of
capital gain over ana <bove the purchase price of the first home. (That provision provides
needed capital for many retirees.)

‘The origin of Sec. 1034 was the Revenue Act of 1951. During the Cold War build-up, industry
employers were finding that their need to move employees around the country was being
impeded by the taxation of homeseller capital gain. At that time no one could have anticipated
that the new capital gain provision, meant to free movement between cities, would eventually
restrict movement within cities, or metropolitan areas.

‘The requirement that a seller purchase a home at least equal in price to the one sold in order to
avoid being taxed is a major incentive not to move down in price. If a city's home prices happen
to be lower than prices in surrounding suburbs (and usually they are), the law is a serious
‘obstacle to moving into the city - irrespective of other possible obstacles such as concen over
crime or quality of schools.

The problem is not just the city’s. The law discourages sellers at all price levels, city and
suburban, from moving down in price, thereby restricting the housing choices available to them,
and it encourages them to move up in price. Typically moving up means moving further out.

‘The more that the geographic pattem of home values across a metropolitan area is one of
increasing value with distance from the center, the more that city and suburban sellers will move
outward. The more they do that, the more that sprawling outer suburban development will occur,
and the more that city (and eventually inner suburban) decline will result.

ur study (report enclosed) of the geographic pattem of home values and the movement of
sellers in the Ohio metro areas of Akron, Cincinnati, Columbus, Cleveland, Dayton, Toledo and
‘Youngstown confirmed the expected patterns.

> 90 percent of the city sellers, and 75 percent of the suburban sellers, moved further out to
buy their next home.

> 80 percent of all sellers met the capital gain provision (bought a home priced at least
equal to the one sold), 84 percent of whom moved further out and 16 percent moved
loser to the city center.


26

Mr. ZIMMER. Well, as I said, in New Jersey they are purchased,
but they can be donated as well.

Chairman JOHNSON. And under your bill, Mr. Houghton and Mr.
Payne, they would be donated?

Mr. Payne. We would generally anticipate that they would be do-
nated. It seems that there is a lot of interest of people now in doing
this and donating, except for the fact that they run into this estate
tax problem.

If we could find a way to, such as the requirements of our bill—
if we could find a way to ensure that we can alleviate estate tax
problems, I think there would be a considerable amount of land
that might well be considered for conservation on a voluntary
basis, which is why the elements of this bill are attractive. It does
not require the governmental unit, whether it is the county or the
State or the Federal Government, to actually purchase these, it
achieves the same purpose, but it does it through the estate Tax
Code.

Chairman JOHNSON. States are tending to run out of their devel-
opment dollars that they have allocated in the past to the purchase
of development rights.

Current law does require that family farms and real property
used in closely held businesses can be included in estates at their
current use value.

Have you found that the closely held business requirement is too
narrow to help farmers who are trying to pass their land on to
their kids for continued farm use?

Mr. PAYNE. There seem to be several concerns about that, and
it does not seem to be providing the kind of incentive that we ought
to provide. One, of course, is that it is capped at $750,000, and in
the case of many larger farms that may not be sufficient.

Second, it is a program that requires that, beyond the event of
death or when the estate transfers, that for some period of time
that the same use continues—I think it is 10 years—and during
that period of time, the Federal Government would have a lien on
the property, which makes it very difficult then to borrow money
to continue to operate in that regard.

There are requirements in terms of ownership prior to and after
the estate changes hands, and I think all of those things add to
some complexity that makes it generally not a very effective way
of encouraging people to maintain their land and conservation
easements.

Chairman JOHNSON. Thank you. That was very helpful.

Clay, on your proposal, to what extent does your bill reinstate
the pre-1986 provisions of the historic preservation tax credit?

Mr. SHaw. I am not sure exactly what the details were in the
1986 provisions. I know that throughout the country, though, that
the tax incentive that was in the law back then did a tremendous
job for us across the country in historic preservation, but I am not
sure exactly whether we tracked that law exactly or not with re-
gard to the 20-percent tax credit.

I have been told that the pre-1986 law was for commercial prop-
erty and this one is for homeowners. This is limited to homes. This
does not get into the commercial side of things.

Chairman JOHNSON. Interesting. Thank you very much.


22

TESTIMONY OF THE HONORABLE DICK ZIMMER
Ways and Means Oversight Subcommittee
Hearing on the impact of the Federal tax law on land use
July 16, 1996

Madam Chairwoman,

Thank you for your commitment to examining the impact of the U.S. tax code on
the preservation of land.

This has been an issue of concern to me since I served in the New Jersey
legislature. As an Assemblyman, I sponsored New Jersey’s Farmland
Preservation Act that has preserved more than 40,000 acres of open space from
development. And the first bill of mine in Congress that became federal law
involved open space and historic preservation -- a bill enabling the national park
service to purchase a significant piece of property in new jersey adjacent to an
existing 1,670 acre national park. The history of that property is worth noting,
because it is what brought my attention initially to one way that the tax code can
discourage our efforts to preserve open space.

The New Jersey property had been owned by Sterling North, the well-known 20th
century novelist. After Sterling North and his wife, Gladys, died, his children
were forced to sell the property to pay estate taxes. The National Park Service
wanted the property as an addition to the Morristown National Historical Park, but
North and his wife had not provided for such a donation in their wills, and their
children could not afford to donate the land.

This experience led me to introduce a bill specifically designed to encourage the
donation of inherited property to the federal government. The bill, which is
pending before this committee, is called The Open Space Acquisition and
Preservation Act, it allows heirs who donate real estate to the federal government
to subtract the fair market value of the land from their estate taxes. The land has
to be undeveloped and sought for conservation purposes by a federal agency, such
as the National Park Service.

Ihave introduced a second land preservation bill which was inspired by a practical
problem encountered in the implementation of my farm preservation law. That


105

FARMERS AND RANCHERS INDIVIDUAL RETIREMENT ACCOUNTS

CEBF supports farmers and ranchers ability to achieve retirement security without having to sell
their land for development. In order to achieve security, fully deductible Individual Retirement
‘Accounts (IRA) for qualified farmers and ranchers, up to a set percentage of their Schedule F
income should be provided. In agriculture especially land holding typically represents most of the
owners life savings and when they do sell, they pay taxes on their investment as a lump sum at a
much higher rate than people who can withdraw their retirement savings over time.

One of the primary obstacles to long-term agricultural land conservation is the need from elderly
farmers and ranchers to base their retirement on the cash equity in their land. Under this proposal,
filers of Schedule F who derive at least 75 percent of their income from farming and ranching
would qualify to fully deduct their IRA investments up to 10 percent of their net farming income

‘We will continue to work for a reduction in both estate and capital gains taxes, the establishment
of Individual Retirement Accounts for farmers, and the protection of agriculture lands.

‘Once again, thank you for the opportunity to submit a statement to the subcommittee. We
welcome any assistance that you may provide in supporting the continuation of family farmers and
ranchers ability to pass the business down from generation to generation.


34

it does not involve government regulation; it does not involve the
cost of acquisition or maintenance of land.

While I recognize that the special use evaluation section of the
Federal Tax Code, section 2032A, is designed to relieve farmers of
the burden of estate taxes, in our experience, it has not been effec-
tive. Section 2032A is complex and difficult to qualify for. In addi-
tion, as Mr. Payne mentioned, there is a limit on the amount of tax
savings allowed which has not been adjusted for a number of years,
and a Federal tax lien is imposed on the farm for the duration of
the agreement that is required under 2032A, and that tax lien sig-
nificantly interferes with the farmer’s ability to obtain operation
and expansion loans. There is also no incentive in section 2032A
for long-term voluntary protection of land.

The proposals which were introduced in this Congress to improve
section 2032A as well as section 6166, which provides for install-
ment payments of estate tax on certain farmland, will help a little
bit. However, none of the proposed changes significantly improve
the provisions of these sections which most discourage their use,
and none of them provide an incentive for permanent, voluntary
land conservation.

Current law allows a deduction for the value of conservation
easements which have been donated. However, because the valu-
ation process is very unpredictable, the extent of potential estate
tax liability on land restricted by an easement is also uncertain,
and that is a disincentive for people who are interested in conserv-
ing their land with that tool.

Current tax treatment of easement donations also tends to favor
those who have large incomes and can take advantage of the in-
come tax deduction under section 170(h). On the other hand, those
who have little income but very valuable land, which is the case
with many farmers, can find little tax advantage to donating an
easement under the current law.

The American Farm Protection Act avoids all of these problems
and provides simple, predictable, and effective estate tax relief as
well as a compelling new incentive for voluntary land conservation.
We thank you for your past support of this legislation and urge you
to include it in any legislation moving through the Committee.

Thank you very much.

[The prepared statement follows:]


115

Written Statement of
THE CITY OF HOUSTON

‘The Honorable Bob Lanier
Mayor

Submitted for the

SUBCOMMITTEE ON OVERSIGHT
of the

COMMITTEE ON WAYS AND MEANS

U.S. HOUSE OF REPRESENTATIVES

HEARING ON THE IMPACT OF TAX LAW ON LAND USE

uly 25, 1996

Introduction: Tax Incentives for Job Creation

Chairwoman Johnson and Members of the Subcommittee, thank
you for allowing the City of Houston to submit testimony relating
to the impact of tax law on land use. We appreciate the
opportunity to discuss the need for tax incentives to help
revitalize distressed communities, including certain
neighborhoods in the City of Houston.

The designation of certain distressed areas as Empowerment
Zones (EZ) and Enterprise Communities (EC) in 1994 was a crucial
step toward helping such communities fight poverty, crime, and
unemployment by fostering economic growth. Congress and the
Administration are now considering proposals to expand the BZ/EC
program, thereby giving such assistance to even more communities
in need. However, revitalization of blighted urban areas will be
limited and lengthy at best until more focused tools are
available to cities. Improvement of infrastructure needs, large
scale demolition of unsafe structures, new housing developments,
crime reduction strategies, etc. are all extremely important but
they will not bring back to these urban areas the one missing
ingredient to long term stabilization - new and expanded job
creation.

Wage tax credits and brownfields clean-up incentives are two
powerful tools which we believe can play an important role in
bringing businesses and jobs to communities like Houston. We
urge you to support the adoption and expansion of these
incentives in order to help the revitalization of American
cities.

‘The Plight of the Inner City

It is often difficult for large cities to compete with the
suburbs that surround them. Land is much more plentiful, land
cost is substantially lower, and environmental problems are not
as pervasive. During the 1980s, Houston’s inner city lost
approximately 100,000 residents to the suburbs for some of these
reasons. Businesses were closed and boarded up. Absentee
landlords neglected their residential properties. One of the
greatest losses was that dollars earned by the remaining
residents did not stay in the neighborhood.

The only way that Houston‘s inner city can overcome such
deterioration is to provide incentives that will make the city
attractive to potential developers and business owners and allow
the inner city to compete on a level playing field. Utilization



58

and would be very much interested in working with you in any way
we could.

Chairman JOHNSON. Particularly farmers paying the 15 percent,
probably not many of them are investing in IRAs. It may be pos-
sible to turn over some of those proceeds to an JRA. We are looking
at some formula that provides fairness. Or maybe a combination of
those things with the conservation concerns. I thank you very
much for your testimony.

Ms. Hocker, over the course of evaluating initiatives, we hope to
have the help of your organization since you are right here near
us. We will certainly keep in touch with all of you as we move for-
ward.

The next panel is Tamar Osterman, the director of government
affairs for the National Trust for Historic Preservation; Richard
Kelly from South Windsor, Connecticut, representing the National
Association of Home Builders; and Bruce MacEwen, the vice presi-
dent of taxation, Portman Holdings, L.P., Atlanta, Georgia, on be-
half of the National Realty Committee.

We welcome you all. We will start with Ms. Osterman.

STATEMENT OF TAMAR OSTERMAN, DIRECTOR, GOVERNMENT
AFFAIRS, NATIONAL TRUST FOR HISTORIC PRESERVATION

Ms. OSTERMAN. Thank you, Madam Chairman. My name is
Tamar Osterman. I am director of government affairs for the Na-
tional Trust for Historic Preservation.

The National Trust is pleased to be here before the Subcommit-
tee today. We commend the Chairman for holding a hearing on the
subject of the impact of the Federal Tax Code on land use deci-
sions. The National Trust has set as one of our principal goals to
reverse the impact of decline and disinvestment in historic re-
sources and historic communities. The Internal Revenue Code pro-
vides tools to address these problems with which I have dealt at
length in my written testimony, and also an excellent opportunity
in the form of legislation pending before Congress.

Between 1981 and 1987, the historic resources of older commu-
nities, particularly in urban areas, experienced no less than a ren-
aissance. During that time, the historic rehabilitation tax credit
stimulated nearly $12 billion of reinvestment in cities and towns
across the country. As a result of this powerful incentive, citizens
rescued landmark railroad stations, hotels, schools, and office
buildings from demolition. Historic preservation fueled the back-to-
the-city movement of the seventies and eighties, bringing new life
to warehouse districts, waterfronts, and downtowns that were the
tattered remnants of our Nation’s history and settlement.

In Connecticut alone, the rehabilitation tax credit generated an
estimated $213 million in investment, creating 8,000 jobs and the
rehabilitation of 2,300 housing units. This economic activity, which
often spurred reinvestment in surrounding areas, has been greatly
diminished since the tightening of the passive loss restrictions in
the 1986 tax act.

Today, private investment and preservation projects under the
credit amounts to less than 20 percent of pre-tax act activity. None-
theless, the investment tax credit continues to be an important tool
for historic preservation and community revitalization, particularly


112

opportunity (0 help increase low- to moderate-income participation in the housing market.
There is also the added benefit of offering an incentive to the often-neglected middle-income
purchaser who might now choose to stay within the inner city. In fact, the LEM is a powerful
tool for attracting these middle-income families who often decide to locate elsewhere, but could
play a critical role in the economic well-being of a community as a whole.

By encouraging expanded credit access within location-fficient communities (urban or
suburban), the LEM will help bring these areas a more vital housing market, and, hopefully.
increased ownership opportunities, including new investment in community revitalization and

infill where appropriate. (In fact, we are presently working with Mission Housing in San
Francisco to use the LEM as part of an effort to create more affordable housing in the Mission
District.) In addition, location efficient areas could experience concurrent commercial
development, helping to create more self-sufficient communities with even less of a need for
driving. Last but certainly not least, the public transportation arteries that make location-
efficiency possible should receive increased support and funding as a direct result of the LEM.

‘THE LEM IS PART OF A LARGER EFFORT that looks at how cities can grow without
putting undue strain on scarce resources and support services such as transportation, water,
sewer, electric, gas, etc. By encouraging a shift toward more investment in location efficient
neighborhoods, the LEM can help promote a sensible distribution of future population growth.

{Long term, the LEM hopes to serve as a catalyst for promoting sustainable land use, increasing
investment in public transit, and making cities and communities more livable as a whole. To be
truly effective, of course, this effort must be a collaboration of government, developers, urban
planners, environmentalists, community rou, ‘and business people. We are actively working
to make that multi-interest partnership a

The project is currently funded by the Federal Transit Administration and the Environmental
Protection Agency, with HUD and the Department of Exergy also expressing an imerest in
providing support is endorsed by the President's Council on Sustainable
Bovclonent oa i a core clement ofthe National Partners in Nomeownersnp Campaira

THE LEM DEMONSTRATION, the first phase, of the project, inkilly targets thee
oetropolitan areas: San Francisco, Los Angeles, and Chicago. We have begun preliminary
discussions with focal governments whom We are asking to become our partners in the test
Phase of the LEM, We plan to work with several banks in each city to seve as lenders for the
fest and also anticipate the secondary market, including Fannic Mae, will become active
partners in this venture. The First National Bank of Chicago and First Nationwide have agreed
fo work with us toward the submission of an application to Fannie Mae’s Experimental
Underwriting Initiative: they will also supply advisors to help us develop the market test for the
LEM. We are fooking for other interested lenders to join in this ground-breaking
demonstration.

LOOKING TOWARD THE FUTURE, we expect to expand the LEM program to other
meopolian ares throughout the country: we have already received inquiries from over twenty
Cities Our goal is the eventual universal acceptance of the principles of location efficiency
within basic underwriting guidelines.

IF YOU ARE INTERESTED IN WORKING WITH US in the creation and implementation

of this new mortgage concept, you can contact Ronnie Himmel at the Natural Resources

Defense Council 71 Stevenson Sieet, San Francisco, CA 94105. Her phone number is 415-
0 x 3


76

mort
Difference in Estate Tax Liabilities for
Different Levels of Taxable Estates’

Current Law vs, NAHB Proposal
Estate Tax Estimates

Taxable Current NAHB
Estate Law Proposal
$600,000] $0] $0
760,000) 37,000] 0
800.000] 75,000) 0
900.000) 114,000) 0
| 1,000,000] 153,000] 0
3,500,000} 363.000! 0
2,000,000] 388,000) 125.0
2,500,000] 833,000] 370,01
3,000,000] 1,098,000] 635,01
Over 3 million [$1,290,800 + | $635,000 +
| [55% of excess| 55% of excess 9
over over $3,000,001
$3,000,000
[NAHE ECONOMICS To Tay 1996}

‘As mentioned above, the majority of NAHB's members are small businesses. many of which
are family owned. H.R. 2190 would eliminate, or significantly lower, the estate tax on most family-
owned building/remodeling firms. This much needed legislation would not only facilitate the
transfer of building/temodeling businesses to the next generation, but would do away with the need
for many small family-owned building and remodeling firms to be sold or forced out of business in
order to pay estate taxes. H.R. 2190 would provide much needed, and long awaited, relief from the
estate tax for our members. NAHB strongly urges you to enact this legislation.

{in the alternative, significant estate tax reform is urgently needed and we would urge you to
enact legislation which would increase, and index for inflation, the unified credit.

CONCLUSION
‘NAHB urges you to pass these legislative proposals as soon as possible, Enactment of these

proposals would simpli good tax policy and benefit out national economy
| would be pleased to answer any questions you might have.



28

and other ways, how we can use tax incentives to encourage great-
er environmental protection, greater conservation.

1 would like to focus on your bill, Mr. Houghton, which I think
is an excellent piece of legislation. I am wondering if your bill lim-
its tax benefits only to conservation of easements of farmland, or
would other types of conservation easements be eligible as well?

Mr. HouGHTON. No. It really is just real property, farmland and
ranch property.

Mr. Ramstap. So it doesn’t extend to other types of conservation
easements.

Mr. HOUGHTON. No.

Mr. Ramstap. Also, why does your bill limit tax relief to land
within a 50-mile radius of a metropolitan area? Why do you place
that limitation?

Mr. PAYNE. Could I speak to that?

Mr. HouGHTon. Sure, you bet.

Mr. RamstaD. You are a cosponsor, Mr. Payne, and I should rec-
ognize your efforts as well.

Mr. Payne. Thank you, Jim.

The intent here was to look to see what might be done reason-
ably, within reasonable cost limitations, to begin to find ways to
protect important open spaces, and it really is a matter of econom-
ics. If, in fact, we had the whole country that was going to be taken
in under this legislation, the cost of it would be much more than
we thought would be affordable in this climate.

This bill, as it was last looked at by the Joint Tax Committee,
with certain modifications, showed it had a cost of $781 million
over 5 years. It was a more limited provision of this that actually
was in the Balanced Budget Act that was passed by the House and
the Senate that would have had a cost of $340 million over 7 years.
This is not only in the areas of SMSAs or metropolitan areas with-
in 50 miles, but also national parks as well, recognizing that they
are already national treasures and we would be interested in look-
ing at how they might be properly protected as well.

Mr. Ramstab. So the fiscal impact is what limited that applica-
tion.

Mr. HOUGHTON. Yes.

If I could just add the difference in the cost between the provi-
sion and the balanced budget agreement, and this has to do with
the radius, which is 50 miles in some areas and 25 in others.

Mr. RamstaD. I appreciate that clarification.

Mr. Payne. It is two things. First, it is fiscal, but second, it is
looking at those areas that are most in need of some sort of ease-
ment or some sort of conservation. Otherwise, they will be devel-
oped in the very near future and we will never have an opportunity
to conserve some of these areas for future generations.

Mr. RamstaD. Well, thank you again, gentlemen. And thank you,
Madam Chairwoman.

Chairman JOHNSON. If the gentleman would yield on that, I
wasn’t quite clear on your response in terms of the difference be-
tween the Balanced Budget Act version of your bill and your bill.
Is the primary difference that 25-mile radius as opposed to the 50-
mile radius?

Mr. HOUGHTON. The primary dollar impact is.


94

STATEMENT OF BARTOW S. SHAW, JR.
THE
AMERICAN FOREST & PAPER ASSOCIATION
AND THE

FOREST INDUSTRIES COUNCIL ON TAXATION
ON THE IMPACT OF TAX LAW ON LAND USE
SUBMITTED TO THE
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
JULY 16, 1996

‘My name is Bartow Shaw. 1 am Chairman of the firm of Shaw, McLeod, Belser &
Hurlbutt, Inc. of Sumter, South Carolina, We are a forestry consulting firm managing timberland
primarily for non-industrial Iandowners. Tam, also, a timberland owner myself. Iam a member of
the Board of Directors of the Forest Industries Council on Taxation, the national trade association
‘which represents the forestry industries and non-industrial landowners on all federal forestry tax
issues. In addition, Ihave served on the Board of Directors of the American Forest & Paper
Association, the national trade association of the forest products and paper industry. AF&PA
represents a vital national industry which accounts for over 7 percent of the total U.S.
‘manufacturing output and employs same 1.6 millon people. I wish to thank you for providing me
the opportunity to submit to the Subcommittee this statement about the impact of tax law on land
use, an issue that is vitally important to tree growers and landowners throughout the nation.

Forest owners are located in nearly every region of the nation. They own 350 millon
‘acres of woodlands, encompassing more than 72 percent of all commercial forests, The typical
non-industrial landowner is not a wealthy individual, owning an average of less than 50 acres of
‘woodland and with an average houschold income of less than $50,000 per year. Our firm has
served hundreds of non-industrial clients for almost three decades, and I can relate from
experience that a great many of them now face a return much lower than expected when they
invested in reforestation because of the Tax Reform Act of 1986 and its treatment of capital gains,

‘Since its enactment in 1944, capital gains treatment for timber dispositions has resulted in
impressive gains in planting and productivity. However, tree planting has suffered a continual
declining trend since 1986. I feel the increase in capital gains rates has been a major factor in
causing this decline.

‘A more limited timber supply will lead to significantly greater pressure to increase timber
removals from public lands at atime when those harvests are being reduced for a variety of
reasons, I believe we are just now beginning to see the effects of a shift in timber harvest from the
Pacific Northwest lands to the Southeast. Because of the time required to effectively create
sustainable forests to meet the demands of the market, we need to urgently put the tax policy in


9

Chairman JOHNSON. Thank you.

I am pleased to have with us so many of our colleagues who have
given this issue a lot of thought, and thereafter a number of na-
tional organizations as well as local groups who are working hard
and are very conscious of both the advantages and disadvantages
of the current structure of our tax laws.

I am pleased also to have so many Members of the Ways and
Means Committee.

Let me start with Hon. Clay Shaw.

STATEMENT OF HON. E. CLAY SHAW, JR., A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF FLORIDA

Mr. SHAW. Thank you, Madam Chairman.

As long as I have been on this Committee, it is the first time I
have been at this table. You all are sitting a lot higher than I
thought you were.

I would like to take this time this morning to briefly discuss a
bill which I feel is very important to the purpose of this hearing.

I introduced H.R. 1662, the Historic Homeownership Assistance
Act, along with our colleague, Barbara Kennelly, to provide pro-
spective homeowners with a powerful incentive to help preserve
and protect our Nation’s historic homes and communities. It cur-
rently has 75 cosponsors. The bill, as others at this hearing will
state, will accomplish several important goals in a cost-effective
manner.

The first is enhanced home ownership. The credit would be avail-
able for those who purchase and renovate historic homes as their
principal residences. Both single and multifamily homes may be re-

abilitated. Twenty percent of the cost of the work could then be
credited against the homeowner’s Federal income tax liability, and
that would have a cap of $50,000 per homeowner. If a developer
repairs the home, the credit can pass through to the person who
purchases the home from the developer. All of these provisions will
make acquiring a qualified property much more attractive to the
home buyers.

Second, I believe that this bill will be of great use to the commu-
nities which are struggling to restore their vitality. Over the past
several decades, our cities have seen a virtual abandonment of
large amounts of housing units. In order to bring people and busi-
nesses back into the city, we have to make housing a more attrac-
tive investment.

This Nation possesses massive urban infrastructure which is
grossly underutilized. Instead of further extending suburban
sprawl, we need to concentrate on restoring existing areas. While
no panacea, H.R. 1662 would certainly be a step in the right direc-
tion.

Third, H.R. 1662 will help to achieve large-scale preservation of
historic homes all over this country. I cannot emphasize enough
how important it is to protect this vital American resource. Older
homes are reminders of, and connections to, our Nation’s history
and our past. For all of the reasons I have spoken of, Madam
Chairman, I believe that H.R. 1662 should be enacted.

Finally, as we have discovered over the past several decades, it
is difficult to preserve not only historic homes and neighborhoods


17

Chairman JOHNSON. Thank you for your excellent testimony with
a variety of suggestions. It is an issue that we are very concerned
with, not only in the agriculttre community but in the small busi-
ness community.

Mr. MacEwen.

STATEMENT OF BRUCE W. MAC EWEN, VICE PRESIDENT,
TAXATION, PORTMAN HOLDINGS, L.P., ATLANTA, GEORGIA,
ON BEHALF OF NATIONAL REALTY COMMITTEE

Mr. MacEwEN. Chairman Johnson and Members of the Sub-
committee, good afternoon.

My name is Bruce MacEwen. I am vice president of taxation of
Portman Holdings, a national firm headquartered in Atlanta,
which owns, manages, and develops office, retail, and hotel prop-
erties throughout the United States as well as in several foreign
countries.

I am here today on behalf of the National Realty Committee,
where I serve as vice chair of its tax policy advisory committee. My
testimony will focus on how the current tax law discourages busi-
nesses from investing in and redeveloping land located in the
urban centers of our country.

A number of these provisions are detailed in our written state-
ment, but I would like to highlight three key areas of tax policy:
Cleaning up contaminated land, demolishing and redeveloping
abandoned structures, and modernizing and reconfiguring existing
commercial space.

First, the cleanup of contaminated land and structures adds to
the cost of the redevelopment project, often significantly. Depend-
ing on the extent and type of contamination, these costs often reach
into the tens of thousands of dollars, and sometimes millions. In
most areas of the country, but particularly in central city areas,
adequate financing to carry out both cleanup and development ac-
tivities is not available at affordable costs. Owners and lenders are
foneerned not only about the costs and risks but also about liabil-

"Additionally, cleanup requires time and delay, further increasing
up-front costs which affect the ultimate profitability of a project.
Therefore, the tax laws relating to cleanup expenses are of vital im-
portance to the project.

At present, the tax laws in this area offer no incentive to invest
in and clean up contaminated land versus clean, previously unde-
veloped land. Instead, these cleanup costs must be added into the
basis of the land itself, meaning that they are not recoverable
through depreciation.

A provision to spur the cleanup of so-called “brownfields” by al-
lowing purchasers to immediately deduct the cost of cleaning up
contaminated land in Federal empowerment zones and enterprise
communities has recently been proposed by Congressman Rangel.
We applaud him and others for recognizing part of this larger prob-
lem.

However, we would urge that the concept of providing a tax in-
centive for the cost of cleaning up acquired contaminated land not
be confined solely to targeted empowerment zones. If immediate de-
ductibility is provided for targeted areas, then, at a minimum,


83

‘Thus, in the relatively short time between 1981 and 1986, the tax treatment of leasehold
improvements dramatically changed from a flexible depreciation system that sought to accurately
tat income with expenses toa sysem that dictates a recovery of expenses ave a period that in
no way reflects the useful life of these improvements. In light of this situation, now is an
‘opportune time to revisit and modify dese mules, which over time have been increasingly
rol

To address this important tax problem NRC is pleased to endorse a provision approved
last year as part of the balanced budget tax legislation which would have clarified that building
owners may fully deduct and close out any unrecovered leasehold improvement expense
semaining af the time the tenant improvement is destroyed. This provision is now included inthe
Senate version of the Small Business Jobs Protection Act and we strong] louse upon for
the provision in Conference withthe Senate, Addivonally House legaslaton GUI TT71) has
beed introduced by Ways and Means Commice members F. Clay Shaw Jt. (FL) and Charles
B. Rangel (D-NY) to reduce the recovery period for certain tenant improvements from 39 to 10
years. This legislation would be a significant step in the right direction of more accurately
‘matching income with expenses.

Empowerment Zones

In 1993, series of peva ederal income ax provisions was enacted to expand business
and employment ‘opportunities in a limited number of qualifying economically distressed urban
and rural areas throughout the country (empowerment zones). Among these special tax
incentives were provisions to provide an employment and training tax credit, an additional
‘$20,000 per year in section 179 expensing, and a new category of tax-exempt private activity
bonds. At the time these rules were enacted, and still today, we believe that in order to
significantly increase the economic activity and job growth in these targeted areas requires an
investment incentive for expenditures ineured in connection withthe acquisition rehabilitation
oF reconstruction of any nonresidential building located in these qualifying empowerment

While recent Administration proposals and Representative Rangel’s legislation (IHR. 3747)
propose to provide tax assistance to clean-up certain hazardous waste in empowerment zones,
consideration should be given to encourage investment in non-contaminated land as well.

Conelusion

National Realty Committee appreciates the opportunity to comment on the current tax
provisions which we believe needlessly discourage mvestment in urban land and cities. We
believe that the provisions relating to the tax treatment of environmental remediation are in
serious need of clarification so that investment is not discouraged due to the inability to recover
clean-up costs. At the same time, the tax treatment of demolition expenses should be reviewed,
and attention should be paid to the compounding effect of rules requiring more and more land
development costs to be capitalized. Most imporiamt in today’s debate, we urge members of the
House to accept the Senate provision on leasehold improvements which is contained in the
Senate version of the Small Business Jobs Protection bill, and consider adopting a shorter time
Period in general fr leasehold improvements along the line ofthe Shaw-Rangel bill. These
actions would, without a doubt, help generate jobs and maintain commercial real estate asset-
values and, as a result, help urban areas grow.

‘Thank you.


***NOTICE -- CHANGE IN LOCATION**

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE CONTACT: (202) 225-7601
July 15, 1996
No. OV-15-Revised

Room Change for Subcommittee Hearing on
Tuesday, July 16, 1996, on the Impact of
Tax Law on Land Use

Congresswoman Nancy Johnson, (R-CT), Chairman of the Subcommittee on Oversight
of the Committee on Ways and Means, today announced that the Subcommittee hearing on
the Impact of Tax Law on Land Use previously scheduled for Tuesday, July 16, 1996, at
11:00 am., in B-318 Rayburn House Office Building, will be held instead in room 1100
Longworth House Office Building.

All other details for the hearing remain the same. (See Subcommittee press release
No. OV-15, dated June 21, 1996, and No. OV-15-Revised, dated July 2, 1996.)

Note: All Committee advisories and news releases are now available on the World Wide
Web at 'HTTP://WWW.HOUSE.GOV/WAYS_MEANS/ or over the Internet at
‘GOPHER HOUSE.GOV' under ‘HOUSE COMMITTEE INFORMATION’.


lll

THE LOCATION EFFICIENT MORTGAGE (LEM)

How can a mortgage affect the way our cities grow? Can the same morigage also influence
transportation policy?

‘The Natural Resources Defense Council (NRDC), the Center for Neighborhood Technology
(CNT), and the Surface Transportation Policy Project (STPP) have joined together 10
demonstrate that a mortgage can indeed influence both urban growth and transportation policy.
while also providing a response to the need for expanded homeownership opportunities for low-
to moderate-income people. As 2 result, the Partnership developed the Location Efficient
Mortgage (LEM), an innovative solution to encourage and facilitate homeownership in transit-
accessible inner city and denser suburban areas.

‘The LEM is based on a 1994 NRDC study by John Holtzclaw that identifies a relationship
between residential density of a neighborhood and total vehicle miles traveled per household
within that neighborhood. For every 100% increase in residential density, the study shows that
there is a 25% decrease in vehicle miles traveled (VMT). As areas increase in density and
transit service, they become more “location efficient”, since they offer easy access to stores,
public transit, churches, jobs, restaurants, recreation, and other common destinations. Because
of this accessibility, people drive less and own fewer or no cars. Basically, the LEM makes
use of the savings derived from driving less to help people afford to buy homes in location
efficient areas, such as high-density inner city neighborhoods.

HOW THE LEM WORKS: The LEM partners have developed a statistical model (based on
MT vs. residential density, transit access, and proximity to stores, jobs, etc.) that shows the
dollar savings per household in a location-efficient area compared to an average household in a
low-density suburb. This savings is then treated as available disposable income by adding it to
the maximum monthly payment allowed by the mortgage formula banks use (new formula: PITT
+ Other long term debt - LEM savings < = 36%), thus enabling someone to afford a higher-
priced “location-efficient” home. With the LEM, homebuyers need not be forced into distant
low-density areas, where they must have a car (often one per capita). The LEM levels the
playing field, allowing people who want to live in location efficient areas a simple way to
afford homes normally considered out of their reach.

For example, the study shows that a typical household in the dense North Beach area of central
San Francisco drives approximately 23,000 miles LESS per year than a household in Morgan
Hill, a representative low-density suburb. That translates into over $400/month in lower
transportation expenses for the North Beach area. Banks currently treat both areas equally,
while the LEM takes this very real savings into account. (Applied to a morgage formul
$400/month in tansportation savings can equal approximately $50,000 more in borrowing
power.)

‘The LEM model builds on Fannie Mae’s Desktop Home Counselor, enabling mortgage lenders
to calculate and apply the savings from location efficiency easily and inexpensively. This model
provides a lender with the applicant's borrowing power after asking them only a few questions,
including car ownership and location of the new home. A version of this model was
‘demonstrated at the National Partners in Homeownership Summit in Washington, D.C. in June.

HOW THE LEM CAN MAKE A DIFFERENCE: The LEM Partnership will be working
with lending institutions and secondary mortgage purchasers to make location efficiency a
standard part of the mortgage lending process. For lenders, the LEM offers them an


81

and other businesses a tax incentive to recover certain costs to remediate
environmentally contaminated ields properties. (The term brownfields generally refers to
certain abandoned, contaminated industrial oF commercial properties that are less oxi than
Sete ee but i to apy ithe lesa redevelopment) ‘The tax incentive (immediate
expensing) is proposed to apply to the cleanup of is in areas, ©
Environ Protectic brownfields pilot evan and feera eipowerment roves ard
averse, communities, ion (H.R. 3747) embodying this concept was recently
luced by Representative While supportive ot spoon (i (@rhich should be
fended fo nontargted areas as we, we aso belive that any « ‘this area also must

include noo-tx, related, provisions that provide ceriinty to eal estate owners and
regarding potential liabil costs of cleaning up hazardous materials on their property.
leg should be provided lo owners where contamination occur By he

they Ives to un
applicable to environmental remediation do not act as a deterrent or disincentive to needed clean-
‘up operations.

We would urge that the “brownfields” concept providing an immediate tax deduction for
the costs of cleaning up sequredconsminaed land in izgeted areas be extended to non-argeted
areas as well. If not immediate deductibility, than some rapid amortization period would seem
appropriate for non-targeted areas.

On the issu of the deducubilty of costs associated with remediation of potentially
hazardous Is in structures (such as asbestos), great uncertainty regarding whether
such costs are capital red se has developed” Because many bullings cated in
tan rene may onan poealy hazardous materials such as asbestos, and therefore due to

ions may need to be remediated, this issue could significantly deter investment
{etsione in uban arcs. We would urge tat the intemal Reverue ice provide guidance in
this area to simply restate the law regarding repair expenses as it clearly existed prior to the IRS
releasing the TAMs in 1992 — that is, that the repair doctrine presented in the
"Tax Court's decision in Plainfeld-Union Water Compary is correct la. This case held that for
purposes of determining whether an expenditure increases the value of property and, therefore,
‘must be capitalized, the proper comparison is between the value of the property after the
expenditure and the value of that property before the condition requiring the expenditure, This
‘would help to ensure that the costs associated with remediating asbestos in long-held properties
would be deductible repairs.

Most important in this area of environmental cleanup costs is that the current law: 1)
provides no clear incentive to clean-up; and, 2) requires compliance with burdensome
regulations, These fctors havea significa negative effect on investment in land, especially
in urban areas,

Land Development Expenses

‘Some have noted that the current cost recovery provisions discourage businesses from
investing in urban areas because, while plant or equipment can be depreciated, the land on which
a structure js built cannot, This is sid to encourage non-urban investment where land costs ae
lower, therefore allowing a greater portion of the investment to be recovered
depreciation allowance; This fetal point is amplified when ne considers that Th tand cost are

‘wx purposes, therefore ly reducing its as an

feet a) nom of investment inland development whch mt be captalized bas
ly over the past 20 years, making a greater portion than ever of development

costs citer not recoverable a all or recoverable over substantially longer period than is

Clearly, tax treatment that capitalizes a greater and greater portion of land development
coots tends te discourege investment n higher cet urban areas Here area few examples of is
troubling trend:

‘+ IRC Section 2808, added to the Code in 1976 and expanded in 1984, requires that demolition
costs as well ste cost of the ‘the demolished structure itself, must be added to the basis of land
deducted. This tends to discourage the aquisition of land, including a structure
‘shut be dese ode conic mote Stu pyscal plan, eee he
costs of demolition are not recovered until the underlying land is disposed. A more
appropriate tax result would permit depreciation of demolition costs.

‘* IRC Section 189, which permitted a 10 year amortization of construction period interest and
‘taxes, was. tin 1986. 1B Thee tach cess mm Od ob
of the building ated over a straight-line basis, generally 39

years Lpropery Thus, recovery for construction
interest and taxes has, colony, eae 86.


107

Clement Dinsmore
3726 Veazey Street, NW Washington, DC 20016-2229

July 26, 1996

Honorable Bill Archer

Chairman

Honorable Sam Gibbons

Ranking Member

House Committee on Ways and Means
1102 Longworth House Office Bldg.
Washington, D.C. 20515

Dear Mr. Chairman and Congressaan Gibbons:
We want to express appreciation for the hearings your Committee conducted

on Tuesday, July 16 through the Oversight Subcommittee on the impact of Federal
tax law on land use.

‘The Location-Efficient Mortgage Partnership:
Using Non-Tax Incentives
To Encourage Efficient Communities

We--the Surface Transportation Policy Project, the Natural Resources
Defense Council, and the Chicago-based Center for Neighborhood Technology--are
partners in implementing a new approach to single family residential mortgage
lending called the Location-Efficient Mortgage program. Attached are materials
that describe our purposes and the general status of our efforts.

We believe that the inefficient use of land resources in this country
results in the inefficient use of public and private capital and human resources
and aggravates the social welfare and health costs that our society is struggling
to finance.

We believe that more efficient use of land has many economic, social,
environmental, and other benefits. We are embarked upon a long term effort to
encourage location efficiency--the efficient location of residential,
transportation, employment, commercial, institutional [such as health care,
education, and job training], and public land uses relative to each other. We
have created a Foundation for Location Efficiency to organize this effort.

In the shorter term we are seeking the cooperative participation of
nortgage lenders and secondary mortgage market institutions in the demonstration
of the Location-Efficient Mortgage program. We believe that through this program
we can create non-tax financial incentives for American households to choose to
live in "location-efficient" communities--communities with higher densities that
support public transportation services and encourage the efficient proximity of
places of employment, employment training, residence, health care, shopping,
education, recreation, and other daily household activity.



92

Empowerment Zones and Enterpri

1d. In the Omnibus Budget Reconciliation Act of 1993 (OBRA ’93),
Congress authorized a federal demonstration project in which nine empowerment zones (EZs)
and 95 enterprise communities (ECs) would be designated in a competitive application
process. State and local governments jointly nominated distressed areas and, along with
‘community participants, proposed strategic plans to stimulate economic and social
revitalization. The response of communities was dramatic, with over $00 applications
submitted by the June 30, 1994, deadline. According to a large number of applicants,
significant benefits were realized from going through the application process itself. On
December 21, the Secretaries of Housing and Urban Development (HUD) and Agriculture
designated the nine EZs (six in urban areas and three in rural areas) and 95 ECs (65 in urban
areas and 30 in rural areas).

Among other benefits, certain businesses located in EZs are eligible for three federal
tax incentives: an employment and training credit; an additional $20,000 per year of section
179 expensing; and, a new category of tax-exempt private activity bonds. Certain businesses
located in ECs are eligible for the new category of tax-exempt bonds. OBRA "93 also
provided that federal grants would be made to designated areas.

‘These federal tax incentives are one component of the efforts to encourage increased
economic activity and the revitalization of the distressed areas. While the tax incentives in
and of themselves may have only indirect impact on land use, there are numerous non-tax
elements of the designated communities” strategic plans that are likely to have a significant
impact on iand use, including initiatives aimed at improving educational and training
‘opportunities, transportation, day care, housing, crime prevention, and environmental safety

President's Proposal. Given the early success of these efforts and their tremendous
promise, the Administration believes that the number of authorized empowerment zones
should be expanded, subject to budgetary constraints. Extending tax incentives to
economically distressed areas will help stimulate revitalization of these areas. Accordingly,
the President's Fiscal Year 1997 Budget proposes to authorize the designation of additional
Empowerment Zones and Enterprise Communities, with new tax incentives, including the
brownfields initiative, additional small business expensing, and new private activity bonds.

Details. The President has proposed a three-part expansion of the of the federal
empowerment zone proposal:

1, Two additional urban EZs could be designated under the OBRA '93 criteria within
180 days of enactment. Qualifying businesses in these areas would be eligible for the same
tax incentives available to businesses in the EZs designated on December 21, 1994.

2. The OBRA '93 criteria would be modified to allow a broader range of businesses
to borrow the proceeds of the tax-exempt bonds and, in empowerment zones, to qualify for
the additional section 179 expensing. However, the requirements that at least 35 percent of a
business's employees be zone residents, and that the tax-exempt bonds be applied against the
State volume caps, would remain unaltered. ‘These changes would be effective for bonds
issued after the date of enactment and, with respect to expensing, for taxable years beginning
on or after the date of enactment.

3. The designation of twenty additional EZs and 80 additional ECs would be
authorized. Among the 20 EZs, 15 would be in urban areas and 5 would be in rural areas,
‘The 80 ECs would be divided between 50 urban areas and 30 rural areas, The designations
would be made before January 1, 1998.

The eligibility criteria for these new zones and communities would be expanded
slightly. First, the poverty criteria would be relaxed somewhat, so that unlike the first
round, there would be no requirement that at least 50 percent of the population census tracts
have a poverty rate of 35 percent or more. In addition, the poverty criteria will not be


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56

Mr. LAUGHLIN. You need to move your farm then.

Mr. BELL. I need to move my farm. I have thought of that often.
We are about 70 miles outside of Columbus. I would like to come
back to what I mentioned about my uncle’s farm before.

We farm several farms in our community. My son and I and a
hired employee, we are farming a lot of land that a lot of farmers
used to farm. Several of those farms, two of them, have been sold
within the last year for development. This is a loss of open space.
This is conversion of farmland to purposes that will never be open
space again. We will never see farmland on those acreages again.

Again, citing my uncle’s example, his farm has a basis of roughly
$100 an acre. The capital gains would be huge if he were to seil
it to me today.

Now, if he lets it go through probate and the basis is stepped up,
his heirs, my cousins, will be the ones dealing with that. It will be
their decision whether they want to see it remain as farmland and
whether they and I can cooperatively come to an agreement that
lets that happen.

In his specific example, the Federal estate tax, depending on how
the land is valued at the time of his death may or may not be a
huge problem. We know that capital gains, if he sold it to me
today, would be a problem. But knowing what the market value of
that land is, not for what I would call its best use, but for what
real estate developers would call its best use, I could not possibly
afford to pay to purchase that farm.

Mr. LAUGHLIN. It sounds from your answer, Mr. Bell, that your
cousins or none of the children of your uncle who has the farm next
door are interested in maintaining the family tradition of farming
that particular property; is that correct?

Mr. BELL. No. If I were to poll them today—there are four of
them—I think that they would say, “Yes, we want to see it kept
as a farm.”

Mr. LAUGHLIN. My question specifically: Would they, the individ-
uals, farm it?

Mr. BELL. No, they as individuals are not interested in farming
it.

Mr. LAUGHLIN. And I wanted that answer, because you almost
went to the next one that I want to ask, and that is, is there a sig-
nificant reason, from an agricultural viewpoint, to have property
passed to someone other than a relative, either through, let’s just
say, sale, when the agriculture use is going to be maintained—
using your cousins as an example of people who are not going to
farm the property but would like to see it continued in a farm oper-
ation—to have some tax benefit to preserve that agriculture use,
rather than in the instance—and I don’t know your cousins, but I
am going to talk about them.

Mr. BELL. That is fine.

Mr. LAUGHLIN. Perhaps sell it for real estate development as a
supermarket or a mall or some other nonagricultural use.

Mr. BELL. Right. We don’t know how this is going to play out.
We have talked about it. To me, the logical thing would be for my
uncle and me to agree on a fair market price for agriculture prior
to his death. If he and I could come to that agreement, I would pur-


18

Testimony
‘The Honorable Philip S. English
before the House Ways and Means
‘Subcommittee on Oversight
Suly 16, 1996

Madam Chairwoman and Members of the Subcommittee, I want to thank you for
holding this important hearing and for allowing me to address my colleagues and
everyone in attendance today on the "American Community Renewal Act of 1996," H.R.
3467. ‘This legislation, introduced by Representative J.C. Watts and Representative Jim
Talent and forty-six others including myself will be examined much more closely at
future hearings. Today, however, I want to focus on several specific tax provisions in the

1 and how the implementation of these provisions relates to current law and
disincentives for businesses to invest in urban areas.

The "American Community Renewal Act," is designed to revitalize families,
neighborhoods, and business sectors in America's impoverished communities. H.R. 3467
will provide greater economic opportunities and new hope for millions of disenfranchised
Americans trapped in poverty. It will do so by encouraging private-sector job creation in
the community, providing opportunities for home ownership and bolstering private
charitable activity, among other incentives.

Title I of the legislation builds on the enterprise zone legislation Jack Kemp
offered in the 100th Congress. It includes the tax incentives in the Abraham-Leiberman
bill in the Senate which contains legislation I introduced in the House, the "Commercial
Revitalization Tax Credit Act," H.R. 2138, and the Riggs/English and Weldon bills in the
House on empowerment zones. The purpose of Title I is to liberate the economic forces
within disadvantaged communities by fostering an atmosphere where real private sector
businesses and jobs are created. It recognizes that new and expanding small businesses
are best suited to provide good jobs in urban neighborhoods. It comes from specific ideas
that urban entrepreneurs believe are necessary to economically restore our low-wealth
communities. Specifically, Title I would:

= Create 100 "Renewal Communities." To qualify, an area must have a
poverty rate of 20 percent or more, an unemployment rate at least 1 1/2 times
the national rate, and at least 70 percent of the households must =ve incomes
below 80 percent of the median income of households, and have had a
population decline of 20 percent or more between 1980 and 1990,

= Require local communities to reduce tax rates and fees within zones and
eliminate state and local taxes to be eligible for community designation.

= Require state and local governments to waive local occupational licensia;
regulations and other barriers to entry, except those explicitly needed to
protect health and safety.

= Create substantial federal tax incentives for renewal communities including
an elimination of capital gains taxes on investments in stock business
property, or partnerships within zones so long as the assets are held for 5
years or longer. As well, the bill would include a business tax credit for hiring
disadvantaged workers. (provisions from Riggs/English)


47

‘The current per person exemption for assets in an estate is $600,000. This exemption amount
‘was last changed in 1987. Farm Bureau policy calls for increasing that exemption to $2,000,000
per person. Exact figures are not available, but itis a reasonable estimate that 95 percent, and
perhaps as many as 98 percent, of the farmers and ranchers would be exempt from estate taxes if
the per person exemption was increased to $2,000,000 and then indexed for future changes in the
overall price level. These farms could then be kept in the family and continued as ongoing
businesses

‘Another way to lessen the potential for the estate tax to force @ change in land use is through
special-use assessment under section 2032A. This provision allows for land to be valued for
estate tax purposes at its agricultural value rather than its market value. Current law limits the
special use evaluation to a reduction in value of $750,000. Removing the limit, or at least
increasing the minimum, would reduce the potential for land to change uses to meet the cost of
estate taxes, especially near large urban areas and around protected areas such as national parks.
Cash leasing of farmland should be allowed under the special use evaluation.

Many other approaches could be used to help lessen the unintended impact of estate taxes.
Targeted estate tax relief for small businesses should be enacted and estate taxes should be
deferred until a family farm is sold by the heirs, The yearly gif allowance should be increased to
$550,000 per year so that land could be transferred before the death of the owner. Farm property
that is restricted by a voluntary conservation easement, while actively farmed by the heirs, should
bbe exempt from estate taxes. These would all lessen the sting of the current estate tax system,
but they would make a complicated tax system even more complex.

‘The best economic reform would be to repeal the estate and gift tax. The second best would be
to increase the personal exemption to the point that most farms and ranches would not be
adversely impacted by the estate tax. The third best solution is to expand the number of ways
that estate taxes can be reduced or delayed. If tax reform is to truly make the tax system simpler
and reduce the unintended consequences, eliminating the estate and gift tax is the best option.

Capital Gains Taxes

‘The capital gains tax is another tax that has unintended consequences for land use and is closely
tied to estate and gift taxes. The capital gains tax is a tax on asset transfers from one form to
another, such as from farm land to certificates of deposits in a bank. The tax can be avoided by
simply not making the asset transfer.

Many farmers and ranchers nearing retirement or in retirement are interested in selling land to
younger farmers and ranchers, including family members involved in the farm or ranch
‘operations. The current 28 percent capital gains transfer tax isa large impediment to taking such
action. Rather than making an orderly transition of land ownership from one generation to the
next, the land is often held by the older generation until death and then caught in the estate tax
web discussed earlier.

Part of the problem with the capital gains tax is that itis a tax on the total dollar gain in value,
including the portion of the gain that simply reflects the change in the overall price level for the
economy as a whole. For example, farmland is often held for 30 years or more. Over the last 30
‘years, the overall price level as increased by roughly three times. Land valued at $500 per acre in
1966 would have to sell for $2,000 per acre in 1996 for it to have the same purchasing power as
‘the $500 had in 1966. Any increase beyond the $2,000 would be the “real” gain in the value of
the land, Capital gains taxes are paid on the entire increase in the value of the land, not just on
the real gain. Once again, this law leads to economic inefficiencies and unintended
consequences.

As with the estate and gift tax, the best policy reform approach would be to eliminate the capital
gains tax, If that cannot be done, the gain should be indexed for the change in the overall price
level and the real gain taxed at a lower rate of 15 percent. Another option would be to allow
retiring farmers and ranchers to sell land and put the money into an TRA-type account and pay


HR. 3550

HR. 3559

HR. 3729

(aumiaxland 716

51

would allow the self-employed, in contemplation of retirement, to invest proceeds
from asset sales in an individual retirement account with taxes due only when the
fund are withdrawn

‘would allow farmers to place an amount equal to their 1996 FAIR Act market
transition payment, or $40,000 whichever is tess, into an income tax deferred
account called a "Farmer IRA”

allows farmers to deduct a percentage of expenses incurred to cultivate, maintain
and develop ceplantings made because of natural disasters, i. irrigation
‘equipment, trellises


80

ined in greater detail in this statement, a number of provisions in the current tax
law act to reduce tne relauve of urban land as a development investment altemative and
tend to hold previously usd urban land below is opimum wse. Chief among these provisions
are those that:

* discourage the soquistion and development of vacant and in urban areas through the lack of
any recovery of costs associated with cleaning-up environmentally contaminated land;

‘+ discourage the redevelopment of existing structures in urban areas due to the high cost of
Femoving and replacing potentially hazardous materials such as asbestos and the apparent
govemmental view that in most cases such costs should be capitalized as a long-term
Eaprovement rather than deducted aa a repair

discourage the modemization and reconfiguration of existing commercial space in urban
areas due to the excessively long cost recovery rules associated with constructing
improvements to the structure to accommodate the needs of office and retail tenants;

require many development costs to be considered acquisition costs therefore requiring such
costs to be capitalized into the basis of the land rather than added to the depreciable basis of
the developed building; ani

* discourage demolition and redevelopment of abandoned structures by requiring that
demolition costs, as well as the cost of the demolished structure itself, be added to the
nondepreciable basis of land rather than added to the basis of any replacement structure and
recovered through depreciation,

It is also worth noting that the existing tax incentives designed 10 entice businesses. to
locate in empowerment zones (an employment and training credit, an additional expensing
allowance, and the recent addition of a new category of tax-exempt private activity bonds) do not
rovide ay additonal incentive to invest in the nondepreiale land (contaminaed o ot or the
depreciable structure necessary to house and operate the business intended to locate in the
empowerment zone. This deficiency may substantially influence certain investment decisions in
empowerment zones.

Discussion
Environmental Remediation Expenses

In National Realty Committee’s view, one of the more significant aspects of the current
tax law which discourages businesses from investing in urban areas concerns the tax treatment of
environmental remediation expenses. There are two specific examples which immediately come
to mind. ‘These concem the lack of clear guidance the recovery of costs
with cleaning-up environmentally contaminated urban land (including the so-called urban
“prownfields, as well as uncertainty conceming the tax treatment of the costs related to
removing hazardous materials from existing buildings.

While this issue can also affect suburban properties, typically remediation issues are more
costly in urban land settings.

Since the enactment of the Comprehensive Environmental Response, Compensation and
Liability Act (1986), the Resource Conservation and Recovery Aci 9976) and the Toxic
‘Substances Control Act (1976), real estate owners have become responsible for sat remediating a

et

variety of different types of hazardous materials, During the same time perio

ble, beginnn i 952, ough a 2 of aaa ee
generally thought 10 be deductible, in 1992, a series ical Advice
Htemoranda (resting largcly on the question of whether the clea-up expense increased the valve
of the asset), the Internal Revenue Service has interpreted case law in a manner that has seemed
to require a’ vast number of such expenses to be capitalized as an improvement, rather than
deducted as a repair.

{The present state of the law regarding land clean-up expenses is murky at best. It now
seems that an owner of land that was not contaminated f deduct

od of ownership, Ho ower, its offi ve sed hat cont eed an purchased
in a contaminated ig land purchased with und storage tanks, must be
‘Dphuaterd and added othe uss St tne ndn-Seprecble land. Ths aspect of he current tax aw
cries out for clarification of the proper tests that will ensure that costs incurred to clean-up
contaminated land are deductible.

Partially addressing this issue, the Administration included in its most recent budget
proposals a proposal to spur the cleanup of so-called “brownfields” by allowing new purchasers


13

Mr. HouGutTon. I would like now to defer to my colleague, Con-
gressman Payne.
Chairman JOHNSON. Yes. Mr. Payne.

STATEMENT OF HON. L.F. PAYNE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF VIRGINIA

Mr. PAYNE. Thank you very much, Madam Chairman, Mr. Mat-
sui, members of the panel. And thank you, Amo, for all the work
that you have done on this legislation, the American Farm Protec-
tion Act, H.R. 864.

As it relates to the future, as it relates to future generations, I
truly believe that this is perhaps one of the most important pieces
of tax legislation that we can enact in this Congress. I want to
thank all of my colleagues who are here and have cosponsored this
bill, and I would urge others to join us in this effort.

Every day our country loses over 4 square miles of farmland to
development. One of the criticisms that we hear of a bill such as
this is that what we are doing is looking at ways that will add loop-
holes for wealthy people. In that regard let me take my few min-
utes, if I might, to tell you about one such person who would be
affected by this—one such family that would be affected by this leg-
islation.

Bob Lange is a full-time farmer in Malvern, which is a small
town 24 miles west of Philadelphia in Chester County, Pennsylva-
nia. Bob was here before us, the Ways and Means Committee, on
this very issue and testified in the last Congress. He operates a
family farm which is currently owned by his 93-year-old grand-
mother and has been in his family since 1896. His farm is 226
acres. It is an active farm, everything from corn to strawberries to
pumpkins, but because of its proximity to Philadelphia, the fair
market value of his farmland is 10 to 15 times higher than typical
farmland in Pennsylvania. This is because the fair market value is
determined by looking at what that land would be worth if it was
developed for residential or commercial purposes and not for its
current farm use.

This is a crucial point, because when the owner of this farm dies,
the Federal estate tax law requires the fair market value of the
farm as developed land be included in the decedent’s estate. Most
heirs like Bob cannot afford the estate tax bill when the farm is
valued in this manner. Even when you take advantage of the lim-
ited provisions in the existing tax law, including the unified credit
deduction for the donation of qualified conservation easements,
farm families typically don’t have enough liquid assets to pay an
estate tax of as much as 55 percent of the estate’s value.

So this is not a bill that is designed to provide some tax relief
for the rich; this is for farm families across this country to ensure
that they would be able to maintain their farms and be able to con-
tinue to use those as they have in the past and not be forced to
sell off parts of these or split these up.

This is also, as Amo has already pointed out, the very best way
that we could act to ensure that we maintain good, open spaces in
and around our national parks and in and around our metropolitan
areas.


55

If the rights were first separated before 1976, and if the owner
can show that the likelihood of surface extraction is so remote as
to be negligible, an easement that is donated on property where the
mineral rights were first severed from the surface rights after that
date in 1976, it is extremely difficult to give a qualified easement
over such property.

We don’t see any reason for having an artificial date in there. It
is important to be able to show, of course, that the surface is un-
likely to be disturbed, because taxpayers don’t want to grant tax
incentives to landowners on land where the surface will be dis-
turbed by major mining, perhaps.

But there is no reason to have an arbitrary date, and for land
where the rights were first separated before that date a deductible
conservation easement property is eligible, and for land where sur-
face rights were separated from mineral rights after that, such
easements are not eligible. It doesn’t make any sense.

The solution simply is to eliminate, eliminate the date, and treat
all land equally. If the rights are severed but the landowner can
show that the likelihood of surface extraction is so remote as to be
negligible, let those landowners donate conservation easements. It
is simply a matter of removing the date from the current law.

Mr. LAUGHLIN. Madam Chairwoman, I see the red light is on,
but I would like to ask Mr. Bell a question.

Chairman JOHNSON. Go right ahead.

Mr. LAUGHLIN. Mr. Bell, you may not be the first bona fide farm-
er that has been before this Committee, but my memory is, you are
the first since I have been on it. So I want to ask you, if you could,
from a farmer’s viewpoint, tell us why the estate gift tax is such
a problem for the agriculture community in preserving the valuable
land for agriculture purposes from one generation to the next, par-
ticularly when we read from time to time that it is extremely dif-
ficult for a new generation of farmer to get into the agriculture
business.

And also as part of your answer, if you could tell us whether
there is anything, other than raising the estate and gift tax limita-
tion or abolishing it, that would be better. In my opinion, these are
the only major tax problems with preserving the property for agri-
culture purposes.

If you could offer the viewpoint of a farmer I would appreciate
it.

Mr. BELL. If you don’t mind, I would like to take the liberty to
also talk about capital gains taxes and their ramifications.

Mr. LAUGHLIN. That was part of my question, because I said in
addition to the estate gift tax.

Mr. BELL. Thank you.

As I sat and listened to my colleagues on the panel discussing
the farmland trust issue, certainly we who are farmers appreciate
that effort. My home State of Ohio is an agricultural State. But
more than that, we are an industrial State, a highly populated
State. Therefore, we have great interest in our State in terms of
preserving farmland.

I relate back to your discussion and your questions about the 50-
mile radius. I am one of those farmers who barely falls outside of
that 50-mile radius.


ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE CONTACT: (202) 225-1721
June 21, 1996
No. OV-15

Johnson Announces Hearing on
the Impact of Tax Law on Land Use

Congresswoman Nancy L. Johnson (R-CT), Chairman of the Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the Subcommittee will
hold a hearing on the impact of Federal tax law on land use. The hearing will take place on
‘Thursday, July 11, 1996, in the main Committee hearing room, 1100 Longworth House
Office Building, beginning at 10:00 a.m.

BACKGROUND:

The Internal Revenue Code includes a number of provisions that have an impact on
land use. Among them are the tax credit for rehabilitation expenditures; incentives for
locating businesses in empowerment zones (an employment and training credit, an additional
$20,000 per year in section 179 expensing, and a new category of tax-exempt private activity
the tax treatment of environmental remediation costs; preservation easements to
Federal estate taxes; an income tax deduction for donating an easement to a
{ulified organization for conservation purposes; and an extate tax preference fr farms and
small businesses.

In announcing the hearing, Chairman Johnson stated: "A number of provisions of

current tax law have both intended and unintended consequences for land use. For instance,
‘owners of historic property can establish preservation easements before they die to minimize
Federal estate taxes and to protect the property in perpetuity. They can also take a deduction
for contributing the easement to a qualified organization. The public policy objective is clear.

(On the other hand, some have argued that current cost recovery provisions discourage
‘businesses from investing in urban areas. A plant or equipment can be depreciated, but the
land on which a factory is built cannot. That often means that a greater portion of an
investment in non-urban areas can be depreciated. We need to look at whether this
discourages businesses from investing in cities.”

FOCUS OF THE HEARING:

‘A number of these provisions were enacted piecemeal over the years. The hearing
will examine the net effect, if any, of the various provisions on land use decisions.

DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD:

Requests to be heard at the hearing must be made by telephone to Traci Altman or
Bradley Schreiber at (202) 225-1721 no later than the close of business, Monday, July 1,
1996. ‘The telephone request should be followed by a formal written request to Phillip D.
Moseley, Chief of Staff, Committee on Ways and Means, U.S. House of Representatives,
1102 Longworth House Office Building, Washington, D.C. 20515. The staff of the
Subcommittee on Oversight will notify by telephone those scheduled to appear as soon as
possible after the filing deadline. Any questions conceming a scheduled appearance should be
Uirecied tothe Subcommittee sa at (202) 225-7601

(MORE)


72

Even worse, a tax incentive from year to year because of inflation
is not considered. Home building is dominated by small firms like
myself which are very often family-owned and -operated. Our fig-
ures show within our organization, NAHB, 79 percent of the mem-
bers are classified as small businesses, small builders, and 91 per-
cent of those are either principal owners or sole owners.

We commend the proponents of H.R. 2190 that would eliminate
the estate tax for each ownership interest of a family-owned busi-
ness worth up to $1.5 million. This much needed legislation would
not only facilitate the transfer of building remodeling businesses to
the next generation but do away with the need for many small
business owned firms to be sold or forced out of business in order
to pay estate taxes.

NAHB strongly urges you to enact this legislation. We cannot
overemphasize the importance of some form of tax estate planning.

An alternate proposal would be to address our concern in retain-
ing the existing unified tax, if nothing else works, at a gift tax rate
schedule, but to increase the uniform tax and gift tax credit, as our
numbers show, to a $1.5 million value. The existing rate structure
and credit would be applied to assets that are not part of the busi-
ness interests. We have clarified that further in the testimony that
we have given to you earlier.

Thus, we would urge you, in the alternative, if nothing else
seems to be flying, to consider legislation which would increase and
index for inflation the unified tax. That is so important for our
185,000 members. But we don’t need to represent homebuilders
when I say that. I could represent the local chamber of commerce,
the local hardware store owner, the local pharmacy owner. It not
only applies to 185,000 homebuilders, it applies to people all over

erica.

Once again, Madam Chairman, I appreciate the opportunity and
feel very humble to sit before you until doing our presentation.
Thank you for listening.

[The prepared statement follows:]


27

It seems to have enormous relevance to a city like Chicago where
there are whole beautiful graystone shells.

Mr. SHaw. We also have an estimate from Joint Tax of $239 mil-
lion over the 5 years.

Chairman JOHNSON. $239 million?

Mr. SHAW. It is less than what I thought it would have been.

Chairman JOHNSON. Thank you very much.

Mr. English, I thought you and your colleagues came up with
some very good ideas, some of which could be applied without the
enterprise zone concept behind them. Isn’t that true?

Mr. ENGLISH. That is correct.

Chairman JOHNSON. I would have to say that in Connecticut,
where we have developed the enterprise zone now quite radically
in the last couple of years, there is developing a terrible tension
among towns that got an enterprise zone and those that didn’t and
an imbalance in their ability to attract small industry, which they
all need. So there are some problems with that.

I like the way you structured part of the tax credits in your bill.
It really looked at the kind of indicators that directs those credits
and places a preference.

I also liked the right of the State to direct the credits. This is
what is now happening in the Low-Income Housing Tax Credit Pro-
gram. Estates are setting the priorities as to where those projects
ought to be directed, and it has been very fruitful.

Mr. Herger.

Mr. HERGER. I don’t have any questions.

Mr. SHAW. Madam Chairman, can I insert something here, be-
cause I think it is tremendously important with regard to your
comments to Mr. English.

Chairman JOHNSON. Yes.

Mr. SHAW. In the Human Resources Subcommittee, we are going
to be taking a very close look at the inner cities’ enterprise zones
and different things that we are going to have to do in order to
wean this country off of the present stagnant welfare system that
we have. Perhaps you as Chairman of this Committee and I as
Chairman of the Human Resources Subcommittee, perhaps at some
future date we should look to have some joint hearings in order to
explore more and more possibilities of how to work our way out of
the current corrupt welfare system.

Chairman JOHNSON. I think that would be very useful, because
one of the issues is going to be affordable housing in the cities,
housing that is affordable fundamentally, not because of section 8
vouchers and things like that. So we really have a lot of work to
do in that area, and I look forward to doing that with you.

Mr. Ramstad.

Mr. RamstabD. Thank you, Madam Chairwoman, and thank you
for calling this important hearing today and for your leadership in
this area. I truly believe this is an important hearing, and I ap-
plaud the leadership as well of our colleagues who are testifying in
this first panel today.

I have long believed that the Tax Code should be used to meet
land use objectives in general and to encourage environmental pro-
tection in particular. 1 am very interested in exploring, in these


70

Chairman JOHNSON. Thank you. I appreciate your testimony.
Mr. Kelley, it is a pleasure to have you with us today.

STATEMENT OF RICHARD KELLEY, PRESIDENT, RSK CON-
TRACTORS, INC., SOUTH WINDSOR, CONNECTICUT, ON BE-
HALF OF NATIONAL ASSOCIATION OF HOME BUILDERS

Mr. KELLEY. Madam Chairman, my name is Richard Kelley. I
have headed a family-run business for the past 25 years in South
Windsor, Connecticut. We build all types of housing, ranging from
entry-level to moving-up to luxury, in the immediate Hartford sub-
urban area. Our company is involved in every aspect of the devel-
opment process, from the purchase of raw land to the development
of property for both residential and commercial uses.

This afternoon, I have the fortunate opportunity to represent
185,000 members of the National Association of Home Builders. I
will paraphrase in the next few minutes a report we submitted to

ou.

I congratulate you also, Mrs. Johnson, for holding this hearing
and giving us the opportunity to present our views from someone
who works in the trenches day in and day out. We are also particu-
larly pleased this hearing will address a number of provisions of
the Internal Revenue Code which impede land development and,
we believe, adversely impact housing affordability.

In this regard, by paraphrasing this morning, we will address
several issues: The installment sales rules, the tax treatment of en-
vironmental remediation costs, the tax credit for rehabilitation ex-
penditures, and the State tax preference for small businesses.

At the outset, I want to congratulate you for being the catalyst
in the Congress, especially introducing H.R. 957, to modify the tax
treatment for contributions in aid of construction. The Senate-ap-
proved version of H.R. 3448 would repeal the CIAC with respect to
water and sewer companies.

Although this proposal was not included in the House-passed
version, we ask you, the Representatives of the House, to please re-
cede to the Senate portion of this issue when it is brought to con-
ference.

I also note that the provision was passed by the House as part
of the 1995 budget but subsequently vetoed by the President, but
it does need to be addressed, and hopefully the House will see fit
to look at the Senate version.

First I would like to talk about the installment sales treatment
for unimproved residential lots. The current installment sales rules
add undue complexity to land development and add significantly to
the cost of housing.

Currently, landowners are reluctant to partner with developers
because of the installment sales rules. Payment to the original
landowner is often contingent upon final sales to the home buyers,
which can delay the actual receipt of funds to that landowner for
years. However, the installment sales restrictions can require land-
owners to pay taxes on funds not yet received and discourage them
from participating in otherwise efficient transactions.

Further, the complexity of the installment sales rules excludes
otherwise qualified land developers from the coverage. This is par-


63

In closing, Madam Chairman, I want to note that the economic
benefits of historic rehabilitation, while considerable and well docu-
mented, are not the only reason why communities pursue historic
preservation as part of an overall revitalization strategy. The so-
cial, cultural, and historical benefits of rehabilitation have been
verified repeatedly by addressing blight and abandonment and by
restoring the tangible markers of a community’s history, hope and
pride can be restored as well as buildings. The results, to which
many neighborhood residents can testify, include safer streets,
more livable neighborhoods, and a social cohesiveness which are all
too often absent in today’s society.

Thank you, Madam Chairman.

[The prepared statement follows:]


20

Chairman JOHNSON. Thank you very much, Mr. English.
Mr. Zimmer.

STATEMENT OF HON. DICK ZIMMER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW JERSEY

Mr. ZIMMER. Thank you, Madam Chair. I appreciate your having
this hearing.

I have been interested in open space preservation for a number
of years. When I was a freshman in the New Jersey State Assem-
bly, I sponsored New Jersey's farmland preservation law, which
has saved some 40,000 acres of land from development. That may
not seem a lot to people from districts like Mr. Herger’s and Mr.
Laughlin’s, but in New Jersey, which is the most densely populated
State in the country, that is a pretty large piece of undeveloped

and.

The first bill that I sponsored in this Congress that became law
was one that would expand the boundaries of a national park in
New Jersey, and the history of that property is worth noting, be-
cause it is what brought to my attention one of the problems of the
Tax Code as it relates to the preservation of open space.

The New Jersey property in question had been owned by Sterling
North who was a well-known 20th century novelist. After Mr. and
Mrs. North died, their children could not afford to pay the estate
taxes on the land, even though the Norths and their children and
the National Park Service all wanted to include this land as part
of the Morristown National Historical Park. So they had to sell
their land.

Fortunately, we were able, through a couple of bills that became
law, to put this land into the National Park System. But it was a
close call, and it might have been sold to a developer who would
have taken it out of the potential ambit of the park forever.

This experience led me to introduce a bill specifically designed to
encourage the donation of inherited property ic the Federal Gov-
ernment. This legislation, which is pending before this Committee,
is called the Open Space Acquisition and Preservation Act, and it
allows heirs who donate real estate to the Federal Government to
subtract the fair market value of this land from their estate taxes.
It is narrowly drawn so that the land has to be undeveloped and
it has to be sought for conservation purposes by a Federal agency
such as the National Park Service.

I have introduced a second bill relating to open space that is
pending before this Committee which was inspired by a practical
problem encountered in the implementation of the New Jersey
‘armland preservation law that I referred to earlier.

This bill, the Land Preservation Tax Fairness Act, affects people
who, in order to preserve open space, sell their land or a develop-
ment easement in that land at below market value to a government
entity or to a nonprofit organization.

In New Jersey specifically, our Farmland Preservation Program
is so popular that there is not enough funding to pay full market
value for the easements that are sold by farmland owners, so many
of them are selling their easements at less than fair market value.
When they do that, if they do it and realize a capital gain, which
is the typical case, they end up paying a greater capital gains tax


37

Surveys of federal estate tax returns filed between
1989 and 1991 indicate that an average of less than 3,500
estates elected treatment under Section 2032A; that is only
7% of all returns filed annually.

There are a number of reasons why Section 2032A is so
little used. It is complex and difficult to qualify for;
there is a limit on the amount of tax savings allowed, which
has not been adjusted for a number of years; in order to
qualify, all owners of land selected for Section 2032A
treatment must consent to personal liability for deferred
taxes; a federal tax lien is imposed which significantly
interferes with the ability to obtain operating and
expansion loans; and a number of other requirements also
pertain. In addition, Section 2032A is not applicable to a
considerable amount of land that is important because of its
environmental sensitivity or proximity to national parks or
wilderness areas. There is also no incentive in Section
2032A for the long-term voluntary protection of the land.

In fact, the donation of a conservation easement on land
subject to a Section 2032A election has been found by the
Tax Court to violate requirements of this Section and
trigger a recapture of tax savings.

Section 6166 applies only in certain circumstances,
which will often preclude relief for estates holding land
with publicly important conservation values. Even where it
applies it leaves farm families with a continuing annual
obligation which must be secured by 2 federal tax lien on
the farm and which must compete with the many other economic
demands on what may be a very limited income. Furthermore
like Section 2032A, Section 6166 provides no incentive for
long-term voluntary land conservation

Current law also allows a deduction (or, in the case of
inter-vivos easement gifts, a reduction in estate value) for
the value of conservation easements. However, the extent of
the deduction and therefore the extent of remaining tax
liability on the restricted land is unpredictable. This
tends to discourage prospective donors who fear the easement
may limit their heirs ability to sell land to pay the tax.

Current tax treatment of conservation easements also
tends to favor those who have large incomes and can take
advantage of the income tax deduction. On the other hand,
those with very valuable land but small incomes find little
advantage from donating an easement. Many farmers and
ranchers fall into this category. For them the current tax
benefits of easement donation provide little or no
incentive. In addition, valuation of the easement is
constantly challenged by the IRS in some parts of the
country - a factor which has discouraged more than a few
potential donors.

The American Farm Protection Act offers simple,
predictable and effective relief and a compelling incentive
for voluntary conservation to owners of land with publicly
significant conservation value that is under development
pressure. Tt does so by providing a full exemption from
estate tax for land subject to a conservation easement
meeting the existing standards of Section 170(h) of the
Internal Revenue Code of 1986. We thank you for your past
support of this legislation and urge you to include it in
any legislation which may come before the Committee.


57

chase it from him prior to his death. But the capital gains restric-
tion probably will not let that happen.

Mr. LAUGHLIN. Mr. Lindstrom, the Houghton and Payne bill, I
understood that use of the property was one of the considerations.
Would Mr. Bell’s family example fall within that bill where there
wouldn’t be the significant tax consequences if the property’s use
continued to be agriculture?

Mr. LinpstRoM. It would be protected under the American Farm
Protection Act.

I would need to look at a map to see physically whether you are
within that 50 miles of that outer boundary of the Columbus met-
ropolitan area. But the way the American Farm Protection Act
works, if Mr. Bell’s uncle were to put a permanent easement on
that land that restricted it to farm use essentially, that land under
the Houghton bill would pass estate tax free.

Mr. LAUGHLIN. Even to a total stranger?

Mr. LinpstRoM. Even to a total stranger.

Mr. LAUGHLIN. The agriculture use would apply.

Mr. LINDSTROM. That is right. And that commitment to agricul-
tural use, of course, would then continue under the terms of the
easement regardless of who owned the land.

Mr. LAUGHLIN. I recommend, Mr. Bell, your organization, and
other agricultural organizations, make as many Members of Con-
gress aware of that benefit of the Houghton-Payne bill.

Thank you, Madam Chairman.

Chairman JOHNSON. I appreciate your questions. I did want to
pursue one other issue with Mr. Bell.

Your testimony raised some problems of equal importance. These
aggie bonds that you referred to and the restriction that they can’t
be used for the purchase by one family member of the farmland
from another family member——

Mr. BELL. Madam Chairman, I confess I am not as familiar with
that as I could be. Could we get that information to you on that?

Chairman JOHNSON. Those are the kinds we ought to look at. It
is those kinds of little glitches in the law that really affect cir-
cumstances like yours. Many farmers are in those circumstances,
where the land was divided by a preceding generation, and yet
those who work the land end up doing the work and getting the
benefit later on, and finally it has to be sold outside the family for
tax reasons.

The other thing that interested me was the need for farmers to
be able to manage their income differently in terms of IRA con-
tributions. I think that is something we need to look at, and we
may want to look at. It goes more to the income security issue than
the conservation issue, but we may want to look at some parallel
right for older farmers, particularly, who sell a principal residence
or sell their farm, to have some exemption from capital gains.

I don’t know what proportion of the farm community has been
consistent about their Social Security. Do small farmers generally
contribute to Social Security the whole 15 percent?

Mr. BELL. Yes, I would say so, yes, ma’am. I would totally concur
and would really appreciate your saying that the interest of looking
at an IRA-type investment for farmers is something that I as an
individual and certainly we as an organization certainly support


23

bill -- The Land Preservation and Tax Fairness Act -- affects people who, in order
to preserve open space, sell their land or a development easement at below market
value to a government entity or a nonprofit organization. Federal tax policy does
not treat the gain from such sales fairly. The taxable gain from a “bargain sale” is
calculated by subtracting only a fraction of the property’s basis from the sales
price, so the benefactor cannot receive the tax benefit that adequately reflects the
original expense of purchasing the land.

For example, if land, purchased years ago for $200,000, and now worth one
million dollars, is sold to a charitable organization for $500,000, the taxable gain
would be calculated by subtracting just one half the original cost of the property ~~
$100,000 -- from the selling price of $500,000. In this case, the benefactor would
not only forgo the additional $500,000 he would receive if he had sold it at its true
value, but would also find his taxes increased by $28,000 (that is, 28% of
$100,000), because of the impact of this rule. Clearly, the current system
discourages charitable land preservation transactions.

My bill would amend the tax code so that the taxable gains from this kind of
“bargain sale” would be calculated by subtracting the full basis from the selling
price. Under my proposal, the individual in the hypothetical example could
subtract $200,000 from the sale price of $500,000 lowering the net taxable gain to
$300,000, instead of $400,000.

Because donations and sales of undeveloped land are greatly influenced by tax
treatment, these modest changes in the tax code could help to enhance open space
preservation and assist in protecting America’s heritage.

While I deeply hope that both of my bills will become law, I also must underscore
that they address only a small part of a larger problem, which is the bias of the tax
code against preservation of open areas.

Current tax policies favor short-term investments in land development over long-

term investment in open space preservation. Fairness should dictate tax policies
that remove the current incentives to convert land to cash.

For instance, our tax code offers tax-exempt bond financing to businesses that
build in empowerment zones -- not to purchase the land or the existing
improvements -- but only to build.


90

FOR IMMEDIATE RELEASE
Suly 25, 1996

WRITTEN STATEMENT OF DONALD C. LUBICK
ACTING ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
HOUSE COMMITTEE ON WAYS AND MEANS.

Madame Chair and Members of the Subcommittee:

In its announcement of this hearing on June 21, 1996, the Subcommittee indicated that
among the provisions it would consider were the tax treatment of environmental remediation
costs and incentives for locating businesses in empowerment zones. I am pleased to present
the Administration’s views on these two topics.

‘The Administration is engaged in a variety of efforts to encourage cleanup and
redevelopment of economically distressed sites. Earlier this year in his State of the Union
‘Address, President Clinton called for targeted tax incentives to help accomplish these goals,
and included such initiatives, fully paid for, in his Fiscal Year 1997 Budget.

The President's brownfields tax incentive is intended to spur the cleanup and
redevelopment of thousands of contaminated sites, and together with the new Empowerment
Zone and Enterprise Community proposal, will help to rebuild neighborhoods, create jobs,
and restore hope to our nation’s cities and distressed rural areas.

Congressman Rangel has introduced the President's brownfields and Empowerment
Zone proposals as H.R. 3747. Senators Mosely-Braun, Jeffords, and D'Amato have
introduced a companion measure in the Senate, S. 1911. The Administration strongly urges
the Subcommittee to favorably consider these proposals.

Envi Cost

Background. Under current law, costs incurred for new buildings or for permanent
improvements made to increase the value of any property (including amounts incurred to
prolong the useful life of property or to adapt property to a new or different use) are not
currently deductible, but must be capitalized. This general capitalization requirement covers
both purchases and improvements to currently owned assets, but does not apply to repairs
(which are generally deductible when incurred with respect to business property as ordinary
and necessary business expenses).

President’s Proposal. The President has proposed a targeted tax incentive to clean up
"brownfields" -- abandoned, contaminated industrial or commercial properties that are less
contaminated than Superfund sites, but still face barriers to redevelopment. Under this
proposal, certain remediation costs would be currently deductible if incurred with respect to a
qualified site

‘This incentive is expected to cost approximately $2 billion while leveraging $10
billion in private cleanups nationwide and returning to productive use as many as 30,000
brownfields. It will also improve environmental and public health protection, and spur
economic development. It has been designed specifically to affect land use in a positive way
in distressed urban and rural areas.


44

Chairman JOHNSON. Thank you very much.
Mr. Bell.

STATEMENT OF AI. (IRV) BELL, PRESIDENT, OHIO FARM
BUREAU FEDERATION, INC., ON BEHALF OF AMERICAN
FARM BUREAU FEDERATION

Mr. BELL. Thank you, Madam Chairman.

My name is Irv Bell. I, along with my wife, Jean, and son, Matt,
operate a feed grain, hog, and beef cattle farm in Muskingum
County, Ohio. Our farm has been in the family for six generations.
I serve as the elected president of the Ohio Farm Bureau Federa-
tion, and I am pleased to represent the American Farm Bureau
Federation at today’s hearing.

The Farm Bureau’s interest in tax policy and its impact on land
use is keen. The production of food and fiber requires the use of
large amounts of land. Roughly 43 percent of the total land in this
country is farm- and ranchland. If you do not count land owned by
State and Federal Governments, farm- and ranchlands account for
almost 70 percent of the privately-owned property.

First on the list of concerns that farmers and ranchers have
about taxes that impact land use is the Federal estate gift tax. Like
our farm, many farms and ranches are multigeneration family
businesses. Estate taxes can make it very difficult for a family to
continue to farm after the death of a loved one. When this happens,
farmland that would normally remain in the family business is
often sold for other uses.

To try to minimize the impact of estate taxes on a family busi-
ness, some farmers seek professional estate planning advice. A
good estate plan may require an accountant, an attorney, a finan-
cial planner, and an insurance agent. Establishing an estate plan
costs money and takes time. It can be such a drain on the ongoing
business and strain to family relationships that some farmers do
not plan.

The Farm Bureau has long called for the elimination of estate
and gift taxes. If this is not feasible, modifications are needed to
reduce the burden on family farms and ranches. Farm Bureau sup-
ports increasing the current $600,000 exemption to $2 million and
indexing the $2 million for inflation. Because land is not easily gift-
ed in small blocks, we recommend that the yearly gift allowance be
increased to $50,000.

We support unlimited use valuation under section 2032A and be-
lieve that cash leasing should not trigger recapture. Targeted tax
relief for small businesses should be enacted, and estate taxes
should be deferred until a family farm is sold by the heirs. Farm
property that is restricted by a voluntary conservation easement
should be exempt from estate taxes.

The capital gains tax is another tax that impacts land use. Many
farmers and ranchers nearing retirement or in retirement are in-
terested in selling land to younger farmers and ranchers, including
family members. The current 28-percent capital gains tax discour-
ages land transfers. Rather than selling farmland to the next gen-
eration, land is often held by the older generation until death and
then becomes subject to estate taxes. My personal situation illus-
trates this point.


85

Mr. KELLEY. Mrs. Johnson, it has a tremendous impact. Person-
ally, we are dealing with a property owner now which happens to
be in a farming area of about 65 acres. When we approached the
farmer—he is well into his eighties now—about working with us as
a partner, of taking his farmland and letting us only take one piece
of it and turn it into housing, and using the vast majority of it to
turn into a community park, for him to take a tax credit, when his
accountant and attorney got through with it, that idea was imme-
diately thrown out, because their concern was, the only way that
this person could do that, the landowner, would be to create a char-
itable trust, put that land, the profit, into the charitable trust.

But their problem was, when is the charitable trust going to be
funded? I said to them it is impossible to fund it up front, so you
have got to fund it over a course of 2 or 3 years when we build the
houses. Their concern, the accountant’s concern was, he is going to
have to pay taxes on money that he doesn’t have.

My idea is, if Congress could take a look at what we are talking
about, let us have some input, since a lot of us are in the trenches
and are doing this all the time, that land use and land develop-
ment in the years to come will look much different than it has in
the past.

‘e, because of haste—and I am as guilty as others—because of
haste, because of some of the restrictions we have, the land use
probably would have been better off if we had slowed down, if we
could have, and taken the time and done something a little dif-
ferent.

The tax credit means installment sales, just like environmental.
A portion of this person’s property, we are concerned, it has con-
taminants on it. If there is, does the law permit him or would the
law even permit me to clean up that portion of that 67 acres that
has the contaminants on it and take it off the cost of that land?
Or would he or I have to put it over a schedule for 20 or 30 years?
It depends on what we put on to that piece of contaminated land.

That is why we are sitting before you this morning, saying to
Congress, saying to Representative Hancock and Mrs. Johnson sit-
ting here listening to us, that things have got to change, that we
all have to be a part of it in order for those things to change in
the future.

Chairman JOHNSON. That is a very interesting point you make
about taking the cleanup costs off of the land.

Mr. KELLEY. Did I answer your question?

Chairman JOHNSON. Yes, thank you.

Mr. Hancock—whose plane just got in a few minutes ago—I am
glad to have you.

Mr. HANCOCK. This is a subject that I have been very interested
in for some 25 years or more.

There is a theory out there that some people say is even more
important than the way the Federal tax applies to the development
of real estate, called land value taxation. Are you familiar with
that term?

Mr. KELLEY. No, I am not, sir.

Mr. HANCOCK. As you know, one of the things, the theory is any-
way, that has caused urban blight was the skipping over of big
areas and going out and buying rural land and holding it until the


62

H.R. 1662, the Historic Homeownership Assistance Act, spon-
sored by Representatives Shaw and Kennelly, is an effective an-
swer to the need for an incentive for historic home ownership. This
legislation calls for a minimum of government involvement and a
maximum of private initiative.

H.R. 1662, which I thank the Chairman for cosponsoring, would
provide a 20-percent credit for qualified rehab expenditures to
homeowners who purchase and rehabilitate a historic home for use
as a principal residence. The maximum credit allowable would be
$50,000 for each residence. But since this proposal is intended not
only to foster home ownership and encourage rehabilitation of dete-
riorated buildings, but also to promote economic diversity and in-
crease local tax revenues, individual taxpayers would be eligible for
the credit without regard to income.

The credit would be available to homeowners in condominiums
and cooperatives as well as single-family homes. It could be used
by the do-it-yourself rehabber or someone who purchases a home
rehabilitated by a nonprofit or for-profit developer. In that case the
credit would accrue not to the developer, but would be passed
through to the purchaser of the home. In this way the historic
homeowner tax credit could be used to help offset the cost of pur-
chasing a home.

As with the current credit, rehabilitation must be substantial:
The greater of $5,000 or the adjusted basis of an eligible building.
However, if the property is in a census tract targeted as distressed
for mortgage revenue bond purposes, or in an empowerment or en-
terprise zone, just a $5,000 expenditure is necessary.

This provision is meant to make the credit usable in situations
where the building has a much higher value relative to the value
of the underlying land which is often true in deteriorated inner-city
neighborhoods. It is a common misperception that historic neigh-
borhoods contain only wealthy people and grand residences. The
truth is that the majority of historic neighborhoods, because they
are in the older areas of towns and cities, are home to people of
modest means. In fact, almost one-third of all historic districts con-
tain or are located in census tracts with poverty rates of 20 percent
or greater.

Because many homeowners might not have sufficient tax liability
to utilize this credit, this legislation creates a mortgage credit cer-
tificate program. Instead of a tax credit that he could not use, a
home buyer could receive a certificate in the face amount of the
credit. The home buyer would transfer the certificate to his mort-
gage lender in exchange for a reduced interest rate on his mort-
gage. The bank could then use the certificate to reduce its own
Federal income tax liability.

The revenue implications of H.R. 1662 would be modest. The
Joint Committee on Taxation has estimated the revenue loss to the
Treasury at $239 million over 5 years. This is largely due to the
limited universe of eligible structures, which includes buildings
listed on the national or State and local registers and contributing
buildings located in national, State, or locally designated historic
districts. The Park Service estimates that there are over 800,000
buildings that would qualify for the credit.


86

city or development comes to it. The theory is to calculate the real
estate tax, which has a big bearing on these decisions, on the value
of the location rather than the value of the improvements—evi-
dently you are not familiar with it at all.

The theory was developed back in the twenties. It happened to
be by an economist by the name of George at the University of Mis-
souri. You might want to look it up, take a look at it. It is called
land value taxation.

The theory is that we would have never suffered the urban blight
if, in fact, property was taxed on the true value of the land. In
other words, the tax structure would provide an incentive to im-
prove urban land so that it would be used for its highest or best
use. You could not buy a piece of property and let it run down be-
cause you are going to get taxed as if you had developed the prop-
erty.

So I would suggest you take a look at it and maybe incorporate
it in part of your work toward providing reasonableness in the Fed-
eral Tax Code pertaining to real estate and development.

Mr. KELLEY. I will. Thank you.

Mr. HANCOCK. Thank you, Madam Chairman.

Chairman JOHNSON. Mr. MacEwen, you suggested really a num-
ber of different changes that are, each one, important. But if you
had to help us target our actions, because we never can do all the
things we believe are most important, what areas do you think are
most important for us to attend to?

I guess I would open this up to all of you.

Mr. MacEwen. Changes in the tax law regarding leasehold im-
provements are very close to fruition and have bipartisan support
in both Houses of Congress. Again, the provision will be an issue
in the Conference Committee.

With respect to the Business Jobs Protection Act, this is an issue
that I think is very important to the development of commercial
real estate and establishing reasonable tax policy thereon.

For years, with the frequent changes in the depreciation period,
we have seen the depreciation of leasehold improvements go from
over the life of the lease, which may be as short as 5 years, all the
way up to 39 years now, from 1981 through current law. We have
seen a lot of changes.

Thirty-nine years is too long to depreciate a leasehold improve-
ment, where, in the real market today, our leases are 5 years—usu-
ally from 5 to 10 years, after which time we have to tear out those
improvements and replace them. We are not allowed necessarily to
write off those costs today. We have to keep those on the books for

years.

This provision, which will come up in conference, will clarify this
and would permit a current deduction. So that one is very close to
fruition.

The other issues, regarding cleanup and demolition costs, are is-
sues that have been in the forefront now for the last few years with
the advent of the asbestos problem. The Service has taken different
viewpoints with respect to the deductibility of those costs.

We think there is case law that supports treatment of remedi-
ation expenses as repairs because it does not enhance the value of
the property, it only restores the property to its previous value.


31

ment, in which in many instances our States have some very fine
conservation programs within the State, or even local government?

And last, I would like for you to address the option of giving the
easement and letting the landowner retain title, and in the in-
stance of my State, they would be paying State and local taxes.

Mr. ZIMMER. There are two separate bills I have referred to. One
deals not with easements but with title to the land, and that bill
relates to the Federal Government. The other deals with easements
but not transfers to the Federal Government.

The first one is basically designed to avoid all of the trans-
actional costs involved in the transfer of inherited land to the Na-
tional Park Service or the Fish and Wildlife Service or whichever
Federal agency was intending to purchase the land in the first
place. This has to be land that was already identified for acquisi-
tion and would have been bought with appropriated funds through
either a negotiated sale or eminent domain by the Federal Govern-
ment.

Under current law, the land goes to the heirs, the heirs pay the
estate tax, and then whoever owns the land afterward sells it to
the Federal Government in a process that costs more money than
the simple credit arrangement that I would substitute for it. We
would short circuit all of this and allow the heirs to transfer the
land in lieu of the same value of dollars to the Federal Government
in satisfaction of the estate tax burden.

So it doesn’t expand the ownership of land by the Federal Gov-
ernment any more than what was intended in the first place; it
simply makes it a short-circuit process rather than a convoluted,
expensive one that may actually cost the taxpayers as well as the
heirs more money.

The second bill contemplates the sale of an easement to a private
conservation organization or typically a State or local government.
It could involve, in theory, a sale to the Federal Government, but
that was not what I had contemplated, because it was suggested
to me as a result of the actual implementation of New Jersey’s
farmland preservation law, which involves the purchase of con-
servation easements by a county agricultural development board
which is funded in part by the State, if those easements are pur-
chased at fair market value, you pay the capital gains tax on the
amount that you received, and there is no problem.

However, we have begun to run out of money, as the Chair point-
ed out was the case in Connecticut, for the purchase of as many
easements as are for sale. So there are many landowners, out of
a combination of necessity and philanthropic impulse, who are sell-
ing their easements at less than the fair market value.

‘When that is the case, it is categorized under a generic category
in the tax law as a bargain sale, and you would end up paying a
higher capital gains tax than would ordinarily be the case. That is
unfair. It is a double hit on somebody who is taking less than fair
market value, but it doesn’t expand the ownership of land by the
Federal Government.

Mr. LAUGHLIN. Under either of your bills, can a family pass on
farmland?

Mr. ZIMMER. Both—well, the first bill is intended to transfer
ownership of farmland, or whatever kind of land it is to the Fed-


7

they finished crossing, the flea said to the elephant, “Boy, we sure
shook that bridge, didn’t we?”

Clearly, there are limits to what we can accomplish with the tax
law, but we surely owe it to ourselves to make sure that we under-
stand current law to satisfy ourselves that current law is not mak-
ing matters worse, take corrective action if it is needed, and per-
haps to find better ways to use tax law to both save our cities and
open spaces.

Let me recognize my colleague, Mr. Matsui.

Mr. Marsul. Well, I would just like to commend the Chair for
holding these hearings.

I have a statement, and I will submit it for the record, but I do
want to commend you and thank you for these hearings.

[The prepared statement follows:]


46

STATEMENT OF
THE AMERICAN FARM BUREAU FEDERATION
PRESENTED BY
A. L (IRV) BELL, PRESIDENT
OHIO FARM BUREAU FEDERATION, INC.
TOTHE
HOUSE WAYS AND MEANS COMMITTEE,
SUBCOMMITTEE ON OVERSIGHT.
REGARDING
THE IMPACT OF TAX LAW ON LAND USE

July 16, 1996

‘Thank you for the opportunity to testify at this hearing on the impact of tax law on land use. My
name is A. I. (Irv) Bell. I, along with my wife, Jean, and son, Matt, operate a feed grain, hog and
beef farm in Muskingum County, Ohio. I serve as the president of the Ohio Farm Bureau
Federation

‘The American Farm Bureau Federation’s interest in tax policy and its impact on land use is keen
Production of food and fiber by farmers and ranchers requires the use of large amounts of land.
Roughly 43 percent of the land in this country is farm and ranch land. When the lands owned by
federal and state governments are subtracted, farm and ranch land account for almost 70 percent
of the privately-owned land,

Chairwoman Johnson, when you announced this hearing, you made a very important statement,
“A number of provisions of current law have both intended and unintended consequences for
land use.” While public policy is usually made with the intent of doing good, often little thought
is given to the “unintended consequences.” Our comments will address both intended and
unintended consequences of the current tax system.

Federal Estate Taxes

At the top of the list of concems of farmers and ranchers about unintended consequences of the
current tax system is the federal estate and gift tax. Farms and ranches are ongoing businesses.
Many of these businesses are multi-generation family businesses. The death of one member of
the business can directly impact the ability of remaining members of the business to carry on
‘operations after paying estate taxes. Land that would normally remain in the family and be
devoted to agricultural production is then available to be put to other uses. Thus, the current
federal estate tax law has, at times, the unintended consequence of forcing family-owned farms.
out of business and possibly shifting agriculture land to other uses.

‘Owners of these multi-generational farms and ranches often seek legal advice for estate planning
to structure their financial assets and farming and ranching operations to minimize the estate tax
consequences of the death of a member of the business. These actions are costly and may reduce
the economic efficiency of day-to-day operations. Land is not easily gifted in small blocks to
avoid the gift tax on yearly transfers, therefore, limiting the usefulness of gifting as an estate
planning tool

Farm Bureau policy has long called for the elimination of estate and gift taxes. This would be
the simplest, cleanest approach to create more economic efficiency. If elimination of the estate
and gift tax is not politically feasible, there are ways to lessen the unintended consequence of
forcing farmland to be sold and possibly shifting to a different use.


6

Chairman JOHNSON. The hearing will come to order. Good morn-
ing. It is a pleasure to have so many of my colleagues with us.

It is no secret that some of our Nation’s most scenic open spaces
are disappearing at a time when many cities; large and small, are
decaying. There are many reasons for this, the development of the
interstate highway system, relatively inexpensive commuting costs
and tax incentives for home ownership, to name but a few.

Obviously, public safety, the quality of schools, the financial
health of the Nation’s cities figure prominently in decisions to move
businesses and family to the suburbs. But a wide array of tax fea-
tures have an impact as well, and as Congress considers a major
overhaul of Federal tax laws, it is essential that we have a better
understanding of the cumulative effect of these provisions.

For instance, it is difficult to recover many of the costs of devel-
opment in urban areas. Many of the costs have to be capitalized
into the basis of the land rather than into the depreciable basis of
the building. On the other hand, the rehabilitation tax credit lever-
aged $483 million in private development activity in 1994 at a cost
to the Treasury of $97 million. Saving historic buildings has helped
revitalize a number of urban neighborhoods throughout the coun-
try. The rules surrounding the tax treatment of environmental re-
mediation expenses are so convoluted and so confusing, it is no
wonder that a number of businesses decide to sidestep them alto-
gether and invest in newer buildings outside the environmentally
distressed areas.

In rural areas, estate taxes can have a tremendous impact on
land use decisions. According to one of our witnesses, the Piedmont
Environmental Council, farmland that sold for $500 an acre in the
sixties is selling for $10,000 and $15,000 an acre today. The tax
cost of passing along such expensive acreage to the next genera-
tion, coupled with the pressure for development in many areas, is
a major reason for the disappearance of open spaces.

There are features in current law to try to offset this. Family
farms and businesses can be taxed on their current use value rath-
er than full market value. Taxpayers can take a deduction for es-
tablishing conservation easements. Some have suggested that these
provisions are inadequate. We will be hearing from several of our
colleagues and other witnesses about alternatives.

Other provisions of the tax law that come into play include the
deductibility of mortgage interest, an array of private activity tax-
exempt bonds, and the treatment of investments and empowerment
and enterprise zones.

Our colleagues, Charlie Rangel and Jim Talent and J.C. Watts
have introduced enterprise zone legislation to build on and expand
current empowerment zones in enterprise communities. Saving our
cities and preserving our countryside, two of our Nation’s most pre-
cious resources, are different sides of the same coin. We cannot ac-
complish one without the other.

Are all the answers to be found in the Tax Code? Of course not.
But at the moment we may not even understand how many of the
problems are exacerbated by the Tax Code.

There is an old parable about a flea riding on an elephant’s back.
They came to a stream and were crossing over on a bridge. When


40

STATEMENT OF
Jean Hocker
PRESIDENT

LAND TRUST ALLIANCE

SUBMITTED TO THE
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS.
UNITED STATES HOUSE OF REPRESENTATIVES

Hearing on the Impact of Tax Law on Land Use
July 16, 1996

Madam Chairman and members of the Subcommittee, 1 am pleased to submit
testimony on the impact of tax law on land use, and to recommend changes to the tax code
that would encourage private, voluntary conservation of land. 1 thank Chairman Johnson for
calling this hearing, and also Congressmen Zimmer and Houghton for their leadership in
advocating new legislation to encourage land conservation. | also commend the
Subcommittee for making this effon to increase public and Congressional awareness of this,
important issue

Tam President of the Land Trust Alliance (LTA), a national membership organization
serving the nation’s more than 1,100 local and regional land conservation groups known as
Jand trusts. Land trusts are nonprofit, tax-exempt land conservation organizations that are
organized to protect natural areas, agricultural land, habitat, wetlands, greenways. urban
gardens, recreational properties, and other kinds of conservation land for public benefit.

Local and regional land trust organizations operate in every state, and have helped to protect
nearly 5 million acres of irreplaceable open land. Together, these land trusts are supported by
close to a million individual members.

Land trust organizations work to conserve selected lands of significant public value;
many also act as community pianning advisors, and nearly half conduct environmental
education. No matter what their individual goals and methods, all land trusts share a
philosophy of private, voluntary, common-sense, solution-oriented land conservation. Land
trusts succeed through nongovernmental, nonregulatory, local citizen initiative. As a recent
article in Small Town magazine stated, “Today's land trusts occupy a niche that links broad
public interests in landscape protection with the desires and interests of individual
landowners."

In communities across the country, land trusts promote good land use, which requires
thoughtful planning for both development and open space. I am pleased to provide the
‘committee with copies of a recent book on this topic, Land Use in America (Henry L.
Diamond and Patrick F. Noonan, Island Press, 1996), to which | was asked to contribute an
article. My testimony today is consistent with the tax recommendations in that article,
beginning on page 257.

Land conservation tools. Land trusts rely on private action to save land, Their
methods include acquisition of land and conservation easements by gift, purchase, or bargain
(oelow market value) purchase; limited development that combines protected open space with
appropriate development; acquisition of land for subsequent conveyance to public conservation
agencies; land exchanges; and other direct methods. But these actions, though primarily
private, are influenced significantly by public laws, policies, programs and rules. In
particular, the land transactions that are at the heart of land trusts’ work are affected
substantially by incentives and disincentives in the tax code, While landowners virtually


120

The need for this legislation is clear when one considers the way in which the farmers
have to make decisions once a disaster strikes. Ordinarily, farmers have to capitalize the costs of
planting a new orchard or vineyard. Ifa disaster strikes, they would still be forced to capitalize
the costs of replacing essential infrastructure, trees and vines and other some other costs related
to replanting. It will be years before those costs are deductible because of the long preproductive,
periods trees and vines may require, A farmer facing massive new investment requirements
without deductions or income may decide to sell out. H.R. 3749 helps keep farmers on the land
by allowing them to deduct more of the costs of replanting,

Estate taxes can also be extremely burdensome. According to the U.S. Department of
Agriculture the average size farm in the U.S. is 469 acres. The land alone of an average
California farm is worth over $1 million and can be worth as much as $8 million. Such farm
values are the reason I introduced H.R. 520 to double the current maximum benefit under the
estate tax special valuation deduction. A farmer can be worth millions in terms acreage, but it
does not necessarily mean that his estate will have the money to pay estate taxes. Estate taxes
can force family farm operations to be split into parcels and sold to developers just to cover
taxes. H.R. 520's increased deduction of $1.5 million would allow for more continuity in farm
acreage, making it easier to transfer land between generations and avoiding the need for families
to split up their land to pay off the estate tax.

Prime agriculture land is being urbanized as we speak. Providing these small incentives
to America’s farmer would encourage families to provide a more natural habitat for our wild life
as well as a secure and abundant food supply for the 21st century.

re)


19

= Gives state and local governments the ability to request waivers to oppressive
federal regulations within the zones. These regulations will be selected from
those outlined by the Commission on Unfunded Mandates. (Riggs/English)

Lt Finally, the bill also includes tax credits for commercial revitalization based
on legislation 1 introduced, the "Commercial Revitalization Tax Credit Act
(CRTC)," ELR. 2138.

HLR. 2138 creates a tax credit that may be applied to construction, amounting to at
least 25 percent of the basis of the property, which takes place in specially-designed
revitalization areas, including enterprise communities, empowerment zones and other
areas specially designated according to federal, state or local law. Qualified taxpayers
could choose a one-time 20 percent tax credit against the cost of new construction or
rehabilitation. Annually, the credit would be allocated to each of the states according to a
formula that takes into account the number of localities where over half the people earn
less than 60 percent of the area's median income. Localities would determine their
priority projects and forward them to the state for allocation of credits according to an
evaluation system which the states establish.

Title IMI of the "American Community Renewal Act” contains the final provision I
will discuss today: a charitable tax credit. The legislation creates a non-refundable, 75
petcent tax credit for up to $200 per taxpayer/per year ($400 for joint filers) for donations
to charities engaged in helping low-income Americans, To be eligible, charitable

organizations must: engage in activities generally aimed at assisting individuals who earn
185 percent of the poverty line or below; obtain their state tax-exempt status; and, spend
no more than 20 percent of their aggregate expenses on administration, fund-raising,
lobbying and litigation.

Madam Chairwoman, I firmly believe that current laws discourage businesses
from investing in urban areas and, in fact, contribute to prolonging the poverty trap.
Legislation like Reps. Talent and Watts have introduced is necessary to provide
incentives to rebuild our cities.

Madam Chairwoman, this is not just a Republican solution. The ideas in this
legislation have come from communities, and I believe they are good ideas that make
sense. The "American Community Renewal Act" incorporates the ideas of the
community leaders who already are making a difference. It is an aggressive urban policy
that relies on the vitality of people while recognizing the limits and dangers of big
government.

Thank you for the opportunity to testify.


4

We think this is good legislation. It is supported by not only a
lot of Members on this Committee and in Congress, both Demo-
crats and Republicans, but groups such as the American Farm Bu-
reau, the National Farmers Union, the American Farm Land
Trust, the Land Trust Alliance, the National Trust for Historic
Preservation, the National Audubon Society, the National Forest
Council, and many others. We would hope that in the remaining
time that we have in this Congress that this legislation could be
moved forward and could become law.

Thank you very much. I would like to put my statement into the
record.

Chairman JOHNSON. So ordered.

[The prepared statement follows:]


In view of the limited time available to hear witnesses, the Subcommittee may not
be able to accommodate all requests to be heard. Those persons and organizations not
scheduled for an oral appearance are encouraged to submit written statements for the record of
the hearing. All persons requesting to be heard, whether they are scheduled for oral
testimony or not, will be notified as soon as possible after the filing deadline.

‘Witnesses scheduled to present oral testimony are required to summarize briefly their
written statements in no more than five minutes, THE FIVE-MINUTE RULE WILL BE
STRICTLY ENFORCED. The full written statement of each witness will be included
in the printed record.

In order to assure the most productive use of the limited amount of time available to
question witnesses, all witnesses scheduled to appear before the Subcommittee are required to
submit 200 copies of their prepared statements for review by Members prior to the hearing,
Testimony should arrive at the Subcommittee on Oversight office, room 1136 Longworth
House Office Building, no later than 10:00 a.m. on Tuesday, July 9, 1996. Failure to do
‘so may result in the witness being denied the opportunity to testify in person.

WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:

‘Any person or organization wishing to submit a written statement for the printed
record of the hearing should submit at least six (6) copies of their statement, with their
address and date of hearing noted, by the close of business, Thursday, July 25, 1996, to
Phillip D. Moseley, Chief of Staff, Committee on Ways and Means, U.S. House of
Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. If those
filing written statements wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this purpose to the
Subcommittee on Oversight office, room 1136 Longworth House Office Building, at least one
hour before the hearing begins.

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‘Note: All Committee advisories and news releases are now available on the World Wide
Web at "HTTP:/WWW.HOUSE.GOV/WAYS MEANS/ or over the Internet at
°GOPHER.HOUSE.GOV’ under "HOUSE COMMITTEE INFORMATION’.


110

THE LOCATION EFFICIENT MORTGAGE PARTNERSHIP

THE PARTNERS: The Location Efficient Mortgage Partnership includes
the Surface Transportation Policy Project, the Center for
Neighborhood Technology [Chicago], and the Natural Resources
Defense Council. The Federal Transit Administration and
Environmental Protection Agency are funding the Partnership's
single family loan program research and development.

WHAT AND WHERE: The Partnership--using data for the Los Angeles,
San Francisco, and Chicago metropolitan areas--is finetuning an
analytical model developed by John Holtzclaw, consultant to the
Partnership, that correlates household geographical location with
relative transportation efficiency and household transportation
expenditures relative to other locations within the metropolitan
areas.

The Partnership--focused initially upon Los Angeles, San
Francisco, and Chicago--is actively exploring with single family
residential mortgage lenders and secondary market entities the
utility of the analytical model in identifying affordable housing
loan market opportunities for lenders in “transportation [or
location] efficient areas"--areas that by reason of their greater
dwelling unit density or access to public transportation require
less household expenditure upon private automobile transportation.
Households in these areas can use their transportation savings to
finance the purchase of affordable housing.

WHEN AND HOW: The Partnership’s goal of demonstrations of the
utility of its model in support of the “location efficient
mortgage” is included in the National Homeownership Strategy
adopted a year ago by the National Partners in Homeownership and is
endorsed by the President's Council on Sustainable Development in
its first report.

The Partnership will be demonstrating the applications of its
model at the first anniversary conference of the National Partners
in Homeownership June 6 and 7 in Washington, D.c..

At and following the June conference the Partnership will be
seeking to confirm interest of primary and secondary mortgage
market lenders in demonstrating the "location efficient mortgage.”

The Partnership will focus its marketing attention upon
innovative, private mortgage lenders and the principal secondary
market institutions, Fannie Mae, Freddie Mac, and the Federal Home
Loan Bank System, as well as State and local residential funding
sources, such as State and local housing finance agencies and
pension funds.

WHO BENEFITS: The Partnership intends to create explicit financial
rewards for households that choose to reduce their daily
transportation requirements and thereby enhance their ability to
dedicate disposable income to housing rather than transportation
expenditures. Creation of such rewards also will benefit employers
concerned with the costs to them and their employees of inefficient
accessibility of employees to employment locations.


69

is shared by the United States Conference of Mayors, the National Association of Home Builders,
the Delaware Bankers Association, as well as preservation, economic development, and citizen
groups across the country. By providing an incentive for Americans at all income levels to invest
in the rehabilitation of deteriorated buildings and become home owners in older neighborhoods
‘and communities, a historic homeowner tax credit can provide the following benefits

> saving invaluable historic resources, which would otherwise be lost through decay,
abandonment and demolition

> stabilizing and rescuing endangered communities through the infusion of new home
‘owners, who will make a commitment to the enhancement of community life through their
purchase of a home.

» providing cities and towns with the chance to strengthen their tax bases by attracting
middle-income and more affluent residents

> ereating jobs and stimulating economic activity in areas where economic opportunities are
scant

‘When preservation begins in a community, good things follow. H.R, 1662 is not a cure-all
for ailing communities. Change for the better, ifit is to come, will be incremental, I will result
from decisions made by individual Americans, one family at a time. But HR. 1662 can be a spark
that ignites those private decisions to the benefit of our families, our communities, and our
heritage as Americans. On behalf of the 265,000 members of the National Trust for Historic
Preservation, 1 strongly urge the prompt enactment of this legislation



24

‘And, because the IRS levies estate taxes based on the value of a parcel’s “highest
and best use,” people often have to sell their land to a developer just to pay the
estate taxes,

According to the American Forest's magazine, “most forest owners simply don’t
invest in maintaining their forest because tax policies make it almost impossible to
deduct these costs on their tax returns. Instead they extract some value ... by
selling land fragments for development or cutting some timber.”

Luckily the motivation for some out there is beyond economic gain. Most people
who donate land for the purpose of open space preservation don’t do it for
financial benefits. But there are many others who can’t afford to because of
punitive tax policies.

And as the population of land owners grows older this problem will only get
worse.

Stephen Small, a Boston attorney and probably the leading authority on land
preservation and the tax code, points out that an enormous amount of private land
in this country is held by people who are 55 years and older, which means that
‘over the next 15 to 20 years, millions of acres are going to change hands and
potentially change use, depending on how landowners plan for their land’s future.

Open space will continue to be threatened unless we are able to correct the current
imbalance in the tax code.

I believe it is not too late to address this problem.
The process must begin now.

Thank you.


10

but also open lands and family farms. One of the main causes of
the phenomenon of sprawl is the Tax Code, which often provides
a disincentive to invest in existing infrastructure. In order to
achieve our common goals of heritage and preservation, we must
provide our homeowners, farmers, and families with a Tax Code
that respects and fosters both our past and our future.

Having restored one of these old homes, I believe—I know,
Madam Chairman, you have been in that home, and you live in one
of the older homes here in the District—it is very expensive. These
old homes are very temperamental, but I think it is very important
that they be preserved instead of bulldozed, and I can tell you also,
as a former mayor, that this would be tremendously important to
the inner cities particularly and could help us out tremendously in
the revitalization of our great cities.

Thank you.

Chairman JOHNSON. Thank you.

Mr. Houghton.

STATEMENT OF HON. AMO HOUGHTON, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF NEW YORK

Mr. HouGuTon. Thank you, Madam Chairman, for the oppor-
tunity to testify.

l ask that my written statement be included in the record.

I am here with my friend and colleague, L.F. Payne, to briefly
discuss our bill, H.R. 864, which is the American Farm Protection
Act. I might say that in addition to Mr. Payne, myself, and your-
self, there are 11 other Members of the Ways and Means Commit-
tee who are cosponsors of this bill.

Now let me make four points very briefly.

First, why do we need such a bill? Because the family farms and
ranchland around the urban areas and in our national parks is
being developed at a very rapid rate. The development value of
such property may greatly exceed the farming value of such prop-
erty, forcing the sale on the death of the owner to pay estate taxes.

Second, how does the bill solve the problem? What it does is pro-
vide an exclusion from estate and gift taxes for the value of farm-
or ranchlands subject to a qualified land conservation easement,
and that is within 50 miles of a metropolitan statistical area or na-
tional park. That is pretty straightforward.

Third, does the Code already provide relief? Even though there
are presently a number of measures in the Internal Revenue Code
to provide some relief, they frankly are not effective. They just
don’t work.

Fourth, our bill provides for the conservation of America’s impor-
tant farm- and ranchland really through voluntary action without
regulation, without cost of public acquisition and maintenance, and
without taking land off the local tax roles.

Thank you, Madam Chairman. That is my statement.

[The prepared statement follows:]


29

Mr. Payne. I think it was a more limited version in that it was
limited geographically. It is also limited in terms of the percentage
of the estate that must fall into this category, which further limits
and to some extent is somewhat problematic.

We think that ours is a better public policy and we would want
to continue to work with the bill that we have, recognizing, though,
that the concept has been approved by both the House and the Sen-
ate and that there are some things that could be done to modify
it to make it a very good piece of legislation, we think.

Chairman JOHNSON. What is the limit on the percent of the es-
tate that can be included?

Mr. Payne. The limit is 40 percent.

Chairman JOHNSON. So that functions like the $750,000 cap in
current law.

Mr. Payne. It does. It becomes a limiting factor in terms of who
would qualify for this particular provision. It is not necessarily on
which pieces of land that most need to be protected or conserved
but, rather, a percentage, an economic percentage of the estate is
the criterion.

Chairman JOHNSON. Thank you.

Mr. Laughlin.

Mr. LAUGHLIN. Thank you, Madam Chairwoman, for calling this
hearing. I thank all of my colleagues for the hard work they have
done. It is important.

With all of you, the basic concern I have is, it sounds like you
want to transfer title to all of this property to the Federal Govern-
ment. I have a real problem with that, because in my State, we are
a State where the Federal Government purchased or had donated
all of the property, and I have an experience in my own district
where substantial land has been taken off the local tax rolls.

It occurs to me also that the private landowner also has equal,
and many times superior, capability to take care of this property
than the Federal Government.

Is there a reason why we are transferring title, even when we
are calling them conservation easements? Do any of the bills allow
it to take place without transferring title from the landowner?

Mr. PayNE. We are not talking about transferring the title, we
are talking about providing an easement so that the title is main-
tained, private landowners continue to own their land. This pro-
vides them, though, the ability to do with their land what they
would like to do, such as in the case that I had just mentioned
where someone who wants to be able to continue to farm their land
won't be able to do that when the estate passes, because the taxes
will be so high, they will have to sell that.

This provides a way that we can allow that private property
gwner to do precisely with their property what they would like to

10.

Mr. LAUGHLIN. Does yours and Amo’s bill allow a family to con-
tinue farming without having a tax consequence just because the
father or the grandfather or the grandmother has passed away?

Mr. PAYNE. That is precisely what this bill is attempting to do.

Mr. LAUGHLIN. Well, I like the thrust of your bill. But let me tell
you a problem I have with your 50-mile radius and your national
park provision.


98

Written Statement of
AMERICAN VINTNERS ASSOCIATION

Simon Sieg]
President

Submitted for the
SUBCOMMITTEE ON OVERSIGHT
of the

COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES

HEARING ON THE IMPACT OF TAX LAW ON LAND USE

July 25, 1996

Introduction

Chairwoman Johnson and Members of the Subcommittee, thank
you for allowing the American Vintners Association ("AVA") to
submit testimony relating to the impact of tax law on land use.
The AVA is a national trade organization of American vintners
with a membership of over 500 wineries in 42 states. We
appreciate the opportunity to discuss one of the major land use
issues currently faced by farmers, vintners, and other crop
owners. The problem we would like to address relates to the
financial burden that farmers face when their crops are damaged
by disease or natural disaster.

As described below, the devastating impact of phylloxera and
frostkill on the wine producing industry is a prime example of
the harmful effects that natural disasters can have on land use,
both economically and environmentally. Crop owners attempting to
recover from such losses often face insurmountable costs,
resulting in long periods of inactivity for the farm or vineyard.
Such nonuse significantly weakens the economic stability of the
industry, and can also damage the land itself, especially when
the land’ is converted to less beneficial uses during the period
of inactivity.

In 1986, Congress recognized the severity of this burden and
enacted section 263A(d) (2) of the federal tax code, which allows
farmers to deduct certain casualty expenses. Unfortunately, the
IRS has adopted an excessively narrow interpretation of this
statute, preventing crop owners from claiming the tax benefits
that section 263A(d) (2) was intended to provide. Because of the
restrictive reading imposed by the IRS, many farmers are unable
to recover from the severe losses caused by natural disasters.

Congressman Bill Thomas (R-CA) has introduced a bill, H.R.
3749, that would clarify the appropriate interpretation of the
1986 farm casualty rule for deducting the costs of replanting
destroyed crops. The American Vintners Association urges the
Committee to adopt this important legislation

Impact of Natural Disasters on Crop Owners and Land Use

Natural disasters can have a catastrophic effect on farmers
whose crops do not reach marketable production until many years
after planting. When diseases or other severe conditions destroy
a farm or vineyard, crop owners must invest large amounts of
money to restore their businesses to working condition. Banks
and other financial institutions are reluctant to take the risks
involved with replanting, particularly when weather and other
natural disasters may destroy the crops again. Furthermore, even
when the damaged property is replaced, it may take another three


91

Details. Generally, the expenses that would be deductible under the President's
proposal are limited to those paid or incurred in connection with the abatement or control of
environmental contaminants. For example, expenses incurred with respect to the demolition
of existing buildings and their structural components would not qualify for this treatment
except in the unusual circumstance where the demolition is required as part of ongoing
remediation,

Qualified sites would be limited to those properties that satisfy use, geographic, and
contamination requirements.

1. The use requirement would be satisfied if the property is held by the
taxpayer incurring the eligible expenses for use in a trade or business or for the production
of income, or the property is of a kind properly included in the inventory of the taxpayer.

2. The geographic requirement would be satisfied if the property is located in

- any census tract (or comparable area) that has a poverty rate of 20
percent or more;

any other census tract (i) that has a population under 2,000, (ii) 75
percent or more of which is zoned for industrial or commercial use,
and (iii) that is contiguous to one or more census tracts with a poverty
rate of 20 percent or more;

= an area designated as a federal Empowerment Zone or Enterprise
Community, including the 104 designated on Dec. 21, 1994, and the
additional 102 that would be designated under the President's proposals
described below; or

= an area subject to one of the 40 Environmental Protection Agency
(EPA) Brownfields Pilots announced prior to February 1996 ,

These qualified sites encompass roughly 30 percent of the country. Both urban and
rural sites would be eligible, though Superfund National Priority listed sites would be
excluded

3, The contamination requirement would be satisfied if hazardous substances
are present or potentially present on the property. Hazardous substances would be defined
generally by reference to sections 101(14) and 102 of the Comprehensive Environmental
Response Compensation and Liability Act (CERCLA).

To claim this deduction, the taxpayer must obtain a statement that the site satisfies the
geographic and contamination requirements from a State environmental agency designated by
the EPA for such purposes. It is anticipated that in States with voluntary cleanup or similar
programs, this process will be handled by the State or local agency overseeing that program.
With respect to other States, it is anticipated that EPA will provide the necessary statements
until appropriate State agencies are designated to take over that task.

This deduction would be subject to recapture under current-law section 1245. Thus,
any gain realized on disposition generally would be treated as ordinary income, rather than
capital gain, up to the amount of deductions taken. This recapture rule is limited to
deductions claimed under this provision. Environmental cleanup expenses that are deductible
under current law would not be subject to recapture. No inference is to be drawn from this
proposal regarding the proper tax treatment of any expense under current law.

The deduction, which would apply for alternative minimum tax purposes as well as
for regular tax purposes, would be effective for eligible expenses incurred after the date of
enactment


ll

STATEMENT OF THE HONORABLE AMO HOUGHTON (R., NY)
MEMBER , COMMITTEE ON WAYS AND MEANS
BEFORE THE SUBCOMMITTEE ON OVERSIGHT

ON THE IMPACT OF TAX LAW ON LAND USE
JULY 16, 1996

‘Thank you, Madam Chairman, for the opportunity to testify before your subcommittee.
‘This is an issue of importance, and one in which I have been involved during this Congress. 1
tum delighted to join my colleague, L.F. Payne, who also has been deeply involved for many
years.

‘As you and I and anyone living in rural and suburban areas of this country know, much
‘of America's (historically and environmentally significant) land is under development pressure.
‘This is often out of proportion to the expected demands of population growth, as sprawl
leaptiogs development far beyond metro centers. Furthermore, this pressure is intensified by
Federal tax laws, in particular estate tax law.

Specifically, the value of land in those parts of the country where ranches, farms and
forests traditionally have flourished has skyrocketed — this to the point where landowners!
children can no longer afford the estate tox bill after their parents die. ‘The result is predictable —
landholdings are spit up and sold. The problem of course is that their land is often some of the
best and most productive agricultural land in the nation, Today provisions in the law provide
litle or no relief from this burden, nor are current incentives in the law to preserve this land in its
‘current, or a less developed state sufficiently attractive or workable to have much success.

‘That is why Mr. Payne and I, along with you, Madam Chairman, and 3 other members of
‘your subcommittee, as weil as 8 of our colleagues on the full Committee in a bipartisan effort
have introduced H_R. 864, the American Farm Protection Act.

‘The American Farm Protection Act addresses the problem faced by the current
‘generation of farm and ranch owners.” It also provides an incentive to conserve valuable farm

‘The American Farm Protection Act would enable America's farm and ranch families to
continue to do what they do best: take care of America's rural lands. It would eliminate the
Federal Government from a family's decision whether to maintain the farm, ranch, or
forest. In other words, the American Farm Protection Act protects farm, ranch and forest land
‘and the families who own it. It does so without regulation, without taking the land off the local


97

‘The AIA believes CRTC is well-targeted, built on proven and accepted mechanisms for delivering
tax incentives. The proposal is designed to reward success: eligible projects must be included in
ocally developed strategy for revitalization and long-term sustainability, and the credit may not be
taken unless the business is generating taxable revenue and the commercial structure is actually
placed in service. It would operate with a minimum of bureaucracy, complement other incentives,
leverage existing infrastructure, and put buildings that are economic and social liabilities back into
Productive use.

If one examines similar credits it is clear that the proposed CRTC has significant potential for
‘encouraging investment in places businesses left years ago. The Low-Income Housing Tax Cr
Program (LIHTC) provides $320 million in credits per year, which generates $2.8 billion a year in
‘wages and salaries and $1.3 billion in tax revenues. It also creates about 110,000 jobs in
construction and related industries.

Another related tax credit is the historic rehabilitation tax credit, which may be applied to historic

properties on the National Register of Historic Places. This credit provided $97 million in FY
1994, generated $483 milion fn private imvestent, and crested 21,000 jobe. Both of thee reds
contribute significantly to the betterment of communities and nei

‘An effective capital-based incentive for non-historic commercial projects in targeted areas is a
missing piece of the incentive package that must be made available to reduce the risk of
investment. The CRTC is not a panacea. It cannot in and of itself solve the problems of
‘economically distressed communities and urban sprawl. It can, however, tip the balance for a
business considering expansion or new development in existing neighborhoods.

‘The AIA believes the CRTC represents a feasible, common sense solution to the inefficient use
and inappropriate placement of this nation’s resources. We commend the Chairwoman for
addressing this issue and exploring altemative options sooner rather than later, and the ALA
stands ready to work with the Subcommittee in the future. Thank you.


102

> Of the 20 percent who did not met the provision, 64 percent moved further out while 36
percent moved closer in.

‘Those who did not comply moved inward at a rate 2.3 times greater than those who did comply
(36 percent vs. 16 percent), which suggests the possibility that more would move inward were it
not for the capital gain provision.

Not only does Sec. 1034 foster urban sprawl and central city decline by obstructing movement
down in price, it also disadvantages homeowners who ate forced to move down because of
personal circumstances such as illness or employment change to a lower level of income. The
code penalizes those least able to absorb it.

For those reasons Sec. 1034 should be revised to remove the penalty against moving down in
price; allow movers to go freely up or down until aged 55 (or older) after which they can settle
up with IRS on their net gain, using the $125,000 exemption.

Better still would be to remove the tax on homeseller capital gain all together. It would cost the
treasury something (I've heard an estimate of about $3 billion) but most gain now is little more
than inflation. Most homeowners may be lucky to stay even with inflation.

‘Thomas Bier, Director
Housing Policy Research Program
Levin College of Urban Affairs
Cleveland State University
Cleveland, Ohio 44115

(216) 687-2211

FAX 687-9277


118

Committee on Ways & Means
Subcommittee on Oversight

Hearing on the Impact of Taxation on Land Use

Tuesday, July 16, 1996, 11:00 a.m.
B-318 Rayburn House Office Building

Representative Charles B. Rangel of New York

Madame Chairman, Today the Committee sits to hear testimony of the impact
of tax policy on land use. 1 thank you for allowing me to offer testimony in
support of H.R. 3747, the Community Empowerment Act.

This legislation will expand upon the Empowerment Zone and Enterprise
Community concept, which was passed as part of the Omnibus Budget
Reconciliation Act of 1993. OBRA 93 authorized a Federal demonstration
project of 9 Empowerment Zones and 95 Enterprise Communities that were
designated through a competitive process, Among the benefits include tax
incentives that: I) offer an employment and training tax credit; 2) provide an
additional $20,000 per year of Section 179 expensing; and 3) create a new
category of tax-exempt private activity bonds.

H.R. 3747 also provides for tax incentives for the cleanup for as many as 30,000
brownfields, contaminated and polluted former industrial sites that lay abandoned
and underutilized. Many of these areas are located in the distressed communities.
Significant economic benefits can be realized if these sites are cleaned up and
made available for use.

Under current law, cost incurred for new buildings or for permanent
improvements made to increase the value of any property are not currently
deductible, but must be capitalized, Under The Community Empowerment Act,
certain remediation costs would be deductible if incurred while restoring a
qualified site

This incentive is expected to cost approximately $2 billion while leveraging $10
billion in private clean-ups nation-wide. With the possibility of returning as many
as 30,000 brownfields to productive use and over 500 communities ready to
Participate, we must move forward with this responsible legislation.

H.R. 3747, The Community Empowerment Act is the next logical step to the
Empowerment Zone initiative. Leveraging public sector resources to enable
private-sector community investment is a fiscally responsible means of promoting
community development and prosperity. 1 welcome my colleagues to join me in
supporting this legislation.

HHH


65

construction, $120,000 will initially stay inthe community, five to nine more construction jobs
will be created; and total household income in the community will increase by $107,000. Building
rehabilitation outperforms new construction in the number of new jobs created, the increase in
local income, and the impact on all other industries.

But while the economic benefits of historic rehabilitation are considerable, they are by no
‘meens the only reason why communities pursue historic preservation as part of an overall
revitalization strategy. The social, cultural, and historical benefits of preserving both architectural
‘gems and the ordinary places where ordinary people lived and worked have been verified
repeatedly, By addressing blight and abandonment, and by restoring the tangible markers of a
‘community's history, a community can restore hope and pride as well as buildings. The results,
to which many neighborhood résidents can testify, include safer streets, more livable
neighborhoods, and a social cohesiveness that is all to often absent in today’s society.

Provisions in the Internal Revenue Code which support the goals of historic preservation

Before turning to the provision which has had the greatest benefit for our country’s
historic resources, the historic rehabilitation investment tax credit, I would like to cite three other
provisions in the code by which historic preservation benefits: the deductibility of interest on
‘mortgage revenue bonds; and property owner income and estate tax exemptions for historic
preservation easements held by qualified organizations.

Historic preservation easements provide key incentives for property owners to protect the
facade and surroundings of historic structures or historic land areas from inapy
development while retaining the property in private ownership, For example, the National Trust
is in the process of acquiring an historic easement on the Clark-Ward House, an 18th century
home listed on the National and Connecticut Registers of Historic Places, which is the oldest
house in West Haven, Connecticut. The neighborhood surrounding the house is undergoing a
transition from residential to commercial use, and the house itself was threatened by encroaching
development. The historic easement will protect the Clark-Ward House in perpetuity, which has
spurred a local non-profit organization to acquire the house in order to create a museum and an
educational center for school children to learn about the history of the area

‘As T noted earlier, the decline and disinvestment of our nation’s older communities puts
their historic resources, and the neighborhoods themselves, at grave risk. By allowing the imerest
paid on mortgage revenue bonds to be tax-deductible, the federal government is pro
Ssriican incentive for reinvestment in older neighborhoods, thereby esting sates and locates
in their efforts to target growth and development. Lest week, Maryland Governor Parris
Glendening announced a six year, $72 million state-wide neighborhood conservation effort,
‘aimed at revitalizing Maryland’s older communities and encouraging investment in already built
up areas. This initiative will be complemented by more flexible eligibility standards for $40
milion in MRB-financed mortgages for Baltimore County and other older Maryland suburbs, in
‘order to attract homebuyers to those areas. In announcing this effort, Governor Glendening said
he intends to continue using such incentives to help localities manage growth.

‘Historic Rehabilitation Investment Tax Credit:

ince 1976 the Internal Revenue Code has contained incentives to stimulate capital
investment in income-producing historic buildings and the revitalization of historic communities.
These include a 10 percent credit for the substantial rehabilitation for nonresidential purposes of
buildings built before 1936 and, more significantly, the Historic Rehabilitation Investment Tax
Credit, which applies a 20 percent income tax credit to qualified rehabilitation expenses on
certified historic structures. Certified historic structures include properties listed in the National
Register of Historic Places, or contributing properties within historic districts in the National
Register of Historic Places, or located in federally-certified state and local districts. The effects of
‘National Register listing are positive, by fact and by law. Listing does not give the federal



71

ticularly evident with respect to the installment sales treatment of
unimproved residential lots.

Developers like myself selling residential lots to individuals in
the ordinary course of business may use the installment method to
regain—to report gain from such sales if neither the seller nor the
person related to the seller makes any improvements on the lot.

The existing law is unclear as to the definition of the term “un-
improved.” It is not clear how many common amenities may be con-
structed before that raw land that can be developed at some time
in the future would be considered to have been improved. Addi-
tional clarification is needed to define the term “unimproved.”

The legislative history of the Tax Reform Act of 1986 says that
construction of common infrastructure items such as roads and
sewers should not cause raw land to be considered improved.

From the available guidance, land developers find it difficult to
determine which common amenities and infrastructure items would
cause an individual lot to no longer be considered unimproved.

For example, in a multifamily complex, would the front gate or
fencing be considered a common element? Would the construction
of a golf course or community clubhouse cause the undeveloped lots
to be considered improved within the meaning of the statute?

Without further clarification, these questions would undoubtedly
lead to increased controversy and lawsuits. Clarification and relax-
ation of these rules will lead to more efficient land use as land-
owners will have greater flexibility in their paying taxes on income
in the year in which it is received.

The second item we would like to address is the tax credit for
rehabilitation. We certainly know what is happening to our cities
across America. The use of the Federal tax incentives to encourage
private investment in historic rehabilitation has probably been one
of the most effective frontal programs to promote urban and subur-
ban growth.

We would like to again thank you, Mrs. Johnson, along with
other of your colleagues, for introducing H.R. 1662, the Historic
Homeownership Assistance Act. NAHB believes that this proposal
would enhance historic rehabilitation credit and benefit those who
wish to restore their historic homes. It would provide much needed
home ownership opportunities and stimulate the revival of decay-
ing neighborhoods and communities by expanding the current his-
torical rehabilitation credit to include buildings owned and occu-
pied as a principal residence.

Promoting the use of existing homes will decrease the need for
more development at the fringe of our urban areas. It will encour-
age rehabilitation of historically significant homes through the pro-
posed tax credit which will increase the preservation of the current
stock of homes. Rehabilitation will also increase employment in
areas where the historic homes are located, which have more con-
venient work destinations for the disadvantaged workers in that
city than the locations in new residential.

Third, I would like to address tax preference for small busi-
nesses. The present estate and gift tax laws operate to destroy fam-
ily-owned businesses by imposing a tax upon the intergenerational
transfer of the business at the worst possible time, the death of the
principal owner of the business.


16
Chairman JOHNSON. Mr. English.

STATEMENT OF HON. PHILIP S. ENGLISH, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF PENNSYLVANIA

Mr. ENGLISH. Thank you, Madam Chair, Members of the Sub-
committee. I want to thank you for the opportunity to testify here
today at this hearing and to speak to the provisions of the Amer-
ican Community Renewal Act of 1996, H.R. 3467. By your leave,
I would like to submit my testimony for the record and make some
general comments.

This legislation, which was introduced by Representatives J.C.
Watts, Jim Talent, and 46 others, including myself, will be exam-
ined much more closely and by a number of other Committees be-
cause it is broad-ranging legislation. However, today I specifically
want to focus on a number of tax provisions in the bill and how
the implementation of these provisions relates to current law and
disincentives for businesses to invest in depressed communities.

The Community Renewal Act is designed to revitalize families,
neighborhoods, and local business areas in America’s impoverished
communities. H.R. 3467 will provide greater economic opportunities
and new hope for millions of disenfranchised Americans trapped in
poverty. It will do so by encouraging private sector job creation in
the community, providing opportunities for home ownership, and
bolstering private charitable activity, along with a number of other
incentives.

Title I of the legislation builds on the enterprise zone legislation
concept that has been before Congress in the past. It includes the
tax incentives in the Abraham-Lieberman bill currently in the Sen-
ate which contains legislation I introduced in the House, the Com-
mercial Revitalization Tax Act, H.R. 2138, and the Riggs, English,
and Weldon bills in the House on enterprise zones.

The purpose of title I is to liberate the economic forces within
disadvantaged communities through the Tax Code by fostering an
atmosphere where real private sector businesses and jobs are cre-
ated and recognizes that new and expanding small businesses are
best suited to provide jobs, particularly in urban neighborhoods. It
comes invested with specific ideas that urban entrepreneurs believe
are necessary to restore the economy in depressed communities.

Specifically, title I would create 100 renewal communities. To
qualify, a community would have to have a poverty rate of 20 per-
cent or more, an unemployment rate of at least 1.5 times the na-
tional rate, and at least 70 percent of the households having in-
comes below 80 percent of the median level of households, and have
a population decline of 20 percent or more between 1980 and 1990.

Second, it would require that local communities reduce tax rates
and fees within zones and eliminate State and local taxes to be eli-
gible for community designation.

Third, it would create substantial Federal tax incentives for re-
newal communities, including an elimination of the capital gains
tax on investments and stock business property or partnerships
within zones so long as the assets are held for 5 years or longer.
It would also include a business tax credit for hiring disadvantaged
workers.


99

to four years before a commercially harvestable crop can be
obtained, thereby eliminating any revenue from the farm or
vineyard’ for an extended period of time. Finally, periods of
nonuse due to economic hardship can cause environmental damage to
the land itself.

While wine producers and grape growers are not the only ones
impacted by such losses, their situation provides a
illustration of how such natural disasters negatively impact both
crop owners and their lands. Wine producers and grape growers
across the country have been faced with severe damage caused by
peste and extreme weather conditions. In the wine growing
regions of New York, Pennsylvania, Ohio, Michigan, Missouri, and
Arkansas, low temperatures lead to "frostkill" --'a weakening of
the vines which kills crops or leaves them vulnerable to disease
and infestation. The affected vines must be removed and replaced
in order for grape production to continue.

Crop owners in California and Oregon, similarly, have been
faced with severe damage caused by a pest known as phylloxera.
Phylloxera is a small aphid-like louse which, because it is
impervious to pesticides, can be eliminated only be removal of
the infested vineyards (including irrigation equipment, drain
tiles, and trellis systems) and the subsequent fumigation and
replanting of vineyards with root stocks resistant to the pest.
Furthermore, the Department of Agriculture has stated that the
failure of a grape grower to eliminate the phylloxera from one
vineyard could have devastating consequences for vast areas of
vineyards.

Wine producers faced with a natural disaster such as
phylloxera or frostkill must generally replace entire vineyards
in order to salvage their business. However, vines and root
stock cannot be removed without removing related improvements,
since the irrigation equipment, trellis systems, and drain tiles
are inextricably linked with the mature vines and root systems.
Furthermore, once a vineyard is removed and replaced, it still
takes many additional years for the vineyard to reach its pre-
casualty maturity level and revenue generation capability.

The huge costs required to replant devastated vineyards have
forced many farmers to keep their land lying fallow or used for
less environmentally beneficial purposes. Vineyards are a
uniquely benign form of land use, because they require very
minimal amounts of water compared to other crops and because they
employ integrated pest management and other "sustainable
agriculture" practices. Therefore, when nonproductive vineyards
are converted to alternative land uses, environmental harm -- in
addition to economic damage -- inevitably results.

Congressional Intent and the Farm Casualty Rule

Section 263A of the tax code, enacted as part of the Tax
Reform Act of 1986, generally requires a taxpayer engaged in a
farming business to capitalize all costs that are incurred in
manufacturing or constructing tangible personal property.
However, recognizing the burden faced by crop owners dealing with
natural disasters, section 263A(d) (2) provides an exception for
costs that are incurred by a taxpayer whose crops are destroyed
by certain casualties. Specifically, section 263A(d) (2) allows a
taxpayer to deduct "any costs" incurred for "replanting plants
bearing the same type of crop" after a crop has been damaged "by
reason of freezing temperatures, disease, drought, pests, or
casualty."

The plain meaning of this statute indicates that Congress
intended the farm casualty rule to alleviate the tax burden that
farmers face when their crops are destroyed by disease or natural
disaster. Despite this statutory language, however, the IRS has
adopted an unduly narrow interpretation of section 263A(d) (2).


21

than they would have if the sales price was actually fair market
value.

They are paying twice, in effect. They are accepting less than the
fair market value of the development easement, and then they are
paying a greater capital gains tax on the sale, because it is consid-
ered to be a “bargain sale” under tax law, which means that the
full value of the property’s basis cannot be subtracted from the
sales price. I can go through a hypothetical example of how that
penalty would affect the typical seller, but I will do it only if asked
in the question and answer period.

Basically, this legislation would treat more fairly people who
have already decided to accept less than the fair market value that
they could have accepted for the sale of their land or an interest
in it. I think that is unfair, and it discourages the preservation of
open space.

Because donations and sales of undeveloped land are greatly in-
fluenced by tax treatment, these modest changes in the Tax Code
could help to enhance open space preservation and assist in pro-
tecting America’s heritage.

Madam Chair, you referred to the story of the flea on the ele-
phant. The flea on the elephant sometimes can make the bridge
shake a lot more than the elephant alone could. While I déeply
hope that both my bills will become enacted into law, I must also
underscore that they address only a small part of a larger problem,
which is the bias of the Tax Code against preservation of open
areas.

Current tax policies favor short-term investments in land devel-
opment over long-term investments in open space preservation.
Fairness should dictate tax policies that remove the current incen-
tives to convert land to cash.

For instance, our Tax Code offers tax-exempt bond financing to
businesses that build in empowerment zones but not those which
purchase the land or the existing improvements in an
empowerment zone. And, because the IRS levies estate taxes based
on the value of a parcel’s highest and best use, people often have
to sell their land to a developer just to pay estate taxes.

According to American Forest magazine, most forest owners—
and I am quoting now—most forest owners simply don’t invest in
maintaining their forests because tax policies make it almost im-
possible to deduct these costs on their tax returns. Instead, they ex-
tract some value by selling land fragments for development or cut-
ting some timber.

Fortunately, the motivation for many people is beyond economic
gain, and most people who donate land f for the purpose of open
space preservation don’t do it for financial benefit. But there are
many others who simply can’t afford to make such a donation or
set their land aside because of punitive tax policies, and as the pop-
ulation of landowners grows older, this problem will only get worse.
Open space will continue to be threatened unless we are able to
correct the current imbalance in the Tax Code. It is not too late to
address this problem, and I am glad that you have begun this proc-
ess now.

I thank you, Madam Chair.

[The prepared statement follows:]


HR. 12

HR 41

HR. 89

HR. 501
HR. 520

HR. 844
HR. 864

HR. 1298

H.R. 1408

HR. 1588

HR. 2078

H.R. 2190

HR, 2218

HR. 2676

HR, 3124

HR. 3251

50

Agricultural Tax Legislation
‘Supported by Farm Bureau
In the
104th Congress

‘American Farm Protection Act of 1995; allows farm property that is voluntarily
restricted by a conservation easement to be exempt from federal estate taxes while
actively farmed by heirs .

provides farmers and agribusiness with a 15 percent tax credit for capital expenses
incurred in complying with federal, state and local environmental laws

Family Farm Tax Relief and Savings Act; allows farmers, in contemplation of
retirement, to invest proceeds from asset sales in an individual retirement account
with taxes due only when funds are withdrawa

provides that certain cash rentals of farmland will not cause recapture of the
special estate tax valuation under section 2032

increases the maximum benefit under the special estate tax valuation rules to $1.5
million

Farmer Retirement Security Act; allows farmers, in contemplation of retirement,
to invest proceeds from asset sales in an individual retirement account with taxes
due only when funds are withdrawn

American Farm Protection Act of 1995; allows farm property that is voluntarily
restricted by a conservation easement to be exempt from federal estate taxes while
actively farmed by theirs

provides that certain cash rentals of farmland will not cause recapture of the
special estate tax valuation under section 2032

allows farmers and ranchers the option to count income from crop insurance
proceeds and disaster payments in either the year of the disaster or the following
year

‘expands the applicability of special tax rules governing the tax treatment of
livestock sold to include all types of natural disasters, not just drought

lowers excise tax on draft cider from the higher wine rate to the lower beer rate

Family Business Protection Act of 1995, targets estate tax relief to family
businesses by forgiving estate taxes on family business assets provided the family
business continues to operate

Farmland Preservation Act of 1995: allows farm property that is voluntarily
restricted by a conservation easement to be exempt from federal estate taxes while
actively farmed by heirs

increases the opportunities for farmer owned cooperatives to own facilities that
process and refine products produced by members by allowing corporations that
sell such facilities to a qualifying farmer cooperative to defer the gain as long as
the proceeds from the sale are reinvested

increases the annual expensing allowance for smail businesses rom $17,500 to
$50,000

‘Aggie Bond Improvement Act; changes the federal laws to allow beginning
farmers to purchase land from family members and customizes the definition of a
first-time farmer by establishing standards on a county specific basis


95

place naw before demand for product puts our resource in a position where it is impossible to
catch up. Unfortunately, I feel more comfortable about the future value of the timber and the
demand for products derived from that resource than I do about a consistent tax policy that will
last the lifetime of the investment. Tree farmers who planted trees 25 years ago have seen the
treatment of capital gains change several times. Many of them now ask, why invest in something
20 risky and for such a long period of time if taxes will eat away most of the profit? In my
opinion, the federal government should develop a relatively stable tax policy to favor sustainable
‘management of nonfederal forest.

‘The Balanced Budget Act of 1995 contained provisions drafted by Chairman Archer
which would have cut the tax rate on capital gains for both individuals and corporations, This
provision would have encouraged long-term investments and risk taking, which timber growing
certainly i Any improvement in the climate for long-term investments, we feel, would be a step
in the right direction.

‘The second area of tax law that is having a devastating effect on land use in our industry is
the current federal estate tax. As I mentioned earlier, timber growing is a long-term illiquid
endeavor with many, many risks. Many family owned tree farms and small businesses are being
estroyed by the federal estate tax. Inflation in land values has pushed otherwise modest
businesses and tree farms into the top estate tax brackets. Although the average individual tree
farmer earns 2 modest income, on paper his tree farm can be valued at well over $2 million,
including the value of mature and harvestable timber. In many cases, when the heirs are presented
the estate tax bill, they are forced to harvest their timber prematurely, sell a portion of the farm, or
liquidate the entire property. Many of these productive tree farms located near large metropolitan
areas are now subdivisions or shopping areas. That certainly is a change in land use, perhaps not
for the better.

In closing, I would like to thank the members of this Subcommittee and the full Ways and
‘Means Committee for having this hearing on tax laws impact on land use, It represents a
‘commitment to a federal tax policy that will provide future generations the multiple benefits from
America's privately-owned forests


33

STATEMENT OF C. TIMOTHY LINDSTROM, DIRECTOR AND
STAFF ATTORNEY, CHARLOTTESVILLE OFFICE, PIEDMONT
ENVIRONMENTAL COUNCIL, CHARLOTTESVILLE, VIRGINIA

Mr. Linpstrom. Thank you, Mr. Zimmer and Members of the
Subcommittee, for the opportunity to speak today.

My name is Tim Lindstrom, and I am an attorney with over 24
years of experience in estate tax, land use, and conservation law.
I currently serve as an attorney with the Piedmont Environmental
Council.

The Piedmont Environmental Council is a not-for-profit land con-
servation organization working in the northern Piedmont region of
Virginia. We have extensive experience with conservation ease-
ments. We became involved in this legislation which Congressman
Houghton and Congressman Payne described as the American
Farm Protection Act back in the 101st Congress when Congress-
man Schulze first introduced it as the Open Space Land Act, and
I would like to thank Mrs. Johnson for being one of the original co-
sponsors way back in the 101st Congress and sticking with it ever
since.

Congressman Schulze became interested in this issue because he
had constituents who were being forced out of farming by Federal
estate tax on farmland ranging in value from $20,000 to $40,000
an acre. We became involved because of that concern, and because
our experience with conservation easements convinced us that a
more predictable and compelling incentive was needed for vol-
untary land conservation. It was to address these two goals, estate
tax relief and providing a more compelling and clear incentive for
land conservation, that this legislation was introduced.

While the Virginia Piedmont is characterized by dramatically in-
flating land values and urban sprawl, that certainly isn’t a feature
confined to the Virginia Piedmont. In fact, during the eighties, just
to take one example, while the population of the State of Michigan
grew by 33,000 people, which isn’t very much, the amount of land
consumed for urban and suburban uses in that same period of time
increased by 40 percent.

A 1995 review of the USDA census of agriculture for the congres-
sional districts which were then represented on the Ways and
Means Committee showed that nearly 4 million acres of actively
farmed land had been lost in just those districts alone since 1974.
That is a loss of over 20,000 farms.

During the same period, the average value per acre of farmland
in these districts increased by nearly 200 percent, so that nearly
26,000 farms just in these districts were exposed to potential Fed-
eral estate tax. In Mrs. Johnson’s district alone, values since 1974
have increased by 280 percent, so that the average farm in her dis-
trict is now worth $670,000.

As a 12-year veteran of the Albemarle County Board of Super-
visors in Virginia, I know of the political and legal difficulties in-
volved in trying to regulate the effective protection of farmland and
open space. I also know that the cost of protecting land by outright
purchase is prohibitive. That is why we support the American
Farm Protection Act. We believe it is a very practical approach to
protecting rural land under development pressure. It is voluntary;


17

Fourth, it would give State and local governments the ability to
request waivers to oppressive Federal regulations within the zones.

Fifth, it would create family development accounts to provide
EITC recipients with a vehicle for enhanced personal savings.

Sixth, the bill would also include tax credits for commercial revi-
talization based on legislation that I introduced.

H.R. 2138, the Commercial Revitalization Tax Act, creates a tax
credit that may be applied to construction, amounting to at least
25 percent of the basis of the property, which takes place in spe-
cially designated revitalization areas. Qualified taxpayers could
choose a one-time 20-percent tax credit against the cost of new con-
struction or rehabilitation.

Annually, the credit would be allocated to each of the States ac-
cording to a formula that takes into account the number of local-
ities where over half the people earn less than 60 percent of the
area’s median income. Localities would determine their priority
projects and forward them to the State for allocation of credits ac-
cording to an evaluation system which the States would establish.
This would create a device for greenlining many of our downtowns
in depressed communities.

Finally, title III of the American Community Renewal Act con-
tains a provision that I will discuss and that I think is particularly
important, a charitable tax credit. The legislation creates a non-
refundable 75-percent tax credit for up to $200 per taxpayer per
year for donations to charities engaged in helping low-income
Americans.

To be eligible, charitable organizations must engage in activities
generally aimed at assisting individuals who earn 185 percent of
the poverty line or below, obtain their State tax-exempt status, and
spend no more than 20 percent of their aggregate expenses on ad-
ministration, fundraising, lobbying, and litigation.

Madam Chair, I firmly believe that the current laws discourage
businesses from investing in urban areas and getting people out of
the poverty trap. What we are hoping with this legislation is to
provide a vehicle for providing incentives to rebuild our cities and
revitalize neighborhoods.

I thank you for the opportunity to testify, and we certainly hope
that this legislation will see the light of day some time in the near
future to help many of our communities that most need it.

[The prepared statement follows:]


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114

interpretation of the law in this area could be a disincentive for companies to cleanup. EE!
‘strongly endorses the tax policy principles set forth in the February 10, 1994, letter.

In response to the letter of the House Ways and Means members and submissions by EEt
and others, the Internal Revenue Service (IRS) held in Revenue Ruling 94-38 that
hazardous waste remediation expenses were deductible as ordinary and necessary
business expenses. This ruling reversed the one technical advice memoranda (PLR
9315004) but did not reverse the other PLR (9240004) dealing with removal and
replacement of asbestos insulation used to insulate equipment.

EEI had hoped that, based upon the rationale underlying Revenue Ruling 94-38, the IRS
would revoke PLR 9240004 as well. Clearly, asbestos removal costs are similar to the
costs incurred in Revenue ruling 94-38 for land remediation and groundwater treatment.
Under Revenue Ruling 94-38 such costs are expensed. The same result should follow in
the case of asbestos removal. Revenue Ruling 94-38 rejected the conclusion in PLR
9240004 that the cleanup and removal expenditures should be capitalized because the
costs enhanced the value of the equipment. Revenue Ruling 94-38 also rejected the
premise underlying PLR 9240004 that the costs of asbestos removal are part of a plan of
fehabilitation associated with the costs of installing an alternative insulation. The cost of
removal of asbestos is not incurred in connection with the installation of new insulation.
It is incurred because taxpayers are required to comply with federal and state
environmental laws and regulations.

CON i

Asbestos removal costs affect numerous taxpayers. For the past two years, EEl and many
other organizations and corporations have been meeting with the IRS and Treasury
requesting clarification on the deductibility of asbestos removal costs. No guidance has
been received to date. For this reason, EE urges the Oversight Subcommittee to
encourage the IRS and Treasury to issue guidance confirming the deductibility of asbestos
removal costs.

Thank you for giving EE! the opportunity to submit our statement.


116

of changes in the tax code may provide some of the incentives
necessary to bring economic redevelopment back to urban areas
like Houston. As a first step toward such revitalization, the
City of Houston was designated a Federal Urban Enhanced
Enterprise Community in December 1994. The Enhanced Enterprise
Community (BEC) comprises an area of severe disinvestment, and is
eligible to receive $25 million in social service and economic
development initiative grant funds.

However, two major incentives are not available to Houston
under current law -- wage tax credits and brownfields remediation
deductions. The-wage credit program is only available to those
few communities that were designated as Empowerment Zones in
1994. Brownfields ‘remediation deductions are part of a recent
proposal that has not yet been enacted and, as such, are not
currently available to potential business developers.

Need for Tax Incentives

New, sustainable job creation is an absolute necessity if
the BEC is to improve and stay healthy. The ability to utilize
wage tax credits as a tool to create these jobs would greatly
enhance the City of Houston’s ability to revitalize and stabilize
these neighborhoods. New businesses or the expansion of existing
businesses would mean that dollars would stay in the community.
Jobs created with the assistance of the wage tax credit would
mean that residents could now find employment in their
neighborhood. Job transportation would become less of an issue
and less of a cost, since residents would have no problem getting
to a job in their own neighborhood. Wage tax credits would be an
incentive for employers to hire youth, providing opportunities
for disadvantaged residents that would otherwise not be available
to them.

Furthermore, businesses would have a great incentive to
expand within the EEC boundaries. Often, it is extremely
difficult for new businesses or expanding entities to locate in
marginal areas because initial cash flow is low. These credits
would have a direct impact on net profits, which would enable
businesses to take a chance on locating in an area that might not
otherwise be possible.

Tax incentives could also help businesses overcone the
environmental challenges to expansion. The City of Houston is
extremely unique in that it is a city without zoning. Due to the
historical lack of land use control measures, it is not
surprising to find inner city neighborhoods surrounded by
industrial properties. Many of these properties are now vacant
and redevelopment is not occurring mainly due to the possibility
of environmental problems.

Houston was recently awarded a brownfields grant, and the
majority of the grant focus area is in or adjacent to the EEC.
Yet adaptive reuse of the old industrial sites would be a much
easier task if the potential private sector developer had the
ability to write off environmental clean up costs quickly. The
business would benefit both from the possible lower purchase cost
and the developer's ability to recapture start up costs from wage
tax credit savings.

Solutions: Making the Incentives Available

Earlier this year, President Clinton proposed an expansion
of the EZ/EC program. ‘Based on the Adninistration’s plan,
legislation has been introduced in both the House and the Senate
to designate an additional 20 Empowerment Zones and 60 Enterprise
Communities. §. 1911, introduced by Senators Moseley-Braun (D-
IL), Jeffords (R-VT), and D/Amato (R-NY), and H. 3747, introduced


***NOTICE -- CHANGE IN DATE/TIME/LOCATION***

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE CONTACT: (202) 225-7601
July 2, 1996
No. OV-15-Revised

Change in Date/Time/Location for Subcommittee
Hearing on the Impact of Tax Law on Land Use

Congresswoman Nancy L. Johnson (R-CT), Chairman of the Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the Subcommittee
hearing on the Impact of Tax Law on Land Use previously scheduled for Thursday, July 11,
1996, at 10:00 a.m., in 1100 Longworth House Office Building, will be held instead on
Tuesday, July 16, 1996 at 11:00 a.m., in roor

Alll other details for the hearing remain the same. (See Subcommittee press release
‘No. OV-15, dated June 21, 1996.)


93

applicable to areas specified in the application as developable for commercial or industrial
purposes (1,000 acres in the case of an enterprise community, 2,000 acres in the case of an
empowerment zone), and these areas will not be taken into account in applying the square-
mileage size limitations (20 square miles for urban areas, 1,000 square miles for rural areas)

Nominations of rural census tracts (or comparable areas) that exceed 1,000 square
miles in size or that include a substantial amount of governmentally owned land may exclude
such excess mileage or governmentally owned land. Unlike the first round, Indian
reservations will be eligible to be nominated (and the nomination may be submitted by the
reservation governing body without the State government's participation). The Secretary of
Agriculture will be authorized to designate up to one rural empowerment zone and five rural
enterprise communities based on specified emigration criteria without regard to the minimum
poverty rates set forth in the statute,

The second-round EZs would have available a different combination of tax incentives
than those available to first-round EZs. The additional section 179 expensing, as modified
above, and the proposal to provide tax incentives for remediation of "brownfields" to zones
and communities (described above) would be available in the second-round EZs. Enterprise
zone businesses in the second-round EZs would also be eligible for a new category of tax-
exempt financing. These bonds, rather than being subject to the current State volume caps,
will be subject to zone-specific caps. For each rural empowerment zone, up to $60 million
in such bonds may be issued. For an urban empowerment zone with a population under
100,000, up to $130 million of these bonds may be issued. For each urban empowerment
zone with a population of 100,000 or more, up to $230 million of these bonds may be
issued. The empowerment zone employment credit will not be available to businesses in the
new empowerment zones, and the increased expensing under section 179 will not be
available in the developable acreage areas of the second-round empowerment zones.

The additional ECs would have available the same tax incentives that apply to the
existing communities (including the private-activity bond modifications and "brownfields" tax
incentives included in these proposals).


38

Chairman JOHNSON. Thank you very much, Mr. Lindstrom.
Ms. Hocker.

STATEMENT OF JEAN HOCKER, PRESIDENT, LAND TRUST
ALLIANCE, WASHINGTON, DC

Ms. HocKER. Madam Chair and Members of the Committee, I
thank you a great deal for devoting your time and attention to this
really important issue. I also want to thank Congressmen Zimmer
and Houghton and Payne for your leadership in advocating new
legislation to encourage private voluntary land conservation.

I am president of the Land Trust Alliance. It is a national non-
profit umbrella organization that provides services and assistance
to the Nation’s more than 1,100 land conservation organizations
known as land trusts. Madam Chair, in your State alone, there are
over 100 of these land trust organizations. In New Jersey, the New
Jersey Conservation Foundation and many smaller groups have
protected a great deal of land. I am happy to say that there are
new land trusts forming now in Texas, and so we are seeing this
movement of private voluntary land conservation groups spreading
all across the country.

These groups usually serve a single community, a watershed, a
valley, or other defined region, and their purpose is to work with
landowners to protect, through voluntary means, natural areas,
productive forest- and farmland, habitat, urban gardens, trails,
greenways, and all kinds of open land.

Land trusts use many tools. They acquire and manage land for
conservation, and very often they use the conservation easement,
which is a tool we have talked about and heard a lot about this
morning. It is sometimes a little difficult to understand how ease-
ments work, but basically they are legal deed restrictions on the fu-
ture use of land. The restrictions protect the conservation values of
the land while leaving the land in private ownership on tax rolls
and in productive use. It is an extremely useful tool for voluntary
land conservation.

What I want to do today is to describe not just one incentive but
several incentives for encouraging private voluntary land conserva-
tion. First I want to say just a couple of words about why it is im-
portant for the Congress of the United States to enact new incen-
tives.

Sound land use requires a mix of land that is built on and land
that is not built on. Undeveloped land near where people live used
to be easy to find because no one had gotten to that land yet. We
all remember the vacant lots where we all played as a kid or the
hillsides defined at the edge of town or down the block where you
could watch tadpoles become frogs. People don’t find that any more.

We need to take deliberate steps to ensure that there is some
open space left. We need to plan for open space, because open land
once built on will never again, in at least one human’s timeframe,
become available as open space. It is disappearing, and we are not
going to get it back.

Land trusts are showing over and over in every State that many
property owners do want to protect their land in a relatively unde-
veloped state, and they will do that voluntarily if they know how
and if they have any incentives to do so.


100

Under the IRS reading of the law, a grape grower whose vineyard
has been destroyed by disease or natural disaster may not deduct
the costs of vines, vinestock, soil fumigation, trellises,
irrigation equipment, or drainage systems. The IRS reading of
the law limits casualty deductibility to preproductive period
expenses, forcing most costs to be capitalized.

‘The Solution: Amend the Code to Allow Deductibility

H.R. 3749, the measure introduced by Rep. Thomas, would
amend section 263A(d) (2) to help ensure that farmere are able to
finance their replanting costs, thereby curbing the negative
impact on land use that such natural disasters can have. The
bill would allow taxpayers to deduct certain expenditures,
incurred after December 31, 1995, for replanting destroyed crops.

A number of special rules are included in this bill to
ensure that abuses do not occur. The bill allows continued
deductibility of all preproductive period costs. However, in
recognition that some improvements might be made during the
replanting process, certain costs, referred to as "special
replanting costs," would only be 80 percent deductible. Such
costs would include tangible assets such as plants and their
supporting structures, and irrigation and drainage systems where
such systems were destroyed during removal of the damaged plants.
The bill includes a clear definition of "preproductive costs,"
and includes language to prevent taxpayers from receiving a
double benefit by taking loss deductions on the same expenditures
which are subject to this rule.

We believe that enactment of this legislation is the only
feasible way to ease the insurmountable burden faced by many crop
owners, and to ensure that the farm casualty rule is interpreted
appropriately. On behalf of the American Vintners Association
and the entire wine industry, we thank the Subcommittee for the
opportunity to testify on H.R. 3749 and ite impact on land use.
Please do not hesitate to contact us if we can provide you with
any additional information on this important issue.


41

never conserve land solely for tax benefit, their decisions are usually determined in part by a
cost-benefit analysis of the tax consequences of various options for managing their assets.

Conservation Easements, One of the principal ways land trusts protect land is by
working with landowners to design conservation easements. The landowner, by means of a
recorded legal instrument, restricts -- usually in perpetuity -- rights to use the land in
delineated ways that would harm its conservation values. The extinguished rights are tailored
for each property, depending on its conservation values and the owner's wishes. The recipient
of the easement, either a nonprofit land trust or government agency, agrees to monitor and
enforce the terms of the easement. Thus, the land remains in private hands. in productive use,
and on tax rolls, but henceforth may not be used in agreed-upon, environmentally harmful
ways. If the easement is perpetual, all future owners are also bound by the agreement. The
monetary value of an easement, determined through a "before and after” appraisal. is generally
equal to the amount by which the restrictions reduce the value of the property

For the value of a conservation easement donation to qualify for a charitable deduction
under [.R.C. Section 170(h). the agreement must meet rigorous public benefit tests. A
qualified conservation easement must be perpetual and donated to a nonprofit that can enforce
it appropriately, or to a government agency. It must meet one or more of the conservation
purposes under law: for public recreation or education: for the protection of habitat: for the
preservation of open space that has scenic qualities benefitting the public, or for the protection
of open space which is consistent with governmental conservation policies. Historically
important land, or certified historic structures, also qualify under 170(h).

Current tax code incentives. Several incentives for land conservation already exist in
the tax code. However, their applicability is often limited

Income tax deductions. The value of a donation of land or a qualified conservation
casement is generally deductible from taxable income. However, the deduction for gifts of
appreciated property is limited to 30 per cent of the taxpayer's contribution base in the year
of the gift, with any additional value deductible in the five succeeding tax years. Thus
property owners whose land or extinguished development rights are worth a great deal, but
whose income is modest, are unable to deduct much of the gift value. In addition, an
easement donated to protect land on which the mineral and surface estates were first separated
after 1977 is unlikely to qualify as a deductible charitable gift under current tax law

Reduction of estate taxes. Gifts of land and easements for conservation can also
lower estate taxes by reducing the value of the taxable estate. This alone can be a major
incentive for conservation donations, because land in an estate is typically valued and taxed at
its development potential. All too often heirs without other sizable assets with which to pay
the estate tax bill must sell for development land that was previously undeveloped or in low-
impact use. So while current law does encourage sophisticated taxpayers with good estate
planning advice to donate land or easements for conservation, land in the estate of a decedent
who did not, or could not, take such steps will often have to be sold. Current law does not
permit the heirs to make conservation donations to reduce estate taxes. In addition, in areas
of rapidly escalating land values, the long term estate tax benefit of a conservation easement
donation may not be substantial enough to serve as a strong incentive for conservation.

Bargain sales. It is often in the best interests of both a landowner and a cash-
strapped conservation agency or nonprofit to transfer land through a bargain sale. The seller
can claim as a charitable gift the difference between the land's fair market value and the
amount he receives for the land. However. for determining the taxable gain on the
transaction. current law generally requires that the taxpayer's basis in the property be
allocated between the sale and gift portion. The taxpayer is denied any tax benefit for the
basis assigned to the gift portion, thus diminishing the tax benefit and the incentive for a
substantial bargain sale.