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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

     IMPACT OF TAX LAW ON LAND USE, CONSERVATION, AND PRESERVATION

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 30, 1999

                               __________

                             Serial 106-76

                               __________

         Printed for the use of the Committee on Ways and Means

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

                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
66-783                     WASHINGTON : 2000

                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                       Subcommittee on Oversight

                    AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio                    WILLIAM J. COYNE, Pennsylvania
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
WES WATKINS, Oklahoma                JIM McDERMOTT, Washington
JERRY WELLER, Illinois               JOHN LEWIS, Georgia
KENNY HULSHOF, Missouri              RICHARD E. NEAL, Massachusetts
J.D. HAYWORTH, Arizona
SCOTT McINNIS, Colorado

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________

                                                                   Page

Advisory of September 23, 1999, announcing the hearing...........     2

                               WITNESSES

U.S. Department of Energy, Hon. Dan W. Reicher, Assistant 
  Secretary, Energy Efficiency and Renewable Energy..............    25
U.S. Environmental Protection Agency, D. Reid Wilson, Chief of 
  Staff..........................................................    29
U.S. Department of the Treasury, Leonard Burman, Deputy Assistant 
  Secretary, Tax Analysis........................................    34

                                 ______

American Farm Bureau Federation, and New York Farm Bureau, Inc., 
  John W. Lincoln................................................    69
Blumenauer, Hon. Earl, a Representative in Congress from the 
  State of Oregon................................................     8
Gilchrest, Hon. Wayne T., a Representative in Congress from the 
  State of Maryland..............................................    14
Hoeffel, Hon. Joseph M., a Representative in Congress from the 
  State of Pennsylvania..........................................     5
Johnson, Hon. Nancy L., a Representative in Congress from the 
  State of Connecticut...........................................    17
Kanjorski, Hon. Paul E., a Representative in Congress from the 
  State of Pennsylvania..........................................    11
King County Council, Seattle, Washington, Hon. Rob McKenna.......    87
Land Trust Alliance, Jean Hocker.................................    54
National Association of Conservation Districts, Thomas C. 
  Spellmire......................................................    91
Nature Conservancy, Michael Dennis...............................    58
Northeast-Midwest Institute, Charles Bartsch.....................    63
Piedmont Environmental Council, Christopher Miller...............    74
Pitts, Hon. Joseph R., a Representative in Congress from the 
  State of Pennsylvania..........................................    21
Real Estate Roundtable, and CenterPoint Properties, John S. 
  Gates, Jr......................................................    95
U.S. Forest Capital, LP, E. Thomas Tuchmann......................    99

                       SUBMISSIONS FOR THE RECORD

American Wind Energy Association, Jaime Steve, statement and 
  attachment.....................................................   110
Bond Market Association, statement...............................   114
Friends of the Earth, Peter Kopsco, statement....................   115
Pacific Forest Trust, Boonville, CA, statement...................   118

 
     IMPACT OF TAX LAW ON LAND USE, CONSERVATION, AND PRESERVATION

                              ----------                              

                      THURSDAY, SEPTEMBER 30, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:01 p.m., in 
room 1100, Longworth House Office Building, Hon. Amo Houghton 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
September 23, 1999
No. OV-11

                     Houghton Announces Hearing on
                     Impact of Tax Law on Land Use,
                     Conservation, and Preservation

    Congressman Amo Houghton (R-NY), Chairman, 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 laws on 
environmental conservation and preservation. The hearing will take 
place on Thursday, September 30, 1999, in the main Committee hearing 
room, 1100 Longworth House Office, beginning at 1:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include rpresentatives from the Administration, land 
conservation and environmental protection organizations, and other 
experts. However, any individual or organization not scheduled for an 
oral appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The Internal Revenue Code includes a number of provisions that 
provide incentives or tax benefits for land conservation and 
environmental preservation. Among them are the deductibility of gifts 
of land to charitable institutions [sec. 170]; the deductibility of 
gifts of conservation easements on land to charitable institutions and 
governments [sec. 170(h)]; expensing of environmental remediation costs 
[sec. 198]; the deductibility of gifts of land from a taxable estate 
[sec. 2055]; the deductibility of conservation easements from a taxable 
estate [sec. 2055(f)]; an exclusion from estate taxes for gifts of 
conservation easements on lands within 25 miles of a metropolitan 
statistical area (MSA), national park or wilderness or within 10 miles 
of an urban national forest [sec. 2031(c)]; a deduction for a post-
mortem election to donate a conservation easement in certain areas 
[sec. 2031(c)]; a post-mortem election to terminate previously reserved 
development rights in certain areas [sec. 2031(c)(5)]; valuation of 
agricultural lands at agricultural value for purposes of estate tax, if 
the land is family-owned and used for agricultural purposes for 10 
years after death [sec. 2032(a)]; and an exclusion from income of 
certain government conservation payments [sec. 126].
      
    In announcing the hearing, Chairman Houghton stated: ``So much of 
our country's beautiful green space is under development pressure. I am 
pleased that the American Farm Protection Act, a bill then-Rep. L.F. 
Payne and I introduced, was enacted in the last Congress. We need to 
see whether it is working as well as we had hoped. We also need to find 
out how the other current tax incentives are working and what further 
steps are needed to encourage people to protect land and other 
spaces.''
      

FOCUS OF THE HEARING:

      
    The Subcommittee will examine the impact of tax incentives in 
current law, as well as proposals referred to the Committee on Ways and 
Means to encourage environmental protections, conservation, and 
preservation. The hearing will follow up on the Subcommittee's July 11, 
1996, hearing on the impact of Federal tax law on land use.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect 5.1 format, with their name, address, and 
hearing date noted on a label, by the close of business, Thursday, 
October 14, 1997, to A.L. Singleton, 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, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.

      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

    Chairman Houghton. The hearing will come to order. Thank 
you, gentlemen, for being with us. We look forward to an 
interesting afternoon.
    We have reviewed the background material for today's 
hearing about the deductibility of qualified conservation 
interests, an estate tax exclusion for land subject to 
permanent conservation easements, expensing environmental 
remediation costs, special use valuation, and tax exempt bonds. 
Now, it occurred to me that it would be easy to get bogged down 
in the minutiae of tax policy and lose sight of our goal, which 
is conservation and preservation. So we should be careful, 
obviously, not to do so today.
    Mr. Gifford Pinchot, the founder of the U.S. Forest Service 
under President Roosevelt, used to say that a nation deprived 
of its liberty may win it, a nation divided may unite; but a 
nation whose natural resources are destroyed must inevitably 
pay the penalty of poverty, degradation, and decay. 
``Conservation easements'' may not sound exciting, but 
preserving the environment for our children and our 
grandchildren, as everyone knows, is one of the most important 
challenges we face.
    Congress enacted the American Farm Protection Act as part 
of the 1997 Taxpayer Relief Act. This bill added an exclusion 
from estate taxes for gifts of conservation easements. The 
relief is targeted. And remember, this provision was enacted in 
a time of budget deficits. There will probably be testimony 
today as to whether the limitations are too restrictive.
    There is no shortage of good thinking about how our tax 
laws can be used to encourage people to conserve open spaces. 
Several of our colleagues, as well as the witnesses from whom 
we will be hearing today, have ideas that are well worth 
exploring.
    When I testified before this Subcommittee 3 years ago, I 
suggested that whenever possible we should find ways to save 
open spaces through voluntary action, without the cost of 
public acquisition and maintenance, and without taking land off 
the local tax rolls. Not every conservation challenge can be 
met in this way, but many can be, and are.
    So let us keep the benefit of voluntary action and private 
stewardship in mind as we hear from our witnesses today. I am 
looking forward to hearing their testimony. I would like to 
begin by recognizing my good friend, Mr. Coyne, for his opening 
statement.
    Mr. Coyne. Thank you, Mr. Chairman. Today the Ways and 
Means Oversight Subcommittee will hold a hearing to review the 
current law tax provisions and pending legislation targeted 
toward improvement of this country's environment.
    Conservation and preservation of our open land is of great 
importance to every American. Protecting our environment can 
take many forms: such as the clean-up of toxic sites, the 
expansion of publicly-owned parks and recreation areas, or 
local ordinances to preserve green spaces. Federal tax 
incentives can also be effective tools for encouraging the 
remediation of brownfields, the donation of land with 
conservation use easements, the use of energy-efficient 
consumer equipment, and the acquisition of open space and 
wetlands.
    I have joined the Administration and many of my colleagues 
here in Congress in sponsoring numerous tax bills in support of 
environmental conservation and preservation. Among them is H.R. 
1630, the Brownfields Clean-Up Act. This proposal, which is 
supported by the Administration, would make permanent the 
deduction under Internal Revenue Code section 198 for 
brownfields remediation costs.
    The current law restriction--which requires that 
expenditures be incurred before the end of the next year--would 
be eliminated under this legislation. Providing special tax 
benefits on a permanent basis would remove doubt among 
taxpayers as to the future deductibility of remediation 
expenditures, and would promote clean-up of contaminated sites 
nationwide.
    Today we will hear about a number of bills that would use 
the Tax Code to achieve important environmental or conservation 
goals. Ways and Means Committee Democrats have been actively 
involved in developing a number of those bills, and I believe 
that there is bipartisan support for such legislation.
    I want to thank Chairman Houghton for holding today's 
hearing, and I look forward to working with the Chairman and 
colleagues on both sides of the aisle to provide incentives in 
the Tax Code for pro-environment activities.
    Chairman Houghton. Thanks, Bill, very much.
    Does anyone else have an opening statement? Would you like 
to say something?
    Mr. Portman. Just briefly, Mr. Chairman, to thank you for 
holding this hearing. It is very important that we begin to 
look carefully at all of the various existing tax provisions 
and potential tax provisions that can help with regard to land 
use, conservation, and preservation.
    I am delighted that the legislation I introduced, Mr. 
Chairman, H.R. 2880, is part of that. And I look forward to the 
testimony from our colleagues and from our experts on it. And 
thank you for holding the hearing.
    Chairman Houghton. All right, good. Well, again, thanks 
very much for being with us. Why do we not start from my right 
with Congressman Hoeffel from Pennsylvania. Would you like to 
begin the testimony? And then we will just go right down the 
line here.

   STATEMENT OF HON. JOSEPH M. HOEFFEL, A REPRESENTATIVE IN 
            CONGRESS FROM THE STATE OF PENNSYLVANIA

    Mr. Hoeffel. Thank you very much, Mr. Chairman and 
colleagues. I appreciate the opportunity to address this 
Subcommittee, and I thank you for holding this hearing. And I 
thank you for mentioning Governor Pinchot--a great 
Pennsylvanian, who helped to start the ``Open Space'' 
preservation program in our State before he took his good ideas 
to the national level.
    I wanted to limit my testimony today to H.R. 2446, the 
Better America Bonds proposal, that I think offers a wonderful 
opportunity for us to preserve open space, to plan for growth, 
to manage the growth that is occurring across our country, and 
to help revitalize brownfields.
    I will not read my testimony that I have submitted in 
writing, but I will simply summarize by saying, first off, 
revitalizing brownfields is a critically important issue, not 
just for the reinvestment that Better America Bonds would 
permit in our denser areas, our more developed areas, that are 
being abandoned as growth leapfrogs away from the cities out 
into the countryside; but every time you save a brownfield, you 
literally save a farm field. If you can reclaim an industrial 
site and direct investment or attract investment back to that 
site, that is one less farm field that will be developed for a 
new use. So reclaiming brownfields has many benefits, economic 
as well as environmental.
    The beauty of the Better America Bonds proposal is for a 
relatively small Federal income tax credit--a proposal of 
three-quarters of $1 billion--we would be able to generate $10 
billion of interest-free loans at the State and local level to 
promote open space preservation, planning proposals, regional 
planning, growth management strategies, and the revitalization 
of brownfields that I just mentioned.
    And certainly, we can all agree that the planning and 
zoning decisions that we need to make in this country need to 
be made at the local level. And no one is trying to change 
that. I do not want, and nobody wants, the Federal Government 
to make zoning and planning decisions. But there is a role for 
us to advocate, to promote--and to help finance through a 
Federal income tax credit--that kind of aggressive work at the 
State and local level, to plan for the growth that is occurring 
in our country.
    The second point is, that growth is not happening 
everywhere. And that is why I fear Congress is not paying as 
much attention as it should. It is essentially happening in our 
suburbs; they are growing in population. There are whole 
stretches of this country that need more development, would 
welcome more industry, would welcome more residential 
neighborhoods, but the suburbs of our country--And certainly, 
in Montgomery County, Pennsylvania, we are threatened, we are 
stressed, by too much development.
    Now, we are not going to stop growth, and we do not want 
to. Because even where I live, growth means jobs and 
opportunities. But we ought to be able to manage it; to direct 
growth into certain areas; to preserve farmland in other areas; 
to encourage recreational opportunities, both passive and 
active recreation, in other areas; and to have some rhyme and 
reason to the development that we see in the suburbs of our 
Nation's great cities.
    This Better America Bonds proposal would enable local and 
State governments to finance the kind of bonds that are needed 
to do this. As a county commissioner in Montgomery County, 
Pennsylvania, I helped start a 10-year, $100-million bond 
program, at county expense, to give mostly to our local 
governments, on a 90-10 matching grant--90 percent on the 
county--the funds to make open space acquisitions. It is the 
most popular thing Montgomery County government has done in its 
history, and it is working well.
    But not all municipalities can do that on their own. The 
Better America Bonds Federal income tax proposal gives us a 
tool to encourage that around the country. And I would urge the 
Committee to give it favorable attention. Thank you, Mr. 
Chairman.
    [The prepared statement follows:]

Statement of Hon. Joesph M. Hoeffel, a Representative in Congress from 
the State of Pennsylvania

    Thank you Mr. Chairman. For the record, my name is Joe 
Hoeffel and I represent the 13th District of Pennsylvania.
    Thank you for recognizing me today to speak in support of 
the use of tax incentives for land conservation and 
environmental preservation. Specifically, I will address the 
need for H.R. 2446, the Better America Bonds Act of 1999. This 
bill would create a new tax incentive to preserve green spaces, 
develop local parks, protect the quality of our water supply 
and cleanup brownfields.
    Throughout the country suburban growth continues to consume 
farmland and wooded acres. Who among us has not driven down a 
country road and seen the familiar sign on the side of a barn 
``Land for Sale--Subdivision possibilities?'' In my district, 
sprawl has been consuming land at the rate of one acre an hour 
for the past twenty years.
    We seem to take it for granted that there is plenty of 
space in our country for new houses, new industrial parks, new 
highways, and new shopping centers. More importantly, we now 
need to give serious consideration to what areas need to be 
protected from these uses. Open space is not just the space 
left over after the development is finished. We need to 
actively work to conserve wetlands. We need to identify the 
historical areas that must be protected from the wrecking 
crews. We need to protect the habitat for the animals and 
plants that renew our air and our water.
    There are local efforts throughout this country to preserve 
and protect the open space that is needed to maintain an 
acceptable quality of life. For example, just last week, we 
passed a bill that will declare the Schuylkill River Valley, in 
eastern Pennsylvania, a national heritage area. Local officials 
and private citizens envision a greenway or linear park along 
this river, which has long been hidden from our view by 
railroads and factories. In June, these citizens traveled the 
length of the Schuylkill River by canoe and became aware from 
that perspective what valuable natural resource had always been 
there. A management plan will be developed to assure that this 
resource is preserved. Better America Bonds may provide the 
means to execute that plan and develop this resource in a 
protected and careful manner.
    I believe that fighting sprawl, planning for growth and 
preserving open space are primarily issues for state and local 
governments. States and municipalities must deal with these 
issues, develop their own plans and make local decisions about 
what should be saved.
    Certainly, though, there is an important role for the 
Congress to advocate and promote these policies and to provide 
the resources to help local and state governments and non-
profit organizations. We need national vision with local 
control to fight urban and suburban sprawl.
    When I was County Commissioner in Montgomery County, 
Pennsylvania, we were able to establish one of the largest open 
space programs in the country. However, I am aware that not all 
counties have the means to protect their resources. The Better 
America Bonds program provides the means for these investments 
that might not otherwise be possible.
    I believe it is important for the Congress to establish 
programs that provide incentives for preservation and 
conservation goals to be achieved. It is appropriate for the 
federal tax system to reward those who choose to preserve our 
natural resources and protect our environment.
    I support the Better America Bonds because:
     They establish an incentive for local initiatives 
to achieve local goals and save local resources.
     They offer the incentive for preservation of open 
space and wetlands,
     They help localities develop public parks and 
greenways.
     They provide the borrowing power for remediation 
of land that has been abused in the past and may need extensive 
cleanup to revitalize entire neighborhoods.
    As this committee is well aware, tax incentives can be a 
powerful motivator of human behavior. I believe that it is 
appropriate and legitimate for the tax system to be used to 
support the public policy goals of local governments, 
especially when those goals are also consistent with the 
national welfare. It is clearly in the national interest to 
protect and preserve our natural heritage resources, to protect 
and restore the wetlands that are so crucial to the health of 
our ecosystems and to encourage the redevelopment of brownfield 
properties. Of course, such tax credits must be paid for in the 
confines of a balanced budget.

                                

    Chairman Houghton. Thanks very much, Joe.
    Mr. Blumenauer.

STATEMENT OF HON. EARL BLUMENAUER, A REPRESENTATIVE IN CONGRESS 
                    FROM THE STATE OF OREGON

    Mr. Blumenauer. Thank you, Mr. Chairman. And I appreciate 
the courtesy in being able to join with you today. And I think 
of the lineup here on this side of the dais: Each of us is 
involved in our own ways with efforts to promote livable 
communities. I have had a chance to be in a couple of your 
districts--in Mr. McInnis' district and in Mr. Coyne's 
district--and I found that people care about these issues in 
very profound ways.
    There are three ways the Federal Government can make a 
difference. One is the traditional fashion, with direct 
expenditures. And we have got lots of programs floating around 
of dubious benefit and questionable ability on our part to 
sustain them, even in these times of prosperity.
    The second way that we can make a difference is by leading 
by example, where the Federal Government actually behaves in 
ways that we are telling the rest of America to play. Like I 
want the Post Office to obey the local land use environmental 
laws that the rest of America operates under, and I am please 
that over 130 of my colleagues in the House have agreed with 
that approach legislatively.
    The third way is by using creatively the impact of the tax 
system. And I commend the Ways and Means Committee. And all of 
you were a part of a package that brought forth to the House in 
recent tax reform one little element that has not received 
enough attention for the impact that it has had in promoting 
livable communities across America.
    That is when you, in your wisdom, decided that you were 
going to increase the tax deduction for the resale of 
residential property. And as we know, virtually no one in 
America paid it except the dumb, the distressed, and the 
divorced. But it had the perverse effect of encouraging people 
to always buy more and more expensive homes, or stay put. The 
tax system was distorting the housing decisions of American 
families. And you helped lead the way in changing that, and it 
is having a significant effect in terms of livability in our 
communities, sprawl, and intrusion into open space.
    You can do the same thing today with legislation that is 
before you. I am very much impressed, and am a cosponsor of 
legislation by your colleague, Representative Nancy Johnson, 
H.R. 2263, part of the thrust of the discussion here today. I 
am very supportive of Congressman Coyne's Brownfields Clean-Up 
Act, H.R. 1630, which would directly help our communities with 
the permanent authorization of the tax provision that allows 
those cleaning brownfields in enterprise zones and other areas 
a tax deduction on clean-up costs. It would give immediate 
benefits, and relieve development pressures on greenfields.
    There is H.R. 2380, the Energy Efficient Technology Act 
introduced by Congressman Matsui, and as has been referenced, 
H.R. 2446, the Better America Bonds, which I also am 
cosponsoring.
    There are two other items that I would put on this agenda 
that I think are a part of this mix that I would hope that you 
would consider. One is H.R. 1172, the Historic Home Ownership 
Tax Credit, that would permit opportunities to provide 
preservation in established neighborhoods, and again avoid 
encroachment into open space around the country. When you are a 
buyer of real estate, you not only look at the building you are 
buying, but the surrounding neighborhood. This would have an 
opportunity. In all of our districts, we would find communities 
where this would make a big, big difference.
    I hope that you would, as you are thinking in these terms, 
even though you have passed some activities that relate to the 
estate tax that has been vetoed--we are sort of out here 
shimmering--I think in the same light that you are bringing 
forward your consideration today, looking at some estate tax 
provisions that would relieve the burdens on woodlots and farms 
at the same time you deal with small family-held businesses--As 
long as those are going to retain, in limited ownership and 
practice, farming, woodlot, or for that matter small business, 
I think you would find that there would be the vast majority of 
people in the House who would step forward to support it.
    It would relieve pressure, again, on what we are seeing on 
the greenfields, open space. I think you would provide a 
tremendous benefit. And it would have minimal cost in the 
context of what we have been talking about with inheritance tax 
reform and other tax benefits.
    I know you have got a very full agenda here today, but I 
would like to express my deep appreciation for your attention. 
I hope you will think about expanding your scope--just a tiny 
bit--to include other elements that are in this same basic 
thrust. I think it will make a huge difference in our efforts 
to promote livable communities across America.
    Because in the final analysis, what we are here for in 
Congress is for the Federal Government to be a better partner 
in making sure that our families are safe, economically secure, 
and healthy. I think you are starting along the right line, and 
I look forward to working with you in that effort.
    [The prepared statement follows:]

Statement of Hon. Earl Blumenauer, a Representative in Congress from 
the State of Oregon

    I want to thank Chairman Houghton and Ranking Member Coyne 
and the Committee for focusing on one of the most important 
issues America is facing--how we build and design our 
communities to be more livable.
    A livable community is one where people are safe, healthy 
and economically secure. Our quality of life in large part 
depends upon the design and placement of our buildings, parks, 
schools, and the access we create to these places. My goal is 
for the Federal Government to be a better partner, helping to 
give people more and better choices in how they live, work and 
travel. How the elements of land use and conservation fit 
together make a tremendous difference to our communities.
    You have heard from my colleagues about several important 
legislative proposals before the committee that I support:
     H.R. 2263 by Representative Nancy Johnson that 
encourages contribution of property for conservation and 
easements
     Representative Bill Coyne's Brownfields Clean Act 
H.R. 1630, that would directly help my community of Portland, 
Oregon with the permanent authorization of the tax provision 
that allows those cleaning brownfields in enterprise zones and 
EPA pilot project. This tax deduction on the cleanup costs 
would give immediate benefits and relieve development pressures 
on greenfields.
     H.R. 2380 the Energy Efficient Technology Tax Act 
introduced by Congressman Matsui that provides for $3.6 billion 
in tax incentives over five years in the four major carbon-
emitting sectors of the economy--buildings, industry, 
transportation and electricity. Tax credits go towards energy 
efficient homes, buildings, hybrid vehicles, and solar and wind 
energy technology.
     H.R. 2446 the Better America Bonds proposes a new 
financing tool generating $9.5 billion in bond authority for 
investments by state, local and tribal governments in green 
spaces, urban parks, water quality and brownfields cleanup. Tax 
credits totaling more than $700 million over five years are 
proposed to finance the bonds.
    I support these pieces of legislation and I am glad the 
committee will be focusing on them in this hearing.
    There are two items that I wanted to mention in more 
detail:
     H.R. 1172 the Historic Home Ownership Tax Credit
     The reform of the inheritance tax to promote sound 
land use
    Since I've been in Congress I've traveled to over 41 
communities and I am amazed at how communities are dealing with 
the issues of growth and urban flight. Last November voters 
dealt with over 240 ballot initiatives that dealt with urban 
growth boundaries, land conservation and growth.
    There are pushes and pulls to neighborhoods. In the real 
estate industry there are factors known as the tipping factor. 
The tipping factors are elements that change a good 
neighborhood to bad or vice versa. When you are a buyer of real 
estate, you not only look at the building you are buying, but 
the surrounding neighborhood. Houses and structures that fall 
into disrepair or become dilapidated or abandon easily tip a 
good neighborhood to a bad.
    Many times the renovation of an older structure is harder 
to find financing for, or is more costly than buying new. This 
is the push factor. It pushes people out to new areas and areas 
where they may not be an existing infrastructure.
    The Historic Home-Ownership Tax Credit H.R. 1172 expands 
the commercial rehabilitation tax credit for historic 
properties. It helps pull people back to historic areas where 
there is already an infrastructure.
    This bill in its current structure as a tax credit gives a 
20 percent income tax credit that can be converted to a 
mortgage credit certificate to buy down the interest on a 
mortgage. The tax credit can be used in Enterprise Zones as the 
credit can be converted and applied towards the down payment of 
a house.
    Keeping this structure as a credit rather than a deduction 
keeps it flexible allowing the American consumer who falls into 
the middle or lower income range an opportunity to take 
advantage of the credit. Restructuring the credit to a 
deduction cuts out this portion of the American population.
    The credit will help neighborhoods from tipping from a good 
neighborhood to a bad neighborhood and may even help restore 
many of the unique structures that give character to a 
community.
    This is another means for the federal government to help 
provide more choice for American families and to help preserve 
American heritage.
    The inheritance tax on small family-owned businesses, 
closely-held corporation, wood-lots and farms needs to be 
reformed. Family businesses should not be forced to sell 
because of the death of a principal. As long as they want to 
continue to operate as a closely-held business there should be 
no tax liability. If they want to cash out this is a different 
discussion.
    This is much like the repeal of the capital gains tax on 
residential sales. It would have little fiscal impact and would 
make a tremendous difference in our land-use patterns, allowing 
people to keep and manage property, not driven by financial 
decisions motivated by inheritance tax liability.
    The federal government should be leading by example with 
the placement of federal buildings like the Post Office and 
GSA.
    I have a little bill, H.R. 670 that requires the Post 
Office to obey local land use laws.
    While I know the focus of this hearing is on tax credits 
and financing, I wanted to mention GSA and the Post Office as 
examples of how the federal government with their buildings and 
sitings lead by example and are things that I will be talking 
to you about personally.
    I want to thank the Members of the committee for their 
work. There are many good pieces of legislation that I am 
looking forward to helping get through the congressional 
process. It is my goal in Congress to help make the federal 
government a more flexible partner to help give Americans more 
choices in how and where they live and move about in their 
community. I appreciate all the attention Chairman Houghton and 
Ranking Member Coyne and the Committee has given to these 
quality of life issues. Given the current mood in Congress and 
our budget straight jacket you may have the only show in town.

                                

    Chairman Houghton. Thanks very much. I appreciate it.
    Now, Paul Kanjorski.

   STATEMENT OF HON. PAUL E. KANJORSKI, A REPRESENTATIVE IN 
            CONGRESS FROM THE STATE OF PENNSYLVANIA

    Mr. Kanjorski. Mr. Chairman, thank you very much. Mr. 
Chairman, I am looking at the Better America Bonds as a 
tremendous tool that I have no doubt, regardless of what form 
it comes out in, should be pursued, because it has deleted the 
best of all elements. It has the private sector involvement; it 
has a government forgiveness, but not a direct subsidy, of the 
full amount; and it requires those people who are using the 
Beter America Bonds to use market considerations in how the 
application should be used. So it is the best of all well and 
delicately thought-out plans.
    However, there are significant problems as it presently is 
created, and I would like the Committee to look at correcting 
these problems so that it properly applies across the country. 
First and foremost, it has a provision calling for the pledging 
of full faith and credit of local governments: Obviously 
written by an investment bond counsel from Wall Street working 
at Treasury. Because there are many ways in which the bond 
holder gets secured without having the full faith and credit of 
the community or political subdivision issuing the bond. And if 
you examine the country, the distressed areas of the country, 
it is highly politically unlikely and, in many instances, 
without a sufficient basis, to issue full faith and credit 
bonds.
    So if you leave that provision in there, you are denying 
people to get insurance on bonds, or having clever ways of 
structuring the bond issue; but, in fact, are favoring the more 
sophisticated and the wealthier communities who want to engage 
sometimes in a dilettante use of the fund, as opposed to 
putting it to hard work. So that is one major place requirement 
that we should eliminate.
    The Federal Government should not get involved in the risk 
factor. If we have people who will buy these bonds, whether 
they are insured or however they are protected, or they are 
supported by assets, we should not have to require that a 
community or political subdivision or an entity issuing these 
bonds pledge their full faith and credit.
    Second, I think that it is very nice to look at a per 
capita allocation, but per capita is grossly disadvantaging the 
rural and exurban areas of the country. Because the density is 
in the cities, and that is where the major portion of the bonds 
will go; whereas the distressed communities and the disturbed 
and degraded lands are in the countryside. So if you use a per 
capita formula, you are going to concentrate this in the high-
density areas of the United States, which have the least amount 
of land to be preserved or reclaimed.
    Third, there should be an emphasis on encouraging regional 
activities. And when I talk about regional activities, I direct 
myself maybe more to Pennsylvania and to New York and the East, 
who suffer from the ``small city syndrome,'' if you will.
    Right now, Pennsylvania has 2,400 communities. Ninety-five 
percent have fewer than 3,500 people. So 95 percent of those 
communities lack the professionalism, and the capacity, to put 
an application in for Better America Bonds. So by virtue of 
just having that restriction in there, only the more 
sophisticated urban areas of the State would have the 
wherewithal to understand and to use the Better America Bond 
concept. And particularly in Pennsylvania, we very often use an 
authority system, where groups of communities come together. 
And that would cause a regional effect and a regional impact. I 
would certainly recommend that.
    Finally, I want to address the idea of brownfields. I hope 
that term is not used, because ``brownfields'' is starting to 
become a word of art. And if you look at most of the EPA 
regulations, former mine-scarred lands are not qualified or 
defined as brownfields. And to a large extent, in the 
Commonwealth of Pennsylvania and through the coal belt of the 
United States, a good part of the distressed lands that these 
Better America Bonds should be used to correct and help out 
would not qualify, because they are not considered brownfields.
    And again, as my fellow colleague from Pennsylvania pointed 
out, every time we re-use mine-scarred land as an industrial 
park, there are that many thousands of acres that do not have 
to be taken out of the pristine environmentally clean farmlands 
and beautiful areas of the country, even within the same 
jurisdictions where this is happening.
    Finally, I want to say that I go back to my experiences as 
a lawyer before I came to the Congress. And very often, people 
who work in government and write this legislation perhaps 
should be sent out in the countryside every now and then to 
work with it.
    There is an anti-arbitrage provision. First of all, I think 
that is impractical, to put a set amount of how much time can 
be arbitrated. And I would recommend that we give discretionary 
power on arbitrage. Because in some communities, by granting 
the power to arbitrage, that may be the only way they can 
either sell the bond or structure the program.
    To put a 3-year limit on arbitrage defines the fact that 
the individual writing the statute never put a public works 
program together on a municipal level. And in a major part of 
my practice before I came to Congress I did sewer systems, 
water systems, highway systems, and I could not think of one 
that ever was performed within 3 years. You are very lucky if 
you have the conceptual idea off the ground, ready to go to the 
engineer, in 3 years. All of these concepts we are looking at 
are really 10-, 15-, 20-year programs.
    Finally, I am very jealous--And I know I am over my time. I 
represent northeastern Pennsylvania, the anthracite coal 
district. I know the Chairman has to drive through my district. 
We have been passed over now for 40 or 50 years. There is no 
program in the United States that allows us to buy that land, 
reclaim that land, put it in productive use.
    The Better America Bonds--if they are properly defined and 
the categories are broad enough and discretionary enough--are 
ideal partial programs to be used in a concept that will allow 
the coal fields of America to finally reclaim their degraded 
and devastated land. It would be very unfortunate if the 
structure of Better America Bonds helped the sophisticated and 
wealthier suburbs preserve their greenway, and forced the 
distressed communities of America to continue to live with the 
degradation of prior practices, where no relief has come from 
the Federal or the State governments, and it is impossible to 
come from the local government.
    So I urge that a portion of this program be designated for 
distressed areas, and that it understand that that is what is 
necessary: a program to bring back degraded and misused land of 
the past into the present, so that these people, too, can 
consider themselves conservationists and environmentalists. 
Thank you very much, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Paul E. Kanjorski, a Representative in Congress from 
the State of Pennsylvania

    Mr. Chairman, I appreciate the opportunity to testify 
before you and the other Members of the Subcommittee this 
morning on the impact of Federal tax laws on environmental 
conservation and preservation. I want to express my strong 
support for the Administration's Better America Bonds proposal. 
While I believe that the Better America Bonds program will give 
local communities a tremendous tool to preserve land and clean 
the environment, I feel that several changes and/or 
clarifications would help to improve its overall design and 
implementation.
    On that note, I would like to briefly recount the 
environmental and land use challenges facing Central and 
Northeastern Pennsylvania. The anthracite coal region of 
Central and Northeastern Pennsylvania contains approximately 
120,000 acres of mine-scarred land that must be reclaimed if 
the region is to solve its environmental problems and sustain 
economic development. Because most of the region's mining took 
place prior to the adoption of strict environmental programs, 
much of the land is devastated by dangerous strip pits, 
underground mine fires and huge mounds of coal waste. In most 
cases, this land is owned by private individuals or companies 
which had nothing to do with the deterioration of the land. The 
cost of restoring the land often far exceeds the value of the 
current value of the land. In time, I am confident that the 
many other attributes of Northeastern and Central Pennsylvania 
will attract the kind of private sector investment that will 
encourage landowners to reclaim their land to put it into 
productive use, but the public sector can encourage thoughtful 
growth by restoring this land now. The Better America Bonds 
could play a key role in the comprehensive restoration of the 
anthracite region.
    Without land reclamation, Northeastern Pennsylvania will 
not be able to address its most pervasive water quality issue: 
acid mine drainage. Water flowing from existing and abandoned 
mine sites has caused pollution so severe that plant and animal 
life that once abundantly existed in streams before mining 
began, no longer survives in great numbers. In my congressional 
district, for example, mine drainage significantly deteriorates 
water quality and prevents the migration of fish from the 
Susquehanna River into upstate New York. Further, the U.S. 
Environmental Protection Agency has determined that the primary 
source of industrial pollution into the Chesapeake Bay comes 
from the acid-mine drainage originating in Northeastern 
Pennsylvania and delivered by the Susquehanna River. Thus, a 
reclamation program supported by Better America Bonds could 
have a national and regional impact.
    Although the current Internal Revenue Code includes a 
number of provisions that provide incentives or tax benefits 
for land conservation and environmental preservation none of 
these provisions have been successfully accessed to reclaim 
mine-scarred land. Better America Bonds would represent the 
first genuine effort by the federal government to give 
communities a tool to undertake significant land preservation 
and protection. For a few select communities, Better America 
Bonds will be a tremendous resource. The Administration has 
designed the program to address the growing number of 
communities struggling to preserve their environmental 
resources.
    However, it is important for this program to be available 
for the purchase and redevelopment of degraded land, which is a 
pressing issue for many communities including other areas which 
have been adversely affected by past mining. In addition to the 
environmental problems associated with mine-scarred lands, 
economic development is adversely affected. Companies and their 
workers do not want to locate in areas of environmental 
devastation. Another insidious result is that ever increasing 
amounts of pristine land is falling to development because the 
presence of mine-scarred land precludes growth.
    In addition to guaranteeing that degraded land is eligible 
for Better America Bonds funds, any proposed legislation should 
insure that a diverse group of communities is able to 
participate in the program. The Better America Bonds program or 
any tax incentive should be designed as to allow for 
participation by only the most established, financially-
sophisticated, and wealthiest communities. Such a result would 
leave those communities who arguably need the resources the 
most without the help that they need. If properly designed, the 
Better America Bonds program has the ability to achieve a 
variety of goals for a variety of community problems. Several 
minor changes would create a more encompassing program that 
will effectively reach more communities.
    By requiring communities to pledge the full faith and 
credit section for these bonds, for example, many small and 
economically disadvantaged communities will not be able to 
apply for them. I would therefore recommend that communities be 
able to purchase bond insurance instead of pledging their full 
faith and credit. The proposed legislation recommends a per 
capita distribution of the bonds, which may not be the most 
appropriate allocation method. The government should allocate a 
set percentage for economically distressed areas or provide 
them with a significant preference in the application process. 
When allocating the bonds, the government should also give a 
preference to regional initiatives. To support regional 
initiatives, regional authorities created under state laws 
should be eligible to apply for Better America Bonds. These 
small adjustments to the legislation would greatly enhance the 
ability of small communities and economically distressed 
regions to utilize the bonds.
    As the Committee considers the Better America Bonds 
legislation, I would recommend eliminating the requirement that 
issuers use funds within three years. It may take communities 
several years to set in place a major environmental restoration 
initiative. As you know, the wheels of government can move 
slowly especially at the local level. Finally, a repayment 
period of 20 to 25 years may be more appropriate than the 
fifteen repayment schedule in the bill.
    Once enacted, the Better America Bonds initiative will 
create a tremendous resource for local communities to enhance 
control of their land use decision-making process, protect the 
environment, and promote economic development. I hope that you 
will consider the points I have raised about this proposal to 
provide tax incentives that adequately address the unique and 
diverse needs of all communities.
    Although this proposal has been hailed by primarily high-
growth regions of the country seeking to preserve their limited 
green space, I believe it can be extremely valuable for regions 
like mine which has not experienced intense development.
    I look forward to working with the Members of this 
Committee to enact bipartisan legislation that will address 
both environmental preservation and restoration.

                                

    Chairman Houghton. OK, thanks very much, Paul.
    Mr. Gilchrest.

   STATEMENT OF HON. WAYNE T. GILCHREST, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MARYLAND

    Mr. Gilchrest. Thank you, Mr. Chairman. First, I would like 
to say that I like the water pitchers in the Ways and Means 
Committee hearing room. We will try to get them changed----
    Chairman Houghton. Just be sure you do not break them. 
[Laughter.]
    Mr. Gilchrest. They are very picturesque. We will try to 
change the natural resources--water pitchers.
    I would also like to say, Mr. Chairman and Members of the 
Committee, that the use of tax incentives to encourage 
conservation I think is a positive way to bring people together 
to protect not only open space--I know we do not want to 
overuse the term ``brownfields''--but to understand the nature 
of protecting the mechanics of natural processes upon which we 
all depend as human beings. And I think tax incentives are a 
powerful tool to do that.
    First, however, I would like to talk a little bit about 
section 508 of the Taxpayer Relief Act of 1997. This is an 
excellent piece of legislating. And I commend the Chairman, and 
I believe this provision was the result of your efforts.
    This section amends section 2031 of the Tax Code to allow a 
deduction for estate and gift tax purposes for a contribution 
of a qualified real property interest to a qualified 
organization exclusively for conservation purposes, provided 
the property is within 25 miles of a national park or 
wilderness area. All too often, heirs are forced to subdivide 
or sell their property just to pay the taxes.
    Section 508 holds a lot of promise for my constituents--if 
we could only get the Internal Revenue Service to answer a 
couple of simple questions: Where does this provision apply? 
Did we mean for it only to apply to landowners within 25 miles 
of one of the 54 crown jewel national parks? In my district, 
Mr. Chairman, we have Assateague, which is a national seashore, 
which comes under, I understand, the jurisdiction of the 
National Park System. But we also have Blackwater National 
Wildlife Refuge.
    Now it is my understanding that the Internal Revenue 
Service has not issued any criteria upon which a landowner, 
especially in my situation, can take advantage of those estate 
tax provisions. And we would really like the Committee to look 
into that particular prospect, so landowners in my area can 
take advantage of that.
    One reason with me is a sense of urgency because Assateague 
is just south--Mr. Chairman, your grandchildren could hit 
Assateague from Ocean City with a stone. The development 
pressures in that area are enormous. And if landowners know 
they can take advantage of this estate tax provision, I think 
it would go a long way in preserving some of that land.
    I would also like to talk a little bit about expanding the 
idea of this tax incentive provision not only to estate taxes, 
not only to agriculture, not only to brownfields, but to the 
whole concept, which is usually controversial, of the 
Endangered Species Act.
    Recently, the Environmental Defense Fund released a report 
entitled ``Rebuilding the Ark.'' And in that report, it 
stated--which is true--``81 percent of habitat for endangered 
species is not on Federal land; it is on private land.'' And 
so, while we have preserved the peregrine falcon, the bald 
eagle, and other species that are sort of glowing in our minds 
as symbols of the United States, the whole biological diversity 
of this country is dependent upon everybody participating in 
the Endangered Species Act program.
    But unfortunately, many people feel that if they find an 
endangered species on their property, they are going to be 
over-regulated and under-compensated, and then they are going 
to bury this or get rid of it. There is no real incentive, I do 
not think, other than the idea that ``I want to protect 
biological diversity'' for private citizens on private 
property.
    Now, I am not proposing that we create a tax break to pay 
for people to comply with existing law. What I would like to do 
is give the Committee some idea that we provide a tax incentive 
in the same way for people that have private property and 
endangered species that we would for agriculture or any other 
land conservation program. But these people, who have to comply 
with the law, but maybe want to go a little further by 
enhancing habitat, might, because it is of public value, get 
some type of tax incentive in order to do that.
    Given the success of using tax incentives to encourage 
landowners to donate property or conservation easements to 
charitable groups, I feel strongly that a similar measure of 
success will come from allowing similar tax breaks for 
endangered species and management activities.
    And I see that the red light is on, Mr. Chairman, and I 
thank you for the time.
    [The prepared statement follows:]

Statement of Hon. Wayne T. Gilchrest, a Representative in Congress from 
the State of Maryland

    Mr. Chairman and Members of the Committee, thank you for 
the opportunity to testify on the use of tax policy to achieve 
environmental conservation goals. Tax breaks are a powerful 
incentive for many landowners to work with conservation groups 
to put land in perpetual conservation easements to preserve 
open space and habitat for wildlife. In many cases, they have 
been extremely successful. I believe we should look at 
expanding the successful use of tax incentives to encourage 
conservation activities.
    First, however, I would like to talk a little about Section 
508 of the Taxpayer Relief Act of 1997 (P.L. 105-34). This is 
an excellent bit of legislating and I commend the Chairman--I 
believe this provision was the result of his efforts. This 
section amends Section 2031 of the tax code to allow a 
deduction for estate and gift tax purposes for a contribution 
of a qualified real property interest to a qualified 
organization exclusively for conservation purposes, provided 
the property is within 25 miles of a national park or 
wilderness area. All too often heirs are forced to subdivide 
and sell property in order to pay the estate tax bill, often to 
the detriment of the environment.
    Section 508 holds a lot of promise for my constituents if 
we could only get the Internal Revenue Service to answer a 
couple of simple questions. Where does this provision apply? 
Did we mean for it only to apply to landowners within 25 miles 
of one of the 54 crown jewel National Parks, or did we intend a 
more broad application? More specifically, do the areas around 
Assateague Island National Seashore and Blackwater National 
Wildlife Refuge on the Eastern Shore of Maryland meet this 
criteria? As you may know, both are federal properties, managed 
with conservation as a primary mission. The National Seashore, 
in particular, is a unit of the National Park System even 
though it is not called a national park. This is a particularly 
important question as the area around Assateague is under 
significant development pressure and this tool would help 
encourage land conservation. I strongly urge the IRS to issue 
some guidance on the use of Section 508 to provide certainty 
and clarity for landowners seeking to plan their estates.
    I look forward to working with the committee to help make 
this incentive available to my constituents.
    We need to create more such options for landowners in order 
to actually restore and sustain our nation's biological 
diversity. Recently, the Environmental Defense Fund released a 
report entitled ``Rebuilding the Ark: Toward a More Effective 
Endangered Species Act for Private Land.'' This report contains 
some startling (or perhaps not so startling) statistics. More 
than half of the endangered or threatened species in the United 
States have at least 81 percent of their habitat on non-federal 
land (most non-federal land is in private ownership). Between a 
third and a half of the protected species do not occur at all 
on federal land. In addition, the authors of the report point 
out more than 60 percent of listed species will need active 
management measures in order to survive and recover. This is of 
particular concern when we consider that over time, while 
spending for endangered and threatened species in general has 
increased, spending per listed species has declined.
    Unfortunately, absent a few glowing examples (peregrine 
falcon, bald eagle) the Endangered Species Act is only capable 
of keeping species on life support--the Act is simply not 
constructed in such a way to recover species that occur on 
other than federal land. Federal officials can take recovery 
actions on public lands and the law includes prohibitions on 
take that apply everywhere. But neither of these will meet the 
most pressing need for active conservation and management 
measures performed on privately-owned land.
    In fact, EDF points out that in some cases the Endangered 
Species Act might actually contribute to the further decline of 
species and impede collection of information on the status of 
listed species--the ``shoot, shovel, shut up'' approach to 
wildlife management. The Fish and Wildlife Service is unable to 
ascertain the status of over half the species found exclusively 
on private land, perhaps because many landowners fear the 
result if they allow conservation officials onto their land to 
assess how endangered species there are faring.
    The Fish and Wildlife Service has implemented a ``safe 
harbor'' policy that provides landowners some assurances that 
they will not be penalized for activities that attract 
endangered species to their property. However, many management 
activities impose costs on individuals that are, perhaps, more 
properly shared by all Americans.
    Am I proposing that we provide a tax break for complying 
with the law? No, I feel strongly that we not pay people to 
comply with the law. But, where a landowner is willing and able 
to take steps to restore and manage a species' habitat, actions 
which are above and beyond what the law requires, the public 
should share in the cost of restoring public trust resources. 
Frankly, these are costs that the public already picks up for 
management activities on Federal lands.
    Changes in the federal tax code are the most efficient way 
for the public to subsidize these activities. To pay federal 
estate taxes, the inheritors of large land holdings often are 
forced to sell, subdivide, or develop the property, resulting 
in the loss of wildlife habitat. In cases where the property 
could be managed to benefit endangered species, the heirs 
should be given the opportunity to defer part of the estate 
taxes by entering into a management agreement with the 
Department of the Interior. Also, as currently written, the 
federal tax code seldom allows landowners to deduct the costs 
associated with maintaining or restoring the habitats of 
endangered species (e.g., prescribed burning, weed control, 
etc.). Were landowners allowed to claim a tax deduction or 
credit for these costs, more of them might be inclined to 
undertake such steps.
    Given the success of using tax incentives to encourage 
landowners to donate property or conservation easements to 
charitable groups, I feel strongly that a similar measure of 
success would come from allowing similar tax breaks for 
endangered species management activities. We are all familiar 
with the deeply divided debate over how best to reform the 
Endangered Species Act that has made reauthorization nearly 
impossible. We need to change landowners perception of what it 
means to find an endangered species on their property. Right 
now, it is a liability. Unless we make a change, species, and 
the public, will continue to lose.

                                

    Chairman Houghton. Thanks very much, Mr. Gilchrest.
    Now, the star of the Ways and Means Committee: Mrs. 
Johnson.

    STATEMENT OF HON. NANCY L. JOHNSON, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CONNECTICUT

    Mrs. Johnson. Thank you very much, Mr. Houghton. And I 
thank the Subcommittee, on which I have served for many years, 
for having this hearing. I believe it is extremely important to 
look at the fact that our Tax Code is not balanced, and 
discourages investment in the very areas where we need it most, 
and encourages it in the areas where we should not be 
encouraging it.
    At this particular time, we have a tremendous opportunity. 
The COPS grants have made our cities safer, without question. 
The Weed and Seed Program, that has been in place now for about 
15 years, has begun to deal with some of the urban problems of 
demolition and neighborhood problems and replacing old problems 
with new economic growth opportunities. So there is a 
combination of factors. Welfare reforms impact on small cities, 
and HUD's new flexibility.
    There are so many things that are now working for the 
rehabilitation and the revitalization of at least small urban 
areas--but I think neighborhoods in our big cities as well--
that we really have to move to make the Tax Code more city 
friendly, more development friendly of our urban areas, and 
less a force for eating up valuable, high quality, open space 
land or agricultural lands.
    So I would like to just testify in support of three bills 
that address themselves to this imbalance in our Tax Code. The 
first would expand the current deduction for brownfields 
remediation, the second would allow a deduction for the 
demolition of certain industrial sites, and the third would 
increase the deduction for land donations--all to rectify the 
balance in our Tax Code that discourages urban development and 
encourages urban sprawl into rural areas.
    First of all, to the expansion for the deduction for 
brownfields: You know, current law allows you to get a 
deduction if you are in an empowerment zone. Well, in my 
hometown, it means that there are a few blocks where you can 
get a deduction, but at the same kind of sites across town, you 
cannot get a deduction. And all of these sites need to be 
cleaned up.
    Talk about urban-rural disadvantages. You know, a 
brownfield site in a small town that may have only one or two 
parcels that could possibly attract a new business with jobs is 
just as much of a problem as a brownfield site in a city. But 
because they are rarely in these empowerment zones, they do not 
get the benefit of current law. So we need to allow that 
deduction for all brownfields, whether they are in an 
empowerment zone or whether they are not in an empowerment 
zone. They are the same environmental problem, and it is the 
same disinvestment to development.
    The places where there are brownfield sites are the older 
manufacturing communities of the Nation, and they are the ones 
that served us well and can only serve again with clean-up. So 
it is very important that we look at the disadvantage that we 
have put those communities at.
    Second, in order to get that deduction you often have to be 
at a 20 percent poverty income index. Well, in New Britain we 
only have 12.5 percent, but we have a lot of people just above 
that poverty index. But the way we have written this law 
disadvantages the very small urban communities that have lots 
of old manufacturing land, lots of old degraded territory that, 
once rehabilitated, can bring development to where the 
infrastructure to support that development is, the 
transportation and so on. To do that right now, when streets 
are now safer in these cities, will give us a tremendous 
opportunity to grow business exactly where we need to grow it.
    In our state, we have between 622 and 942 brownfields. Now, 
there is a big variation in number, because no town wants to 
acknowledge that a site is a brownfield and get that bad 
publicity, if they can possibly avoid it, because there are so 
few resources to clean up. So this is really an urgent matter 
for communities of all sizes.
    The U.S. Conference of mayors estimates that there are 
19,000 brownfields representing 178,000 acres. If we could 
encourage development on those 178,000 acres, just imagine the 
amount of open space, the amount of fertile land, that we could 
protect from development.
    If we further couple the brownfields relief with a second 
bill that I have introduced to make it easier to demolish old 
buildings, then we will really encourage that redevelopment in 
the cities. In my legislation, my demolition incentives have 
been developed in a way that protects buildings of historic 
significance, including residential buildings of historic 
significance.
    And last, let me just point to my third bill in the 
package, which does a better job of rewarding people who are 
willing to donate their land for preservation. You all know the 
problems the development rights programs in the States are 
running into. They are very expensive. States are not funding 
them as well as they used to. We are not funding them at all. 
We used to fund, put some money in that direction.
    And so we do need some new vehicles whereby people with 
large farms can donate them for preservation and realize some 
benefit to themselves and their heirs, some ability to justify 
that decision, some ability to have an income source that will 
support them during that period of transition.
    So my legislation would increase from 30 to 50 percent of 
their income the deduction they could receive in any current 
year until the full value of the land is realized, whether that 
takes 5 years or more. The current law is only 5 years.
    So this package of bills would go a long way. Incidentally, 
I should mention that that current legislation that allows the 
deduction only allows it if you are within 25 miles of a 
metropolitan statistical area, a national wilderness area, or a 
national park, or 10 miles from an urban park. Well, this 
includes all of Connecticut, so it does not make any difference 
to me. It excludes most of the Midwest. So that is where many 
of the big open spaces remain. And we are really shooting 
ourselves in the foot as a nation to continue to have that 
restriction.
    Our goal should be to encourage development where there is 
the infrastructure to support business and where we can reuse 
old lands and create healthy communities, and to discourage 
urban sprawl, strip malls, and all those things that have so 
compromised both the aesthetic appeal and the integrity of our 
small towns. Thank you very much.
    [The prepared statement follows:]

Statement of Hon. Nancy L. Johnson, a Representative in Congress from 
the State of Connecticut

    I would like to begin by thanking Congressman Amo Houghton 
for convening this hearing. As well as thank my colleague Mr. 
Blumenauer for co-sponsoring my three bills about which I have 
come to testify today. I would also like to acknowledge some of 
the groups who will testify later in the hearing with whom I 
have worked closely in developing my proposals, including 
representatives from the Realtors and the Nature Conservancy.
    As the former Chairman of the Oversight Committee, I too 
discovered what I believe Mr. Houghton has, that our tax code 
unfairly encourages development of land that is vital to our 
conservation efforts. While Congress often uses the tax code to 
promote certain activities, we haven't used it properly to 
promote land and wildlife conservation.
    My state of Connecticut, like most of its fellow New 
England states, is known for its historical beauty. With farms 
and homes dating back to our revolutionary days sprinkled 
across the state and its many beautiful farmlands and open 
spaces, it takes visitors through a tour of our country's past. 
However, like so some many communities across the country, we 
have seen an alarming amount of farmland and greenspaces lost 
to development. More and more strip malls, shopping plazas and 
housing complexes are replacing productive farms and valuable 
open spaces.
    A particulary disturbing aspect of the ``sprawl'' problem 
is that most of our cities have the infrastructure, public 
transportation and buildings to meet the needs of new 
businesses. Yet most new businesses choose to develop outside 
of the urban centers.
    There are obviously a variety of causes for this move away 
from our cities, including local zoning, safety and parking 
problems and development costs. But I do not believe that our 
tax code should be one of those causes. I have introduced three 
pieces of legislation to first expand the current deduction for 
brownfield remediation, allow a deduction for the demolition of 
certain industrial sites and increase the deduction for land 
donations. Our tax code unfairly encourages development outside 
of our urban centers absorbing our valuable land, and 
discourages development in the very areas that we need to grow 
businesses.
    Under current law, our tax code provides a deduction of 
environmental remediation costs for a brownfield if it is one 
of the EPA's designated brownfields, within an area that has 20 
percent poverty or is contained within an Empowerment Zone.
    While I certainly support allowing the deduction in these 
areas, it is needed by all brownfields in all parts of the 
country. For instance, the last available poverty rate for New 
Britain is 12.8 percent in 1990. That is a staggering number 
although it doesn't meet the 20 percent requirement for a 
deduction. Once the manufacturing hub of Connecticut, New 
Britain is now struggling to keep jobs and bring in new 
businesses. Encouraging the reuse of any city business plots is 
far preferable to pulling the same acreage out of agriculture 
and into development.
    Connecticut's General Assembly published a report in 
December, 1998 detailing the state's brownfields renewal 
efforts. The state uses the Environmental Protection Agency's 
definition of brownfield which is an abandoned, idled or 
underused industrial and commercial property where expansion or 
redevelopment is complicated by real or perceived environmental 
contamination. The state found, after surveying its towns, that 
there are between 622 and 942 brownfields in the state. The 
large gap in the count is in part due to some cities hesitancy 
to label a site as a brownfield if the contamination is only 
perceived.
    The United States Conference on Mayors has done a great 
deal of work on Brownfields research and advocacy. In its 
annual survey of cities, 180 cities responded that they had a 
combined total over 19,000 brownfields representing over 
178,000 acres of land. Imagine how many farms we could save, 
open spaces we could preserve or parks we could build from the 
land we could save from development by encouraging the clean-up 
of those 178,000 acres?
    This deduction certainly isn't going to inspire the clean-
up of all of the sites. But for a developer on a very tight 
budget, being able to expense the clean-up costs may be just 
the amount of savings needed to redevelop a site in the city 
rather than develop a brand new one in the suburbs.
    As the Connecticut General Assembly states in its report:

          The price someone is willing to pay for a site is based on 
        its cost relative to the return the owner expects to receive 
        from whatever activity is undertaken on the property. In the 
        case of a brownfield, the cost of the site includes the 
        expenses associated with the remediation of the property. In 
        many cases, the cost of remediating a brownfield will be 
        greater than the cost of adding infrastructure to a comparable 
        clean site.

Further, when the economy takes a downturn, the expected 
revenue from the potential use of the land will decline thus 
making remediation a less attractive option as their chances of 
recouping those expenses diminish.
    There are also sites for which clean-up is not an 
appropriate response but demolition may be. I have introduced 
legislation to allow a developer to expense the cost of taking 
down a building with protections built in for buildings of 
historical significance, including residential buildings. While 
the cost of demolition may not be determining in many cases, it 
can be the difference between developing an existing site or 
using an undeveloped piece of land in the suburbs.
    Providing incentives for developers to reuse already 
developed sites is only half the battle. We must also make 
donating land a more financially palatable option compared to 
selling it to the highest bidder.
    During our last national election, there were over 200 
ballot initiatives proposed to preserve open space. States like 
Connecticut and New Jersey have embarked on major initiatives 
to either buy, or provide grants for the purchasing of land for 
conservation or recreation.
    In addition to these popular state initiatives, more must 
be done to encourage those who are land rich to donate that 
land to a nonprofit organization for conservation purposes or 
even a government agency. My legislation would increase the 
current deduction from 30 percent to 50 percent of their income 
until the full value of the land is realized rather than the 
current 5-year limit.
    Further, language was included in the Taxpayer Relief Act 
to permit executors to donate land for a reduction in estate 
taxes. However, the proposal is so complicated that it is 
rarely used. Adjustments were made through the IRS Reform bill 
but not enough. In order to qualify, the property in question 
must be within 25 miles of a metropolitan statistical area, a 
National Wilderness Area or National Park, or 10 miles from an 
urban park. While all of my home state of Connecticut is 
included, most of the Midwest is not. My bill would eliminate 
the geographic requirement. It should be noted that the Senate 
version of this year's tax bill, increased the geographic 
boundaries to 50 miles from a metropolitan statistical area and 
25 miles from an urban park. My bill also makes other changes 
to clarify the language and eliminate restrictions on the value 
of the land.
    In closing, it is important not to limit choices for our 
constituents or dictate to where they should live or work. We 
do, however, have a responsibility to help them grapple the 
issues affecting their daily lives and sprawl is definitely one 
of those. Through some very simple tax measures we can provide 
incentives to developers to redevelop existing sites providing 
consumers and home-owners more options. We can give back a 
little in the form of a tax deduction to those who sacrifice 
high profits that come from selling their land to those who 
instead donate for the good of us all. The tax code should 
promote responsible development and environmentally friendly 
uses of our lands and currently it does not do that. My three 
bills are a small step in the path to a better, more responsive 
tax code.

                                

    Chairman Houghton. Thank you, Mrs. Johnson.
    Mr. Pitts, good to see you.

STATEMENT OF HON. JOSEPH R. PITTS, A REPRESENTATIVE IN CONGRESS 
                 FROM THE STATE OF PENNSYLVANIA

    Mr. Pitts. Thank you. Mr. Chairman and Members of the 
Subcommittee on Oversight, thank you for allowing us to testify 
on this important issue.
    As we all know, increased development pressures have had a 
drastic effect on farmland throughout the United States, 
especially in the Northeast Corridor. We have seen a sharp drop 
in our country's farm acreage. In my State of Pennsylvania 
alone, farm acreage has dropped from 9 million acres in 1980 to 
8 million in 1990, and the numbers continue to decline. Since 
1950, the Commonwealth of Pennsylvania has paved over a land 
mass equal in size to the entire State of Connecticut. Today in 
my congressional district, made up of Lancaster and Chester 
Counties, losses around 2,000 acres of farmland each year to 
development occur. That figure could rise rapidly in coming 
years if the land owned by retirement-aged farmers does not 
remain in farming.
    Recently, one of my local extension agents asked, ``Could 
Lancaster County, the home of the Amish, become the next Los 
Angeles?'' With the aging trend coinciding with the years of 
depressed milk prices and escalating land values, he believes 
this is a possibility. He informed me of the strong 
agricultural heritage Los Angeles had before development. In 
1944, Los Angeles County ranked No. 1 in the Nation in total 
agricultural production, at $129.4 million. Lancaster ranked 
15th, at $47 million. In 1992, Los Angeles County ranked 92d 
nationally in agricultural production. Lancaster County ranked 
13th--although we are No. 1 in non-irrigable products.
    To combat this threat to Pennsylvania's economy and quality 
of life, the Pennsylvania Agricultural Conservation Easement 
Program was developed. This program enables State and county 
governments to purchase easements, sometimes called 
``development rights,'' from owners of prime farmland. It was 
passed into law in 1988, and as of August 30, 1999, 1,140 farms 
in the Commonwealth of Pennsylvania have been preserved. That 
is 142,000 acres. Roughly $277 million of State and local funds 
have been spent to purchase these easements. Implementing such 
farmland preservation programs is not only popular in 
Pennsylvania, a number of States are enrolling farms in similar 
programs.
    Please allow me to explain these programs for the record. 
Farmland preservation programs are voluntary programs in which 
a farm owner foregoes his rights to sell the farmland for 
development purposes and enters into a legally binding 
covenant. In this covenant, the owner agrees to keep the land 
under cultivation for the life of the farm. In return, the 
owner receives a one-time payment from the State or local 
government. Often, the payment is the difference between the 
agriculture value and the development value of the land. The 
land can never be used for non-agricultural purposes, such as 
housing developments. These restrictions affect all future 
owners of that land, and can never be reversed. It is important 
to note that farmers who sell their development rights still 
own and control every other aspect of their land.
    Mr. Chairman, I believe that the Federal Government needs 
to do its fair share to preserve our precious farmland. That is 
why I introduced the Open Space Preservation Act, legislation 
that was originally introduced by my predecessor, Congressman 
Bob Walker. The Open Space Preservation Act is very simple: It 
repeals estate and capital gains taxes on all farms that are 
preserved in farmland preservation programs. Rather than 
creating more Federal programs and mandates for land use, I 
believe that tax relief is a more effective and less intrusive 
way to protect the environment and curb urban sprawl.
    Because of the burden of estate and capital gains taxes, 
farmers are often forced to sell their farms to developers. The 
punitive estate tax has forced the sale of thousands of family-
owned farms in recent decades--many times, just to pay the 
estate taxes. I strongly believe that families should not be 
forced to visit the undertaker and the tax man in the same 
week. By enacting the Open Space Preservation Act and repealing 
the estate tax on all farms that are preserved, younger 
generations are going to be able to stay in farming, rather 
than hand over 55 percent of the legacy a loved one intended 
for his family.
    By repealing capital gains taxes on preserved farms, our 
farmers would be able to save for their retirement, their 
children's education, or a better quality of life. And this 
would be extremely helpful for owners of preserved farms. If 
the Open Space Preservation Act were enacted, a farmer could 
finally sell his farm to another farmer, without paying the 
exorbitant capital gains tax.
    I might mention, when they sell part of the farm to pay 
taxes, they reduce their asset base. Farmers do not have a 
large cash flow, and they have to get loans. And this asset 
base going down limits the loans that they can get for 
operation.
    Mr. Chairman, I can assure you from my experience in the 
Pennsylvania State legislature that farmers greatly appreciate 
the opportunities that our Commonwealth's farmland preservation 
programs have provided. As a whole, farmers are proud of their 
profession. They like farming. They want to continue to farm as 
long as they can. At the same time, they realize that 
agriculture is a tough profession in which to be economically 
successful. Many farmers look upon their farm as their means 
for retirement security.
    Preservation programs nationwide have allowed farmers to 
receive reasonable compensation for their land, while allowing 
them to continue in agriculture. The proceeds from their 
easement sales may be used to purchase additional farmland or 
farm equipment, or may be just for a retirement nest egg. In 
any event, farmland preservation has provided farmers a greater 
opportunity to be financially secure and continue their 
profession.
    Although the compensation provided from agriculture 
conservation easement sales is welcomed, it is not the only 
reason farmers participate in the program. If money were the 
only motivator, farmers would sell their properties outright to 
a developer and receive a much higher price than the 
preservation program.
    Why would farmers settle for less than full price for their 
farms? I believe the answer is simple. While farming is a 
business, farmers do not make decisions on their farm 
operations strictly on the basis of dollars and cents. Farmers 
see a real value in the preservation of their farm and farming 
business for future generations. Farmers want their children to 
continue the family farm--if not their children, then 
individuals in succeeding generations who are as committed to 
farming as they are.
    Mr. Chairman, even with Pennsylvania's success in farmland 
preservation, much more needs to be done, not only to preserve 
farmland, but to preserve the economic integrity of 
agriculture. It is my hope that this Committee will lead the 
effort to, No. 1, provide meaningful tax relief and, No. 2, 
assist state- and local-administered farmland preservation 
programs.
    The Open Space Preservation Act does just that. It not only 
preserves our open spaces, but provides real tax relief to free 
hardworking families from the fear of losing their farms. Thank 
you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Joseph R. Pitts, a Representative in Congress from 
the State of Pennsylvania

    Mr. Chairman and members of the Subcommittee on Oversight, 
thank you for allowing me to speak before you on this very 
important issue. As we all know, increased development 
pressures have had a drastic effect on farmland throughout the 
United States, especially in the Northeast Corridor.
    We have seen a sharp drop in our country's farm acreage. In 
my state of Pennsylvania alone, farm acreage has dropped from 
nine million acres in 1980 to eight million in 1990. And the 
numbers continue to decline. Since 1950, the Commonwealth of 
Pennsylvania has paved over a land mass equal in size to the 
entire state of Connecticut. Today, my Congressional District, 
made up of Lancaster and Chester Counties, loses around 2,000 
acres of farmland each year to development. That figure could 
rise rapidly in coming years if the land owned by retirement-
aged farmers does not remain in farming.
    Recently, one of my local extension agents asked, could 
Lancaster County, the home of the Amish, become the next Los 
Angeles? With the aging trend coinciding with years of 
depressed milk prices and escalating land values, he believes 
this is a possibility. He informed me of the strong 
agricultural heritage Los Angeles had before development. In 
1944, Los Angeles County ranked #1 in the nation in total 
agricultural production at $129.4 million; Lancaster ranked 
15th at $47 million. In 1992, Los Angeles County ranked only 
92nd nationally in agricultural production; Lancaster County 
ranked 13th.
    To combat this threat to Pennsylvania's economy and quality 
of life, the Pennsylvania Agricultural Conservation Easement 
Program was developed. This program enables state and county 
governments to purchase easements (sometimes called development 
rights) from owners of prime farmland. It was passed into law 
in 1988, and as of August 30, 1999, 1140 farms in the 
Commonwealth of Pennsylvania have been preserved. That's 
142,000 acres. (Roughly $277 million of state and local funds 
have been spent to purchase those easements.) Implementing such 
farmland preservation programs is not only popular in 
Pennsylvania--a number of states are enrolling farms in similar 
programs.
    Please allow me to explain these programs for the record. 
Farmland preservation programs are voluntary programs, in which 
a farm owner foregoes his rights to sell the farmland for 
development purposes and enters into a legally binding 
covenant. In this covenant, the owner agrees to keep the land 
under cultivation for the life of the farm. In return, the 
owner receives a one-time payment from the state or local 
government. Often the payment is the difference between the 
agricultural value and development value of the land. The land 
can never be used for non-agricultural purposes, such as 
housing developments. These restrictions affect all future 
owners of that land and can never be reversed. It is important 
to note that farmers who sell their development rights still 
own and control every other aspect of their land.
    Mr. Chairman, I believe that the Federal government needs 
to do its fair share to preserve our precious farmland. That is 
why I introduced the Open Space Preservation Act, legislation 
that was originally introduced by my predecessor Congressman 
Bob Walker. The Open Space Preservation Act is very simple: it 
repeals estate and capital gains taxes on all farms that are 
preserved in farmland preservation programs. Rather than 
creating more federal programs and mandates for land use, I 
believe that tax relief is a more effective and less intrusive 
way to protect the environment and curb urban sprawl.
    Because of the burden of estate and capital gains taxes, 
farmers are often forced to sell their farms to developers. The 
punitive estate tax has forced the sale of thousands of family-
owned farms in recent decades. I strongly believe that families 
should not be forced to visit the undertaker and the tax man in 
the same week. By enacting the Open Space Preservation Act, and 
repealing the estate tax on all farms that are preserved, 
younger generations are going to be able to stay in farming, 
rather than hand over 55 percent of the legacy a loved one 
intended for his family.
    By repealing capital gains taxes on preserved farms, our 
farmers would be able to save for their retirement, their 
children's education, or a better quality of life. This would 
be extremely helpful for owners of preserved farms. If the Open 
Space Preservation Act were enacted, a farmer could finally 
sell his farm to another farmer without paying the exorbitant 
capital gains tax.
    Mr. Chairman, I can assure you from my experience in the 
Pennsylvania State Legislature that farmers greatly appreciate 
the opportunities that our Commonwealth's farmland preservation 
programs have provided. As a whole, farmers are proud of their 
profession. They like farming, and want to continue to farm for 
as long as they can. At the same time, they realize that 
agriculture is a tough profession in which to be economically 
successful. Many farmers look upon their farm as their means 
for retirement security.
    Preservation programs nationwide have allowed farmers to 
receive reasonable compensation for their land, while allowing 
them to continue in agriculture. The proceeds from their 
easement sales may be used to purchase additional farmland or 
farm equipment, or may just be used to provide a retirement 
nest egg. In any event, farmland preservation has provided 
farmers a greater opportunity to be financially secure and 
continue their profession.
    Although the compensation provided from agriculture 
conservation easement sales is welcomed, it is not the only 
reason farmers participate in the program. If money were the 
only motivator, farmers would sell their properties outright to 
a developer, and receive a much higher price than the 
preservation program. Why would farmers settle for less than 
full price for their farms? I believe the answer is simple. 
While farming is a business, farmers do not make decisions on 
their farm operations strictly on the basis of dollars and 
cents. Farmers see a real value in the preservation of their 
farm and farming business for future generations. Farmers want 
their children to continue the family farm--if not their 
children, then individuals in succeeding generations who are as 
committed to farming as they are.
    Mr. Chairman, even with Pennsylvania's success in farmland 
preservation, much more needs to be done not only to preserve 
farmland, but to preserve the economic integrity of 
agriculture. It is my hope that this Committee will lead the 
effort to 1) provide meaningful tax relief and 2) to assist 
state-and local-administered farmland preservation programs. 
The Open Space Preservation Act does just that. It not only 
preserves our open spaces, but provides real tax relief to free 
hard-working families from the fear of losing their farms. 
Thank you, Mr. Chairman.
      

                                

    Chairman Houghton. Thank you, Mr. Pitts.
    Mr. Coyne. Mr. Chairman?
    Chairman Houghton. Yes?
    Mr. Coyne. Our colleague from California, Pete Stark, had a 
statement he would like to be included in the record.
    Chairman Houghton. Absolutely, without objection.
    [The information was not available at the time of 
printing.]
    Chairman Houghton. So, Mrs. Johnson, gentlemen, thank you 
very, very much for being part of the panel.
    Now I would like to call a second panel: Mr. Burman, who is 
Deputy Assistant Secretary of Tax Analysis at the Department of 
the Treasury; Mr. Reid Wilson, Chief of Staff at the 
Environmental Protection Agency; and Hon. Dan Reicher, 
Assistant Secretary, Energy Efficiency and Renewable Energy, of 
the Department of Energy.
    All right. Mr. Reicher, would you begin your testimony?

 STATEMENT OF HON. DAN W. REICHER, ASSISTANT SECRETARY, ENERGY 
   EFFICIENCY AND RENEWABLE ENERGY, U.S. DEPARTMENT OF ENERGY

    Mr. Reicher. Thank you, Mr. Chairman and Mr. Coyne and 
Members of the Subcommittee. I am very pleased to have the 
opportunity to testify today. And I am going to discuss very 
briefly the economic and environmental benefits that can accrue 
to the Nation through energy efficiency and renewable energy 
technologies. My colleague, Mr. Burman, will discuss how tax 
incentives can spur the use of energy efficiency and renewable 
energy technologies.
    Mr. Chairman, I have a very simple message today: While we 
have made great progress over the last two decades in cutting 
the costs and improving the performance of renewable energy and 
energy efficiency technologies, we have some distance to go 
before solar, wind, biomass, and geothermal power, and highly 
efficient buildings, vehicles, and industrial processes are 
fully competitive in the U.S. market.
    Success, Mr. Chairman, requires sustained government 
commitment to research and development, and support of 
policies, particularly targeted tax incentives, the subject of 
today's hearing. Let me quickly give you some examples of our 
progress to date, and the remaining challenges.
    Wind power in 1980 cost 40 cents per kilowatt-hour. Today, 
it is one-tenth of that. With this dramatic cost reduction, and 
the availability of the Federal wind production tax credit, we 
have seen substantial growth of U.S. wind power capacity.
    Wind, however, is still not fully competitive in the U.S. 
with fossil fuel power plants. With continued progress in R&D 
and renewal of the wind production tax credit, as proposed in 
Mr. Matsui's bill, we see this technology competing fully and 
successfully in the early part of the next decade. In fact, the 
administration's goal is to obtain 5 percent of U.S. 
electricity from wind by 2020.
    As another example, electricity-producing solar panels in 
1980 produced power at more than $1 per kilowatt-hour. Today, 
the cost is about one-fifth of that figure. As a result, solar 
electric, or photovoltaic, systems are beginning to be 
installed in substantial numbers on roofs across the United 
States. However, again, we still have a good distance to go to 
cut the cost of these panels to under a dime per kilowatt-hour. 
In conjunction with further R&D advances, tax incentives for 
solar energy, like those in the Matsui bill, will help build a 
larger market for solar energy, and cut costs.
    In the area of biomass, we have also made great progress, 
driving the costs of fuels and power derived from forest and 
agricultural crops and waste down to a fraction of what they 
were in the past. But again, we have some distance to go.
    Tax incentives can definitely help, but I would note that 
the so-called ``closed loop approach'' in current law has 
spurred no new biopower development in the near term. An open 
loop approach, that the Matsui bill moves toward, would be far 
more effective.
    In the area of the efficiency of our buildings, we have 
long known how to build a more efficient home or office. The 
issue has been how to do it cost-effectively. Through 
government-industry R&D partnerships, along with codes and 
standards, we have vastly improved the efficiency and lowered 
the cost of heating and cooling systems, appliances, windows, 
and insulation.
    We have also improved the system efficiency of whole 
buildings. But again, we have some distance to go. Additional 
R&D, tax incentives like those contained in Mr. Matsui's bill, 
and more robust consumer information will quickly lead us to an 
area of vastly reduced energy bills and pollution in connection 
with buildings.
    In the area of industrial energy efficiency, the use of 
energy in our most energy-intensive industries like steel, 
aluminum, pulp and paper, glass, let me give you a startling 
statistic. On average in the United States, it takes three 
units of fossil or nuclear derived energy to produce one unit 
of electricity; the other two units being lost generally as 
heat through cooling towers, discharge pipes, steam vents, and 
by other means. The amount lost is about equivalent to Japan's 
entire annual energy use, the amount lost from our energy 
production system.
    Combined heat and power systems link electricity generation 
and the use of waste heat in industrial and commercial 
settings, raising generation efficiencies from about 35 percent 
to 65, 75, even 85 percent levels. These systems are making 
inroads in this country; but again, we have some distance to 
go. And continued R&D, changes to environmental electricity 
regulations, and targeted tax incentives can help.
    Last, we have lost ground in recent years in the fuel 
efficiency of our vehicles, particularly with the rise of light 
trucks and sport utility vehicles. Under the Partnership for a 
New Generation of Vehicles, the U.S. Government and the Detroit 
auto companies have made good progress toward our joint goal of 
an 80-mile-per-gallon, five- to six-passenger production 
prototype vehicle by 2004.
    We are pursuing hybrid electric-gas, electric-diesel, and 
fuel cell automobiles. Meanwhile, some Japanese companies are 
introducing two- and four-passenger hybrid vehicles in the U.S. 
market over the next several months. Tax incentives like those 
in Mr. Matsui's bill, in combination with additional R&D, will 
accelerate our progress to an era when 60-, 80-, or 100-mile-
per-gallon vehicles are commonplace. Success in this endeavor 
is likely to be highly important to the future competitiveness 
of our U.S. car companies.
    In conclusion, we have made a great deal of progress in 
energy efficiency and renewable energy technologies over the 
last few decades, but we have some distance to go. Congress' 
support, through targeted tax incentives, in combination with 
aggressive R&D, will hasten the day when these technologies and 
the economic and environmental benefits that come with them are 
commonplace in the United States. Thank you, Mr. Chairman and 
Members of the Subcommittee.
    [The prepared statement follows:]

Statement of Hon. Dan W. Reicher, Assistant Secretary, Energy 
Efficiency and Renewable Energy, U.S. Department of Energy

    Mr. Chairman and Members of the Subcommittee, I am pleased 
to have the opportunity to appear before you to discuss the 
many economic and environmental benefits that can accrue to the 
Nation through continued support of energy efficiency and 
renewable energy technologies. Although we at the Department of 
Energy have a strong interest in tax incentives to spur the use 
of clean energy technologies, my colleagues at the Department 
of Treasury have provided testimony on current tax proposals 
since this lies within their jurisdiction. However, I want to 
express my appreciation to Congressman Matsui, and to 
Representatives Lewis and Neal from this subcommittee for their 
introduction of H.R. 2380, a bill which incorporates many of 
the Administration's proposed tax incentives for renewable 
energy and energy efficiency. These tax incentives will 
encourage the use of energy efficiency and renewable energy 
technologies thereby advancing U.S. environmental quality and 
economic growth.
    Today, I want to share with you some of the exciting 
progress that we have made in energy efficiency and renewable 
energy over that last 20 years. Twenty years ago renewable 
energy was generally produced at a very high cost and in an 
inefficient manner. Advanced power delivery system components 
and high temperature superconducting materials did not even 
exist, and the alternative transportation fuel sector was very 
immature. We have come a long way although we have some 
distance to go before many of these technologies reach full 
competitiveness in the U.S. market. Tax incentives can 
accelerate this progress.
    For example, the cost of electric power from wind turbines 
in 1980 ranged from $0.30-$0.40 per kilowatt-hour (kWh). 
Through aggressive R&D by Department of Energy's Office of 
Energy Efficiency and Renewable Energy (EERE) and its industry 
partners on wind turbine aerodynamics, materials development 
and computer-aided design, we have been able to reduce the 
costs to between $0.04 and $0.06 per kWh. At this price, wind 
systems are beginning to enter the marketplace, expanding from 
the early California windfarms to include States ranging from 
Vermont to Alaska and from Minnesota to Texas. Wind energy 
systems are also poised to expand into other Great Plains and 
Northeastern locations, such as Oklahoma, Wisconsin the 
Dakotas, Maine, and New York. We are also working on Next 
Generation Turbines to reduce the cost of electricity from wind 
even further--to as low as 2\1/2\ cents per kWh by 2002. This 
cost will enable wind to compete fully across the United 
States.
    As another example, the first commercially-available 
photovoltaic (PV) systems in the early 1980s produced power at 
a cost of more than $1.00 per kWh. Today, PV systems are 
delivering electricity about $0.20 per kWh--depending upon the 
specific technology--making clean, reliable PV systems 
competitive in many remote and on-grid sites here in the U.S. 
and around the globe. By 2010 we project PV-generated 
electricity will drop to $0.10 per kWh. At this price solar 
would be a competitive power option in many urban and suburban 
areas where transmission and distribution systems are 
constrained and also in rural areas across the entire United 
States where distribution costs are too high. Improved 
materials manufacturing techniques and energy conversion 
improvements--most supported by DOE and its laboratories--have 
made and will make these cost reductions possible and have 
facilitated the resurgence of the U.S. PV industry as the 
world's leader in this $1.2 billion global industry, which grew 
95 percent between 1995 and 1998.
    With large manufacturing plants in Virginia, Maryland, 
California, Michigan, Delaware and Massachusetts, the solar 
industry is a growing part of the U.S. economy. However, global 
competition is fierce. While both domestic PV production 
capacity and U.S. product sales are up, the U.S. risks losing 
its world market leadership, having dropped from 44 percent in 
1996 to 40 percent in 1997 to 35 percent in 1998. Our potential 
loss of this growing market is exacerbated by a Japanese PV 
budget that is three times what we spend in the U.S. ($240 
million in Japan in FY 1999 vs. $72 million in the U.S. in 
1999).
    We are also making tremendous progress in making solar 
water heaters an economically attractive option for families 
across the U.S. by 2003. We are developing a new generation of 
solar water heaters that is 50 percent less expensive than 
today's technology (from $0.08/kWh to $0.04/kWh delivered 
energy cost). This would enable a family to buy a solar water 
heater for about $1,000 and see their investment returned in 
energy savings within four years.
    In our geothermal program, we are working with U.S. 
industry to establish geothermal energy as a sustainable, 
environmentally sound, and economically competitive contributor 
to the U.S. and world energy supply. These joint efforts 
sponsor research and development that leads to advanced 
technologies to improve reliability, reduce environmental 
impacts, and lower costs of geothermal energy systems. 
Attainment of the five goals of the Geothermal Energy Strategic 
Plan for 2010 which have been endorsed by industry will: supply 
the electrical power needs of 7 million U.S. homes; provide the 
heating, cooling, and hot water needs of 7 million U.S. homes; 
meet the basic energy needs of 100 million people in developing 
countries; ensure that the United States continues to lead in 
geothermal technology; and develop new technology to meet 10 
percent of U.S. non-transportation energy needs.
    Production of ethanol is also on track for widespread 
vehicle use at competitive prices. To compete with today's 
inexpensive gasoline, our biofuels program focuses on the 
development of facilities that make ethanol from agricultural 
and forest wastes and dedicated crops. Construction recently 
began in Jennings, Louisiana, on a ``first-of-a-kind'' 
production plant with 80 percent industry cost-sharing that 
will produce ethanol from sugarcane waste. This 20-million 
gallon facility is scheduled to come on-line in the year 2000 
with initial ethanol production costs of $1.00 per gallon, 
putting us well on-track for the program's 2010 production cost 
goal of less than $0.75 per gallon. We are also supporting the 
development of demonstration plants in California and New York 
that will use rice straw and municipal solid waste to produce 
ethanol. Additionally, we are studying ways to add facilities 
to existing corn-ethanol plants to produce ethanol from corn 
stalks and leaves. R&D on ethanol technology is very important 
to our future energy security. By 2020 net U.S. oil imports, 
which accounted for about 50 percent of domestic petroleum 
consumption in 1998, will grow to 65-70 percent of domestic 
petroleum consumption--with an annual oil bill ranging from 
$130 billion to more than $180 billion in current dollars.
    While we are making tremendous strides in these 
technologies, we still have much work to do. The competitive 
revolution in the power generation sector has led to drastic 
decreases in the price of power from new sources of generation. 
For example, natural gas-fired combustion turbine technology 
produces electricity for about $0.03 per kWh. Given the 
currently low domestic market prices of fossil fuels, market 
penetration of renewable energy technologies is occurring more 
quickly in remote locations domestically and also overseas 
where the cost of electricity is generally much higher than in 
the U.S. Large-scale penetration of the U.S. electricity market 
requires further technological progress and supportive policies 
such as tax incentives and federal electricity restructuring 
legislation.
    In our other major program area, the investments in energy 
efficiency made by the Department of Energy and its private 
sector partners have had a profound effect on economic 
development. They have produced real results that are helping 
U.S. industries cut costs and more successfully compete in the 
increasingly tough global marketplace. In industries facing 
severe international competition--from steel to forest products 
to chemicals--EERE technologies are being used to lower 
production costs--helping to keep these vital industries 
competitive. In the automobile sector, EERE technologies will 
not only result in the 80 mile-per-gallon family sedan and a 
more competitive domestic auto industry in the next decade, but 
have already contributed to the efficiency and competitiveness 
of many models on the road today. In buildings, EERE 
technologies in lighting, windows, building design, heating, 
cooling and materials have increased the efficiency of U.S. 
buildings from California to Connecticut. And as our nation 
embarks upon a new construction boom, these technologies will 
position builders to offer even greater efficiency in both new 
construction and renovation of homes, offices and schools. For 
example, the 6,000 new schools to be built and tens of 
thousands of schools to be renovated in the next decade present 
a key opportunity for energy savings--which can mean more money 
for teachers and textbooks.
    Our programs have a compelling record of success--in 
transportation, we are meeting our industry/government 
partnership goals and are on schedule to meet the goal of the 
ten-year Partnership for a New Generation of Vehicles (PNGV): 
the 80 mpg production prototype family sedan. In addition, the 
PNGV effort has led to significant engine and materials 
technologies being incorporated into current vehicle models. 
Also, we have built prototype diesel engines for small trucks 
that could be twice as efficient as current sport/utility 
vehicle engines with very low emissions. Finally, our work has 
helped make possible large-scale deployment of alternative fuel 
vehicles--such as natural gas cars and buses.
    Through the Industries of the Future program, we are 
working with the most energy intensive U.S. industries to 
develop technologies that cut their energy requirements, 
emissions and production costs and thereby improve their 
competitiveness. For example, in the steel industry, we have 
developed and demonstrated a portfolio of technologies that 
likely will save over $8 million per year at Bethlehem Steel's 
Burns Harbor, Indiana, plant and could save nearly $200 million 
per year if implemented industry-wide. We have also developed a 
wide range of crosscutting technologies that are being applied 
across many industries, for example, efficient motor and steam 
systems, advanced materials and combined heat and power 
technologies. Finally, we have nearly completed the development 
of our revolutionary high-efficiency, low-emissions natural gas 
turbine for industrial applications. These technologies cut 
production costs in the industries America needs to stay 
competitive--such as petroleum production, forest products, 
agriculture and mining.
    In buildings, EERE has supported technologies that have 
saved consumers literally tens of billions of dollars to date 
in energy costs. In Building America, we have demonstrated to 
builders from Pittsburgh to Los Angeles that they can build 50 
percent more efficient houses without increasing their 
construction cost. Through Rebuild America we have partnered 
with communities across the nation to continue energy 
efficiency retrofits in 400 million square feet of commercial 
buildings that will save over $140 million per year in energy 
costs. We have developed a revolutionary natural gas chiller 
that significantly increases building cooling efficiency. 
Finally, we have reinvented the appliance efficiency standards 
process to increase coordination--and the likelihood of 
consensus--with industry and other affected stakeholders. As 
with our renewable technologies we have made a great deal of 
progress on energy efficiency but our challenge in the next 
decade is to take these technologies and fundamentally 
transform the way we produce and use energy. Again, tax 
incentives can accelerate this progress.
    Many of the technologies I've discussed today are included 
in H.R. 2380. Enactment of tax incentives and a strong, 
continuing federal commitment to research, development and 
deployment will further enhance the technological benefits to 
be gained. By spurring the use of renewable and energy 
efficiency technologies, we are investing in the long-term 
health of our economy and our environment. Thank you for the 
opportunity to testify.

                                

    Chairman Houghton. Thank you very much, Mr. Reicher.
    Mr. Wilson.

         STATEMENT OF D. REID WILSON, CHIEF OF STAFF, 
              U.S. ENVIRONMENTAL PROTECTION AGENCY

    Mr. Wilson. Mr. Chairman and Members of the Subcommittee, 
thank you very much for this opportunity to discuss Clinton 
administration proposals to use tax incentives to preserve open 
space, spur economic redevelopment through brownfields clean-
up, and promote more livable communities.
    Across America, communities are searching for ways to 
improve their quality of life. In 1998 on the election day, 
there were over 240 green ballot initiatives across the 
country. Over 150 of them passed. And they authorized more than 
$7.5 billion to try and make those communities more livable.
    This Administration has proposed creative approaches to 
complement these State and local efforts, and I would like to 
address two of those today; namely, Better America Bonds, and 
the Brownfields Tax Incentive.
    One principle is key to both of these proposals, and that 
is that the appropriate role for the Federal Government is to 
provide tools and resources and information to communities, but 
not to interject itself into the decisions that these 
communities make. This is about empowering communities, not 
dictating decisions to them.
    The Better America Bonds program as embodied in H.R. 2446, 
would provide States, tribes, counties, and cities $9.5 billion 
in bonding authority over 5 years. And I would like to thank 
Congressmen Matsui and Doggett, though they are not here, for 
their leadership in sponsoring that legislation.
    There are three general purposes for Better America Bonds. 
One is to protect open space, so a community could create 
parks, greenways, and protect threatened farmland. And they 
could do this either by acquiring title or by purchasing 
conservation easements.
    The second general purpose is for brownfields site 
assessments and clean-ups. Clearly, there are so many 
brownfield sites around this country, and we heard from a 
number of the members this morning about that. There is 
probably almost never enough money to get to the job of 
cleaning them all up. And this proposal would provide more 
funds to do that.
    And third, Better America Bonds can be used to improve and 
enhance water quality. And we are really trying to focus this 
toward polluted runoff. We are not talking about building 
sewage treatment plants; we have other programs to do that. 
This is more about wetlands restoration, planning buffers along 
streams, buying sensitive land to protect wellheads, things 
like that.
    The thing that is great about this proposal for communities 
is that it provides them a real bargain. Because this is a tax 
credit bond, they would not pay interest on the bonds. The bond 
holder would receive a tax credit, in lieu of the interest they 
would have received from the community. So it is a deep subsidy 
to these communities.
    And just one example that the Treasury Department has 
provided is that if you had a $1 million bond, a tax-exempt 
bond, a community would have to spend roughly $100,000 per year 
to service that debt. Under a tax-credit bond, it is only about 
$40,000 per year to service the debt; a savings of about 60 
percent. And over the 15-year life of the bond, that adds up to 
$900,000 in savings for the community. So we believe this 
program is a real financial incentive for communities.
    Bonding authority would be awarded through a competitive 
process. We would plan to run this program much like we do our 
successful Brownfields Pilot Grant Program. In that program, we 
have provided grants totaling $60 million to 307 communities. 
That has leveraged over $1.5 billion, and it helps support 
4,000 jobs.
    We have done that without writing a single rule or 
regulation. And we would want to do Better America Bonds in the 
same way; which is a very flexible, easy program to use for 
communities. There are no rules or regulations. It has easy to 
follow criteria and guidelines about how they would apply for 
this bonding authority.
    As an example of how this could be used, a city and two 
surrounding counties, for instance--and we would want to 
encourage regional approaches--could come to us with a proposal 
to clean up four brownfield sites in the city, for example, and 
to restore some wetlands along the stream that separates the 
city from the counties, and also purchase some land along the 
stream for parks. So that kind of thing is how Better America 
Bonds could work.
    It is important to say what the program is not. The Federal 
Government will not buy one inch of land. We will not micro-
manage local decisions. It is up to them to decide how they 
would use the bonding authority.
    And this proposal has strong support from the Conference of 
mayors, the National Association of Counties, the National 
Realty Committee, the Trust for Public Land, the Garden Club--
very broad support. And on the other side of the Hill, there is 
a bipartisan bill sponsored by Senators Baucus and Hatch.
    Now, I have got a yellow light, so I am going to turn to 
the Brownfields Tax Incentive. We would like to commend this 
Committee and Congress for passage of the tax incentive in the 
1997 tax bill. It has helped level the field between 
redeveloping brownfield sites and developing pristine 
greenfield sites.
    Under the tax incentive, environmental clean-up costs for 
properties in designated areas are fully deductible in the year 
in which they are incurred, rather than being capitalized into 
the basis of the property. The incentive can reduce the capital 
cost of these types of investments by up to half. We regard 
this tax provision as an essential element of a comprehensive 
brownfields program.
    We strongly support H.R. 1630, introduced by Congressman 
Coyne--and thank you for your efforts on that--because it would 
make this tax incentive permanent. And by doing so, it would 
remove a lot of the uncertainty that developers and communities 
have about if they will be able to find the funding to clean up 
and redevelop these brownfield sites. And we think a permanent 
extension is better than another short-term extension, which 
would again have a sunset provision. Because that again, at 
some point, will increase the uncertainty that communities 
face.
    One other quick point about the tax incentive is that we 
have heard from States and others that to make this more 
broadly available we ought to look at changing the definition 
of what is a hazardous substance, to include petroleum, 
asbestos, and lead paint. And we are working with our 
colleagues at Treasury to see if that is indeed workable. They 
certainly make some good arguments as to how that would help 
them clean up brownfields quicker.
    So in conclusion, the Administration has put forth these 
two innovative proposals that provide resources to communities 
to protect open space, clean up their water, and redevelop 
economically by cleaning up brownfield sites. And it allows 
them to do this in a way where they set their own priorities 
and make their own decisions.
    We just want to be there to help them do that. And we look 
forward to working with the Committee on these proposals in the 
future. And thank you very much.
    [The prepared statement follows:]

Statement of D. Reid Wilson, Chief of Staff, U.S. Environmental 
Protection Agency

    Good afternoon Mr. Chairman and Members of the Committee. I 
am Reid Wilson, Chief of Staff at the United States 
Environmental Protection Agency (EPA). I am pleased to provide 
comment about the Clinton Administration efforts to use tax 
incentives to preserve open space, spur economic redevelopment 
through brownfields cleanup, and promote more livable 
communities throughout America.
    Across America, communities are searching for ways to boost 
economic growth, protect their environment and public health, 
and preserve a high quality of life. They want to see older 
neighborhoods revitalized. They want to see their local waters 
protected. And they want to preserve farmland and green space 
close to home.
    In 1998, according to the Brookings Institute and State 
Resources Strategies, more than 240 ballot initiatives to 
preserve open space, protect water quality, and speed 
brownfields cleanup were considered in communities across the 
country. More than 150 passed, authorizing $7.5 billion in 
state and local spending. These communities were responding, in 
part, to the astonishing loss of open space that has occurred 
across the nation. According to the American Farmland Trust, 
more than 30 million acres of farmland have been lost since 
1970. That's like paving over all of Pennsylvania. This loss of 
land has substantial environmental consequences. For instance, 
a one-acre parking lot generates sixteen times more runoff than 
a meadow. This runoff washes toxic chemicals and other 
pollutants into our waters, lakes and coastal areas, making 
them unfit for families who want to enjoy them and wildlife 
that depend on them.
    This Administration has proposed creative ways to help 
communities further their efforts to promote more livable 
communities. I would like to focus on two of these proposals--
the Better America Bonds program and extension of the 
Brownfields Tax Incentive. A key principle to both of these 
proposals is that the federal government's appropriate role is 
to provide tools, resources and information to communities so 
that they can grow in ways that are best for them, not to 
interject the federal government into local land use decisions. 
These proposals are about empowering and assisting communities, 
not dictating or micromanaging their decisions.
                          Better America Bonds
    The Better America Bonds program, as embodied in H.R. 2446, 
would provide states, tribes, counties, and cities $9.5 billion 
in bonding authority over five years to preserve their open 
spaces, protect their water, clean up brownfields, and improve 
their quality of life, in a manner that works best for them.
    Better America Bonds can be used for three general 
purposes. First, State, Tribal and local governments can create 
or restore parks and greenways, preserve green spaces, and 
protect threatened farmland and wetlands, either by acquiring 
title or purchasing conservation easements.
    Second, Better America Bonds can be used to fund 
brownfields site assessments, site cleanups, and provide 
flexible funding to boost reuse of these contaminated 
properties. The U.S. Conference of Mayors has pointed to a lack 
of capital for local governments as the leading barrier to the 
cleanup and reuse of brownfields. Better America Bonds will 
supplement existing brownfields grant and loan funding with 
bond proceeds. This spares green space from development by 
reusing already developed properties at a time when over 700 
acres of open space and farmland are lost per day to 
development.
    Third, Better America Bonds can be used to protect and 
improve water quality. Rivers, lakes, coastal waters, and 
wetlands can be restored or protected, stream side corridors 
can be planted or repaired, and land can be acquired to reduce 
polluted runoff or protect drinking water sources.
    Better America Bonds are structured to provide a deeper 
subsidy to communities than traditional tax-exempt bonds. In 
short, they are a great bargain for state and local 
governments. The bonds are interest-free to communities because 
the bondholder receives tax credits from the federal government 
in lieu of the interest they would have received from the 
community. The Treasury Department and EPA estimate that a 
community that issues a one million dollar, 15-year, tax exempt 
bond (at an interest rate of 5.8 percent) would pay roughly 
$102,000 per year to service the debt. But a community issuing 
a tax credit bond would pay only $46,000 per year into a 
sinking fund earning interest at the current Treasury rate of 
about 6.2 percent. That is an annual savings of $60,000--or 
about 60 percent. Over the fifteen year life of the bond, the 
savings add up to $900,000.
    Bonding authority will be distributed directly to States, 
Tribes, and local communities through a competitive process. 
EPA plans to administer the Better America Bonds program in 
consultation with other federal agencies including the USDA, 
Transportation, and Interior. EPA envisions that the program 
will be run the same way as our successful Brownfields grants 
program, which has provided over $60 million to three hundred 
communities to assess contamination of brownfields sites and 
plan cleanup activities. This program has leveraged over $1.5 
billion in redevelopment funds and supports more than 4,000 
jobs. All of this has been accomplished without writing a 
single rule or regulation.
    The Brownfields program is popular and easy for communities 
to use. At the outset, EPA conducted an extensive stakeholder 
outreach effort to help us shape the application criteria that 
communities use to apply for grants. As with the Brownfields 
program, EPA will embark upon a thorough outreach process to 
receive advice and input from federal agencies and communities 
to help create the application criteria for Better America 
Bonds (assuming the program is passed by Congress and signed 
into law). In fact, this summer, EPA held Better America Bonds 
listening sessions around the country to solicit advice from a 
diverse group of stakeholders. We will work closely with 
communities to ensure that the program is structured in a way 
that meets their needs. We want to preserve green space, not 
promote red tape. And, like the Brownfields program, once the 
criteria are written and applications are received, we will put 
together a panel of federal agencies with relevant expertise to 
help review and evaluate applications.
    One thing we would like to encourage through Better America 
Bonds is regional partnerships. For instance, a city and 
several neighboring suburban counties could submit a joint 
application to clean up brownfields sites in the city, purchase 
open space outside the city, and protect drinking water by 
restoring wetlands along a shared stream. We also want to make 
sure the program is available to all types of communities--big 
and small, suburban, rural, and urban.
    It is important to emphasize what this program is not. The 
Federal Government will not purchase one square inch of land; 
the purpose of the program is to provide resources to 
communities so that they can implement decisions they believe 
are in their best interests. Nor will the federal government 
get involved in local zoning decisions. EPA will not 
micromanage decisions included in communities' applications for 
bonding authority. Just as in our Brownfields program we do not 
tell communities which brownfields sites to assess, we will not 
suggest which parcels of land to purchase under Better America 
Bonds. It is up to the community to put together a plan that is 
best suited to its needs, whether it is brownfields cleanup, 
water quality protection, open space preservation, or some 
combination. Finally, this program is not mandatory; it is up 
to communities to choose whether they want to participate.
                       Brownfields Tax Incentive
    EPA and other Federal agencies are providing resources and 
tools to state and local governments to clean up and redevelop 
brownfields--abandoned, potentially contaminated properties. As 
mentioned before, EPA's pilot grant program has been extremely 
successful. In addition, EPA's Brownfields Cleanup Revolving 
Loan Fund provides funding for communities to move beyond site 
assessment and on to cleanup. So far, 68 communities are 
eligible for up to $500,000 each for cleanup activities. 
Finally, EPA's Job Training and Development Demonstration Pilot 
Program has helped create jobs by training workers to perform 
site cleanups in 21 communities so far.
    We would like to commend this Committee and Congress for 
the passage of the Brownfields Tax Incentive in the last 
Congress. Passage of the Brownfields Tax Incentive has enabled 
the federal government to help level the economic playing field 
between brownfields and previously unused greenfield sites. 
Under the tax incentive, environmental cleanup costs for 
properties in designated areas are fully deductible in the year 
in which they are incurred, rather than being capitalized into 
the basis of the property. The incentive can reduce the capital 
cost of these types of investments by more than half. We regard 
this tax provision as an essential element of a comprehensive 
brownfields program and hope it can be made a continuing and 
broad tool for brownfields redevelopment in the future. The 
Treasury Department estimates that the $.3 billion incentive 
will leverage $3.4 billion in private investments and return 
some 8,000 brownfields to productive use.
    West Chester, Pennsylvania provides a good example of how 
the tax incentive can be used to great advantage. The tax 
incentive was used there to help a demolition and environmental 
service company relocate its headquarters onto a brownfields 
property. The site was in a part of town plagued by a 29.6 
percent poverty rate, well above the 20 percent poverty 
threshold set in Section 198. The company estimates that 100-
200 jobs could be created and that the tax incentive saved 
nearly $42,000 in project costs.
    Similarly, a company in Portland, Oregon plans the 
redevelopment of a brownfields located in an Enterprise 
Community along Portland's waterfront. The waterfront location 
and large property size made the area perfect for marine-
related activities. The federal tax incentive was a key element 
in the efforts to revitalize a site that laid dormant and 
derelict within Portland's urban core. If the site is developed 
as planned, the company estimates that it will generate more 
than 150 jobs, some of which may be filled by residents in the 
adjacent community.
    Despite these successes, many stakeholders voiced a concern 
that the geographic requirements are too restrictive. EPA, in 
response, has developed an internet-based mapping program which 
will allow taxpayers to determine the eligibility of their 
properties for Section 198 election. This mapping system has 
shown us that large and widespread tracts of our inner cities 
and rural economic corridors are eligible under one or more of 
the criteria.
    Permanent extension of the Brownfields Tax Incentive is 
critical so that more communities can include it in their set 
of tools to bring brownfields sites back to vital economic 
life.
                               Conclusion
    The Administration is working hard to develop new ideas and 
approaches that respond to public concern that we find creative 
ways to help communities grow according to their own values, 
maintain their quality of life, and enhance economic 
competitiveness. This is a challenging task, but innovative tax 
proposals such as Better America Bonds and extension of the 
Brownfields Tax Incentive will provide communities with 
resources they need to protect parks and open spaces, enhance 
water quality, and return contaminated properties to productive 
economic use. These programs allow communities to set their own 
priorities and design for themselves their preferred path 
toward economic revitalization and environmental protection. We 
look forward to working with the Committee to define common 
sense approaches to meet the new challenges that we face today.

                                

    Chairman Houghton. Thanks very much, Mr. Wilson.
    Mr. Burman.

 STATEMENT OF LEONARD BURMAN, DEPUTY ASSISTANT SECRETARY, TAX 
           ANALYSIS, U.S. DEPARTMENT OF THE TREASURY

    Mr. Burman. Mr. Chairman, distinguished Ranking Member, and 
Members of the Subcommittee, thank you for inviting me to 
discuss the Administration's tax proposals to improve the 
environment and help State, local, and tribal governments to 
make their communities better places to live and work.
    Earlier this year, in the Administration's budget for FY 
2000 the President proposed initiatives to help build livable 
communities for the 21st century. The Liveable Communities 
Initiative aims to provide communities with tools, information, 
and resources they can use to enhance the quality of life of 
the residents, strengthen their economic competitiveness, and 
build a stronger sense of community.
    As part of that initiative, the administration proposed a 
new financing tool: Better America Bonds. Seven hundred million 
dollars in tax credits would make available $9.5 billion in 
interest-free tax credit bond authority over 5 years to finance 
investments by State, local, and tribal governments. Those 
investments preserve green space, create or restore urban 
parks, protect water quality, and clean up abandoned industrial 
sites.
    The Administration also proposed to make permanent the tax 
incentive to clean up brownfields and targeted areas, which is 
scheduled to expire on December 31, 2000, at a cost of $0.6 
billion over 5 years. The Administration's budget also included 
a $3.6 billion package of tax incentives over 5 years to 
encourage energy efficiency, reduce greenhouse gas emissions, 
and develop renewable energy sources. The tax incentives are 
part of a larger package of complementary initiatives.
    In addition to the $3.6 billion of tax incentives, the 
Administration proposed to increase funding for R&D and energy 
efficient technology and renewable energy, a new Clean Air 
Partnership Fund to boost State and local efforts to reduce air 
pollution from greenhouse gases, and $1.8 billion for global 
climate change research.
    Mr. Wilson has already spoken about the Better America 
Bonds program. I want to talk about a few of the technical 
details. The Better America Bonds program is modeled after the 
existing Qualified Zone Academy Bonds which, after a slow 
start, have gained widespread acceptance among many of the 
States. The Federal Government would, in effect, pay all of the 
interest on Better America Bonds for 15 years, in the form of 
tax credits to bond holders. Interest exemption is a much more 
valuable subsidy for governments than the tax exemption for 
traditional municipal bonds. Mr. Matsui and others have 
introduced a proposal for Better America Bonds in H.R. 2446 
which, as Mr. Wilson mentioned, we strongly support.
    In general, the property that governments acquire with the 
proceeds of Better America Bonds must be available only for 
public use and use by tax-exempt entities, but not private use. 
This is for the benefit of communities. The one exception is 
with respect to remediated brownfields, which could be sold to 
a private entity for private development, with the sale 
proceeds made available to repay the principal.
    The Administration proposes $1.9 billion of annual 
authority to issue Better America Bonds for 5 years, beginning 
in 2000. The EPA would administer an annual open competition 
among State, local, and tribal governments for authority to 
issue these bonds, subject to EPA's guidelines, which Mr. 
Wilson just spoke about.
    In the case of brownfields, which are abandoned or under-
utilized properties where redevelopment is complicated by known 
or suspected contamination, lenders, investors, and developers 
fear the high and uncertain costs of clean-up, so they avoid 
developing these contaminated sites. Blighted areas of 
brownfields hinder the redevelopment of effective communities, 
and create safety and health risks for residents.
    The obstacles in cleaning these sites, such as regulatory 
barriers, lack of private investment, contamination and 
remediation issues, are being addressed through a wide range of 
Federal programs, including the tax incentive for brownfields.
    The Administration proposed, and the Congress enacted, in 
the Taxpayer Relief Act of 1997 a Brownfields Tax Incentive 
that permits current deduction of certain remediation expenses. 
The qualified contaminated site must be located within a 
targeted area: high-poverty Census tracts, designated 
Empowerment Zones and Enterprise Communities, or certain EPA 
brownfields pilot projects. State environmental agencies 
certify eligibility. That provision expires at the end of 2000.
    The current law tax incentive was designed to be temporary, 
to encourage faster clean-up of brownfields in targeted areas. 
But many taxpayers were unable to take advantage of the 
incentive because environmental remediation often extends over 
a number of years. For that reason, the Administration's budget 
proposed a permanent extension of the Brownfields Tax 
Incentive, and that proposal was introduced by Mr. Coyne, for 
which we are grateful, in H.R. 1630.
    Finally, a set of proposed incentives for energy efficiency 
and the environment, which Mr. Reicher mentioned briefly, is 
contained in H.R. 2380, introduced by Mr. Matsui and others.
    The incentives are designed to reduce energy consumption 
and greenhouse gas emissions by encouraging the deployment of 
technologies that are highly energy efficient and that use 
renewable energy sources. The incentives cover buildings and 
homes, vehicles, renewable energy, and industrial equipment.
    We had to consider a number of different proposals in 
putting together this package. And we applied certain criteria 
to guarantee that the incentives were as efficient as possible. 
First of all, the kinds of technologies qualifying for these 
tax incentives had to exhibit superior energy efficiency 
compared to conventional equipment. We wanted to avoid using 
tax dollars to pay for things that people would be buying in 
any event.
    Second, there was a high threshold for eligibility. The 
energy efficiency standards had to be set sufficiently high 
that, although they were manageable, they were pushing the 
frontier of what was available, and trying to move the markets 
to develop more highly energy-efficient technologies.
    Third, there are high up front costs, compared to 
conventional equipment. But we did not want to pay for small 
items that are widely used, in large part to control the 
revenue cost. We wanted to focus on technologies where the high 
up front costs were a barrier to acceptance, in the hope that 
as they were accepted more, the costs would come down.
    These technologies had to be commercially available. And 
finally, there had to be a criterion available so that the IRS 
could administer the tax incentives. EPA or another agency had 
to be able to certify that specific technologies, or specific 
pieces of equipment, would qualify.
    The proposed incentives for buildings and homes would 
encourage investment in highly energy-efficient building 
equipment in new homes and solar energy systems. The tax credit 
for energy-efficient building equipment would range from 10 to 
20 percent depending on the efficiency of the items. The items 
covered include electric heat pumps, natural gas water heaters, 
electric and natural gas heat pumps, advanced central air 
conditioners, and fuel cells.
    The higher credit is available for super energy-efficient 
models, and the lower credit for items that meet high energy 
efficiency standards but do not satisfy the 20-percent 
threshold. The tax credit for energy efficient new homes ranges 
from $1,000 to $2,000, depending on the home's energy 
efficiency. There is also a 15-percent credit, up to $2,000, 
for photovoltaic solar energy systems, and $1,000 for solar 
water heating systems.
    The proposed tax credits for electric and hybrid vehicles 
will encourage purchase of vehicles that incorporate advanced 
automotive technologies and help move advanced hybrid vehicles 
from the laboratory to the highway.
    Chairman Houghton. Can I ask you a question? How much 
longer are you going to go on? Because the red light is on. We 
have got other panels.
    Mr. Burman. About a minute, sir.
    Chairman Houghton. OK. Fine. Thank you.
    Mr. Burman. There is a 10-percent credit for the cost of 
electric vehicles and fuel cell vehicles, up to $4,000. That is 
supposed to be phased down between 2002 and 2005 under current 
law. The proposal would extend the $4,000 credit through 2006. 
The proposal would also provide credits up to $3,000 for hybrid 
vehicles.
    The proposal would extend the wind and biomass tax credit, 
and make it available to open loop biomass, and also to energy 
produced from cofiring biomass with coal. There is also an 8-
percent tax credit for energy-efficient industrial equipment, 
such as combined heat and power systems. There is an 8-percent 
credit for that.
    The proposed incentives have the potential to significantly 
improve energy efficiency and the environment. There are some 
examples in my testimony. I will just conclude by saying that 
the package of tax proposals put forward by the Administration 
would, if enacted, make American communities stronger, cleaner, 
and better places to live and work. I applaud the Chairman and 
the Ranking Member for holding this hearing on the proposals of 
the Members of the Ways and Means Committee to advance these 
important priorities. And we look forward to working with you 
toward that end.
    [The prepared statement follows:]

Statement of Leonard Burman, Deputy Assistant Secretary, Tax Analysis, 
U.S. Department of the Treasury

    Mr. Chairman, Ranking Member Coyne, and distinguished 
Members of the Subcommittee:
    I appreciate the opportunity to discuss with you today the 
Administration's proposed tax incentives for improving the 
environment.
    Earlier this year, in the Administration's budget for FY 
2000, the President proposed initiatives to help build livable 
communities for the 21st century. The Livable Communities 
initiative aims to provide communities with tools, information, 
and resources they can use to enhance the quality of life of 
their residents, enhance their economic competitiveness, and 
build a stronger sense of community. As part of that 
initiative, the Administration proposed a new financing tool--
Better America Bonds--to help preserve green space and improve 
water quality for future generations. The proposed $700 million 
in tax credits over 5 years would make available $9.5 billion 
in bond authority over 5 years for investments by state, local, 
and tribal governments to preserve green space, create or 
restore urban parks, protect water quality, and clean up 
abandoned industrial sites. The Administration also proposed to 
make permanent the tax incentive to clean up brownfields in 
targeted areas, generally low-income communities, which is 
scheduled to expire on December 31, 2000. The revenue cost of 
that proposal is estimated to be $0.6 billion over five years.
    The Administration's budget also included a $3.6 billion 
package of tax incentives over 5 years to encourage energy 
efficiency, reduce greenhouse gas emissions, and develop 
renewable energy sources. The tax incentives are part of a 
larger package of complementary initiatives. In addition to the 
$3.6 billion of tax incentives, the Administration proposed to 
increase funding for R&D in energy efficient technology and 
renewable energy, a new Clean Air Partnership Fund to boost 
state and local efforts to reduce air pollution and greenhouse 
gases, and $1.8 billion for global climate change research.
    My comments today will focus on an explanation of the 
Administration's tax initiatives for improving the environment.
                          Better America Bonds
    Americans are concerned that the quality of the environment 
surrounding their communities is threatened by sprawl, that 
scenic vistas are being lost, that watersheds are eroding and 
contaminated, and that public access to outdoor recreation is 
diminishing.
    To address these concerns, the Administration proposed the 
creation of a new financial tool--referred to as ``Better 
America Bonds''--for use by state, local, and tribal 
governments, often in partnership with non-profit 
organizations, in securing more livable communities. Better 
America Bonds are modeled after the current-law provision for 
Qualified Zone Academy Bonds. The federal government would, in 
effect, pay all the interest on Better America Bonds for 
fifteen years, thereby significantly lowering the cost of 
financing below that attainable by state, local, and tribal 
governments issuing traditional tax-exempt bonds. Mr. Matsui 
and others have introduced a proposal for Better America Bonds 
in H.R. 2446.
    Interest would effectively be paid to holders of Better 
America Bonds in the form of a credit that could be claimed by 
the bondholder against Federal income taxes otherwise due. The 
credit rate would be set by the Treasury Department on a daily 
basis based on aa corporate yields of comparable maturity. The 
credit rate set for the day on which the bonds were sold would 
apply for the life of the bonds. (This method of setting credit 
rates was established by Treasury regulations for Qualified 
Zone Academy Bonds sold on or after July 1, 1999.) Issuers of 
Better America Bonds would pay no interest for the 15-year term 
of the bonds; their only obligation would be for repayment of 
principal after 15 years.
    H.R. 2446 is designed to enhance the marketability of 
Better America Bonds by allowing buyers of the bonds to strip 
the ``coupons,'' in the form of the tax credits, from the 
obligation to repay principal and sell the two pieces 
separately, much the same way that Treasury obligations are 
stripped. This would permit non-taxable entities, such as 
pension funds and endowments, to benefit from the gain between 
the current value of the stripped principal and the repayment 
of principal at par upon redemption, while another taxable 
investor claims the tax credit.
    The proceeds of Better America Bonds could be used for the 
following purposes:
    1. Acquisition of land for open space, wetlands, parks, or 
greenways. Acquired land would be owned by a government or a 
tax-exempt entity whose exempt purposes include environmental 
protection.
    2. Construction of public access facilities such as 
campgrounds, hiking and biking trails on publicly-owned land or 
land owned by a tax-exempt entity whose exempt purposes include 
environmental protection.
    3. Remediation of publicly-owned parks and open space to 
improve water quality by planting trees or other vegetation, 
creating settling ponds to control runoff, or remediating 
conditions caused by the prior disposal of toxic or other 
waste.
    4. Acquisition of permanent easements on privately-owned 
open land that prevent commercial development and any 
substantial change in the character or use of the land. Such 
easements could be held by governments or tax-exempt entities.
    5. Environmental assessment and remediation of brownfields 
owned by state or local governments under certain 
circumstances.
    In general, property acquired with the proceeds of Better 
America Bonds would be available only for public use and use by 
tax-exempt entities, but not private use. The one exception is 
with respect to remediated brownfields, which could be sold to 
a private entity for private development, with the sale 
proceeds made available to repay principal.
    After the expiration of the 15-year term of the bonds, tax-
exempt entities whose purpose includes environmental protection 
would have first option to buy any land acquired with Better 
America Bond proceeds if the government decided to sell the 
land for development or otherwise convert it to a non-
qualifying use. A tax-exempt entity's option to buy could be 
exercised at the original price of the land, rather than its 
current market price. The tax-exempt entity would be required 
to hold the property in its qualifying use in perpetuity.
    The Administration proposes $1.9 billion of authority to 
issue Better America Bonds each year for 5 years beginning in 
2000 (i.e., a total of $9.5 billion of bond authority). The 
Environmental Protection Agency (EPA) would administer an 
annual, open competition among state, local, and tribal 
governments for authority to issue these bonds, subject to 
published EPA guidelines. H.R 2446 stipulates that, as part of 
the competitive application process, the EPA should try to 
distribute the credits among the states in proportion to their 
populations.
    Projects qualifying for Better America Bonds, with the 
exception of remediated brownfields converted to private use, 
could be financed by tax-exempt bonds under current law. 
Indeed, states and localities occasionally use tax-exempt bonds 
for these purposes. But more needs to be done. Benefits from 
environmental projects are often so diffused over time and 
distance that taxpayers within particular local jurisdictions 
are reluctant to finance such projects with conventional tax-
exempt bonds.
    Compared to traditional tax-exempt bonds, Better America 
Bonds would significantly reduce the financing costs to local 
taxpayers of environmental projects. For example, annual 
payments of principal and interest on a traditional 30-year, $1 
million tax-exempt bond issue would, at current interest rates, 
be about $71,000. In comparison, the annual payments into a 
sinking fund that would repay after 15 years the $1 million 
principal of an issue of Better America Bonds would be about 
$42,000. A state or local government issuing the bonds would 
thus save about $29,000 per year over the initial 15 years, and 
$71,000 per year over the remaining 15 years of a 30-year 
bond's term. Better American Bonds would cost state and local 
governments only about half of what a tax-exempt bond would (in 
present value terms). This is a powerful tool for financing 
investments to make our communities better.
                     Brownfields Remediation Costs
    Brownfields are abandoned or underutilized properties where 
redevelopment is complicated by known or suspected 
contamination. Because lenders, investors, and developers fear 
the high and uncertain costs of clean up, they avoid developing 
contaminated sites. Blighted areas of brownfields hinder the 
redevelopment of affected communities and create safety and 
health risks for residents. The obstacles in cleaning these 
sites, such as regulatory barriers, lack of private investment, 
contamination and remediation issues, are being addressed 
through a wide range of Federal programs that includes the tax 
incentive for brownfields remediation.
    To encourage the clean up of contaminated sites, the 
Administration proposed, and the Congress enacted in the 
Taxpayer Relief Act of 1997, a brownfield tax incentive that 
permits the current deduction of certain environmental 
remediation costs. Environmental remediation expenditures 
qualify for current deduction if the expenditures would 
otherwise be capitalized (generally costs incurred to clean up 
land and groundwater that increase the value of the property) 
and are paid or incurred in connection with the abatement or 
control of hazardous substances at a qualified contaminated 
site. A qualified contaminated site must be located within a 
targeted area, i.e., census tracts with at least 20 percent 
poverty rates (and certain contiguous industrial or commercial 
tracts), designated Empowerment Zones and Enterprise 
Communities, and the 76 EPA brownfields pilot projects 
designated before February 1997. In order to claim a current 
deduction, the taxpayer must obtain a statement from a 
designated state environmental agency that the qualified 
contaminated site satisfies the statutory geographic and 
contamination criteria of a brownfield. The provision applies 
to qualified environmental remediation expenditures paid or 
incurred in taxable years ending after August 5, 1997, and 
before January 1, 2001.
    The current-law tax incentive is designed to be temporary 
to encourage faster clean up of brownfields in targeted areas. 
However, many taxpayers are unable to take advantage of the 
incentive because environmental remediation often extends over 
a number of years. For that reason, the Administration's budget 
proposed a permanent extension of the brownfields tax 
incentive. That proposal was introduced by Mr. Coyne and 
several cosponsors as H.R. 1630.
    Reclaiming brownfields would encourage the redevelopment of 
targeted communities by making unused or underutilized land 
productive again. Extending the special current-law rule on a 
permanent basis would eliminate uncertainty regarding the 
future availability of the incentive and encourage long range 
investment in the targeted areas. The revenue cost of the 
proposal is estimated to be approximately $0.6 billion for FY 
2000-2004. Treasury estimates that the tax incentive would 
induce an additional $7 billion in private investment to return 
18,000 brownfields to productive use over the next ten years.
                 Energy Efficiency and the Environment
    Individuals and businesses do not invest enough in energy-
saving technologies that produce benefits to society in excess 
of their private returns. If a new technology reduces pollution 
or emissions of greenhouse gases, those ``external benefits'' 
should be included in the decision about whether to undertake 
the investment. But potential investors have an incentive to 
consider only the private benefits in making decisions. Thus, 
they avoid technologies that are not profitable even though 
their benefits to society exceed their costs. Tax incentives 
can offset the failure of market prices to signal the desirable 
level of investment in energy-saving technologies because they 
increase the private return from the investment by reducing its 
after-tax cost. The increase in private return encourages 
additional investment in energy-saving technologies.
    The proposed tax incentives for energy efficiency and the 
environment are designed to reduce energy consumption and 
greenhouse gas emissions by encouraging the deployment of 
technologies that are highly energy efficient and that use 
renewable energy sources. The proposed incentives are also 
designed to minimize windfalls for investments that would have 
been made even absent the incentives and to facilitate tax 
administration.
    The design of the tax incentives incorporates the following 
considerations:
    1. Superior energy efficiency compared to conventional 
equipment. The eligible items should meet higher standards for 
energy efficiency than conventional equipment or use renewable 
energy sources. This ensures that tax benefits promote energy 
efficiency and reduce greenhouse gas emissions.
    2. High threshold for eligibility. The energy efficiency 
standards should be set sufficiently high so that eligible 
items presently account for a small share of the market. This 
minimizes windfalls for purchases that would have been made 
absent the credit.
    3. High up-front costs compared to conventional equipment. 
The targeted technologies have significantly higher purchase 
prices than conventional equipment and, at current market 
prices, have limited cost effectiveness. These high up-front 
costs are another reason relatively few items incorporating the 
targeted technologies would be purchased without the credit.
    4. Commercially available. The items should be commercially 
available or near commercialization. This ensures that the 
incentives encourage the deployment of new technologies that 
private markets have already developed.
    5. Ease of administration. The items must be able to be 
defined precisely enough so that the IRS can administer the 
incentives. This helps to ensure that tax benefits are claimed 
only for items for which they are intended.
    The tax incentives the Administration has proposed cover 
buildings and homes, vehicles, renewable energy, and industrial 
equipment. Mr. Matsui and others introduced these proposals in 
H.R. 2380.

Buildings and Homes

    This sector currently accounts for about one-third of 
energy consumption and the related greenhouse gases. The 
proposed tax incentives would encourage investment in highly 
energy efficient building equipment and new homes, and solar 
energy systems.
    Tax credit for energy efficient building equipment. A tax 
credit of 10 percent or 20 percent would be provided for energy 
efficient equipment, depending upon the efficiency of the 
equipment. This credit encourages the purchase of equipment 
that will improve the energy efficiency of both residential and 
commercial buildings. The items covered are electric heat pump 
and natural gas water heaters, electric and natural gas heat 
pumps, advanced central air conditioners, and fuel cells.
    The credit would be 20 percent of the cost of super energy 
efficient models, subject to a cap. It would be available for 
the period 2000 through 2003. A 10 percent credit would be 
available for electric heat pumps, central air conditioners and 
natural gas water heaters that meet high efficiency standards, 
but do not satisfy the standards for the 20 percent credit. The 
smaller credit would be available for the period 2000 through 
2001.
    Items eligible for the 20 percent credit are top-tier 
technologies that are much more energy efficient than 
conventional equipment. For example, compared to typical units 
on the market, the eligible advanced air conditioning systems 
and electric heat pumps are 40 percent more efficient, and 
eligible electric heat pump water heaters and natural gas heat 
pumps are about twice as efficient. Items eligible for this 
credit embody new, cutting-edge technologies that have 
substantial purchase prices and limited in their cost 
effectiveness. They generally account for less than one percent 
of market sales. Therefore, the credits would benefit very few 
purchases that would have been made absent the credit. The 10 
percent credit provides a more widely available incentive for 
purchases of highly energy efficient items, as well as state of 
the art technology, during the period 2000 through 2001. Some 
makes and models of qualifying items are currently available. 
Existing energy efficiency standards for the designated classes 
of equipment have been used to define eligible items precisely 
enough for IRS to administer the credit.
    The revenue cost of this incentive is estimated to be $1.5 
billion for FY 2000-2004. The credit is estimated to increase 
purchases by nearly 10 million items of highly energy efficient 
building equipment through 2009.
    Tax credit for energy efficient new homes. Residences 
account for about one-sixth of U.S. greenhouse gases and offer 
one of the largest sources of energy saving potential. Over one 
million new homes and manufactured homes are built and sold 
each year. Some states and certain Federal programs require new 
houses to meet certain energy code standards for insulation and 
related construction standards, and for heating, cooling and 
hot water equipment. However, the energy efficiency of new 
homes could be improved significantly through the use of more 
energy efficient building practices and more efficient heating 
and cooling equipment that exceed current efficiency standards.
    A tax credit equal to $1,000 to $2,000 (depending upon the 
home's energy efficiency) would be provided to encourage 
consumers to purchase energy efficient new homes. The tax 
credits would be: (1) $1,000 for homes that use at least 30 
percent less energy than the standard under the 1998 
International Energy Conservation Code (IECC); this credit 
would be available for homes purchased during the period 2000 
through 2001; (2) $1,500 for homes that use at least 40 percent 
less energy than the IECC standard; this credit would be 
available for homes purchased during the period 2000 through 
2002; and (3) $2,000 for homes that use 50 percent less energy 
than the IECC standard; this credit would be available for 
homes purchased during the period 2000 through 2004.
    Homes qualifying for the credit would use 75 percent to 85 
percent less energy than existing housing and as much as 50 
percent less energy than typical new housing. The revenue cost 
is estimated to be $0.4 billion for FY 2000-2004. The credit is 
estimated to result in purchases of over 250 thousand new 
energy efficient homes through 2009.
    Tax credit for solar energy systems. Solar energy systems 
accounted for 0.02 percent of electricity generation in 1996. 
These systems produce no greenhouse gas emissions. The tax 
credit for the purchase of rooftop photovoltaic (PV) systems 
and solar water heating systems would be 15 percent of the cost 
up to a maximum credit of $2,000 for PV systems and $1,000 for 
solar water heating systems. The tax credit for PV systems 
would be available for the period 2000 through 2006, and the 
tax credit for solar water heating systems would be available 
for the period 2000 through 2004.
    The revenue cost of this incentive is estimated to be $0.1 
billion for FY 2000-2004. This incentive will help to achieve 
the President's goal of one million solar energy roofs by 2010. 
The credit is estimated to reduce electricity production from 
non-solar sources by 3 billion kilowatt hours through 2009.

Vehicles

    Cars and light trucks (including minivans, sport utilities, 
and pickups) currently account for 20 percent of greenhouse gas 
emissions. Those vehicles also account for about 20 to 40 
percent of urban smog-forming emissions and 40 percent of total 
U.S. petroleum consumption. Almost all cars and trucks use a 
single gasoline-fueled engine.
    Hybrid vehicles, which have more than one source of power 
on board, and electric vehicles have the potential to reduce 
greenhouse gas emissions, air pollution, and petroleum 
consumption. The proposed credits will encourage the purchase 
of vehicles that incorporate advanced automotive technologies 
and will help to move advanced hybrid vehicles currently under 
development from the laboratory to the highway. These vehicles 
can significantly reduce emissions of carbon dioxide, the most 
prevalent greenhouse gas.
    The proposal would extend the present tax credit for 
electric vehicles and fuel cell vehicles. Under current law, a 
10 percent credit is provided for the cost of qualified 
electric vehicles and fuel cell vehicles up to a maximum credit 
of $4,000. The maximum amount of the credit is scheduled to 
phase down in 2002 and be phased out in 2005. The President's 
proposal would extend the tax credit at its $4,000 maximum 
level through 2006.
    The proposal also would provide tax credits of $500 to 
$3,000 for certain hybrid vehicles, depending upon requirements 
for the vehicle's design and performance. A qualifying hybrid 
vehicle is a road vehicle that can draw propulsion energy from 
both of the following on-board sources of stored energy: (1) a 
consumable fuel, and (2) a rechargeable energy storage system. 
The tax credits would be available for vehicles purchased 
during the period 2003 through 2006. The credit amounts--
available for all qualifying vehicles, including cars, 
minivans, sport utility vehicles, and pickup trucks--would be:
     $500 if the rechargeable energy storage system 
provides at least 5 percent but less than 10 percent of the 
maximum available power;
     $1,000 if the rechargeable energy storage system 
provides at least 10 percent but less than 20 percent of the 
maximum available power;
     $1,500 if the rechargeable energy storage system 
provides at least 20 percent but less than 30 percent of the 
maximum available power, and
     $2,000 if the rechargeable energy storage system 
provides 30 percent or more of the maximum available power.
    If the vehicle actively employs a regenerative braking 
system, the amount of the credit shown above would be increased 
by:
     $250 if the regenerative braking system supplies 
to the rechargeable energy storage system at least 20 percent 
but less than 40 percent of the energy available from braking 
in a typical 60 miles per hour (mph) to 0 mph braking event;
     $500 if the regenerative braking system supplies 
at least 40 percent but less than 60 percent of such energy to 
the storage system; and
     $1,000 if the regenerative braking system supplies 
60 percent or more of such energy to the storage system.
    Hybrid vehicles eligible for the largest credit would be 50 
percent to 100 percent more fuel efficient than a conventional 
vehicle of the same size and power. Doubling a car's fuel 
economy reduces its emissions of carbon dioxide by about 50 
percent. The revenue cost of this initiative is estimated to be 
$0.9 billion for FY 2000-2004. These credits are estimated to 
result in purchases of 13 million electric and hybrid vehicles 
through 2009.

Renewable energy

    Wind and biomass currently account for about 2 percent of 
electricity generation from renewable sources. These renewable 
energy sources produce virtually no greenhouse gas emissions. 
To make electricity produced from wind and biomass price 
competitive with other forms of electricity generation, the 
proposal would extend the current-law tax credit for wind and 
biomass for five years, expand eligible biomass sources, and 
allow a credit for electricity produced from cofiring biomass 
with coal.
    Current law provides a tax credit of 1.5 cents per kilowatt 
hour (adjusted for inflation after 1992) for electricity 
produced from wind and closed-loop biomass (organic material 
from a plant that is grown exclusively to fuel a qualified 
electricity generation facility). The current tax credit covers 
the first ten years of production from facilities placed in 
service before July 1, 1999.
    The proposal would extend and expand the tax credit for 
electricity produced from wind and biomass. It would:
     Extend the current wind and biomass credit for 5 
years to cover facilities placed in service before July 1, 
2004.
     Expand the definition of eligible biomass for the 
1.5 cent credit beyond closed-loop biomass to include certain 
forest-related resources and agricultural and certain other 
sources. This change would apply to facilities placed in 
service after June 30, 1999 and before July 1, 2004.
     Allow cofiring biomass with coal. This proposal 
adds a 1.0 cent per kilowatt hour tax credit for electricity 
produced by cofiring biomass in coal plants after the date of 
enactment and before July 1, 2004. Only the portion of 
electricity associated with biomass would be eligible for the 
credit.
    The revenue cost of this incentive is estimated to be $0.3 
billion over FY 2000-2004. This incentive is estimated to 
increase electricity production from renewable energy sources 
by 32 billion kilowatt hours through 2009.

Industry

    The proposal would promote energy efficiency in industry by 
encouraging investments in combined heat and power (CHP) 
systems. These systems use the thermal energy that is otherwise 
wasted in producing electricity by more conventional methods. 
These systems increase energy efficiency, lower the consumption 
of primary fossil fuels, and reduce greenhouse gas emissions 
compared with conventional methods.
    To encourage and accelerate investment in CHP equipment, an 
8 percent tax credit would be provided for eligible CHP 
investment. A qualified CHP system would be required to produce 
at least 20 percent of its total useful energy in the form of 
thermal energy and at least 20 percent in the form of electric 
or mechanical power, and would have to meet certain efficiency 
standards. The credit would apply to property placed in service 
between 2000 and 2002. Eligible CHP systems should reduce input 
energy requirements by about one-third compared to conventional 
systems. The revenue cost of this incentive is estimated to be 
$0.3 billion for FY 2000-2004. The credit is estimated to 
increase cogeneration electrical capacity by more than 1.2 
gigawatts through 2009.

Environmental benefits of the proposal

    The proposed incentives described above encourage 
businesses and consumers to increase their investment in 
energy-efficient items, new technologies, and renewable energy 
sources. The investments induced by the credits would be long-
lived and, therefore, would produce energy savings and 
greenhouse gas reductions for many years after the investment 
is undertaken. The induced increase in the market penetration 
of energy-efficient technologies, new technologies, and 
renewable energy sources may lead to lower cost production and 
increased awareness of the benefits of such technologies that 
could have lasting effects.
    The cumulative reduction in greenhouse gas emissions 
attributable to the tax incentives is estimated to be between 
100 and 150 million metric tons of carbon equivalent (MMTCE) 
over the lifetime of the investments undertaken from 2000 
through 2009.\1\ Over one-third of the emissions reduction is 
attributable to the tax credits for electric and hybrid 
vehicles and over one-fourth to the tax credits for building 
equipment.
---------------------------------------------------------------------------
    \1\ According to the Department of State, Climate Action Report, 
July 1997, US greenhouse gas emissions are estimated to be 1,646 MMTCE 
in 2000, 1,742 MMTCE in 2005, 1,837 MMTCE in 2010, 1,998 MMTCE in 2020.
---------------------------------------------------------------------------
    Reductions in greenhouse gas emissions, however, are not 
the only benefits that will be realized from these incentives. 
The incentives will also reduce local air pollution. In 
addition, the proposals will produce private benefits, such as 
energy savings for consumers and businesses. The present value 
of energy savings for consumers and business over the lifetime 
of items purchased through 2009 is estimated to be between $22 
billion and $33 billion.
                               Conclusion
    The Administration strongly supports the proposed tax 
credits for holders of Better America Bonds, a permanent 
extension of the current deduction of brownfields remediation 
expenses, and tax credits for energy efficiency and the 
environment.
    The proposed Better America Bonds provide a new financing 
tool that will enable state, local, and tribal governments to 
preserve green spaces, create and restore urban parks, protect 
water quality and clean up brownfields. Those governments would 
be authorized to issue a total of $9.5 billion of Better 
America Bonds to finance environmental and conservation 
projects. The proposed permanent extension of the current 
deduction of brownfields remediation costs will help return 
industrial and commercial sites in targeted areas to productive 
use. The proposal is estimated to induce an additional $7 
billion in private investment and return an additional 18,000 
brownfields to productive use over the next ten years. 
Together, these initiatives will help to preserve our 
environmental heritage and make our communities more livable in 
the 21st century.
    The Administration's proposed package of tax incentives for 
energy efficiency and the environment is designed to achieve 
reductions in greenhouse gas emissions and improvements in 
energy efficiency. Purchases of items that offer superior 
energy efficiency or that use renewable energy sources would be 
eligible for a temporary tax credit. The proposed incentives 
are estimated to reduce greenhouse gas emissions by 100 to 150 
MMTCE over the lifetime of purchases made through 2009 that 
were induced by the credits. The benefits of the proposal 
should increase significantly in the years beyond the ten-year 
budget window, through the transformation of markets after the 
credits are no longer in effect. Moreover, the proposed 
incentives also may generate other benefits to society, such as 
cleaner air.
    In conclusion, Mr. Chairman, we believe that the 
Administration's proposed tax initiatives represent sound 
policy that can produce significant environmental benefits over 
the next ten years and for decades to come. The proposals 
represent investments that will generate long-term benefits for 
the Nation. We look forward to working with the Congress on 
these initiatives.
    This concludes my prepared remarks. I would be pleased to 
respond to your questions.

                                

    Chairman Houghton. Likewise. Thanks very much. I am sorry 
to push you along here.
    Mr. Burman. That is fine.
    Chairman Houghton. We just have a few other people.
    So I am going to ask Mr. Coyne if you would like to start 
the questioning.
    Mr. Coyne. Thank you, Mr. Chairman. I wanted to ask Mr. 
Burman whether, in your assessment, the Better America Bonds 
will be a good financial product and will have the ability to 
attract investors?
    Mr. Burman. I believe they will. As was mentioned, I think 
by Mr. Wilson, these bonds provide tax credits in lieu of 
interest for 15 years, a 15-year duration of the bond issue. By 
comparison, tax-exempt bonds reduce the cost of borrowing, but 
communities still have to pay the interest on those loans. We 
did some calculations that suggested that a locality would pay 
off the bond issue over the first 15 years with lower payments 
than they would make on a 30-year bond, substantially lower.
    In the case of the Qualified Zone Academy Bond program, 
there has been an increasing public acceptance of that program. 
I think it was stimulated by the fact that Treasury recently 
issued regulations that set the interest rate at a more 
reasonable level, at the rate for corporate AA bonds. And 
recent bond issues have been trading at or near par. Several 
States have actually exhausted their bond authority. I think 
California is one.
    Mr. Coyne. Thank you.
    Mr. Burman. Thank you.
    Mr. Coyne. Thank you, Mr. Chairman.
    Chairman Houghton. Thank you, Mr. Coyne.
    Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman. I would like to start 
by asking Secretary Reicher, if I could, a couple of questions 
about his testimony, in particular, wind power.
    I understand from your testimony that you believe wind 
power is close to being competitive in the United States, but 
that we still have some distance to go, because of the cost. 
And I guess what I would like to know is, given your 
experience, how are we doing in wind power development, 
particularly in farm country? And how would the extension of 
the production tax credit which is, as you know, one of the 
things we are talking about in the extender package to do yet 
this year--how would that assist with regard to wind power 
development?
    Mr. Reicher. Mr. Portman, we are doing well in the 
development of wind power. First of all, it is a huge resource 
in this country. Two States alone, Texas and North Dakota, 
could easily supply the entire electricity needs of the 
country. Costs have come down. As I said, they are a tenth of 
what they were in 1980. The production tax credit has helped.
    We are seeing real growth: States like Iowa, Minnesota, 
Wisconsin, the Dakotas, Texas, Colorado, Wyoming, Vermont. And 
in fact, Mr. Coyne and Mr. Houghton, there will be new wind 
facilities, major ones, built both in New York and Pennsylvania 
over the next year.
    California is not even on the list of the top 15 wind 
States in the United States in terms of the resource potential. 
States that I have mentioned, even New York State for example, 
has a greater developable resource than California in terms of 
wind.
    The important point, referring to Mr. Portman's question 
about wind power, is that it is a wonderful addition to farm 
country. I visited Iowa recently and Minnesota recently. And 
there, the wind developers are paying $2,000 to $3,000 per 
turbine per year to farmers for the use of their land. They 
plant crops right up to the base of the turbine. They graze 
their cows right up to the base. And as one of the farmers said 
to me, ``This is a real cash crop.'' And it is an important 
cash crop when farm country is in such crisis.
    So it is a wonderful, wonderful addition. And the key is 
that we are not quite there, in terms of the cost of this 
technology. Combined cycle natural gas produces electricity at 
about 2 to 3 cents a kilowatt-hour; wind is about 4 to 5 cents. 
Production tax credit is critical to make up that gap, as we 
continue through R&D to bring the cost down.
    It is a multi-billion-dollar-a-year industry worldwide. We 
do not lead it; the Danes and the Germans do. We would like to 
recapture our place in that industry. We have new factories 
being built in North Dakota, in Illinois. In Mr. Portman's 
district there is a gear box manufacturer.
    And we just think the tax credit is absolutely essential to 
moving this technology--the cheapest of the renewables--
forward, and gaining the benefits, both economic and 
environmental, that we see from it.
    Mr. Portman. Just a quick follow-up. The production credit 
is what? One-and-a-half cents?
    Mr. Reicher. Yes.
    Mr. Portman. And you are saying it is 4 to 5 cents per 
kilowatt-hour now, which does not allow it to be competitive 
with the most efficient uses of other sources of energy, but it 
is now within striking distance. How much longer do you think 
the tax credit would be needed, if we were to reinstate it?
    Mr. Reicher. I think that the 5-year extension, we would be 
there with that 5-year extension. As I said, the natural gas 
plants are 2 to 3 cents. We are at 4 to 5 cents. Our R&D 
trajectory has us getting down to 2 to 2\1/2\ cents for wind in 
the next few years. So a 5-year extension would comfortably get 
us there.
    And I tell you, this is a terrific technology, and brings 
real economic benefits to so many areas of the country. I spoke 
to Congressman Boehlert recently. There will be a major 
installation in his district. And the farmers there are very 
much looking forward to the sort of payments they get as they 
struggle, for example, with the loss of the dairy industry.
    Mr. Portman. When you look at it from a big-picture 
perspective, comparing it to other sources of alternative 
energy, including solar and biomass and other areas within your 
jurisdiction at the Department of Energy, would you say that 
wind has the most potential?
    Mr. Reicher. Wind is today the cheapest of the renewable 
energy sources. So in the near term, it has the greatest 
potential in adding large-scale megawatts of clean energy to 
the U.S. base. We are making great progress in solar, in 
biomass, in geothermal, but wind is the cheapest of those, and 
the production tax credit there. And I would also encourage you 
as well in biomass and solar. That will move those down those 
cost curves and make those important parts of our energy mix, 
as well.
    Mr. Portman. Thank you, Mr. Secretary. Thank you, Mr. 
Chairman.
    Mr. Reicher. Thank you, Mr. Portman.
    Chairman Houghton. Thank you very much.
    Ms. Dunn.
    Ms. Dunn. Thank you very much, Mr. Chairman.
    Mr. Wilson, I wanted to ask you, with the brownfields 
initiative and the tax incentives that you have been using, is 
this bringing people together in communities, like the one that 
I represent, the Seattle area? Are you finding success there as 
local governments work with the Federal Government and 
conservancy constituencies get involved, too?
    Mr. Wilson. Are you speaking just of the tax incentive, or 
sort of the overall brownfields?
    Ms. Dunn. The program.
    Mr. Wilson. In terms of the brownfields program, we are 
seeing in cities around the country really great emerging 
partnerships between developers and community groups and local 
governments to figure out ways to identify the areas they need 
to clean up to be able to bring in redevelopment, whether it is 
housing or businesses or a park for the neighborhood. We have 
seen that all over the country.
    And in terms of the Brownfields Tax Incentive in 
particular, because it is newer, because there is some 
uncertainty with it, because it is going to sunset under 
current law, we have not seen it used as much as the other 
brownfields programs.
    But for instance, in Westchester, Pennsylvania, there is a 
great example where the local developers and community people 
have said to us over and over again that the tax incentive has 
been a real boon to them putting together the deal to redevelop 
a neighborhood that is in a very poverty-stricken part of 
Pennsylvania. If the plans go forward as they think they will, 
they might be able to hire as many as 200 people. And because 
of the tax incentive, they believe they will save over $40,000 
in clean-up costs.
    And I think if we can make this tax incentive permanent, 
you are going to see more and more examples of that around the 
country, because people will be more willing to get into it 
because they know it is going to be there reliably in the 
future.
    Ms. Dunn. How much time do you expect it would take to 
evaluate whether people will take advantage of the incentive?
    Mr. Wilson. Well, in the law as it is currently written, 
there is no provision to sort of go out and collect information 
about how well it is being used. The States have surveyed their 
localities. And we have found 30 or 40 of these sites, 
brownfield areas, have really been worked well and are using 
the tax incentive.
    In the future, I think we would want to look at ways that 
we can get a better sense of exactly where this is being used, 
because in current law we do not have a mechanism to go out and 
find exactly how extensively it is being used.
    Ms. Dunn. All right. Thank you.
    Mr. Wilson. We have imperfect information right now.
    Ms. Dunn. You have what?
    Mr. Wilson. Imperfect information, because we just have not 
been able to get information back from everyone who is using 
it.
    Ms. Dunn. Thank you very much. Thank you, Mr. Chairman.
    Chairman Houghton. Fine.
    Mr. Weller.
    Mr. Weller. Thank you, Mr. Chairman. I want to commend you 
for the subject matter of this hearing. This is a very, very 
worthwhile hearing, discussing something that I think we all 
care about in a bipartisan way.
    On the issue of brownfields, I represent a pretty diverse 
district, representing the South Side of Chicago and the south 
suburbs and Will and Cook Counties and a lot of farm 
communities and bedroom communities. And brownfields are an 
issue that affects every one of those types of communities, 
whether you are in a rural area or a suburban or a city-type 
community.
    And, you know, it can be anything from an abandoned gas 
station to hundreds of acres of abandoned industrial parks. In 
the tenth ward of Chicago, I have the largest brownfield in 
Illinois, the former Republic Steelworks. And then, of course, 
neighboring to that is the former Wisconsin Steelworks; and 
then the Joliet Arsenal, a larger former military facility, 
which is a brownfield; and a lot of smaller ones. It is 
estimated, I think, there are over 2,000 brownfields in the 
Chicago region, alone.
    Mr. Wilson, you had indicated in your testimony, you were 
discussing the current tax provision, and I was one of those 
who worked to get that in the 1997 Balanced Budget Act, working 
with mayor Daley and others to have that included. You had 
indicated that the current provision would essentially benefit 
about 8,000 brownfields across this country.
    Now, I have seen statistics that there is almost an 
estimate one-half a million--an estimated 500,000--brownfields 
across the country. What is necessary, do you believe, to be 
able to achieve the goal of eliminating, cleaning, up and 
revitalizing all brownfields; not just the 8,000 that would be 
targeted by the existing provision, but to eventually clean 
them all up?
    Mr. Wilson. Well, it is clearly a huge task. I mean, just 
in the Chicago area alone, you have pointed out, there are 
2,000 of these sites. For one, I do believe that if Congress 
was to make permanent the Brownfields Tax Incentive, you would 
get more of these brownfields cleaned up, because developers 
would be able to save money on their clean-up costs. That 8,000 
figure is over a 5-year period. So if it is used and used and 
used into the future, you are going to keep being able to clean 
up more of these brownfields.
    In addition, the Better America Bonds program, I think, 
complements this very well. One of the three general uses for 
the bonding authority is to clean up brownfield sites.
    Mr. Weller. Mr. Wilson, the Better America Bonds, is that 
targeted in the same way, a community's ability to use those, 
to the restrictions that were in the 1997 Act? Because when it 
comes to the Brownfields Tax Incentive, being able to expense 
those clean-up costs, you know, those were targeted, that 
benefit, solely to essentially low-income Census tracts, 
neighboring Census tracts, and Empowerment Zones.
    Now, the Better America Bonds, are they restricted and 
targeted in the same way? Or can any community, whether it is 
New Lennox, Illinois, or Ottawa, or the tenth ward of Chicago, 
be able to use them?
    Mr. Wilson. They are not limited in the same way at all. 
Any community that had a brownfield site that wanted to either 
assess the contamination or clean it up, or both, could apply 
for bonding authority under Better America Bonds. So there is 
no restriction in that way.
    And getting back to your other comment, I think there is a 
perception out there that the current restrictions on the 
Brownfields Tax Incentive, whether it be the poverty 
restriction or the geographic, are really restrictive. And we 
have looked at that. And I think it is largely a perception at 
this point.
    We have done a mapping program that is available to 
communities, for them to be able to identify, ``Here is where I 
live. Here is where this brownfield site is. Can it use the tax 
incentive?'' And indeed, it is much more widely available than 
I think people think. And we should probably do a better job of 
letting people know exactly how they can figure out if they are 
eligible.
    Mr. Weller. Well, my understanding is the redevelopment of 
the Joliet Arsenal, which is a 24,000-acre former military 
facility--there is a tall grass prairie there, the Abraham 
Lincoln National Cemetery--about 3,000 acres were set aside for 
industrial use. One of our later witnesses, of Center Point 
Properties, has taken on one of those industrial parks for 
redevelopment on the Joliet Arsenal.
    And my understanding is that the Joliet Arsenal 
redevelopment, which has always received bipartisan support, is 
not eligible for this Brownfields Tax Incentive. So I would be 
interested in seeing those maps.
    But the question I have for you--and perhaps I should 
direct it to Mr. Burman--is, would the Administration support 
changing this tax incentive so that any community, whether it 
is rural, city, suburb, or a middle-class community, regardless 
of the economic nature or whether or not it is in an Enterprise 
Zone, can be eligible for this Brownfields Tax Incentive?
    Mr. Burman. Obviously, we would like to work with you on 
the targeting of the tax incentive, to make sure it is reaching 
its intended use. The Brownfields Tax Incentive was limited to 
the targeted areas, because in higher-income areas market 
incentives should result in properties being redeveloped. The 
land is worth more than the cost of remediation.
    The real concern is that in high-poverty areas the land, 
after being remediated, might not be worth as much as it cost 
to do the remediation.
    Mr. Weller. You know, Mr. Burman, one thing I have always 
found is that all of us, I think, as we drive through 
communities, regardless of how prosperous they are, we all have 
noticed that gas station that used to sit there that closed a 
few years ago and that has never been redeveloped. And of 
course, that is a brownfield. And that is the cost of the 
financial liability of that clean-up.
    And I just do not understand why we have a bias against a 
middle-class community, or a community of any other economic 
standard, on whether or not they could take advantage of this 
tax incentive. The question I have is, why not allow any 
community 
anywhere the opportunity to use this tax incentive to 
revitalize and clean up abandoned brownfields?
    Mr. Burman. As you pointed out, the Better America Bonds 
program does have a special provision in the case where 
property is not worth the clean-up cost and it is taken over by 
State or local government. Because it is abandoned, that 
government can use Better America Bonds to redevelop the 
property, and then move it back into commercial use.
    Mr. Weller. Of course, tax incentive is an incentive for a 
private developer, not the local government. But a private 
developer will take it on and recover their expenses and put it 
back to productive use.
    Mr. Chairman, thank you for the little bit of few extra 
seconds there. And I look forward to working with you and the 
administration to solve this challenge.
    Chairman Houghton. Thank you, Mr. Weller. Thank you very 
much, Mr. Burman.
    Mr. Neal.
    Mr. Neal. Thank you very much, Mr. Chairman. And again, 
thanks for holding this hearing in a bipartisan spirit.
    Mr. Reicher, Mr. Wilson, or Mr. Burman, if you would like 
to take a stab at this question, do you get concerned at all 
that some of the zeal for open space preservation is also 
intended to say ``No more growth; no more housing''? I mean, 
some people would argue that the best use of a piece of land is 
to put a house on it.
    Mr. Wilson. There may be some who think that way. We do not 
count ourselves among them.
    Mr. Neal. Do you prefer ``snob zoning'' that would keep 
some housing out?
    Mr. Wilson. Pardon me? I did not hear your question. Sorry.
    Mr. Neal. Do you prefer the application of some ``snob 
zoning'' that would prevent people from building homes?
    Mr. Wilson. No. In fact, we want to stay as far away from 
local zoning decisions as possible. That is the job of local 
governments, not the Federal Government. But in terms of open 
space, we think there is value in open space, whether it is in 
urban area, a rural area, a suburban area. And one of the 
things we are going to try and do, assuming this Better America 
Bonds becomes law, is to make sure that all types of 
communities have access to this bonding authority, so that if 
they want to protect open space or create a park inside of a 
city, they are able to do that.
    But it is up to them to decide which open space they would 
want to preserve. And so if a community cannot really 
demonstrate that it has broad community support for that idea, 
we would have to look at that closely.
    Mr. Neal. Well, ``broad community support'' could be 
interpreted as ``No more growth,'' could it not?
    Mr. Burman. One point that is important is that this is 
just one of many tools that we are proposing to provide to 
State and local governments to help them decide what is best 
for their communities. Also in the budget is a proposal to 
increase the low-income housing tax credit, which is important 
for providing housing in lower income areas. There is also a 
proposal for the new markets tax credit.
    Mr. Neal. So you are arguing for more low-income housing in 
more low-income areas?
    Mr. Burman. I am sorry, low-income housing wherever it is 
built. The point is, I think we are trying to provide tools to 
help local governments to deal with the challenges that they 
are facing. Among them, and certainly in some places, is the 
issue of sprawl and congestion and pollution.
    Mr. Neal. Look, I am sympathetic to what you want to do. 
But I think it is also important to take a look at how some of 
these patterns are developing. And some of these patterns are 
developing with the support of people who do not have a lot of 
interest in open space or environmental needs; they are 
interested in shutting the door on any more growth in those 
communities. And I think that that ought to be part of any 
discussion that takes place here. And I think you should be 
mindful of that as these deliberations ensue. In addition to 
that, you can make the argument that some 
low-income neighborhoods are saturated with low-income housing.
    Mr. Wilson. I think that is a valid point. And I think that 
one of the reasons why we want to encourage regional 
partnerships to come forward to us with applications is so we 
are not pitting one jurisdiction versus another, or one 
neighborhood against another; but that there is a sort of a 
comprehensive look at a city and its surrounding areas, or a 
rural area or a small town and its surrounding rural counties.
    Mr. Neal. Yes, I think that that is the tack to adopt, 
primarily because I have witnessed that a lot of people who 
show up--and I do not have these responsibilities any more--but 
I have witnessed that a lot of people who show up have no 
environmental interests or leanings, but all of a sudden 
develop a fascination with open space.
    Mr. Wilson. Right.
    Mr. Neal. So the point that I try to raise is that growth 
is important. And I still think that in a lot of vacant areas, 
putting a house on a piece of land helps an awful lot of 
people, and not just real estate people. It helps people who 
are desirous of finding that first-time home purchase.
    Mr. Wilson. Right. Yes, this program is not about no-
growth. It is about providing tools to communities to grow in 
the ways that they think are best for them.
    Mr. Neal. Enlightened growth.
    Mr. Wilson. Yes.
    Mr. Neal. Thank you.
    Chairman Houghton. All right, thanks, Mr. Neal.
    Mr. Hulshof.
    Mr. Hulshof. Thank you, Mr. Chairman. Thank you, gentlemen, 
for being here.
    You know, one of the challenges of being a Member of 
Congress is that often we will start with a good idea or a 
laudable goal of something that we would like to see happen, 
and then in our zeal and clamor to get there, we sort of forget 
the steps that have to go into place to get to that goal. And 
specifically, maybe we do not examine whether or not the path 
to that goal is the best one.
    And where I want to specifically focus--And Mr. Burman, I 
have got Treasury's description of the FY 2000 Budget that 
talks about tax credits for holders of Better America Bonds. 
And at page 30 it talks about the structure of Better America 
Bonds is identical to those proposed for the Qualified Zone 
Academy Bonds. And I think you have made reference in your 
testimony to the QZABs.
    Now, for those folks who are not familiar with QZABs, this 
was bonding authority in the amount of $400 million in 1997, 
and an additional $400 million in bonding authority for 1998, 
for a total of $800 million in bonding authority available. And 
yet, you would agree with me, I think, because you made 
reference to it at the tail end of your remarks, that the 
markets have been less than receptive. And I think that may be 
kind, but I do not want to characterize it. Would you agree 
with me that the markets have been less than receptive in using 
QZABs?
    And I see some people behind you shaking their heads 
``No,'' but I will take your answer as a ``Yes'' or a ``No.''
    Mr. Burman. Well, let me see if I can remember their 
talking points. [Laughter.]
    Mr. Burman. There was slow take-up for Qualified Zone 
Academy Bonds in the first place. It was a brandnew program. It 
was just enacted in 1997. State and local governments had to 
figure out how to deal with these bonds, how to issue them; as 
did bond markets. And the credit rate, which was supposed to be 
the market interest rate, was set too low.
    Once we adjusted the credit rate so that it was equal to 
the corporate AA bond rate, similar to the pre-tax rate that 
would apply to tax-exempt bonds, there has been, I think, 
fairly wide acceptance for Qualified Zone Academy Bonds. There 
have been several bond issues in California, I think Indiana--
and I am just going to make up a list here, but I will be 
wrong--Illinois, Oklahoma, Texas, and Virginia. And there are 
numerous other States that are planning to issue bonds.
    So I think for a new program, the experience has not been 
disappointing.
    Mr. Hulshof. I appreciate your having done your homework on 
this issue, anticipating these questions. The most recent 
letter that I have gotten, that I requested and received a 
response to from your former boss, Mr. Rubin, indicated, at 
least as of April 29 of this year, some months ago, I think 
about a total of about $30 million issued. You are telling me 
that there are some additional states that you mentioned, 
Illinois, for instance, and some others. Do you have the most 
recent amount of QZABs that have actually been issued--
generally, a ballpark number?
    Mr. Burman. So far, it is about $50 million.
    Mr. Hulshof. Fifty million, out of an $800 million 
authority?
    Mr. Burman. Right. But there are a number of other bond 
issues that are in the pipeline.
    Mr. Hulshof. The other thing, and you mentioned this at the 
tail end of your remarks, Mr. Burman, and I take it in the 
spirit that it is given. And you probably anticipated this 
question as well, regarding par value. And at least early on, 
for instance, there was an issue sold for a school in Chicago 
that was 97 percent of par. There was a second issue, a project 
in the Fresno and Clovis school districts in California, at 91 
percent of par. How do we get beyond those discounted measure?
    Mr. Burman. The Treasury Department issued regulations in 
July that reset the credit rate exactly in response to those 
concerns. Since July that there has been a groundswell of 
interest in the program. So we think we have solved that 
problem.
    Mr. Hulshof. Let me, in the remaining time--Mr. Wilson, not 
to let you get off the hot seat, with one question. Again, and 
I mean this with much respect, but it is my understanding the 
proposal calls for the U.S. Environmental Protection Agency to 
review and approve each application. And I have got to tell 
you, I do not know anything about your background; maybe you 
are a finance major. But can you tell me what special expertise 
the EPA has regarding the issuance of financial instruments?
    Mr. Wilson. Sure. Let me do it a little more broadly. The 
Administration believes it makes sense for EPA to be sort of 
the lead agency on reviewing applications, for several reasons. 
No. 1, the stated purposes of the Better America Bonds are 
brownfields clean-up, water quality enhancement, and open space 
protection.
    Clearly, we already do a lot in the realm of brownfields 
assessment and clean-up. We have several different programs 
that have been very successful. And we plan to model this 
program along the lines of how we run that one, in terms of a 
competitive process and reviewing applications; and reviewing 
applications not just by ourselves, but with a panel of other 
Federal agencies who have relevant expertise, whether it is 
Treasury on tax and financial issues, or Interior on land-use 
issues, things like that. So it is not going to be us alone.
    Second, we actually do have some experience on financial 
matters, because we have the Clean Water State Revolving Loan 
Fund, and the Drinking Water State Revolving Loan Fund. So we 
have a team of people at EPA who are extremely well versed in 
the issues of bonding and those kinds of things.
    So one part of the answer is we have a lot of experience in 
these issues. And two is, it is not just alone; it is going to 
be us and other agencies.
    Chairman Houghton. Fine. Thanks very much.
    Mr. Hayworth.
    Mr. Hayworth. Thank you, Mr. Chairman. Gentlemen, thank you 
for your time today and coming in to visit. One of the 
advantages of a hearing format like this is that we talk, 
obviously, about the matter of most concern in terms of 
taxation and tax policy and where we are heading, in terms of 
the environment.
    But there are also some housekeeping notes that I would be 
remiss if I did not share with each of you gentlemen. If you 
gentlemen would go back to your respective secretaries and 
directors, and pass along this helpful hint: When a Member of 
Congress writes them a letter directly requesting a response, 
that duly elected, constitutional officer is entitled to an 
acknowledgement of the receipt of the letter.
    I have sat here and my colleague to my left--figuratively 
speaking--I was pleased to see that departing Secretary Rubin 
was courteous enough to write him back. On several occasions, I 
would write Secretary Rubin, and he would fail to respond. And 
Mr. Burman, perhaps now, with Secretary Summers, we will see an 
improvement in that relationship. But perhaps Secretary Rubin, 
in preparing to return to the private sector, rediscovered 
responsiveness to be to his benefit. And I am glad that he 
responded to my friend, Congressman Hulshof.
    On several occasions, I wrote to Director Browner. Letters 
were referred to other folks. I finally had an oral 
communication with her the night of the State of the Union 
Message, and she responded that, ``Oh, yes, I have let other 
people know about it.'' But it is just good sense and common 
courtesy to respond directly to the member that the 
communication is acknowledged and other people are working on 
it.
    Mr. Wilson, with reference to the EPA--and I do not want to 
get too far afield--let me thank your agency for packing up and 
leaving New River, Arizona, as the regional office did in San 
Francisco. Because once that happened, we were able to solve 
the problem affecting the people of New River. And that may be 
the subject of oversight for another Committee at another time 
in another venue. And we appreciate all three of you gentlemen 
coming down.
    A point I would like to make here today deals with overall 
tax policy, especially in the wake of the President, who did 
have the courtesy to communicate his veto to us last week of 
broad-based tax relief. It deals with the death tax. The sixth 
district of Arizona in square mileage is about the size of the 
Commonwealth of Pennsylvania. And while there are urban areas 
there, there are vast reaches of rural lands and lands that 
have been preserved, and also lands that have been farmed and 
ranched.
    And this death tax, and our failure to repeal it, present a 
major obstacle to the family farmers and ranchers in my 
district. And I think we have seen this nationwide. These folks 
want to pass their land and their assets--in essence, their 
family businesses--on to their heirs. The imposition of this 
death tax too often forces large parcels of environmentally 
valuable land to be sold off in smaller, and some would say 
less environmentally friendly, parcels.
    That is especially true in Arizona. And again, in my 
district there is great diversity. Yes, as you might suspect, a 
fair amount of desert; but also, cotton farms, dairy farms, 
cattle ranches, that have run for generations. And the sad fact 
is, now there are many fewer of these enterprises than there 
were when I was elected in 1994.
    Time and again, when I go to my constituents and ask them 
why the change, they tell me this death tax is to blame. The 
patriarch of the family passes away; the family has no choice 
but to liquidate their assets to pay the tax. And the irony is 
that virtually in every case, to liquidate the estate, the land 
is sold and it is developed. Never again will it be prime farm 
land or ranch land. It becomes part of the problem of urban 
sprawl.
    The bottom line is this, gentlemen. We appreciate your 
attendance here today. And, my colleagues, I think we have to 
ask this question: How can anyone testify that this 
administration really seeks to preserve the environment? Just 
last week, with his veto of death tax repeal, the President 
took off the table what I believe to be the most effective 
weapon to reduce the single most prominent factor in breaking 
up family-owned farms and ranches. Because, as we have seen, 
and as I see acutely in Arizona, we have over-development and 
ever-increasing sprawl, because families have no choice.
    And with that, I thank the Chairman, and yield the balance 
of my time.
    Chairman Houghton. OK, thanks very much.
    Gentlemen, thank you very much for being on our panel. We 
certainly appreciate your time.
    I would like to call the third panel: Ms. Jean Hocker, 
president of the Land Trust Alliance; Michael Dennis, vice 
president and general counsel of the Nature Conservancy; 
Charles Bartsch, senior policy analyst, Economic Development, 
of the Northeast-Midwest Institute; John Lincoln, board of 
directors, American Farm Bureau Federation; and Christopher 
Miller, president of the Piedmont Environmental Council in 
Virginia.
    Well, thank you very much for being with us. Ms. Hocker, 
would you like to begin the testimony?

             STATEMENT OF JEAN HOCKER, PRESIDENT, 
                      LAND TRUST ALLIANCE

    Ms. Hocker. Yes, thank you very much. Mr. Chairman and 
Members of the Subcommittee, I really appreciate your holding 
this hearing. It is important to us, and to the country.
    I am Jean Hocker. I am president of the Land Trust 
Alliance, which is the national umbrella organization for local 
and regional land conservation organizations that are known as 
land trusts. These are the grassroots groups, by and large--
some small--some large, that are working with landowners all 
across the country to help protect open space in their 
communities. Together, these grassroots groups have protected 
over 4 million acres--actually, nearly 5 million acres--of open 
space.
    The Ways and Means Committee has helped enormously in this 
work through the tax incentives that you have initiated over 
the last 25 years. But with sprawl overtaking open space in 
communities all across the country, there is a lot more that 
needs to be done and that can be done.
    I do want to thank Representatives Johnson and Portman and 
Dunn for sponsoring legislation to provide additional tools for 
conservation in the Tax Code, and to thank those members who 
have joined them in sponsoring their bills. I have included a 
chart with my testimony that enumerates and summarizes all of 
those. And it is truly an impressive collection of tax 
proposals to support open space, so we thank you.
    I want to focus on two of those proposals today, although 
many of them are worthy of support. The first is section 2(a) 
of Representative Johnson's bill, H.R. 2263, which would make 
the provisions of the American Farm and Ranch Protection Act 
apply uniformly to conservation land in every part of the 
country. Currently, those provisions are limited to certain 
areas. We think they ought to be available to all landowners 
who want to protect their land, regardless of where they live.
    As you know, the Farm and Ranch Protection Act--which Mr. 
Houghton, we thank you for, and others on the Committee who 
helped pass it into law in 1997--now section 2031(C) of the 
Code, does two really very important things. First, it provides 
for an election to exclude from the taxable estate to 40 
percent the value of land subject to a qualified conservation 
easement. And second, this Act allows the executor of an estate 
to grant a qualifying conservation easement on property after 
the decedent's death, and thus to receive these benefits.
    Now, I want to digress for just a minute here. I do know 
that many Members of this Subcommittee are committed to ending 
the estate tax altogether, and that the tax bill Congress 
passed several months ago would have done that. But let me 
point out, as you know, that that bill would have taken 10 
years to totally eliminate the estate tax. And I want to point 
out how much 10 years can do to land that deserves 
conservation.
    Of the 2.3 million acres protected by conservation 
easements held by local and regional and national land trusts, 
80 percent of those easements have been put in place in the 
last 10 years. So even if the next decade is the last one for 
estate taxes, it is going to be too late for a lot of land that 
needs to be protected. Our focus now is on tools that will get 
land protected in the next decade, because after that a lot of 
important lands will not be available for protection.
    The tools in the American Farm and Ranch Protection Act are 
limited currently to the lands only within 25 miles of a 
metropolitan statistical area or a national park or wilderness 
area. They should be extended to all parts of the country. 
Indeed, it is the lands that are just outside the envelope of 
intense pressure today that we should be targeting for 
protection. These are the lands that will be under pressure 
very quickly, if recent history is any guide. We should 
encourage vision and foresight by those landowners that want to 
protect them today, not penalize them.
    Likewise, the post mortem election is another very 
important conservation tool that gives heirs a choice now. Now, 
when Congress was considering the American Farm and Ranch 
Protection Act, the Joint Tax Committee raised some concerns--
about potential costs. The results were the geographic 
limitations I referred to.
    In my testimony and in front of you now is a map that shows 
the lands that are covered by the Act today, prepared by The 
Nature Conservancy in consultation with our staff. Sixty-four 
percent of the lower 48 states are covered, but landowners in 
36 percent of the Nation are unable to use these tax 
incentives.
    The tax bill passed earlier this year did include a 
provision that more than doubled the area, and that provision 
was scored by the Joint Committe on Taxation as costing $175 
million over 10 years. But even that map leaves a lot of holes 
in the country. Senator Baucus asked the Committee to score 
simply eliminating all of the geographic limitations, and the 
Joint Tax Committee said it would cost $279 million over 10 
years. I have attached that estimate to my written testimony. 
We think that this overstates the cost. But even so, it is a 
very modest cost for the land conservation it can deliver over 
the next decade.
    The second issue I want to refer to briefly--is 
Representative Portman's H.R. 2880, which would reduce by half 
the capital gains tax on the sale of land or easements for 
conservation. Many landowners cannot afford to make outright 
gifts of land. But if they had a choice between selling for 
development or selling for conservation, they probably would 
like to choose conservation. This provision would make that 
choice much easier for landowners. And I encourage you to make 
this change. It will be extremely important for conservation in 
this country. I believe it will lead to a great deal of 
conservation that would not take place otherwise.
    In summary, let me just thank you again for your interest 
in this, for your action on land conservation, and for your 
ability to understand that the Tax Code of this country can 
have an important benefit for conservation. These tax 
incentives produce tangible, visible, and permanent results. 
You and your constituents will be able to see the lands that 
you have helped people protect as open space, and share in the 
joy of having protected this land for future generations. Thank 
you very much.
    [The prepared statement follows:]

Statement of Jean Hocker, President, Land Trust Alliance

    Mr. Chairman and Members of the Subcommittee:
    Thank you for the opportunity to appear before the 
Subcommittee today, to discuss the impact of tax laws on 
environmental conservation and preservation. I am Jean Hocker, 
President of the Land Trust Alliance, the national organization 
that guides and serves the more than 1,200 land trusts in the 
United States. These are local and regional nonprofit 
conservation organizations that work with private landowners to 
protect open space in their communities through voluntary 
methods. Together, these grassroots groups have protected more 
than 4 million acres of open land all across the country.
    The Ways and Means Committee has helped that work 
enormously over the last 25 years by initiating tax incentives 
that help landowners who want to protect open space. The 
existing incentives--charitable deductions for donations of 
land or of conservation easements, and recognition that those 
easements reduce the taxable value of a landowner's estate--are 
helping preserve open space in every part of the country.
    But there is a great opportunity to help us do more. I want 
to thank Representatives Nancy Johnson, Rob Portman, and 
Jennifer Dunn for sponsoring legislation to provide additional 
tools for conservation in the tax code, and to thank those 
Members who have joined them in cosponsoring their bills. We 
are particularly grateful to Representative Johnson for her 
bill, H.R. 2263, which compiles a wide variety of measures 
which would help voluntary land conservation. I have included a 
chart with my testimony that summarizes the range of land 
conservation tax measures that have been proposed in this 
Congress. We applaud and support these efforts and your 
recognition that open land, once paved over, will never again 
be available as productive farms, ranches and forest land, or 
as critical natural areas and habitat.
    Today I want to focus on two of those proposals, which we 
especially hope will soon become law.
    The first is Section 2(a) of Representative Johnson's bill, 
H.R. 2263, which would make the provisions of the American Farm 
and Ranch Protection Act apply uniformly to owners of 
conservation land in all parts of the United States. Currently, 
the provisions are limited to landowners whose property lies 
within specifically-defined areas, leaving many critical 
conservation lands ineligible for its compelling conservation 
incentives.
    The Farm and Ranch Protection Act, which Mr. Houghton and 
others on the committee helped pass into law in 1997 and which 
is now section 2031(c) of the Internal Revenue Code, does two 
very important things:

          First, it provides an election to exclude from the taxable 
        estate 40 percent of the value of open land subject to a 
        qualified conservation easement. The exclusion, which is capped 
        at $200,000 today, rises to a $500,000 cap in 2003.
          Second, the Act allows the executor of an estate to grant a 
        qualifying conservation easement on appropriate conservation 
        property after the landowner's death, and thus to elect the 
        benefits of Section 2031(C).

    I know that many members of this subcommittee are committed 
to ending the estate tax altogether. The tax bill the Congress 
passed several months ago would have done that. But it would 
have taken 10 years to do it. That ten years can be critical to 
land conservation. Of the 2.3 million acres protected by 
conservation easements held by local and regional land trusts, 
80 percent were protected in the last decade. Even if the next 
decade is the last one for estate taxes, in ten years it will 
be too late for much of the farm and ranch land, forest 
property, and key habitat that is under pressure today or soon 
will be. We need to perfect the tools we have today, to make 
sure time does not run out for critical conservation parcels.
    The tools provided by the American Farm and Ranch 
Protection Act are important ones. Currently they are available 
only to lands within 25 miles of a Metropolitan Statistical 
Area or a national park or federal wilderness area, or within 
10 miles of a National Urban Forest. They need to be extended 
to all parts of the country.
    Indeed, the additional exclusion provided in the Farm and 
Ranch Protection Act is of particular relevance for people 
whose land is just outside the envelope of today's immediate 
development pressure. For a farmer in this kind of area, whose 
land today may be valued for development at only 30 percent 
more than its value as farmland, a donation of a conservation 
easement may not yield a great deal in current income tax 
benefits. Yet this is precisely where it is most important for 
conservation to take place--where development hasn't already 
made inroads that will make it very difficult for farming, 
ranching, forestry, or wildlife lands--to remain. Section 
2031(c) addressed just these situations, by allowing an extra 
reduction in the taxable estate where an easement reduces the 
value of lands by 20 percent or more. This encouragement ought 
to protect open space values wherever landowners want to choose 
conservation.
    The other key provision of 2031(c) is the ability it gives 
heirs to land to consider conservation as an option. This 
provides something enormously valuable--a second chance at 
conservation. So long as we have an estate tax, 2031(c) gives 
the heirs to land the potential to plan for conservation, even 
when the previous owner, for whatever reason, failed to do 
that. This choice, too, ought to be fairly available to all 
heirs of conservation lands.
    But when Congress was considering The American Farm and 
Ranch Protection Act, the Joint Tax Committee raised concerns 
about its potential cost. The result were the geographical 
limitations I referred to earlier. My testimony includes a map, 
prepared by The Nature Conservancy in consultation with our 
staff, showing where 2031(c) applies, and where it does not. 
The map shows that 65 percent of the lower 48 states are 
covered, leaving landowners in 45 percent of the nation unable 
to use these conservation incentives.
    Unfortunately, it does not include areas where important 
conservation work needs to be done. Representative John 
Tanner's district, to take one example, includes seven National 
Wildlife Refuges--but the lands around those refuges are not 
covered by 2031(c). On close inspection, many members of the 
Ways and Means Committee will see that some or all of their 
districts are not covered under the current terms of 2031(c).
    The tax bill which passed this year included a provision 
that more than doubled the area covered by 2031(c). It was 
scored by the Joint Committee on Taxation as costing $175 
million dollars over 10 years. But even that still leaves lots 
of holes in the map--places that aren't covered. Senator Max 
Baucus asked the committee to score simply eliminating the 
complex geographic limits. The Joint Tax Committee says it 
would cost $279 million over ten years. I have attached that 
estimate to my written testimony.
    We believe these estimates overstate the cost of applying 
the law across the country. But even if not, this is a very 
modest cost for the land conservation it can deliver by 
providing additional incentives for the donation of 
conservation easements.
    The second issue I want to focus on involves the sale of 
land for conservation, because donations alone will not be able 
to protect every special place. Not every landowner can afford 
to donate land or a conservation easement on land. More and 
more, we find our members involved in the purchase of 
easements, or the purchase of fee title to lands. Increasingly, 
they are working with local governments in this effort.
    Last November, 143 referenda were on local and state 
ballots to provide funding for acquisition of lands and 
easements to protect open space. Of those, 124 won--84 percent. 
Many were general obligation bonds. Many were direct votes on 
taxes to fund these programs. I have included in my testimony a 
copy of the results of those elections. The total funding 
committed in the measures that passed exceeded $6.28 billion.
    Since November, there have been a number of special 
elections for the same purpose. This November, Maine will vote 
on a $50 million bond for land protection. Next March, there 
will be a $2.1 billion environmental bond issue in California, 
and in November, 2000, a $1.5 billion bond issue in the state 
of Washington.
    It is wonderful that state and local governments are taking 
up this cause. You can help them, quite directly. Virtually 
every time a landowner sells property, or sells a conservation 
easement on their property, they are paying capital gains tax 
on it--even though the sale is to a public entity, for a public 
purpose. Representative Portman's bill, H.R. 2880, would cut 
capital gains in half on such sales. It would be a boon to 
every single one of these jurisdictions, as well as to the 
landowners. There is probably no other single proposal that 
will have as direct an effect on local land conservation. When 
landowners are faced with a choice of buyer, this provision 
will encourage them to sell for conservation.
    In summary, let me thank the subcommittee for this 
opportunity to ask your continued help to make the most of the 
opportunities we have to conserve the landscapes that people 
love and that they identify with their communities. The federal 
government has been a partner in that effort, through the tax 
code and in many other ways. Together, we have the opportunity 
to do more, and we ask you to help us. Tax incentives for 
conservation produce tangible, visible, permanent results. You 
will be able to see the lands that you have helped people 
protect as open space, and share in the joy of having protected 
that land for future generations.
    Thank you.
    [Attachments are being retained in Committee files.]

                                

    Chairman Houghton. Yes, thank you, Ms. Hocker.
    Mr. Dennis.

    STATEMENT OF MICHAEL DENNIS, VICE PRESIDENT AND GENERAL 
        COUNSEL, NATURE CONSERVANCY, ARLINGTON, VIRGINIA

    Mr. Dennis. Thank you, Mr. Chairman. The Conservancy 
appreciates the opportunity to speak with you today. And also, 
our sincere thanks to you for having the foresight to support 
and sponsor the American Farm and Ranch Protection Act, a very 
important piece of legislation.
    I am the general counsel and land acquisition director for 
The Nature Conservancy. The Nature Conservancy is a global 
conservation organization that identifies and protects 
important habitats for plants and animals. We use a full array 
of protection tools: We buy land outright; we acquire gifts of 
conservation easements; we negotiate management leases; and 
more and more, we are working with local communities to build 
conservation capacity within the local community.
    A couple of examples of types of projects that we work on: 
In the North Woods in the Adirondacks, over the past decade we 
have protected several hundred thousand acres of lands, using 
the deductible conservation easement as a tool.
    Recently, in Arizona we acquired a cattle ranch, the San 
Rafael Cattle Co., which is right down on the Mexican border. 
And we are in the process of transferring a conservation 
easement to the State of Arizona. And then we are selling the 
ranch, with the restriction that it cannot be developed but it 
can be ranched. And we are blending protecting the natural 
resources with ranching. And of course, with the easement on 
the property, it substantially reduces the purchase price, so a 
rancher can come in and afford to keep ranching.
    Another project that I work on extensively is referred to 
as the Malpai Borderlands Group. This is an area of the country 
in the Southwest, the boothill of New Mexico and the southeast 
corner of Arizona, right on the Mexican border, where we have 
helped set up a local land trust. The trustees are all local 
ranchers. And working with them, we are experimenting, and 
actually successfully utilizing a whole bunch of new 
conservation techniques: grass banks in exchange for easements, 
low-interest loans. The whole thrust of the program is to keep 
the ranchers on the ground. Hopefully, they will have a viable 
ranching operation, and it will be done in a way that is 
consistent with protecting the landscape. And this has been a 
very successful program.
    And I might add, a couple of you may pick up the accent: I 
am from Boston. And the first time I went down there, there was 
one other Bostonian who had located down there. And they all 
thought he had a speech impediment, until they heard me talk--
and then they figured we all talk this way.
    That was a joke, by the way. [Laughter.]
    Mr. Dennis. Thank you. We are losing species in open space 
at alarming rates, as everyone knows. And while the Conservancy 
over the past 15 years has protected, with its partners, over 
6-mllion acres of land, it is an uphill battle.
    We have done a ``back-of-the-envelope'' estimate, and we 
figure, although we are only looking at targeting less than 5 
percent of the landscape, it could cost in excess of $10 
billion over the next decade. We clearly need additional tools, 
protection tools. And that is why we are here, The Nature 
Conservancy is here today, in support of tax incentives for 
conservation.
    In my written testimony we talk about three different 
categories of tax incentives. One group is incentives that will 
encourage landowners to sell or exchange or donate conservation 
lands to conservation agencies, public and private.
    Another category is tax incentives that would encourage a 
private landowner to take certain actions on his or her land to 
enhance it as conservation land and provide some type of tax 
credit or deduction. For example, if one were to do wetland 
restoration on one's land, they would get a tax credit for that 
activity, for those expenses.
    The third category is enhancing some of the estate tax 
rules--death taxes, as Congressman Hayworth had referred to 
them earlier--and enhancing section 2031(c), as has already 
been mentioned here a little earlier today.
    I would like to highlight one particular provision, and 
that is in H.R. 2880, which has been sponsored by Congressman 
Portman. This is the provision that excludes one-half of the 
capital gain on a sale of conservation land to a conservation 
agency. We think this is a very important provision. It is 
voluntary. It actually is a provision that benefits people who 
cannot afford to make gifts. The only provisions in the Tax 
Code right now for conservation are oriented toward wealthy 
people who can make gifts. This is a provision for people who 
cannot afford to make gifts.
    And it would apply to sales of conservation restrictions. 
With many of the projects that I am doing down in the Malpai 
region this would be an additional incentive for a rancher to 
transfer it to sell restrictions on his or her ranch and to 
continue ranching.
    And finally, the cost factor on this was about $65 million 
a year, and we think it will leverage $85 million to $100 
million a year in conservation.
    In closing, I wear a lot of hats in the conservation 
community. I am from Boston, and I started out as a general 
counsel for The Nature Conservancy; I still am. I am also the 
general counsel for the Malpai Borderlands Group. And I have 
served as council member of the North American Wetlands 
Conservation Council since its inception.
    All three of these organizations operate a little bit 
differently. But the thing that binds all three of them is, No. 
1, they are all interested in protecting the landscape; and No. 
2, these tax incentives that we have proposed today in the 
written testimony and that you have heard about today, all of 
them, will enhance their ability to do a better job in 
protecting the landscape.
    We appreciate the opportunity to testify, and we are 
available to work with any of you who would like to pursue 
these further. Thank you very much.
    [The prepared statement follows:]

Statement of Michael Dennis, Vice President and General Counsel, Nature 
Conservancy, Arlington, Virginia

    Mr. Chairman and Members of the Committee, thank you for 
the opportunity to present testimony on the critically 
important issue of tax incentives for land conservation. I am 
speaking today on behalf of The Nature Conservancy, a private 
conservation organization that protects the land and water 
needed to protect the diversity of life on earth. For nearly 
half a century, we have worked with the private sector, using 
the tools of the market place and the best available scientific 
information, to conserve the special places that ensure the 
survival of plant and animal species. To date, we have helped 
protect more than 10 million acres of land in the United 
States. Our experience working hand-in-hand with landowners in 
diverse communities has led us to seek changes in the federal 
tax code that would more effectively encourage and reward 
private conservation actions.
    I am here today to explain the federal tax code changes 
that The Nature Conservancy recommends, and which would provide 
the most benefit for land conservation. I will present a fairly 
comprehensive set of recommended changes for the committee's 
consideration. These proposals are based on input from field 
staff who work with landowners on a daily basis and understand 
the major obstacles to land conservation. Among these various 
proposals, our top priority is the capital gains exclusion for 
sales of land for conservation purposes. This proposal, 
discussed in more detail below, was introduced in the House and 
Senate as the Conservation Tax Incentives Act of 1999 and 
enjoys bipartisan support.
          The Conservation Problem: Preserving Quality of Life
    Healthy communities are made up of complex systems of 
forests, wetlands, deserts, productive soils, rivers and other 
interdependent resources. The cumulative effect of seemingly 
unrelated activities such as deforestation, the paving over of 
agricultural land, the filling in of wetlands and urban sprawl 
has been to fragment the landscape and strain the fabric of 
wild and human habitat. The sustainability and quality of life 
in every region of the country is in danger. The rate of the 
development of land exceeds by far both the rate of population 
growth and the rate of open space conservation.
          The Landowner's Problem: Safeguarding Financial and 
                          Environmental Assets
    Federal and State environmental protection laws and 
regulations such as the Endangered Species Act, the Clean Water 
and Clean Air Acts, are important tools to help preserve the 
environmental quality of land, but they can place economic and 
regulatory burdens on individual landowners. Government cannot, 
and should not, have the sole responsibility for maintaining 
and preserving the public benefit of open spaces. If 
conservation efforts are to succeed, private landowners must be 
active and willing participants. In the United States, 
approximately 70 percent of the land is privately owned. Well 
over half of all imperiled species are found on private land, 
and many exclusively so. The species found on private lands are 
declining more rapidly than are those on publicly held lands.
    Landowners have a stake in the quality of their community's 
environment. They also have a right to realize economic 
benefits of their investment in land. Tax incentives for 
conservation provide a mechanism for meeting both of these 
interests.
                        Solution: Tax Incentives
    Two kinds of tax incentives for conservation currently exist in the 
federal tax code. One provides an income tax deduction for charitable 
contributions of partial interest in land for conservation purposes; 
the other provides an estate tax exclusion for gifts of conservation 
easements in certain geographic areas. These benefits can make it 
possible for landowners to meet both conservation and financial goals 
if they have an income sufficient to utilize the tax deduction. But 
there are many landowners with income too low, or land so valuable, 
that these provisions are not financially beneficial. For example, for 
many farmers near metropolitan areas the fair market value of their 
land is a primary financial asset that cannot be relinquished. Market 
conditions can mean that the sale of the land for development is the 
only viable choice in order to realize a full economic return.
    Existing conservation tax incentives are important but, given the 
rate at which land is disappearing and species are lost, they are not 
sufficient. New tax incentives are needed to encourage the protection 
of additional private lands. To address this need, The Nature 
Conservancy supports a range of conservation tax incentives that fall 
into three general categories:
    1. Incentives to encourage the sale, gift or exchange of land or 
easements for conservation;
    2. Incentives to encourage private land to be managed for 
conservation benefits; and
    3. Incentives to prevent the break-up of large land-holdings.

    Within each of these categories, we have proposed specific 
tax changes that will provide benefits to both landowners and 
conservation. They are as follows:
    (1) Incentives to Encourage the Sale, Gift or Exchange of 
Land or Easements for Conservation
    (a) Capital Gains Reduction for Conservation Sales. This 
proposal, which would be implemented by H.R. 2880, would reduce 
the amount of capital gains tax if land is sold for 
conservation purposes, thereby providing a landowner with a 
more attractive financial return from such sales.
    H.R. 2880, sponsored by Congressman Rob Portman, and 
cosponsored by Congresswoman Nancy Johnson and Congressmen 
Robert Matsui and John Tanner, is The Nature Conservancy's top 
priority.
    I would like to congratulate Congressman Portman for his 
leadership on this issue. His legislation is a fiscally 
conservative, market-based approach to land conservation. It 
achieves environmental objectives without imposing new land use 
regulations. The provision is strictly voluntary, 
administratively simple, and uses definitions and tests for 
conservation purposes that are already contained in the tax 
code. It provides capital gains tax relief for sales of land 
for conservation to government agencies or qualified 
conservation nonprofits. The bill would allow landowners to 
preserve permanently their property's environmental value 
without foregoing its financial value. It would exclude 50 
percent of any gain realized from private, voluntary sales of 
land or interests in land for conservation. The land must be 
used to protect fish, wildlife or plant habitat or open space 
for agriculture, outdoor recreation or scenic beauty.
    Congressman Portman's bill also helps state and local 
governments leverage funds and accomplish more with their tax 
dollars. Estimates indicate that, for every dollar of lost 
revenue from this tax provision, almost two dollars worth of 
land would be protected. Sales of land to state and local 
governments for conservation would qualify, in addition to such 
sales to federal agencies and conservation nonprofit 
organizations. Citizens who vote to increase their taxes to 
fund bonds for land conservation will benefit because the funds 
raised will go farther toward reaching the community's 
conservation goals.
    (b) Increase the Value of Gifts of Land or Easements Made 
for Conservation. This proposal would change the individual and 
corporate charitable giving laws to make the tax value of 
conservation gifts more valuable, particularly for the ``cash 
poor-land rich'' landowner.
    Congresswoman Nancy Johnson's legislation, H.R. 2263, would 
promote this objective by increasing from 30 percent to 50 
percent the amount of the taxpayer's adjusted gross income that 
could be offset by a conservation donation, and by allowing the 
unused deduction to be carried forward indefinitely. The 
Conservancy strongly supports this legislation.
    (c) Enable Conservation Transactions to Qualify for Low-
Cost Financing. This provision would allow conservation 
organizations to qualify for tax-exempt financing or to issue 
tax-exempt installment obligations to a seller when purchasing 
land.
    The Community Forestry and Agriculture Conservation Act of 
1999 (H.R. 1863), sponsored by Congresswoman Dunn, would create 
a targeted version of this incentive. It would allow tax-exempt 
financing of working timber and agricultural lands by 
nonprofits, requiring permanent conservation easements to 
ensure sustainable use of the land. The Nature Conservancy 
endorses this proposal, and commends Congresswoman Dunn for her 
leadership in this legislation.
    We recommend broadening the legislation with a slight 
modification so that it would apply not only to the acquisition 
of working lands, but also to the acquisition of other 
conservation lands. We would like to see this type of tax-
exempt financing used for any conservation land acquisition 
made by qualified land trusts and conservation organizations. 
This change could be accomplished with small additions to HR 
1863. The Conservancy would be happy to work with Congresswoman 
Dunn to develop such language.
    (d) Encourage Private Capital to Make Investments in 
Conservation Land. The basic idea is to create incentives 
(greater deductions, tax credits or loan guarantees) for 
private, third party financing for conservation transactions; 
for investments in geographic areas (ecological enterprise 
zones); or incentives to match conservation ``investors'' who 
would buy tax-favored conservation easements with landowners in 
need of cash and willing to give up such easements.
    (e) Change Corporate Liquidation Rules Where Conservation 
Lands are Involved. This proposal would allow small 
corporations whose primary asset is land to donate such land 
for conservation purposes without triggering a tax, as is the 
case under current law.
    (f) Revise the Rules for Land Exchanges Where Conservation 
Lands are Involved. This revision would lengthen the time for 
qualifying exchanges and/or broaden the types of property that 
could qualify for treatment as a like-kind exchange involving 
conservation lands.
    (2) Incentives to Encourage Management of Private Land for 
Conservation
    (a) Make Conservation Management Expenses More Valuable for 
Private Landowners. Provide tax credits for habitat management 
expenses such as prescribed burns, exotic species removal, 
riparian and habitat restoration.
    (b) Provide Habitat Conservation and Management Insurance. 
Create a subsidized insurance program whereby landowners who 
agreed to manage land in furtherance of a conservation plan 
would be held harmless (using the insurance proceeds) from the 
potential loss in value of their land from implementation 
activities under the plan.
    (c) Make Private Ownership of Conservation Land Affordable. 
Make property taxes paid on land subject to conservation 
easements eligible for treatment as a tax credit.
    (3) Incentives to Prevent the Break-Up of Large Land-
Holdings
    (a) Provide Estate Tax Relief for Conservation Landowners 
and their Estates. Extend the geographic application and 
financial benefits of recent estate tax changes to encourage 
conservation. Allow estates with conservation lands to donate a 
conservation easement and use the value of such an easement to 
offset the estate tax that would otherwise be due.
    The American Farm and Ranch Protection Act, now section 
2031(c) of the federal tax code, was sponsored by Chairman 
Houghton, endorsed by The Nature Conservancy, passed in 1997 
and was expanded in 1998. This legislation was the first new 
tax incentive for conservation since the enactment of the 
conservation easement donation incentive in 1976, and it has 
the potential to save a great deal of land that would otherwise 
have been subdivided and sold for development in order to pay 
estate taxes. We support efforts to perfect and strengthen 
2031(c) so that it can realize this potential.
    First, we have estimated that approximately one third of 
the continental U.S. is currently not covered by the statute. 
The current boundaries omit critically important areas with 
national natural resources. For example, National Wildlife 
Refuges, BLM designated lands of critical environmental 
concern, Wild and Scenic River designated areas, and other 
categories of Federal resource lands are excluded by the 
geographic restrictions. There is no clear rationale for 
omitting these lands from those included in the Act. In 
addition, land in or near state and local protected areas are 
not included even though they may be under severe pressures.
    The land that is excluded from coverage under the Act is 
likely to have, on average, low fair market values because it 
is located in predominately rural areas. Therefore, the 
marginal cost of including such land under the statute should 
be small. This small cost to the public is greatly outweighed 
by the land conservation benefits to be derived.
    Finally, the American Farm and Ranch Protection Act's 
effectiveness would be substantially improved if the financial 
limitations on its use were removed. With the caps in place, 
the provision has a limited ability to serve as a conservation 
incentive on large landholdings that may have values inflated 
by nearby development. These are the very resources that the 
original legislation intended to reach.
    (b) Provide Incentives Against Habitat Fragmentation 
Actions. Create incentives to prevent open land from being 
converted or fragmented; reward landowners who refrain from 
habitat fragmentation causing actions and seek to remove 
existing incentives in the tax code that encourage landowners 
to subdivide and fragment their lands.
                               Conclusion
    Land conservation is a growing national need. Private 
landowners hold the future of biodiversity in their hands. The 
tax incentives the Conservancy recommends would provide 
interested landowners with the tools to conserve their land and 
contribute to the public interest in the preservation of the 
diversity of life.
    We appreciate the leadership of Congressmen Portman and 
Congresswomen Johnson and Dunn and encourage the other members 
of Congress to support the innovative, voluntary tax proposals 
that we are discussing today.
    Chairman Houghton, as the House sponsor of the American 
Farm and Ranch Protection Act, deserves our thanks for this and 
other advances in land conservation legislation. The 
Conservancy is eager to work with the Chairman and other 
members of this committee in support of new tax incentives for 
conservation. Thank you for the opportunity to present 
testimony before you today.

                                

    Chairman Houghton. Thanks, Mr. Dennis.
    Mr. Bartsch.

 STATEMENT OF CHARLES BARTSCH, SENIOR POLICY ANALYST, ECONOMIC 
                DEVELOPMENT, NORTHEAST-MIDWEST 
                           INSTITUTE

    Mr. Bartsch. Mr. Chairman and Members of the Subcommittee, 
thank you for the opportunity to testify. I am Charles Bartsch, 
senior economic development policy analyst at the Northeast-
Midwest Institute. And my focus in the next few minutes will be 
on issues relating to the brownfields expensing tax incentive.
    Since 1991, the Institute has worked closely on brownfield 
issues with the bipartisan Northeast-Midwest Congressional 
Coalition, which is currently chaired by Representatives Bob 
Franks and Marty Meehan. And we have examined site reuse 
activities in more than 50 cities in New York and Pennsylvania 
and Ohio and other States. A key focus of this analysis has 
been the link between environmental contamination and economic 
development.
    First, how has the brownfields issue changed, and why do we 
need an incentive? Well, during the last few years, the way in 
which we deal with brownfields has evolved, as States and 
communities have gained more familiarity with the environmental 
aspects of brownfield situations. Now it takes on more of an 
economic development, dollars-and-cents urgency in most places. 
Costs and financing have emerged as the common predominant 
concerns that prospective site users must address.
    According to case studies from Cleveland and elsewhere, 
total site preparation costs per acre for long-time industrial 
sites in inner city areas can be quadruple those of a site of 
the same size in a new pristine development. And in fact, the 
mere presence of contamination has increased the time and 
effort needed to put financing packages together, which has 
increased lending costs more than threefold in real-dollar 
terms since 1980, according to some bankers. So clearly, 
financing gaps are a primary deterrent to reuse.
    Second, how has Congress addressed these critical financing 
issues? Congress has recognized that no single approach fits 
the financing needs of all brownfield projects, which vary by 
project situation and type of developer, level and type of 
contamination, and the needed rate of return.
    Bipartisan efforts to explore various ideas date back to 
the 104th Congress. At that time, the link between 
environmental concerns and real estate markets and financing 
emerged, and it became clear that new approaches would be 
needed to address this issue. And in fact, several Members of 
this Oversight Subcommittee were active early on. In the 104th 
Congress, for example, Representative Coyne first advanced his 
proposal to establish tax credits to offset site remediation 
expenses. In mid-1995, Representative Weller cosponsored Mr. 
English's bill that proposed two tax incentives to encourage 
clean-up of contaminated sites. And Chairman Houghton 
cosponsored a bill in early 1996 to allow brownfield clean-up 
costs to be deducted from income in the year that such costs 
occur, which is really the forerunner of the existing 
brownfield expensing incentive.
    In August 1997, as part of the Taxpayer Relief Act, 
Congress approved a potentially significant brownfield 
expensing tax incentive, which is just now starting to work its 
way into the redevelopment process and mindset. Its quicker 
cost recovery was intended to help offset the cost of site 
clean-up and level the economic playingfield between 
brownfields and greenfield sites which do not have to bear such 
costs.
    Third, what role have tax incentives played in brownfield 
reuse? Brownfield incentives have objectives similar to 
traditional tax incentives for economic development purposes. 
They aim to overcome capital market imperfections and channel 
economic activity to achieve the greatest possible public 
benefit.
    At the State level, tax incentives have played a major role 
in strategies to promote brownfield reuse, and they show how 
Federal efforts could enhance site redevelopment. About 22 
States have some sort of brownfield tax incentive or tax credit 
initiative in place. And these programs, in combination with 
other public sector brownfield initiatives, have really started 
to tally some encouraging results, according to an Institute 
survey of State program managers.
    For example, Missouri has approved $16.5 million in tax 
credits for 13 sites, where new business activity has created 
2,000 jobs. Ohio's efforts have brought more than 1,400 acres 
of brownfields back to productive use, creating about 7,100 
jobs. Pennsylvania's program has encouraged clean-up of some 
7,000 acres in 60 of the State's 67 counties, leading to nearly 
15,000 new jobs at more than 300 sites. And other States have 
seen similar results.
    So clearly, resources for clean-up are a paramount need. 
And clearly, tax incentives have stimulated brownfield reuse, 
as the track record from the States suggests. So why has the 
Federal brownfield expensing provision gotten so little use so 
far?
    Only a couple of dozen sites have used the incentive as of 
summer 1999, and there are several key reasons for this. 
Initially, Federal agencies were slow to market the incentive, 
and they may have misjudged the willingness and ability of the 
private development market to make an effort to understand how 
it could work and the benefits it could bring to a project's 
bottom line.
    Although EPA and HUD have provided ample information, many 
in the private development industry were skeptical, because 
they saw the credit as cumbersome, with requirements that could 
trip them up. And no developer wants to be caught in a 
``Gotcha'' situation. Essentially, the real estate developers 
who are viewed as key players in brownfield reuse and prime 
targets for the brownfield incentive simply do not operate in 
terms of Census tracts and poverty levels, and their education 
process is taking a long time.
    If I could just have a few more seconds, please.
    Chairman Houghton. Very well.
    Mr. Bartsch. And now the incentive sunset date poses a 
deterrent to more widespread use. Local economic development 
officials are concerned that the 15 months remaining is not 
time enough to carry out reuse projects, and this makes them 
hesitant to promote the incentive's use.
    Finally, why should the incentive be retained and made 
permanent? Let me offer three reasons: First, for purposes of 
both planning and comfort, developers and investors need the 
certainty that permanence will bring. Given the length of time 
that it can take to get large-scale multi-year projects 
underway and completed, permanence means that the developer can 
count on the incentive, even if unanticipated delays slow down 
the redevelopment process.
    Second, the brownfield expensive incentive is one of the 
few redevelopment tools that focus on the private-sector side 
of the reuse equation, and provide help in meeting clean-up 
costs, the No. 1 financing need of most brownfield sites.
    And third, after a slow start, Federal agencies' technical 
assistance and outreach capabilities, such as site and Census 
tract maps and support for State agency staff, are now in place 
to promote and implement the program and allow it to move 
toward the $1.5 billion level authorized in 1997.
    I have got more examples and information in my written 
statement. I thank you for the extra time, and I thank you for 
the opportunity to speak. And I look forward to your questions.
    [The prepared statement follows:]

Statement of Charles Bartsch, Senior Policy Analyst, Economic 
Development, Northeast-Midwest Institute

    Mr. Chairman and Members of the Oversight Subcommittee, 
thank you for the opportunitiy to testify about the financing 
issues affecting the productive reuse of older, often 
contaminated industrial and commercial sites. I am Charles 
Bartsch, senior economic development policy analyst at the 
Northeast-Midwest Institute. Since 1991, the Institute--working 
closely with the bi-partisan Northeast-Midwest Congressional 
Coalition, currently chaired by Reps. Bob Franks and Marty 
Meehan--has examined the relationship between environmental 
contamination and economic development. At that time, we 
recognized the severity and potentially devastating impact of 
neglected brownfield sites on long-established communities with 
a legacy of manufacturing. Both organizations began to identify 
case examples where environmental and redevelopment obstacles 
had been successfully addressed. The issue has come a long way 
since then; as this hearing underscores, many Members have 
worked hard this year to bring brownfields to the Congressional 
front burner.
    The Institute has analyzed site reuse activities in more 
than 50 jurisdictions--large cities like Pittsburgh, Chicago, 
Dallas, Los Angeles, Seattle, and Cleveland; mid-sized cities 
like Buffalo, Kansas City, Sacremento, and Worcester; and small 
towns like Meadville, Pennsylvania, Glen Cove, New York, and 
Wyandotte, Michigan. Our research has indicated that, while the 
problems surrounding reuse of contaminated sites are critical 
ones in the nation's traditional industrial centers, they are 
by no means confined to such communities. The issue of 
brownfields is widespread, having surfaced in every state 
across the country, and in numerous small towns as well as most 
large cities. To meet it, communities need practical tools and 
approaches with broad applicability and appeal.

4What are the key issues surrounding brownfield sites?

    Successsful brownfield reuse projects must overcome several 
critical barriers, which have been well documented. These 
include the lack of process certainty and finality; liability 
concerns; added expenses of environmental cleanup; and lack of 
redevelopment financing resources available for brownfield 
projects.
    The brownfield issue has evolved over the past few years, 
as states and communities have gained more familiarity with the 
environmental aspects of brownfield situations, and it has 
taken on more of an economic development urgency in most 
places; cost and financing have emerged as the common, 
predominant concerns that prospective site users must address. 
The procedural and legal steps needed to address brownfield 
barriers--testing, acquiring, cleaning, and redeveloping 
contaminated older sites--can be complicated, expensive, and 
time-consuming.
    In practice, the brownfield reuse issue boils down to one 
of simple dollars and cents. In one scenario, a developer can 
acquire an untouched greenfield site, probably in a new 
industrial or business park far from the central city, and 
build a facility to suit with minimal fuss. Or, that same 
developer can acquire a previously used site in an old, often 
abandoned central city industrial district. The latter site, 
almost assuredly a brownfield, is probably available at little 
or no cost. However, the developer will then need to spend time 
and money having it tested to determine exactly what substances 
it might contain, spend time and money cleaning it up and 
preparing it for construction, spend months pleading with 
bankers to lend on it, and likely spend more time and money for 
additional documentation and site monitoring. According to case 
studies from Cleveland and elsewhere, in fact, total site costs 
per acre for long-time industrial sites in inner city areas can 
be quadruple those of a site of the same size in a new exurban 
development.

What is the real-dollar impact of this contamination?

    Cleaning up contamination adds to the cost of any reuse 
project, often significantly. In fact, in most areas adequate 
financing to carry out both cleanup and redevelopment 
activities is not available at affordable costs. This drives 
development to greenfield locations in undeveloped areas, away 
from established economic and population centers. The mere 
presence of contamination has increased lending costs--more 
than three-fold in real dollar terms since 1980, according to 
some bankers. More time and staff work is required to put 
financial packages together, and prospective borrowers must pay 
for environmental assesments and more detailed appraisals--
before they even begin the cleanup process.
    This undermines efforts to revive brownfield sites in two 
ways. On one hand, higher transaction costs can make loans 
prohibitively expensive to obtain, particularly for small 
business owners or prospective purchasers with no collateral 
other than the site itself. On the other hand, depending on the 
extent and type of contamination, cleanup costs often exceed 
$50,000 and may top $1 million or more. While new insurance 
products can help guard against costly surprises during the 
remediation process, they do not reduce the initial costs. And 
these up-front expenses are not easily recovered as part of the 
normal course of doing business, placing brownfield sites and 
facilities and a tremendous competive disadvantage with 
greenfield locations.
    Clearly, financing gaps are a primary deterrent to reuse. 
However, the public sector can do much to help balance the 
playing field between greenfield and brownfield sites. 
Creatively designed and carefully targeted incentives and 
assistance can help advance cleanup and reuse activities and 
achieve significant community benefits.

How has Congress addressed critical financing issues?

    Members from both parties began exploring ways to address 
specific financing barriers to brownfield development back in 
the 104th Congress. At that time, the link between 
environmental concerns and real estate markets and financing 
emerged, making it clear that new approaches would be needed to 
address this issue. Several Members of this Oversight 
Subcommittee were active early on; in the 104th Congress, for 
example, Rep. Coyne first advanced his proposal (HR 2846) to 
establish tax credits to offset site remediation expenses. In 
mid-1995, Rep. Weller introduced a bill (HR 1799) proposing two 
types of tax incentives to encourage cleanup of contaminated 
sites. Chairman Houghton co-sponsored a bill in early 1996 (HR 
2919) to allow brownfield cleanup costs to be deducted from 
income in the year such costs occur--the forerunner of the 
existing brownfield expensing incentive.
    In the 105th Congress, Members introduced nearly 30 
different bills dealing with some aspect of the brownfield 
financing or re-development processes. Thes efforts laid a good 
foundation for the ongoing consideration of legislative answers 
to complex brownfield questions in the 106th Congress; Members 
of both parties have introduced nearly a dozen bills already 
this session. This activity cuts across many committees and 
transcends party and ideology; bills offered by both 
Republicans and Democrats have similar--often identical--
objectives and approaches. Conceptually, there is a lot of 
agreement on ways to meet critical brownfield process and 
financing needs.
    Over the past five years, Congress has recognized that no 
single approach fits the financing needs of all brownfield 
projects, which vary by project situation, type of developer, 
level and type of contamination, and needed rate of return. In 
general, bills to support brownfield financing have fallen into 
one of three broad categories:
     process related initiatives, to offer further 
protection to prospective purchasers and adjoining landowners, 
which can play a critical role in determining whether 
brownfield redevelopment financing is secured;
     direct capital support efforts, typically taking 
the form of grants for site assessment, planning, and to 
capitalize revolving loan funds for actual site cleanups 
themselves--activities usually not financed by private sources; 
and
     tax incentives, which can help attract affordable 
private investment and provide a cash-flow cushion for 
companies undertaking brownfield reuse projects.
    In August, 1997, Congress approved a potentially 
significant brownfield tax incentive, which is just now 
starting to work its way into the redevelopment process. Known 
as the brownfield expensing provision, it allows new owners of 
brownfield sites to write site clean-up costs off their taxes 
in the year they incur them, rather than having to capitalize 
them over a longer period of time. This quicker cost recovery 
is intended to help level the economic playing field between 
brownfield and greenfield sites, which don't have to bear such 
costs. Currently, the expensing incentive--scheduled to sunset 
at the end of 2000--is the focus of a couple of bills.

What role have tax incentives played in brownfield reuse?

    Incentives focused on brownfield sites have similar 
objectives to traditional tax incentives for economic 
development purposes--they aim to overcome capital market 
imperfections and channel economic activity to achieve greater 
public benefits. Incentive programs can enhance a project's 
cash flow, by allowing revenue to be used for site cleanup and 
redevelopment activities, rather than for taxes or other 
purposes. This, in turn, can help a project's financial look in 
the eye of a lender. Tax incentives focused on environmental 
cleanup and reuse could help level the economic playing field 
between old brownfield sites and new greenfield locations.
    At the state level, tax incentives have played a major role 
in strategies to promote brownfield reuse, and they show how 
federal efforts could enhance site redevelopment. About 22 
states have some sort of brownfield tax incentive or credit 
initiative in place, notably the following.
     Ohio is working to level one aspect of the site 
selection playing field by offering a state franchise or income 
tax credit for Phase I and II assessment and cleanup costs. 
Site owners can claim the lesser of 10 percent or $500,000 for 
these purposes.
     Illinois provides a 25 percent income tax credit 
of up to $150,000 per site, available to developers who spend 
at least $100,000 to restore contaminated sites, and these 
credits are transferable to new owners. Florida offers a 35 
percent credit, up to $250,00 per site, which also is 
transferable.
     New Jersey brownfield site owners in designated 
Environmental Opportunity Zones can negotiate with local 
communities and arrange to use some of their annual property 
tax levy to cover up to 75 percent of their site clean-up 
costs, instead of paying it to local tax coffers.
     Missouri's brownfield redevelopment program offers 
a flexible ``menu'' of tax incentives, based on new investment 
and job creation, up to 100 percent of remediation costs.
    In addition, Pennsylvania this year enacted its Keystone 
Opportunity Zone programs, in which all taxes may be forgiven 
for up to 12 years. And, Massachusetts this year joined 
Wisconsin in offering remediation tax credits of up to 50 
percent of cleanup costs.
    These programs, in combination with other public-sector 
brownfield incentives, have started to tally some encouraging 
results, according to an Institute survey of state program 
managers. For example, Missouri has approved $16.5 million in 
tax credits for 13 sites--on which new business activity has 
creatd 2,000 jobs. Ohio's efforts have brought more than 1,400 
acres of brownfields back to productive use, creating about 
7,100 jobs. Michigan's extensive brownfield incentive programs 
point to $459 million in new private investment, including 750 
housing units, that have generated nearly 5,500 jobs. 
Pennsylvania's program has encouraged cleanup of some 7,000 
acres in 60 of the state's 67 counties, leading to nearly 
15,000 new jobs at more than 300 sites. Colorado attributes 
more than 6,200 jobs and 2,800 residential units to the 146 
sites that have gone through the state's voluntary cleanup 
program.

Why has the federal brownfield expensing provision gotten so 
little use so far?

    Initially, EPA and Treasury had estimated that the $1.5 
billion in tax expenditure authority the 1997 law provided 
would be used at 30,000 sites over the three-year life of the 
incentive. However, only a couple of dozen sites have used the 
brownfield expensing incentive as of summer, 1999. There are 
several key reasons for this.
    Initially, federal agencies were slow to market the 
incentive, and may have misjudged the willingness and ability 
of the private development market to make an effort to 
understand how it could work and the benefits it could bring to 
a project's bottom line. Although EPA and HUD made ample 
information on poverty and locational eligibility available to 
the public--including GIS maps and census tract data--many in 
the private development industry were skeptical because they 
perceived the credit as featuring complicated and cumbersome 
qualification and targeting requirements that could trip them 
up. Essentially, the real estate developers viewed as key 
players in brownfield reuse and prime target beneficiaries of 
this incentive simply do not operate in terms of census tracts 
and poverty levels, and the education process is taking a long 
time. In addition, it took a long time for developers to get 
comfortable with the notion that EPA actually wanted to be 
their ally in brownfield endeavors; their long-held views of 
the agency as adversary were slow to change. Many developers 
were reluctant to approach EPA and state environmental agencies 
to pursue the expensing incentive.
    Now, the incentive's sunset date poses a deterrent to more 
widespread use. The closer we get to the end of December, 
2000--when cleanups need to be completed to qualify--and the 
expiration of the credit, the less likely developers will 
attempt to use it. Local economic development officials are 
concerned that not enough time remains now to bring projects 
through the brownfield acquisition/cleanup/redevelopment phases 
in time for new users to take advantage of the incentive. This 
makes them hesitant to promote its use, even though it could 
play an important role in making specific sites more viable 
candidates for reuse. Similarly, even though more private 
developers now have a grasp of the incentive and its benefits, 
they are reluctant at this time to factor it into their 
project's financial calculations--brownfield redevelopment, 
especially on a large scale, is a complicated process, and they 
are concerned that an unforseen delay in their project schedule 
will push them past the sunset date, and that they will have to 
forfeit the benefits they had anticipated.
    In addition, private developers have noted that a couple of 
specific provisions of the expensing incentive also inhibit its 
use. One concerns lessors of facilities; while lease holders 
are technically eligible to take advantage of the incentive, in 
practice they are discouraged from using it because the law 
does not mention a specific length of lease term--which leads 
to uncertainty and discourages use. The law could be clarified 
to specify that new site users who opted for a long-term lease, 
say 30 years, would qualify for the incentive if they cleaned 
up the site they leased, even if they did not take title. This 
could encourage more private redevelopment activity on publicly 
owned sites.
    A second provision that deters use of the expensing 
provision is the requirement that the recapture of incentive 
value be taxed as ordinary income. It discourages developers 
who will not be the end-users (such as those converting sites 
to retail or commercial use) from taking on brownfield sites. 
Since their business is real estate development and subsequent 
sale, this provision mitigates the benefits that the incentive 
brings. An alternative would be to tax the recapture as capital 
gains income, or allowing the incentive to be transferable to a 
new owner (as several states do), so that the developer could 
retain some of the value through its reflection in the purchase 
price.
Why should the incentive be retained and made permanent?

    Clearly, the incentive has great potential and needs to be 
extended permanently, so that this tool can be better used to 
restore brownfields to productive, tax-and job-generating uses.
     For purposes of both planning and comfort, 
developers and investors need the certainty that permanence 
will bring. Given the length of time that it can take to get 
large-scale, multi-year projects underway and completed, 
permanence means that developer can count on the incentive, 
even if unanticipated delays slow down the redevelopment 
process.
     The brownfield expensing incentive is one of the 
few redevelopment tools that focus on the private-sector side 
of the reuse equation, and provide help in meeting cleanup 
costs--the number one financing need at most brownfield sites.
     After a slow start, federal agencies' technical 
assistance and outreach capabilities--such as site and census 
tract maps and support for state agency staff--are now in place 
to promote and implement the program.
    To close, let me reiterate that site assessment and cleanup 
require financial resources that many firms lack and find 
difficult to secure. And without financing, brownfield reuse 
projects can not go forward, further undermining efforts to 
revive distressed, older industrial areas. The combined efforts 
of the public and private sectors will be needed to move 
properties into the realm of economic viability, and ultimately 
bring prosperity back to them. Therefore, Members of Congress 
are to be commended for their willingness to consider and 
promote different approaches to the complex issue of brownfield 
finance. While much attention is given to state and local 
initiatives, it is the federal government--whose programs, 
policies, and regulations form the foundation on which many 
state and local financing incentives--that must play a strong 
role if private financing for brownfield redevelopment is to 
become more widely available.
    Thank you for the opportunity to speak, and I look forward 
to your questions.

                                

    Chairman Houghton. Mr. Bartsch, thank you.
    Mr. Lincoln, it is great to see you. Thanks very much for 
coming.

STATEMENT OF JOHN W. LINCOLN, PRESIDENT, NEW YORK FARM BUREAU, 
  INC., AND MEMBER, BOARD OF DIRECTORS, AMERICAN FARM BUREAU 
                           FEDERATION

    Mr. Lincoln. Very nice to see you. Good afternoon. My name 
is John Lincoln. I am a dairy farmer from Bloomfield, New York, 
where I own and operate Linholm Farm. I serve as the elected 
president of the New York Farm Bureau, and I am a member of the 
board of directors of the American Farm Bureau.
    Our farm, Linholm Farm, is a family farm. It is operated by 
myself and my wife, our daughter, and son-in-law, and son. So 
many of the issues that I will speak to you about will have a 
great impact upon whether that farming operation is able to be 
transferred to the next generation.
    Like most farmers in New York, I have a special interest in 
land conservation because of the amount of farmland lost each 
year in my State. Because my farm is located near Rochester, I 
know firsthand how development and urban sprawl can turn farms 
and open space into housing projects and shopping centers.
    The Farm Bureau commends you, Chairman Houghton and the 
Subcommittee Members, for calling attention to the impact of 
tax law on land use. I am pleased to be here today to make this 
statement on behalf of the American Farm Bureau.
    The estate taxes are at the top of Farm Bureau's list of 
tax policies that cause changes in land use. The estate tax 
rates of 37 to 55 percent can force the sale of farmland, 
because heirs must come up with cash to pay the onerous tax. 
What farm businesses have is land, not cash. And often land has 
to be sold to generate the money to pay estate taxes. More 
often than not, the highest bidder is a developer, and not a 
farmer.
    Over the years, attempts have been made to try and lessen 
the impact of estate taxes on farmers and ranchers. In 1997, 
the family business estate tax exemption was established. 
Special use valuation has been part of the Code since the mid-
seventies. While these targeted provisions are helpful, they 
are very complex, and require huge investments in time and 
money for estate tax planning. This expense discourages their 
use, and takes money needed by farmers and ranchers to run 
their businesses.
    The Farm Bureau believes that estate taxes should be 
eliminated. Other efforts to reduce estate taxes should be 
viewed as incremental reform, and be designed to lead to the 
eventual elimination of estate taxes.
    The capital gains tax is another tax that has a tremendous 
impact upon the conservation of farm and ranch land. Many 
agricultural producers near or in retirement want to sell their 
land to younger farmers and ranchers, including family members; 
but capital gains taxes encourage farmers and ranchers to hold 
property until death, triggering the sale of land to pay estate 
taxes.
    When farmland is sold, capital gains taxes also encourage a 
land use change. The selling price of land is typically set to 
recover capital gains taxes from the buyers. Developers, not 
farmers, can more easily afford the higher price. The transfer 
of land out of agriculture will accelerate if the stepped-up 
method of valuating property is replaced with the carryover 
method, because the change will cause a huge capital gains tax 
increase on farmland.
    The Farm Bureau supports the elimination of capital gains 
taxes, and supports the retention of the stepped-up method for 
valuing property at death. Until the tax is eliminated, the 
capital gains tax rate should be lowered to no more than 15 
percent.
    There are many proposals to provide tax incentives; either 
tax reductions, or credits. To farmers and ranchers who act to 
conserve their land, the effectiveness of tax incentives is 
limited, however, because they only have value if the farmer or 
rancher is making money and paying taxes. This leads me to my 
final point. The best way to conserve farm and ranch land is to 
keep farming and ranching profitable, and keep agricultural 
producers on their land.
    Congress is considering several tax proposals that would 
help farmers and ranchers manage risks caused by uncontrollable 
weather and markets. Enactment of the risk management tools, 
like farm and ranch risk management accounts, is a priority for 
the Farm Bureau.
    Again, thank you for the opportunity to speak today. And I 
would be glad to answer questions.
    [The prepared statement follows:]

Statement of John W. Lincoln, President, New York Farm Bureau, Inc., 
and Member, Board of Directors, American Farm Bureau Federation

    My name is John Lincoln. I am a dairy farmer from 
Bloomfield, New York, where I own and operate Linholm Farm with 
my wife Anne, daughter Julie and son-in-law Michael. I serve as 
the elected President of the New York Farm Bureau and I am a 
member of the Board of Directors of the American Farm Bureau 
Federation.
    Like most New York farmers, I have a special interest in 
land conservation. My farm is located in Ontario County near 
Rochester. I serve on the Farmland Protection Board of Ontario 
County and know first hand how development and urban sprawl can 
turn farms and open space into housing projects and shopping 
centers. Thank you for the chance to present the views of Farm 
Bureau on the impact of tax law on land conservation.
    The American Farm Bureau Federation's interest in tax 
policy and its impact on land conservation 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 
accounts for almost 70 percent of the privately owned land.
    While tax policy is usually made with the intent of doing 
good, often little thought is given to the ``unintended 
consequences'' of tax policy on land use. Our comments will 
address both intended and unintended consequences of the 
current tax system.
                          Federal Estate Taxes
    At the top of the list of concerns of farmers and ranchers 
about unintended consequences on land conservation from 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 family 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 shifting agriculture land to 
other uses.
    Owners of these multi-generation farms and ranches often 
seek legal advice for estate planning to structure their assets 
and operations to minimize the estate tax consequences of the 
death of a member of the family. 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 cancel the impact of estate taxes on land use. 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.
    The current per person exemption for assets in an estate is 
$650,000. Current law will increase the per person exemption to 
$1 million by 2006. Farm Bureau policy calls for increasing 
that exemption to $5 million per person. Exact figures are not 
available, but it is a reasonable estimate that as high as 99 
percent of the farmers and ranchers would be exempt from estate 
taxes if the per person exemption was increased to $5 million 
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.
    The changes in estate taxes in 1997 created a family-owned 
business exemption of $1.3 million. This is helpful, but we 
continue to be concerned about how this section is administered 
so that as many families as possible qualify for the exemption. 
In addition, this section of the law is very complex and its 
use necessitates extensive and expensive estate tax planning. 
Farmers and ranchers worry that even with careful planning, 
their estate may be fail to meet all the eligibility criteria 
at their death making a bad situation even worse. Increasing 
the regular per person exemption would remove some of these 
uncertainties.
    Another way to lessen the potential for the estate tax to 
force a 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 (indexed for 
inflation). 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.
    The yearly gift allowance should be increased to $50,000 
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 be exempt from estate taxes.
    The best way to lessen the impact on estate taxes on land 
use 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.
                         Establishment of Basis
    The tax package that was passed by the House and Senate 
this summer and recently vetoed by President Clinton had 
important estate tax changes supported by Farm Bureau. The 
estate tax would have been repealed in 2009 and replaced by a 
capital gains tax when property is sold. Of great concern to 
farmers and ranchers was the loss of stepped-up basis for 
capital gains tax purposes. Under current law, the basis for 
capital gains tax purposes is stepped-up for the heirs to the 
value of the assets at the time of death of the decedent. The 
heirs only pay capital gains taxes on the increase in value of 
assets during the time they own the assets. The recently vetoed 
legislation would have made the original basis of the decedent 
the basis for the heirs. This would have significantly 
increased capital gains taxes for heirs who sell assets.
    If the assets of a multi-generation farm are not sold, 
basis is not an issue. But in many cases the loss of stepped-up 
basis will impact whether or not land stays in farming or is 
moved into other uses. Often one sibling in a family remains in 
farming and/or ranching while other siblings pursue off-farm 
employment. The farm or ranch is often the principal or only 
asset of the older generation. At death, the farm or ranch is 
divided among the siblings. The sibling that has remained in 
farming or ranching has to buy, lease or rent the portions 
owned by the other siblings. If the other siblings wish to sell 
and use the money for other purposes, they will face 
substantial capital gains taxes based on the original basis for 
the property. This makes it more difficult for the actively 
farming sibling to buy the land. If the basis was stepped-up, 
the taxes would be less and the sibling wishing to buy would be 
in a better position to purchase the land and keep it in 
farming or ranching.
    In many situations, none of the heirs wish to continue 
farming or ranching and all wish to sell. A capital gains tax 
based on the carry over method increases the cost of buying 
land for younger farmers just getting started and those wanting 
to expand their farming or ranching businesses. When new or 
neighboring farmers and ranchers can't afford to buy farmland, 
selling the land for alternative uses becomes the only option.
                           Capital Gains Tax
    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 farmland 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 20 percent capital gains transfer 
tax is a 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 it 
is 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. The overall price 
level is roughly four times what it was 30 years ago. Land 
valued at $500 per acre in 1969 would have to sell for $2,000 
per acre in 1999 for it to have the same purchasing power as 
the $500 had in 1969. 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 of forcing land use 
changes.
    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 
IRA-type account and pay taxes when the money is withdrawn from 
the account. Another option to provide capital gains tax relief 
would be to make current exclusion of the first $500,000 of 
gain on the sale of a principle residences to apply to sale of 
a farm.
    All of these approaches would allow for an orderly 
transition of land from one farmer to another and increase the 
potential for land to remain in production agriculture rather 
than be shifted to other uses.
               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 risk 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.
    One drawback of tax incentives for mandated environmental 
actions is that they only have value if the farm or ranch is 
making money and paying taxes. It is important--to recognize 
during these difficult economic times in agriculture that tax 
incentives may have little to no value. They are not an 
adequate substitute for cost-sharing that provides direct 
assistance to farmers and ranchers to carry out environmental 
mandates.
            Incentives for Voluntary Conservation Easements
    While harboring the same drawbacks as other tax incentives, 
tax deductions or credits for voluntary conservation 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 and should apply to both 
donated easements and easements that are purchased. As stated 
previously, the bulk of a farmer's net worth is in land. The 
separation of development rights from property can decrease 
land value tremendously. It is therefore difficult to devise a 
tax credit that will adequately compensate farmers and ranchers 
for donated easements, limiting their effectiveness.
                    Farm Profitability and Land Use
    Farms and ranches that are profitable will remain in 
agriculture therefore preventing changes in land use. 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.
    Enactment of Farm and Ranch Risk Management Accounts (FARRM 
accounts) that allow farmers and ranchers to reserve part of 
their income for bad financial years is a Farm Bureau priority. 
FARRM accounts were included in the Taxpayer Refund and Relief 
Act passed by Congress but vetoed by the President. 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. Cash accounting is an important financial 
management tool. Recent changes to allow income averaging have 
been helpful.
    Many other tax law changes would help farmers and ranchers 
stay 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.
                   Implications for Future Tax Policy
    This Subcommittee faces a major challenge in considering 
the impact of federal tax policy on land use. Current tax law 
has a major impact on land conservation because the overall tax 
load is large enough to cause landowners 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 conservation.
    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 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 help 
keep farmers and ranchers on the land and keep land in farming 
and ranching.
    Thank you.

                                

    Chairman Houghton. Thanks very much, Mr. Lincoln.
    Mr. Miller.

     STATEMENT OF CHRISTOPHER MILLER, PRESIDENT, PIEDMONT 
           ENVIRONMENTAL COUNCIL, WARRENTON, VIRGINIA

    Mr. Miller. My name is Christopher Miller. I am president 
of the Piedmont Environmental Council, a 26-year-old land use 
and land conservation organization located in Warrenton, 
Virginia, serving an area of Virginia approximately the size of 
the State of New Jersey. We appreciate very much the 
opportunity to testify before the Oversight Subcommittee on the 
successes of the American Farm and Ranch Protection Act and our 
suggestions of how to make a good law better.
    After looking hard at the questions of environmental 
degradation and land use, we believe that sprawl--the loss of 
farmland, forest land, ranches, other open space--is probably 
the single greatest threat to the environment. For those 
families that wish to remain in farming and continue ownership 
of open space lands, the effect of sprawl patterns of 
development is intense. In the short term, farmers and other 
open space landowners are faced with local property taxes that 
are increasing rapidly and combined with appreciating land 
values. This effect is amplified by many local governments 
increasing property tax rates to cover the direct costs of 
sprawl. Since farm income has not increased as quickly, and in 
many areas is declining, landowners are often faced with the 
prospect of selling land to pay local property tax bills. Added 
to the immediate pressure of increasing property taxes is 
Federal tax law, and in particular the enormous penalty of 
estate tax law.
    We thank Chairman Houghton for his sponsorship and 
stewardship of the American Farm and Ranch Protection Act, 
which was enacted as part of the Taxpayer Relief Act of 1997. 
This vital legislation was a first step toward creating an 
important incentive for landowners to protect open space and 
the farming tradition on a voluntary basis.
    The Farm and Ranch Protection Act enables America's farm 
and ranch families to continue what they do best: take care of 
America's rural lands. It lessens the Federal Government's 
interference in the family's decision on whether to maintain 
the farm, ranch, or forest. It does so without regulation, 
without taking the land off the local and State tax rolls, and 
without imposing on the American taxpayer the costs of 
acquisition, administration, and maintenance of the land.
    The estate tax incentives are part of an entirely voluntary 
approach for a rural landowner to preserve the land for rural 
purposes. The bottom line is conservation easements are working 
where the benefits are most needed, among small farmers and 
ranchers. Since the effective date of the American Farm and 
Ranch Protection Act, the rate of easement donation in the 
Virginia Piedmont has nearly doubled, as measured both in terms 
of the number of easements recorded, and the total acres 
recorded, during the year 1998.
    By the end of 1999, we expect over 200 applications by 
individual landowners to donate easements on approximately 
20,000 to 30,000 acres of land. That is adding to a total that 
we have already protected of about 105,000 acres, all still in 
private ownership. Our understanding is that the experience in 
other States is similar, particularly in the West.
    By increasing the benefits to a level where the impact is 
substantial, relative to the overall estate tax liability, 
Congress provided a tremendous hand in the efforts to combat 
sprawl and to protect rural lands. As such, the goal of the 
Congressional urban sprawl agenda should be to further expand 
and reform the American Farm and Ranch Protection Act.
    And here are some suggestions. The current law restricts 
the estate tax exclusion for land placed under easement to 40 
percent of the value of the estate, with a limitation of 
$400,000 on the amount that can be excluded for the purposes of 
estate tax. The limitation would increase to $500,000 for 2002 
and beyond. In order to provide a meaningful improvement in 
this important provision, the objective of Congress should be 
100-percent exclusion from the estate tax, with no limitation, 
regardless of the size of the estate.
    We also support the expansion of the area. We find that the 
areas under pressure are approximately 50 miles driving 
distance from a metropolitan region. And that might do a lot to 
include the areas that others felt have been left out by the 
previous limitations.
    We also believe that there should be elimination of the 
valuation threshold. It would serve to improve the provision 
and enhance both the benefit and administration of the 
provision. Strict tests exist in law to determine whether land 
qualifies for a conservation easement. The valuation test adds 
a level of uncertainty and inconsistency, because assessors 
value land differently. Protecting pristine lands, even in 
cases where the conservation easement does not cause a drastic 
drop in land values, should be encouraged, rather than 
disqualified.
    There are some technical issues with amendments which would 
be addressed by amendments we have proposed to clarify the 
prohibition on commercial recreational use and to correct the 
deletion of historic land as being qualified for exclusion. We 
also hope that Congress will look at other tax incentives to 
help protect open spaces, including creation of funds for the 
purchase of conservation easements on private land.
    I appreciate your time, and would be happy to answer any 
questions.
    [The prepared statement follows:]

Statement of Christopher Miller, President, Piedmont Environmental 
Council, Warrenton, Virginia

    The Piedmont Environmental Council appreciates the 
opportunity to testify before the Oversight Subcommittee of the 
House Ways and Means Committee on the success of the American 
Farm and Ranch Protection Act and its strengths and weaknesses. 
In particular, we commend the Committee for evaluating the 
impacts of the American Farm and Ranch Protection Act and other 
tax provisions on the broader effort to slow the loss of farm, 
ranch and other open space lands to sprawl patterns of land 
development.
    The Piedmont Environmental Council, a 26-year-old non-
profit organization located in Warrenton, Virginia, serves an 
area of Virginia approximately the size of New Jersey. Our 
mission is to promote and protect the rural economy, natural 
resources, history and beauty of the Virginia Piedmont. For 27 
years we have worked hard to better understand the pressures 
facing rural landowners and rural communities. From our 
experience, the most serious threat is the sprawl pattern of 
land development that is typified in Northern Virginia and so 
many other metropolitan regions in the United States.
    The most serious environmental problem facing America today 
is the loss of farmland, forest-land, ranches, and other open 
space to sprawl patterns of development. By consuming land at 
four times the annual rate of populations growth, the costs of 
sprawl far outweigh the benefits of the associated economic 
development. Time and time again, studies by PEC and other 
organizations have demonstrated that the net fiscal and 
economic costs of providing services to rapidly growing and 
widely dispersed development far outweigh additional tax 
revenue and economic activity.
    The most obvious costs of sprawl are the dramatically 
higher expenditures for transportation, new schools, and other 
infrastructure investments. The current estimate in Virginia of 
additional tax revenue required for the next generation of 
interstates, highway expansions and bypasses of new urban areas 
is $70 billion over 20 years. This is in addition to the 
increased levels of transportation funding authorized last year 
by TEA-21. The story in the case of school construction is even 
more daunting; not only must we find the revenue for new school 
construction in areas of sprawl development but we must also 
replace the revenue lost from declining urban and inner-
suburban neighborhoods necessary to maintain and remodel the 
existing schools. [One estimate of the immediate needs in 
Virginia was $26 billion.]
    An indirect cost to the Federal government is the cost of 
controlling air and water quality. The failure to meet air and 
water quality standards has forced state and federal government 
officials to pursue increasingly onerous regulatory programs, 
at considerable expense to the taxpayer and American 
businesses.
    In places like Northern Virginia, the improvements in 
emissions controls on cars has been off-set by the steady 
increase in the number of vehicles and vehicle miles traveled. 
As our communities become more widely dispersed, we rely on 
cars for more often and we drive them further each trip. As a 
result, air quality is deteriorating, not improving, relative 
to the levels in 1991 when the latest amendments to the Clean 
Air Act were enacted. During the past summer, Northern Virginia 
experienced nearly 40 violations of the .08 ppm 8 hour average 
for ozone, meaning that the public was exposed to dangerous 
levels of air pollution nearly one out of every three days.
    In the case of water quality, sprawl patterns of land 
development is responsible for a large portion of the 
sedimentation that is identified nationally as the single 
largest threat. The water quality reports for streams across 
the United States, required by section 303(d) of the Clean 
Water Act, consistently identify sedimentation as the greatest 
threat. Land development disturbs huge areas, and combined with 
loss of forest cover, results in an increase in the total 
sediments eroding into the nation's streams.
    Less tangible, perhaps, is the impact of sprawl on the 
American family and its values. Many of the social ills facing 
our communities, such as road rage, increased juvenile 
delinquency, and persistent unemployment in urban and inner 
suburban communities, can be attributed in part to the effects 
of sprawl patterns of land development. Road rage is directly 
related to the traffic congestion that results from more people 
driving greater distances. Juvenile delinquency is, at least in 
part, due to the fact that parents are commuting nearly three 
hours per day, meaning children and teenagers are frequently 
unsupervised in the afternoon and evening. And finally, the 
unemployed and under-employed are unable to afford the 
transportation costs to reach increasingly dispersed jobs on 
the outer edges of expanding metropolitan regions.
    The phenomenon of sprawl is an increasingly common one. All 
across the country, farms, ranches, forests and wetlands are 
forced to give way to the pressures for new office buildings, 
shopping malls and housing developments. America is losing over 
four square miles of land to development every day. 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 leapfrogs 
development far beyond metro centers.
    For those families that wish to remain in farming and 
continue ownership of open space lands, the effect of sprawl 
patterns of development is intense. In the short term, farmers 
and other open space landowners are faced with the local 
property tax impacts of rapidly appreciating land values. This 
effect is amplified by many local governments increasing 
property tax rates to cover the direct costs of sprawl. Since 
farm income has not increased as quickly and in many areas is 
declining, landowners are often faced with the prospect of 
selling land to pay local property tax bills.
    Added to the immediate pressure of increasing property 
taxes is Federal tax law, in particular the enormous penalty of 
estate tax law. Specifically, the value of land in those parts 
of the country where ranches, farms and forests traditionally 
have flourished has skyrocketed to the point where landowners' 
children can no longer afford the estate tax bill after their 
parents die. The result is predictable. Family land holdings 
are split 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.
    The trend is alarming: since 1950, Pennsylvania has lost 
more than 4 million acres of farmland; an area larger than 
Connecticut and Rhode Island combined. Metropolitan Phoenix now 
covers an area the size of Delaware. It is estimated that over 
the next 45 years, sprawl in the Central Valley of California 
will affect more than 3.6 million acres of America's most 
productive farmland. Added to this is the fact that, in some 
areas of the country, more than 60% of the land will experience 
inter-generational transfer in the next ten years. And this is 
only the tip of the iceberg.
    In Washington's own ``back yard,'' the Piedmont region of 
Virginia, like many urbanizing areas across America, is 
characterized by dramatically inflating real estate values. 
Farmland which once sold for $500 an acre in the 1960's now 
sells for $10,000 to $15,000 an acre. In central Loudoun 
County, the second fastest growing county in America, land that 
in the 1960s and 1970s was exclusively in farming, now has 
speculative development values of more than $50,000 an acre. 
This spillover effect is manifested 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.
    Recognizing this development pressure, and the threat to 
America's farmers, ranchers and open space, the Piedmont 
Environmental Council has worked with Congress to develop 
solutions which combine the best aspects of public and private 
involvement. Working with Chairman Houghton, Senator Chafee and 
countless other Members of Congress and citizen groups, this 
effort culminated in the enactment of the American Farm and 
Ranch Protection Act in 1997, which created a conservation 
easement incentive under Internal Revenue Code section 2031(c).
    We thank Chairman Houghton for his sponsorship and 
stewardship of the ``American Farm and Ranch Protection Act'' 
to enactment as part of the ``Taxpayer Relief Act of 1997.'' 
This vital legislation was a first step toward creating an 
important incentive for landowners to protect America's open 
space and farming tradition on a voluntary basis by placing 
their lands under easement in exchange for relief from the 
estate tax, which often threatens our farmers and ranchers.
    The American Farm and Ranch Protection Act enables 
America's farm and ranch families to continue to do what they 
do best: take care of America's rural lands. It lessens the 
Federal government's interference in a family's decision of 
whether to maintain the farm, ranch, or forest. In other words, 
the American Farm and Ranch 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 and state tax 
rolls, and without imposing on the American taxpayer the costs 
of acquisition, administration, and maintenance of the land. 
This important new law also provides an entirely voluntary 
approach for a rural landowner to preserve the land for rural 
purposes. This, in turn, contributes greatly to the larger 
public good of conserving America's increasingly threatened 
rural lands.
    The impact of the American Farm and Ranch Protection Act on 
the rate of voluntary land conservation is difficult to 
isolate, since it is one of several tax benefits that result 
from donating a conservation easement. The addition of this new 
incentive, however, has clearly spurred increased interest in 
voluntary land conservation. Since the effective date of the 
American Farm and Ranch Protection Act, the rate of easement 
donation in the Virginia Piedmont has nearly doubled, as 
measured in numbers of easements recorded and total acres 
recorded in 1998. We expect that the rates for 1999 will be the 
same or greater. One interim measure in Virginia is the number 
of easement applications under consideration by the Virginia 
Outdoors Foundation, which estimates that over 175 applications 
have been received in 1999.
    Most importantly, it is greatly benefitting the family 
farmer, enabling smaller farms to protect almost the entire 
operation from the estate tax. As the son of one farmer in 
Orange County put it during a discussion as to whether to take 
advantage of easement donation, ``If you don't do it, Dad, I 
won't have a chance of staying in farming. I will have to sell 
the farm to pay the estate taxes.''
    In other farming and ranching communities across the 
country, including Wyoming, Montana, and Pennsylvania, the 
story is similar. The Jackson Hole Land Trust reports that 
``The Jackson Hole Land Trust has experienced a significant 
increase in the number of easements that have been closed since 
the passage of the American Farm and Ranch Protection Act. The 
American Farm and Ranch Protection Act is a significant 
contributor to the increase. It's definitely been something 
that keeps people at the table and it has definitely given 
prospective easement donors a reason to follow through--it 
really works for people. Particularly in concert with other 
estate planning techniques.'' The Montana Land Reliance has 
relied on the additional incentives resulting from the American 
Farm and Ranch Protection Act to generate thousands of acres in 
easements in 1998. The Lancaster Farmland Trust and the 
Brandywine Conservancy also believe that section 2031(c) has 
increased both the interest in easement donation and the rate 
of donations.
    The bottom line is conservation easements are working where 
the benefits are most needed--among small farmers and ranchers. 
By increasing the benefits to a level where the impact is 
substantial to overall estate tax liabilities, Congress could 
lend a tremendous hand to efforts to combat sprawl and protect 
our farms and open space. As such, the goal of the 
congressional urban sprawl agenda should be to further expand 
and reform the American Farm and Ranch Protection Act.
    Due to revenue constraints during the original debate, the 
conservation easement provision was scaled-back (i.e., 40 
percent exclusion from the estate tax up to $400,000 with a 
ramped-up limitation of $500,000 by 2002 and thereafter) and a 
cumbersome threshold test was established (i.e., value 
threshold test for determining ``threatened land''). The 
ultimate provision provided desperately needed immediate 
conservation incentives and has served as a ``foot-in-the-
door'' for future expansion and reform efforts while the 
``pilot'' program was evaluated. The overwhelming success of 
2031(c) in providing relief to farmers and ranchers, coupled 
with the ever-growing problem of urban sprawl, presents 
Congress with a rare opportunity to build on a program that 
works.
        Expansion of the American Farm and Ranch Protection Act
    Current law restricts the estate tax exclusion for land 
placed under easement to 40 percent of the value of the estate 
with a limitation of $400,000 on the amount that can be 
excluded for purposes of the estate tax. The limitation would 
increase to $500,000 for 2002 and beyond. In order to provide 
the most meaningful improvement in this important provision, 
the primary objective of Congress should be a 100 percent 
exclusion from the estate tax with no limitation regardless of 
the size of an estate. Not only would this simplify the current 
system, it would serve to provide an additional incentive to 
landowners to create conservation easements on a voluntary 
basis. The rancher in Colorado who owns 2000 acres of land 
hardly finds relief in a $400,000 provision. It is unfortunate 
that the law compels him to sell the land , almost always to 
developers, to pay the estate tax because farming does not 
produce the revenues to either pay the estate tax or remain 
viable if debt is incurred to cover the estate tax liability.
    The provision adopted in 1997 limits eligible lands to 
those within 25 miles of a metropolitan area (as defined by the 
Office of Management and Budget), national park or wilderness 
area or within 10 miles of an urban forest (as designated by 
the Forest Service). While these areas represent the most 
threatened lands, urban sprawl is proceeding at such a rapid 
pace that protection of open space should not have to wait 
until sprawl is knocking on the door (literally). The recently 
passed Financial Freedom Act of 1999 would have doubled the 
geographic area covered by section 2031(c) to 50 miles and 20 
miles respectively. We are very supportive of that effort and 
encourage Congress to consider allowing all lands subject to 
developmental pressure to qualify for conservation easement tax 
incentives. The land we can save today will most certainly be 
threatened tomorrow. Acting proactively to protect our farmers, 
ranchers and open space is the best way to avoid the decay of 
our countryside.
    Eliminating the valuation threshold would also serve to 
improve the provision and enhance both the benefit and 
administration of the provision. Strict tests exist in law to 
determine whether land qualifies for a conservation easement. 
The valuation test adds a level of uncertainty and 
inconsistency (different assessors value differently). 
Protecting pristine lands, even in cases where the conservation 
easement does not cause a drastic drop in land values, should 
be encouraged rather than disqualified or nullified.
          Reform of the American Farm and Ranch Protection Act
    Since adoption of the American Farm and Ranch Protection 
Act, various technical issues have arisen which, if enacted, 
would further encourage farmers and ranchers to utilize 
conservation easements as envisioned by the legislation. Last 
year, Congress began the process of reform by providing 
important clarification to the post mortem election and working 
to advance certain technical amendments to IRC section 2031(c) 
which are widely viewed as improvements to the American Farm 
and Ranch Protection Act. These amendments include: (1) clarify 
the prohibition on commercial recreational use and correct the 
deletion of historic land as being qualified for the exclusion; 
and (2) ensure a fair procedure for any determination by the 
Secretary of the Treasury that land within 25 miles of a 
national park or wilderness area is not eligible because it is 
not under significant development pressure. It is our hope that 
Congress include these provisions in the soonest available tax 
vehicle.
                     The Need for Other Incentives
    The estate tax incentives of the American Farm and Ranch 
Protection Act do not meet all the challenges facing rural 
landowners. Further, the combination of income tax and estate 
tax benefits are of little incentive to the rural family that 
is generating only marginal income from open space uses. We 
would encourage the Congress, and Members of the committee to 
support other efforts to expand and promote conservation 
easements as a valuable tool in our fight against urban sprawl. 
We are currently working with Members on other relevant 
committees and officials at the Departments of Interior and 
Agriculture to develop a funding pool for the purchase of 
conservation easements on America's valuable farming land. 
Keeping the land in the custodial care of farmers and ranchers 
and encouraging farms to continue farming is the best way to 
ensure that our rich agrarian heritage is maintained and that 
our children and grandchildren will enjoy the grandeur of 
America's vast open space.
    In closing, the best caretakers of America's land are the 
farm and ranch families who have owned and cared for it for 
generations. Once these families are displaced from their land, 
no amount of regulation or government spending can replace 
their productive stewardship of the land. Chairman Houghton's 
strong support of the American Farm and Ranch Protection Act 
ensures the nation's farmers and ranchers will maintain their 
important role in conserving America's open space our great 
agrarian tradition.

                                

    Chairman Houghton. Fine. Thanks, Mr. Miller.
    Mr. Coyne, would you like to ask a question?
    Mr. Coyne. Thank you, Mr. Chairman.
    Mr. Bartsch, given the brownfields time in existence, the 
legislation that was passed--that is, the tax incentive portion 
of it--and it has only been available for a year and a half 
now, could you tell us just what activities have been 
undertaken as a result of that to date?
    Mr. Bartsch. Well, about 20 or 25 projects have actually 
used the incentive. I think what is important, again, is the 
timing. Large-scale redevelopment of brownfield sites takes a 
long time. And when you start to introduce a new incentive into 
the mix, again, there is an education process. People need to 
understand how it would work, and why it would work, and what 
benefits it would bring.
    I think we have not had enough time to let that play 
through. There is more interest now. I think a good analogy to 
this is when Congress passed the rehabilitation tax credit for 
historic structures a number of years ago. That took a while, 
too, to get worked into the redevelopment process so that 
people could understand what would happen. But that has been 
very successful. And I think there is a lot of potential for 
the brownfield tax incentive to grow in usefullness in the same 
way.
    Mr. Coyne. So it takes a while to get geared up, and if 
there is not enough time allotted, before you know it, the 
program expires.
    Mr. Bartsch. The program will expire. What has happened now 
is more people are interested in it. But again, they are now 
looking at the fact that reuse projects can take a long time; 
there may be unforeseen delays. And they are just really 
worried that they are not going to get through completion 
before the expiration, and that will throw off their financial 
calculations for the project. And it just makes them a little 
nervous. The uncertainty makes them very concerned.
    Mr. Coyne. Thank you.
    Chairman Houghton. Thanks very much.
    Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman, and thanks to the 
panel for the good testimony. I would like to ask a few 
questions, if I might, about priorities and what might be the 
most cost-effective way to get at the same result, particularly 
Ms. Hocker and Mr. Dennis, with regard to land conservation and 
the various proposals that you talked about.
    As I heard your testimony, Mr. Dennis, you talk about three 
kinds of incentives. First, is I guess what you might call 
transfer or gift encouragement; somebody giving land that is 
being utilized for private purposes to a conservation easement, 
or actually selling the land to a conservation use, State, 
local, Federal Government, or non-profit.
    Second would be how to manage your own land without 
transferring it. And I think one of the interesting things 
about the Member testimony earlier that you may have heard was 
Mr. Gilchrest's comments about the Endangered Species Act and 
the disincentive that many landowners currently feel to 
protecting endangered species because they feel they will be 
over-regulated and burdened by having an endangered species on 
their land; rather than having the right incentive, which is to 
help protect that endangered species on the land.
    And then the third one was the notion of a death tax, as 
you said, and how to deal with sort of break-up prevention, so 
that when someone dies you do not have the land being broken 
up. And we also talked about that in terms of the farms with 
Mr. Lincoln.
    But my question to you is, could you prioritize those three 
for us? And maybe, if it is easier, prioritize the specific 
proposals that might be within those three in the order of 
which one has the maximum impact on what you are trying to 
achieve.
    Mr. Dennis. No matter how I answer that question, I am 
going to get in trouble.
    Mr. Portman. You are going to get in big trouble, yes.
    Mr. Dennis. Well, I will say----
    Mr. Portman. You can forget about H.R. 2880. I mean, I do 
not have a vested interest in this.
    Mr. Dennis. Well, I do not want to ingratiate myself with 
you, but that was----
    Mr. Portman. Do not bother.
    Mr. Dennis. We happen to feel that the exclusion of one-
half of the capital gain is at the top of the list.
    Mr. Portman. Do you really think that would be the most 
effective?
    Mr. Dennis. We went out to all of our people in the field 
who are in the land business, and we gave them a menu of 
different types of tax incentives. And we asked them to get 
back to us and rank them.
    Mr. Portman. Yes.
    Mr. Dennis. And that was right at the top of the list. 
Everyone put that at the top of the list.
    Mr. Portman. That was ahead of estate tax?
    Mr. Dennis. That was ahead of estate tax. And the reason 
was a couple of things. First of all--now, remember, these are 
people who are entrepreneurs out trying to acquire land--it is 
not a very expensive provision, and in this day and age, we 
have to be real sensitive to the revenue cost.
    Mr. Portman. Right.
    Mr. Dennis. And we felt that that provision gives us a 
competitive edge if we are out there negotiating for land, 
which is real simple. It allows you to beat someone else to 
that piece of property. And it is incredibly important to us.
    Mr. Portman. The 50-percent exclusion is adequate to create 
that competitive advantage?
    Mr. Dennis. Well, do you want to make a better offer? 
[Laughter.]
    Mr. Portman. Remember, we are trying to keep it 
inexpensive.
    Mr. Dennis. We feel good about the 50 percent. And we are 
not greedy. We just want a competitive edge. We really do feel 
it would make a big difference.
    Mr. Portman. But the price of the land is more competitive 
for you to purchase at that 50 percent. It still takes an 
intent on behalf of the seller to want to conserve the land.
    Mr. Dennis. Well, of course, when negotiating for the land, 
the first thing we would do is back down from the purchase 
price that 50 percent.
    Mr. Portman. Right.
    Mr. Dennis. And then work from there.
    Mr. Portman. Right.
    Mr. Dennis. And that way we would probably end up splitting 
the savings with the seller.
    Mr. Portman. Yes.
    Mr. Dennis. So we would be able to get the property at a 
discount. You know, this has been our experience in this 
business. So I am not too sure if that answers that. I do want 
to talk about some of the other provisions.
    Mr. Portman. Yes, sure.
    Mr. Dennis. Just to make sure you understand it.
    Mr. Portman. But that is important. And just back on one 
thing you said in your testimony, which I think I have talked 
to your group about, but one of the reasons we have pursued 
this, as compared to the deduction, is that a lot of people 
cannot use the deduction.
    Mr. Dennis. Yes.
    Mr. Portman. I mean, you have to have income to use the 
deduction. So we thought this might broaden the scope of who 
could be potentially interested in using it.
    Mr. Dennis. That is a very important part of it, too. There 
are not that many provisions in the Tax Code that are targeted 
to conservation tax incentives. The ones that we see used most 
often, of course, are the ones that relate to conservation 
easements and deductibility.
    Mr. Portman. Right.
    Mr. Dennis. And that does require income to shield. You 
have to have income. This provision is geared more for someone 
who does not have the ability to make a gift--the rancher or 
the farmer or the average person.
    Mr. Portman. Right.
    Mr. Dennis. We are working in rural communities, and that 
is the profile of the average seller of land.
    The other thing I did want to talk about is, when I say 
``death taxes,'' when I went out West, the minute I started 
talking about estate taxes, they looked at me and, ``What are 
you talking about?'' And they said, ``You mean death taxes.'' 
And I do feel lifting the exclusion on estate taxes would be 
very important.
    Mr. Portman. The exemption?
    Mr. Dennis. The exemption. Because in the ranching 
community, for example, the average rancher that I deal with in 
the Malpai region has--You talk about cash poor; these are 
people who go out and blade roads and drive schoolbuses to make 
ends meet. They do have a piece of land that is worth a 
considerable amount of money. And if they get hit with the 
estate taxes, that land is gone. So I happen to think raising 
that cap to 4 or 5 million dollars--or maybe even beyond that--
would be very important to that community.
    I also want to talk just briefly about tax-exempt bonds, a 
proposal that has been put forward.
    Mr. Portman. Yes.
    Mr. Dennis. It does not go far enough. We would love to be 
able to issue tax-exempt bonds to be used for conservation in 
general. Conservation is not just timber. I know that now I am 
reaching. That is very expensive. We understand that there is a 
revenue impact there.
    Mr. Portman. Yes.
    Mr. Dennis. But that is another provision we feel very 
strongly about.
    Mr. Portman. It has a much larger expense, interestingly, 
than the tax proposals we are talking about.
    Mr. Dennis. I am sorry?
    Mr. Portman. The cost to the Federal Treasury is much 
higher over the 5-year period, at least for the proposal, the 
Better America Bonds, that we have been talking about.
    Mr. Dennis. Yes. We have not run the numbers on that. I 
think other people have. But it would be considerably more 
expensive than the capital gains provision, for example.
    Mr. Portman. Well, thank you. Ms. Hocker, I am sorry, my 
time has expired, but thank you for the good work you are doing 
out there with all those land trusts.
    Chairman Houghton. Thank you.
    Mr. Hulshof.
    Mr. Hulshof. Thank you, Mr. Chairman.
    Mr. Lincoln, welcome. Welcome to all of you, but Mr. 
Lincoln especially. I want to talk just a little bit, and I 
want to respond really to a good point that you make on page 3 
regarding our discussion on, in fact, the $792 billion tax cut 
that was vetoed last week which included the death tax repeal.
    Just for informational purposes, you make an excellent 
point about the step-up in basis. And I had a lot of folks who 
talked to me at home about that over the August break. In fact, 
my family was just in exactly the same scenario as you put out 
in your written testimony; that is, my mother's mother passed 
away, my grandmother, and then passed along a piece of 
property. And of course, even though we are actively engaged in 
farming, we did not want to take that small piece of land. And 
so the sale or the rent of it--It is exactly as you said.
    I will just tell you that as the tradeoff, what we came up 
with was allowing that land to be subject to only capital gains 
tax rates, as opposed to the 37 to 55 percent on the estate 
tax. And that was sort of the tradeoff. Were this an ideal 
world, and were you and I kings for a day, we could get rid of 
not only the death tax, but the capital gains tax as well. But 
your point was well taken in your testimony.
    Mr. Dennis, what I would say to you is that, as Benjamin 
Franklin once said, the only two sure things in life are death 
and taxes. I do not think he meant them in that order, or that 
the Federal Government would combine those two traumatic events 
through the death tax; but we are working on it.
    What I do want to spend some time with--And Mr. Miller, I 
think probably I am going to pick on you a little bit. I do not 
know if you were here during the questions of the previous 
panel that I had regarding the Treasury Department's idea of 
Better America Bonds, and they wanted to mirror the QZABs. And 
I just do not see the proof in the pudding yet, as far as how 
those have been successful.
    Do you think--let me just ask your comment--do you think 
that the idea of Better America Bonds meets the objective of 
promoting smart growth?
    Mr. Miller. I think that it could be vastly improved, if 
that is the goal. If the goal is to stimulate brownfields 
redevelopment, that is OK, that is good, but that is not 
necessarily smart growth. One of the problems is that 
brownfields are not necessarily located in the smartest 
locations, and so you may be stimulating redevelopment of 
property that should not be developed if your concern is sprawl 
or your concern is the pattern of land use.
    Similarly, land conservation is not always a smart growth 
technique. I mean, in general, it is, but there is a difference 
between environmental quality improvements, park land creation, 
and smart growth. It requires a careful analysis of regional 
and local land use patterns, all the other things. And so 
targeting and having criteria that really provide targeting are 
a critically important element.
    Mr. Hulshof. Well, let me ask you, because you work at the 
local and you mentioned the regional level. Then what would you 
give us as guidance as the appropriate level of Federal 
involvement?
    Mr. Miller. Well, I think the Federal involvement, the 
incentives are good. I mean, it would be nice to have the 
Federal Government providing additional incentives to smart 
growth. So a more targeted Better America Bonds program could 
work, potentially.
    I think that the other thing that the Federal Government 
should look at is existing tax programs, to be sure that they 
are not encouraging the sprawl that they are then trying to 
correct. One of the things we have run into--and we are in an 
exurban area, just at the end--is the use of industrial 
development bond authority and sewage treatment plant bond 
authority to encourage sprawl. And those are something that I 
think needs to be reevaluated. Are we giving tax breaks for the 
right uses? That is one area.
    Another area is to look carefully--and this is not 
necessarily tax policy--where we put our infrastructure 
dollars. And I will just give you a quick example. In Virginia, 
the proposals for highway construction that would provide the 
infrastructure for sprawl are estimated at $70 billion in 
additional tax revenues over the next 20 years by the State. 
That is on top of the additional revenues provided by T-21 in 
the last Congress. So if we do not look carefully at those 
issues, something like the Better America Bonds is trying to 
offset a whole series of Federal policies that create more of a 
problem.
    Mr. Hulshof. As a last comment, maybe if you want to follow 
up--or any of you--our State legislature in Missouri recently 
enacted a bill that, especially as we see the development 
taking over--and Mr. Lincoln, as you mentioned, urban sprawl is 
getting closer to you--our State legislature made it 
appropriate for farms to be valued at the agricultural value 
for property tax purposes. And that was challenged. Our supreme 
court recently ruled in favor of the agriculturalists; and that 
is that it should be the lower property tax value.
    I do not know if that is something that should be done on 
an individual State legislature basis, or if it is something we 
can do. But I really do appreciate all of you and your input 
today. Thank you, Mr. Chairman.
    Chairman Houghton. Thank you very much, Mr. Hulshof.
    Mr. Weller.
    Mr. Weller. Thank you, Mr. Chairman. And the question I 
would like to put out there--and I think I will address it to 
Mr. Dennis with The Nature Conservancy; it is a group I have 
worked with on some initiatives back in Illinois--and 
particularly in the south suburbs in the State of Illinois, 
open space and farmland preservation particularly have been 
priorities over the last several years. We enacted the Illinois 
Land Conservation Act, redeveloping the Joliet Arsenal, setting 
aside 19,000 acres for the national tall grass prairie. And 
that doubled the amount of open space in Will County. Will 
County also passed a $50-million referendum for open space land 
acquisition this past fall, and Governor Ryan succeeded in 
convincing the State legislature to approve a $160-million 
bonding program for open space.
    The question I would like to ask of you--and if others on 
the panel would share your opinions--is, there is always a 
debate of how best to use those dollars. Do we purchase 
development rights, leave it in the hands of the local farmer 
to continue farming it but you purchase development rights so 
that they cannot subdivide it or develop it for commercial 
purposes? Or do you purchase the land outright? Taking it off 
the tax rolls, of course, is of great concern to the local 
school district in many cases, because of property taxes role 
when it comes to funding our local public schools.
    From your perspective, what is the best use of those 
resources? You have a limited amount of money, limited budget, 
limited number of tools available. What is the best approach to 
get the most efficient use of those resources to preserve open 
space and prime farmland?
    Mr. Dennis. That is a very good question. We at the 
Conservancy, any time we answer a question like that we go back 
to what our mission is. And our mission is preserving important 
habitats for fish and wildlife, and that is the starting point.
    The next thing we would do is we would look at that 
particular habitat or system and try to determine what are the 
threats, what are the stresses, to that particular habitat? And 
then we will develop strategies that respond to those stresses. 
And those strategies, if you are tying them to the stresses, if 
you are dealing with farmland, it may be that a no-development 
restriction may be the very best thing you could do with that 
property, and that is what you do.
    If you are dealing with a piece of property that has got 
the last known rookery on it or something, and it is a very 
fragile area, you may want to buy the property outright because 
that is the best way to control it.
    So what we would do is, we go through that analysis 
whenever we are talking about spending money--whether it is our 
money or an agency's money. What are you trying to protect? 
What are the stresses to what you are trying to protect? And 
then, what strategies do you develop? And that is what is going 
to drive whether you buy it outright, you lease it, you work on 
a management plan, or you negotiate for an easement on the 
property.
    Mr. Weller. Mr. Lincoln, what is the perspective of the 
Farm Bureau on that question?
    Mr. Lincoln. Well, I think when you consider the limited 
resources--We use purchase of development rights in New York, 
and I think Suffolk County on Long Island was probably one of 
the initial uses. And I would say it has been very effective 
there. And in other parts of New York, too, conservation 
easements are used, south of Rochester.
    But I think as my testimony--When you look at the overall 
impact and what causes farms to go out, estate taxes rank very 
high on that list. And that is why the American Farm Bureau--
which, as you know, the Farm Bureau is a grassroots 
organization, and through our county development, State 
development, policy development, and at the national level, 
estate taxes and capital gains, and the fact of when you have 
multi-family members who may have to sell part of that estate 
either to the other family members so the capital gains comes 
into play.
    But I think overall the best way to keep farms in business 
is to have them profitable. And that is why my final comment on 
the farm accounts to me makes a lot of sense, being able to set 
aside up to 20 percent of your income during a good year--
which, as a dairyman, most dairymen had a great year last year. 
You know, next year may not be.
    Mr. Weller. Sure. You know, Mr. Lincoln, of course, Kenny 
Hulshof, who just stepped away, has been leading the fight for 
those farm accounts. Unfortunately, the President vetoed those 
farm accounts when he vetoed our effort to lower taxes and 
simplify the Tax Code this past week.
    You know, your point about some of the initiatives, you 
know, one of my biggest disappointments--the Conservation 
Reserve Program. We talked about wildlife habitat and taking 
fragile farmland out of production that perhaps should not be 
in production. And this Congress authorized over 36-million 
acres for the Conservation Reserve, but they have only enrolled 
about 31 million. So that means there are 5-million acres of 
unused CRP that could be used to take fragile farmland out of 
production, create more wildlife habitat and, of course, 
preserve highly erosive farmland. And of course, when corn and 
soybean prices in Illinois are one-fourth lower than they 
should be, farmers are hurting. And of course, a lot of them 
are saying, ``Why do we not have this land taken out of 
production?'' And that is an important question, and we are 
still waiting for an answer from the Administration. Thank you, 
Mr. Chairman.
    Chairman Houghton. Thank you very much.
    Mr. Bartsch. May I add a quick comment on that, please?
    Chairman Houghton. Yes, go ahead.
    Mr. Bartsch. I think your question really shows how a lot 
of these incentives are really linked. Because the extent to 
which we bring back thousands of acres of brownfields using the 
expensing incentive or whatever, well, that really gives 
choices and options, and that may relieve some pressures on 
farmland that is subject to being used for new development.
    Chairman Houghton. Thank you. Thanks very much. We are sort 
of in a push for time, so I really appreciate your being part 
of this thing, and we will consider your testimony in all our 
deliberations. So I thank you very much.
    And I would like to ask the next panel to come up, if I 
could. This would be Hon. Rob McKenna, the Council Member of 
the King County Council in Seattle; Tom Spellmire, who is with 
the National Association of Conservation Districts in Ohio; 
John S. Gates, president of Center Point Properties in 
Illinois, on behalf of The Real Estate Roundtable (formerly 
National Realty Committee) and Thomas Tuchmann, principal and 
vice president of Resource Management, U.S. Forest Capital, in 
Portland, Oregon.
    Now, gentlemen, let me just make a quick statement here. 
You know, you have come a long way, and I really appreciate it, 
but we are going to end this meeting by 4 o'clock. We have got 
to. And so therefore, anything you can do to sort of condense 
those statements and hit the high points, so that we can get on 
to the questions, we would certainly appreciate it.
    So I would like to call on Mr. McKenna.

STATEMENT OF HON. ROB McKENNA, COUNCIL MEMBER, SIXTH DISTRICT, 
            KING COUNTY COUNCIL, SEATTLE, WASHINGTON

    Mr. McKenna. Thank you very much, Mr. Chairman. And I will 
try to set a good example for the entire panel by paraphrasing 
my comments. I thank you very much and the members for holding 
this hearing today. And I want to extend a special ``Thank 
You'' to Congresswoman Dunn, who is one of my constituents, and 
with whom I have worked closely on a number of issues of 
importance to King County, including H.R. 1863, the Community 
Forestry and Agriculture Conservation Act, which I am here to 
testify in support of today.
    H.R. 1863 is a powerful combination of tax-exempt 
financing, private capital, timber and agricultural harvesting 
using best management practices, in order to save working 
forests and farmland, while protecting private property rights, 
providing liquidity to landowners, and while respecting 
critical environmental values such as habitat conservation and 
water quality.
    H.R. 1863 would achieve those goals through the use of tax-
exempt revenue bonds issued by a private non-profit which would 
be repaid with revenues from the low-impact harvest of timber 
or agricultural products.
    H.R. 1863 is of great interest and importance to King 
County and to many parts of this country. King County is 2,200 
square miles in size, with a population of 1.7 million. The 
eastern third of the county is covered with rural working 
forest lands. But King County is also a crossroads of 
traditional manufacturing, such as Boeing and PACCAR, alongside 
software, biotechnology, and other high-tech companies such as 
Microsoft and Immunex.
    We have an abundance of natural resources that my 
constituents value very highly, just as they value the great 
economy and the job opportunities they have. But the two values 
of natural resources and economic growth have come into 
conflict to some extent. Over the last 25 years, 107,000 acres 
of forest land have been converted to development in the 
Seattle area in King County.
    We have taken a lot of steps locally to deal with that. We 
have spent over $200 million locally to acquire forest lands, 
habitats, and other sensitive areas. And we continue to spend 
millions of dollars a year for acquisition. But every year it 
becomes tougher, the challenge becomes greater.
    We are facing tremendous pressures to convert working 
corporate forest lands to non-forest uses such as rural forest 
residences. These are the 5- and 10- and 20-acre mini-estates 
that are increasingly in demand by the folks who are cashing in 
all those stock options.
    Second, we are trying to enhance water quality standards to 
comply with the Endangered Species Act listing of the Chinook 
and other anadromous fish.
    Third, the policy climate for forest protection in the 
Northwest is somewhat of a zero-sum mentality. And there is 
more conflict than there is cooperation frequently.
    And fourth, all levels of government and the philanthropic 
community can never come up with enough cash to buy all the 
land outright with government dollars and with charitable 
dollars. And so we have been looking for another tool that 
would allow us to preserve working forests, and also to 
preserve environmental values.
    And 1863 helps us do that. It is a simple concept. We would 
create a new ownership category, a non-profit which is private, 
which would provide an alternative to outright preservation, 
intensive timber production, and development. This private non-
profit would be required to exceed relevant environmental 
statutes and have a board makeup consisting of environmental 
representatives, large commercial landowners, and local 
government officials. They would work together, and would 
leverage scarce taxpayer dollars with this tax-exempt financing 
to generate hundreds of millions of dollars nationwide in 
investment capital, private capital, that could be used to 
acquire working forests and to keep those forests in 
production.
    We have been working in King County for the last 2 years 
testing this concept. We actually went out and put together 
three case studies using actual large tracts of land in 
cooperation with the commercial property owners. And what we 
found when we applied the tax-exempt and commercial lending 
rates to these three different parcels is that we can generate 
the cash flow to pay off both the principal and the interest on 
the bonds with the tax-exempt rates, even while only applying 
fairly light forest harvests.
    On the other hand, at taxable rates, you have to harvest at 
commercial rates of harvest in order to be able to repay the 
debt. So you end up with clear cuts and other fairly intensive 
commercial harvest practices.
    We have a special opportunity, I think, now as a country, 
and certainly in the Pacific Northwest, to keep forests in 
production, while also harvesting it in a sensitive way that 
protects the environment, harvesting it more lightly, but 
protecting those jobs, and ultimately protecting the open space 
because once the bonds are retired, we can choose not to 
harvest the land again.
    So I appreciate very much the opportunity to come and talk 
to you about 1863. It is a reasonable cost of $78 million over 
5 years that could protect hundreds of thousands of acres. And 
at that cost I think actually it would be significantly less 
expensive than the Better America Bonds, which are another good 
idea. So again, thank you. And thank you for allowing me to 
speak to you as a representative of local government.
    [The prepared statement follows:]

Statement of Hon. Rob McKenna, Council Member, Sixth District, King 
County Council, Seattle, Washington

    Mr. Chairman and members of the Subcommittee, my name is 
Rob McKenna. I represent the Sixth District on the Metropolitan 
King County Council in Washington State. Thank you for holding 
this hearing on the relationship between tax law and 
conservation. I would also like to extend a special thank you 
to Congresswoman Dunn with whom I have had the pleasure of 
working on many issues of importance to King County including 
H.R. 1863--The Community Forestry and Agriculture Conservation 
Act which I testify in support of today.
    King County is located in northwest Washington and includes 
both metropolitan Seattle and ``edge cities'' like Bellevue and 
Redmond which are home to hundreds of high tech companies such 
as Microsoft. At 2,200 square miles in area and with a 
population of 1.7 million, King County is one of the nation's 
largest counties. The eastern parts of the county include many 
rural and mountainous forestlands. My constituents care deeply 
about those forests. King County is a crossroads of traditional 
manufacturing industries such as Boeing and PACCAR alongside 
software, biotechnology and other high-tech companies. This 
powerful combination has resulted in explosive economic growth 
that has produced a high standard of living. King County also 
features an abundance of natural resources that provide a 
quality of life that continues to attract new residents. From 
Puget Sound in the west to the Cascade Mountains in the east, 
King County residents love their natural resources and 
environment.
    But, as recognized more and more in the press, this 
explosive growth has not come without its challenges. In the 
Seattle area, forestland has been reduced by approximately 
107,000 acres in the last 25 years. As the County continues to 
grow, the King County Council has worked to develop new tools 
that will continue to provide jobs for our constituents while 
managing growth in such a way that our quality-of-life is 
maintained. These tools have included a nationally recognized 
forestland, habitat and open space conservation program that 
has invested over $200 million in land acquisitions over the 
past three decades. These programs, coupled with philanthropic 
and state and federal technical and financial assistance, have 
helped us achieve some real gains in open space protection.
    Yet, so much more needs to be done, especially given the 
increased rate of growth in forested areas. The tougher 
challenges we face in the years ahead are driven by four 
primary factors.
    First, there are increasing pressures to convert working 
corporate forestlands to non-forest uses. These corporate 
forestlands sit between the Mount Baker-Snoqualmie National 
Forest to the East and the City of Seattle to the West. These 
lands have long served as an economic buffer for small rural 
forest -dependent communities and as an environmental buffer 
between the Cascade uplands and Puget Sound lowlands. However, 
as our population and the wealth of that population grows, we 
are seeing increasing development on the urban boundary and 
increasing fragmentation in rural areas as more and more 
citizens are interested in rural forest residences. We need to 
provide both green space and expansion in a mutually acceptable 
manner.
    Second, King County is facing unprecedented pressures to 
enhance water quality standards in response to the listing of 
anadromous fish under the Endangered Species Act. We are 
working hard to do this without the divisiveness that has 
occurred among various parties in the past. And we have, in 
fact, made some progress, adopting a Sensitive Areas Ordinance 
to govern development standards and Best Management Practices 
for our roads maintenance program, among other measures. Yet 
again, one of the keys to our success will be assuring that 
non-point water sources flowing from the county, state and 
national forests through our cities will meet water quality 
standards. The working forests buffer I just spoke about, with 
the right management regime, provide a very attractive 
environmental means to achieve our endangered species goals 
under the listings without creating stricter regulatory 
mandates or impacting private property rights.
    Third, the current policy climate, notwithstanding my 
explanation above, has been less than cooperative, especially 
when it comes to forestry issues. This has made it difficult to 
bring people together, especially when one party or another has 
a stake in the issue, but may not be in a decision-making role.
    Fourth, all levels of government and the philanthropic 
community just do not have the kind of funding that is needed, 
given other public policy needs, to achieve the level of 
conservation that so many of my constituents support. I know we 
are not alone and that local, state and federal entities share 
this challenge.
    So what do we do about it? Time is running out in King 
County. Mr. Chairman, and members of the Subcommittee, we 
desperately need you to support H.R. 1863--The Community 
Forestry and Agriculture Conservation Act because it is the 
only tool that will address the challenges above in a manner 
that is doable today.
    Community forestry and agriculture bonds will allow private 
non-profit entities to issue tax-exempt revenue bonds for 
conservation purposes if the forestland they buy will have a 
permanent conservation easement placed on it and if the 
management plan they approve exceeds relevant environmental 
laws. While the transactions are complex and must be 
professionally managed, the concept is simple and responds to 
the challenges I outlined above in the following ways:
     For the first time an ownership category--private 
non-profit--provides an alternative to outright preservation, 
intensive timber production, and development. A private non-
profit entity will have the philosophical and financial 
wherewithal to acquire large forested ownerships in an 
unfragmented state.
     The private non-profit will be required to exceed 
relevant environmental statutes and will have the board make-up 
and financial flexibility too not only meet the standards for 
anadromous fish protection, but exceed them if community 
economic objectives are met.
     For the fist time, environmentalists, industry, 
financial and local opinion leaders will have the opportunity 
to make decisions together regarding a large forested 
ownership.
     For the first time, a conservation entity will be 
able to leverage scarce taxpayer dollars with private 
investment to generate the large sums--tens to hundreds of 
millions of dollars--that are needed for large scale working 
forest protection.
    King County is so supportive of this concept that we have 
been working for the last two years to test its feasibility and 
to create a financially sound and environmentally worthy non-
profit in anticipation of using this tool.
    The feasibility analysis was completed by the County's 
Department of Natural Resources and tested both the financial 
and policy effectiveness of the tool. From a financial 
standpoint, we took actual data from corporate timberlands and 
applied three different forest management scenarios to those 
lands. Then we applied both tax-exempt and commercial lending 
rates to those scenarios to see if we could generate the cash 
flow to pay off the principal and interest on the bonds. We 
could, even under the lightest forest harvest. We also tested 
this tool with a wide range of constituents as well. While they 
stressed the need for accountability, they also were supportive 
of moving forward with forestland acquisitions.
    Last year the King County Council passed a resolution in 
support of the Congresswoman Dunn's Community Forestry and 
Agriculture Conservation Act. In June my colleague 
Councilmember Larry Phillips and I--as private citizens--joined 
two prominent conservationists and the University of 
Washington's forestry dean to create a non-profit in 
anticipation of taking advantage of community forestry bonds. 
We are working to identify an individual with financial 
experience to join the board and we are keeping a seat open in 
case a forestland seller would like a seat on the board. This 
will be quite a groups, with conservationists and landowners--
reflecting an array of philosophical and political beliefs--
joined together to manage forestlands. We eagerly wait for the 
time when we can move forward with a transaction.
    And time is running out. In the two years we have been 
working on this concept, more and more forestland has been 
converted and those lands that have not been converted are 
seeing their land values skyrocket. Even with tax-exempt rates, 
we still need to be able to service bond debt through 
sustainable forest harvests and the longer we wait, the more 
difficult it will be for us to achieve our goals. More 
importantly, the more pressing the challenges outlined earlier 
will become and the more costly those resolutions will become.
    Mr. Chairman and Members of the Subcommittee, we have had 
enough fighting about our forests. I urge you and your 
colleagues to provide us with a market -based conservation 
vehicle that doesn't require landowners or investors to leave 
money on the table to protect the environment. Please help us 
bring people together in support of our working forests. If 
not, I am afraid that we will be back in a more contentious 
setting that in the end will cost a lot more money and cause a 
lot more divisions.
    Thanks you for providing me with this opportunity to 
testify today and I would be pleased to answer any questions 
you may have.

                                

    Chairman Houghton. Thank you very much. You have been a 
great example. That is wonderful.
    Mr. Spellmire--Wait, wait just a minute. Excuse me. I am 
sorry. I want Mr. Portman to talk about you a little bit.
    Mr. Portman. Sorry, Mr. Spellmire. You need a brief 
introduction. This is a friend and constituent of mine, Mr. 
Chairman, from Ohio. And he is listed here as ``Thomas C. 
Spellmire, Legislative Committee, National Association of 
Conservation Districts.'' He has also, though, been very 
involved not only at the national level but the local and State 
level in these issues, and was a member of the Ohio Farm 
Preservation Task Force, and has been a good adviser to me and 
other local officials on preservation of farmland in Warren 
County and that area. So welcome, Mr. Spellmire.

     STATEMENT OF THOMAS C. SPELLMIRE, MEMBER, LEGISLATIVE 
  COMMITTEE, NATIONAL ASSOCIATION OF CONSERVATION DISTRICTS, 
                         LEBANON, OHIO

    Mr. Spellmire. Thank you, Mr. Portman. Mr. Chairman, 
Members of the Committee, my name is Thomas Spellmire. I am a 
farmer by occupation, from the State of Ohio. We currently farm 
about 2,400 acres. It is all leased property. We used to farm 
3,100 acres, but they have since built two successive ``Home-
arama'' sites on ground that we used to lease.
    I would like to cover two land use issues in my 
presentation here: farmland preservation and conservation 
practices and suggested changes to the Tax Code. Well, I am 
going to just start with the issue of farmland preservation. 
And in my opinion, three changes could be made with the IRS Tax 
Code that would give current and future owners of farmland more 
options.
    The first recommendation deals with the issue of unintended 
consequences of the current tax law and how addressing this 
issue would also address retirement issues and it would also 
aid in the transfer of farmland from one generation to the 
next, as well as encourage more land ownership by owner-
operators.
    My second recommendation deals with the issue of allowing 
an agricultural buyer of land with development value to bid 
more competitively for that land.
    The third recommendation deals with a proposal that would 
allow contributions from a larger sector of the U.S. population 
that I hear is doing very well to create opportunities for the 
agricultural sector, which seems to have been left out of the 
current economic boom.
    The first recommendation is for creation of a capital gains 
deferred tax account. Please note, this is a recommendation for 
deferred tax collection, not elimination of tax. What I am 
proposing here is merely deferring the collection of capital 
gains taxes to some later point in time.
    Under the current Tax Code, like-kind exchanges are exempt 
from capital gains taxes. If a tract of land is sold, the 
seller has so much time to reinvest the money in land to avoid 
capital gains taxes. The unintended consequence is that now you 
have more agricultural land being owned by individuals who have 
demonstrated a willingness to sell land for a non-agricultural 
use.
    A deferred capital gains tax would also aid in the transfer 
of farm land from one generation to the next, and allow for 
more owner-operators to actually own the land that they farm.
    My recommendation No. 2 is to increase the tax 
deductibility of gifts of conservation easements on land to 
charitable institutions and governments. Under the current Tax 
Code, the charitable contribution as a tax deduction is allowed 
if a conservation or agricultural easement is placed on the 
land and the easement is donated to a qualified organization. 
This is a donation that can be utilized by farmers, and allows 
them to bid more competitively for the purchase of land that 
has development potential but is not yet developed.
    If this tax deduction were increased by a factor of two or 
more, the cash value of this deduction would be more in line 
with the value of the deduction. This would then be a more 
viable option, and allow the agricultural bidder to bid more 
competitively.
    Recommendation No. 3 is creation of a tax deduction for 
contributions to build capital to fund link-deposit revolving 
loan funds. To encourage such contributions, the deduction 
should be 200 percent or more of the actual value of the 
contribution.
    I personally like the idea of low-interest loans on 
farmland in exchange for conservation and agricultural 
easements. This would allow those who wish to purchase land for 
agricultural use to bid more competitively. What I am proposing 
is the Federal Government providing the mechanism, through the 
use of an increased tax incentive, to allow land trusts and 
other non-profits dedicated to conservation to raise capital to 
fund link-deposit revolving loan funds.
    Now, moving on to conservation practices, this is a 
proposal to increase the allowable tax deduction for the cash 
expenses incurred during the installation of certain 
conservation practices, from 100 percent to 200 percent, or any 
percent greater than 100 percent.
    I have been a supervisor on my local conservation board of 
supervisors for the past 12 years. We now have an agricultural 
as well as a land developer customer base. These are two very 
different customer bases, but when it comes to conservation and 
land stewardship these two groups have some common ground.
    Both the agricultural community and the development 
community have a certain segment of their respective members 
that truly embrace sound conservation practices on the land. 
These are profitable entities, and a tax incentive would 
further increase the survivability of these companies. I 
believe we would all benefit if more companies and individuals 
with a conservation ethic were given an extra tax incentive to 
make them more competitive.
    I would like to close by again thanking the Subcommittee 
for inviting me here today. I would like to thank Congressman 
Rob Portman for his support in encouraging this hearing. And 
finally, I would like to thank the Chairman for holding this 
hearing, because I feel these issues greatly impact our 
standard of living in this country. Thank you.
    [The prepared statement follows:]

Statement of Thomas C. Spellmire, Member, Legislative Committee, 
National Association of Conservation Districts, Lebanon, Ohio

    Mr. Chairman, Members of the Committee, my name is Tom 
Spellmire. I am a farmer by occupation from the State of Ohio. 
I have for the past twelve years served voluntarily on my local 
Soil and Water Board of Supervisors and the local, state, and 
national RC&D Council. I had the opportunity to serve on then 
Governor George Voinovich's Farmland Preservation Task force of 
1996-1997. I currently am a member of the National Association 
of Conservation Districts Legislative Committee.
    I will cover two land-use issues in my presentation. 
Farmland Preservation and Conservation practices and suggested 
changes to the tax code.
    Allow me to start with the issue of Farmland Preservation. 
In my opinion three changes could be made to the IRS Tax Code 
that would give current and future owners of farmland more 
options. The first recommendation deals with the issue of 
unintended consequences of current tax law and how a change 
would address retirement issues and aid in the transfer of 
farmland from one generation to the next, as well as encourage 
more land ownership by owner-operators. The second 
recommendation deals with the issue of allowing an agricultural 
buyer of land with development value to bid more competitively. 
The third recommendation is a proposal that would allow 
contributions from the larger sector of the United States 
population that is doing very well to create opportunities for 
the agricultural sector which seems to have been left out of 
this current economic boom.
 Recommendation No. 1--Creation of Capital Gains Deferred Tax Accounts.
    Please note this recommendation is for a deferred tax 
collection, not an elimination of tax. What I am proposing here 
is merely deferring the collection of capital gains taxes to 
some later point in time. This would help deal with possibly 
unintended consequences of the current tax code.
    Under the current tax code like-kind exchanges are exempt 
from capital gains taxes. I am sure that some would argue, and 
rightly so, that this enables landowners who become surrounded 
by urban development to sell their property for development and 
relocate their farm to another location using the tax-free 
like-kind exchange option. One problem with this scenario is 
that in some cases when the landowner goes to buy land in 
another location they are bidding just to avoid paying capital 
gains taxes. This gives them the ability to out-bid other 
potential buyers of the land. These buyers are more than 
willing to bid more than agricultural value for the property 
just to avoid paying capital gains tax. Once the sale is 
complete at the new location another potential scenario 
evolves. These new landowners in a farming community now have 
ties to the development community and view their purchases a 
little differently than an agricultural buyer. Are these new 
landowners really farmers or are they more accurately land 
speculators who happen to farm? You now have more agricultural 
land being owned by individuals who have demonstrated a 
willingness to sell land for a non-agricultural use.
    It is this willingness to allow land to be converted to 
non-agricultural use that fuels the attitude that the best way 
a community can help its farming sector is to create the right 
atmosphere for development to non-agricultural use. When 
landowners with this attitude are approached by developers the 
cycle repeats itself over and over thus this desire to avoid 
capital gains taxes has created the unintended consequence of 
contributing to urban sprawl. Those who had intended to 
purchase the land and keep it in agriculture are very much 
overwhelmed by this whole process. A process that was triggered 
by an individuals desire to avoid capital gains taxes.
    I am not proposing doing away with like-kind exchanges but 
rather creating another option for sellers of land subject to 
capital gains tax. A capital gains deferred tax account fund 
could be a viable investment option for a seller of land. The 
seller would deposit the proceeds from the sale of the land 
into the qualified fund. The investor would be subject to 
ordinary income tax rates on ``interest'' earned and withdrawn 
from the fund and subject to capital gains rates on any 
``principal'' withdrawn. Thus, the tax on the sale merely would 
be deferred.
    Another scenario that demonstrates the need for a capital 
gains deferred tax account is that farmers who are nearing 
retirement may need to sell their farm to provide retirement 
income. Unlike other people who build up a retirement nest egg 
and are able to withdraw retirement funds over a long period of 
time (and therefore defer the payment of tax on that retirement 
nest egg), such farmers are forced with an immediate capital 
gains tax. Under current tax law, a retiring farmer cannot 
practically utilize the like-kind exchange provisions of the 
Internal Revenue Code, because reinvesting in land does not 
meet their retirement needs.
    Again, incentives could be implemented by amending the 
existing like-kind exchange provisions of the tax law to allow 
anyone selling real estate to defer payment of tax if sale 
proceeds are invested in a qualified fund. The investor in the 
fund could select from various payment options so that the 
investor would be taxed on payments from the fund when 
received. The investor would be subject to ordinary income tax 
rates on ``interest'' earned and withdrawn from the fund and 
subject to capital gains rates on any ``principal'' withdrawn. 
Thus, the tax on the sale merely would be deferred. Also, this 
would provide a mechanism that will specifically address the 
needs for retirement income of a farmer nearing retirement. 
This would allow a farmer to utilize the full value of the sale 
price of the farm to fund their retirement rather then the 
current system of after tax value. If the tax were deferred 
this would allow a landowner to seriously consider a bid that 
may reflect the agricultural value rather then be forced to 
consider only development bids knowing that the sale proceeds 
are subject to capital gains taxes. A deferred capital gains 
tax would also aid in the transfer of farmland from one 
generation to the next and allow for more owner-operators to 
actually own the land they farm.
   Recommendation No. 2--Increase the Tax Deductibility of Gifts of 
     Conservation Easements on Land to Charitable Institutions and 
                              Governments.
    Under the current tax code, a charitable contribution tax 
deduction is allowed if a conservation or agricultural easement 
is placed on land and the easement donated to a qualified 
organization. The amount of the tax deduction is the difference 
between the appraised fair market value and the agricultural 
value. This deduction is limited to no more than 50 percent of 
adjusted gross income per year but can be spread out over a 
period of up to five years. The actual cash value of this 
deduction is dependent on the tax bracket rate of the 
individual multiplied by the value of the deduction. This is a 
tax deduction that can be utilized by farmers and others so as 
to allow them to bid more competitively for the purchase of 
land that has development potential but not yet developed. The 
inequity that I see is in a scenario when a farmer is bidding 
against someone taking advantage of the like-kind exchange 
option of capital gains the advantage goes to like-kind 
exchanges. In this scenario an individual utilizing the like-
kind exchange option can bid 20 percent higher for the land 
with no restrictions on the land use. For the sake of example 
this 20 percent is also the difference between the fair market 
value and the agricultural value. The farmer cannot bid as 
competitively because his tax incentive is limited to his tax 
rate times the value of the deduction. If this tax deduction 
were increased by a factor of two or more the cash value of the 
deduction would be more in line with the value of the 
deduction. This would then be a more viable option and allow 
the agricultural bidder to bid more competitively. This is 
another tool that would also aid in the transfer of farmland 
from one generation to the next and allow for more owner-
operators to actually own the land they farm.
Recommendation No. 3--Creation of a Tax Deduction for Contributions to 
   Build Capital to Fund Link-Deposit Loan Funds. To Encourage Such 
Contributions the Deduction Should be 200 Percent or More of the Value 
                          of the Contribution.
    Allow me to explain by starting with some background 
information first.
    Low interest loans on farmland in exchange for conservation 
or agricultural easements would allow those who wish to 
purchase land for agricultural use to bid more competitively. 
The federal government does not have a very good track record 
when it comes to administering low interest loan programs in 
the agricultural sector. What I am proposing is the federal 
government providing the mechanism through the use of an 
increased tax incentive to allow Land Trusts and other non-
profits dedicated to conservation to raise capital to fund 
link-deposit revolving loan funds. Contributions to non-profits 
are currently tax deductible so this is a proposal to increase 
the incentive by allowing the contributions to be deducted at 
more than face value to qualified non-profits. The Land-Trusts 
and other non-profits would be required to enter into link-
deposit agreements with various financial institutions and 
banks. The banks would agree to administer the loan funds for a 
fee. This would mean that it is the bank that determines the 
credit-worthiness of potential borrowers not the non-profits. 
In exchange for the fee the bank would guarantee the principal 
amount and a nominal return on the deposit to the non-profits. 
The liability for any delinquent loans would be the bank's 
responsibility. The loan funds deposited by the non-profits 
would be secured by the financial security of the bank. The 
non-profits could receive a nominal return on the fund to 
provide operating capital. The Land-Trusts and non-profits 
would set the overall parameters of the loan program and be 
responsible for holding the conservation or agricultural 
easements. Under this scenario if the non-profit agreed to a 1 
percent return on capital and the bank agreed to a 2 percent 
administrative fee the farmer could borrow the funds at a 3 
percent interest rate. This would allow the farmer to bid more 
competitively for land to purchase and keep in agricultural 
production. This would also allow the sons and daughters of 
retiring farmers to purchase the family farm for a price that 
allows the older generation to fund their retirement and the 
younger generation to service the loan from the proceeds from 
the farm. This is another tool that would also aid in the 
transfer of farmland from one generation to the next and allow 
for more owner-operators to actually own the land they farm.

Conservation and Land Stewardship Issues and the IRS Tax Code

    This is a proposal to increase the allowable tax deduction 
for the cash expenses incurred during the installation of 
certain conservation practices from 100 percent to 200 percent 
or any percent greater than 100 percent. Again, allow me to 
start with some background information. Nationally Conservation 
Districts have a long tradition of administering voluntary 
conservation programs mainly targeted at the agricultural 
community. The Natural Resource Conservation Service provides 
the technical expertise for these voluntary measures. Some 
agricultural producers do not consider these to be voluntary 
since some of these are required for participation in USDA 
commodity programs. In more recent history some Conservation 
Districts have been administering local construction site 
erosion control measures. These measures usually fall under the 
heading of urban sediment control measures and have been 
adapted by their perspective counties. These are not voluntary 
conservation measures and are targeted at land developers. I 
have been a supervisor on my local Conservation Board of 
Supervisors for the past twelve years. During that time our 
district has added the element of administration of urban 
sediment and erosion control regulations for our county. We now 
have an agricultural as well as a non-agricultural customer 
base. These are two very different customer bases but when it 
comes to conservation and land stewardship these two groups 
have some common ground. Both the agricultural community and 
the development community have a certain segment of their 
respective members that truly embrace sound conservation 
practices on the land. There are a number of individuals and 
companies that project the image that they have incorporated 
conservation and land stewardship into their vision statements. 
These are profitable entities and a tax incentive would further 
increase the survivability of these companies. I believe we all 
would benefit if more companies and individuals with a 
conservation ethic were given an extra tax incentive to make 
them more competitive. For some reason people respond to tax 
deduction incentives disproportionately to the actual cash 
value and I believe now is a good time to utilize this option 
to promote conservation and land stewardship. A tax incentive 
would encourage more conservation practices to be implemented. 
It would also encourage more research and development into more 
efficient ways to meet conservation objectives. It is my 
understanding that the United States now has a budget surplus 
and at the same time Congress is trying to operate under the 
budget caps. By utilizing the tax code we would in effect be 
increasing the expenditures for conservation practices and at 
the same time Congress could operate under the budget caps. By 
initiating such a change to the IRS tax code the Conservation 
Districts efforts to initiate and implement conservation 
practices would be much easier.
    I would like to close by again thanking the subcommittee 
for inviting me here today. I would like to thank Congressman 
Rob Portman for his support in encouraging this hearing. 
Finally, I would like to thank Chairman Amo Houghton for 
holding this hearing for these are issues that greatly impact 
our standard of living in this great country. Again, Thank You 
for giving me this opportunity.

                                

    Chairman Houghton. Thank you very much, Mr. Spellmire.
    Mr. Gates.

STATEMENT OF JOHN S. GATES, JR., PRESIDENT AND CHIEF EXECUTIVE 
   OFFICER, CENTERPOINT PROPERTIES, OAK BROOK, ILLINOIS, AND 
               MEMBER, THE REAL ESTATE ROUNDTABLE

    Mr. Gates. Mr. Chairman and Members of the Subcommittee, my 
name is John Gates. I am president and chief executive officer 
of Center Point Properties, which trades on the New York Stock 
Exchange. I am here today on behalf of The Real Estate 
Roundtable, and am joined in this by eight other national real 
estate organizations.
    Center Point Properties has a portfolio of more than 30 
million square feet of industrial property in Chicago, making 
us by far the largest owner and developer of industrial 
property in the Nation's largest industrial property market. We 
are quite experienced in inner city and existing community 
redevelopment.
    And redevelopment of existing sites is an important 
component of any community's growth and development plan. 
However, several Federal tax and non-tax policies are very 
serious impediments to redevelopment; particularly the 
redevelopment of the brownfield sites.
    The U.S. Conference of mayors currently estimates that 
there are over 400,000 brownfield sites across the Nation. 
Development of these sites would help restore many blighted 
areas, create jobs where unemployment is high, and ease 
pressure to develop beyond the fringes of our existing 
communities. Small urban centered businesses often benefit most 
directly by this type of redevelopment.
    Many brownfields properties are located in inner cities, 
precisely where many businesses currently want to be. The 
economics are right; critical infrastructure, including 
existing transportation resources, is already in place; and the 
work force is in close proximity.
    I know that Congressman Weller is very aware of these 
dynamics, because he has played an enormous role in initiating 
and helping Center Point to work through the Byzantine Federal 
rules and policies necessary to recycle the contaminated and 
now dormant Joliet Military Arsenal into a 25,000-acre national 
park, veterans cemetery and, adjacent to it, a 2,000-acre 
transportation, manufacturing, and distribution complex.
    Unfortunately, while many of these sites have great 
potential, they remain a province of Federal policies such as 
Superfund that perpetuate the legacy of urban decay by 
inhibiting the very kinds of investments our company and many 
others like us are in the business to make.
    The potential of open-ended Superfund liability for 
prospective purchasers of brownfields, no matter how remote, is 
an imposing Federal impediment to brownfields redevelopment, 
and often a deal killer. If Federal policies were changed so 
that the potential liability for would-be purchasers would 
become clearer, the real estate community would be far more 
ready, willing, and able to invest private capital in 
brownfields redevelopment. Additionally, we need more certainty 
that clean-up decisions made at the state level are also 
recognized as final determination under Federal law.
    With respect to tax policies affecting redevelopment, it is 
important to focus on current tax treatment of environmental 
remediation costs. These costs primarily involve brownfields, 
but also 
include clean-up for leaking underground storage tanks, 
asbestos removal, and lead-based paint abatement.
    Current law generally requires that clean-up costs be 
capitalized and added to the basis of the asset, which in most 
cases is the land. Since the land is not depreciable, these 
costs cannot be recovered unless the property is sold. This 
discourages long-term ownership and long-term investment. 
Recognizing the burden that this tax treatment imposes, 
Congress recently enacted an important exception for 
Empowerment Zones, Enterprise Zones, and certain targeted high-
poverty areas, that allows the costs to be deducted in the year 
that they are incurred.
    We are pleased that many Members of this Committee 
recognized what a serious impediment the tax treatment of 
environmental remediation costs is to clean-up and 
redevelopment. Mr. Weller's bill, H.R. 997, is particularly 
notable, because it would allow the immediate expensing of up 
to $500,000 of remediation costs, and a 5-year amortization of 
costs exceeding that amount. This approach would provide 
meaningful cost recovery, particularly to smaller redevelopment 
projects; yet is measured enough so as not to stimulate tax-
driven development.
    There are various other types of impediments to 
redevelopment, including the current depreciation rules on the 
depreciation of lease-hold improvements and the requirement 
that demolition costs must be capitalized.
    In conclusion, we would urge Congress to act to remove 
Federal policies that are impediments to redevelopment. 
Brownfields remediation and redevelopment will particularly 
benefit if the dual impediments of Superfund liability and 
capitalized cost treatment are removed.
    The result will be the injection of new capital into 
rehabilitation projects. Many small urban center businesses 
will benefit, resulting in substantial job creation and 
economic revitalization. Also, the viability of existing space 
will improve, and ease the pressure to develop greenfields, 
allowing for the preservation of far more open space. Thank you 
very much.
    [The prepared statement follows:]

Statement of John S. Gates, Jr., President and Chief Executive Officer, 
CenterPoint Properties, Oak Brook, Illinois, and Member, The Real 
Estate Roundtable

                              Introduction
    Mr. Chairman and Members of the Subcommittee, my name is 
John Gates. I am President and CEO of the CenterPoint 
Properties, a Chicago-based real estate investment trust, or 
REIT, publicly traded on the New York Stock Exchange. I am here 
today on behalf of The Real Estate Roundtable. The Real Estate 
Roundtable is the successor to the National Realty Committee, 
an industry organization which has advocated economically based 
real estate tax policies for three decades. Joining The Real 
Estate Roundtable in these comments is the American Seniors 
Housing Association; Building Owners and Managers Association, 
International; International Council of Shopping Centers; 
National Apartment Association; National Association of 
Industrial and Office Properties; National Association 
Realtors; National Association of Real Estate Investment 
Trusts; and National Multi Housing Council.
    CenterPoint Properties is metropolitan Chicago's largest 
owner of industrial property. The Chicago region has more than 
1.2 billion square feet of industrial property, making it the 
nation's largest and most diverse industrial property market.
    Centerpoint Properties and a number of other members of the 
real estate organizations joining these comments, have 
substantial experience with environmental remediation and 
redeveloping brownfields. Several federal tax and non-tax 
issues play a role in brownfields redevelopment and 
redevelopment in general.
                 Federal Policies Impede Redevelopment
    In our view, Congress and federal agencies should reform 
those laws and policies that impede the abilities of states and 
local communities to develop and grow as they deem in their own 
best interests. Redevelopment of existing sites and properties 
is an important component of any community's development plans. 
A number of federal policies--including federal tax policies--
are impediments to redevelopment and other forms of so called 
``smart growth.''
    Brownfields remediation is a highly visible area where 
federal policies are hindering redevelopment where it is often 
needed most. The U.S. Conference of Mayors estimates that there 
are over 400,000 brownfields sites across the country. 
Development of these sites would help restore many blighted 
areas, create jobs where unemployment is high and ease pressure 
to develop beyond the fringes of communities. Small, urban 
centered businesses often benefit most directly by this 
redevelopment.
    Many brownfields properties are located in inner cities--
precisely where many businesses want to be. The economics are 
often right. Critical infrastructure, including transportation, 
is already in place and the workforce is in close proximity. I 
know Congressman Weller is very aware of these dynamics because 
he has played an invaluable role in helping CenterPoint work 
through the Byzantine federal rules and policies necessary to 
recycle the now dormant Joliet military arsenal into a thriving 
economic development.
    Unfortunately, while many of these sites have great 
potential, they remain the province of federal policies, such 
as Superfund, that perpetuate a legacy of urban decay by 
inhibiting the very kinds of investments our company and many 
others are in business to make.
    The potential of open-ended Superfund liability for 
prospective purchasers of brownfields--no matter how remote--is 
an imposing federal impediment to brownfields redevelopment and 
often a deal killer. If federal policies were changed so that 
the potential liability of would be purchasers became clearer, 
the real estate community would be far more ready, willing and 
able to invest private capital in brownfields redevelopment. 
Additionally, we need more certainty that cleanup decisions 
made at the state level are also recognized as final 
determinations under federal law.
    To that end, we urge Congress to swiftly enact the kinds of 
reforms contained in H.R. 1300--the bipartisan Superfund bill 
sponsored by Congressman Boehlert and recently passed out of 
the House Transportation Committee 69 to 2. We also support the 
efforts of Congressman Greenwood to advance similar legislation 
in the Commerce Committee.
     Proper Federal Tax Policies Can Aid Redevelopment of Existing 
                               Properties
    With respect to tax policies affecting redevelopment, it is 
important to focus in the current tax treatment of 
environmental remediation costs. These costs primarily involve 
brownfields but also include clean up for leaking underground 
storage tanks, asbestos removal and lead based paint 
treatments.
    Current law generally requires that clean up costs be 
capitalized and added to the basis of the asset--which in many 
cases is land. Since land is not depreciable, these costs 
cannot be recovered until and unless the property is sold. 
Recognizing the burden that this tax treatment imposes, 
Congress recently enacted an important exception for 
contaminated sites in empowerment zones or certain targeted 
high poverty areas. In those cases, the costs may be deducted 
in the year they are incurred.
    We are pleased that so many Members of this committee 
recognize what a serious impediment the tax treatment of 
environmental remediation costs is to clean up and 
redevelopment. Mr. Weller's bill, H.R. 997, is particularly 
notable because it would allow immediate expensing of the first 
$500,000 of remediation costs and a 5 year amortization of 
costs exceeding that amount. This approach would provide 
meaningful cost recovery, particularly to smaller redevelopment 
projects, yet is measured enough so as not to stimulate tax 
driven development. We also applaud Mrs. Johnson's efforts in 
the recently vetoed Taxpayer Refund and Relief Act of 1999 to 
broaden the definition of brownfields qualifying for 
deductibility treatment under Section 198. Further, we consider 
H.R. 1630, a bill sponsored by Mr. Coyne and Mr. Rangel to make 
permanent the current law ability to deduct remediation 
expenses in empowerment zones, important and support its 
passage.
    Other tax impediments to redevelopment include 39 year 
depreciation of leasehold improvements and the capitalization 
of demolition costs. We urge the immediate enactment of H.R. 
844, Mr. Shaw's bill to change the depreciation treatment for 
leasehold improvements to 10 years. It is cosponsored by almost 
every member of the Ways and Means Committee and would more 
closely align the tax depreciation of the improvements with the 
economics of the lease transaction. This would help keep 
buildings modern and ease the pressure to develop new sites. 
Mr. Neal and Mr. English, the co-chairs of the Real Estate 
Caucus, have been particularly supportive of this bill.
    Demolition can be an expensive cost component of a 
redevelopment project. Similar to environmental remediation 
costs, demolition costs must be capitalized to the land and 
this unfavorable tax treatment is an impediment to 
redevelopment. We believe demolition costs for non-historic 
structures costs should, at a minimum, be added to the basis of 
the building and depreciated. Mrs. Johnson has been supportive 
in this area and we look forward to working with her and other 
Members of the Committee on this issue.
                               Conclusion
    In conclusion, we urge Congress to act to remove federal 
policies that are impediments to redevelopment. Brownfields 
remediation and redevelopment will particularly benefit if the 
dual impediments of Superfund liability and capitalized cost 
treatment are removed. The result will be the injection of new 
capital into rehabilitation projects. Many small, urban 
centered businesses will benefit resulting in substantial job 
creation and economic revitalization. Also, the viability of 
existing space will improve and ease the pressure to develop 
``greenfields'' allowing for the preservation of more open 
space.

                                

    Chairman Houghton. Thank you so much, Mr. Gates.
    Mr. Tuchmann.

STATEMENT OF E. THOMAS TUCHMANN, PRINCIPAL AND VICE PRESIDENT, 
  RESOURCE MANAGEMENT AND ENVIRONMENTAL AFFAIRS, U.S. FOREST 
                 CAPITAL, LP, PORTLAND, OREGON

    Mr. Tuchmann. Thank you, Mr. Chairman, and thank you, 
Members of the Subcommittee, for having this hearing today. And 
a special ``Thank You'' to Congresswoman Dunn and Congressman 
Tanner for your leadership on the Community Forestry and 
Agriculture Conservation Act and rural forestry and natural 
resource issues.
    It is late, and I am last, so I will stick to three points. 
No. 1, there urgent policy issues that create a foundation for 
this discussion today on the minutia related to tax policy. And 
these issues relate to folks with strong values regarding 
private property rights, resource management, and resource 
protection. That is tearing at the fabric of rural communities 
throughout the Nation.
    No. 2, we have a real restructuring of the forest products 
industry throughout this country. It is not driven by 
environmental issues. It is actually driven by business 
decisions. 10.6 million acres have been sold, or are under 
contract domestically over the last 1\1/2\ years. That compares 
to about 500,000 acres historically. This high disposition 
rate, is being driven by Wall Street demanding higher rates of 
return from commercial forest lands.
    The bottom line on this is, those lands are going into more 
intensive forest management at a time when more conservation is 
being demanded. And it establishes incentives for those forests 
to be fragmented to non-forest uses.
    So what do we do about this? And that brings me to my third 
point. Congresswoman Dunn and Congressman Tanner, along with 
your colleagues, have introduced the Community Forestry and 
Agriculture Conservation Act. The Act allows, as Mr. McKenna 
said, the establishment of non-profit private organizations to 
be established with environmental, industry, financial, and 
other opinion leaders from communities. The non-profits work to 
develop management plans for forest lands; they can acquire by 
issuing tax exempt debt through private marketplace at very low 
costs of capital. Tax exempt debt will provide great 
conservation benefits at very low cost to the taxpayer. It is a 
win-win, and it is one we think whose time has come.
    Our company is working with communities across the country, 
from King County with Mr. McKenna to Mendocino County, which is 
home of the Headwaters Forest--which many of you have heard 
about--to Jacksonville, Florida. And we have also spoken with 
folks in Tennessee, for example, and New England, as well. 
Throughout the country we have seen a new demand for 
conservation-related provisions that this Committee can play a 
large role in helping us achieve.
    We urge you to pass H.R. 1863--The Community Forest and 
Agriculture Conservation Act.
    I would be happy to answer any questions you might have.
    [The prepared statement follows:]

Statement of E. Thomas Tuchmann, Principal and Vice President, Resource 
Management and Environmental Affairs, U.S. Forest Capital, LP, 
Portland, Oregon

    Mr. Chairman and Members of the Subcommittee, my name is 
Tom Tuchmann, Principal and Vice President of Resource 
Management and Environmental Affairs with U.S. Forest Capital, 
LP. I want to thank you for your leadership in holding this 
hearing on the impact of tax law on land use, conservation and 
preservation. I would also like extend a special thanks to 
Congresswoman Dunn, along with Congressmen Tanner, Herger and 
Matsui, whose strong leadership on this issue have allowed 
communities from Florida to Washington to explore new ways to 
protect their environment and help stabilize rural forest-
dependent communities. Your interest in developing new tools 
that will bring people together on these difficult 
environmental issues is sorely needed and greatly appreciated. 
I am honored to appear before you to testify in support of H.R. 
1863, The Community Forestry and Agriculture Conservation Act 
of 1999.
    By way of background, U.S. Forest Capital is a forestland 
investment services company servicing commercial and 
conservation landowners in acquisitions and dispositions, 
organizational development and resource management, and 
environmental affairs. Our company's expertise in the tax-
exempt bond and capital markets, together with experience in 
natural resource policy, management and forest economics, has 
attracted us to innovative financial tools like the tax-exempt 
revenue bond concept being considered by this Committee.
                           Conservation Today
    It is no secret that forestland conservation is a popular 
but often controversial subject that inspires passionate debate 
among people. This debate began in earnest in the 1870s and 
continues 130 years later. At issue then as it is today, is the 
amount of land that should be publicly protected and the 
management intensity that should be allowed on private forests. 
Over the years, local, state, and federal governments have 
created public policy remedies that recognize conservation. 
These conservation programs are supported through: the tax 
code; federal regulatory, financial and technical assistance 
programs; state and local zoning and land use programs; and, 
state and local general obligation bond authorizations.
    One hundred and thirty years of policy making have, thus, 
created a mosaic of land ownership patterns and land ownership 
objectives. While some may disagree, I believe that this mosaic 
is one of our nation's greatest assets. From commercially 
managed forests which provide products that people demand to 
our National Park and Wilderness systems that protect special 
places for their ecological and spiritual values, Americans 
enjoy unprecedented environmental and economic values.
    Few would argue with the successful legacy of these 
efforts. Yet, governmental and philanthropic funding sources 
are limited at best, and regulatory efforts are often 
controversial and entail difficult tradeoffs with private 
property rights. Moreover, these programs, in our view, do not 
address one of the most pressing conservation needs of the next 
century; namely, halting the fragmentation of working forests 
throughout the nation and helping rural forest-based economies 
compete with capital investments that favor pavement over 
conservation. The challenge has been to develop new win-win 
conservation tools that:
     Create real conservation gains on private working 
forests;
     Do not require further governmental regulation;
     Protect property rights;
     Sustain rural employment; and,
     Provide cost efficient solutions for investors, 
landowners and governments.
                           Conservation Need
    Fragmentation--Forest fragmentation and conversion to non-
forest uses is taking place at alarming rates. For example, 
according to American Forests, a national conservation group, 
107 acres or 50 percent of the Seattle, Washington, area has 
been converted to non-forest uses since 1973. In the Baltimore-
Washington corridor, forestland has declined by 265,000 acres 
or 32 percent.
    While conversion lands must be allocated for economic 
growth, this growth should also be balanced with natural 
resource conservation in a manner that protects both our 
environment and our rural natural resource dependent economies. 
Unfortunately, current programs do not provide the tools to 
generate the financial resources to manage fragmentation in a 
politically acceptable manner. Clearly, we should be able to 
generate a mutually acceptable way to keep working forests 
working. Meaning, those private forests that have been 
intensively managed for commercial products in the past will be 
protected in their forested condition in the future, along with 
the water quality and recreational and employment 
opportunities.
    Forestland Dispositions--Dramatic changes taking place in 
the integrated forest product and pulp and paper industries 
create both a new need and opportunity for conservation-related 
forestland transactions. Historically, the forest products 
industry owned their forestlands as standing inventory to 
supply raw material for mills. As such, companies rarely valued 
these forests for their pure investment potential. Since the 
mid-1980s, this perspective has changed as pension funds and 
others investors have bought and managed forestlands to 
diversify their investment portfolio and reap their independent 
economic value. Their successes--returns on investment 
approaching 20 percent--and paper stocks' poor performance--in 
the low single digits--have not gone unnoticed on Wall Street. 
Thus, since 1997, more than 10.6 million acres of forestland 
have either sold or are currently under contract for sale 
nationwide. The combined value of these lands is approximately 
$6 billion. Over the past eighteen months alone, 8.7 million 
acres of forestland have either sold or are approaching sale. 
And these are only transactions of $50 million or greater.
    U.S. Forest Capital expects the fundamentals that drive 
these forestland dispositions to remain strong for the next 
five years. Moreover, we expect that many of the 10.6 million 
acres that have been sold since 1997 will be refinanced and/or 
carved out for real estate disposition. In either case, the 
financial pressures on some of these lands could trigger 
significant pressure to increase harvest or further fragment 
the existing domestic forestland base.
                Community Forestry and Agriculture Bonds
    People continue to debate how much forestland should be 
protected and how much should be commercially managed. We 
believe one land ownership category that could bring people 
together has not been fully explored; namely, private non-
profit forestry entities that can harness the power of the 
market place in a way that keeps working forests working with a 
``light on the land'' approach. This is a tall order for sure, 
but also one that holds great promise for people that hold both 
environmental and commercial perspectives.
    The Concept--For three years, U.S. Forest Capital has been 
working closely with experts from the environmental, landowner, 
and financial communities to explore how to conserve working 
forests by bringing often disparate parties together to jointly 
manage their operation. The result is a new conservation tool 
that meets these objectives while protecting landowner property 
rights and local communities' economic well being. In short, 
tax-exempt revenue bonds are issued to allow for the 
acquisition of forest and agricultural land by private non-
profit, 501(c)(3) entities. The low-cost bonds would be revenue 
bonds, backed by the revenue stream generated by the low-impact 
management of the land. The land would be owned by the private, 
non-profit entity and the public benefit would be afforded by 
the:
     Lower cost of capital associated with tax-exempt 
bonds;
     Diversity of decision makers on the non-profit 
board; and,
     Lack of need to maximize financial returns.
    To issue the tax-exempt bonds, the non-profit board must:
     Place a permanent conservation easement on the 
property;
     Exceed relevant environmental laws;
     Complete a multi-resource management plan;
     Provide for a qualified third-party to hold the 
easement; and,
     Provide the third-party easement holder with 
adequate funds to monitor and enforce the easement.
    Monitoring and enforcement of the public benefits outlined 
above are achieved through:
     Local government hearings prior to bond issuance;
     Internal Revenue Service approval of the 501(c)(3) 
and on-going review of conservation purposes for which the non-
profit was established;
     Legally binding bond documents which are drafted 
to assure investors that the non-profit's activities will 
remain tax-exempt;
     The third-party easement holder who will be paid 
by the land owning non-profit to monitor and enforce the 
easement;
     Conservation and public interests on the non-
profit board of directors; and,
     Normal local, state and federal regulatory 
compliance.
    Attachment 1 summarizes the primary activities that are 
needed to achieve a successful tax-exempt transaction.
    Power of Tax-Exempt Debt--If a non-profit meets the stated 
requirements, it can raise hundreds of millions of dollars from 
private investors at a very low cost to the federal treasury. 
The tax-exempt market is well established with approximately 
$150 billion issued annually for public benefit entities such 
as hospitals, education facilities and transportation 
infrastructure. Premier municipal underwriting companies such 
as Seattle Northwest Securities and San Francisco's Stone & 
Youngberg believe that demand for conservation based bonds will 
be significant.
    See Attachment 2 for an analysis of the present net value 
of timberlands--at tax-exempt and commercial rates--which can 
be supported by three different harvest scenarios for property 
in King County, Washington. These numbers were generated from 
real forestland data that was provided by a potential seller.
    Public Benefits at Low Public Cost--Currently public and 
non-profit organizations fund acquisitions through annual 
appropriations, philanthropic contributions and tax incentives. 
As outlined above, these programs have and are continuing to 
protect some of the nation's most special places. Yet, as also 
outlined above, these tools have limited utility for 
acquisitions over $50 million in that there just is not the 
level of revenue on an ongoing basis to generate the funds 
needed given the current disposition rate.
    By allowing private, non-profit entities to access the tax-
exempt debt markets, the Federal government can achieve the 
conservation benefit that people are demanding, while doing so 
at a fraction of the cost. No other financial vehicle provides 
the public leveraging of private investment like tax-exempt 
bonds. For example, the Redwood Forest Foundation--a non-profit 
established in anticipation of taking advantage of Community 
Forestry Bonds--would like to issue $200 million in tax-exempt 
bonds to buy up to 200 thousand acres of working forests in 
Northern California. Such an issue would only cost the Federal 
treasury $66 million in foregone tax revenues over a 40-year 
period. This represents a modest investment by the taxpayer for 
significant conservation gains that will be achieved for 
current and future generations.
                            Policy Benefits
    While no conservation tool can provide all things to all 
people, community forestry and agriculture bonds can 
comprehensively provide more benefits to more people on large 
scale working forests than currently exist. Community forestry 
and agriculture bonds:
    Work for landowners and the timber industry because:
     Property rights are maintained as all transactions 
will be completely voluntary and no regulatory entity at any 
level exists to force transactions;
     Landowner liquidity is enhanced at fair market 
value;
     Timber supply will be maintained for either the 
seller or other buyers depending on the seller's fiber needs;
     Collaborative forums with a market-based tool will 
be established, and,
     Goodwill opportunities will be expanded.
    Work for the environment because:
     Forestlands throughout the nation will be 
permanently protected from conversion to non-forest uses;
     Non-timber benefits such as water quality, fish 
and wildlife habitat, and non-commercial forest-dependent 
biological species will be greatly enhanced;
     Environmentalists will serve on decision making 
boards that oversee management of large-scale forests; and,
     Scarce public and philanthropic resources 
dedicated to conservation will be leveraged to allow more acres 
to be protected over time.
    Work for communities because:
     Community officials become facilitators among 
constituents as compared to judges that must choose among lose-
lose options;
     Environmental compliance opportunities will be 
enhanced;
     Forestry operations that provide a sustainable 
supply of forest products will help stabilize the economic 
stability of rural forest dependent communities; and
     The bulk of acquisition costs will be borne by the 
investor, thus there will be little or no cost borne by the 
local governmental budgets.
    U.S. Forest Capital is currently working with two non-
profits comprised of environmental, landowner, financial and 
elected officials who are seeking to protect working forests 
and provide additional conservation benefits to their rural 
forests. The first is the Redwood Forest Foundation, mentioned 
above, which is located in Mendocino County, California, and 
the second is the Evergreen Forest Trust in Washington state. 
We have also begun working with the Mayor of Jacksonville, 
Florida to scope out opportunities for their working forests as 
well.
                           Legislative Needs
    Current law allows qualified non-profit organizations to 
have tax-exempt debt issued for public benefits. However, the 
asset that is purchased or constructed with bond proceeds must, 
in general, be owned and used appropriately by the non-profit 
during the term of the bonds. In addition, the term of the 
bonds cannot be significantly longer than the useful life of 
the financed property, with land being deemed to have a useful 
life of 30 years. This makes sense for hospitals, for example, 
in which the building financed with bond proceeds may not be 
sold or leased during the term of the bonds, and the term of 
the bonds generally matches the useful life of the building. 
For renewable resources like forests, however, a clarification 
is needed because the trees (and land) for which the bonds were 
issued must be harvested, in the manner outlined above, to 
service the debt, and the financed asset, by its very nature, 
has an extremely long useful life. Current law is silent on 
these points; therefore, for community forestry and agriculture 
bonds to be sold, the law must be clarified to allow the debt 
service on long-term bonds to be paid with timber harvest 
revenues.
    H.R. 1863, The Community Forestry and Agriculture 
Conservation Act clarifies the tax code to allow tax-exempt 
revenue bonds to be issued for conservation purposes. The bill 
clarifies that standing tress and tree growth may be harvested, 
mandates what public environmental benefits must be achieved 
and includes provisions that prohibit abuse. The bill is 
supported by a wide range of groups including, among others, 
the: World Wildlife Fund, Trust for Public Lands, Land Trust 
Alliance, Society of American Foresters, American Sportfishing 
Association, Plum Creek Timber Company, Mendocino Redwood 
Company, Harwood Forest Products, King County Council and the 
Mendocino County Council.
    H.R. 1863 is the only tool available today that can 
leverage the power of Wall Street and private investment to 
generate the capital needed to allow private non-profit 
entities to engage in large scale transactions for conservation 
purposes. Tax-exempt revenue financing would be a fantastic 
tool to use in concert with Congressman Portman's bill (H.R. 
2880) and other ideas that focus on smaller scale but equally 
important lands owned primarily by non-industrial landowners. 
It would also be a great complement to currently authorized 
conservation tools such as the Land and Water Conservation 
Fund.
    Mr. Chairman, and Members of the Subcommittee, on behalf of 
the many communities around the nation who are seeking to keep 
working forest and agricultural lands working, I urge you to 
pass H.R. 1863. Time is running out.
    Again, thank you for holding this hearing. I would be 
pleased to answer any questions you may have.
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[GRAPHIC] [TIFF OMITTED] T6783.002

                                

    Chairman Houghton. OK. Thanks very much.
    Mr. Coyne.
    Mr. Coyne. No questions.
    Chairman Houghton. All right.
    Ms. Dunn.
    Ms. Dunn. Thank you very much, Mr. Chairman. I congratulate 
all you gentlemen for coming in from such long distances to 
join us today. And we are very glad to have you here. 
Obviously, my question will be going to Mr. McKenna, and also 
to Mr. Tuchmann.
    You gentlemen have both talked in your testimony about 
bringing people together and getting elements of our society to 
work together as we look toward setting aside important pieces 
of agricultural or forest property. Tell me what that really 
means.
    Mr. McKenna. Well, bringing people together, first of all, 
will occur when we form these non-profits. These non-profits 
will have boards--in fact, we have already formed one--that 
will include conservationists, representatives of large 
commercial landowners, local government officials. These are 
representatives of many of the competing interests that often 
clash over forest policy.
    It will bring those competing interests together on a 
larger scale, as well, because 1863 gives us a tool that 
advances all of our interests. It will provide liquidity to 
these large commercial property owners who often in King County 
own land which is too close to the urban area to be intensively 
commercially harvested, but is outside of the urban growth area 
so it cannot be intensively developed for homes either because 
it is outside of that urban growth boundary.
    But it will provide values to the environmental community 
and to all of us who are concerned about environmental values 
like water quality, by keeping the forests in production but at 
a much lighter rate, and by keeping the forests out of 
commercial development for housing, for example.
    And so, it strikes the common ground among all of those 
competing interests, and literally brings them together to put 
together deals, such as deals that we are actually working on 
today with those large commercial landowners and with 
conservation groups.
    Ms. Dunn. Mr. Tuchmann.
    Mr. Tuchmann. Yes, I would just add that one of the 
problems in natural resource policy right now is many Americans 
want decision making input on lands that they only have 
peripheral control of, whether it is public lands or private 
lands. For the first time, these non-profits will allow the 
environmental community and the industry to share environmental 
and economic responsibilities. The conservation community will 
have the opportunity to implement an environmentally-oriented 
management plan and be required to generate only enough 
revenues to service the debt. The industry will have a 
responsibility to protect those environmental attributes and at 
the same time maintain timber supply and jobs. So, together, on 
a board of directors of a private non-profit they will protect 
the environment, provide jobs, and provide a good investment 
vehicle.
    Ms. Dunn. And that is important because there is some cost 
related to this provision, and we want to make sure that the 
taxpayers get the benefits of that cost back.
    Mr. McKenna, are there any particular pieces of property in 
your area and my area, the Seattle area, that you are currently 
working on?
    Mr. McKenna. Yes. We are working with one large commercial 
landowner, a forest company, on a parcel which is several 
thousand acres in size. And it is outside of the urban growth 
boundary, but it is close enough that it really cannot be 
intensively commercially harvested. There would be a huge 
outcry if it were clear cut--unlike their lands farther up in 
the mountains which are under the usual commercial practices.
    At the same time, although it cannot be developed for 
subdivisions because of our growth management policies, it is 
in 5- and 10- and 20-acre zoning. And what that means is that 
folks who want to buy their 5- or 10- or 20-acre estates are 
out there actively seeking these properties.
    And what happens when they build their mini-estates is that 
the forests become fragmented, they are taken out of working 
forest status. But the ecology is fragmented as well, as we cut 
roads in to serve those homes. And inevitably, there are 
impacts on water quality. And of course, as that property goes 
into private home ownership, it is really lost as open space. 
And it loses a lot of its value as wildlife habitat as well.
    So it is that land that is between the mountains, the 
national State forest lands, and the suburban and urban areas, 
that we are really focusing on here.
    Ms. Dunn. Thank you. Mr. Chairman, I do hope that we can 
encourage the Committee to take a serious look at H.R. 1863. 
These properties are slipping away from us every single year, 
and it is just so important. Those of us in the Northwest are 
particularly concerned about what is happening. And as you 
know, we are facing the prospect of the first urban listing of 
an endangered species, and that is of great concern to us. But 
we must protect these properties. And I think that this 
proposal is a very, very good one.
    And I thank you gentlemen, for coming to testify.
    Chairman Houghton. All right. Thanks very much.
    Look, we have got about 2 minutes here. So if anybody has a 
question? John, have you got a question? Could you ask it 
quickly, and then we will move on.
    Mr. Tanner. Yes, thank you, Mr. Chairman. I want to thank 
you for holding this hearing, and I want to thank the panel. 
And I want to ask Mr. Tuchmann, how does 1863, in your view, 
complement the Land and Water Conservation Fund? And also, how 
does it relate to the other bill we are considering, 2446, the 
Better America Bonds Act?
    Mr. Tuchmann. Congressman, just real briefly, they 
complement very well. The Land and Water Conservation Fund and 
Better America Bonds are focused primarily on preservation of 
special places the urban-rural interface. Our effort is more 
focused on working forests that are being converted to non-
forest uses. They could complement each other very well, in 
terms of leveraging both public and private moneys.
    Chairman Houghton. Mr. Portman.
    Mr. Portman. Mr. Spellmire, thanks again for your 
testimony. Your focus a lot was on capital gains. And I just 
wondered, you had not commented on some legislation that came 
up earlier in the hearing, and that is H.R. 2497, by 
Congressman Pitts.
    It is called the Open Space Preservation Act of 1999. And 
it deals with both estate tax and capital gains, but it 
excludes from income the revenues from the sale of a property 
covered by a qualified covenant that restricts the land to 
farming use only.
    I just wondered, Tom, if you had any time to look at that 
legislation; if so, if you had any thoughts on it?
    Mr. Spellmire. I have not really looked at it, other than 
the briefing that I was given. To me, though, it sounds like it 
is something that would address part of this issue anyhow. A 
lot of farmers are looking for a way that they can make these 
transitions and not be subject to the capital gains.
    Part of the problem with capital gains is, a lot of people 
that own ground--I mean, there are legal ways to circumvent 
capital gains, through charitable remainder trusts and all 
these other tools that are out there. But a lot of farmers, for 
some reason, the people who actually own the ground, feel very 
uncomfortable using those tools.
    Mr. Portman. Yes.
    Mr. Spellmire. They need a much more direct approach. And 
that sounds like a much more direct approach.
    Mr. Portman. Thank you again for your testimony and for 
coming.
    Chairman Houghton. Thanks, Mr. Portman.
    Mr. Weller.
    Mr. Weller. Mr. Chairman, thank you. I do have one question 
I want to direct to Mr. Gates. But I was also going to ask 
unanimous consent of the Committee if I were to submit some 
additional questions of Mr. Gates, that his answers be put into 
the record.
    Chairman Houghton. It is just a function of time. Time is 
in your hands.
    Mr. Weller. OK. Thank you. Mr. Gates, thank you very much 
for traveling all the way from Oak Brook, Illinois, to be here 
today and to participate in today's panel. And I also want to 
commend you and all of the good people in your organization 
that I have had the opportunity to work with in redevelopment 
of the Joliet Arsenal and to restore the jobs that were once at 
the Joliet Arsenal, as well as some of the other projects that 
you are involved in on the South Side of Chicago and the south 
suburbs. I want to thank you for that, and for participating 
today.
    And I am going to direct one question, and I will submit to 
you some additional questions, which I would ask if you could 
respond to. And we will submit them to the record for the 
purpose of this hearing.
    But one of the focuses of this hearing today has been on 
the tax incentive that we provided for brownfields 
redevelopment and brownfields clean-up that was in the 1997 
Balanced Budget Act. And that was, of course, targeted to 
specific types of communities, tending to be low-income 
communities or Empowerment Zones or areas adjacent to low-
income Census tracts.
    And I am an advocate, of course, for expanding that tax 
incentive so any community anywhere in Illinois or the United 
States would be able to enjoy that tax incentive to clean up a 
brownfield in the community. And I was wondering, what is your 
recommendation, as a businessperson, as the best way to improve 
the tax incentive so it would work toward the goal of 
redeveloping brownfields, restoring jobs, doing the 
environmental clean-up that is necessary; but also be workable? 
Do you have some specific suggestions?
    Mr. Gates. Yes. What you are trying to do is level the 
playingfield. One is considering making a choice between 
approving a greenfield site, where one can begin to develop 
immediately, versus a brownfield site, where there are delays 
and significant up front costs for clean-up. You are trying to 
level the playingfield to make the economic options or the 
economic viability of the two be roughly the same. You do not 
want to over-incent, however, brownfields situations and as a 
result spur development which is not driven by the marketplace 
overall.
    I do actually like the piece of legislation that you have 
proposed, 997, because it does strike a balance between the 
two. It provides, particularly for smaller sites, a very easy 
way of compensation for the up front costs; but yet it is 
capped at a level that does not encourage, I am going to call 
it, uneconomic development, like maybe some of the tax laws we 
had in the 'eighties.
    But I think it is also very, very simple to administer. It 
is simply something that is done in your tax return. It does 
not require special, unusual financial instruments that do not 
trade in the public markets. It does not require a lot of 
consultants, so on and so forth. So I think if that type of 
incentive were broadened out of the specific Enterprise Zones 
into maybe other existing communities, you would certainly see 
a lot of these 400,000 brownfield sites get more attention than 
they are currently getting.
    They are there, but it is just too easy to go into a virgin 
piece of ground, as opposed to dealing with all the hassles of 
clean-up and consultants and the regulatory environment.
    Mr. Weller. Well, the point you brought up about the 
greenfields is a good one, because it is estimated that for 
every greenfield industrial site, it consumes five times as 
much land as an existing brownfield, if you were to redevelop a 
brownfield. That is one of the statistics I have seen.
    I would like to provide some additional questions in 
writing to you, if you would provide answers. And we will 
submit them to the record.
    I recognize we are beyond the hour of 4 o'clock so, Mr. 
Chairman, thank you for allowing me to answer that question. 
Mr. Gates, thanks for being here today.
    Mr. Gates. Thank you.
    Chairman Houghton. Thank you. Thank you, everybody. The 
hearing is adjourned.
    [Whereupon, at 4:04 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]
Statement of Jaime Steve, Legislative Director, American Wind Energy 
Association

    The American Wind Energy Association or AWEA, respectfully 
submits this testimony in support of H.R. 750, Rep. Bill 
Thomas' legislation providing for a five-year extension of the 
wind Energy Production Tax Credit (PTC). (Language identical to 
the text of H.R. 750 is contained in H.R. 4538, theEnergy 
Efficient Technology Tax Act).
    One of the pro-business, pro-environment provisions 
contained in H.R. 4538 is a five-year extension of the existing 
1.5 cent per kilowatt-hour Production Tax Credit (PTC) for 
electricity produced using wind energy resources. (Section 45 
of the Internal Revenue Code). An immediate extension of this 
provision is crucial if we are to see significant growth in the 
domestic wind energy industry.
    Strong Bi-Partisan Support for Wind Energy Tax Credit Extension
     A five-year PTC extension bill by Rep. Bill Thomas 
(H.R. 750) has attracted more than 175 sponsors, including 27 
of the 39 members of the Ways and Means Committee.
     A companion bill by Sen. Chuck Grassley (S. 414) 
has attracted 25 Senate sponsors including 10 members of the 
Finance Committee.
     A four-year extension of the PTC was contained in 
the $792 billion Congressional tax package (H.R. 2488).
     A five-year PTC extension is part of the 
Administration's FY 2000 budget request. (The same provision 
was contained in the FY 1999 request).
     Cost: $76 million over five-year (source: Joint 
Committee on Taxation).

        Wind PTC Not Included in Current House Extenders Package
    The wind energy Production Tax Credit (PTC) extension was 
deleted from the Ways and Means Committee tax extenders package 
adopted by the Committee on Friday, September 24.
                       Explanation of Current Law
    The Production Tax Credit (PTC) provides a 1.5 cents per 
kilowatt-hour credit (adjusted for inflation) for electricity 
produced from a facility placed in service between December 31, 
1993 and June 30, 1999 for the first ten years of the 
facility's existence. The credit is only available if the wind 
energy equipment is located in the United State and electricity 
is sold to an unrelated party. Under current law, the tax 
credit qualification date expired on June 30, 1999. A five-year 
extension would create a new sunset date of June 30, 2004.
    The Energy Policy Act of 1992 (EPAct) enacted the PTC as 
Section 45 of the Internal Revenue Code. The credit is phased 
out if the price of wind generated electricity is sufficiently 
high. In report language accompanying EPAct (H. Rpt. 102-474, 
Part 6, p. 42), the Ways and Means Committee stated, ``The 
Credit is intended to enhance the development of technology to 
utilize the specified renewable energy sources and to promote 
competition between renewable energy sources and conventional 
energy sources.''
    Since its inception, the PTC has supported wind energy 
development and production. In the 1980's, electricity 
generated with wind could cost as much as 25 cents per 
kilowatt-hour. Since then wind energy has reduced its cost by a 
remarkable 80 percent to the current levelized cost of between 
4 and 5 cents per kilowatt-hour.
    The 1.5 cent per kilowatt-hour credit enables the industry 
to compete with other generating sources being sold at 3 cents 
per kilowatt-hour. The extension of the credit will enable the 
industry to continue to develop and improve its technology to 
drive costs down even further and provide Americans with 
significantly more clean, emissions-free electricity 
generation. Indeed, experts predict the cost of wind equipment 
alone can be reduced by another 40 percent from current levels, 
with an appropriate commitment of resources to research and 
development and from manufacturing economies of scale.
                      Contributions of Wind Power
    Wind is a clean, renewable energy source which helps to 
protect public health, secure a cleaner environment, enhance 
America's national security through increased energy 
independence, and reduce pollution. In fact, reducing air 
pollutants in the United States will necessitate the promotion 
of clean, environmentally-friendly sources of renewable energy 
such as wind energy. Further, renewable energy technologies as 
wind power should play an important role in a deregulated 
electrical generation market.
    Wind power alone has the potential to generate power to 
provide the electric energy needs of as many as 10 million 
homes by the end of the next decade. The extension of the PTC 
will not only assure the continued availability of wind power 
as a clean energy option, but it also will help the wind energy 
industry secure its position in the restructured electricity 
market as a fully competitive, renewable source of electricity.
          Significant Economic Growth Potential of Wind Power
    The global wind energy market has been growing at a 
remarkable rate over the last several years and is the world's 
fastest growing energy technology. The growth of the market 
offers significant export opportunities for U.S. wind turbine 
and component manufacturers.
    The World Energy Council has estimated that new wind 
capacity worldwide will amount to $150 billion to $400 billion 
worth of new business over the next twenty years. Experts 
estimate that as many as 157,000 new jobs could be created if 
U.S. wind energy equipment manufacturers are able to capture 
just 25 percent of the global wind equipment market over the 
next 10 years. Only by supporting its domestic wind energy 
production through the extension of the PTC can the U.S. hope 
to develop the technology and capability to effectively compete 
in this rapidly growing international market.
    Finally, we must stress that the immediate extension of the 
PTC is critical to the continued development of the wind energy 
industry. Since the PTC is a production credit available only 
for energy actually produced from wind facilities, the credit 
is conditioned on permitting, financing and construction of the 
facilities. The financing and permitting requirements for a new 
wind facility often require 2 to 3 years of lead time. With the 
lapse of the credit on June 30, 1999, utilities, investors, and 
wind energy developers have been reluctant to commit to any new 
projects.
    The American Wind Energy Association appreciates the 
opportunity to submit written testimony on this matter. We 
stand ready to assist the Committee in any way regarding the 
five-year extension of the wind energy Production Tax Credit.
    Thank you.
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Statement of Bond Market Association

    The Bond Market Association appreciates the opportunity to 
comment on the impact of tax laws on land use, conservation, 
and preservation, and in particular, on issues related to the 
innovative financing of land preservation projects. The Bond 
Market Association represents approximately 200 securities 
firms and banks that underwrite, trade, and sell debt 
securities both domestically and internationally. We are 
pleased that the Committee has chosen to explore ways to 
encourage land conservation and preservation using innovative 
financing solutions--without increasing the financial burden on 
our nation's states and localities.
                    Benefits of Tax-Exempt Financing
    Tax-exempt bonds are one of the most important sources of 
funding available to state and local governments for the 
financing of vital public projects. Tax-exempt bonds are 
efficient and well-understood, are popular among investors, and 
have an established market infrastructure with a history that 
dates back to colonial times. Moreover, tax-exempt bonds are an 
important form of federal assistance to states and localities. 
Because the federal government foregoes the tax revenue on 
interest earned by investors on tax-exempt municipal bonds, 
investors demand a much lower rate of interest than they 
otherwise would. States and localities benefit through a lower 
cost of capital.
    Tax-exempt bonds are not plagued by any of the problems 
that would affect the success of tax-credit bond programs for 
environmental purposes, such as the ``Better America Bonds'' 
(BABs) program proposed by the Administration. Under the 
Administration's plan, state and local governments would have 
to apply to the Administrator of the Environmental Protection 
Agency (EPA) for the authority to issue tax-credit bonds. The 
EPA Administrator, in consultation with other federal agencies, 
would then review applications and award allocations to the 
applicants. The holder of a tax-credit bond would receive 
annual federal income tax credits equal to the applicable 
credit rate multiplied by the amount held on its anniversary 
date.
    The Bond Market Association believes that a better, more 
efficient financing approach is one that involves the tax-
exempt bond market. The municipal bond market is a large and 
established market with a broad base of investors, so secondary 
market trading is relatively active and liquid. Additionally, 
interest rates are set efficiently according to market-based 
rates of return. Finally, using tax-exempt financing, state and 
local governments can retain the authority and control of their 
land preservation projects, without having to get approval from 
federal authorities. Tax-credit bond programs, while 
commendable for their desire to finance land preservation, 
would create another level of federal bureaucracy and would 
intrude into a decision-making process that is best left to 
states and localities. In short, municipal bonds are well-
tailored to providing tax-preferred financing for conservation 
and land preservation purposes, and would preserve the autonomy 
of state and local governments.
                      Public-Private Partnerships
    The Bond Market Association has consistently supported 
responsible proposals that would employ the use of public-
private partnerships to expand the amount of capital available 
to finance vital public projects--ranging from school 
construction and highways, to parks and the environment. 
Through the utilization of innovative financing techniques, 
minimal federal resources are required to support state and 
local initiatives. By empowering the private sector to take 
more responsibility for public projects, the demand on the 
federal government is lessened. In addition, by designing 
programs that are self-supporting, financial risks are 
minimized, and all levels of government inevitably bear less 
financial burden.
                              Current Law
    Currently, state and local governments can issue tax-exempt 
bonds without limit for environmental purposes as long as no 
more than ten percent of the proceeds are used by private 
entities in a business and no more than ten percent of the debt 
service is secured by private businesses, or no more than five 
percent of the bond proceeds are lent to private businesses or 
individuals. Under current law, private entities generally 
cannot borrow on a tax-exempt basis. However, an exception is 
provided for certain types of so-called private-activity bonds, 
including bonds issued by tax-exempt, 501(c)(3) organizations.
    Private-activity bonds are generally subject to certain 
issuance limitations and certain restrictions on investment. 
Bonds issued by 501(c)(3) organizations are subject to some of 
the restrictions, but exempt from others. For example, 
501(c)(3) bonds are exempt from the annual unified volume cap 
restriction that limits the issuance of other allowable 
private-activity bonds. Interest earned on 501(c)(3) bonds is 
also not subject to the individual alternative minimum tax. 
However, certain restrictions do apply to 501(c)(3) bonds. For 
example, private-activity bonds, including 501(c)(3) bonds, may 
be issued for uses consistent with their charter. Tax-exempt 
financing is allowed for the purchase of land and related 
property used in the exempt activities of the 501(c)(3). 
However, for environmental organizations, the leasing of timber 
and other renewable land use rights to finance the purchase of 
land is not a permitted purpose under existing law.
                          Pending Legislation
    Legislation pending in the House (H.R. 1863) and Senate (S. 
1085) proposes the use of innovative financing techniques to 
facilitate access to capital markets in a cost-efficient 
manner. Under the legislation, tax-exempt revenue bonds could 
be issued to finance the purchase of forest and agricultural 
lands by non-profit 501(c)(3) organizations. Government 
entities would issue the bonds on behalf of the non-profit 
organization, and the non-profit would typically obtain the 
ownership rights to the property. The benefits of this 
innovative approach would be several. First, local communities 
will be able to ensure that renewable resources will be 
protected by partnering with non-profit entities to acquire 
land that would otherwise be too expensive to finance. Second, 
non-profit entities could manage the renewal process of the 
land and collect revenues from the harvesting of the resources 
to pay for bonds issued to finance the land acquisition, 
thereby ensuring the conservation of the land for the long 
term. Meanwhile, original landowners would be compensated for 
the sale of their land at fair market values. Finally, the 
federal government would not take ownership of the land, so 
ownership would stay in the private sector.
                              Conclusions
    The desire to preserve America's renewable resources is a 
laudable goal. Careful planning for the harvesting and renewal 
of resources will provide numerous economic and public 
benefits. The Bond Market Association fully supports proposals 
to finance environmental projects using innovative financing 
techniques such as those contained in H.R. 1863 and S. 1085. We 
urge Congress to act on this legislation quickly, and we look 
forward to working with Members of this Subcommittee as the 
legislation advances.

                                

Statement of Peter Kopsco, Tax Policy Analyst, Friends of the Earth

                              Introduction
    Friends of the Earth, a global environmental advocacy 
organization with organizations in 54 countries, supports 
expanding tax incentives for land preservation. It is very 
encouraging to see such a broad bipartisan effort to find 
solutions to the vexing problem of urban sprawl. This hearing 
comes at an ideal time. It is high time we shifted the focus 
from tax cuts at any cost to providing tax cuts that benefit 
those people and businesses that choose to benefit the 
environment.
    Tax policy is a powerful tool to effect social change. One 
of the most important challenges facing us as a nation today is 
sprawling land use. The affects are widespread, and include:
     deterioration of traditional community centers;
     increased pressure on family farmers;
     unhealthy air and water pollution as a result 
paving of roadways and parking lots, and an increase in 
automobile traffic;
     dangerous traffic congestion;
     loss of open space for the enjoyment of people; 
and
     fragmentation, conversion and depletion of habitat 
for species.
    Friends of the Earth feels that it is time to maximize this 
powerful tool to control this threat by discouraging sprawl 
style development and encouraging protection of open-space and 
by investmenting in tradition town centers.
    There are two advantages to using the tax code to help 
control this threat to our communities and our environment. One 
is that the tax code provides incentives for people to take 
action voluntarily. The other is that by taking such steps 
voluntarily, landowners reduce the need for imposition of 
regulatory restrictions.
    Many measures currently in place are helpful. Many measures 
under consideration today are steps in the right direction. As 
Congress moves forward, Friends of the Earth urges Members of 
Congress to consider whether tax legislation advances the goals 
of conservation of land, or instead merely benefits industries 
that degrade and pollute the environment.
                   Current Provisions in the Tax Code
    Friends of the Earth supports many of the measures 
currently in place. However, one need only look around many 
American towns and suburbs to see that there is plenty of room 
for improvement. Therefore, Friends of the Earth believes these 
measures should be expanded and new ideas should be nurtured.

Deductions for Donations of Conservation Easements

    The deduction for charitable donations of conservation 
easements creates an incentive to preserve land for open space 
and to protect natural habitat. This makes such donations 
attractive and is a valuable program. But for little cost, in 
terms of revenue, Congress could could expand its effect. One 
proposal to do so is before you today. Representative Johnson's 
bill would increase the size of this deduction across the 
board. Another approach, introduced in the Senate, would 
accelerate the deduction for conservation easements to benefit 
threatened and endangered species. Considering that 
preservation of land and protection of species diversity 
provides a public benefit incentives to private individuals to 
participate is worth the taxpayer investment. Friends of the 
Earth supports each of these measures and would advocate 
combining them. By sharing information and working together we 
can come up with new and powerful tools to slow down wasteful 
growth.

Exclusions for Donations of Conservation Easements

    Another item that is currently in the tax code that 
benefits the environment is the exclusion from estate taxes of 
land subject to a conservation agreement. This provision fills 
two important roles. One, it provides an incentive to preserve 
land for endangered species. Another is that it insures that 
the land is managed properly.
    This provision has a significant limitation, however -it is 
limited geographically. The exclusion currently applies only to 
land within 25 miles of a metropolitan area, national park or 
wilderness area; or 10 miles of an Urban National Forest. The 
result is that almost one-third of the continental United 
States is not eligible for the exemption. Not included are 
areas near national wildlife refuges and areas that have not 
yet reached the dubious status of metropolitan area. These 
restrictions exclude many pristine and sensitive lands near 
parks and many fast-growing areas that are not yet sufficiently 
developed to qualify as metropolitan areas. In many cases it is 
just these types of places that we most need to protect.
    Some in Congress have advocated eliminating the estate tax. 
Under tax legislation passed in 1997, estate tax rates are 
already set to decline over the next seven years. The estate 
tax actually serves as a significant inducement to promote land 
conservation because donations of land for conservation 
purposes can reduce the estate tax burden. Conservationists 
believe that estate tax relief should be used as an incentive 
to encourage property owners to permanently protect land as 
habitat for wildlife, recreation, and open space. Cutting the 
estate tax without adding collateral incentives for 
conservation will reduce the overall amount of convervation. 
Rather than cutting the estate tax altogether, Congress should 
target cuts to encourage environmental benefits.

Differential Valuation of Agricultural Land

    The differential valuation of agricultural land, already in 
place in the tax code is highly beneficial because it helps 
farmers and it helps fight sprawl. It helps farmers by enabling 
family farms stay in business from generation to generation. It 
does so by reducing pressure on families to sell their 
inheritance to pay estate taxes that can saddle large tracts of 
land. The result is preservation of traditional American 
communities, with farm and forestlands surrounding livable town 
and city centers. Again more can be done to relieve the 
pressure these farming families face. Friends of the Earth 
encourages this Sub-Committee to enact strong legislation to 
help maintain this sort of land use.
    There are certainly many other provisions in the code that 
give citizens the ability to help out. Friends of the Earth 
encourages the Sub-Committee to find ways to expand and improve 
them.
        Support for Selected Proposals Before the Sub-Committee
     H.R. 2263, Charitable contribution deduction and 
exclusion for conservation easements: This bill would simply 
increase the incentives for charitable contributions of 
interests in land. This is a very common-sense approach that 
Friends of the Earth heartily supports. Doing so will increase 
participation and increase the amount of land we preserve. By 
taking such steps voluntarily, landowners reduce the need for 
imposition of regulatory restrictions.
     H.R. 2497, Open Space Preservation Act: This 
strong piece of legislation would be very helpful for families 
who wish to continue farming their land. It provides generous 
tax relief to farming families who chose to forever farm their 
land. First, it excludes from income all gains from the sale of 
farmland subject to an irrevocable covenant which permanently 
restricts the land to agricultural uses only. Second, it 
excludes from a decedent's gross estate the value of farmland 
subject to one of these irrevocable covenants. These will be 
very helpful for families dedicated to the farming way of life 
and will preserve open space for years to come.
     H.R. 2880, Conservation Tax Incentives Act of 
1999: Often times landowners who cannot afford to donate 
property or who cannot use a deduction still want to conserve 
their land. In fact, this includes many farmers who may own a 
lot of land, but who do not have a lot of cash on hand. This 
bill provides such landowners with a way to conserve land by 
selling it for conservation purposes for less than they would 
do to developers. The provision allows these individuals to 
still come out ahead thanks to the tax savings. This is the 
sort of innovative and common-sense measure needed.
     H.R. 2380, Energy Efficient Tax Act: Among other 
things, this bill will promote the development of new energy 
efficient technology for homes, wind and biomass electricity 
production, and for electric and hybrid vehicles. Discussion of 
incentives for these new technologies fits-in well with 
discussion of incentives to fight sprawl because these 
technologies help to curb the pollution and resource depletion 
associated with sprawling development-especially the provisions 
relating to cars. As vehicle miles traveled continue to 
increase, we need to find cleaner ways to commute.
     H.R. 1863, Community Forestry and Agriculture 
Conservation Act: Friends of the Earth supports conserving 
forestlands. Friends of the Earth also supports sustainable 
timber management in private forestlands. Primarily, Friends of 
the Earth supports the values represented by forestland, such 
as habitat, and recreation. In cases where forests would 
otherwise be doomed to be developed or clear-cut it makes sense 
to preserve them using strategies like those created by this 
legislation. This bill has potential and Friends of the Earth 
advocates giving this innovative proposal a closer look.
     H.R. 1630, Brownfields Cleanup Act: Section 198 of 
the Internal Revenue Code allows taxpayers to deduct 
environmental remediation expenditures. It will expire in 2001. 
This bill simply extends the life of this measure indefinitely. 
This is a positive step that will increase participation by 
creating increased certainty for businesses engaged in these 
activities. Friends of the Earth supports brownfield 
redevelopment so long as the resources are spent wisely on our 
downtowns and on land that is forsaken. Taxpayer money should 
not be used simply to subsidize cleanup or redevelopment that 
would happen anyway.
     H.R. 2446, Better America Bonds Act: Creating tax 
exempt bonds for acquisition of open space, projects to improve 
water quality, and remediation of brownfields is a great idea 
and should be enacted. However, what is uncertain is whether 
this program will be taken advantage of by those who qualify, 
and whether the money will pin-point only those projects where 
public financing is necessary and not act as a subsidy for 
activities that fit the criteria but do not need the public 
money. This proposal deserves more exploration.
                       Other Measures to Consider
    This Sub-Committee is to be commended for considering these 
proposals. Dialogues like this one will only increase support 
for common sense incentives that promote our environmental 
goals by increasing voluntary action by people on behalf of the 
environment. Ultimately, this will reduce the expensive burden 
government bears when we enact regulations instead.
    Here are some other approaches Friends of the Earth 
supports.
     A land gains tax that discourages short term 
speculation of real estate. Short term speculation on land, 
contrasted with long term land stewardship, frequently results 
in increased land fragmentation and conversion. The result is 
fragmentation of habitat, open space and ultimately the 
degradation of an area's character. This tax incentive 
discourages land speculation by removing a significant 
percentage of the capital gains made on these short term 
transactions, which are often times the result of government 
improvements anyway. Land gains taxes have proven to be very 
effective in Vermont.
     H.R. 1172, The Historic Homeownership Assistance 
Act, is another measure that we should continue to explore. 
This measure would grant a credit to owners of historic homes 
in urban downtowns. As such it would encourage the resettling 
of older buildings in urban centers.
                               Conclusion
    Friends of the Earth is encouraged by this hearing and the 
attention this Sub-Committee is giving to concerns about 
sprawl, conservation, energy efficiency and open space. We 
appreciate the opportunity to submit testimony.

                                

Statement of Pacific Forest Trust, Boonville, CA

    The Pacific Forest Trust (PFT) applauds Chairman Houghton 
and the Oversight Subcommittee for taking up the important and 
timely topic of federal tax law impacts on environmental 
conservation and preservation. PFT appreciates this opportunity 
to submit its views on this important topic.
    PFT is a non-profit, 501(c)(3) organization dedicated to 
restoring, stewarding, and preserving the private, productive 
forests of the Pacific Northwest, with a primary focus on 
California, Oregon, and Washington. PFT works with landowners, 
forest managers, public agencies, local communities, and others 
to sustain private forest lands for the wealth of goods and 
services they provide. PFT believes that private forests will 
only be protected if they remain productive and can only be 
productive if protected.
                               Background
    The Pacific Forest Trust has worked for years to promote 
sustainable forest management and conservation in the Pacific 
Northwest. Yet, our experience has shown that the existing 
incentive structure is simply inadequate to reverse the trend 
towards deforestation. The trends at work in Pacific forests 
are reflected elsewhere across the nation, especially in the 
Southeast and Northeast--which also are home to highly 
productive forests. In fact, studies project a loss of 25 
percent of Southeastern forest lands over the next decades if 
action is not taken. It is a sad irony that just as ecologists 
and forest scientists have begun to more fully understand the 
valuable and inter-connected services provided by forests, the 
loss of forests has accelerated nationally.
           A Missing Tool: The Forest Conservation Tax Credit
    In order to conserve these valuable forest resources and 
stem the tide of forest conversion, a new incentive is 
required. A new tax credit--made available to forest landowners 
who enter into voluntary agreements to permanently conserve and 
steward forests--will protect the diverse services that intact 
natural and sustainably managed forests provide for society at 
large.
    Such a tax credit should build upon the successes of 
existing tools and conservation principles that are familiar 
and fair to landowners and return real public benefits. 
Specifically:
     Tax incentives should be provided for landowners 
who voluntarily choose to protect and sustainably manage--over 
the long term--forest land. Incentives also should be provided 
for measures that reforest deforested areas, or turn 
agricultural land to forest cover.
     Significant tax incentives should only be provided 
for permanent forest conservation through conservation 
easements, which have proven their effectiveness in conserving 
land nationwide, and are flexible enough to meet the management 
goals for productive parcels.
    A focused tax credit that promotes the long-term 
conservation of forest lands will help reverse this trend. 
While forests provide many benefits for society, the market 
does not adequately reward forest landowners who manage their 
forests to produce these benefits. However, tax incentives can 
provide a valuable inducement for forest landowners to improve 
their stewardship. Such a public investment will prove to be a 
wise one, maintaining the public benefits of private forests 
available for future generations.
    PFT has nearly completed its work of drafting a forest 
conservation tax proposal that reflects the principles outlined 
below.
     The Public Benefits of Productive Private Forest Conservation
    Protecting undeveloped areas--Forests provide an important 
limit to urban sprawl, protecting ``open space'' and 
undeveloped tracts of land at urban fringes and beyond. As open 
space protection becomes a priority for communities and 
policymakers, protecting forested conservation lands is a way 
to secure multiple benefits with those conservation 
investments.
    Conserving clean water and protecting watersheds--
Approximately 60 percent of the total streamflow in the United 
States originates on forest land, most of which is privately 
owned. A number of urban areas--from New York to Seattle--long 
ago recognized the importance of publicly acquiring parts the 
forested watersheds that supply their drinking water. New York 
recently adopted a program that will utilize some $300 million 
to acquire land and conservation easements. Such expenditures 
are estimated to save between $4 and $6 billion in water 
treatment facilities, plus several hundred million in annual 
operating costs (Budrock 1997, Revkin 1997). While few new 
opportunities for conserving watershed areas as public lands 
may exist today, increased incentives for stewardship of 
private forest lands will protect water quality for residential 
uses. Protecting forests and reducing watershed erosion not 
only benefits drinking water supply, but also conserves 
important habitat for fish, including habitat for rare and 
endangered salmon and trout species.
    Providing wildlife habitat--At least 90 percent of federal 
threatened and endangered species have some or all of their 
habitat on non-federal lands, while forests provide an 
estimated 50 percent of the habitat for imperiled species (NRC 
1998). Slowing or halting the conversion of nonfederal forests, 
and increasing their connectivitiy, will play critical role in 
the conservation of biological diversity. Conserving key 
forested habitats for endangered species also will 
significantly complement the current public and private 
resources being spent on wildlife and endangered species 
conservation programs.
    Providing energy security--Protecting the forested land 
base, as well as promoting long-term, sustainable forest 
stewardship means secure long-term supplies of the renewable 
forest products and biomass. In addition to traditional forest 
wood products, forests can be sources for sustainable biomass 
fuels that increase our long-term energy security.
    Providing jobs in sustainable forestry--Private forests 
support the vast majority of this country's 1.2 million forest 
industry workers (NRC 1998). With sustainable practices and 
increases in long-term forest stewardship, this job base could 
remain stable or even expand. On the other hand, if forest area 
and sustain ability continues to decline, these forest jobs 
will significantly decrease in number.
    Sequestering carbon--Forests are a major tool to reduce the 
buildup of carbon dioxide, the most prevalent greenhouse gas, 
storing carbon as biomass and in forest soils. It is estimated 
that non-federal forests store nearly 40 billion metric tons of 
carbon, sequestering more than 100 million metric tons of 
carbon annually. Older natural forests--including old-growth 
stands--hold vast amounts of carbon, and continue to sequester 
additional carbon often for hundreds of years (Franklin 1999).
    Supplying alternative products--Some 450 specialty 
products--ranging from pinecones and floral greens to the raw 
materials used to produce pharmaceuticals--are gathered off of 
non-federal forests each year, yielding millions of dollars in 
sales. Worldwide trade in certain specialty forest products 
such as floral greens reaches into the billions of dollars 
annually. Observers estimate that such non-timber forest 
products will increase significantly in value in the years to 
come (Molina et al. 1997).
    Providing critical opportunities for public recreation--
Private forest lands provide significant opportunities for 
public recreation--about a quarter of all non-industrial 
private forest land, as well as considerable amounts of 
industrial forest land is used by the recreating public (NRC 
1998). With increasing urbanization, these recreational 
opportunities will only become increasingly valuable over time.
    Development and conversion of resource lands to other uses 
are the result of many forces, ranging from subsidizing 
development costs in rural areas to resource management 
practices. Given this diversity of drivers, it follows that a 
variety of public policy tools should be crafted to reduce 
undesirable development patterns and better conserve valuable 
but threatened natural resources. A number of these policy 
tools are before the Committee.
    However, the package of existing and proposed tools does 
not adequately address the threats to highly significant 
forested ecosystems and land uses. Forests provide many 
essential services to all U.S. citizens--timber, water, 
recreation are but a few--but forests are being lost at an 
alarming and unacceptable rate. PFT would therefore like to 
draw the Committee's attention to the problem of forest 
fragmentation and loss, and put forward a recommendation to 
redress this problem.

The Problem of Forest Fragmentation

    Forests cover approximately a third of the land area of the 
Untied States. About 60 percent of those forests are privately 
owned, while nearly three quarters of the productive 
timberlands are privately owned (timberlands are defined as 
forests capable of producing 20 cubic feet of marketable wood). 
During the 20th century, more than 276 million acres of US 
forest land has been lost, with 55 million acres of forests 
converted to other uses since 1978 alone (NRC 1998, DOE 1998). 
Such forest conversion is the result of many pressures, 
including suburban sprawl, leapfrogging development to rural 
areas, and unsustainable forest practices that degrade forests, 
making development a higher and better economic use of once-
forested land.
    The loss of productive private forest land in this country 
has repercussions that ripple through our economy and affect 
the resource base upon which both rural and urban communities 
depend. Forested lands are critical natural resource lands, 
conserving many different human and natural resources ``under 
one roof.'' While much of that private forest land base has 
been lost, much still remains and should be the focus of 
protection efforts. Roughly 424 million acres of private 
forests are at stake--nearly 20 percent of the land area of the 
United States. Policies that promote sustainable conservation 
of these critical forest lands will pay significant dividends 
with numerous public and conservation benefits.
    We look forward to working with members of this Committee 
to refine and carry that proposal forward with other 
appropriate tools to conserve important resource lands and open 
spaces in this country.
    Thank you for the opportunity to submit this testimony.
                            literature cited
    Budrock, Helen. 1997. Summary Guide to the Terms of the 
Watershed Agreement. The Catskill Center for Conservation and 
Development, Inc. Arkville, New York.
    Franklin, Jerry F. 1999. Great Opportunities are Emerging 
from Changing Climate, Changing Markets, and Changing Forestry. 
Pacific Forests, Volume 2 No. 12:4-5.
    National Research Council. 1998. Forested Landscapes in 
Perspective, National Academy Press. Washington, D.C.
    Molina, Randy, Vance, N., Weigand, J., Pilz, D., and 
Amaranthus, M., ``Special Forest Products.'' 1997. In Kathy 
Kohm and Jerry Franklin, 1997. Creating a Forestry for the 21st 
Century, Island Press. Washington, D.C. and Covelo, CA.
    Revkin, Andrew. 1997. New York begins spending to save 
City's reservoirs. New York Times, January 1, 1997.
    U.S. Department of Agriculture, National Resource 
Conservation Service, ``1992 National Resources Inventory 
Highlights'' available at http://www.nhq.nrcs.usda.gov/NRI/
    U.S. Department of Energy, Energy Information 
Administration. 1998. ``Emissions of Greenhouse Gases in the 
United States.''
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