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93–793 2004

PRESIDENT’S FISCAL YEAR 2005 BUDGET WITH AN

OFFICIAL OF THE U.S. DEPARTMENT OF THE

TREASURY

HEARING

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

FEBRUARY 11, 2004

Serial No. 108–38

Printed for the use of the Committee on Ways and Means

(

ii

COMMITTEE ON WAYS AND MEANS

BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

AMO HOUGHTON, New York 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

JENNIFER DUNN, Washington 

MAC COLLINS, Georgia 

ROB PORTMAN, Ohio 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

SCOTT MCINNIS, Colorado 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

ROBERT T. MATSUI, California 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

GERALD D. KLECZKA, Wisconsin 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

MAX SANDLIN, Texas 

STEPHANIE TUBBS JONES, Ohio 

Allison H. Giles, Chief of Staff 

Janice Mays, Minority Chief Counsel

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. 

iii 

C O N T E N T S 

Page 

Advisories announcing the hearing ........................................................................ 1 

WITNESS 

U.S. Department of the Treasury, Hon. Pamela F. Olson, Assistant Secretary 

for Tax Policy; accompanied by Gregory F. Jenner, Deputy Assistant Secretary for Tax Policy ............................................................................................ 6 

SUBMISSIONS FOR THE RECORD 

Coalition for Fair International Taxation, statement and attachment ............... 39 

Credit Union National Association, Inc., statement ............................................. 42 

Equipment Leasing Association of America, Arlington, VA, statement .............. 44 

National Association of Realtors, Jerry Giovaniello, letter ................................ 46 

R&D Credit Coalition, statement ........................................................................... 48 

(1)

PRESIDENT’S FISCAL YEAR 2005 BUDGET 

WITH AN OFFICIAL OF THE U.S. DEPARTMENT OF THE TREASURY 

WEDNESDAY, FEBRUARY 11, 2004

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, DC.

The Committee met, pursuant to notice, at 11:10 a.m., in room 

1100, Longworth House Office Building, Hon. Bill Thomas (Chairman of the Committee) presiding. 

[The advisory and revised advisory announcing the hearing follow:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721

February 04, 2004

FC–14

Thomas Announces Hearing on

President’s Fiscal Year 2005 Budget with an

Official of the U.S. Department of the Treasury

Congressman Bill Thomas (R–CA), Chairman of the Committee on Ways and 

Means, today announced that the Committee will hold a hearing on President 

Bush’s fiscal year 2005 budget tax proposals. The hearing will take place on 

Wednesday, February 11, 2004, in the main Committee hearing room, 1100 

Longworth House Office Building, beginning at 10:30 a.m.

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. The witness will be an official of the 

U.S. Department of the Treasury. 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: 

On January 20, 2004, President George W. Bush delivered his State of the Union 

address in which he outlined numerous budget and tax proposals. The details of 

these proposals were released on February 2, 2004, when the President submitted 

his fiscal year 2005 budget to the Congress. 

FOCUS OF THE HEARING: 

The Treasury official will discuss the details of the tax proposals in the President’s budget. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person or organization wishing to submit written comments 

for the record must send it electronically to hearingclerks.waysandmeans@ 

mail.house.gov, along with a fax copy to (202) 225–2610, by close of business 

Wednesday, February 25, 2004. In the immediate future, the Committee website 

will allow for electronic submissions to be included in the printed record. Before submitting your comments, check to see if this function is available. Finally, due to 

the change in House mail policy, the U.S. Capitol Police will refuse sealed-packaged 

deliveries to all House Office Buildings. 

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 electronically 

to hearingclerks.waysandmeans@mail.house.gov, along with a fax copy to (202) 225–2610, in 

WordPerfect or MS Word format and MUST 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. 

3

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. All statements must include a list of all clients, persons, or organizations on whose behalf 

the witness appears. A supplemental sheet must accompany each statement listing the name, 

company, address, telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

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.

* * * NOTICE—CHANGE IN TIME * * *

f ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721

February 05, 2004

FC–14–Revised

Change in Time for Hearing on

President’s Fiscal Year 2005 Budget with an

Official of the U.S. Department of the Treasury

Congressman Bill Thomas (R–CA), Chairman of the Committee on Ways and 

Means, today announced that the Committee hearing on the President’s fiscal year 

2005 budget with an official of the U.S. Department of the Treasury, scheduled for 

Wednesday, February 11, 2004, at 10:30 a.m., in the main Committee hearing room, 

1100 Longworth House Office Building, will now be held at 11:00 a.m.

All other details for the hearing remain the same. (See full Committee Advisory 

No. FC–14, dated February 4, 2004.)

of-town visitors. As soon as I sat down, everybody rushed to their 

Chairman THOMAS. Good morning. We must not have any outf seat and quietly anticipated the beginning of the hearing. So, welcome, all you old-timers. Today we welcome Assistant Secretary for 

Tax Policy Pamela Olson, who is accompanied by Mr. Jenner. 

I want to tell you how much I have appreciated your know-how, 

comprehension of tax policy, the way you have been open to the 

Committee when we have needed information. 

I welcome Gregory Jenner, and let me say that oftentimes we 

often forget that public service, while it is important, is also something that is very difficult in today’s society, one, because if you 

find someone competent and capable in that public service, the private sector can be very alluring, because they have the ability to 

4

outbid us in every instance; but in addition to that we see each 

other as Members and witnesses, Assistant Secretary and Members, when, in fact, we are real people, we have families, loved 

ones, and responsibilities that are sometimes extremely difficult to 

juggle as we think our family is entitled to while we pursue sometimes very demanding, but almost always enormously time-consuming careers. 

So, for all of those reasons, I believe Ms. Olson has decided to 

terminate her current activity in the public sector. I want to wish 

you well in the private sector and in your ongoing and growing 

teenage and preteen family responsibilities. 

Once again, we are faced with the whole tax agenda, including 

several tax relief initiatives from the President in his budget for individuals and job creators. The President’s aggressive economic 

policies have produced record growth, and I note unemployment 

now has dropped over the last 5 months faster than it has in the 

last 10 years. 

A number of important tax relief measures are set to expire this 

year, and everyone says it is difficult to do things during an election year, but I do think not addressing some of these programs, 

not necessarily all of them, but some of these programs, would be 

a real disservice to the economy, to individual commercial sectors, 

to employees, and a number of other ramifications. 

I know that we have not finished our business with corporate 

America. There may be some questions directed toward that area, 

Ms. Olson, in terms of studies that you have taken. The public has 

seen only the tip of the iceberg in terms of investigations of corporate misbehavior, and, as we wind our way through the justice 

system, it always seems to take longer than anyone realizes, but 

we are anxious to wait, if necessary, to get the kind of information 

necessary to pass good law, if law seems to be necessary in this 

particular area. Mr. Jenner will, in all probability, be involved as 

we move forward in looking at ways in which, in deed as well as 

word, people who assume significant fiduciary responsibilities, if 

they do not have the internal moral compass to drive them, can at 

least face an objective public one. It is going to be difficult, but I 

think it still needs to be done. 

The other thing that I am very much concerned about is the fact 

that we are fast approaching March 1st, which is, I think, the last 

possible time the Europeans can back up in fulfilling the World 

Trade Organization (WTO) requirement that we deal with foreign 

sales corporation (FSC) language. I am concerned that we are running out of time, and that as we slip into exposure to retaliation 

for our failure to repeal this provision, it is absolutely the wrong 

time in our economic timing and certainly for the world’s economic 

timing to not address this in a forthright way. Anything you can 

do to assist us in perhaps a packaging concern would be very helpful. 

You have some loophole closing; other people call it tax increases. 

I am pleased to have you before us because, although we do appreciate the view of the President’s budget and tax policies from 

30,000 feet, we are, in essence, the House’s foot soldiers, and we 

are on the ground, and we need to ask you some questions about 

both tactical and topography aspects as we move forward. 

5

So, with that, I will recognize the gentleman from New York for 

any statement he may make. 

[The opening statement of Chairman Thomas follows:]

Opening Statement of the Honorable Bill Thomas, Chairman, and a 

Representative in Congress from the State of California 

Good morning. Today, we welcome the Treasury Department’s Assistant Secretary 

for Tax Policy, Pamela Olson, for her final appearance before this Committee. Ms. 

Olson, we appreciate the know-how and comprehension of tax policy you brought to 

the Treasury Department and the insights you shared with this Committee. We 

wish you luck as you move forward. Also joining us is Gregory Jenner, who will 

serve as the acting Assistant Secretary for Tax Policy after Ms. Olson’s departure. 

Welcome, we look forward to hearing your testimony. 

Once again this year, we are faced with a full tax agenda, including several tax 

relief initiatives for individuals and job creators. The President’s aggressive economic policies have produced record rates of growth, which in turn will channel increased federal revenues into the Treasury—helping to reduce the deficit and bring 

balance to our federal budget. 

A number of important tax relief measures are set to expire in 2004. Congress 

must make these tax cuts permanent to prevent a tax hike on Americans and their 

families. This tax relief not only gave back American workers some of their hardearned money, but also was impeccably timed to help get the U.S. economy back 

on track after facing recession, corporate scandals, and the horrific acts of terrorism 

on September 11, 2001. Allowing this tax relief to expire—when our economy is resuming strong, steady growth—would reverse the positive economic changes tax relief has delivered. 

We are also quickly approaching March 1st, the European Union’s target date to 

begin billions of dollars worth of retaliation against some of America’s most sensitive industries. Last year, the Committee passed legislation to not only prevent 

a trade war, but also create American jobs and make U.S. companies and workers 

more competitive. The House must now act to ensure U.S. farmers and manufacturers are not the brunt of this retaliation. 

Ms. Olson, we look forward to discussing these proposals, as well as Treasury’s 

initiatives to close loopholes and improve tax compliance. However, before we begin, 

I would like to recognize the gentleman from New York, Mr. Rangel, for any opening 

retary Olson, in whatever you do in the private sector. It is a little 

statement he has at this time.

Mr. RANGEL. Thank you, Mr. Chairman. Good luck to you, Secf disappointing for me to hear that you are leaving, because Secretary Snow spoke in such broad general terms about how some of 

these problems would be handled. He said not to worry about the 

specifics, that you will be here to guide us through this, so that we 

have cut the budget in half, created more jobs, and have America 

back in line with the prosperity that we enjoyed in prior Administrations, but at least you can share with us in your testimony the 

direction in which you would like to see this Committee go. 

Some of the problems that we had was with the alternative minimum tax (AMT) exemption. As you know, there has been no specifics as to how the Administration will handle this. The Secretary 

said he wanted revenue-neutral; I think the figures used were 

some $700 billion. So, it helps us, especially in the Minority, to 

hear what the Administration would want, because it is sometimes 

very difficult to find out from the Majority. So, I know you have 

some specific ideas and guidance to give the Committee as to how 

we would raise this $700 billion and where it would come from. 

Another problem we have is the Administration’s position in providing incentive for offshore jobs. There was something in the 

paper where the President’s adviser is indicating that this is a good 

6

thing to have jobs offshore, and that we should have even more incentives, which brings us around to the WTO ruling on the FSC 

and the extraterritorial income (ETI). 

The Chairman has a proposal where it supports the President’s 

belief, if indeed it is the President’s belief, as shared by his economic adviser, that we have to provide more incentives overseas, 

and I think that is the proposal that came from the Majority. 

As you well know, some of us believe that the savings we should 

have in revenue should be creating more jobs here on the mainland, but I do not think it has ever been clear to us where the 

President’s office comes from in this tax policy, and it certainly 

should not be coming. 

When I talked with the trade representative, he said this was a 

tax issue, so I think that would be in your shop. 

We would have a lot of questions as to where we are going, and 

I do not know how long you are going to be with us so that you 

can guide us through these perilous political waters, but I am glad 

that you have been with us this far. I wish you luck for the future, 

and I do hope you will be able this morning to at least share with 

us what Secretary Snow could not, and that is specifically what 

will you be recommending in terms of making the tax cuts permanent, what happens with AMT, and where are we with the WTO 

problems that we have? I thank you very much. 

[The opening statement of Mr. Rangel follows:]

Opening Statement of the Honorable Charles B. Rangel, a Representative 

in Congress from the State of New York 

Last week, Secretary Snow had the luxury of speaking in broad generalities, leaving the specifics of the budget proposals for others. 

Today’s witnesses are faced with a more difficult job, actually helping this Committee understand the specifics of the tax proposals in the President’s budget. 

Secretary Snow’s testimony left me with many questions. 

For example, last week he testified that failure to extend a current tax benefit 

is, in effect, a tax increase. But he failed to explain why the President’s budget did 

not extend the current level of the AMT exemption. 

By Secretary Snow’s definition, the President’s own budget advocates a large tax 

increase that will hit families from high tax states such as New York, California, 

and many midwestern states the hardest. 

Last week, Secretary Snow spoke of a revenue neutral solution to the problem of 

the expanding alternative minimum tax. I am hopeful that our witnesses today may 

help this Committee understand where the needed $700 billion will come from. 

I agree with Secretary Snow’s testimony last week that we need to comply with 

the WTO ruling on our FSC/ETI international tax provisions. I am hopeful that the 

witnesses today will provide Treasury’s position concerning the bill previously reported by this Committee and the bill reported by the Senate Finance Committee. 

Last year, the President’s budget recommended that all of the revenue from repeal of the current FSC/ETI benefits should be used to expand tax benefits for the 

offshore operations of U.S. multinationals. Essentially, the Bush Administration was 

recommending a tax increase on U.S. manufacturers in order to fund benefits for 

companies that have moved their manufacturing and other operations offshore. 

Since this is now an election year, this year’s Administration budget concerning 

FSC/ETI is not as clear. However, the President, in his budget, continues to argue 

that our companies need more tax benefits for their offshore operations. Last Week, 

Treasury Secretary Snow testified that enacting these offshore tax benefits remains 

an important goal for the Administration. 

I was surprised to find that the Economic Report of the President, as reported 

by the L.A. Times, ‘‘endorses . . . outsourcing high-end, white-collar work to India 

and other countries.’’ And the Chairman of Bush’s Council of Economic Advisors 

says that ‘‘Outsourcing is just a new way of doing international trade’’ and that 

‘‘More things are tradable than were tradable in the past. And that’s a good thing.’’

7

If outsourcing is a result of natural economic forces, I hope you will explain why 

the Administration feels it is so important to give companies additional tax incentives encouraging outsourcing and the relocation of jobs off-shore. 

I look forward to your testimony and your responses to questions on the specifics 

of the President’s budget.

mony will be made part of the record, and you can address us as 

Chairman THOMAS. Thank the gentleman. Your written testif you see fit in the time that you have. 

STATEMENT OF THE HONORABLE PAMELA F. OLSON, ASSISTANT SECRETARY FOR TAX POLICY, U.S. DEPARTMENT OF 

THE TREASURY; ACCOMPANIED BY GREGORY F. JENNER, 

DEPUTY ASSISTANT SECRETARY FOR TAX POLICY 

Ms. OLSON. Thank you. Mr. Chairman, Mr. Rangel, distinguished Members of the Committee, I appreciate the opportunity to 

appear before you today to discuss the tax proposals included in 

the President’s fiscal year 2005 budget. I am going to give a fairly 

brief statement, and then we will leave plenty of time for you for 

questions on some of the specific issues. 

Over the last 3 years, the President and Congress have responded with courage to the recession and to external crises that 

put an extraordinary strain on our economy. The bursting of the 

high-tech bubble, the revelation of corporate accounting problems, 

September 11th, the uncertainties of the war on terror and global 

conflicts have contributed to the recession and prolonged the weakness in the economy. Those came on top of the remarkable global 

political, economic and technological changes that have occurred 

during the past 15 years. 

Fiscal policy has played a crucial role in responding to these 

events. In 2001, many doubted that the legislative process could 

move fiscal policy rapidly enough for the effects to have an impact 

on an economic downturn. You have proved them wrong. The tax 

cuts enacted in 2001 were an important factor in making the downturn one of the shallowest on record, providing support to a weakening economy in a critical juncture. 

The stimulus bill enacted in 2002 provided vital support to the 

economy in a key area of weakness, corporate investment. The temporary bonus depreciation provision, for example, provided the 

needed incentive for new corporate investment at just the right 

time. 

The 2003 tax cut provided the needed lift to help the nascent recovery to continue and gain strength. Immediate support to the 

economy was provided through the acceleration of lower tax rates, 

expansion of the child credit, and marriage penalty relief. 

Weakness in corporate investment was addressed by reducing 

the double tax on corporate income. This change lowered the cost 

of equity capital and provided an important stimulus to corporate 

investment. The increase in small business expensing and bonus 

depreciation provided additional stimulus to corporate investment. 

These changes are leading to a robust economic recovery, and the 

recovery is beginning to put Americans back to work. Moreover, the 

tax cuts enacted will continue to spur economic growth. The tax 

changes have also laid the groundwork for strong economic growth 

8

in the future. The lower tax rates improve incentives. After-tax rewards from working are now substantially higher. The rewards to 

innovation and risk-taking are greater. The cost of equity capital 

and investing has been reduced. More risk-taking, investment, and 

innovation mean higher productivity and greater capital accumulation. A larger capital stock translates into higher living standards 

for all in the future. 

The tax cuts enacted have been fair and balanced, and now we 

must turn to eliminating the economic uncertainty created by their 

temporary nature by making them permanent. 

In addition, we must take steps to address other national priorities: increasing the personal savings rate, making health care 

more affordable, reducing the barriers to home ownership, simplifying the tax laws, ensuring the integrity of the tax system by preventing abusive transactions, and responding to the WTO decision 

on the ETI provisions. 

The savings provisions in the budget further promote an ownership society by removing barriers to savings, reducing complexity 

and improving fairness by providing the benefits of tax-preferred 

savings to everyone regardless of financial sophistication or capacity to save for the very long term. The single-family housing tax 

credit would similarly reduce the barrier to an ownership society 

by increasing construction or rehabilitation of affordable homes for 

lower-income individuals. 

In addition, the President’s budget reflects the importance of preserving defined benefit pension plans and the benefit they provide 

to workers and their families regarding this form of pension coverage. 

We must address the rising costs of health care, and we must expand access to health insurance. These are complex issues for 

which there is no single solution. The President’s proposal for a refundable, advanceable health insurance tax credit would help make 

insurance more affordable for lower-income individuals. The credit 

amount under the proposal would vary with family size, mirroring 

the relationship of actual health insurance premiums. 

Health savings accounts (HSAs) are a significant step toward 

promoting cost-consciousness through greater reliance on individual choice and high-deductible plans. The President’s budget includes above the line deductions to purchase the high-deductible 

health plans necessary to have an HSA, helping to level the playing field for a segment of the population that does not have employer-sponsored coverage. 

The present tax system imposes compliance costs on taxpayers, 

estimated to range from $70 billion to $100 billion per year, just 

from the individual income tax. The complexity undermines confidence in the system, and the compliance costs represent a serious 

loss to the economy. For these reasons it is crucial that we begin 

efforts to simplify the tax laws. The President’s budget includes 

several new simplification proposals that would address complexities borne by individuals and families. We look forward to working 

with the Committee on this effort. 

Confidence in the tax system is also undermined by the use of 

abusive transactions to avoid taxes rightfully owed. For the past 3 

years, the Administration has acted aggressively to restore conVerDate jul 14 2003 06:21 May 28, 2004 Jkt 093793 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HR\OC\93793.XXX 93793
9

fidence in the tax system by halting the promotion of abusive 

transactions and bringing taxpayers back into compliance with the 

tax laws. The President’s budget builds on these efforts and information gathered through the Internal Revenue Service (IRS) compliance programs. The new legislative proposals close loopholes and 

target identified abusive transactions and practices. 

One proposal deserves particular mention. The Administration 

has proposed to limit certain types of abusive leasing transactions, 

known as sale-in, lease-outs (SILOs). These arrangements are entered into with tax-indifferent parties, such as foreign governments, domestic municipalities, and tax-exempt organizations. 

They purport to be leasing transactions, but, in substance, provide 

no financing to the tax-indifferent party aside from a fee for the 

claimed transfer of a tax benefit. 

The SILOs represent a threat to the viability of the corporate tax 

base. It is essential that Congress address this issue promptly, but 

do so without interfering with leasing transactions that involve legitimate financing or refinancing of assets. We believe the proposal 

in the President’s budget leaves legitimate transactions unscathed, 

while preventing abusive lease transactions from going forward. 

Honoring our WTO obligations requires repeal of the ETI provisions. At the same time, meaningful changes to our tax law are required to preserve and enhance the competitiveness of U.S. businesses operating in the global marketplace. We look forward to continuing to work with the Congress on prompt enactment of legislation that brings our tax law into compliance with the WTO rules. 

Thank you, again, Mr. Chairman, Members of the Committee, for 

the opportunity to appear before you today. I appreciate the opportunity that I have had to work with Committee Members and staff 

over the past 3 years, and I can assure you that I am leaving the 

Office of Tax Policy in very good hands and with a very talented 

staff. Thank you. 

[The prepared statement of Ms. Olson follows:]

Statement of the Honorable Pamela F. Olson, Assistant Secretary for Tax 

Policy, U.S. Department of the Treasury; accompanied by Gregory F. Jenner, Deputy Assistant Secretary for Tax Policy 

Mr. Chairman, Congressman Rangel, and distinguished members of the Committee: 

Thank you for the opportunity to appear before you today to discuss the tax proposals included in the President’s Fiscal Year 2005 Budget. 

Over the last three years, the President and Congress have responded with courage to the recession and to a number of external crises that put additional, extraordinary, strain on that economy. The end of the high-tech bubble and its consequences for the stock market, the revelation of years of wrong-doing on the part 

of certain corporations and their executives, the impact of the September 11 attacks, 

and the uncertainties of the war on terror and the conflicts in Afghanistan and Iraq, 

are all at the root of the recent economic difficulties. These events worsened and 

prolonged the weaknesses in the economy. 

Fiscal policy has played a crucial role in responding to these events. The tax cuts 

enacted in 2001 were an important factor in making the downturn one of the 

shallowest on record. Together with an expansionary monetary policy embodied in 

a series of deep interest rate cuts, the tax cuts provided support to a weakening 

economy at a critical juncture. The stimulus bill enacted in 2002 provided vital support to the economy in a key area of weakness—corporate investment. The temporary bonus depreciation provision, for example, provided the needed incentive for 

new corporate investment at just the right time. 

While the tax cuts of 2001 were essential to keep the recession from deepening, 

the 2003 tax cut provided the needed lift to allow the nascent recovery to continue 

10

and gain strength. Immediate support to the economy was provided through the acceleration of the lower tax rates, expansion of the child credit, and marriage penalty 

relief. Weakness in corporate investment was addressed by reducing the double tax 

on corporate income through the lower tax rate on dividends and capital gains. This 

change lowered the cost of equity capital and provided an important stimulus to corporate investment. The increase in small business expensing and bonus depreciation 

provided additional stimulus to corporate investment. 

With these vital changes in tax policy, we now have a robust economic recovery 

with strong economic growth and tightening labor markets that are beginning to put 

Americans back to work. Moreover, the tax cuts already enacted will continue to 

spur economic growth. The Jobs and Growth Tax Relief Reconciliation Act 

(JGTRRA) will put another $146 billion into the economy this year with $100 billion 

in the first half of the year.

But the tax changes enacted over the past three years have done much more than 

address and respond to the economic difficulties and crises we have faced. They also 

laid the ground work for strong economic growth in the future. The lower tax rates 

improve incentives. After-tax rewards from working are now substantially higher. 

The taxes paid by entrepreneurs, who tend to pay taxes through the individual income tax, are now lower. The rewards to their innovation and risk-taking are greater. The cost of equity capital and investing has been reduced. More risk-taking, investment, and innovation mean higher productivity and greater capital accumulation. A larger capital stock translates into higher living standards for all in the future. 

Moreover, the tax changes enacted over the past several years have been fair and 

balanced. Without the tax cut, the bottom 50 percent of taxpayers would have paid 

slightly more than 4 percent of individual income taxes. As shown on the chart 

below, now they pay even less—3.6 percent. In contrast, the top 5 percent of taxpayers pay a larger share—52.8 percent of individual income taxes rather than 50.2 

percent without the tax cuts. The same is true for the highest income taxpayers—

the top 1 percent.

This group now pays 32.3 percent of all individual income taxes, rather than 30.5 

percent before the tax cuts were enacted. 

Much remains to be done, however. Making the tax cuts enacted in 2001 and 2003 

permanent, promoting savings, making health care more affordable, reducing the 

barriers to home ownership, simplifying the tax system, ensuring the integrity of 


Insert 93793A.001 Insert 93793A.002
11

the tax system by preventing abusive transactions, and responding to the WTO decision on the extraterritorial income exclusion (ETI) provisions are all important priorities reflected in the President’s budget proposals. I will focus on each of these priorities in turn.

Permanence: A Stable, Certain Tax Code

The tax reductions made in the Economic Growth and Tax Relief Reconciliation 

Act of 2001 (EGTRRA) and JGTRRA proved essential for promoting economic 

growth and will help to ensure higher living standards in the future. If these provisions are allowed to sunset, taxes will increase: for many individuals after 2004, for 

many small businesses in 2006; for investors beginning in 2009, and again for most 

taxpayers beginning in 2011. 

An uncertain tax code imposes real costs on the economy. Uncertainty makes it 

difficult for workers and businesses to plan for the future and increases investment 

risk. The possibility of higher taxes increases the cost of equity capital to businesses 

and reduces individuals’ after-tax rewards to working and investing. A higher cost 

of equity capital and lower rewards to workers and investors dampen long-run economic growth. 

Permanent extension of the tax cuts enacted by the President and the Congress 

will provide a more certain tax environment for workers and businesses to plan and 

invest, both reducing complexity and continuing to support a growing economy. The 

revenue cost of making the tax cuts permanent ($989 billion) is only a small percentage of the revenue of the federal government over the 10-year budget window. 

Moreover, the cost is only a tiny fraction of the United States economy over this 

same period. 

In addition to uncertainty, failure to make the tax cuts permanent will inflict a 

real blow to the economy. Allowing the tax cuts to expire amounts to nothing more 

than a massive tax increase on the vast bulk of individual and business taxpayers.

Towards a Long-Term Solution to the AMT

The expected growth in the individual alternative minimum tax (AMT) is a major 

problem in the tax code that must be addressed. The AMT was first enacted in the 

late 1960s to target a small number of very high income taxpayers who paid little 

or no tax. The stage was set for the AMT’s growth when the regular tax was indexed in the early 1980s but the AMT was not. Other changes throughout the 1980s 

and 1990s compounded the problem. 

Now the AMT is a tax that is beginning and will continue to affect increasing millions of taxpayers. It will reach into the ranks of the middle class, potentially denying taxpayers the benefit of many of the deductions, credits and lower tax rates 

available under the regular tax system. The AMT also significantly increases the 

complexity of tax filing for taxpayers subject to the AMT and for millions of additional taxpayers who must complete AMT forms only to determine they are not subject to the AMT. 

The AMT’s future growth must be addressed. The President’s budget extends 

through 2005 the temporary increase in the AMT exemption amounts and the provision that allows certain personal credits to offset the AMT. These temporary provisions will keep the number of taxpayers affected by the AMT from rising significantly in the near-term. More importantly, they will allow the Treasury Department 

the time necessary to develop a comprehensive set of proposals to deal with the 

AMT in the long-term. Because of the revenues involved and the number of taxpayers affected, any long-term solution to the AMT could well require significant 

changes to the regular income tax. The Treasury Department looks forward to its 

task and to working with this Committee to find a long-term solution.

Simpler Savings Options for All

Americans continue to save at a very low rate relative to historical standards and 

our major trading partners. The President has put forward in this year’s Budget a 

modified version of his savings proposal to help address this low rate of saving. The 

proposal carefully balances the need for a simpler approach for providing accessible 

tax-preferred savings options to all Americans and preserving the employer-provided 

pension system, which has been the foundation for meeting the retirement savings 

needs for millions. 

Saving is made simpler by replacing the existing web of tax-preferred saving options with two new savings vehicles: Retirement Savings Account (RSAs) and Lifetime Savings Accounts (LSAs). These savings vehicles allow everyone to contribute 

regardless of age or income. The simplicity of these new savings vehicles will help 

encourage individuals, especially lower income individuals, to save. 

12

Lower income individuals often do not have the resources to save for the distant 

future and are unwilling to take the risk of locking up their savings in tightly restricted accounts. In addition, these individuals tend not to have access to the sophisticated advice needed to navigate the complex, and often conflicting, rules that 

govern the existing savings vehicles. LSAs have been designed to make the decision 

easy: it is a savings vehicle accessible for all, especially low and moderate income 

individuals. Any money contributed can be withdrawn at any time without penalty. 

Treasury believes that these more relaxed rules will encourage individuals to save 

who might otherwise not do so in targeted savings plans because of restrictions on 

and penalties for withdrawals. As individuals learn to save, and become comfortable 

doing so, they will do more of it. The lower $5,000 contribution limit, as compared 

to the proposal in the FY 2004 Budget, will minimize the effect of these proposals 

on employer plans. 

The proposal for RSAs would simplify the range of choices for taxpayers saving 

for retirement. The proposal takes the easy to understand Roth IRA and makes it 

available to all. Any taxpayer can contribute up to the lesser of $5,000 or their 

earned income. Unlike current law, however, withdrawals could only be made for 

retirement, beginning at age 58. RSAs are the perfect complement to LSAs: targeted, tax-favored savings coupled with savings for any reason. 

The proposal for Employer Retirement Savings Accounts (ERSAs) would consolidate six different types of employer contributory plans into a universal account. The 

proposal has been modified from the previous FY 2004 Budget proposal to enhance 

flexibility and encourage small businesses (10 or fewer employees) to fund an ERSA 

by contributing to a custodial account, which is similar to a current-law IRA. 

A third proposal would credit Individual Development Accounts (IDAs) to encourage and assist lower-income individuals to save. This proposal would provide dollarfor-dollar matching contributions of up to $500 targeted to lower income individuals. 

Matching contributions would be supported by a 100 percent credit to sponsoring 

financial institutions. 

Together, these proposals further promote an ownership society by removing barriers to savings, reducing complexity, and improving fairness by providing the benefits of tax preferred savings to everyone, regardless of financial sophistication or capacity to save for the very long-term.

Reducing Barriers to Homeownership

A significant barrier to homeownership continues to be the supply of affordable 

housing for lower income individuals. To address that need, the President has proposed a $2.4 billion ($16 billion over 10 years), 5-year Single-Family Affordable 

Housing Tax Credit of up to 50 percent of the project costs of rehabilitation and construction of affordable homes, provided they are offered to homebuyers with incomes 

of not more than 80 percent of area median income. The tax credit would eventually 

result in an additional 200,000 affordable single-family homes becoming available 

through construction or rehabilitation.

Affordable Health Care is a Priority

Expanding access to health insurance remains an important goal of the President 

and is reflected by his continued commitment in this area. The lack of access to affordable health insurance is a complex problem that requires a comprehensive approach focusing on different segments of the uninsured with policies tailored to meet 

their needs. There is no one size fits all solution; a policy that excels in one dimension may do poorly in others. The high and rising cost of health insurance is a key 

factor that limits access. Policies that help control costs will make insurance more 

affordable through lower premiums. 

Health Savings Accounts (HSAs), enacted as part of the recently-passed Medicare 

Reform legislation, are a significant step towards promoting cost consciousness 

through greater reliance on individual choice and high deductible plans. HSAs, now 

part of current law, are complemented by a new proposal in the President’s Budget 

for an above-the-line deduction for premiums to purchase the high deductible health 

plans (HDHP) necessary in order to have an HSA. The proposal generally helps 

level the playing field for a segment of the population that does not have employersponsored coverage. 

The proposal for a refundable, advanceable health insurance tax credit would help 

make insurance more affordable for lower income individuals. The credit amount 

under the proposal would vary with family size, mirroring the relationship of actual 

health insurance premiums. The credit is targeted to low-income individuals and 

families, who are the least likely to have employer-based health insurance, resulting 

in the efficient use of the subsidy. Together, these policies promote affordability and 

13

access, and help encourage greater cost consciousness by giving individuals a greater stake in their health care choices.

Protecting Defined Benefit Plans and Promoting Fair Treatment for

Older Workers in Conversions to Cash Balance Plans

The President’s budget reflects the importance of preserving defined benefit pension plans and the benefits they provide to workers and their families. In addition 

to the proposal to fix the flawed interest rate used to determine the amount of contributions a plan sponsor must make to its defined benefit plan, the budget contains 

three interrelated proposals that recognize the importance of cash balance plans in 

providing retirement security to millions of Americans. The first proposal would ensure that companies converting from a traditional defined benefit plan to a cash balance pension include a fair transition for older workers. A five-year hold harmless 

provision would be required in a cash balance conversion, so that workers would 

continue to earn benefits under the greater of the prior plan formula or the cash 

balance formula for five years after the conversion. The second proposal would clarify that cash balance plans do not violate the age-discrimination rules that apply 

to pension plans as long as they treat older workers at least as well as younger 

workers. This would remove uncertainty created by inconsistent federal court decisions and would ensure the future of cash balance plans. The final proposal would 

eliminate the ‘‘whipsaw’’ effect, which acts as an effective cap on the interest credits 

that cash balance plans can provide to workers. This would permit companies to 

give higher interest credits, allowing larger retirement accumulations for workers.

Simplification of an Overly Complex Tax Code

In a sophisticated economy, a tax code with complex provisions may be unavoidable. It is the price we pay to ensure fairness, to limit government interference with 

personal and business decisions, and to prevent abuse. On the other hand, unnecessary complexity imposes tremendous burdens on honest taxpayers simply doing 

their best to comply with the law. The present tax system imposes compliance costs 

on taxpayers estimated to range from $70 billion to $100 billion per year from the 

individual income tax alone. Compliance costs also are onerous for business taxpayers, especially small businesses, while the typical Fortune 500 company spends 

almost $4 million a year on tax matters. 

For these reasons, it is crucial that we continue efforts to simplify the tax laws. 

The 2005 Budget includes several new simplification proposals. All of these proposals address complexities borne by individuals and families. They do not represent 

an exhaustive list; instead, they serve as examples of the many steps that can and 

should be taken to make the tax code easier to understand and comply with. The 

Treasury Department looks forward to working with this Committee to identify 

other areas where significant improvements can and should be made.

Stopping Abusive Transactions

Voluntary compliance with the tax laws is undermined when taxpayers use abusive transactions to avoid paying the taxes they rightfully owe. For the past three 

years, the Administration has acted aggressively to restore confidence in the tax 

system by halting the promotion of abusive transactions and bringing taxpayers 

back into compliance with the tax laws. The President’s Budget builds on these efforts and information gathered through IRS compliance programs. The new legislative proposals close loopholes and target identified abusive transactions and practices. As other abusive transactions are identified, the IRS will challenge the transactions in audits, and the Treasury Department and the IRS will work with Congress to enact any legislation necessary to address such transactions. 

One proposal deserves particular mention. The Administration has proposed to 

limit certain types of abusive leasing transactions, known as SILOs. These arrangements are entered into with tax-indifferent parties, such as foreign governments, domestic municipalities, and tax-exempt organizations. They purport to be leasing 

transactions but, in substance, provide no financing to the tax-indifferent party 

aside from a fee. These arrangements have no meaningful financial or economic utility other than the transfer of tax benefits to a U.S. taxpayer (by means of a purported ‘‘sale’’ of property) in exchange for the payment of an accommodation fee to 

the tax-indifferent party. 

Although Treasury has been aware of SILOs for some time, the extent of the problem has only recently come to light. Our data indicates that as much as $750 billion 

dollars of SILOs have been done in just the last four years. We have every reason 

to believe that, left unchecked, this trend will continue and grow. Because these 

transactions essentially involve no risk to either party, and require very little in the 

14

way of actual cash investment, corporations seeking to reduce their U.S. tax liability 

will face no economic bar to seeking out these arrangements on an increasing basis. 

SILOs represent a threat to the viability of the corporate tax base. They present 

a ready-made tool for self-help tax relief for large corporations and consortiums of 

smaller ones. Indeed, the magnitude of SILO transactions is such that the Treasury 

Department had to re-estimate and reduce its baseline estimate of corporate tax receipts over the ten-year budget window. It is essential that Congress deal with this 

issue. Otherwise, any corporation with the wherewithal to do so could plan itself out 

of the corporate income tax. The American citizenry rightfully expect their government to ensure that all taxpayers pay the taxes they owe, unreduced by artificial 

transactions. Congress should act promptly to ensure that SILOs are not permitted 

to continue. 

At the same time, in addressing the SILO problem, it is not our goal to interfere 

with garden variety leasing transactions that have been entered into for many years 

and that involve legitimate financing or refinancing of assets. The detailed SILO 

proposal in the President’s budget permits legitimate lease transactions to continue. 

We look forward to working with this Committee to ensure that legislation is enacted that leaves legitimate transactions unscathed while preventing abusive lease 

transactions from going forward.

Responding to WTO Decisions on ETI Provisions

The Extraterritorial Income (‘‘ETI’’) provisions of our tax law, like the prior-law 

foreign sales corporation provisions, have been found to be inconsistent with World 

Trade Organization (WTO) rules. The WTO has authorized the imposition of trade 

sanctions against U.S. exports up to the level of $4 billion per year, and the European Union has adopted a plan providing for sanctions to be phased in beginning 

next month if the ETI provisions remain in the law. 

Honoring our WTO obligations requires repeal of the ETI provisions. At the same 

time, meaningful changes to our tax law are required to preserve and enhance the 

competitiveness of U.S. businesses operating in the global marketplace. Thus, the 

necessary repeal of the ETI provisions should be coupled with other tax changes 

that promote the competitiveness of American manufacturers and other job-creating 

sectors of the U.S. economy. Tax law changes that would provide a benefit to these 

vital contributors to the U.S. economy include across-the-board corporate tax rate 

reduction, expansion and permanence of the research credit, improvements in depreciation rules, extension of NOL carryback rules, AMT reform, business tax simplification, and rationalization of the international tax rules. The Administration intends to continue to work with this Committee and the Congress on prompt enactment of legislation that brings our tax law into compliance with WTO rules and 

makes changes to the tax law to enhance the global competitiveness of American 

businesses and the workers they employ.

Conclusion

Thank you again, Mr. Chairman and members of the Committee, for the opportunity to appear before you today. We look forward to working together with this 

Committee and others in the Congress to promote tax policies that continue to provide a sound foundation for economic growth.

some of us like these sessions is so we can get into details quickly 

Chairman THOMAS. I thank you very much. One of the reasons 

f and expect answers. 

On the leasing proposal that you outlined, pretty obviously, it is 

fairly broad and getting broader. Whenever I see more of something, it is because it is a good deal for somebody. 

I am very much concerned about the idea that an indifferent 

party is able to do something with a, quote/unquote, benefit it cannot use in transferring it to someone else. We had a major internal 

debate over that very same concept in the energy bill when the 

term at that time was tradable credits, and I find it kind of interesting that you cannot use it, but if you can trade it to someone 

else, they get to use it, which, in a more fundamental sense, brings 

into question the whole concept of a tax credit as an appropriate 

15

vehicle in which to make decisions. We will leave that for another 

day. 

In some of these business transactions that I have looked at, one, 

it is very, very complicated and very clever. Everybody is a whole 

lot more familiar with leasing than they used to be 10 years ago. 

Most people are probably familiar with leasing of relatively expensive items like automobiles, where you get away from a significant 

front-end payment. Your monthly payments are lower, because you 

are not trying to amortize the cost over a period of time. Maintenance is usually thrown in, and if you are going to be making 

monthly payments anyway, why not walk away from a 3-year-old 

car in 3 years and get a new one and continue to make payments? 

The commitment, of course, is that you are going to continue making payments for the rest of your life. 

So, I do think there are legitimate reasons to lease in your analysis you go through, and I think as we look at them in some details, some of them make sense. However, now you take the money, 

invest it for payback over a period of time, a 99-year lease is currently defined as ownership. Does that need to be changed? 

There are just a whole lot of hinge points, I think, that we need 

to get into detail, because Members’ first reactions from cities, 

counties, States, special districts are that we are into this up to our 

eyeballs, and please do not stop it. 

The one, the fifth one, is the one that I do not fully understand. 

I want you to spend just a minute or two at least explaining how 

you would arrive at it, because the fifth criteria or test that you 

advocate is the lease is not identified as abusive in a U.S. Department of the Treasury regulation. 

My first reaction is Potter Stewart’s definition of obscenity: ‘‘I 

cannot define it, but I know it when I see it,’’ so show me one of 

these, and then I will look at it to decide whether it’s been abusive 

or not. 

What can we hang onto in terms of more objective criteria that 

Treasury will begin to look at as to what is abusive or not? If I normally make a 15-percent profit on arm’s-length business, leasing 

transactions, if I only make a 2-percent profit, is the amount of 

profit reaching an abusive point where it is not really a profit, but 

an attempt to show that I have met the letter of the law, certainly 

not the spirit? Where are we going to know when Treasury thinks 

the transaction is not abusive? 

I guess ultimately what I am going to ask for is a continuum 

where I am sure that you could come up with leases that would be 

legitimate, and we could all come up with leasing arrangements 

that are not legitimate. The ones that are legitimate and the ones 

that are not legitimate on the far ends of the spectrum are obviously the ones we should be less concerned about. It is when you 

get to that point where there are a whole lot of new ones out there, 

and what is your observation; what are you going to use to decide 

that one is abusive, the other is not, notwithstanding these criteria 

which I am quite sure very clever corporate attorneys and others 

will begin to change the playingfield as we begin to examine it? 

It is a little open-ended, but it is going to be a major point of controversy if for no other reason that you are laying, in a very difficult budgetary time, somewhere between $25 and $35 billion on 

16

the table, which many people would like to take from the table, but 

they are concerned with the consequences of taking that concept 

from the table. 

Ms. OLSON. Mr. Chairman, the leasing bar has been described 

by many as among the most creative group of attorneys in the 

country, and I concur in that assessment. 

The fifth criteria that you refer to is merely authority for the 

Treasury Department and the IRS to address holes in the first four 

exceptions to the proposal; to the extent that the leasing bar finds 

ways to work around it, to achieve results that are similar to the 

results that they are achieving today, so that the effort would be 

focused on making sure that we do not inadvertently leave things 

out that are economically the same as the things that we propose 

to cover, and to make sure that the leasing bar does not find ways 

to work around it. 

Chairman THOMAS. Well, that is another way of just saying 

trust us. Although I happen to say I may be more inclined to do 

that in an Administration of my own party than another one, I am 

not inclined to do that with anybody in which the results will go 

far afield from where we thought they were going to go based upon 

our discussions. 

I just want to underscore this is an important area. If we do not 

lay down some kind of a bright line, it will only increase, in my 

opinion, the idea of going into a city and finding out that all of the 

municipal buildings and all of the vehicles and all of the assets of 

the city are not really owned by the city, but the city owned them 

and is leasing them back, and entered into more leasing arrangements; and then to find out it is not only domestic, but it is also 

international, and, given the complexity of tax rules, you may be 

able to lease the same item in three different countries three different ways is something of very great concern. In hard-pressed 

times, people do conduct, behavior, that would not ordinarily be assumed to be rational, and when you call them on it, who gets to 

do it and who does not is going to be a very, very sensitive political 

issue. How do you grandfather in some that are—how do you stop 

them if they are almost or just like something that has already occurred? 

Those are all problems that we are going to have to address, and, 

Mr. Jenner, you are going to inherit some of this and whoever follows on. We have to be completely open, as honest as we can, using 

specific examples, so that Members can understand what you are 

talking about in today’s world, because there is a lot of leasing 

going on that I believe is totally legitimate for good business reasons in not having to maintain capital employees and others to 

maintenance that leasing activities. 

There are also, as this information comes to light, some amazing 

arrangements that are hard for somebody to say with a straight 

face are legitimate and appropriate, if not impossible to explain, except for the fact, quote/unquote, it happens to be my municipality 

or my major city, and so go somewhere else. 

That is going to be a very difficult problem to resolve, so as you 

identify the problems and as you work on the solutions, you are 

going to have to work very closely with us so that we have a comfort level in going forward. Gentleman from New York? 

17

Mr. RANGEL. Let me underscore: if you do not work very closely 

with us, then we Democrats have no one to work with at all, and 

so we are depending on the Administration to give us a little guidance so we know what is going on. 

Now, the Secretary has indicated that this AMT problem will cost about $700 billion in a tax increase if we do not do anything. 

Would you agree to that estimate? 

Ms. OLSON. There are a fairly wide range of estimates. 

Mr. RANGEL. What would yours be? 

Ms. OLSON. It depends on what you think a tax—depends on 

what you think making a change or not making a change would 

mean. 

Mr. RANGEL. Do you think we should make a change? 

Ms. OLSON. Yes, Mr. Rangel, I think we do need to make a 

change because right now——

Mr. RANGEL. Do you know what that change would be? 

Ms. OLSON. No. We are not in a position to recommend what 

that change should be. We have been studying the AMT. 

Mr. RANGEL. Do you believe it should be revenue-neutral? 

Ms. OLSON. There are ways in which the AMT problem can be 

addressed that would produce revenue-neutral results. You could 

make changes to produce almost any result you want, but there are 

ways in which it could be done. 

Mr. RANGEL. Well, the Secretary suggested it should be revenue-neutral. Do you agree with the Secretary? 

Ms. OLSON. I think what the Secretary is referring to was the 

fact it could be done on a revenue-neutral basis, and if he said it 

should be done, I think he probably just slipped a couple of words. 

It can be done on a revenue-neutral basis. 

Mr. RANGEL. Well, if it is not done on a revenue-neutral basis, 

where would we raise the money to give the relief that I think you 

and I and the Congress believes that these people should get, because we are really talking about working families receiving a dramatic increase in taxes and also the fact that some of them come 

from high-tax States like New York and California, so that if we 

do not do anything, we are involved in increasing taxes, which I 

think we can agree that the Administration and the Congress 

would not want that to happen. If you are just saying that it is 

some way down the line we will find some answers to it, but we 

do not know what the Administration would want, then I will accept that, except that we have thought that your Department 

would be a little more specific. 

What about the problem we have with the WTO? So far, I 

haven’t gotten any direction from the Administration. You talk 

with the trade ambassador. He says he is not a tax expert, that 

that is Treasury’s department, not a trade department. You talk 

with the Chairman of the Committee, and he does not talk with 

you, so you talk with people on the other side that will they come 

up with something, and that is rejected. 

It might make it a lot easier for us if we found out where is the 

Administration; do you support the Chairman; do you support alternatives; are you involved in this at all? What do we say to our 

foreign friends when they threaten us with a $4 billion increase in 

tariffs against our manufacturers? What do we say, that Treasury 

18

hasn’t made up their mind, trade hasn’t made up their mind, and 

we have a political dispute on the Committee? 

Ms. OLSON. Mr. Rangel, there are a number of things that could 

be done to address issues in the Tax Code with the revenues that 

will come from repealing FSC and ETI. We have outlined a number 

of those options in the budget. Many of those options would inure 

to the benefit of manufacturers in particular. 

I would note the AMT changes that are discussed in there. Manufacturers bear a particular burden from the AMT because of the 

capital-intensive nature of the business and because of the cyclical 

nature of the business. The same is true with changes to the net 

operating loss rules. 

There are a variety of things that we could do that would improve the tax system for manufacturers and make them more competitive. 

Mr. RANGEL. Madam Secretary, there is a lot of controversy involved in whether or not we use the revenues that we save by correcting the FSC problem as to whether the incentive should be 

given to American businesses that are offshore, or whether we 

should have a more equal distribution of this tax benefit, because 

by removing it the way the WTO would want, you would agree 

with me that this would be a substantial increase for our exporters. 

So, it is a very difficult political question, and I know there are 

many ways to do it, and, if you are saying that in the future, after 

you leave, somebody else has got to give us some guidance, I accept 

that. The Secretary was specific in saying that your shop was the 

one that dealt with these type of things, so we are not getting any 

answers from you on these sensitive questions. 

It is a political year, and it would be very helpful if the President 

and his Cabinet at least say that this is what I want you to do, 

but you try to work it out, because, after all, you are the legislators; but, if you are just going to have us have a food fight over 

these things politically, I do not really think the country or the Administration benefits from not dealing with these specific questions 

because they are so difficult politically. Thank you. 

Chairman THOMAS. I thank the gentleman. The gentleman 

from Illinois wish to inquire? 

Mr. CRANE. Thank you Mr. Chairman. 

Chairman THOMAS. Would the gentleman yield briefly? 

Mr. CRANE. Yes, indeed. 

Chairman THOMAS. One of the things I would hope we would 

all learn from the AMT situation was that in 1986, in the tax bill, 

there was an attempt to, quote/unquote, get a group of people, and 

then in the 1993 tax bill there was a failure to index the way in 

which we were going to get a certain group of people. 

One of the lessons I would hope we would learn from this is that 

when we do not go back to fundamentals and we do not change the 

way in which we decide to define groups and tax them, you are 

going to find yourself in these kind of situations. We should have 

done it more fundamentally back in 1986 and indexed it in 1993, 

and the consequences of not doing so are the current situation that 

we are in. 

I do want to remind people that we were not in charge at that 

time, and my hope is that whenever we do these kinds of tax 

19

changes, that we deal with fundamentals and not be driven by the 

desire to, quote/unquote, get certain people. 

Mr. RANGEL. Mr. Chairman, Mr. Chairman, I respect the prerogatives of the Chair, and I do not want to do anything to diminish it because I still believe that one day I will be Chair, but having said that, there should be some basic rules involved as to 

whether or not the Chair believes it has to politically respond to 

everything that the Minority says, because we have had some discussion on this subject matter, and that would give you about 20 

much more times to pontificate than the rest of us. So, at some 

point, and perhaps not openly, we ought to agree on how we ought 

to handle that. 

Chairman THOMAS. Tell the gentleman I recognized the gentleman from Illinois, asked for him to yield to me, and the time 

that the Chair was speaking was on the gentleman from Illinois’ 

time. The Chair recognized the gentleman from New York, and it 

will not come out of the gentleman from Illinois’s time. 

Mr. RANGEL. I appreciate that. 

Chairman THOMAS. If the gentleman or any other Member 

yields on a request for time and I will utilize that time, that is 

wholly within the rules, has been in the rules, and will be in the 

rules. 

Mr. RANGEL. Well, let me apologize to the Chair, and I am 

sorry that both of us has utilized all of Mr. Crane’s time. 

Chairman THOMAS. I think you will find that all of Mr. Crane’s 

time has not been utilized, and I want to thank the gentleman 

from Illinois for yielding to me. 

Mr. CRANE. I most certainly appreciated the opportunity to 

yield some time, and I want to express my appreciation to Madam 

Secretary for your tour of duty. We think you have done an outstanding job, and we know that you look forward to going back to 

the real world for a change, too. 

Ms. OLSON. Thank you, Mr. Crane. 

Mr. CRANE. One of the things you mentioned in your testimony 

dealt with the leasing issue, and I just want to say, as a matter 

of my personal convictions, any retroactivity in taxes, to me, is totally unacceptable. If there are reforms that are called for, that is 

one thing, but there is no retroactivity being contemplated, is 

there? 

Ms. OLSON. We have proposed that the provisions take effect 

the first of this year, so there is a little bit of retroactivity, about 

2 weeks’ worth. 

Mr. CRANE. The first of this year? 

Ms. OLSON. Yes. 

Mr. CRANE. Okay. All right. One of the major issues to me, of 

course, is the repeal of the ETI and being WTO-compliant. We have 

that deadline that has been extended to March 1st, and starting 

March 1st, if we do not act, we are going to start taking a hit, the 

beginning of a hit, that could amount to on an annual basis over 

$4 billion to our manufacturers that are trading abroad. One of the 

worrisome things is we are almost halfway through the month already now, and we are about to have a full week off during the 

President’s break. I hope that the Administration is working to try 

and get action taken. 

20

Action has been taken in Committees, both the Senate and the 

House, and while there are differences there, I think we can negotiate over the differences and hopefully get that reconciled. We 

really need a full court press by the Administration; otherwise, to 

me, there are some very serious concerns about what could happen 

after March 1st, and it is not just taxes. It is tariff protectionism. 

Ms. OLSON. I certainly recognize that concern, Mr. Crane. We 

have been spending a lot of time on this issue. I think there are 

probably more similarities between the bills that have passed the 

Senate Finance Committee and the Committee on Ways and Means 

than differences, and I think we can get together to get them reconciled and get legislation passed. We are certainly encouraging 

Congress to do so and are certainly willing to do whatever we can 

to help move in that direction. 

Mr. CRANE. Well, I appreciate that, and I would hope that we 

could make an outreach to some of our colleagues on the other side 

of the aisle who are basically on the right track, but need a little 

bit of encouragement. 

The other thing, the provisions in the Tax Code that are scheduled to sunset, some as soon as the end of this year, what would 

likely happen if we failed to extend that 10-percent bracket, the 

marriage penalty, and other tax relief that is set to expire in 2004? 

Ms. OLSON. Well, we would have a very quick increase in taxes 

on lower- and moderate-income folks; in particular, the ones who 

benefit from the child credit, the ones who would benefit particularly from expansion of the 10-percent bracket, and those who benefit from marriage penalty relief, which is a complete elimination 

of marriage penalty at the lower end, moderate-income levels. So, 

we would see increases across the board there. 

Mr. CRANE. Thank you very much, and good luck to you, 

Madam Secretary. 

Chairman THOMAS. Thank the gentleman, and thank him once 

again for his willingness to yield. Gentleman from Michigan wish 

to inquire? 

Mr. LEVIN. Thank you, Mr. Chairman. Welcome. Just a minute 

on the earned income tax credit (EITC) changes. As I read the 

budget proposal, it includes some efforts to simplify the EITC for 

working—poor working families. Do you consider these simplification provisions important ones? 

Ms. OLSON. Yes, we certainly do. We believe that a lot of the 

problems that we see with errors in the EITC area stem from the 

fact that the rules are complicated and difficult to follow, and that 

the changes that we propose would go some distance to eliminating 

those problems. 

Mr. LEVIN. Thank you. On the AMT, you mention there was a 

range of estimates. Tell me what the range is. The Secretary—I do 

think Mr. Rangel is right—mentioned $700 billion. What is the 

range? 

Ms. OLSON. Dealing with the AMT issue, I think, is going to require us to take a very significant look at the underlying 

underpinnings of our tax system on the individual side, and that 

is what we are undertaking right now at the Treasury Department. 

I believe that if we simply extended the patches and current law, 

that cost would be something north of $400 billion over a 10-year 

21

budget window. Depending on how you scale those things up, you 

could go higher; you could go lower. Mr. LEVIN. So, $400 billion is some figure that people could 

work with? We have to have some idea. 

Ms. OLSON. It depends on what you want to do, Mr. Levin. Our 

recommendation would be that we not continue to patch the system, but rather that we take a more significant look at the tax system, because right now the fact that there are two separate tax 

systems adds considerably to the complexity of the system. It 

means a loss of transparency for people in terms of understanding 

how the system works, what their tax systems are, and for making 

plans for taking provisions for various things in the Tax Code that 

are intended to provide various things like education benefits. So, 

we would like to step back and take a very significant look, longterm look, at the system, not just to continue patching it, but rather to bring the two systems together. Mr. LEVIN. Okay. So, patching it would cost at least $400 billion, more or less? 

Ms. OLSON. That is my recollection. 

Mr. LEVIN. Okay, and a more basic set of reforms, what are the 

ranges of cost there? 

Ms. OLSON. It depends on how far you want to go, Mr. Levin. 

Mr. LEVIN. Well, give us some idea. 

Ms. OLSON. We will be doing it on a revenue-neutral basis, as the Secretary suggested, to something far in excess of $400 billion. 

Mr. LEVIN. How long has the Treasury been working on this? 

Ms. OLSON. We have been looking at the AMT issue for as long 

as I have been at the Treasury Department. 

Mr. LEVIN. How long has that been? 

Ms. OLSON. Three years, Mr. Levin, and so far we have proposed only patches, but we really do need to stop just patching the 

system and go back and take a harder look at it. 

Mr. LEVIN. See, here is the problem: you have been working on 

this for 3 years. What is proposed in the budget is minimal, just 

a temporary addressing of it, and so it pushes the whole issue of 

cost off another year. 

It is pretty clear to most people it is going to be costly to fix it. 

There is no provision for that in this budget, which already has 

huge deficits. It is that kind of failure to kind of come clear, if not 

clean, that leads people to be very skeptical about the candor. 

I was reading a comment of former Treasury Secretary—someone 

who is not a Secretary, but in the Reagan Administration, William 

Niskanen, and he said this about this budget, ‘‘I despair’’—this is 

in quotes—‘‘I despair about this budget. I do not think Bush is 

being honest with the world. I am not sure he is being honest with 

himself.’’

We need to tell the American people that changing the rules as 

to AMT is going to cost considerable moneys. You have already 

been working on this for 3 years. A patch is $400 billion. There is 

no indication that we can go beyond that in the immediate future, 

and so there is that huge hole there that isn’t filled. 

We have got to be sure that there isn’t an increased credibility 

gap, and this budget is just filled with gaps in terms of credibility, 

and the AMT is clearly one of them. 

22

Ms. OLSON. Mr. Levin, we have been working on a lot of other 

things for the last 3 years as well. It has been a busy time—-

Mr. LEVIN. I know. 

Ms. OLSON. In the tax policy area, and I can assure you that 

we are going to continue to be working on it, and that we do intend 

to propose our level best. 

Mr. LEVIN. When? 

Ms. OLSON. Our goal is to have something ready for the budget 

next year. 

Mr. LEVIN. Not this year. 

Ms. OLSON. Well, we passed the budget for this year already, 

but we are looking forward to something—something in the budget 

next year, and we are looking forward to working with the Committee to finding a solution to the AMT issue that is fair and appropriate for all. 

Chairman THOMAS. The gentleman from Louisiana, Mr. 

McCrery wish to inquire? 

Mr. MCCRERY. Yes. Thank you, Mr. Chairman. Ms. Olson, I 

would like to add to the Chairman’s comments that I very much 

appreciate the service you have given the Bush Administration and 

the American people. You have been very professional and forthright in your dealings with us, this Committee, both in your appearances and hearings and in meetings that we have had, and I 

want to add my commendation to that of the Chairman of your efforts on our behalf. So, thank you very much. We will miss you. 

Ms. OLSON. Thank you, Mr. McCrery. 

Mr. MCCRERY. I would like to get back to this leasing question. 

The retroactive date does concern me. This Committee has in the 

past, on occasion, stated unequivocally—in the case, for example, 

of a change in the capital gains rate, if we change the capital gains 

tax rate, then it will be effective as of this date, and we do that 

so that there will not be distortion in the capital markets. I think 

that is a very valid reason to set an arbitrary date, even without 

full legislative action. 

In the case of the leasing provision, though, it seems to me we 

risk having just the reverse reaction in the market if you set an 

arbitrary date before any action is taken. It seems to me that could 

put a chill on the market and perhaps distort market activity, and 

perhaps even slow down or even prevent what you and I might regard as legitimate leasing activity that should be—have some tax 

advantages. 

So, I am concerned about the retroactivity, and I hope the Chairman of the Committee on Ways and Means will join me in stating 

unequivocally that this Committee does not intend to enact a retroactive date of application. In fact, we will wait until at least this 

Committee takes some definitive action and crafts a proposal that 

does what the Chairman said, draws that bright line, so that we 

can distinguish the policing arrangements that we think are appropriate for favorable tax treatment and those that are not. 

Chairman THOMAS. Gentleman yield on that point? 

Mr. MCCRERY. Yes, sir, be glad to. 

Chairman THOMAS. You clearly outlined a concern about 

chilling the marketplace, but I think there is some concern as well, 

since this is a bit amorphous in that we haven’t been able to create 

23

that spectrum and draw that line, that there will be a number of 

people who will rush to judgment in putting together a number of 

deals that may, in fact, fall on the abusive side of the spectrum and 

then argue they should not be reproached because that would be 

retroactive. 

I do think, notwithstanding the leasing attorneys, it probably 

takes some time to put these deals together, that we have a window of opportunity, one of the reasons I urged we move fairly 

quickly on looking at the structure. I do want to support your argument. It makes no sense that we would draw some date from the 

previous year or January 1st as the date that we would operate 

with, but if the gentleman brings this subject matter up, my desire 

would be to act as contemporaneously as possible. 

We have product and we indicate that henceforth that activity 

would not be allowed based upon the legislation that we draw, but 

it underscores the haste at which we need to come together on this 

legislation. 

Mr. MCCRERY. I agree with the Chairman’s assessment of what 

would be appropriate in terms of the timing of this. 

Ms. OLSON. Mr. McCrery, we did give careful thought to the effective date on the market, and we did try to put within the scope 

of the changes we propose that had things that we think really are 

problems and that you would not want to go forward on any basis. 

There are certainly room on some of the changes as you look at 

them that you might conclude that what you need is a split effective date; that some of the provisions should be effective as of the 

first of this year, whereas others might be effective as you move 

forward with legislation. 

Mr. MCCRERY. Thank you. One more question, it is switching 

subjects here, to the international tax reform. This Committee, as 

you know, passed out legislation last year that not only repealed 

FSC/ETI, but made a number of changes in our international tax 

provisions, and some critics of those changes have claimed that the 

effect of those changes would be to encourage jobs to move overseas. Would you comment on that? What is your opinion and Treasury’s look, because you recommended some of those changes? 

Ms. OLSON. Yes, we did recommend some of those changes, Mr. 

McCrery. 

One of the concerns has been that we are taking the FSC/ETI 

benefits and we are giving them to people who are moving jobs offshore, which is sort of a line that has been used, but right now the 

current FSC/ETI beneficiaries are by and large in multinational 

companies. Those multinational companies have businesses offshore not because they are manufacturing over there and then 

shipping things back, but because it is important for them to be 

there to serve the local market. 

A lot of their offshore activities that would be benefited by some 

of the international reforms that we have talked about and this 

Committee has considered would allow them to more efficiently 

market U.S.-made products. So, we do think that it is important 

for us to look at international reform. Right now, we are driving 

around in a 1960 Chevy pickup, and everybody else is working in 

virtual reality. We need to reconsider our rules. 

Mr. MCCRERY. Thank you. 

24

Chairman THOMAS. Thank the gentleman. The gentleman from 

Maryland, Mr. Cardin wish to inquire? 

Mr. CARDIN. Thank you, Mr. Chairman, I do. First, let me 

thank Ms. Olson for your public service. We very much appreciate 

working with you and the Committee. 

Ms. OLSON. Thank you. 

Mr. CARDIN. Yesterday Secretary Thompson was before the 

Committee, and he made a statement that was rather dramatic, 

and that was that he believed the President’s proposals would cut 

the number of uninsured for health insurance by 50 percent. The 

tools that the President has in his budget all fall within Treasury, 

so let me take a chance, if I might, to inquire as to Treasury, as 

to the numbers that you have; first of all, the number of people 

who currently do not have health insurance, at least your numbers 

in that regard, and how you believe the HSAs that were included 

in last year’s medical bill would reduce those numbers. Then the 

additional tools that you have in this budget for the deductible savings accounts and the credits, how that will impact the number of 

uninsured? 

Ms. OLSON. Thank you, Mr. Cardin. First I am pleased to say 

that there are some proposals that fall outside of Treasury’s bailiwick. I think there are some proposals on the State Children’s 

Health Insurance Program (SCHIP) and some proposals on associated health plans that are both outside of Treasury’s bailiwick, and 

both of those I believe Secretary Thompson believes would contribute to reducing the number of uninsured. 

There is a fairly wide variation in the estimated number of uninsured in this country. The number that we typically work with is 

something north of 40 million. The budget proposals that we put 

together, we believe, would reduce the number of uninsured on the 

tax side, the tax budget proposals, by something of 4 or 5 million. 

The low-income health insurance tax credit in particular would 

help a good segment of that part of the market be able to get 

health insurance which currently cannot. 

The HSAs are targeted at a different problem, which is trying to 

introduce some more cost-consciousness into the health care market with the goal of making people consume less. So, that is the 

direction that the HSAs go, and the high-deductible health insurance premium deduction along with that; again, to try to put some 

of this back into the control of consumers to make them more sensitive about it. 

Mr. CARDIN. I appreciate that. So, when you’re dealing with the 

number of uninsured, the 4 to 5 million that you believe would be 

on the tax side would be in primarily the credit? 

Ms. OLSON. That is correct. 

Mr. CARDIN. I thank you for that, and we will question Secretary Thompson more how the SCHIP program and the others, 

the association plans, will, I guess, equal another 20 million somewhat. 

Ms. OLSON. He does believe very strongly that those are the answers to that, and part of the answer to the health insurance tax 

credit allows people to work with the State pools, which again he 

believes very strongly there is a solution. 

25

Mr. CARDIN. Those numbers do not seem credible, but we will 

go back and look at that. We have done a lot to advance these 

issues, and they have had minimal impact of reducing the number 

of uninsured in our health system. 

I want to touch on the defined benefit comment that you made, 

that you are concerned about the defined benefit plans, as we are 

concerned about it. I personally believe it is the preferred source 

for retirement security because it is a guaranteed benefit for individuals, and it is one that is generally better managed than individuals’ defined contribution plans. 

So, what is the Administration’s position on the replacement 

now, 30-year Treasury? We have a bill that is moving through the 

Senate and one through the House. We have a 2-year temporary 

bill that substituted a corporate bond mix. I saw that you issued 

a veto threat on the Senate bill. Is there a specific position that the 

Administration has now? 

Ms. OLSON. We support the temporary fix that the House has 

passed. We would like to see that enacted into law, and that is an 

issue that has to be addressed fairly quickly for the corporate community. So, we would encourage you to move forward with that. 

The bill that has passed the Senate side includes some deficit reduction contribution (DRC) relief for a couple of specific industries 

and then with a rather amorphous permission to the IRS to grant 

other relief. We are very concerned about the DRC relief just continuing to exacerbate the problem with underfunded plans, and 

that is what has caused the concern. 

Mr. CARDIN. I share your concern, but I would point out the urgency to try to resolve this. Mr. Chairman, we are going to run into 

a situation where the well-funded plans are the ones that are going 

to be freezing or converting or leaving the defined benefit market, 

and we will be left with more and more plans that are underfunded 

because they have no opportunity to do much other than that. I 

wasn’t happy with the 2-year fix, but it was a temporary fix, but 

it was a better option than doing nothing, and I would hope that 

we would be able to get the bill to the President’s desk that he can 

sign as soon as possible. 

Chairman THOMAS. I thank the gentleman. Gentleman from 

Pennsylvania, Mr. English wish to inquire? 

Mr. ENGLISH. Thank you, Mr. Chairman. I do. I would also like 

to congratulate Secretary Olson on her extraordinary service and 

the activism that she has brought to this job, which is so refreshing. 

Madam Secretary, I have heard concerns from companies in 

Pennsylvania about a proposal in the Senate Finance Committee 

ETI bill relating to what is called the economic substance doctrine. 

My constituents are concerned that this doctrine should be left to 

the courts, and attempting to write it into statute would interfere 

with ordinary business transactions. In a region that has seen, I 

dare say, more than its share of difficult economic times, we see 

this as another potential burden on the global competitiveness of 

certain companies. What is the Administration’s view of this proposal? 

Ms. OLSON. Thank you, Mr. English. We have had considerable 

concern about the attempts to codify the economic substance docVerDate jul 14 2003 06:21 May 28, 2004 Jkt 093793 PO 00000 Frm 00029 Fmt 6633 Sfmt 6602 E:\HR\OC\93793.XXX 93793
26

trine as well, because although we think there are very serious 

compliance issues out there that need to be addressed, we don’t 

think the economic substance doctrine—the codification of the economic substance doctrine would be particularly effective in addressing those. 

The statutory provisions that have been drafted are very complicated. I think it would be very difficult for the IRS to apply, 

which would mean they would not be particularly effective as a tool 

for the IRS, and they have the potential of hitting a number of 

transactions or chilling a number of transactions that really aren’t 

the intended target of it. We spent a lot of time looking at this 

issue in trying to find ways to direct the effort into the things that 

actually cause us concern, and I think that is a more fruitful direction to go. 

Mr. ENGLISH. Do you believe that the proposals in the President’s new budget on combating abusive tax avoidance transactions 

will be sufficient to address the serious problem of abusive tax 

shelters? 

Ms. OLSON. We believe that we have made a real dent in the 

marketing of abusive tax transactions over the course of the last 

3 years with much more aggressive enforcement activities by the 

IRS and with the regulatory changes that we have made. What we 

could really use is some statutory changes that would allow us to 

complete the web of information that the IRS relies on in order to 

combat abusive transactions. The statutory provisions that we have 

requested changes for would allow us to do that, and we would 

urge the Committee to go forward with those. 

Mr. ENGLISH. Thank you. Finally, I have noticed there have 

been discussions so far in this hearing about the individual AMT, 

which is certainly a very serious and growing problem that the Administration, I think, is clearly building some particular capital to 

deal with. Certainly your predecessors did not address this problem, and it has been out there since the eighties growing in force. 

The issue that I wanted to finally ask you about is the corporate 

AMT, probably the most perverse provision, I think, in the entire 

corporate code. When I first came to Congress, I introduced a bill 

to repeal it because I think it is a dead drag on the competitiveness 

of the manufacturing economy. In your view, can you explain why 

the AMT might be, on the corporate side especially, stifling to manufacturing and how its repeal might boost manufacturing? 

Ms. OLSON. Certainly. We did include in the budget discussion 

of the FSC/ETI repeal three specific items with respect to the corporate AMT that the Committee ought to consider if it wants to improve the climate for manufacturing in this country. One of them 

is the depreciation differential that exists between regular tax and 

the corporate AMT. The fact that that provision is in the AMT increases the cost of capital, which is a particularly significant item 

for manufacturers who tend to have high capital investment. So, 

getting rid of that provision would be a significant positive for 

manufacturing. 

The other two items that we specifically refer to in the budget 

are the limitation on net operating losses and the limitation on foreign tax credits that exist in the AMT. Both of those, likewise, have 

a particularly bad effect on manufacturers. Manufacturers, because 

27

of the cyclicality of the industry, are more likely to get caught by 

the AMT because that is when the AMT tends to kick in—when the 

economy is down. 

Mr. ENGLISH. It is the ‘‘kick them when they are down’’ tax. 

Ms. OLSON. There you go. Anything we can do to reduce that 

effect would be a positive for manufacturers. 

Mr. ENGLISH. As Co-Chairman of the Zero AMT Caucus, which 

is gearing up its efforts now, we really appreciate your suggestions 

on some incremental steps to begin to reduce the impact of the corporate AMT with an eye toward its eventual abolition. 

Chairman THOMAS. Gentleman from Washington, Mr. 

McDermott wish to inquire? 

Mr. MCDERMOTT. Thank you, Mr. Chairman. Ms. Olson, if I 

applied for a 501(c)(3) status for an organization that I created, and 

the public planning of that organization was a fundraising event 

which provided access to the Democratic leadership at the next 

Democratic convention, do you think that would fall within the 

guidelines for 501(c)(3)? 

Ms. OLSON. Doesn’t sound like it to me. 

Mr. MCDERMOTT. Didn’t sound like it to me when Mr. DeLay 

did it either. When I wrote a letter to them, they said that the IRS 

has not received—has not recognized—the children’s fund is exempt from Federal income tax. We have no record of a Celebrations 

for Children, Inc. (CFC) filing on a Form 990. So, it sounds like he 

is telling people he is a tax-exempt organization, but, in fact, he 

has no status with the IRS. 

Now I will enter into the record the brochure of the organization, 

but I assume that if the CFC has an application that is still pending, I have a question. Will the contributors that contribute to that 

organization be allowed to have a tax deduction this year for 

money they contributed to the organization under the belief that it 

was going to be a 501(c)(3)? 

[The information is being retained in the Committee files.] 

Ms. OLSON. I am sorry, Mr. McDermott, that is an area I am 

not familiar with, and I will be happy to take the question back 

and get you an answer. 

Mr. MCDERMOTT. You can’t tell me whether—you start an application for an organization, and you have an application in, and 

you start collecting money, you can’t tell me whether people get the 

tax exemption or not? 

Ms. OLSON. My guess is that the answer is no, you don’t, but 

I believe there are some exceptions to that rule, and I don’t want 

to answer the question without having the rules in front of me to 

be able to answer it definitively. 

Mr. MCDERMOTT. I will tell you that the IRS liaison to the 

Congress says, yes, you do get the deduction. You can take the deduction even though it is pending. The question is, how does Treasury go back and get the taxes if they deny the 501(c)(3) status? 

Ms. OLSON. I don’t know the answer to that question either, Mr. 

McDermott. I would be happy to get you an answer to the question, 

but I can’t answer it today. 

Mr. MCDERMOTT. I think it is a question we really ought to 

look at. I think the Republican leadership setting up this shadow 

501(c)(3) and going out and collecting and telling people they are 

28

going to get a tax exemption and don’t have to disclose who gives 

the money, no requirement for a 501(c)(3) to declare where they got 

the money from or how much, and it then could be denied after the 

election, and lo and behold, everybody would have taken the tax 

deduction. How will the Treasury go back and find them? Will they 

bill them, or will they audit these people if a tax deduction or if 

a tax organization loses its fight for an exemption? 

Ms. OLSON. I don’t know the answer off the top of my head. I 

will be happy to go and get one for you. 

Mr. MCDERMOTT. Well, I think it is something that the Committee ought to take up, Mr. Chairman. I think when the leadership of the Republican party is setting up what I believe is an operation to use the Tax Code as was used by the previous Speaker and 

then—he collected money from Mr. Callaway, a former Member of 

Congress from Georgia, and then the exemption was taken away, 

and then the Department never went after the money. They reversed their decision a second time. So, they granted a tax exemption, took it away, and granted it back. There is nobody on this 

Committee that can get the papers from the IRS. 

That is a travesty of the Tax Code, because it allows all kinds 

of foolishness and deception to go on. I really think this is an issue 

that ought to be taken up by this Committee. I yield back the balance of my time. 

Chairman THOMAS. The gentlewoman from Connecticut, Mrs. 

Johnson wish to inquire? 

Mrs. JOHNSON. Thank you, Mr. Chairman, and thank you, the 

Honorable Assistant Secretary Pam Olson, for your excellent service to the Treasury and also to this Committee. I appreciate the 

very clear presentation you just made of the impact of tax changes 

adopted in recent years on the recovery. It was clear and concise, 

and people need to understand how important tax policy is to the 

strength of our competitiveness and of our economy. 

I am also pleased with the President’s willingness to go ahead in 

very difficult times to address the problem of the uninsured. Indeed, the presence of so many uninsured is pulling down all of our 

provider organizations. So, it is important we move forward on 

that, and it is a suggestion we can build on. 

The loophole closing and the AMT discussions are ones that I 

support, but I would have to say that I feel the Administration has 

been somewhat lackadaisical in their attitude with this problem 

with Europe. I know you talked about it, but this is big. There is 

$14 billion in product that can be cycled through. For a soft economy, if this starts March 1st, this is a big issue. I am concerned 

that there hasn’t been more emphasis on it; and furthermore, there 

hasn’t been more willingness to say since the last time we made 

big changes in our tax law, we made our corporate rate the lowest 

in the world, we now are the second or third highest in the world 

in every avenue, whether it is research and development (R&D), 

corporate taxes, or capital gains or whatever, we are behind. 

Not only do our business taxes not fall off our exports like they 

do from Europe, but the tax burden our products carry into the 

competitive world market is higher than most countries. If our 

global companies are to survive, and if we are to begin stemming 

29

the offshoring of component parts to countries like China, we have 

to help them be competitive. 

I think using this opportunity not only to address the FSC/ETI 

problem, but also to strengthen the competitive positions of our 

businesses is the biggest thing we can do to protect existing jobs 

and to bring jobs back to our country. It is just so bizarre that if 

you invest profits overseas, you don’t get taxed. If you bring them 

back here, you do. 

To me, jobs and the economy is the whole thing. If we don’t deal 

with this, jobs and the economy—jobs are going to go, and the economy is going to suffer. I don’t mean to be disrespectful, but I do 

feel a lack of urgency and the lack of sort of big picture thinking 

on this issue. I think this Committee—and I commend the Chairman on this, and Mr. Crane worked with him, and many Members 

did, on the comprehensiveness on this bill. It pains me to think 

that it is complicated, that we can’t move forward. What it did for 

small manufacturers in America we never thought about doing. We 

never come close. We have to depreciate like the rest of the world 

does. So, we have to encourage investment and inventory and machinery and equipment. 

I just needed to say that, and thank you for your good service 

and your testimony. I hope the Administration will get out there 

with us and push hard. To me that is much more important than 

making the tax changes permanent. I understand the need for 

some to be made permanent now, but this is the biggest issue, the 

job protection issue, I think, we face. 

Ms. OLSON. We do have a couple of provisions in the budget 

that should be made permanent that definitely move in that direction for companies that are trying to produce more jobs here in the 

United States. Among them would be section 179. We need to make 

that permanent. Of course, the research and experimentation 

(R&E) credit, which expires on the 30th of June of this year. 

Mrs. JOHNSON. How long do you extend that for? 

Ms. OLSON. We would like to see it made permanent. 

Mrs. JOHNSON. Do you fund making it permanent in your 

budget? 

Ms. OLSON. No. We think it should just be extended. 

Mrs. JOHNSON. For how long? 

Ms. OLSON. We would like to see it made permanent. The point 

you are making is exactly right. There is a tremendous competition 

worldwide for R&E today, and R&E is our future, and we have to 

invest in R&E. If we don’t make the credit permanent, then what 

we continue to do is leave companies uncertain about whether they 

should be making the R&E investments here or making them 

somewhere else. I think we need to move forward with that. 

Mrs. JOHNSON. Thank you. 

Chairman THOMAS. If you want to make something permanent 

that costs money, you have to show us where you are going to get 

the money. It is out there. Gentleman from Massachusetts, Mr. 

Neal wish to inquire? 

Mr. NEAL. Thank you very much, Mr. Chairman. I am going to 

suggest where we can get $5 billion pretty quickly. Again, as the 

other Members stated, thanks very much. You were particularly 

helpful on a couple of constituent issues that appeared to be lost 

30

causes. You and your staff did a great job of really helping out on 

an individual basis, and I have not lost sight of that. 

Ms. OLSON. Thank you, Mr. Neal. 

Mr. NEAL. I still can’t leave you off the hook on AMT. Isn’t it 

fair to argue that the tax cuts over the last 3 years have exacerbated the AMT situation? 

Ms. OLSON. The lower tax rates—because of the way the AMT 

functions, the lower tax rates have become a preference, but that 

has been the case since the rates increased back in 1993. I can recall meetings with my predecessors back in the nineties, and the 

complaint that we got at the time was that there were too many 

AMT forms being filed. We, at the time, said, this is your future. 

You need to do something to address the fact that the AMT is not 

indexed, and the problem is going to get worse because of the increase in the rates. 

Chairman THOMAS. Would the gentleman yield briefly on that 

point? The reason I don’t believe we have exacerbated the AMT is 

because every time we have passed a tax bill, we have vetted the 

hold harmless aspect of the AMT, and it has been tens of billions 

of dollars to try to not have the problem that you are concerned 

about happen. So, I believe we have held them harmless, but at an 

enormous cost to tread water. This won’t come off the gentleman’s 

time. 

Mr. NEAL. There obviously is a difference of opinion as it relates 

to this issue between the Administration and the Chairman’s perspective on this, but let me take this a step further and maybe 

make reference to the Chairman’s opening comments as well. 

I accept the responsibility on our side for what happened in 1986 

and 1993, but can we not make the argument that the Majority has 

now been in charge of this institution for 10 years, and trying to 

get around to fixing this issue ought to have priority status? It 

strikes me it was so easy to proceed with tax cutting, but not to 

address the attending issue of what the tax cutting has done. 

I heard Members speak earlier today of the notion of what we 

are going to take care of the marriage penalty down the road and 

other issues that had such sex appeal here, and the problem is that 

the taxpayers, as they begin to take advantage of these opportunities in the Tax Code, what we give to them on one hand with some 

tax preference we are going to ask back to the Treasury because 

of AMT. Is that a fair statement? 

Ms. OLSON. For some part of the population, yes. 

Mr. NEAL. Exactly, yes. That is the point I am trying to make. 

I would suggest that as much as we talk about this—and I understand the Chairman’s sentiments that we do provide that patchwork, but it doesn’t escape notice here that the problem still gets 

worse. 

Ms. OLSON. It hasn’t escaped notice at the Treasury Department either, and I can assure you we have been looking very long 

and very hard at this. That is why there is a another 1-year patch, 

as opposed to a permanent patch. We think that we need to look 

at more significant structural changes to the income tax, because 

we don’t think leaving the AMT in place is necessarily the right 

thing to do. We are not sure that it serves the purpose for which 

31

it was initially enacted. We need to take a harder structural look 

at the income tax, and then come to you with a proposed solution. 

Mr. NEAL. I appreciate the sentiments you have offered, and you 

share my conclusion, if not some of the other information I put forward. If we continue down the road of making the Bush taxes permanent and don’t do anything with the AMT, we end up with doubling the problem over the next decade. As sincere as you might 

be today, I think we are going to be back with another 1-year fix 

next year and the year after. 

The Chairman talked about how we might raise some revenue 

from time to time. The most annoying problem I have had perhaps 

now in the 12 years I have been on this Committee is the whole 

issue of Bermuda. For us to have 134,000 troops in Iraq and to let 

these folks off the hook who, for a $25,000 to $27,000 post office 

box address, they are allowed to escape supporting these troops, 

men and women who have performed brilliantly, it strikes me as 

being odd that that would not be one of the things we could come 

up with a firm recommendation on. They should be paying their 

fair share. I have had estimates by the Joint Committee on Taxation and others here that suggested that we could pick up $45 billion if we would simply close the Bermuda loophole. 

Ms. OLSON. Well, we certainly agree with you that we need to 

take steps in that regard. I assume you are referring to the inversion activity in particular? 

Mr. NEAL. Safe assumption. 

Ms. OLSON. The issue that we saw when we did our inversion 

study 2 years ago that was really driving people offshore was the 

ability to reduce their U.S. taxes, taxes on U.S.-earned income, by 

leveraging those operations. We have taken—we have put forward 

a legislative proposal, and I know this Committee has passed a legislative proposal that would take the juice out of those transactions. 

We have acted on the regulatory front in two different ways. We 

issued regulations providing for information reporting on these 

transactions because our belief was that some of the transactions 

were going forward without the shareholders recognizing that they 

had a tax liability as a result of the transaction, and that that tax 

liability may not have been paid. We have also gone forward with 

changes in section 482 regulations, which would be another way for 

companies to move intangibles offshore and then charge royalties 

back to the United States, which would again reduce the U.S. taxable income of these companies. 

We have gone forward with changes in the section 482 regulations that begin to address those issues, and then we have been 

working hard on the treaty front as well. I think you know, there 

is one treaty in particular that has been used not to eliminate double taxation, but rather to eliminate all taxation. We have been 

working hard to get that treaty reformed as well. 

Mr. NEAL. One last question. Do you believe that Tyco is a Bermuda-based company, or do you believe that Tyco is an American 

corporation? 

Ms. OLSON. I am not sufficiently familiar with the Tyco structure to know where they belong. 

Mr. NEAL. They are incorporated in Bermuda. 

32

Ms. OLSON. I am aware they are incorporated in Bermuda, but 

don’t know enough about the structure. One of the things we have 

to consider in these is that the transactions of moving offshore are 

taxable transactions. They are going to be taxed either at the corporate level or the shareholder level. If the transactions go forward 

on that basis, then we have to give some recognition to what has 

occurred, or we shouldn’t be taxing the company or the shareholders. We shouldn’t just be saying, you didn’t leave, you are still 

here. I know some of the things that you have been thinking about 

are also some of the things we have been giving serious consideration to as well. 

Chairman THOMAS. The gentlewoman from Washington, Ms. 

Dunn wish to inquire? 

Ms. DUNN. Thank you very much, Mr. Chairman. I want to add 

my congratulations to Secretary Olson for a job well done. During 

our lives, those phases we go through every now and then, we see 

where attention needs to be directed in a new direction or different 

direction. I think you have picked up on that, and I congratulate 

you. 

What I wanted to chat with you about today is the effects of the 

estate tax on the economy of the United States. The Economic Report of the President, the one that we saw on Monday, mentions 

that—it talks about the negative impact of the estate tax, and it 

says, quote, ‘‘it is likely to take the form of a reduction in capital 

accumulation.’’ Then it goes on to say that part of the long-run burden of the tax is likely to be shifted to workers through a reduction 

in wage rates. I wanted to ask you a couple of questions and listen 

to your response. 

First of all, have the economists in Treasury attempted to evaluate the effect of the economy—of the depressing effect on the economy of the estate tax? Have you been able to estimate for this 

Committee the positive impact of eliminating the tax permanently? 

On the cost of repeal, lots has been discussed about the loss of the 

revenues from this tax, but none of the estimates that I have seen 

take into consideration the diversion of working capital to the costs 

involved in complying with producing this tax. 

There was an economic report that was completed last year by 

the CONSAD Research Corporation that indicated that permanent 

repeal would free up capital. So, my additional question is: don’t 

you think we need a more accurate picture of the actual effects of 

the repeal of this tax on our economy? Would you conclude as a result that this tax, if it were permanently repealed, could actually 

end up as budget-neutral? 

Ms. OLSON. Thank you, Ms. Dunn. Treasury has spent a lot of 

time looking at the economic effects of the estate tax, and obviously 

now, as the Council of Economic Advisers has indicated by the report they released on Monday. We would certainly concur in their 

conclusion that the estate tax is an additional tax on capital, and 

as an additional tax on capital, the logical effect is that you end 

up with less of it, and it translates through to reduced capital for 

workers and reduced wages, a ripple effect through the economy. 

The tax is also unfortunate because it is in many way a tax on 

virtue. It is a tax on those who are trying to leave a legacy to those 

33

they leave behind, and that is another unfortunate feature of the 

tax. 

One of the things that we analyze when we analyze the repeal 

of the estate tax was the income tax effect, because in some ways 

the estate tax and gift tax has served as a backstop to the income 

tax. So, that is one of the things we have to take into account as 

we look at what the costs of repeal are. 

Ms. DUNN. What about my question on budget neutrality? 

Ms. OLSON. That was my intended response to the question, 

that there are other effects besides just the revenues from the estate tax. It is the effect that it has on the backstop on the income 

tax that has produced some of the size in the revenue estimates. 

Chairman THOMAS. Gentleman from Texas, Mr. Johnson wish 

to inquire? 

Mr. JOHNSON. Pam, I just want to congratulate you on a job 

well done. You have been responsive to the Members on every occasion, and I just want wish you well in whatever endeavor you 

choose from here on. 

Ms. OLSON. Thank you. 

Chairman THOMAS. The gentleman from North Dakota wish to 

inquire? 

Mr. POMEROY. Thank the Chairman. Let me add my best wishes to Secretary Olson. Been a pleasure for a North Dakota boy to 

work with a Minnesota girl in this position you have held. 

Chairman THOMAS. You betcha? 

Mr. POMEROY. You betcha. That isn’t to say we ever quite 

agreed on several important matters, and I would say especially 

the savings issues. The Secretary, when he was here the other day, 

spoke of studies within the Treasury Department that supported 

the savings programs advanced in the budget. I have not read the 

studies. I have not been aware of studies in circulation. I asked the 

Secretary for them, and he indicated that you would be coming up 

to talk to me about those studies. Are there studies that have been 

reduced to writing that we can circulate for evaluation? 

Ms. OLSON. We have done a lot of analysis. There is one study 

that is out on the Treasury website that has been out for a couple 

of years on the effect of complexity on savings. The others are not 

reduced to formal studies. 

Mr. POMEROY. The lifetime savings account (LSA) proposal 

isn’t 2 years old yet. I am interested in whatever study might be 

in support of this significant reform. I find it somewhat amazing 

a statement in your testimony on page 5, LSAs have been designed 

to make the decision easy. It is a savings vehicle accessible to all, 

especially low- and moderate-income individuals. Let us talk about 

that for a minute. 

The LSA, as I understand, lets you put $5,000 in every year per 

family member, correct? 

Ms. OLSON. In every year, and every year that you can afford 

it, of course, and one of the things with low- and moderate-income 

folks is that they can’t afford to every year. So, whenever they have 

the ability to sock money away, we would like make sure they have 

the ability. 

34

Mr. POMEROY. Accessibility really relates to affordability. If you 

have wealth to invest, then you can access this savings vehicle. If 

you don’t, then you can’t. 

Ms. OLSON. I don’t think Mr. Gates cares about an LSA, but I 

think a lot of constituents would benefit greatly from it. 

Mr. POMEROY. We will talk about that, but let us get to this 

accessibility versus affordability. If you don’t have the money to put 

in it, you can’t access it. If a family of four every year can put 

$20,000 in an account and never be taxed on that money again, to 

suggest that that is going to be a vehicle principally used by 

moderate- and low-income people is, in my opinion, specious and 

false, because moderate- and low-income people don’t even make 

$20,000—low-income people, they don’t have the aftertax money to 

put into these accounts. 

Now it concerns me a lot that you have done away with savings 

incentives that have been in the marketplace and have proven 

themselves. You and I have a fundamental difference. You take the 

position complexity is a key bar to getting moderate- and low-income people to save. I went on the Internet and pulled down some 

individual retirement account (IRA) applications. Here is a 3-pager. 

Couldn’t be more simple. There are 36 million households with traditional IRAs. 

Ms. OLSON. Only 8.5 percent of the population participated in 

2001. 

Mr. POMEROY. Eight and a half percent is pretty good. You repealed this traditional IRA. 

Ms. OLSON. That is 8.5 percent for all kinds of IRAs. 

Mr. POMEROY. There are 36 million traditional IRAs, and you 

repealed them in the Tax Code. 

Ms. OLSON. Many of those rollovers. 

Mr. POMEROY. Madam Secretary, with respect, I have to finish 

my point here. I think what you need to get people to save when 

they are under very tight financial circumstances is some powerful 

incentives to save. The saver’s credit is showing some strong early 

promise in that regard. It is on the books. It passed this Committee, and in the year 2002 we had 3.5 million people participating. You wiped that one out, too. The tax-deductible IRA is 

gone. The saver’s credit, which matches savings by a partial credit 

for moderate- and low-income, gone. In exchange for that, you have 

got this account that disproportionately benefits those that can afford to put in up to $20,000 a year for a family of four. 

In my opinion, you have taken away the incentives that benefit 

low- and moderate-income. You have added a very substantial additional tax shelter. You seem to create a picture that when you talk 

about ownership society, essentially what you are talking about is 

taxes will be on wages, taxes will not be on investments. Is that 

where we are headed? 

Ms. OLSON. Where we are headed is in the direction of rewarding people who say—this Minnesota girl is a farmer’s daughter. My 

father was a sharecropper, and all of four of us went to college. 

Three of us have at least one advanced degree. We can save if we 

want to. What we want to do is encourage people to do more of it. 

That is the goal of this proposal, and complexity does get in the 

way. 

35

Of those 36 million IRA accounts, we are not wiping any of them 

out. People will be able to keep that on a going-forward basis. We 

haven’t looked at the saver’s credit yet. As you know, it doesn’t expire until 2006. 

I want to point out to you last year when we were here, you complained to the Secretary that we hadn’t done anything about the 

qualified tuition deduction, and in our simplification proposals we 

have taken that into account and making that permanent as part 

of the credit. We will continue to look at this and look forward to 

working with you on it because we have the same goals. 

Mr. POMEROY. As always our conversations are always stimulating. 

Chairman THOMAS. The Chair would recognize those individuals who may wish to make a brief statement rather than take 

their full 5 minutes, with the full understanding that the gentlewoman from Ohio will be recognized. The Chair is very cognizant 

of the time and the need to move to other activities and prepare 

for the Director of the Office of Management and Budget (OMB), 

who will testify at 2:00 p.m. Anyone who wishes not to go into a 

questioning at this time will be recognized at the beginning of the 

OMB Director’s time rather than waiting for additional time. With 

that, anyone want to take me up on my offer? The gentleman from 

Florida. 

Mr. SHAW. Thank you, Mr. Chairman. I just want to join and 

make a comment similar to Mr. Johnson’s comment that you certainly are going to be missed. Been a pleasure to have before this 

Committee. You seem to bring civility into the room with you, and 

we wish you all the best. I understand you are taking a respite 

here for all the right reasons, and I compliment you for it. 

Ms. OLSON. Thank you, Mr. Shaw. 

Chairman THOMAS. Gentlewoman from Ohio. 

Ms. TUBBS JONES. Ms. Olson, as much as I would like to ask 

you questions since you are leaving me, I would like to ask the 

next speaker more questions. I wish you success in your new position, and I will see you out in the street somewhere. 

Chairman THOMAS. Any additional Members wish to take me 

up on the offer? You want to ask a question, don’t you? 

Mr. HOUGHTON. I will be very, very brief. Look, I have a question about the R&D tax credit, and the regulations are fine, they 

are doing a good job. However, there is the glitch here in terms of 

making progress in developing rules for service companies. The 

only thing I am going to ask is would the Treasury be willing to 

work with the Committee to clarify the internal software rules? 

Ms. OLSON. Yes, Mr. Houghton, we would be delighted to, and 

that is a very complex area and have had a hard time dealing with 

it, and that is why we haven’t been able to finalize that part of the 

regulations. 

Chairman THOMAS. Software is hard. Gentleman from Illinois. 

Mr. WELLER. Thank you, Mr. Chairman. As I understand, if we 

would like to ask a question now, we are deferring our opportunity 

to the next panel. 

Chairman THOMAS. You will be taken in order at the next 

panel if you wish to inquire at this time. 

36

Mr. WELLER. Based on that understanding, I do have a question I would like to ask Ms. Olson. 

Chairman THOMAS. Gentleman from Illinois is recognized. 

Mr. WELLER. Thank you, Mr. Chairman and Madam Secretary, 

and wish you well in your future endeavors. You have been a great 

asset for the Bush Administration as well as all of us in the Committee. Thank you for the assistance you have given each of us. 

I would like to make a comment and then a question regarding 

a provision that we included in the jobs and economic growth package that the President signed into law last year. It is clear that the 

President’s jobs and economic growth package is working. We are 

seeing economic growth and have seen 300,000 new jobs created. 

Unemployment is dropping, and we have seen record levels of capital investment; in fact, the highest level ever recorded in history. 

Much of the credit for that capital investment is given by the most 

pro-manufacturing provision that was in the jobs and economic 

growth package, and that was the bonus depreciation provision. 

Manufacturing sector, general aviation seen a 38-percent increase 

for demand for their products; electronics technology, over a 40-percent increase in demand for their products; and the credit, the 

bonus depreciation as not only being a contributing, but a deciding 

factor. 

I noticed in the Administration’s budget that you submitted the 

expiring provisions at the end of this year. Bonus depreciation was 

not one of them. Can you share with us the thinking? Here is 

something that is clearly working, it is driving the economy and 

providing an incentive for business to invest. It is pro-manufacturing, and it is a sensitive area for all of us, and I was wondering 

why the Administration did not include it as part of the tax provisions in the Administration budget? 

Ms. OLSON. Thank you. It was included in the 2002 and 2003 

legislation with the Administration’s full support as a short-term 

stimulus, and we think some of the benefit from it has come from 

the short-term nature of the provision. That is why we have not 

proposed extending it. 

Mr. WELLER. How would you feel, though, if we were to extend 

it? Would the Administration support or oppose that initiative? 

Ms. OLSON. We have included in the budget a permanent extension of section 179, but our view at this point in time is that we 

would not be supporting—can’t tell you this is a definite position 

that the Administration has taken—but I believe the view would 

be that we would not extend a portion of the 50 percent. 

Mr. WELLER. I was wondering, like many of my colleagues, as 

an advocate of the bonus depreciation because it works and in driving economic growth, I feel that short-term economic stimulus, if 

you want to use that term, needs to be long-term economic growth. 

Clearly, reforming how we depreciate assets and moving toward expensing is a key part of that effort. I would like to work with your 

successor and our friends in the Administration to work toward 

that goal. I also would once again advocate extension of the bonus 

depreciation because, again, it is working, it is driving investments, 

and it is creating jobs. 

Chairman THOMAS. Any other Member wish to curry favor with 

the Chairman with a brief farewell? The gentleman from Colorado. 

37

Mr. MCINNIS. I have been quickly putting on my pad whether—

the plusses and minuses of questioning now or later, but I would 

like to ask a question now. I will complete it before the yellow light 

goes on. First of all, Madam Secretary, I, too, join the rest of the 

people to thank you for the excellent job you have done. 

Chairman THOMAS. The mike is not on. Use the one next to 

you. The Chair would like to convey the sincere appreciation of the 

gentleman from Colorado. 

Mr. MCINNIS. I will make a brief statement and not even a 

question. The fact is, you have done an excellent job here. I have 

in my hands a report which greatly concerns me. The report indicates that a deal was recently done which allows the same assets 

to be depreciated on three separate continents and countries at the 

same time, Australia, the United States, and France. The report essentially brags about this fact. Have you heard about this, and if 

so, are you also concerned about these transactions? 

I know you will have great success when you go. 

Ms. OLSON. We are similarly concerned about the triple depreciation option. 

Mr. MCINNIS. Thank you. 

Chairman THOMAS. We all want to thank you for your service. 

I know that this isn’t just a job for you, and that we will be able 

to work together on problems of common interest. I appreciate the 

service you have given the country. 

If there are no further questions, the hearing is adjourned. 

[Whereupon, at 12:45 p.m., the hearing was adjourned.] 

[Additional questions submitted by Representative Wally Herger 

to the Honorable Pamela F. Olson, and the response follows:]

Washington, DC 20515 

February 12, 2004

Ms. Pamela F. Olson 

Assistant Secretary for Tax Policy 

U.S. Department of the Treasury 

1500 Pennsylvania Avenue, Room 3120 

Washington, D.C. 20220

Dear Ms. Olson,

Thank you for taking the time to testify before the Committee on Ways and 

Means on February 11, 2004 regarding the tax proposals in the Administration’s 

FY05 Budget. As a follow-up to your testimony, I would appreciate the Treasury Department’s views on the issue of donated conservation easements. 

The Administration’s FY05 revenue proposals include efforts to ensure that patents, intellectual property and automobiles are valued correctly when donated to 

charity. I appreciate Treasury’s willingness to address these important issues. However, I am concerned that there is potentially much greater fraud and abuse in the 

area of land conservation and specifically concerning the donation of conservation 

easements. 

In 1976, Congress made donations of conservation easements tax deductible in an 

effort to encourage land conservation. Easement donors can claim Federal income 

tax deductions for any loss of property value caused by the restrictions on future 

development. The value of these tax deductions is generally established by appraisers hired by the land donor. 

How do we know that these appraisals are accurate? The Washington Post, in a 

series of articles last year, cites a case in North Carolina 2 years ago where luxury 

home builders bought over 4,000 acres in the Great Smoky Mountains for $10 million, developed less than a third of the land, and claimed a tax writeoff of $20 million. So while I appreciate the Treasury Department’s efforts to ensure that donated 

38

patents and automobiles are valued correctly, I am concerned that you may be missing a much larger area of abuse. 

A 1984 IRS study examined 42 deductions for easement donations and determined 

that all but one appeared inflated, resulting in overvaluations totaling nearly $32 

million. According to a General Accounting Office report on this study, taxpayers 

generally overvalued their conservation easement deductions by an average of about 

220 percent. The revenue implications of this study are immense, considering that 

today there are an estimated 12,000 easements nationwide. 

Has Treasury looked at this problem recently? What data does the federal government have on the amount of fraudulent deductions that are occurring? 

Finally, Treasury’s revenue proposals this year once again include a 50-percent 

exclusion of capital gains for land sales for conservation purposes. I continue to respectfully oppose this proposal as misguided tax policy. Already, more than 50 percent of my district is largely off limits to future development because it is owned 

by the Federal government. 

I would appreciate an explanation as to why the federal income tax system is an 

appropriate mechanism by which to encourage land conservation, especially in light 

of the tax abuses that appear to be occurring in the area of donated conservation 

easements. 

I sincerely hope that Treasury will be willing to work with me and other concerned Members of Congress to gather comprehensive data regarding conservation 

easements, and to formulate appropriate legislative proposals to address the tax 

abuses that are taking place. 

Again, thank you for your testimony before the Committee and for your meritorious service as the assistant secretary for tax policy. I would appreciate answers 

to my questions at your earliest convenience.

Sincerely,

Wally Herger 

f Member of Congress

This is in response to your follow up questions regarding the 

issue of donated conservation easements. We share your concern 

about improper deductions being claimed for donations of conservation easements. We are reviewing valuation and compliance issues 

relating to donations of all types of property, including conservation 

easements. We are considering actions to ensure accurate valuation 

and compliance with applicable law. 

Under current law, a charitable deduction is allowed for the donation of a conservation easement only if the donation is made to 

a qualified organization exclusively for statutorily defined purposes. As you know, the value of the donation is the fair market 

value of the easement at the time of the contribution, which may 

be measured by the difference in the value of the restricted property before and after the granting of the easement. Treasury regulations provide that these values should take into account not only 

the current use of the property but an objective assessment of how 

immediate or remote the likelihood is that the property, absent the 

easement, would in fact be developed, as well as any effect from 

zoning or conservation laws that already restrict the property’s potential highest and best use. In addition, the amount of the deduction must be reduced by the amount of any financial or economic 

benefit to the donor or a related person, including any resulting increase in the value of other property (whether or not the property 

is contiguous) owned by the donor or a related person. It is the taxpayer’s responsibility to obtain qualified appraisals as required to 

substantiate any deduction claimed. The Administration’s Budget 

includes a proposal to require all taxpayers (including corporations) 

39

to obtain a qualified appraisal for donated property worth over 

$5,000, and to attach a copy of the appraisal to the taxpayer’s return if the deduction claimed exceeds $500,000. This proposal to require qualified appraisals would apply to donations of conservation 

easements, as well as other types of property. 

Further, your letter notes that the Administration’s Budget includes a proposal to exclude from income fifty percent of any capital gain from the voluntary sale of land for conservation purposes. 

The proposal defines conservation purposes in the same way as existing law, complementing the charitable contribution deduction by 

encouraging the sale of land to charitable organizations having conservation as their primary purpose. We believe this proposal will 

strengthen the ability of charitable organizations to compete with 

other buyers of appreciated, environmentally sensitive land. Conservation purposes would be served, under the proposal, by voluntary sales of property rather than by government regulation of 

land use. 

Your letter asked for an explanation why the Federal income tax 

system is an appropriate mechanism by which to encourage land 

conservation. In enacting the charitable deduction relating to property preservation and conservation for a historical as well as ecological goal, ‘‘Congress believe[d] that the achievement of this goal 

is largely dependent upon whether private funds can be enlisted in 

the preservation movement.’’ Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act 1976 (Pub. L. 

94–455) at 643. This legislative history may explain Congressional 

intent in using the Federal income tax system as a mechanism by 

which to encourage land conservation. 

Thank you for your expression of willingness to work with the 

Department of the Treasury in gathering data on conservation 

easements and in formulating responsive proposals. We look forward to working together to ensure that charitable deductions 

serve their intended purposes. 

[Submissions for the record follow:]

Statement of Coalition for Fair International Taxation 

The Coalition for Fair International Taxation (‘‘C–FIT’’) is a group of over twodozen U.S. employers representing a broad cross-section of industries that supports 

the modernization of the U.S. international tax law to ensure that U.S. companies 

can effectively compete at home and abroad. (Please see the attached list of companies.) We appreciate the opportunity to submit our views to the Committee. 

Introduction

We applaud the Bush Administration’s Fiscal Year 2005 Budget for its continued 

recognition of the necessity of reforming the nation’s international tax provisions as 

an appropriate response to the World Trade Organization (WTO) rulings invalidating the Foreign Sales Corporation (FSC)/Extraterritorial Income Exclusion (ETI) 

provisions. 

The WTO has now ruled definitively in a case initiated by the European Communities (EC) that the FSC/ETI rules violate U.S. international trade obligations, and 

has authorized the EC to impose up to $4 billion in annual trade sanctions against 

U.S. exports. EC officials have announced their intention to begin imposing tariffs 

by March 1, 2004 if the United States does not comply with the WTO decision. The 

Administration again makes clear in its FY 2005 Budget its position that the United 

States should comply with the WTO ruling through the passage of legislation repealing ETI. It is imperative that the Congress pass ETI replacement legislation in 

order to avoid the crippling economic effects of a trans-Atlantic trade war. 

40

1General Explanation of the Administration’s Fiscal Year 2005 Revenue Proposals, Dept. 

Treasury (February 2004), p. 187. 2 U.S. Council of Economic Advisors, Economic Report of the President, 2003, p 208. 

As described in more detail below, C–FIT strongly supports legislation approved 

by the Ways and Means Committee, the American Jobs Creation Act (H.R. 2896). 

The legislation brings the United States into compliance with its international trade 

obligations as well as meets the charge laid out to Congress in the Administration’s 

Budget that the ‘‘ETI provisions should be replaced with tax law changes that preserve and enhance the global competitiveness of U.S.-based businesses and American workers.’’ 1

FSC/ETI Replacement Legislation Should Advance U.S. Economic Interests

• In responding to the WTO FSC/ETI ruling, the Congress must take account of the vital role that U.S.-based multinational operations play in 

increasing U.S. exports.

U.S. multinational corporations play a vital and leading role in the U.S. economy, 

and are responsible for:

• 23 million American jobs • 9 million of the 16 million U.S. manufacturing workers • 21% of U.S. GDP • 56% of U.S. exports • $131 billion in annual U.S. R&D spending and • 49% of U.S. corporate income tax payments

Moreover, foreign direct investment by U.S. businesses helps create markets for 

American products. This leads to sales in foreign markets that likely would not happen by simply exporting goods. For example, Wal-Mart, a member of C–FIT, has expanded its global reach by opening stores in foreign markets and providing additional markets for the U.S. products it sells. As a result, more U.S. products—most 

of them from small businesses—find their way onto foreign shelves. Small U.S. producers have a much tougher time getting onto the shelves of Wal-Mart’s foreign 

competitors, like Carrefour, a French company. 

A recent study by the Organization for Economic Cooperation and Development 

(OECD) found that each dollar of outward foreign direct investment led to two dollars of additional exports and a $1.70 increase in the U.S. bilateral trade surplus. 

The Commerce Department’s ‘‘Survey of Current Business’’ indicates that in 2000 

(the most recent year for which data are available), U.S.-based multinationals accounted for about two-thirds of overall U.S. merchandise exports. Foreign affiliates 

of U.S.-based multinationals purchased $203 billion of goods from U.S. sources, 

while domestic operations of U.S.-based multinationals exported $236 billion to 

other foreign customers.

• The nation’s tax and trade policies should work in tandem to strengthen the U.S. economy, including by retaining headquarters of companies 

in the United States.

In recent years, Congress and the Administration have recognized the economic 

importance of trade liberalization measures by enacting sweeping tariff reduction 

agreements. The domestic benefits of free trade are not only challenged by overseas 

trade barriers but are also being frustrated by an outdated U.S. international tax 

regime that acts as a trade barrier in its own right—however, this is a trade barrier 

we impose on ourselves. 

The increasingly interdependent global economy has largely been a good thing for 

the U.S. economy. As the President’s Council of Economic Advisors observed in 

2003, ‘‘The U.S. economy is increasingly linked to the world economy through trade 

and investment. Domestically based multinational businesses and their foreign investment help bring the benefits of global markets back to the U.S. by providing 

jobs and income.’’ 2

U.S. international tax rules have been cited as a factor in the loss of U.S. headquarters jobs, one that may create an incentive for foreign multinationals to acquire 

the U.S. operations of American companies. These transactions are likely to result 

in the relocation of U.S. headquarters to foreign countries. A 2002 Treasury report 

on corporate inversions notes the growth in foreign acquisitions of U.S. businesses 

in recent years: $90.9 billion in 1997, $234 billion in 1998, $266.5 billion in 1999, 

and $340 billion in 2000. The relocation of headquarters abroad poses a serious 

long-term risk to the U.S. economy, to the extent that management functions move 

out of the United States and foreign overseers make future U.S. versus foreign inVerDate jul 14 2003 06:21 May 28, 2004 Jkt 093793 PO 00000 Frm 00044 Fmt 6633 Sfmt 6621 E:\HR\OC\93793.XXX 93793
41

3SBA Office of Advocacy, ‘‘The New American Evolution: The Role and Impact of Small 

Firms’’ (June, 1998). 

vestment and employment decisions. Decisions made by companies regarding the location of their headquarters affect the creation and retention of jobs in management, marketing, R&D, information technology, and other high-wage, high-skill 

areas. It is therefore critical that we not adopt policies that encourage companies 

to locate their headquarters overseas.

• Thousands of small U.S. businesses participate in the global economy 

as suppliers to U.S.-based multinational corporations.

Thousands of small businesses support and depend on the global operations of 

U.S. firms. As the Small Business Administration found in a report discussing the 

role of small businesses in the global economy, ‘‘smaller firms can conduct international expansion on their own, or by collaborating with a multinational firm. The 

intermediated form of international expansion has certain advantages. The small 

firm benefits from having access to the multinational firm’s global market reach. 

From the large firm’s perspective, the arrangement enhances the value of its existing contributions to internationalization.’’ 3

Accordingly, reforms that increase the international competitiveness of large U.S. 

based companies will have a positive impact on U.S. small businesses.

• Congress must act to support the competitive efforts of American companies that operate in the global marketplace.

The challenge for U.S. companies to remain competitive on an international basis 

has never been greater than it is today. One significant factor limiting our competitiveness is the basic structure of the U.S. international tax regime. That regime was 

enacted over 40 years ago when the U.S. economy dominated the world and 18 out 

of the top 20 global companies were headquartered here. At the time, the United 

States accounted for over half of the world’s multinational investment. Today, to remain competitive and fuel U.S. economic growth and jobs, domestic companies must 

compete against foreign-owned firms for clients and customers that are located 

around the globe. 

Defects in the Subpart F and foreign tax credit regimes cause U.S. companies to 

face discriminatory tax burdens not borne by their foreign competitors. Present law, 

in general, allows the deferral of U.S. tax on foreign earnings of U.S. companies. 

The Subpart F rules inappropriately impose current U.S. taxation on many types 

of active business income earned by U.S. companies through their foreign subsidiaries. This premature U.S. tax places the U.S. owned foreign subsidiary at a disadvantage relative to its competitors. The U.S. rules should permit active business 

income of foreign operations to be taxed when the earnings are paid as dividends 

to the U.S. parent company. 

Similarly, the FTC was enacted to prevent the double taxation of income earned 

by U.S. companies overseas—that is, by both a foreign country and the United 

States. Unfortunately, the FTC has numerous arcane rules that cause double taxation of foreign-source income. The improvements to the foreign tax credit rules in 

H.R. 2896 go a long way toward eliminating the prospect of double taxation of foreign source income. The goal of U.S. international tax policy should be to allow U.S. 

companies to pay roughly the same burden of income tax as their competitors do 

in markets both at home and abroad. 

C–FIT Supports the American Jobs Creation Act (H.R. 2896)

Briefly, the Ways and Means bill would repeal ETI over three years and replace 

it with a host of business tax reforms that would provide crucial benefits to all sectors of the American economy, spur the economic recovery, and create new jobs.

• Improves International Competitiveness. To fuel U.S. economic growth and 

jobs here at home—H.R. 2896 would reform antiquated U.S. international tax 

rules that undermine the international competitivenessof domestic companies. 

• Provides crucial benefits for small businesses. According to the National 

Federation of Independent Business (NFIB), several provisions of H.R. 2896 

would prove extraordinarily helpful to America’s small businesses: reduced 32% 

rate for small employers; restaurant and leasehold depreciation shortened from 

39 to 15 years; increased exemption from the corporate alternative minimum 

tax; reduced depreciation period for manufacturing equipment used in the 

United States; and extension of the 50% bonus depreciation for an additional 

42

year. Importantly, these benefits would flow to all small businesses: firms that 

do and do not export. • Delivers Immediate Relief. Small businesses would receive many of the benefits included in H.R. 2896—AMT relief and depreciation reform—as early as 

this year, providing a critical and timely boost to the economy. • All Businesses Qualify. The Ways and Means Committee bill takes account 

of the full range of American employers that export and compete in the global 

marketplace for worldwide business. The bill does not limit its benefits to corporations and thus includes small manufacturers operating as sole proprietors 

or partnerships. H.R. 2896 provides all sectors of the U.S. economy—including 

the valuable services and manufacturing sectors—with needed job-creating incentives. 

Conclusion

The United States must comply with the WTO’s FSC/ETI ruling, taking into account the interests of all American businesses and their workers. ETI replacement 

legislation should also ensure that U.S. businesses and workers are not placed at 

a disadvantage in relation to their foreign competitors. The WTO-mandated changes 

to U.S. tax law should include much needed reforms to our outmoded international 

tax regime because these reforms will ensure that U.S.-based companies can continue to compete globally against foreign-based companies operating under more advantageous tax regimes. 

C–FIT supports the Bush Administration in its efforts to replace the FSC/ETI provisions with reforms to the international tax laws of the United States. Accordingly, 

we enthusiastically support the American Jobs Creation Act (H.R. 2896) because it 

meets the high bar set by the Administration: honoring the nation’s WTO obligations and enhancing the competitiveness of U.S.-based businesses and American 

workers. We stand ready to work with the Congress and the Administration to 

achieve passage of this important legislation. 

LIST OF MEMBER COMPANIES

3M 

Agilent Technologies 

Cargill 

Cisco 

Citigroup 

Coca-Cola 

Coca-Cola Enterprises 

Deere & Company 

Dow Chemical 

EDS 

Exxon-Mobil 

Ford 

General Mills 

General Motors 

Georgia Pacific 

Hewlett-Packard 

International Business Machines Corporation 

Johnson & Johnson 

Kodak 

Mars, Inc. 

McDonald’s 

Praxair 

Procter & Gamble 

Texas Instruments 

Wal-Mart

Statement of Credit Union National Association, Inc. 

f The President’s 2005 Budget, which was transmitted to the Congress on February 

2, 2004, contains a number of proposals that the Credit Union National Association 

(CUNA) supports. CUNA represents over 90 percent of the nation’s approximately 

10,000 state and federally chartered credit unions and their 84 million members. We 

43

1For a married couple, the maximum contribution would be the lesser of annual earned income or $10,000. 2Qualified distributions would be those made after age 58 or if the account owner died or became disabled. 

are pleased to provide comments for the record in connection with the February 11, 

2004, hearing of the House Committee on Ways and Means on the ‘‘President’s Fiscal Year 2005 Budget.’’

The Administration’s FY 2005 budget plan would, among other things, create an 

Individual Development Account (IDA) tax credit and simplify personal saving by 

replacing existing tax-preferred saving options with Lifetime Savings Accounts 

(LSAs), Retirement Savings Accounts (RSAs) and Employer Retirement Savings Accounts (ERSAs). 

IDAs are matched savings accounts that may be opened by persons who meet a 

net worth test and are eligible for the Earned Income Tax Credit or Temporary Assistance for Needy Families. The accounts are restricted to three uses: 1) buying a 

first home; 2) funding post-secondary education or training; or 3) starting or improving a small business. They were first authorized by the Personal Work and Responsibility Act of 1996 (P.L. 104–193). In 1998, the Assets for Independence Act (P.L. 

105–285) established a five-year $125 million demonstration program administered 

by the Department of Health and Human Services to evaluate the effects of savings 

incentives on persons of limited means. 

Currently, contributions are not deductible but are matched by contributions from 

a program run by a state or a participating nonprofit organization. Matching contributions and their earnings are not taxed to the individual. The Administration’s 

IDA proposal would provide dollar-for-dollar matching contributions of up to $500 

supported by a 100 percent transferable tax credit to sponsoring financial institutions. An additional $50 per account per year would be available to offset administrative costs and expenses associated with providing financial literacy training. 

In this connection, CUNA notes that H.R. 7, the ‘‘Charitable Giving Act,’’ passed 

by the House on September 17, 2003, by a vote of 408–13 and S. 476, The Charity, 

Aid, Recovery and Empowerment (CARE) Act of 2003, passed by the Senate on April 

9, 2003, by a vote of 95–5 both contain IDA expansion provisions and await further 

congressional action in conference. We urge you to include the transferable tax credit provision included in the Senate bill in the final agreement reached on this most 

important legislation. 

Under the Administration’s Lifetime Savings Accounts proposal, individuals of 

any age or income could contribute up to $5,000 annually (nondeductible) to a LSA, 

regardless of whether they had any earnings that year. Investment earnings and 

distributions from the account would be tax-free. There would be no required distributions from LSAs during the account owner’s lifetime. Coverdell Education Savings Accounts (ESAs) and Section 529 Qualified State Tuition Plans (QSTPs) could 

be converted to LSAs up to December 31, 2005. 

We agree that these more relaxed rules could encourage individuals to save who 

might otherwise not do so in targeted savings plans because of restrictions on and 

penalties for withdrawals. 

The Administration’s Retirement Savings Account proposal would allow individuals of any age or income to contribute up to $5,000 per year 1 (nondeductible) from 

earned income to a RSA. Qualified distributions 2 would be tax-free. All other distributions would be subject to tax on amounts exceeding contributions. Current 

‘‘Roth IRAs’’ would be renamed RSAs and would be subject to the rules for RSAs. 

Owners of traditional IRAs could convert them to RSAs. 

We agree that RSAs would simplify the range of choices for taxpayers saving for 

retirement by making the Roth IRA concept available to all taxpayers. Any taxpayer 

could contribute up to the lesser of $5,000 or their earned income. Unlike current 

law, however, withdrawals could only be made for retirement, beginning at age 58. 

RSAs would address a key component of retirement—personal savings. 

By eliminating income restrictions, the RSA could become a strong vehicle for retirement savings, particularly for those who are within a decade of beginning to retire. 

The Employer Retirement Savings Accounts proposal would make many of the 

employer plans easier to understand. Beginning in 2005, § 401(k), § 403(b), Savings 

Incentive Match Plans for Employees (SIMPLE plans), Simplified Employee Pension 

(SEP) plans and governmental § 457 plans would be consolidated into ERSAs, which 

would be available to all employers. Qualification rules under the Internal Revenue 

Code would be simplified. 

44

LSAs, RSAs and ERSAs could provide additional encouragement for all taxpayers 

to save. However, we urge you to also include and expand the current law SAVER’s 

tax credit in the provision. 

American’s private savings rate remains low and many low—and middle-income 

individuals continue to have inadequate savings or no savings at all. Lower income 

families remain more likely to be more budget constrained with competing needs 

such as food, clothing, shelter, and medical care taking a larger portion of their income. Applying the SAVER’s credit to RSA and ERSA contributions would provide 

a needed additional tax incentive that would enhance their ability to save adequately for retirement. We believe the credit should also be made refundable to be 

available to individuals who might not have to pay tax in any particular year. 

CUNA urges Congress to pass tax legislation that would encourage all Americans 

to increase personal savings. We understand that Congress may address other tax 

matters, either as a part of this package or later in this session. Should such an 

opportunity arise, we request that you consider legislation that would:

• Simplify the Earned Income Tax Credit; • Create Farm, Fish, and Ranch Risk Management Accounts (‘‘FFARRM’’ accounts); • Permanently extend the retirement and savings provisions of the Economic 

Growth and Tax Relief Reconciliation Act of 2001 EGTRRA; • Permit tax free withdrawals from IRAs for charitable contributions; • Provide a tax credit for developers of affordable single-family housing; • Permanently extend the disclosure of tax return information for administration 

of student loans; and • Extend the protections of section 7508 of the Code to all Armed Forces reservists and National Guardsmen called to active duty.

CONCLUSION

CUNA appreciates having this opportunity to present our views on the revenue 

provisions contained in the President’s fiscal year 2005 budget proposal. We look 

forward to working with you in the future on these most important matters.

Statement of Equipment Leasing Association of America, Arlington, Virgina 

f This statement is submitted on behalf of the 800 member companies of the Equipment Leasing Association of America (ELA). ELA is a non-profit association representing the equipment leasing and finance industry. 

Equipment leasing is used by eight of every ten organizations, including tax-exempt entities, to acquire productive assets and raise capital. In 2004, the leasing 

industry will provide over $220 billion in equipment investment through lease products. Organizations of all types utilize leasing for all kinds of equipment and financing needs. In an econometric study released February 3, 2004, the preeminent research firm, Global Insight, determined that over the period 1997–2002, equipment 

leasing produced between $100–$300 billion additional real GDP. The study, The 

Economic Contribution of the Equipment Leasing Industry to the U.S. Economy, indicates that equipment leasing produced between $227–$229 billion in additional 

real equipment investment and created between 3–5 million additional jobs. 

The ELA expresses its strong opposition to certain ‘‘anti leasing’’ tax proposals in 

the Administration’s FY 2005 budget. The Administration is proposing a major tax 

increase on the leasing industry and constitutes a major policy change in this area. 

The ostensible policy justification for the proposals is to address ‘‘unintended’’ leasing transactions and practices. The tax principles involved in leasing, however, have 

been developed and reviewed by the Congress, successive Administrations and 

courts over decades in legislation, regulations and court decisions. 

It has long been the policy of the Congress to use tax depreciation to incent investment in productive assets. Leasing has played an important role to insure that 

these incentives worked efficiently for private companies that were currently not 

profitable and for tax-exempt entities by more readily allowing them to acquire productive assets and raise capital. 

In 1984 and 1986 Congress specifically addressed the use of leasing by tax-exempt 

entities.

• Congress spelled out the reduced rate of tax depreciation available for leases 

of tax-exempt use property—the so-called ‘‘Pickle rules’’. 

• Congress created an exception from the ‘‘Pickle rules’’ for short-term leases. 

45

• Congress created an exception for Qualified Technological Equipment to promote acquisition and deployment of technology. • Congress adopted special rules to encourage investment in a range of assets, including solid waste disposal through service contracts.

Current and historical public policy regarding leasing to tax-exempts has provided 

a reduced investment incentive for the lessor as a result of a lower rate of tax depreciation if the lessee is a tax-exempt customer such as a hospital, city, education facility, public transit authority or foreign entity. Congress has recognized that it is 

contrary to sound public policy for the cost of capital for cities, hospitals, public 

transit systems and other tax-exempts be substantially higher than that of private 

entities. The proposed policy changes would effectively take away the option of leasing for tax-exempt entities by changing this long held value of stimulating investment in capital goods. 

Specifically, the Administration’s proposals would remove the exemption for qualified technological equipment (QTE) from the‘‘Pickle rules’’ for depreciation. There is 

no description in the Administration’s proposal or any Treasury literature of any 

abuse associated with the exemption for QTE. Qualified technological equipment 

and computer software are essential to the productivity of any organization and the 

quality and cost of services provided. A tax-exempt hospital would have to pay 

$38,000 more a year to lease a CAT scan machine. A newly mandated emergency 

communications systems would cost a city substantially more and a public transit 

authority that needs to upgrade its signaling and control systems would similarly 

incur higher costs. 

No modern organization, whether private or tax-exempt, can operate efficiently 

and effectively without investment in technology. In addition, technology equipment 

and software are major sectors of the U.S. economy. Reducing demand conflicts with 

objectives to grow the economy and related jobs. Congress has a consistent history 

of encouraging and incenting research and the development and deployment of technology. While Treasury can properly define technology for QTE purposes it is poor 

public policy to impose a blanket penalty on all technology equipment acquired by 

a tax-exempt entity. 

The Administration’s proposals include aggregating potential subsequent service 

contract periods with initial lease periods for purposes of computing depreciation. 

The proposal has been rejected in prior Congresses and ignores the very real differences that exist among the parties in a service contract versus those that exist 

among the parties in a lease. The proposal also would undermine the policy considerations that led to the service contract distinction that currently exists in the Internal Revenue Code. 

Treasury also proposes to limit deductions for leases to tax-indifferent parties. 

The proposal sets forth five ‘‘safe harbor’’ requirements from application of the proposed limits. The first four ‘‘safe harbor’’ requirements are too complex to address 

in this testimony. However, the association wishes to express its willingness to address the implications of each of the requirements with Treasury officials and the 

Congress. A central concern is that any regulation or policy take into account the 

realities of risk management and credit enhancement in today’s capital markets. 

The fifth requirement is so broad that we are unable to comment. However, to unintentionally foreclose practices or structures commonly used in capital markets just 

because the customer, the lessee, is a municipality or a hospital or a water treatment authority or other tax-exempt entity would be unfair. 

As a result of the Treasury’s proposals in the FY 2005 budget, however, there will 

be at least three serious consequences for tax-exempt entities.

• The options available to tax-exempt organizations for acquiring equipment and 

raising capital are reduced. This loss of flexibility makes efficient management 

more difficult. Strategies such as privatization and public-private financings 

will be severely limited. • The cost of acquiring equipment and raising capital will increase for tax-exempt 

entities. The results will include delayed or deferred capital expenditures, personnel layoffs and increases in fares/costs for services. • Tax-exempt entities, organizations that make up a significant portion of the 

economy and provide needed services, will not have the necessary access to productive modern equipment.

CONCLUSION

As it has for over forty years, the association is prepared and willing to work with 

Congress as it considers legislation in the tax-exempt leasing area. No major policy 

change with broad effect should be made without careful consideration of the impact 

on a significant sector of the economy, the people who rely on tax-exempt organizaVerDate jul 14 2003 06:21 May 28, 2004 Jkt 093793 PO 00000 Frm 00049 Fmt 6633 Sfmt 6621 E:\HR\OC\93793.XXX 93793
46

tions for quality service, on a major financial services industry and on the manufacturers of equipment and software. 

The value of leasing is that it makes what Congress intended work—investment—

productivity—growth—jobs. Congress has never said:

• ‘‘We want to incent investment, but not for tax-exempt organizations.’’ 

• ‘‘We want a free market with business and financing options and alternatives, 

but not for tax-exempt organizations.’’ 

• ‘‘We want to encourage the development and use of technology in our economy, 

but not for tax-exempt organizations.’’

• ‘‘We want American businesses to be more global, to export what they make or 

do, but you cannot use the traditional elements of the tax code to do it.’’ 

• ‘‘We want to encourage public-private partnerships, but let’s so unlevel the playing field they will not work.’’ 

• ‘‘We want to encourage and even mandate upgrades and improvement in public 

safety systems, but increase the cost to the agencies who have to do it.’’

The association wishes to express its appreciation to the Congress for its serious 

attention to these comments. For those who have an interest in greater information 

we recommend that they go to the following web sites.

http://www.elaonline.com/GovtRelations/Federal/

http://www.elaonline.com/Leasing4USA/

fNational Association of Realtors

Washington, DC 20001

February 26, 2004

Honorable Bill Thomas 

Chairman 

Committee on Ways and Means 

1100 Longworth House Office Building 

Washington, D. C. 20515

Dear Mr. Chairman:

Pursuant to your request for comments on the President’s FY 2005 Budget, the 

NATIONAL ASSOCIATION OF REALTORS (NAR) wishes to draw your attention 

to two proposals of interest to our members. NAR represents nearly one million Realtors who are engaged in real estate activities such as sales, leasing, property 

management, brokerage and commercial property investment. Realtors also are active in their communities and seek to expand homeownership opportunities in them.

Affordable Housing

The President’s budget proposal recommends a tax incentive designed to spur the 

production of affordable housing. Despite the vigor of the housing market in recent 

years, one category of purchasers has been underserved. There is a shortage of 

housing stock available for purchase by individuals and families below the median 

income level for their communities. In many cases these individuals are the teachers, firemen and police officers who provide significant services to communities they 

cannot afford to live in. One Realtor has characterized the problem succinctly: ‘‘We 

are losing our stock of entry level housing.’’

President Bush has proposed a tax credit designed to attract housing capital to 

areas where, under current market conditions, the cost of constructing or rehabilitating properties exceeds the amount that could reasonably be charged as a fair 

market purchase price for the community. For example, in an older, inner-ring suburb, the cost to develop housing units might be $130,000 per unit, but a fair market 

value purchase price might be $105,000. The President’s proposal would provide a 

tax credit designed to cover the gap. The tax credit would be administered by state 

housing agencies. The pay-out period for the credit would be five years. 

The President’s proposal follows the model of the very successful Low Income 

Housing Tax Credit (LIHTC) of Section 42. The General Accounting Office has audited many LIHTC projects and has found the program to be efficient, effective and, 

as a general matter, not susceptible to fraud. The President’s proposal provides significant safeguards to assure that housing is constructed where it is needed and 

where it will contribute to community renewal objectives. 

A coalition of 40 groups has come together to seek enactment of this proposal, embodied in H.R. 839. This bill was originally introduced by Messrs. Portman and 

47

1Survey conducted by Public Opinion Strategies, August 2003. 

Cardin and several other members of your Committee. As of February 20, 2004, the 

bill has 250 cosponsors that represent the full range of perspectives across the entire political spectrum. Companion bills in the Senate (S. 875 and S. 198) together 

have more than 40 cosponsors, again reflecting bipartisan support. Bipartisan majorities of the Ways and Means Committee, the Senate Finance Committee and of 

the House and Senate Committees with jurisdiction over housing programs are represented among that wide cosponsorship. 

NAR recognizes that the President’s proposal carries a substantial revenue estimate. An NAR representative serves on the steering committee of the coalition supporting the credit. NAR has discussed with other coalition members ways to reduce 

the cost of the proposal. NAR is eager to work with you, your staff and other coalition members to address revenue concerns. Our highest priority is to facilitate the 

prompt enactment of the President’s proposal. 

Under the terms of H.R. 839, projects could be undertaken in central cities, suburbs and rural areas. Projects in census tracts that satisfy certain demographic requirements are eligible to apply to the state housing agency for an allocation of the 

tax credit. The agencies would grant allocations based on statewide needs. The allocation requirements and numerous other features of the legislation are designed to 

prevent abuses. The goal is to provide a mechanism that has numerous safeguards 

that is nonetheless flexible enough to attract capital to neighborhoods where it is 

currently difficult to attract housing capital. 

Realtors have a significant stake in this legislation. For the past few years, Realtors have found that it is easier for a family of modest means to qualify for a mortgage than it is for that family to find a suitable house to purchase. The financial 

marketplace has worked efficiently to design mortgage products that those of modest means can afford. The housing marketplace, however, has not provided sufficient 

amounts of housing, either newly-constructed or rehabilitated, to meet the needs of 

qualified lower-income buyers. Realtors are committed to expanding homeownership opportunities for all Americans. The ideal of homeownership will remain out 

of reach for a substantial group of otherwise qualified Americans, however, if the 

available supply of decent, affordable housing is not increased. 

Polling data demonstrate both the widespread concerns about the availability of 

affordable housing and the willingness of voters to support affordable housing initiatives for their communities. When asked ‘‘How concerned are you about the cost of 

housing in your area?’’ two-thirds of respondents said that they were very concerned 

or somewhat concerned. When asked to evaluate the statement ‘‘I would like to see 

government place a higher priority on making housing—both for renters and homeowners—more affordable in my area, a total of 71% agreed with the statement. Notably, 51% of respondents said that they strongly agreed with the statement. Twothirds of respondents said that commitment to affordable housing would be an important determinant of their choices of candidates.1

NAR urges the Committee to act on President Bush’s proposal and H.R. 839. 

There is a great need for this tax incentive as a mechanism that would increase 

the available inventory of affordable and entry-level housing.

Capital Gains

President Bush recommends a change to the computation of depreciation recapture as a component of capital gains measurements. NAR wishes first to express its 

ongoing and fervent opposition to the depreciation recapture changes that were 

made in 1997. Prior to 1997, previously-allowed depreciation deductions on both residential and nonresidential property were treated as capital gains when a property 

was sold. The capital gains rate was applied to gain in excess of the adjusted basis. 

(Before 1986, when capital gains were partially excluded from income, the depreciation recapture amounts were eligible for the same exclusion as all other gain.) Since 

1997, however, the depreciation deductions are treated as neither capital gains nor 

ordinary income and are taxed at a fixed rate of 25%. NAR continues to believe that 

the appropriate treatment of these amounts is to afford them capital gains treatment. 

The President’s proposal would reclassify the depreciation recapture amount. Onehalf would be treated as capital gains income and one-half would be treated as ordinary income. The effect of this change is that taxpayers in the top income tax bracket (currently 35%) would experience no change in the effective tax rate on the recapture amount. That rate would remain 25%. Taxpayers in brackets below 35% would 

experience a very modest reduction in the effective tax rate on their recapture 

amounts. 

48

So far, so good. We note, however, that if, at any time, marginal tax rates on ordinary income exceed 35%, individuals who sell investment real estate will experience 

a tax increase on their recapture amounts. NAR is concerned about this possibility. 

Not only do we believe that current law related to depreciation recapture is incorrect, but we see the possibility under current law that the tax rate on recapture 

would increase should the Bush tax cuts expire. Moreover, we see the President’s 

proposal as one that offers either a half-full or half-empty glass to real estate. In 

bifurcating the recapture amount into ordinary and capital gains amounts, the proposal presents an opportunity to future Congresses to either restore capital gains 

treatment to the full recapture amount (which we would eagerly support) or to treat 

the full recapture amount as ordinary income (which we would oppose). 

NAR will not oppose the President’s proposal. We do wish, however, to make the 

Committee aware of the long-term implications of the concept. Our members viewed 

the reduction of the capital gains rate to 15% as a positive development, but remained disappointed that the recapture tax rate was not reduced by a commensurate amount. This proposal would create the possibility of increased recapture burdens should tax rates change. 

The NATIONAL ASSOCIATION OF REALTORS appreciates this opportunity to 

present its views to the Committee. We look forward to working with you and your 

staff. 

Sincerely, 

Jerry Giovaniello 

f Sr. VP, Government Affairs

Statement of the R&D Coalition 

Chairman Thomas, Ranking Member Rangel and members of the Committee: 

The R&D Credit Coalition appreciates the opportunity to share its views with the 

committee on the provision in President Bush’s proposed FY 2005 Budget that 

would make permanent the federal R&D tax credit. 

The R&D tax credit is key to the ability of companies to continue creating jobs 

in the United States. Growth in jobs and in the economy depend on growth in U.S. 

R&D spending. This important tax credit, which encourages companies to create 

more R&D jobs in the U.S., should be permanent, and the Coalition applauds the 

President for again demonstrating a strong commitment to making the credit permanent. Many members of Congress share this commitment and a permanent extension of the R&D credit has long been championed on a bipartisan basis by members of this committee. 

First, and foremost, it is imperative that Congress act to extend and strengthen 

the R&D credit before its scheduled June 30, 2004 expiration. Expiration of this 

credit, even with a retroactive extension, is extremely disruptive to businesses with 

research projects in the pipeline. Further, the effect of an expiration of the credit 

could be felt in the financial markets this year as companies adjust their financial 

statements to factor in a higher cost of their research projects. 

The President’s budget proposal, in addition to recommending the permanent extension of the credit, also acknowledges the need to assess whether modifications 

to the credit are necessary and directs the Treasury Department to study the credit 

and ways to improve its incentive effect. The Coalition looks forward to working 

with the Treasury Department and the Congress in this endeavor. 

We submit for consideration in this regard the following recommendations that 

the hundreds of research-intensive businesses and organizations in the Coalition 

strongly support. We believe that an extension of the R&D credit coupled with the 

changes we recommend will address the most pressing concerns that face the business community now and will help ensure that as we continue to strive for the ideal 

research incentive we do not disrupt research projects already underway.

Recommendations

The Coalition’s members—who are unified in support of a permanent and 

strengthened research tax credit—recommend that, first, the R&D tax credit be 

made permanent and that the current Alternative Incremental Research Credit 

(AIRC) rates be increased to improve the effectiveness of the AIRC. The Administration pointed out in its budget, and we want to underscore, that permanence is essential to the effectiveness of this credit. 

Research and development projects typically take a number of years and may 

even last longer than a decade. The continued uncertainty surrounding the credit 

49

has induced businesses to allocate significantly less to research than they otherwise 

would if they were assured the tax credit would be available. This uncertainty undermines the purpose of the credit and has stifled its full potential for inducing research spending. For the government and the American people to maximize the return on their investment in U.S.-based research spending, this credit must be made 

permanent. 

In addition, we recommend a new alternative simplified credit that will allow taxpayers to elect to calculate the R&D credit under computational rules. Although the 

current-law regular R&D tax credit is still an effective incentive for many companies, the combination of the base period and business cycle changes, has resulted 

in many companies that incur significant research expenditures being unable to 

claim any credit. To help solve part of this problem Congress enacted the AIRC in 

1996 and our recommended alternative elective credit will help address the rest of 

that problem. 

Under current law, both the regular credit and the AIRC are calculated by reference to a taxpayer’s gross receipts, a benchmark that could produce certain anomalous results. For example, many taxpayers are no longer able to qualify for the regular credit, despite substantial R&D investments, because their R&D spending relative to gross receipts has not kept pace with the ratio set in the 1984–88 base period, which governs calculation of the regular credit. This can happen, for example, 

simply where a company’s sales increase significantly in the intervening years, 

where a company enters into a new line of business that generates additional gross 

receipts but involves little R&D, or where a company becomes more efficient in its 

R&D processes. 

We recommend that taxpayers be permitted to elect, in lieu of the regular credit 

or the AIRC, a credit that would equal 12 percent of the excess of the taxpayer’s 

current year qualified research expenditures (‘‘QREs’’) over 50 percent of the taxpayer’s average QREs for the 3 preceding years. Unlike the regular credit and the 

AIRC, this credit calculation does not involve gross receipts. 

The R&D Credit Coalition is committed to working with the Bush Administration 

and the Congress to achieve the important goal of growth in the economy that 

comes from growth in R&D spending and the high-wage jobs that are created in the 

United States.

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