U.S. GOVERNMENT PRINTING OFFICE

56–396 CC WASHINGTON : 1999

PRESIDENT’S FISCAL YEAR 2000 BUDGET

HEARING

BEFORE THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

FEBRUARY 4, 1999

Serial 106–18

Printed for the use of the Committee on Ways and Means

(

ii

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

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

PHILIP S. ENGLISH, Pennsylvania

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

SCOTT MCINNIS, Colorado

RON LEWIS, Kentucky

MARK FOLEY, Florida

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

WILLIAM J. COYNE, Pennsylvania

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

KAREN L. THURMAN, Florida

LLOYD DOGGETT, Texas

A.L. SINGLETON, 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

Advisory of January 28, 1999, announcing the hearing ....................................... 2

WITNESSES

U.S. Department of the Treasury, Hon. Robert E. Rubin, Secretary; accompanied by Hon. Sylvia Mathews, Deputy Director, Office of Management

and Budget ........................................................................................................... 6

SUBMISSIONS FOR THE RECORD

American Farm Bureau Federation, statement .................................................... 69

Business Council for Sustainable Energy, statement ........................................... 70

Joint Industry Group, letter ................................................................................... 74

National Realty Committee, statement ................................................................. 75

North Dakota Public Service Commission, Bismarck, ND, Bruce Hagen,

statement .............................................................................................................. 83

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PRESIDENT’S FISCAL YEAR 2000 BUDGET

THURSDAY, FEBRUARY 4, 1999

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

Washington, DC.

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

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

[The advisory announcing the hearing follows:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721

January 28, 1999

No. FC–4

Archer Announces Hearing on the

President’s Fiscal Year 2000 Budget

Congressman Bill Archer (R–TX), Chairman of the Committee on Ways and

Means, today announced that the Committee will hold a hearing on President Clinton’s fiscal year 2000 budget proposals within the jurisdiction of the Committee. The

hearing will take place on Thursday, February 4, 1999, in the main Committee

hearing room, 1100 Longworth House Office Building, beginning at 10:00 a.m.

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

hearing will be from invited witnesses only. The main witness will be Secretary of

the Treasury Robert E. Rubin. 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 19, 1999, President Clinton delivered his State of the Union address.

In it, he outlined numerous budget and tax proposals. Among them was a proposal

to set aside 62 percent of projected budget surpluses over 15 years for Social Security’s cash reserves. One-quarter of this amount would be invested by the Federal

government in stock markets. The President proposed setting aside another 11 percent of projected surpluses to create individual retirement accounts, which would be

in addition to Social Security and another 15 percent for Medicare. Among other

things, the President proposed a number of new tax credits. His budget is expected

to include various other tax, fee, and revenue increases.

The details of these proposals are expected to be released on February 1, 1999,

when the President is scheduled to submit his fiscal year 2000 budget to the Congress.

In announcing the hearing, Chairman Archer stated: ‘‘I look forward to receiving

the President’s budget proposals. The President has already announced many interesting ideas and it’s appropriate we review them in complete detail. I’m sure they

will raise important questions for thoughtful discussion.’’

FOCUS OF THE HEARING:

The Committee will receive testimony on the President’s fiscal year 2000 budget

proposals from Secretary Rubin. The Secretary is expected to discuss the details of

the President’s proposals which are within the Committee’s jurisdiction.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Any person or organization wishing to submit a written statement for the printed

record of the hearing should submit six (6) single-spaced copies of their statement,

along with an IBM compatible 3.5-inch diskette in WordPerfect 5.1 format, with

their name, address, and hearing date noted on a label, by the close of business,

Thursday, February 18, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways

and Means, U.S. House of Representatives, 1102 Longworth House Office Building,

Washington, D.C. 20515. If those filing written statements wish to have their stateVerDate 11-SEP-98 10:09 Dec 03, 1999 Jkt 056396 PO 00000 Frm 00005 Fmt 6633 Sfmt 6621 F:56396 W&M3 PsN: W&M3
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ments distributed to the press and interested public at the hearing, they may deliver 200 additional copies for this purpose to the Committee office, room 1102 Longworth House Office Building, by close of business the day before the hearing.

FORMATTING REQUIREMENTS:

Each statement presented for printing to the Committee by a witness, any written statement

or exhibit submitted for the printed record or any written comments in response to a request

for written comments must conform to the guidelines listed below. Any statement or exhibit not

in compliance with these guidelines will not be printed, but will be maintained in the Committee

files for review and use by the Committee.

1. All statements and any accompanying exhibits for printing must be submitted on an IBM

compatible 3.5-inch diskette in WordPerfect 5.1 format, typed in single space and may not exceed a total of 10 pages including attachments. Witnesses are advised that the Committee will

rely on electronic submissions for printing the official hearing record.

2. Copies of whole documents submitted as exhibit material will not be accepted for printing.

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material

not meeting these specifications will be maintained in the Committee files for review and use

by the Committee.

3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments

by the Committee, must include on his statement or submission a list of all clients, persons,

or organizations on whose behalf the witness appears.

4. A supplemental sheet must accompany each statement listing the name, company, address,

telephone and fax numbers where the witness or the designated representative may be reached.

This supplemental sheet will not be included in the printed record.

The above restrictions and limitations apply only to material being submitted for printing.

Statements and exhibits or supplementary material submitted solely for distribution to the

Members, the press, and the public during the course of a public hearing may be submitted in

other forms.

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

Wide Web at ‘HTTP://WWW.HOUSE.GOV/WAYS MEANS/’.

The Committee seeks to make its facilities accessible to persons with disabilities.

If you are in need of special accommodations, please call 202–225–1721 or 202–226–

3411 TTD/TTY in advance of the event (four business days notice is requested).

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.

Chairman ARCHER. The Committee will come to order. The Chair

invites guests and staff to take seats.

Mr. Secretary, good morning, and good morning to everyone in

the room.

We are glad to have Secretary Rubin here to discuss the administration’s budget proposal for Social Security, Medicare, tax relief,

and other important priorities. This is pretty much an annual

event.

Secretary RUBIN. Yes, sir.

Chairman ARCHER. This morning I am going to begin with an announcement concerning one of Congress’ top priorities for the year,

and that is education.

In 1997, we worked across party lines to improve education. We

passed 220,000 new Pell grant scholarships for deserving students.

We made interest on student loans deductible. We created tax-free

education IRAs, and in legislation last year, we gave families a

$1,500 tax credit for the first 2 years of college, the Hope ScholarVerDate 11-SEP-98 10:09 Dec 03, 1999 Jkt 056396 PO 00000 Frm 00006 Fmt 6633 Sfmt 6602 F:56396 W&M3 PsN: W&M3
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ship, to cover the cost of tuition and other expenses. We also provided a lifetime learning credit for those students continuing their

education in college, graduate school, and job training. Mr. Secretary, we did that together, and I think that was a great, great

accomplishment for the country.

Today, I am pleased to build on our success in education by announcing another initiative that will help build more public elementary and secondary schools across the United States. This initiative is not narrowly targeted, but is available to every school district, from the Spring Branch Independent School District in my

district, to larger school districts in Los Angeles, New York, and everywhere in between. This plan is universal; it covers the cities, the

suburbs, and the farms.

When we get to a tax bill this year, I will include in it a $1.4

billion school construction initiative that makes permanent changes

to tax-exempt bond rules that will spur school construction now

and in the future. This plan will make it much easier for State and

local governments to comply with the current complicated bonding

rules that takes money out of their school construction funds.

In short, the proposal will do three things. It will provide more

money for school districts, it will reduce paperwork for State and

local governments, and it will give greater flexibility to school districts regarding issuing bonds and building public schools.

Education is vital to our Nation’s future, and I am proud to be

a part of a Congress that puts education first.

Mr. Secretary, when we talk about the budget, we are talking

about basically the blueprint for government action in all types of

fields in the next year. I am sure that Members will have many,

many questions on a variety of subjects. We are happy to have you

here, and I hope we can find a way to work together this year as

we did in 1997 to do good things for this country.

Welcome, and after Mr. Rangel makes his comments, we will be

pleased to have your testimony. In the meantime, without objection, each Member will have the opportunity to submit a written

statement and have it included in the record at this point.

[The opening statement follows:]

Opening Statement of Hon. Bill Archer, a Representative in Congress from

the State of Texas

Good morning Mr. Secretary. We’re glad you’re here to discuss the Administration’s budget proposal for Social Security, Medicare, tax relief, and for other important priorities.

This morning, I want to begin with an announcement concerning one of Congress’

top priorities for the year. Education.

In 1997, we worked across party lines to improve education.

We passed 220,000 new Pell Grant scholarships for deserving students.

We made the interest on student loans deductible. We created tax-free education

IRAs. And last year, for the first two years of college, we gave families a $1,500

tax credit—the HOPE scholarship—to cover the cost of tuition and expenses. We

also provided a Lifetime Learning Credit for those students continuing their education in college, graduate school, and job training.

Today, I’m pleased to build on our success in education by announcing another

initiative that will help build more public schools all across the United States—from

the Spring Branch independent school district in Texas to larger school districts in

Los Angeles, New York and everywhere in between. This plan is universal. It covers

the cities, the suburbs, and the farms.

My 1999 tax bill will include a $1.4 billion school construction initiative that

makes permanent changes to tax-exempt bond rules to spur school construction now

and in the future. This plan will make it much easier for state and local governVerDate 11-SEP-98 10:09 Dec 03, 1999 Jkt 056396 PO 00000 Frm 00007 Fmt 6633 Sfmt 6602 F:56396 W&M3 PsN: W&M3
5

ments to comply with complicated bonding rules. In short, this proposal will do

three things:

It will provide more money for school districts

It will reduce paperwork for State and local governments

And it gives greater flexibility to school districts regarding issuing bonds and

building public schools

Education is vital to our nation’s future and I’m proud to be part of a Congress

that puts education first.

Mr. Secretary, I look forward to discussing the rest of your budget with you and

I hope we will be able to count on the Administration’s support so we can, in an

appropriate and effective way, help improve education for all our young people.

Chairman ARCHER. Mr. Rangel.

Mr. RANGEL. Thank you, Mr. Chairman.

Mr. Secretary, first, let me thank you for the leadership that you

have given to our country by stressing solid fiscal policy and your

temperament, your tolerance, and your ability to bring forth issues

that are not Democratic or Republican but are sound tax policy and

good for the people of our great country. And let me pause to thank

my Chairman for picking education as an issue that he would focus

on to start this hearing.

We were chatting earlier, and we hadn’t discussed this, but I certainly wish I had brought it up because if Democrats are being

charged with stealing good Republican ideas, I hope that they steal

this Democratic idea of supporting public schools so that we can

start off together by reading from the same page.

I don’t know what your school construction legislation would do,

but I am ready to walk down any road with you that would build

on the fundamental premise that cannot reject any students. Instead of fighting about whether we should have individual education accounts or vouchers, let the private school be supported,

but let us make certain that we have a sound public school system,

because in so many of our communities the public school system is

being broken because buildings are not serviced, teachers are not

qualified, kids are put out into the street without adequate training, and drugs and violent crime are prevalent. This country can’t

continue with 1.8 million people in jail. Everyone agrees that a

good solid education is the best way to avoid all of these pitfalls.

So, I hope that this will be a great area that we can use to bridge

the appearance of a gap between our parties by working with the

administration for a sound public school system.

In the areas of Social Security, tax cuts, and Medicare, bridging

the gap is going to be more difficult, but I hope it is possible because I truly don’t believe that Republicans or Democrats win if we

get a label of a do-nothing Congress. I think that we all have a second chance to improve upon the reputation that politicians have,

especially those of us in Washington.

The President will be getting a second chance for a terrible mistake that he has made in his private life. The American people are

giving him a second chance, and soon he will know that he has 2

years to work on a legacy that he can be proud of. Republicans will

be given a second chance to remove the stigma about the way they

have handled the President’s mistakes so that in the year 2000 the

party of Republicans will not be considered ‘‘dead men walking.’’

6

The Democrats also will have a second chance. We are in the minority, and we have to prove that we can do better. And we can’t

do that by fighting each other. We have to do that by showing that

we have the ability to provide the leadership to try to work out our

differences.

Education is easier than Social Security. But maybe, just maybe,

the leadership of our parties can find out how far apart we are.

Maybe we can’t do Social Security, and we will move to Medicare.

Our constituents are not looking for a Republican solution or a

Democratic solution, and that is certainly true when it comes to

preserving the Social Security Trust Fund.

Let’s not start off with, say, a debate about a 10-percent tax cut

across the board, because that would cause us to lock into a very

partisan position.

So, we have the President’s budget. It makes a lot of sense to me.

Some may wish to improve a some part of it—this is the first day

of the beginning of the campaign for the year 2000. I think that

we will all be better off in trying to see where we agree than to

lock into positions this morning.

Mr. Secretary, thank you so much for your past service, and we

look forward to working with you in the next 2 years of this Congress.

Chairman ARCHER. Mr. Secretary, welcome again. If you would

like to summarize your testimony, without objection, your entire

written statement will be printed in the record. We are happy to

have you and will be pleased to receive your testimony.

STATEMENT OF HON. ROBERT E. RUBIN, SECRETARY, U.S.

DEPARTMENT OF THE TREASURY; ACCOMPANIED BY HON.

SYLVIA MATHEWS, DEPUTY DIRECTOR, OFFICE OF

MANAGEMENT AND BUDGET

Secretary RUBIN. Thank you, Mr. Chairman.

Let me first say that I appear with Sylvia Mathews who is Deputy Director of OMB, and she and I will both be glad to respond

to questions after I deliver my testimony if I may.

Let me start by expressing the appreciation for the opportunity

to discuss the President’s fiscal year 2000 budget. This has, as you

say, become an annual event, Mr. Chairman, and, I think, a very

useful one.

With the result of the fiscal policy of the past 6 years that the

economy has helped produce and the ongoing interaction between

the two, this Nation has, as you know, gone from a very large and

increasing deficit to a period of surpluses that are projected to continue for a long, long time to come. In our judgment, Mr. Chairman, that gives us all, working together, as you correctly say, a

historic opportunity to meet challenges that will affect our economic and social well-being for the decades ahead. And that is the

purpose that lies behind the President’s budget.

The core of that budget is fiscal discipline, and, thereby, to increase the national savings in order to promote economic growth,

retirement security in the years ahead.

Let me briefly comment on the last 6 years, if I may. In 1992,

the deficit was $290 billion and projected to increase substantially.

And that was after a period in which the Federal debt had, roughly

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speaking, quadrupled over 12 years. The President responded with

an economic strategy that was focused on fiscal discipline. It also

included investing in people and open markets. This strategy has

contributed to moving us from these very substantial deficits to

surpluses and what many consider the best economic situation in

decades. The very high rate of job creation, the lowest unemployment rate in decades and real increases in incomes across all strata.

I believe, Mr. Chairman, that it is very useful to look at what

has happened and also the strategy that has contributed to what

has happened as a guide for policy to the future.

Let me also stress that tax burdens on working families are at

record lows compared to recent decades. For a family of four with

a median income, the Federal income and payroll tax burden is at

its lowest level in 21 years in part because of the child tax credit

that this Congress and the President, working together, enacted in

1997. For a family of four with half the median income, the income

and payroll tax burden is at its lowest level in 31 years, in part

because of the 1993 expansion of the earned income tax credit as

well, of course, as the Child Tax Credit. And for a family of four

with double the median income, the Federal income tax burden is

at its lowest level since 1973. Overall, tax revenues have risen as

a percentage of gross domestic product, GDP, primarily because the

most affluent have had large increases in income in part because

of bonuses tied to stock prices, in part because of capital gains, and

also because of increase in corporate income.

Against that background, the President’s new budget proposes

that in order to increase jobs, raise standards of living, promote retirement security, we must save, save the great preponderance of

the projected surpluses and not consume them for tax cuts and for

spending. Specifically the budget proposes that 62 percent of the

surpluses be allocated for Social Security and 15 percent of the surpluses be allocated for Medicare. These resources will then be used

predominantly to paydown publicly held Federal debt and, in part,

to purchase equities both of which, in effect, preserve our National

savings, and, by preserving national savings, promote economic

growth rather than eliminating national savings that is represented by the surplus, which, in our judgment would adversely

effect economic growth.

In addition, national savings is increased by allocating 12 percent of the surpluses for creating new, universal savings accounts.

Finally, the budget insists, as you know that none of the surpluses be used, at all, for any purposes until Social Security is put

under firm, financial footing.

Let me focus for a moment on debt reduction. When President

Clinton was elected, publicly held debt equaled 50 percent of gross

domestic product. Under the President’s plan, 80 percent of the

surpluses, allocated to Social Security, and all of the surpluses allocated to Medicare will reduce the debt held by the public. As a result, by 2014, publicly held debt will decline to about 7 percent of

GDP. This reduction of debt as a percentage of GDP will have

three effects.

First, the government will not have to finance Federal debt and

thereby will consume less of national savings thus making capital

8

more readily available to the private sector which in turn will reduce interest rates, and, I believe, increase job creation and standards of living.

Second, when the President came into office, debt service costs

to the Federal Government in 2014 were projected to constitute 27

percent of the Federal budget. Under the President’s proposal, and

because of the progress made to date, it is now estimated that debt

service cost will be 2 percent of the Federal budget in 2014.

Third, the decrease in debt means that the Federal Government

will have enormously increased capacity to access external capital

should that need arise.

In addition, the President’s budget strengthens Social Security

and Medicare. With regard to Social Security, the President has

proposed two measures that, taken together, would extend the life

of the Trust Fund to 2055. The first is the purchase of Treasury

special, nonmarketable securities which are, in effect, a first claim

against the general revenues of the Federal Government to meet

the already existing Social Security commitments. The second proposal is that, of the 62 percent of the surpluses transferred to the

Social Security Trust Fund, about one-fifth should be invested in

private sector equities.

I have expressed concern from time to time about investment in

equities by the trust fund. Let me make two observations, if I may,

about this particular proposal.

First, it would result in roughly 15 percent of the trust fund

being invested in equities. Equities do have risks, and in my view,

at least, those risks are often underweighted in discussions about

investment of Social Security in equities. I believe that we have

found a prudent balance between the potentially greater return

from equities that has existed historically and keeping the investment small enough so that the government is not exposed to undo

risk.

Second, we are proposing to have two levels of protection to make

sure that there is no political influence in the investment process.

Money managers would be from the private sector and there would

be no investment function performed by the government. Also, a

mechanism would be devised, working with Congress, to provide

apolitical oversight and apolitical selection of the managers.

In addition, the President has proposed that a bipartisan process

be created to recommend the difficult choices necessary to extend

the life of the Trust Fund beyond 2055 to long-term actuarial balance, 2075. However, within the framework of these tough choices,

the President is committed to reducing the high rate of poverty for

elderly widows and to eliminating the earnings test for working

seniors.

With regard to Medicare, we extend the life of the trust fund to

2020 by, again, purchasing Treasury special, nonmarketable securities. In addition, the President proposes that we work in a bipartisan basis to enact reforms after the Medicare Commission submits

its report, which I believe is due on, or about, March 1. He also

proposes that these reforms should include the coverage of the cost

of prescription drugs.

The President has also proposed a new, universal savings accounts. These accounts would receive 12 percent of the surplus, be

9

separate from Social Security, and provide incentives for workers

to save for retirement. The government would provide a refundable

tax credit of an equal amount for each account and also a match

for each additional dollar voluntarily saved with larger matches

going to low-income workers.

Finally, the remaining 11 percent of the surplus would not be

saved, which means that 89 percent would go to increase national

savings. The final 11 percent would not be saved but would be allocated for defense spending and for critical, domestic discretionary

investment priorities. This 11 percent supplements other discretionary expenditures that are within the limits proposed by the discretionary spending caps.

Let me very briefly highlight some of the key investments and

priorities in the budget. And first let me say once again that all

discretionary spending is under the caps and all mandatory expenditure increases are fully offset as required by PAY–GO rules.

In his State of the Union, the President made clear his priority

with respect to tax credits, discretionary spending would be education, working families, communities, a strong economy and a

strong America in the world.

For education, the budget proposes to help States and school dis- tricts build and renovate schools to $3.75 billion of tax credits over

5 years. We also propose to extend section 127 for employer-provided educational assistance.

For working families, the budget proposes a long-term care ini- tiative that includes a new, $1,000 tax credit that will compensate

families for the cost of caring for an ailing relative and a new,

$1,000 tax credit to assist workers with disabilities. There are a

number of programs to help with childcare costs.

Third, for communities, the budget provides for a new market in- vestment initiative that we believe could create $15 billion in new

capital investment in businesses in underserved inner cities and

rural areas with tax credits and loan guarantees. It also includes

an increase in the low-income housing tax credit.

Finally there are a number of law enforcement initiatives which

will build on the work that the administration has done in the last

6 years with respect to increasing law enforcement officers on the

streets, making the Brady law permanent and banning violent juveniles from buying guns.

Fourth, to help foster a strong economy, the budget proposes to

facilitate Y2K amelioration activities for the Council on Year 2000

conversion and to extend the research and experimentation tax

credit.

Finally, the budget asks for resources to strengthen America’s

leadership in the world. I believe that the Congress has contributed

greatly to financial stability in the world by, last year, providing

full requested funding to the International Monetary Fund, and I

believe that a similar contribution can be made this year by approving the request this year to meet all of our financial obligations

to the United Nations.

Before I close, let me, if I may, Mr. Chairman, mention one other

important element of this year’s budget, and one that I believe will

be important to this Committee. Our budget contains several proposals aimed at curbing corporate tax shelters which have proVerDate 11-SEP-98 10:09 Dec 03, 1999 Jkt 056396 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 F:56396 W&M3 PsN: W&M3
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liferated in recent years. Corporate tax shelters not only erode the

corporate tax base, they also breed disrespect for the tax system

both by those who participate in the corporate tax shelters and by

others more generally who view the tax system in an unfair fashion.

Our budget proposals address these issues in two ways. One, by

increasing disincentives for entering into abusive transactions,

those are generic provisions. And second, by attacking a specific tax

shelter’s transactions of which we are aware. Our department

would very much like to work with this Committee and with Congress more generally to deal with this very important problem.

Let me conclude, Mr. Chairman, that restoring fiscal discipline

to our country has, in my view and in our view, contributed enormously to the strong economic conditions of the past 6 years. Because of what has been accomplished we now have a unique opportunity to further economic and social well-being for the years and

decades ahead. The President has proposed that the surpluses be

used predominantly to increase national savings and improve the

fiscal conditions of the Federal Government while at the same time

strengthening Social Security and Medicare.

The effect of all of this should be to increase jobs, increase standards of living, continue the favorable economic conditions of the

last 6 years and improve the economic security of future retirees

and workers. We look forward to working together in the bipartisan

spirit that you discussed, Mr. Chairman, as we face these critical

challenges.

Thank you.

[The prepared statement follows:]

Statement of Hon. Robert E. Rubin, Secretary, U.S. Department of the

Treasury

Mr. Chairman, members of this Committee, I appreciate the opportunity to discuss with you the President’s FY 2000 Budget, the first budget of the 21st century.

As a result of the fiscal policy of the last six years, the economy it helped produce,

and the ongoing interaction between the two, the nation has moved from an era of

large annual budget deficits to an era of budget surpluses for many years into the

future. And this gives us an historic opportunity to meet challenges that will affect

our economic and social well-being for decades to come, including the economic and

fiscal pressures created by the retirement of the baby boom generation. And meeting

those challenges is exactly what the President’s budget does. The core of this budget

is fiscal discipline, and thereby increased national savings, in order to promote economic growth and retirement security in the years ahead.

Before I discuss how this budget will meet these challenges, let me review what has taken place in the last six years. In 1992, the deficit reached a record of $290

billion, the Federal debt had quadrupled during the preceding twelve years and both

the deficit and debt were projected to rise substantially. The President responded

with a three-pronged economic strategy of fiscal discipline, equipping people for the

future and open markets at home and abroad. This strategy contributed greatly to

moving us from deficits to surpluses, and to what many consider to be the best economic conditions in recent memory—the longest peacetime economic expansion in

our history, a very high rate of job creation, the lowest unemployment in decades,

and real increases in income across all income strata. It seems to me that focusing

on the economic conditions of recent years, and on the strategy that contributed so

much to them, provides very useful guidance as we face policy issues going forward.

Let me also stress that tax burdens on working families are at record lows for

recent decades. For a family of four with a median income, the federal income and

payroll tax burden is at its lowest level in 21 years, in part because of the child

tax credit enacted in the 1997 balanced budget plan. For a family of four with half

the median income, the income and payroll tax burden is at its lowest level in 31

years, in part because of the 1993 expansion of the Earned Income Tax Credit for

fifteen million families as well as the 1997 enactment of the child tax credit. And

11

for a family of four with double the median income, the federal income tax burden

is at its lowest level since 1973. While overall tax revenues have risen as a percentage of GDP, that is primarily because affluent individuals have had large increases

in incomes, in part from bonuses based on high stock prices and increased realizations of capital gains, and in part because of increased corporate earnings.

Against that backdrop, the President’s new budget proposes that in order to generate jobs, raise standards of living and promote retirement security most effectively, we must save the great preponderance of projected budget surpluses, not consume them for tax cuts and spending programs. Specifically, the budget proposes

that 62 percent of the surpluses be allocated for Social Security, and 15 percent of

the surpluses be allocated for Medicare. These resources will then be used predominantly to pay down publicly held debt of the federal government, and in part to purchase equities, both of which will in effect preserve and invest rather than consume

and eliminate the increase in national savings that comes from the surplus. In addition, national savings is increased by allocating 12 percent of the surpluses for creating new Universal Savings Accounts. Finally, the budget insists that none of the

surpluses be used at all until we have put Social Security on sound financial footing

for the long-term.

Let me focus on debt reduction for a moment. When President Clinton was elected, publicly held debt equaled 50 percent of GDP. Under the President’s plan, 80

percent of the surpluses allocated to Social Security and all of the surpluses allocated to Medicare will reduce debt held by the public. As a result, by 2014, publicly

held debt will decline to about 7 percent of GDP. This reduction in debt will have

three effects. First, the government will not have to refinance federal debt and

thereby will consume less of national savings, thus making capital more readily

available to the private sector. That, in turn, will reduce interest rates and increase

confidence in the economy, increasing economic growth, job creation and standards

of living. Second, debt service costs will decline dramatically. When the President

came into office debt service costs of the federal government in 2014 were projected

to constitute 27 percent of the federal budget. Under the President’s proposal, and

because of the progress we have made to date, we estimate the debt service costs

will be 2 percent of the federal budget in 2014. Third, the decrease in debt means

the federal government will have a greatly improved capacity to access external capital should the need arise.

In addition to reducing publicly held debt, the President’s budget strengthens Social Security and Medicare. With regard to Social Security, the President has proposed two measures that—taken together—will extend the life of the Trust Fund

to 2055. The first measure is the purchase of Treasury ‘‘special’’ non-marketable securities, which are in effect a first claim against the general revenues of the federal

government to meet the already existing Social Security commitments. The second

proposal is, that of the 62 percent of the surpluses that will be transferred to the

Social Security Trust Fund, about one fifth would be invested in private-sector equities.

I have had concerns about investment in equities by the Trust Fund. Let me

make two observations about this particular proposal. First, it would result in

roughly 15 percent of the Trust Fund being invested in equities. Given that equities

do have risks, that seems to me to be a prudent balance between receiving the potentially greater return from equities and keeping the investment small enough so

that the Trust Fund is not exposed to danger. Second, we are proposing to have two

levels of protection to make sure that there is no political influence in the investment process. Money managers would be from the private sector and there would

be no investment function performed by government officials. A mechanism would

be devised in concert with Congress to provide apolitical oversight and apolitical selection of these managers.

In addition, the President is also proposing that a bipartisan process be created

to recommend the ‘‘tough choices’’ necessary to extend the life of the Trust Fund

beyond 2055—to 2075. However, within the framework of these ‘‘tough choices,’’ the

President is committed to reducing the high rate of poverty for elderly widows—and

to eliminating the earnings test for working seniors.

With regard to Medicare, we extend the life of the Trust Fund to 2020 by purchasing Treasury ‘‘special’’ non-marketable securities, as under current law. In addition,

the President proposes that a bipartisan process be used to enact reforms, but only

after the Medicare Commission submits its report in March, and that coverage of

the cost of prescription drugs should be part of any package recommended by this

bipartisan process.

Now let me focus on our proposal for the new Universal Savings Accounts. These

accounts would receive 12 percent of the surplus, be separate from Social Security,

and would provide incentives for workers to save for retirement. The government

12

would provide a refundable tax credit of an equal amount for each account and also

a match for each additional dollar voluntarily saved, with larger matches going to

low income workers. The exact details of the program would be worked out by the

Administration and Congress.

Finally, the remaining eleven percent of the surpluses would not be saved, but

would be allocated for defense spending to protect our national security and for critical domestic discretionary investment priorities. This eleven percent supplements

other discretionary expenditures in the budget that are within the limits imposed

by the discretionary spending caps.

Let me now highlight some of the key investments and priorities in the discretionary and mandatory sides of the President’s budget. Leaving aside measures in

the budget that are paid for out of the surplus after Social Security has been addressed, all new tax cuts and mandatory spending are fully paid for and the budget

complies with the discretionary caps.

In his State of the Union Address, the President made clear that our key investments for the future and our critical priorities were concerned with providing important programs and tax credits for education, working families, communities, and fostering a strong economy and a strong America in the world. Within these broad

areas, I would like to focus on just a few specific initiatives.

First, for education, the budget proposes to help states and school districts build and renovate schools through $3.75 billion of tax credits over five years. The budget

also proposes to extend and expand the tax deduction for employer-provided educational assistance.

Second, for working families, the budget proposes a long-term care initiative that includes a new $1,000 tax credit to help compensate families for the cost of caring

for an ailing relative. The budget also includes a new $1000 tax credit to assist

workers with disabilities. And the budget helps with child care costs in three ways:

through greater tax relief for working families and for those parents who stay at

home, through subsidies to help families pay for child care, and through dramatic

increases in funding for after-school programs.

Third, for communities, the budget provides for a ‘‘New Markets Investments Ini- tiative’’ that could spur $15 billion in new capital investment in businesses in underserved inner cities and rural areas through tax credits and loan guarantees. It

also includes an increase in the low-income housing tax credit. Finally, the budget

calls for a new 21st century policing initiative that would help communities add between 30,000 and 50,000 more law enforcement officers, give law enforcement officials access to the latest crime-fighting technologies, make the Brady law permanent, and permanently ban violent juveniles from buying guns.

Fourth, to help foster a strong economy, the budget proposes to facilitate ‘‘Y2K’’

amelioration activities through the Council on Year 2000 conversion and extend the

Research and Experimentation tax credit.

Finally, the budget asks for resources to strengthen America’s leadership in the

world. The Congress contributed to global financial stability last year by providing

the full amount of resources for the International Monetary Fund. I would like to

strongly encourage the Congress to approve the request in this budget to meet all

of our financial obligations to the United Nations. We are also asking for resources

to promote trade with Africa.

Before I close, let me mention one other important element of this year’s budget.

Our budget contains several proposals aimed at curbing corporate tax shelters. Tax

shelters not only erode the corporate tax base, they also breed disrespect for the tax

system both by people who participate in the corporate tax shelter market and by

others who perceive corporate tax shelter users as paying less than their fair share

of tax. Our budget proposals address these issues by increasing disincentives for entering into abusive transactions and by attacking specific corporate tax shelter

transactions of which we are aware. The Treasury Department will continue to

study additional remedies for the corporate tax shelter problem and to work with

the members of Congress and their staffs to address this issue.

Mr. Chairman, restoring fiscal discipline to our country has contributed enormously to the strong economic conditions of the last six years. Because of what has

been accomplished, we now have a unique opportunity to further our economic and

social well-being for the years and decades ahead. The President has proposed that

the surpluses be used predominantly to increase national savings and improve the

fiscal condition of the federal government, while at the same time, strengthening Social Security and Medicare. The effect of all this should be to increase jobs, raise

standards of living and improve the economic security of future retirees and workers. I look forward to working with the members of this Committee as we face these

critical challenges. Thank you very much.

13

Chairman ARCHER. Thank you, Mr. Secretary.

Mr. Secretary, on January 21, we had our first Social Security

hearing of the year, here, in this room. At that time I agreed to

move toward the President as a starting point for the Social Security solution by agreeing to wall off 62 percent of the surplus until

Social Security could be saved. I think that this is an expression

of cooperation moving toward the foundation of the President’s proposal.

Now, I also adamantly oppose the investment by the government

of Social Security Trust Fund dollars in the private marketplace.

I have made a number of public statements over the last 11⁄2 years

against that sort of proposal including when the Advisory Board

came out with its recommendation awhile back. So, that was not

intended to be an immediate negative reaction to the President’s

proposal.

Once we have walled off the 62 percent, can you explain to me

what the administration proposes to save Social Security for 75

years which is our responsibility and obligation with which we are

charged?

Secretary RUBIN. Two comments, if I may, Mr. Chairman.

I do think that, as you say, the walling off of the 62 percent did,

in a sense, accept the foundation piece of the President’s proposal.

But the President, as you know, has the view, and I think correctly, that we shouldn’t simply wall it off. That we shouldn’t do

anything else with the surplus until we actually enact a Social Security plan. And I think that for two reasons.

First, the concern is that if we wall it off but don’t enact Social

Security reform and do the other kinds of things that we may prefer to do that we may, in fact, deal with the Social Security issue.

And so, in order to maintain maximum pressure to get Social Security done, his view is that we should first enact Social Security, and

that is the view that he has had over the last year, and then go

on to do all of the other things that we may want to do and debate

what we do with the other 38 percent.

Second, although our proposal is 62 percent, there is no way of

knowing what Congress and the administration while working together might ultimately decide. It is possible, and it is quite possible, I suspect, that this would be done with 62 percent of the surplus, and other things would be done to deal with the rest of Social

Security, but one can’t tell, and, in our view, at least, we shouldn’t

limit the flexibility of Congress and the administration to deal with

Social Security by doing other things with the surplus before Social

Security is dealt with. But, predominantly, I think that it is really

to maintain the pressure to get Social Security addressed.

Third, to go from 2055 to 2075, as you correctly say, involves a

lot of very difficult decisions, and it was the President’s view again,

I think correctly, as he has said through this whole process, is that

what he should do is what he thinks will best move this process

forward. And it is his view that at this time what he should do is

work with Congress on those kinds of very difficult issues with the

concern that if he gets ahead of Congress or gets ahead of the rest

of the process then the proposal that he might put forward could

14

create a negative political reaction and actually retard the process

rather than put it forward.

As you and I have had this discussion over the course of the last

year, his consistent principle has been to do whatever it is that will

move this process forward. I must say that we have come a long

way following that principle. When you consider that all of last

year we did not touch the surplus, we did preserve it for Social Security. We have now positioned ourselves where there seems to be

a coalescence around that is using this 62 percent.

So I think that with that principle we have made enormous

progress, and we should now do what he says and all work together

on these very difficult issues rather than throw out proposals independently of that which runs the risk of those proposals being attacked and setting the process back.

Chairman ARCHER. What actions are currently being taken by

the administration to move this ball forward?

Secretary RUBIN. I think that what needs to happen, Mr. Chairman, is for the leadership in the Congress, the administration, once

we get through the process that we are in right now, the process

of hearings on the budget, to determine a process that could work

effectively to move us forward on the difficult decision, just like we

do in every other legislation that we face in this Congress. As you

said, we have done this on an annual basis.

I have been here 6 years now, and you have been here a lot

longer. It seems to me that—you must have started younger—but

it seems to me that what we do each time is find some way to work

together. At least in the years that I have been here, the modality

of that working together has been somewhat different from year to

year and then we work together on the very difficult issues, and

that is exactly what I would do now.

Chairman ARCHER. I think there is common agreement that we

have a very limited window of opportunity, realistically, to address

this very difficult problem. I think that it behooves us to move as

rapidly as we can.

Secretary RUBIN. I agree.

Chairman ARCHER. I would like to followup on a comment you

made in your response that you protected the surplus last year.

Did the President sign any legislation last year that spent any of

the surplus? If it happened, of course, that was done prior to saving

Social Security or Medicare.

Secretary RUBIN. I am sorry, Mr. Chairman, I missed the question.

Chairman ARCHER. Did the President sign any legislation last

year that spent any of the surplus prior to saving Social Security

and Medicare?

Secretary RUBIN. The only spending that we had last year was

the spending that was done in accordance with the budget including emergency spending.

Chairman ARCHER. No, no, it is not whether it was in accordance

with the budget. The question was, did the President sign any legislation that spent any of the surplus?

Secretary RUBIN. In my judgment the answer to that question is

no. But if what you are referring to, Mr. Chairman, are the emergencies, emergencies are, as you know, provided for under the BalVerDate 11-SEP-98 10:09 Dec 03, 1999 Jkt 056396 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 F:56396 W&M3 PsN: W&M3
15

anced Budget Agreement in 1997, and I think that when you calculate the surplus you calculate the surplus net of the budget, and

emergencies that are provided for in the Balanced Budget Agreement.

The answer to your question, in my judgment, is no.

Chairman ARCHER. In your judgment, I understand.

Secretary RUBIN. Well, I will take out in my judgment.

Chairman ARCHER. I think that an objective citizen of this country would say that when you project surpluses of a certain amount

of money and you do not cover all of your spending under the

spending caps, irrespective of whether you call it emergency or supplemental, you have spent part of the surplus that you projected

you would otherwise have.

Secretary RUBIN. Well I guess where I would disagree, if I may,

Mr. Chairman, is that the surplus, at least as I understand it, in

the 1997 Balanced Budget Agreement was a surplus net of both

regular spending and also emergencies. There was provision for

emergency spending in the 1997 Balanced Budget Agreement.

Chairman ARCHER. But, Mr. Secretary, you can’t project surpluses net of emergency spending unless you know what the emergency spending is going to be in advance, and if you know what it

is going to be in advance, it isn’t emergency spending.

Secretary RUBIN. Well, I think that it actually cuts a little bit the

other way, if I may say so. I think that your projection of a surplus

is a number based on the regular budget and then it is subject to

the contingency of emergencies, and so the actual projection, if you

will, is the surplus in accordance with the regular budget net of

whatever emergencies may occur that Congress agreed—that is

they agreed last year, for example—are duly constituted emergencies.

In other words, the surplus, under the agreement we reached in

1997, the surplus is projected, according to budget, less whatever

emergency spending may occur. And of course, for emergency

spending to occur, it must be approved by Congress. And you all,

I think correctly, agreed that certain matters constituted emergencies last year.

Chairman ARCHER. Mr. Secretary, let me take issue in that regard because I am a firm believer that we do not budget correctly.

We should have a contingency fund in every budget that we enact

that anticipates the average amount of supplemental spending that

will occur. We have supplemental spending every year. There is no

State in this country or city in this country that does not provide

for a contingency fund for the things that they know will arise,

whether for disasters or whatever else. To simply say that we have

an unlimited amount to declare anything we want to an emergency, the next year the money has already been spent. This opens

the door to say that you could spend the entire surplus and declare

it an emergency and there would be no surplus for Social Security

or Medicare or anything else. That is a terrible way to budget.

I am urging the CBO and our congressional budgets to include

a contingency fund, and I think that if OMB realistically had a

budget that made sense they would have a contingency fund up

front.

16

A good example of this is the money being spent for Bosnia that

is coming out of the Defense Department budget. We know that

those troops are going to be in Bosnia. You will not let us remove

the troops from Bosnia. That is not an emergency. And yet when

you replenish that money in the supplemental spending bill, you

will say that that is an emergency and therefore you can spend the

surplus.

Secretary RUBIN. Well, I think that the problem that you have

got, Mr. Chairman, look, you are raising a very important, and I

think difficult issue. But I think that the problem that you have,

and we can ask Ms. Mathews if I am right, that in Bosnia we do

pay for that. But I don’t know how you anticipate a Hurricane

Mitch or a Hurricane Andrew. I don’t think that you can—this is

a very important budgeting issue, I agree, but I think, unfortunately, Mr. Chairman, that life is more uncertain than projections

of average contingency spending might allow. So I think in the

final analysis, that what you are going to have to rely on is a sensible definition of an emergency and then a sensible application of

that definition by the Congress working with the administration.

Ms. MATHEWS. And in this current budget that we submitted,

Bosnia is paid for within our defense budget.

Chairman ARCHER. OK, but it was not last year. We put $1.8 billion in supplemental which you said was emergency spending for

the Bosnia operation. That had not been budgeted.

Secretary RUBIN. But Mr. Chairman, I think that unfortunately

that the United States is faced with the kinds of uncertainties that

you simply can’t encompass with projected contingency spending.

One doesn’t know what kind of hurricanes, typhoons, and other

kinds of activities, including, unfortunately when necessary military activities might take place next year.

Chairman ARCHER. Well, Mr. Secretary, all I can say is every

other body I know of has a contingency fund based on average expectancy of the things that will come up judged by past year’s experience, over many years. And certainly you can’t know for sure, but

every year we have disasters. Every single year. And we should

provide at least a minimal amount as a contingency. Otherwise you

simply are discarding this question of surplus. And the American

people understand that if the government spends money, irrespective of how you characterize it, they are eating into the surplus.

So, I don’t want to belabor that anymore. I have two other quick

things that I wanted to ask you.

Secretary RUBIN. Could I just make one more comment? I think

we do have though, in the system that we now have, the good fortune of the protection of the integrity of the concept of emergency

by virtue of the fact that the President can’t do it on his own initiative. The Congress has to approve it. Last year, you, and I think

rightly, felt that a number of things were emergencies, and approved the spending. I personally think that your judgment was

right.

Chairman ARCHER. Well, Mr. Secretary, I really want to start on

a strong, bipartisan foot. [Laughter.]

But let me tell you that when we had to accept your emergency

spending, it was with a gun held to our head that the government

17

would be shut down if we didn’t do it. And so it was not a voluntary activity on our part. But let’s not get back into all of that.

Secretary RUBIN. Well, there are all sorts of pressures that act

and apply to all of us, Mr. Chairman, but it was something that

we all worked out together.

Chairman ARCHER. But I would rather talk about the future.

In your opinion, can Social Security be saved by an expenditure

of the surplus that is less than 62 percent of the projected surplus?

Secretary RUBIN. I’m sorry, you said less than 62 percent?

Chairman ARCHER. Yes.

Secretary RUBIN. Well, there are many different ways to approach the question.

Chairman ARCHER. No, I understand that. But can you pick one

that you believe would save it for less than 62 percent? Do you

think that is possible?

Secretary RUBIN. If you are asking me if it is possible, there are

people, as you know, that would use less than 62 percent. I think

that they would use less than 62 percent. There certainly are other

approaches to dealing with Social Security. What percentage of the

surplus they use, I don’t recollect. But there are about half a dozen

plans that have now been put forth by various Members of Congress.

My own view is that we have reached a sensible balance in the

way that we have proposed this, but there are many other proposals around.

Chairman ARCHER. So, you could conceive of a plan that would

save it for less than 62 percent of the surplus?

Secretary RUBIN. Well, one thing that you could do, for example,

would be to dramatically reduce benefits. The President happens to

feel that benefits should not be reduced, and that is why——

Chairman ARCHER. Well, we do, too. We do, too.

Considering the basic concept that we are not going to increase

taxes and we are not going to reduce benefits, is there a way to

solve the Social Security problem with less than 62 percent of the

surplus, in your opinion?

Secretary RUBIN. And the two posits are that you don’t increase

taxes and you don’t reduce benefits?

Chairman ARCHER. Well, both of us have said that we are not

going to cut benefits and that we are not going to increase taxes.

That is a bipartisan, public statement on both sides.

Secretary RUBIN. Well, actually, just for the record, what we

have said is that we would put 62 percent into the Social Security

Trust Fund and that we would not raise the payroll tax rates, and

that beyond that, we would have very serious concerns about measures that would effect benefits. But we want to work with Congress

on the difficult decisions to figure out how we go from 2055 to

2075.

Chairman ARCHER. OK. But assuming the presumption that we

are not going to raise taxes and we are not going to cut benefits,

in your opinion, is there a way to solve Social Security with less

than 62 percent of the surplus?

Secretary RUBIN. I guess the best answer that I can give you, Mr.

Chairman, is that when we put forward our proposal, it involves

62 percent. If somebody has another proposal——

18

Chairman ARCHER. No. I am just asking. There are many, many

proposals. You have looked at a lot of them.

Secretary RUBIN. Yes.

Chairman ARCHER. I am just asking you as you evaluate those,

do you think that it is possible that we could——

Secretary RUBIN. Yes, I will give you an example of a way that

we could do it——

Chairman ARCHER. I don’t need any examples. I just——

Secretary RUBIN. Well, let me give you an example just to show

you why I wouldn’t do it.

If you wanted to take the whole portion of the surplus that you

are putting into Social Security and buy equities with it, if the

stock market behaves well, you would obviously capture the historical difference between equity and fixed income rates of return. You

would presumably accomplish the same 2055 with a smaller percentage of the surplus. But I personally think that would be an extraordinarily unsound thing to do, but you could try it.

Chairman ARCHER. No, I am talking about a 75-year solution for

the Social Security problem and whether it would be possible to do

that with less than 62 percent of the surplus when you did not cut

benefits and did not increase taxes.

Secretary RUBIN. I guess the best answer that I can give you, Mr.

Chairman, is that we put forward what we think is a very sensible

proposal. If you have something specific in mind, we would be

happy to look at it.

Chairman ARCHER. Well, I am not trying to make a judgment on

a plan, I am just trying to determine as a basis for our consideration whether or not it might be possible to do it with less than

62 percent of the surplus.

Secretary RUBIN. I guess the best answer that I can give you, Mr.

Chairman, is that I don’t know, and I don’t know what to tell you.

If you were to put forth a plan, let me take a look at it.

Chairman ARCHER. OK. Well, we are still waiting for your plan

as a leader of the country, but we won’t get back into that.

Mr. Secretary——

Secretary RUBIN. Well, just in the interest of our bipartisan conversation, we put forward a plan. That is precisely what we did.

[Laughter.]

Chairman ARCHER. OK.

Mr. Secretary, relative to your proposed government-controlled

management of investments in the stock market of the Social Security Trust Funds——

Secretary RUBIN. I’m sorry. The government-controlled what?

Chairman ARCHER. The government-controlled and managed investments in the stock market of roughly $700 billion of the Social

Security Trust Fund, can you refer me to the page in the budget

so I can see the details and where it is explained?

Secretary RUBIN. I don’t know where it is explained in the budget, but I will tell you exactly what we have in mind.

Chairman ARCHER. No, no, no. I really said that since we have

got the written budget, I am really just looking for the page where

we can see the explanation of that. Can you refer me to the page?

Ms. MATHEWS. Our Social Security framework is described, I

think in the pages you have seen, where the totals are laid out in

19

terms of the transfer to Social Security but we have not broken out

the equity portion within the document that you have seen.

Chairman ARCHER. OK, but it is hard for me to understand if

you don’t have it in writing what your specific plan is.

Secretary RUBIN. Can I make a suggestion, Mr. Chairman, and

maybe this will facilitate the matter.

Chairman ARCHER. We really should have that in writing, not

just some sort of verbal——

Secretary RUBIN. Let me make a suggestion. I would be delighted

to send you a letter, if you would like, articulating what I said, or

really restating what I have said in my opening statement which

is, one, investment we have done entirely——

Chairman ARCHER. No, I am not—that’s not——

Secretary RUBIN. There will be no government investment and

there would be an apolitical oversight and an apolitical choice of

managers.

Chairman ARCHER. That is not what I am getting at. I am getting at the numbers part of it. The budget is a numbers document,

and in order to get the complete budget, we need to have some

numbers and how it works. Is that in there, and what page is it

on?

Secretary RUBIN. There is on page 41 of whatever this document

is called, the President’s framework to save Social Security.

Chairman ARCHER. Are the specific numbers in there so that we

can look at a complete budget and be able to evaluate it?

Secretary RUBIN. The actuaries—I don’t have it in my hand unfortunately, Mr. Chairman, but the actuary did give us a letter saying, as you know, that our plan would extend the Social Security

Trust Fund to 2055.

Chairman ARCHER. I see a lot of words in here on page 41, but

I don’t see any numbers.

Secretary RUBIN. My suggestion, Mr. Chairman, is rather than

rely on us, and all we are is the administration, we actually now

have a letter from the actuary saying that this proposal would extend the Social Security Trust Fund to 2055

Chairman ARCHER. So, this document that we have is really not

your budget, it is just a summary of generalities. Is that——

Secretary RUBIN. No, I think that is actually a very good budget,

and I think that it is a budget——

Chairman ARCHER. It’s not a question of whether it is good——

Secretary RUBIN. Mr. Chairman, again in the interest of our bipartisan dialog, this is the budget. And in order to accomplish all

that the President set forward, we are all going to have to work

together in putting in place a Social Security plan.

In terms of the issue that you are raising, if you are a little bit

uncomfortable about whether or not this plan will get us to 2055,

which is I assume is the substantive issue at stake, what we have

here is the actuary’s letter, these are the career actuaries. They say

that our plan will, in fact, extend the Social Security Trust Fund

until 2055. I don’t know what the date of this letter is, oh, January

26, 1999. So, there it be.

Chairman ARCHER. Well, I have always thought of a budget as

being a precise blueprint of numbers that add up in the end to

what you are spending and what you are taking in——

20

Secretary RUBIN. Oh, the numbers——

Chairman ARCHER [continuing]. And what the projections are

over the years.

Secretary RUBIN. Mr. Chairman? The numbers—if you are asking about the numbers that effect the budget as a result of our allocation surplus, that is in here. If that is your question.

Secretary RUBIN. What page is that on relative to the investment

part in the stock market?

Ms. MATHEWS. The investment portion—in terms of the surplus

and the overall budgeting and what we would take from the surplus and how we would net our numbers are on page 377. That is

Table S–7.

Throughout most of our summary tables what you will see is that

we have included the numbers that include what would happen

with the 62 percent, the 15 percent, and that is included in a number of our summary tables. It is all summarized on page 377 in

terms of the numbers that affect the bottom lines of the budget.

The surpluses, where the surpluses would go, where the dollars

would be spent.

Chairman ARCHER. I only have one last, quick question, you have

proposed what you call the USA accounts. Can you refer me to the

page in the budget where I will find the details of that?

Secretary RUBIN. Mr. Chairman, what we have done is proposed

a framework.

Chairman ARCHER. No, I understand that. What I am asking is

just one specific question.

Secretary RUBIN. But I am trying to be helpful.

Chairman ARCHER. What page—no, no—because I want to move

on and let other Members inquire. I just simply want to know what

page of the budget, that we find the details. Perhaps Ms. Mathews

can refer me to the page in the budget that gives the details of the

USA accounts.

Secretary RUBIN. What we have in the budget is the allocation

of 12 percent of the surplus. With respect to the specifics of the accounts, we are still working on that, Mr. Chairman. As soon as we

have completed our work we will report back to this Committee.

Chairman ARCHER. OK, that is the answer. There are no specifics in the budget on the USA accounts.

Secretary RUBIN. No, I think actually that the more accurate answer, if I may, is that the 12 percent allocation of surplus, there

is a framework that the President set out in his State of the Union

Address, and we are working on the specifics at the present time.

Chairman ARCHER. No, I listened to the State of the Union Address, but we now have the specific budget——

Secretary RUBIN. Correct.

Chairman ARCHER. And I am asking Ms. Mathews what page in

the budget describes the USA accounts so that we will be able to

evaluate them.

Secretary RUBIN. But for the purpose of the budget, which is the

question of the numbers, which you correctly said a few moments

ago, Mr. Chairman, all that you really need to know is what the

cost to the Federal Government will be, and that is the 12 percent

of the surplus which we have in there.

21

In terms of the specifics of the program, we are working on that

now, and when we have completed our work, then obviously this

is the Committee, this and the Senate Finance Committee will be

the Committees that we will be working with on this.

Chairman ARCHER. But, Mr. Secretary, we cannot evaluate the

numbers until we know the details of the program. If I send a request for the estimates to the Joint Committee on a tax proposal,

and I say, ‘‘Well, this is generally what we want to do,’’ they will

say, ‘‘Look, until you send me the statutory language and the details, we can’t give you an estimate. We can’t make a judgment

until we know the details of the program.’’

Secretary RUBIN. And we will——

Chairman ARCHER. And most of the things in the budget are supported by details so we can make a valid judgment. But in any

event——

Secretary RUBIN. As will this piece in the very near future. And

what we did here, really, was to provide simply, as I said a moment ago, the quantitative, or numerical impact of the President’s

proposal with the specifics to be worked on now.

Chairman ARCHER. OK, thank you, Mr. Secretary.

Mr. Rangel.

Mr. RANGEL. Thank you so much, Mr. Chairman.

Mr. Chairman, in the spirit of bipartisanship, could you tell me

why that green light went on when I started speaking when it had

not been functioning before? [Laughter.]

Continuing with this spirit of bipartisanship, let me pursue some

of the Chairman’s line of questioning.

The Chairman has agreed to this 62 percent walled-off figure. Is

it the President’s position that he you would not entertain a tax cut

until the Congress presented a Social Security proposal that was

satisfactory to the President?

Secretary RUBIN. The President’s view, Mr. Rangel, is that we

should not do anything with the rest of the surpluses until Social

Security has been addressed, and then once Social Security has

been addressed, we can have a debate about whether it should be

used, for what purpose the rest of the surplus should be used.

Mr. RANGEL. What would the President’s position be on the

Medicare Trust Fund?

Secretary RUBIN. The President’s view is that once Social Security is addressed that we should then allocate the surplus in the

manner in which I described in my opening statement, and that includes using 15 percent of the surplus to extend the Medicare

Trust Fund from 2008 to——

Mr. RANGEL. So will the President not entertain a tax cut until

after Medicare has been taken care of as well as Social Security?

Secretary RUBIN. The President believes that what we should do,

even though it is the hard path to go and not the easy path to go,

is to continue on the path that we have been on these last 6 years,

Mr. Rangel, and continue to improve national savings and the fiscal position of our government. And in our judgment, that has contributed enormously to both job growth and increased standards of

living in this country.

Mr. RANGEL. And that is consistent with Chairman Greenspan’s

view.

22

Secretary RUBIN. I gather that was the view. I did not actually

see that hearing, but I gather that was the view that he expressed

at a Senate hearing a week or two ago.

Mr. RANGEL. Now, the Chairman has indicated that a number of

the items——

Secretary RUBIN. Could I just say one thing, Mr. Rangel? I’m

sorry. I think that there was a remarkable contrast to——

Mr. RANGEL. I didn’t answer yes or no, you realize that? [Laughter.]

Secretary RUBIN. I think that there was a remarkable contrast

between the 12 years from 1980 to 1992 when the Federal debt

quadrupled and the period that we are in now where we have gone

from enormous debt to enormous surpluses and we are now seeing

the Federal debt come down, and that is what we want to continue.

Mr. RANGEL. Well, you have to admit that that is because of the

leadership of Ronald Reagan, so we will move on and leave that

alone.

The Chairman is concerned that your budget really does not provide the details that would allow us to legislate. I want to thank

you for that because you have not locked us into any position but

have given us the flexibility to attempt to reach those goals. I want

to thank the Republicans for advocating a 10 percent tax cut across

the board. They have not bothered us with any legislation either,

specific or otherwise. It is just more general terms. And I can understand the direction in which you would want us to go.

I am concerned that if the President’s position is that we have

to present to you an acceptable Social Security plan and an acceptable Medicare plan before we can deal with tax cuts, the same

thing might apply if Chairman Archer and I wanted to get together

and do something in the educational field. Would we have to wait

until we have resolved the Social Security Program?

Secretary RUBIN. As you know, Mr. Rangel, the President has

been enormously focused on education through the 6 years that he

has been here. You have been very much a part of that, and we

now have, I think, a very strong proposal on school construction

bonds. But even with respect to the measures that the President

thinks are so critically important to the future of this country, he

believes that we should first address Social Security, with respect

to the use of the surplus. Now within the regular budget, obviously

there are a whole variety of measures including the school construction bonds.

Mr. RANGEL. Well, I am going to need some direction because,

while there is some problem on the other side——

Secretary RUBIN. And can I just say, if I may, Mr. Rangel, the

school construction bonds. Since they are paid for in the regular

budget and don’t draw on the surplus, that can proceed prior to addressing Social Security.

Mr. RANGEL. OK. Well that is a breath of fresh air because I

would not want the administration to say that until we resolve the

Social Security problem to his satisfaction that this Committee

would be out of business.

Secretary RUBIN. No, no. As long as it is in the paid for part of

the budget, discretionary or mandatory, then at least it is the

23

President’s—then that is the budget, and the President’s view is

that that should go ahead.

The question is what do we do about the surplus. And it is with

respect to the surplus that he has taken the view that we should

not do anything until we address Social Security. And these education provisions are fully paid for in the budget.

Mr. RANGEL. We pretty well know what the President’s plan is

without the details, of course. Do you know of any other plan that

has been recommended by the Majority that is under consideration

by the administration? Any ideas or anything? Because, I was joining with Republicans in saying that the President just can’t talk

about taking care of the Social Security Program. I thought that he

had an obligation to bring us something. Well, he has done that,

and some don’t like some parts of it.

Do you have anything coming from the Majority that we can

compare?

Secretary RUBIN. To the best of my knowledge, Mr. Rangel, there

is not what you would call a Majority Party proposal. There are a

goodly number of specific proposals, well, more or less specific proposals that have come from various Members, some on——

Mr. RANGEL. Yes, but there is no Majority proposal in front of

the White House at this point anyway?

Secretary RUBIN. That is correct.

Mr. RANGEL. And I assume that the administration would not—

do you have any, Mr. Chairman?

Can I have regular order here because I am always distracted by

Members that want to say things to me but don’t know how to do

it except through you.

Mr. THOMAS. Will the gentleman yield?

Mr. RANGEL. No. Please, please. If you wanted to talk with me,

I will be finished in a minute, and I will be glad to talk with you.

What I was trying to say is that the administration doesn’t intend to be arrogant enough, I hope, to give us a Social Security bill.

You are not going to draft our legislation, are you?

Secretary RUBIN. Mr. Rangel, I think that we are on the right

position, and I think that it is for the reasons that you have said.

I think that we have provided a very strong—I think that what

we—we have done two things, it seems to me. One is that by acting

in the fashion that the President did, we avoided having the surplus used for purposes other than for Social Security until Social

Security is addressed, and now we have provided a strong framework to move forward.

We could disagree, I suppose, about what is the most effective

way to move forward, but I think that in an area like this which

is as difficult, in as many ways, as it is, that the most effective way

to go forward is on a bipartisan basis rather than putting forth specific proposals that then become subjects to all sorts of criticisms

for all sorts of reasons.

Mr. RANGEL. Well, this has been the beginning of our bipartisan

relationship with the administration, and we thank you for giving

us a broad-based budget. I understand that there will be a bipartisan piece of legislation that would allow us to assume some of the

responsibility of determining what is an emergency and what is a

hurricane, what are troops in Bosnia, so that the administration

24

will not have to do this crystal ball gazing alone. We will participate in the future.

I don’t know what else to ask you to do. I kind of think that what

you have done is throw the Social Security Trust Fund problem in

our laps. The ball is in our court, and if we don’t like what you are

doing, I think that we ought to come up with a better plan. If the

administration wants us to put it in legislative form, we will be

glad to do that on the Minority side.

I want to thank you for what you have done in the past. I ask

you to be tolerant with us. We are not used to working in a bipartisan way, and I hope that we will find some way in the House to

work more closely together to make it easier for the President, to

make it easier for the Congress. But most of all, to make it easier

for the American people to see that we are not sent here just to

differ. Instead, we have to find some area where we can agree.

Thank you so much. I yield back the balance of my time.

Chairman ARCHER. Mr. Secretary, our effort to encourage the

White House to submit a plan on Social Security is not for political

partisanship. In the history of Social Security there has been no

major reform without the White House or a commission submitting

a plan to Congress. The Congress has never, within its own ranks,

been able to come to grips with major reform to Social Security,

and that is documented for all history. My suggestion, the White

House submit us a plan is to give us the best opportunity to reach

a solution based on history.

Now, the White House shot down our effort to create a bipartisan

commission last year. They opposed it actively, and had a lot to do

with its failure in the Senate. We passed it in the House. If we had

been able to get White House help on that bipartisan commission,

we would very soon be receiving a recommendation on a bipartisan

basis as occurred with the Greenspan Commission in 1982.

But, Mr. Rangel’s suggestion that all we have to do is whip it together here in the Congress does not pay any attention to the reality of what has happened with Social Security since it began.

Secretary RUBIN. Mr. Chairman.

Chairman ARCHER. And so I just want to make that statement.

I recognize Mr. Crane.

Secretary RUBIN. Well, could I respond to that for a moment,

though?

Mr. RANGEL. Mr. Chairman, a point of personal privilege.

Chairman ARCHER. Mr. Crane is recognized.

Mr. RANGEL. A parliamentary point of order. Since my name was

mentioned, that common courtesy, if not the Rules of Order, would

indicate that——

Chairman ARCHER. The Chairman was not inquiring of the Secretary. The Chairman was making a comment to explain a position

that the Chairman has taken over the last many months, and I am

sure that Mr. Rubin will have the opportunity to express whatever

views he has through the questioning in the rest of the hearing.

Mr. Crane.

Mr. RANGEL. I am not the least bit concerned with the Secretary’s position. I am concerned because you used my name and

described the position that I had stated. A point of personal priviVerDate 11-SEP-98 10:09 Dec 03, 1999 Jkt 056396 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 F:56396 W&M3 PsN: W&M3
25

lege is not for the Secretary of the Treasury. He is appointed. I am

elected.

Chairman ARCHER. Mr. Crane. Mr. Crane is recognized.

Mr. CRANE. Mr. Chairman, it is hard to be heard with all this

chatter going on up here at the dais.

I did want to make a reference to a comment made by our distinguished Ranking Minority Member when he did control some time,

and that has to do with our bipartisanship and collegiality, and I

would like to tell you, Mr. Secretary, that 2 days ago we reintroduced the African Growth and Opportunity Act, and within 24

hours we had 60 cosponsors, 30 Democrats, 30 Republicans. Yesterday we had a hearing on it with Secretary Daley, and then after

the hearing we had a markup, and the markup we reported out of

the Trade Subcommittee, our bill again, and it had unanimous support, every Democrat and every Republican on the Trade Subcommittee. So, we are making progress in this bipartisan effort,

and I congratulate our Ranking Minority Member because he was

there for all of this, too.

We, however, are looking down the road in the trade arena, and

I would like to ask you a question there that has to do with the

administration’s effort to try and secure fast track passage because

the African Growth and Opportunity Act opens up an opportunity

with 48 sub-Saharan African countries to engage in free trade. But,

on the other hand, absent fast track, it is kind of meaningless. Is

the administration going to help this year overwhelmingly in trying

to secure renewal of fast track?

Secretary RUBIN. First, let me say, if I may, Mr. Crane, that I

think that your work this year and last year on the African trade

bill is both very important. I was in Africa about 6 months ago or

so, and there was enormous focus on what you were doing in that

area. I think that it is enormously constructive, and, as you say,

it is a good example of people working together.

In terms of fast track, as the President said in the State of the

Union Address, he very much wants to have fast track legislation

passed. The issue is finding, I have forgotten how he put it, but he

put it very well, we need to get passed the things that have traditionally divided us and find common ground on environmental

issues, labor issues, and the other issues that have made it so difficult to do this in the past. But he very much wants to get fast

track legislation, but has recognized that substantively, and otherwise, we have to be able to find common ground in these areas, and

that is what we are going to work toward doing.

Mr. CRANE. Well, I would hope that you would communicate to

the President, or remind him, that he has the authority to pursue,

progress with any country, unilaterally on environmental questions

and on labor questions. Please go forward. We will try, in turn, on

the trade side, to give him the renewal of that fast track authority.

Let me ask you one other question that is topical right now, and

that is your position on various pieces of legislation that are being

talked about, or some are already submitted language, dealing with

the ban or quotas on steel imports. Mr. Visclosky, as you know, has

a bill on the subject. What would the economic impact be on our

trading partners? Would such action impact their ability to recover,

26

for example, from the Asian financial crisis, if we went beyond existing trade laws and put bans on the importation of steel?

Secretary RUBIN. I think, Mr. Crane, that you are raising a very

difficult issue, and it is particularly difficult at this moment in

time. Let me try to give you my view, but it is not a simple view.

On the one hand, clearly, steel imports to this country have increased enormously, and that has created great hardship for the

steel industry and workers in the steel industry, and it is an issue

that we have been enormously focused on. As the President said in

the State of the Union Address, we are fully committed to using

our trade laws. We are monitoring this very closely. We are very

concerned, if there are unfair trade practices, to deal with them effectively. At the same time that the President is in Japan he has

spoken to the appropriate officials, including the Prime Minister,

about going back to precrisis levels and the rest. We are negotiating with Russia, as you know, and the December figures are, I

gather—or not, I gather, they are reflecting some of what has been

happening and exports to this country have gone way down.

On the other hand, there are larger issues here, and I think,

maybe, that is what you are alluding to. So, we are very much focused on the issue of steel and unfair trading practices, if they

exist, dealing with them and dealing with them forcefully.

But there is a larger issue here, if this is what you are alluding

to. We have the most open markets, probably, of any major economy—I would say almost surely, of any major economy in the

world. We have 4.3 percent unemployment. In continental Europe,

where markets are not as open as our, they have 10 to 12 percent

or higher unemployment. In Japan, where markets are not as open

as ours, they are now in the, I think, the fifth quarter of recession,

if I remember correctly, and the 8th year of very slow growth. I

think that our country has benefited enormously from pursuing

open markets abroad and from having open markets in this country.

In addition, there are two special factors right now. Number one

is the one that you alluded to. There are many countries in crisis

around the world. It is enormously in our economic interest. It is

important for job creation and the standard of living in this country

that these countries recover, and part of that recovery will be exports.

Second, there are tremendous protectionist pressures around the

world, and if this, the largest and most successful major economy

in the world with 4.3 percent unemployment and rapid growth and

all the rest, were to go into a restrictionist mode with respect to

trade, I think that it runs a very real risk of triggering protectionist pressures around the world which would have an enormous adverse impact on jobs and standards of living in this country.

Mr. CRANE. I agree with you wholeheartedly, and, in effect, what

you are saying is that we have the existing guidelines and laws in

place for dealing with dumping. In other words, we don’t need new

legislation.

Secretary RUBIN. I was actually——

Mr. CRANE. We can examine what some of these trading partners

are doing in terms of the increases that are coming into our market.

27

Secretary RUBIN. I think that we should vigorously enforce our

trade laws, Mr. Crane, and I think that what the President did was

very important when he was in Japan. I was in Switzerland this

past weekend, and I spoke with some very high Japanese officials

and also talked about the difficulties arising from the vast increases in exports from Japan, and we have, as you know, have negotiations with Russia to deal with the issue there. We have acted

to counter subsidization of steel in Korea.

Mr. CRANE. Thank you, Mr. Chairman.

Chairman ARCHER. Mr. Thomas.

Mr. THOMAS. Thank you, Mr. Chairman.

I have had difficulties on and off whenever we have had to talk

about items that are very serious, significant and important with

such a level of flippancy that really, I think anybody watching

would want to know whether this is a theatrical tryout or whether

it reinforces a lot of cynicism about government today.

I was pretty amazed when the gentleman from New York, given

his seniority, said that the Rules of Order would demand it. I assume that he understands that it is Jefferson’s manual that we use

as the parliamentary structure here.

But I wasn’t any more amazed by that than I was amazed by the

Secretary’s repeated statement that this administration hasn’t

spent the surplus. You spent $51 billion of the surplus. The problem is that when you spend it, it isn’t spending the surplus. When

someone else wants to spend the surplus, it is spending the surplus. So, at some point, if we are ever going to possibly move forward in a positive, bipartisan way, the degree to which we are inaccurate is going to be an enormous hurdle to overcome.

I would like to ask you a very specific question about a proposal

in the President’s State of the Union Message because I can’t get

the answer. The President proposed a better America bonds for the

purchase of greenspace. This is a bond program that would essentially be operated by the Environmental Protection Agency. Can

you tell me or the Committee what parts of the current tax-exempt

bond law would prevent communities and States from currently

buying greenspace?

Secretary RUBIN. From currently buying greenspace?

Mr. THOMAS. Yes.

Secretary RUBIN. To the best of my knowledge, and I may be

wrong, Mr. Thomas as I am not an expert in this, but to the best

of my knowledge, they can buy greenspace. I think that the question is, how do they fund it?

Mr. THOMAS. Tax-exempt bonds.

Secretary RUBIN. Yes, but what this was doing was to provide

tax credits, as you know, to pay the interest on the tax-exempt

bonds so that there would be Federal help in doing that.

Mr. THOMAS. They have Federal help today in terms of taxexempt bonds.

Secretary RUBIN. And this would go further than tax-exempt

bonds——

Mr. THOMAS. OK. So there is nothing in the law, that you know

of, that would prohibit them from doing that today through the taxexempt bonds?

28

Secretary RUBIN. No. But you can have a legitimate debate

whether the Federal Government should provide additional assistance. In our judgment, they should provide additional assistance.

Mr. THOMAS. That is fine.

Secretary RUBIN. You may feel differently.

Mr. THOMAS. No, I just couldn’t understand why.

Second question. In response to the gentleman from Illinois, and

I appreciate that it is always easy to slip into a protectionist mode,

especially when it is in your backyard that needs that protection,

but the administration did address the steel question and the concerns about job losses in the steel industry, I believe, by offering

an ability to carry back their net operating losses over a 5-year period as a suggested partial remedy to the problem in the steel industry today. Is that correct?

Secretary RUBIN. That is correct.

Mr. THOMAS. Well, the steel industry has lost about 10,000 jobs.

Oil and gas industry has lost 30,000 jobs. Three times as many jobs

lost in an area that is being impacted virtually identically to what

is occurring in steel. Why didn’t the President offer the same aid

to the oil and gas industry?

Secretary RUBIN. I think, Mr. Thomas, that you, again, get into

what is a very important, as Mr. Crane said, a very important and,

I think, central issue. I believe, and much more importantly, the

President believes, and he has said this many times, that if we are

going to be a successful economy, a dynamic economy, we are going

to have to embrace change, and change takes place as a result of

technology, and to a lesser extent it takes place as a result of trade.

There are those who think that we should not impede change, we

should encourage change. Change also creates, while, on the overall——

Mr. THOMAS. I have three more questions. I thought it was a

simple one. Why didn’t you extend the same 5-year carryback to

the oil and gas industry that you provided to steel?

Secretary RUBIN. No, no, but you very thoughtfully raise——

Mr. THOMAS. I know, but I don’t have an hour. I have a yellow

light now. Could I have the short version?

Secretary RUBIN. What?

Mr. THOMAS. The short version.

Secretary RUBIN. This is the short version. I have a long version,

too. Let me just finish.

All of these kinds of changes also carry with them dislocations,

and then the question is, how are you going to react to dislocations.

My own view is that what you need to do is to encourage change

and then try to deal with dislocations in an effective fashion. It was

our judgment that, given the extreme circumstances in steel that

this was an appropriate thing to do.

Mr. THOMAS. How do you define extreme circumstances? Loss of

jobs?

Secretary RUBIN. I think that the rapidity with which——

Mr. THOMAS. Three times as many jobs have been lost in the oil

and gas industry.

Secretary RUBIN. Well, first you have to take a look at the number of jobs that exist in the industry. You have to take a look at

over the period of time of which it has happened——

29

Mr. THOMAS. Look at the scope of the impact across the country

in terms of where the jobs are lost.

Secretary RUBIN. No, no, but I think that you have to take a look

at something else, Mr. Thomas, which is what are the circumstances that gave rise to the loss of jobs. There have been no

decisions yet in the dumping cases, and I do not know how those

will come out, but there are many who feel that there are trade

practices here that are subject to a lot of question rather than

being simply structural or normal market events.

Chairman ARCHER. The gentleman’s time has expired.

Mr. THOMAS. Thank you, Mr. Chairman, thank you.

Chairman ARCHER. Mr. Matsui.

Mr. MATSUI. Thank you, Mr. Chairman.

In view of the fact that the Chair has not recognized a right of

personal privilege, I ask the gentleman from New York if he would

like me to yield him some of my time, given the fact that his name

was again mentioned in the prior questioning. Would the gentleman like me to yield?

Mr. RANGEL. No. I thank you, Mr. Matsui, but I don’t feel that

it would be helpful to extend this dialog any further. Thank you

very much.

Mr. MATSUI. Thank you.

Mr. Secretary and Director Mathews, I appreciate your testimony, and I have to say that I was one of the ones that did not

want the President to come out with his plan on Social Security because I was afraid that the plan would be attacked, and, unfortunately, I think that my predictions proved to be right. This was

just an opportunity to put out a plan and then have others attack

it.

I would have to say, however, that after reviewing the plan, I

think that it is a very good plan. I am now kind of revising my

original recommendation to the administration, and I am very, very

pleased that you have come up with it because you do solve the

problem through the year 2055, and obviously you draw down the

debt which is extremely important until—the current $3.7 trillion

will be down to $1.2 trillion.

But I am happy that the Chair has suggested saving 62 percent

of the surplus for Social Security. I am somewhat concerned, however, about the possibility of using the balance, the 38 percent, because I think, Mr. Rubin, that you are absolutely correct in terms

that we don’t know what the legislative body is going to do, the

House and the Senate, in terms of whether we go over 62 percent

or not. And I just point out this morning, that, as all of you know,

Mr. Gramm on the Senate side, and Mr. Domenici were going to

have a press conference and unveil their new Social Security proposal, patterned after Mr. Feldstein’s proposal.

Well, late last night, Mr. Domenici pulled back because he had

done a run on it and he pointed out that it went over 62 percent.

In fact, it went into general revenues. And Mr. Gramm now has

to make a decision as to what he is going to do. But it is quite possible that we in the Congress, in order to satisfy our appetite,

might go over that, and so, I would really caution my Democrat

and Republican colleagues that we ought to be very, very careful

about what we do with that surplus because we can’t control what

30

the other body may do. We certainly can’t even control what we

may do.

I hope that the administration will not change their current

strong position on saying Social Security first before spending any

of that surplus particularly for tax cuts. I just to have also—we

have a balanced budget, but that balanced budget is contingent

upon about 200–300 billion dollars’ worth of spending cuts that are

unidentified in the years ahead. And certainly there is no guarantee that this Congress, or any other Congress, will show the kind

of discipline that we promised back in 1997.

Let me take a moment—there is a lot of talk about in the area

of Social Security of the so-called carve out, in other words, going

into the 12.4 percent, taking 2 or 3 percent of that and then allowing private investment that counts for each individual employee.

There is, from what I understand, at least actuarially, about $8

trillion in unfunded liabilities currently, if we are going to maintain the current level of benefits for current generations of workers

and also future generations of workers. Am I correct? It is about

$8 trillion?

Secretary RUBIN. I think that it is about $8.5 trillion. Something

like that.

Mr. MATSUI. And if we penetrate that 12.5 percent, that means

that that money does not go to pay the benefits of the current generation of employees, is that correct?

Secretary RUBIN. One of the very serious problems of carve-outs

is precisely the point that you are making, Mr. Matsui. If you are

going to have carve outs, you are going to have to figure out someway to deal with existing workers and retirees.

Mr. MATSUI. And, so, in other words, this could result in perhaps

hundreds of billions or perhaps trillions of dollars over a period of

time, depending upon what that carve-out percentage is.

Secretary RUBIN. Depending upon how large the carve out is.

The size of the carve out would determine the size of the transition

cost, but it would be very substantial, in any case.

Mr. MATSUI. The administration, undoubtedly, will want to make

sure, before approving any plan, and obviously the Republicans and

Democrats in the House, hopefully, will show some discipline as

well, by coming up with that transition cost, if, in fact, we do penetrate into that 12.5 percent.

Secretary RUBIN. I think that any plan for carve outs faces at

least two problems, Mr. Matsui, one of which, as you correctly say,

is the transition problem. I think that anybody who is going to propose such a plan is going to have to show how they are going to

pay the transition costs, and they are very substantial. The other

is, if the carve out is an individual account that is invested in equities, or however it is invested, it doesn’t matter, if it is a defined

contribution, it is exposed to a defined benefit, it is putting the retiree at risk.

Mr. MATSUI. I appreciate this. And let me just conclude by making one further observation. I was on the Committee in 1983 when

we last fixed the Social Security system, and I have to tell you that

the Greenspan Commission did come up with this recommendation.

But it was really through the leadership of then-Chairman Rostenkowski and Tip O’Neill and Jim Baker, the White House Chief of

31

Staff, that really put together the final deal because when Mr.

Greenspan originally unveiled his plan, it was not well received. In

fact, there was a lot of opposition to it. But it required congressional leadership working with the administration, the thenReagan administration, to put this together. I hope that is the lesson that we all learned from 1983. Not the constant bickering that

has been going on. This is a problem that is too serious.

Secretary RUBIN. Had I had a chance to respond to the Chairman’s comments, Mr. Matsui, that is precisely what I would have

said. Our model is precisely that which is that the administration

and the leadership of Congress get together in precisely the fashion

that they did there. In those days, I think that they met in Jim

Baker’s living room; I guess we can find some other locale. But

they would get together and work through a set of decisions that

we could then all coalesce around.

Mr. MATSUI. And I recall that Chairman Rostenkowski didn’t attack. He was trying to come up with a solution.

I yield back.

Secretary RUBIN. But the President would expect that the administration would be exceedingly active in that process, but it would

involve all of the participants working together. Precisely.

Chairman ARCHER. The Chair is constrained to have to comment

on the colloquy.

Mr. MATSUI. You can, or you don’t have to, Mr. Chairman. But

you seem to comment every time a Member has a comment.

Chairman ARCHER. The Chair is the only person in this room

who was a member of that commission. The only Member in this

room who was a member of the commission. And, Mr. Secretary,

what you said was not true. This was a bipartisan commission, not

of Members of Congress and the White House. It included many

people from the private sector who gave it a very different approach. In the end, the recommendation to the Congress was on a

bipartisan basis, not dictated or participated in by Chairman Rostenkowski, but by many private citizens who were working with

some Members of Congress who were in the Minority. So we tried

to create that kind of commission last year with the opposition of

the administration. The administration’s approach now—I don’t see

any similarity to what happened with the Greenspan Commission.

Secretary RUBIN. Well, if I may say so, Mr. Chairman, I have actually spoken—it may be a difference with the history, and I think

that that would actually be a worthwhile discussion to have at

some—wherever you choose to have it. But I have spoken to a

number of people involved with the Greenspan Commission, and

the description that I have heard, in fact, quite a number of people

involved, tracks with Mr. Matsui’s description.

Chairman ARCHER. Mr. Secretary, I am not sure to whom you

have spoke.

Secretary RUBIN. People on both sides.

Chairman ARCHER. But you are now speaking to a member of

that commission, and the way that it was described is not accurate.

I was there every moment, and the way that it has been described

is not accurate. But the important thing is that the process today

is very different than the process was back in 1982 and 1983, very

different, and cannot be compared.

32

Secretary RUBIN. Well, I guess I would make two suggestions,

Mr. Chairman. One is that I think it probably would be interesting,

just as a guide to the future, to talk to various people who are involved. You obviously have a very different impression, and you

were there, as you correctly say. On the other hand, I have spoken

to people who were also there, because they were Members, and

they had an impression more like Mr. Matsui’s.

But I think that the key is what you said, in any event, which

is how do we go forward, and the notion of how to go forward

tracks, at least in our judgment, with what Mr. Matsui said. But

we can have differences of views on that.

Chairman ARCHER. Mr. Secretary, we don’t need to obfuscate

this. There is no commission today. There are no private citizens

who are working day after day, week after week, in order to develop a suggested plan to save Social Security within the confines

of a commission along with Members of Congress. That does not

exist. To try to compare what is happening today to what occurred

then is just erroneous.

Secretary RUBIN. No, no. I agree that it doesn’t exist, though, I

think that you would agree that we have come an enormously long

way from 11⁄2 years ago with respect to Social Security. It has become a national priority. We have all agreed to put most of the surplus into it. And now the question is, how do we take the next step.

I think that you should be pleased.

Chairman ARCHER. I am hopeful. The President has 2 years left

in his term. I have 2 years left in the Congress, by my own announced retirement. I would like to get this solved.

Secretary RUBIN. As would he.

Chairman ARCHER. He would, too. We have discussed this personally on two or three occasions. I am very, very sincere in wanting to solve it. I don’t know if it can be done. I don’t think that

it can be done internally within the Congress. That has never happened before.

Secretary RUBIN. But that is not what we are suggesting, as you

know.

Chairman ARCHER. We need to develop a process by which we

work to give ourselves the greatest opportunity to achieve success.

And that is all that I am trying to get at.

Secretary RUBIN. And that, Mr. Chairman, I would agree with

100 percent.

Chairman ARCHER. OK, Mr. Houghton.

I am sorry, Mr. Shaw. I apologize.

Mr. SHAW. Thank you.

Mr. Secretary, you and I are of the same generation. In fact, we

grew up in the same community. We had many of the same friends.

For you and I, Social Security is going to be there for us. You know

that, and I know that. It is there for my mother, whom I am lucky

enough to still have, and I hope that you have some parents that

are receiving Social Security.

But what we are concerned about is the next generation and

their children, our grandchildren. Anyone who says that there is

not a pending crisis in the Social Security system is either a damn

fool or just doesn’t care about the next generation. You and I agree

on this.

33

We also agree, I would hope, that we do have a point in history,

which is, indeed, historic, which gives us a good opportunity to

solve this problem in a bipartisan way. I hope that it is done on

the President’s watch. I was very, very much delighted when I took

the chair of the Social Security Subcommittee, but I did it with a

great deal of thought and reservation. But I was delighted, and almost euphoric after the White House conference of last year when

I got the President’s promise to come forward. He did agree with

us that it was his position to come forward with a plan. And he

told us in just about these exact words, ‘‘I don’t expect you Republicans to come up with a plan. I will come up with a plan.’’

But I want to look at the plan that he has come up with because

it does create somewhat of a shellgame. By putting 62 percent of

the surplus into the trust fund and investing one-fifth of that into

equities, you take four-fifths of that and buy Government Treasury

Bills, IOUs which are nothing more than a call on future tax dollars, and put the money back out into the Federal Government.

Now the problem that you have there is that you might on paper

extend the life of the trust fund, but you do not extend the income

of the trust fund, and that is a huge problem. Following your scenario——

Secretary RUBIN. That is not actually his plan.

Mr. SHAW. Let me finish, and then I am going to ask for your

comments.

Following this scenario, you might as well put the entire surplus

in there because all you are going to do is pump it out the other

end and borrow money. Now, we have heard from Dr. Henry

Aaron, who is generally friendly to the administration. He testified

to us last Tuesday. He said that the President’s proposal doesn’t

delay by 1 single day when Social Security’s income is insufficient

to cover benefits. Now, what we are looking at is our grandchildren

having to commit up to 40 percent of their income in order to take

care of their parents. That is disgraceful, and we need to do something about it. We need to do something substantively to extend

the program.

And now I will yield to you.

Secretary RUBIN. Mr. Shaw, I think that there is just one slight

difference, if I may, on what the President has proposed.

He has, as you correctly said, proposed we put 62 percent into

the Social Security Trust Fund, and then he has proposed that 20

percent of that be put into equities. The other 80 percent would actually go into the reduction of the publicly held debt of the Federal

Government. If you look at the entire program—and then, at the

same time there would be——

Mr. SHAW. But you are taking it out of the public hands and putting it into the trust fund. The debt is still there. That is the problem.

Secretary RUBIN. No.

Mr. SHAW. By law it has to be invested in Treasury Bills.

Secretary RUBIN. Yes, but let me, if I just could finish this.

Mr. SHAW. I beg your pardon. I do want you to finish.

Secretary RUBIN. That is OK.

So, what you are doing is you are reducing, and in this case,

very, very substantially reducing the publicly held debt of the FedVerDate 11-SEP-98 10:09 Dec 03, 1999 Jkt 056396 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 F:56396 W&M3 PsN: W&M3
34

eral Government, the creditworthiness, if you will, or the ability of

the Federal Government to access the capital markets will be vastly improved as a consequence.

What you are also doing is issuing first claims against the general fund, the general revenues of the U.S. Government with respect to meeting the already existing Social Security commitments.

I think that the question that that poses—because I think that you

are getting at a very important question—the question that that

poses then is how secure are those claims. Though they do have the

full faith and credit of the U.S. Government behind them.

If you take a look at the budget that we have submitted, that

budget projects surpluses to at least 2039 on one set of assumptions and later on another, to at least 2039. So what that says is

that not only do you have the full faith and credit of the U.S. Government behind these obligations, but these obligations are first

claimed against general revenues in an environment.

Mr. SHAW. Which is a claim on the taxpayer, which is a claim

on future taxes.

Secretary RUBIN. Well, yes, but it is not in an environment in

which you would require an increase in taxes. Quite the contrary.

It is an environment in which there will not have to be an increase

in taxes because with the currently projected tax rates, there is actually a surplus in the unified budget until 2039.

Mr. SHAW. But Mr. Secretary, how do you pay those off?

Secretary RUBIN. You pay those off——

Mr. SHAW. You pay those off with tax dollars. That is where the

revenue comes from.

Secretary RUBIN. Well, but you pay them off out of the general

revenues of the Federal Government under the existing tax structure. You do not need any additional taxes. In fact, as I said a moment ago, when you get out in time, what you find is that not only

can you meet all of the Social Security commitments, but you will

still have a surplus left over.

Chairman ARCHER. The gentleman’s time has expired.

Mr. Houghton? Is Mr. Houghton here? Mr. Houghton? Mr.

Houghton, you are recognized.

Mr. HOUGHTON. Waiting in the wings here. Thank you very

much, Mr. Chairman.

Mr. Secretary, good to see you here. It’s strange, isn’t it? I listen

to this debate and there were contentious words when we had a

deficit. I thought it would all be over when we had a surplus, and

we are still in there battling.

But I have a different type of question. I was just down at the

IRS yesterday, and we were talking about some of the things on

which the Oversight Committee might be interested in. One of the

things that concerns me is that you have got a wonderful Commissioner down there. He is trying to do a great job, and yet at the

same time with all the things that are now on the table, his job

gets more and more complicated rather than less and less. When

you take a look at some of the President’s tax proposals and these

new targeted credits, I don’t know how they are going to keep up

with them. Literally, I don’t. I just don’t know what the answer is.

The President signed in July a tax simplification bill. The whole

ethos is out there to try to make it plainer and simpler, more unVerDate 11-SEP-98 10:09 Dec 03, 1999 Jkt 056396 PO 00000 Frm 00037 Fmt 6633 Sfmt 6602 F:56396 W&M3 PsN: W&M3
35

derstandable, and here we are trying to confuse it again and laying

on that agency, which is trying to get over terrible past problems,

things which I am not sure they are going to be able to handle.

Maybe you have a comment on that?

Secretary RUBIN. I think that, Mr. Houghton, that you are raising what is a very important question. It is one that we have taken

into consideration. We have worked with Mr. Rosotti. I agree with

you, I think that he is an outstanding choice. I think that he is

doing an outstanding job as Commissioner. I think that there has

been real progress at the IRS. If you take a look at the various indices of progress, telephone calls answered, refunds made and the

time in which they have been made. All the different initiatives,

electronic filing and so forth, all the different initiatives of movement and progress at the IRS, I think that a lot has been accomplished, though there is an enormous amount yet to do.

What we have tried to do in this case is to take into consideration not only the tax policy, if you will, aspects of our proposals,

but also the very issues that you very correctly are raising which

is the ability of the IRS to handle this. At least it is in our judgment that the degree of, that the proposals that we are proposing

are proposals that they can handle in an orderly fashion.

We also, as you know, I think that it was last year or maybe it

was 2 years ago, I have forgotten, no, I guess it was 1997, actually,

had something like 40 tax simplification measures. Maybe it was

1998, 1997 or 1998, had 40 tax simplification measures passed.

That was designed to try to make the Tax Code simpler, which is

good for taxpayers and it is also good for the IRS. But let me assure you, because you raise a very important point, that we take

into account the ability of the IRS to deal with the changes in the

Tax Code as we design and propose these measures.

Mr. HOUGHTON. Right. Well, I guess we are trying to get at the

same answer here. I guess the thing that worries me is that when

you have all these different tax credits that the President mentioned, I don’t know how many there are, there must be 10 or 15

or 20 of these things. I don’t see us getting to where we want to

get and what the President had originally stated in July of last

year.

Let me just mention something. When I was on the Oversight

Committee when J. Pickle was the Chairman of it, we had a field

hearing. I don’t know what the figure is now, but the figure at that

point, as estimated by OMB, Office of Management and Budget,

was that there was something like $197 billion in compliance costs

with filling out the tax returns. And I am sure that it is higher

now. And it goes on and on and on. And I just, I know that there

is good will here, and I know that you are trying to do a good job,

and I know that Mr. Rosotti is terrific, but I don’t see us making

any progress on this.

Secretary RUBIN. On the complexity of the Code?

Mr. HOUGHTON. Right.

Secretary RUBIN. Well, it is a balance between simplification

measures and then the additional measures that are designed to

advance various social and economic purposes. I think that all of

us would agree, Mr. Houghton, that the simplification should be a

very important objective with respect to Tax Code, and it is one

36

that we certainly have pursued. But I think that one has to balance between the objectives of simplification and the objectives of

things like long-term care tax credit and other kinds of social or

economic objectives that are very important.

Mr. HOUGHTON. Well, I don’t know why it isn’t possible to either

expand the brackets or lower the rates or do something rather than

have all these different exceptions and all these different credits.

Secretary RUBIN. I might add incidentally, if I could, that we

have been very—we have worked with Mr. Rosotti on the question

of what the effective dates of all these measures should be so that

he can effectively relate that to his Y2K conversion and the other

kinds of issues that he is facing.

Mr. HOUGHTON. Thank you very much.

Chairman ARCHER. Mr. Coyne.

Mr. COYNE. Thank you, Mr. Chairman.

Mr. Secretary, President Clinton and yourself and others in the

administration have led us into a period of very strong economic

growth, and that is a very positive thing for all of us. You alluded

in your testimony to investment in people in the budget. I wonder

if you could tell us a little bit more. Everyone is not participating

in this vibrant economy.

There are many people that unfortunately are left behind and

unable to get the economic opportunity that they would like to

have. I was just wondering how your budget, the President’s budget, addresses that, and particularly in light of the earlier discussion

where you talked about the steel companies getting their net operating loss carrybacks. That is one thing. That will help steel companies. But what about the 10,000 steel workers who have lost

their jobs as a result of the illegal dumping that we have experienced over this period of time? In addition to the people who have

not participated in the growth of the economy, what does the budget do for those people?

Secretary RUBIN. Let me mention a couple of things, if I may,

Mr. Coyne, because I think that the area that you are focused on,

as you know, is an area that the President is very much focused

on. We have had an extraordinary economy, and incomes are rising

across all the quintiles of the income spectrum, but having said

that, there are still too many people that are not participating in

our economy, and then there are people who are suffering the dislocations that come with change. That is inevitable in a dynamic

economy.

We have asked for full funding for the—for example, the CDFI

fund which provides capital for distressed urban and rural communities. There is a, what we call a new markets tax incentive for investors to invest in entities that are investing in inner cities. We

have increased funding in all sorts of programs that are directed

toward distressed areas.

Let me ask Ms. Mathews if she would like to expand on that,

though, because I think that this is an extremely important focus

of our budget.

Ms. MATHEWS. I will keep my comments to just two specific

areas, though it cuts across issues like crime and many other

things. But I will address education and the economy and just give

a few details there.

37

In the education area, one of the things that we have done in our

school construction proposal is to try to target funding to needier

schools. Additionally, I think that you have seen increases in

money for afterschool programs, and that is for the less fortunate

and those who aren’t as able to do things like that.

A related issue is childcare for many who are not participating

in the health of the economy, and that is an entire proposal.

Regarding the economy, let me mention a couple of things. One,

is the EDA, the Economic Development Assistance Program, that

is a part of the Department of Commerce and this gets to a couple

of the questions that have been asked about dislocation. This year

we have proposed a $20 million increase that is specifically targeted to places that are suffering from economic dislocation, much

of that coming from trade. And I would just say, on the discretionary side, as the Secretary mentioned, the new markets initiative, there which is specifically focused at developing markets in

the United States; ensuring that where it is a question of untapped

markets, whether large companies and small entrepreneurs can do

economic development in those areas.

So, that is both on the economic and education fronts.

Mr. COYNE. I wonder if you could touch on anything that may

be in the for training for people who have been dislocated, who are

not in preschool or grade school or high school?

Ms. MATHEWS. This is our most aggressive year in terms of focusing on the issues of training and related issues such as adult

literacy, which is sometimes a problem for those in transition. We

do focus on that and propose increases within the Labor Department.

In an effort to try to create a situation over time where there will

be universal assistance, we believe what is needed is one-stop shopping, a place to go to learn about how you transition, or, number

two, if you actually have transition needs in training, that we create a program over a period of years to address that universally.

Mr. COYNE. Thank you.

Chairman ARCHER. Mr. Herger.

Mr. HERGER. Thank you, Mr. Chairman.

Mr. Secretary, it is always a pleasure to have you with us. I have

to admit that I have some very strong concerns on the budget that

President Clinton and the administration has put forward. On one

side I want to commend you. It must be a lot nicer sitting in your

chair as Treasury Secretary today than it was back in 1994 back

when we were projecting $200 billion budget deficits as far as the

eye could see. I believe that our numbers are somewhere in the vicinity of $782 billion in projected surpluses over the next several

years.

My concern has to do with, and I think was summed up pretty

well in an editorial that was in one of our Washington papers here

just a couple of days ago. The title of it was ‘‘Tax and Spend, Tax

and Spend.’’ It was referring to the President’s budget. In it, it indicated that even though our surpluses are projected at $782 billion, we still see net tax increases proposed by the administration

of $45.8 billion. In addition to that, the Cato Institute identified

nearly $150 billion in new spending over the next 5 years.

38

I do want to commend you, there are a few tax credits that are

in the President’s budget. I am very concerned, however, that even

though a major elimination of the marriage penalty was in our

budget that went through last year that passed out of the House,

that the President has excluded that from his budget. I think that

is very wrong, and I hear this in all my townhall meetings, to

somehow penalize our married families at the same time when

their tax rates are lower if they happen to be single.

But I guess with all this in mind, it also concerns me just yesterday in the Budget Committee, which I also serve on, we had presented to us the budget for the United States, your Executive Office of the President’s OMB budget. In it, with these projected surpluses, and even though the President has proposed major net tax

increases, that the total debt, national debt, rather than going

down at a time that we are having surpluses, are actually going

up. And they are going up each and every year. This last year,

1998, our National debt, that is owed by every American taxpayer,

but even more importantly owed by our children and our grandchildren, increases from $5.4 trillion to $5.5 trillion this year, to

$5.7 trillion next year. Each and every year up and through 2004

to a net increase owed by our children and grandchildren of our

National debt of $1.3 trillion at a time that we are projecting major

surpluses.

Is there any explanation for this?

Secretary RUBIN. I think, if I may, that what one needs to do is

distinguish, as you would in looking at any country’s balance sheet,

and as you know, I do this all the time and have done it for a long

time in both the public and private sector, between publicly held

debt which is the debt which is evaluated by capital markets when

they look at a country, and the special government securities which

are simply an internal claim within the unified budget and do not

affect the creditworthiness of the U.S. Government one iota.

Mr. HERGER. But it is owed by our children and our grandchildren. Is that not correct?

Secretary RUBIN. It is——

Mr. HERGER. I heard this all day yesterday in the Budget Committee. This debt, held by the government which the administration attempts to make it seem like it is nothing is really real, and

it is debt that is owed by our children and grandchildren. Is that

not correct?

Secretary RUBIN. Let me make a suggestion, if I may.

Mr. HERGER. Is that not correct? Just yes or no. Is that debt not

owed by our children and grandchildren?

Secretary RUBIN. The answer to the question is that there are existing Social Security commitments under existing law that are obligations of the U.S. Government. What this is is a first claim

against the future general revenues of the Federal Government to

meet the Social Security obligations.

Mr. HERGER. And is part of the debt held owed by our children

and grandchildren? Would you just say yes or no on that?

Secretary RUBIN. Well, there isn’t a yes or no answer to the question. The answer is that they are not a debt of the Federal Government that affects the creditworthiness of the Federal Government

in the capital markets. And if you go to people——

39

Mr. HERGER. That is not the question that I asked because I

agree with that answer.

Secretary RUBIN. Good.

Mr. HERGER. The question that I asked, which is different than

the question——

Secretary RUBIN. Well, they are exactly what I just said. They

are first claims within a unified budget——

Mr. HERGER. First claims owed by our children and grandchildren.

Secretary RUBIN. Well, they are first claims——

Chairman ARCHER. The gentleman’s time has expired.

Secretary RUBIN. They are first claims to meet the Social Security benefits that are already obligated by law within the unified

budget. And it was our judgment, which you can disagree with,

that the Social Security benefits that are already committed to

under law should have a first priority with respect to the claims

against future general revenues.

Mr. HERGER. That’s wonderful, but our debt goes up each and every year even while we are having surpluses to the tune of $1.3

trillion.

Secretary RUBIN. But the distinction that I am trying to make for

you, and I really do think that it is the way that any analyst would

look at the U.S. Government, is that is not debt. That is not publicly held debt.

Mr. HERGER. It is not debt.

Secretary RUBIN. Wait a minute. That is not publicly held debt

that constitutes publicly held claims against the U.S. Government.

What that is is an intragovernmental claim by the Social Security

Trust Fund with respect to the general revenues of the U.S. Government.

Mr. HERGER. A shell game, but nonetheless our children——

Secretary RUBIN. No, no. It is not a shell game. It is actually not

a shell game.

Chairman ARCHER. I don’t think that the gentleman and the Secretary are ever going to get together on this. The gentleman’s time

has expired.

Mr. HERGER. Thank you, Mr. Chairman.

Chairman ARCHER. Mr. McCrery.

Mr. MCCRERY. Thank you, Mr. Chairman.

Secretary RUBIN. Could I just say one thing, though, Mr. Chairman?

I think that the reason that others who have testified with respect to our budget, whatever their disagreements may be with

other matters, view this as such a fiscally responsible budget. It is

precisely on the issue of which we are now discussing which is it

is reduction of publicly held debt of the U.S. Government.

Chairman ARCHER. Please don’t let that go on Mr. McCrery’s

time.

Mr. McCrery.

Mr. MCCRERY. Thank you.

Now, Mr. Secretary, first of all, let me compliment the President

and the administration for coming forward with the Social Security

proposals that you have thus far. I think that they do move the

process forward. I think reserving 62 percent is a good idea, and

40

I congratulate you on coming up with, I think, a realistic estimate

of what it will cost us to transition to some new Social Security system or make refinements on the current system. Last year you

were saying 100 percent, and I thought that was too much. Now

you are saying 62 percent. I think that is a realistic estimate, and

I think that is commendable that you have done that, that you

have put that forward.

I also think that you are to be congratulated for suggesting that

some moneys be invested in the stock market. Now, we may disagree on how that is done, but at least you have broached that

question and come up with the right solution in terms of taking

that risk for a higher rate of return on some of our money.

But even if all of your assumptions are correct, and everything

works just like you say it will, you still only extend the life of the

trust fund to 2055. So we still have a lot of work to do. And I think

that you would agree that if we do everything you have proposed,

that following 2055, if we do nothing else, the picture gets much

darker very quickly. So, we really need to work together to propose

some more fundamental reforms to the program if we are going to

brighten that picture after 2055. But, I do think that it is important that we commend you on doing some positive things to move

the process forward.

I want to just quickly, if I can, get back to Mr. Shaw’s line of

questioning and Mr. Herger’s on the debt question. I too agree with

you in terms of the capital markets and how they look at the Federal Government, they look at the publicly held debt primarily. But

still, the internal debt is still a call on tax dollars. And as you say,

in the Social Security Trust Fund it will be first call on the Federal

treasury. So even though it is an internal debt, still we have to pay

that with tax dollars. So there has got to be a plan, at some point

to pay not only publicly held debt when it comes due, but the internal debt when it comes due.

Secretary RUBIN. But the point that I was trying to make, which

I probably didn’t articulate as clearly as I should have, is that plan

already exists. All you need to do is look at the budget. Because

what actually happens out in some outer year is that you start

with the preexisting commitments, that is to pay Social Security.

Then you have a first claim against the general revenues of the

U.S. Government. Then you have to look at the general revenues

as projected under this budget, and you have to see whether the

claims that exist against the general revenues, in their totality,

will exceed those revenues or be less than those revenues.

In this case, the claims will be less than those revenues, including, I might add, the payment of these first claims that go to meet

the Social Security benefits. So that with the existing programs in

place, you will have the revenues to both meet these Social Security commitments via, as you correctly say, via these first claims

and leave a surplus. So there will still be a surplus in the year

2030, for example, or 2020, or whatever year you wish to choose.

So what you are not doing, and actually you are getting at it, at

least in my judgment, in exactly the right way. What we are not

doing is putting the Federal Government in a position when the

year 2020 or some such year, in order to meet these first claims

they would have to either raise taxes or cut spending because

41

under the existing programs there will be a surplus in the unified

budget.

Mr. MCCRERY. So you are saying that in the out years when we

have to start redeeming those IOUs on the Social Security Trust

Fund, that there will not—and even as late as 2045 or 2050, we

won’t have to raise taxes or cut other spending in order to pay

those?

Secretary RUBIN. Well, under this budget, under the proposed

budget, that is true out until 2039 at the very least. I don’t remember the exact year, but I think that I am right in my recollection,

2039 at the very least and 2049, I think at the outer edge.

Mr. MCCRERY. OK. I would be real interested to see how we

would reach that, but I will take your word for it now.

Let me just sneak in one last question about the total tax take

of the Federal Government. Your budget assumes for the next several years that the percent of GDP, which will come to the Federal

Government in the form of revenues, is over 20 percent. Does that,

as an economist, give you any pause that the Federal Government

takes that high of a percent of what we produce as a Nation?

Secretary RUBIN. Oh, I thought that you were actually going to

ask a different question which is a very interesting and troubling

question.

Oh this question in particular doesn’t trouble me at all. It is a

lot lower than it has been. Well, not a lot lower, but it is somewhat

lower I believe than it has been a good number of years in the past.

More to the point, I think, don’t hold me to this, but I think that

it is something like the third lowest tax. I apologize for not remembering the numbers, but I just saw it the other day in a totally different connection. It was a substantial list of countries that we are

comparing our country to for a totally different purpose, and I

think that we had the third lowest tax burden of about 15 or 20

countries, whatever number it was we were looking at.

Mr. MCCRERY. Well, if I can just interject here. My appreciation

of the facts are that we are now at a peace time high in terms of

the take.

Secretary RUBIN. On the Federal?

Mr. MCCRERY. Yes.

Secretary RUBIN. I am going to retract what I said before. In

terms of spending, in terms of spending——

Mr. MCCRERY. No, no. I am talking about revenues.

Secretary RUBIN. Yes. In terms of spending I know that we have

been lower than we have been historically.

Mr. MCCRERY. Yes, look. We have made a lot of progress on the

spending side, and I congratulate you and us for that accomplishment. But I am talking about the revenue take.

Secretary RUBIN. We have moved somewhat up on the revenue

side for the reasons that I said in my opening statement. It is because basically it’s been driven by the stock market and the bonuses, the capital gains that’s created and corporate profits.

But I think that we are still, as I said a moment ago, and I can

get this for you and I’ll send it to you, I just don’t remember what

it was. Within the universe that we were looking at, we are still,

I think, the third lowest taxed country of that universe.

42

And working Americans, as I said in my opening remarks, have

actually had their tax burdens come down substantially because of

the work that the Congress did and the work that the administration did.

Chairman ARCHER. The gentleman’s time has expired.

Mr. Levin.

Mr. LEVIN. Thank you, Mr. Chairman.

And Mr. Secretary——

Secretary RUBIN. It was the 29 countries of the OECD, that was

the universe.

Yes, go ahead. I’m sorry, Mr. Levin.

Mr. LEVIN. Thank you. That is an important subject, and we

need to pursue it further. Why the tax revenues have gone up and

whether that level will be sustained in view of the reasons for the

increase.

But first, let me congratulate you on your accomplishments as

Secretary and also for the dignity with which you conduct yourself.

Also your insistence we look to the future. We can argue about the

past, why a Social Security Commission wasn’t created. There was

resistance, Mr. Chairman, among Republicans in the Senate as

well as from the White House and some of the Democrats here who

thought that we should tackle this ourselves.

Also, about the emergency bill, the supplemental, I think as you

were pointing out, after all, that it was accepted by the Majority

Leadership in the House and in the Senate, and to simply say that

it was the obstinate position of the White House, I think misses the

point. As I remember it, many billions were inserted in that emergency provision at the insistence of the then-House leadership. So,

keep looking to the future.

And let me just say a word about steel and the response to Mr.

Coyne’s question. I think that retraining workers is a very good

idea, and we do it fairly well in this country. But I don’t think that

you can say to thousands and thousands of steel workers who are

in their forties and fifties that we will simply retrain you and not

worry about the impact of dumping on the industry. We have to

balance these considerations, but we need an activist policy.

But let me just talk to you about the trust fund and the suggestion that there be public investment, because that became kind of

the focal point of our discussion with Mr. Greenspan. Actually his

opposition, as we later talked about it, I don’t think was so stringent as was portrayed by some in the media. He later said, in response to a question, that the problems are mainly political and he

would trust our judgment. But I want to ask you your judgment,

because you have had some hesitation in the past.

Tell us what can be built into this so that there would not be the

problems that you have worried about and some of us have worried

about. Because we need to solve that issue if we are going to move

ahead with Social Security efforts.

Secretary RUBIN. Yes, I have had reservations in the past, and

I have reservations now. But I think that those reservations are

meetable, and that was what I tried to say in my opening statement, Mr. Levin.

I don’t know precisely what mechanisms we should create, but I

would observe that we have an independent Federal Reserve

43

Board, and we have created a mechanism there. And through many

presidencies, that independence has been respected, I think very

much for the benefit of our country. I think that we need to find

a mechanism that will be similarly independent and that we work

to develop, develop with Congress, that will provide a totally apolitical investment process with respect to these funds.

I don’t have a view at this time, Mr. Levin, as how best to do

that. I note the Fed is a good example of success in this area, and

it seems to me that this should be readily doable. I think that the

best way to do it, so that we have the confidence of all, is to work

with you all to develop that.

Mr. LEVIN. And this would involve independence from political

inputs? It would involve private managers?

Secretary RUBIN. Oh, I think that the managers clearly should

be private. I think that the money should be invested in some sort

of broad-based index fund of some sort. I think that the choice of

the managers should also be totally apolitical.

Mr. LEVIN. OK, thank you.

Chairman ARCHER. Mr. Johnson of Texas is next. He is not here.

Which prompts me, Mr. Secretary, to ask you if you would be willing to accept written questions from Members whose time has run

out or who cannot be here in order to verbally question you?

Secretary RUBIN. We would be pleased to, Mr. Chairman.

Chairman ARCHER. Thank you very much.

Is Ms. Dunn here?

Mr. English.

Mr. ENGLISH. Thank you, Mr. Chairman.

And thank you, Mr. Secretary, for the opportunity to question

you on a couple of topics. I want to reiterate Mr. Rangel’s initial

comments complimenting you for your temperament and your tolerance. And I don’t mean to test either of those here today.

I do want to raise a question with regard to steel that has not

been covered so far. As you know, the domestic steel industry is

reeling under a wave of unprecedented imports. Many of us, as you

have heard today, have been disappointed by the administration’s

response, but I don’t plan to revisit that as a broad policy. I am

specifically interested in your proposal for extending the net or operating loss carryback period supposedly to help the industry. You

project that this relief might inject $300 million into the steel industry. In the President’s steel report this proposal was described

as designed to provide timely and significant relief and to help

stave off job losses.

I am wondering, because I have looked at this proposal, specifically did the Treasury or the administration check to determine

which, if any, steel employers would benefit from this proposal?

Secretary RUBIN. I am sure, Mr. English, that the $300 million

estimate was based on looking at specific companies and their financial situation, because I don’t see how else you could arrive at

the estimates. So the answer, by extrapolation, has to be yes,

though I was not personally, specifically involved in the analysis.

Mr. ENGLISH. Do you know offhand, would this benefit, for example, U.S. Steel or National Steel?

Secretary RUBIN. I do not know who specifically would benefit,

but we can certainly get back to you on that.

44

Mr. ENGLISH. OK.

[The following was subsequently received:]

According to our analysis, roughly 10% (by number) of all steel companies would

benefit from the proposal. These would tend to be fairly small companies. Several

large steel companies would not benefit because the longer tax carryback period

would not reduce their taxes.

Mr. ENGLISH. I have a list here of the top ten manufacturers in

the country representing the bulk of steel production in the United

States. For your reference, and I hope this is helpful, my limited

staff has contacted all of them and so far has found that none of

them would benefit from the proposal put forward by the administration. For your reference, we did find one company in the Pittsburgh area, a small one called J and L Specialty Steel who support

your provision and would benefit. They are owned by Usinor SA,

a French company. But I do not know of any major, domestic steel

company that would benefit from this provision. Can you enlighten

us on this point and give us any indication of where this would

benefit?

Secretary RUBIN. Can I make a suggestion, Mr. English?

Mr. ENGLISH. Surely.

Secretary RUBIN. Obviously the estimates of the $300 million

have to have come from looking at companies, their P and Ls, their

projected P and Ls and their past profits. My suggestion would be

that we, because I don’t know it offhand, that we get back to you.

Mr. ENGLISH. I would be delighted. I would like to review the

specifics of your analysis, because as I have said, not one of the top

ten steel producers would benefit from the proposal that you have

outlined.

Secretary RUBIN. There is another possibility, it has just occurred to me. We look, obviously, at the publicly held data because

that is what we have access to. It may be that they are looking at

data that we don’t have access to, or it may be that they are interpreting in ways different that we do.

But our primary thrust, as you know, Mr. English, because I responded to your letter, I don’t know whether you received it yet,

but——

Mr. ENGLISH. Absolutely.

Secretary RUBIN. This whole area has not been the net operating

loss. Our primary response has been the one that I outlined before,

and maybe it was in response to Mr. Coyne or maybe somebody

else, I don’t remember. We will also be limited in terms of our discussions with your staff by whatever restrictions exist with respect

to our right to discuss specific companies. But we are doing the

best we can to try to——

Mr. ENGLISH. I would like to follow up with one other unrelated

question, though.

I noticed that the President in the State of the Union Address

and then in his budget has proposed incentives similar to our Ticket to Work Act to bring people who are SSI recipients back into the

work force. The President has also proposed an increase in the

minimum wage. But the President, as far as I can see, has not proposed an increase in the SSI earnings limit and would leave people,

45

under his budget, who are collecting SSI, who are not blind, limited

to $500 a month in earnings or they would lose their benefits. I am

very concerned about this.

With the additional minimum wage increase the President has

proposed, and I have supported minimum wage increases in the

past, many persons who are on SSI, who are disabled, would have

a very limited opportunity to participate in the work force. As you

know, I sent a letter to the President, ten of us signed on to it, asking him to include an increase in the earnings limitation in his

budget. Is there any prospect that we can eventually agree on that?

Secretary RUBIN. That is a very thoughtful question. Let me ask

Ms. Mathews if she would respond.

Ms. MATHEWS. This is a regulatory matter. It can be done

through regulation. At OMB right now this very question is one we

are examining.

Mr. ENGLISH. Well, I believe that it is under statute limited to

$500 a month.

Ms. MATHEWS. We are working on it to see. I think that we agree

that there is a problem in terms of trying to provide incentives to

work. This is a place that we are looking at right now.

Mr. ENGLISH. But I am right, though, the President did not propose the increase from $500 a month, $6,000 a year, as part of his

budget?

Ms. MATHEWS. I will have to go back and check if it is within

the budget document that exists. This is something that I will get

back to you on. It is something that we recognize, and I think that

your letter has come through as something that is an issue that we

need to address.

[At the time of printing, no responses had been received from Ms.

Mathews.]

Mr. ENGLISH. Thank you so much for your testimony.

Chairman ARCHER. Mr. Weller.

Mr. WELLER. Thank you, Mr. Speaker, and good afternoon now,

Mr. Secretary.

I have got a couple of observations. I have been taking some

notes during your testimony and response to questions. Of course,

when it comes to Social Security, of course I think that all of us

appreciate the President’s suggestion regarding setting aside 62

percent of the surplus tax revenue for saving Social Security, and,

of course, we applaud that. I think that a minimum, I think that

we certainly feel that we should do at least that.

I also want to note, of course, this Committee, just last year, just

2 months ago, passed and sent to the Senate legislation which

would have set aside 90 percent of the surplus for saving Social Security. So clearly that is an area where I think that we can work

together.

I also want to note that I salute the President in embracing repeal and elimination of the earnings limit on Social Security. Of

course, our new Speaker of the House, Dennis Hastert, has led that

fight over the last 2 years. It was part of the Contract With America, and clearly I applaud the President embracing Denny Hastert’s

idea because I think that is one area where we need to work together.

46

Secretary RUBIN. I am not quite sure how he relates to it, but

in any event.

Mr. WELLER. But I do want to express concern, particularly with

the over $80 billion in tax increases in the President’s budget. I

think that there are well over $40 billion in net tax increases, it

is my understanding. I want to express concern about that. I think,

as Mr. McCrery pointed out, the tax burden on our economy is at

its highest level ever. Twenty-one percent of our economy goes to

the Federal Government. In Illinois, the average family that I have

the privilege of representing, sends about 40 percent of its income

to government at the State and local level. The tax burden is at

its highest level ever on Illinois families.

It is my understanding that since 1992 the total amount of tax

revenue that your agency collects from individual taxpayers has

gone up about 63 percent. So, clearly, the tax burden is pretty high.

And when we are looking at a $2.3 trillion projected surplus of

extra tax revenue, or the overpayment as a result of the balanced

budget, I wonder why we need tax increases.

But also another issue which I think is important, and I am wondering why the administration did not include an initiative is the

issue of the marriage tax penalty. As you know, 21 million married

working couples pay, on average, about $1,400 more in higher

taxes under our Tax Code just because they are married, if you

compare that to a working couple with identical income living together outside of marriage.

The question that I have is not only why does the administration

not embrace the elimination of the marriage penalty, but second,

in studying the tax credits that the President proposes for longterm care and disabled tax credit, he creates an additional marriage tax penalty. I was just wondering if you can explain why he

did not look into the impact on married couples when creating

these new tax credits as well as why you do not support elimination of the marriage tax penalty in general.

Secretary RUBIN. Let me do this, if I may, Mr. Weller. You have

raised a lot of questions, let me try to get as many of them as I

can.

In terms of the marriage tax penalty, we have always been in

favor of dealing with the marriage tax penalty. The question has

always been a question of finding the money. Clearly, as you go

back over the last 2 years, there has been a constant tension, if you

will, between the question of taxing—in effect the 1996 presidential

campaign was about this, I suppose—between tax cuts and fiscal

discipline, and fiscal discipline is always a much tougher and in

many ways a much less attractive path.

On the other hand, I don’t personally think that there was any

question but that the enormous change from deficits to surpluses

that we have experienced over these last 6 years has been central

to the tremendous increase in jobs, standards of living, and the rest

that the American people have experienced. We, too believe, we

agree with you, the marriage tax penalty should be dealt with.

What we need to do is to work with Congress to find some way to

fund it.

47

In terms of tax cuts, what we—and I am not quite sure what your $40 billion—are you referring to the offsets that we have in

the discretionary account?

Mr. WELLER. My understanding is that your net tax increases are considered offsets, and that is still about $43 billion in net tax

increases.

Secretary RUBIN. For what period of time?

Mr. WELLER. In your budget that you proposed.

Secretary RUBIN. No, but there are a lot of different time periods.

If you are talking about the offsets that we have, if this is what

you are talking about, the offsets that we have in the year 2000,

we do believe that there should be a cigarette—that you cost that

the Federal Government incurs because of smoking, and we do believe that they should be paid for by an excise tax.

Mr. WELLER. Mr. Secretary, once you subtract the tobacco tax, there is still a roughly what, $30 some billion in new taxes that

you are left with on the business community and on the private

sector.

Secretary RUBIN. No, no. Again, I am not quite sure what num- bers you are talking about, but if you are talking about the $45 billion of offsets in the discretionary account, $34 billion of that is the

tobacco tax, and $11 billion is other things, most of which, yes, virtually all of which I believe, or certainly most of which, are extensions of taxes that have existed and have expired.

Let me also say that if you put into place the President’s program, you will be back into a net tax cut, in fact, a substantial net

tax cut because you will have the USA accounts created.

Mr. WELLER. Mr. Secretary, just to quickly follow up. You had

indicated that the administration has always supported eliminating

the marriage tax penalty, but you have yet to propose your own

ideas on solving it. Of course you took a position in opposition to

legislation that we passed last year which would have eliminated

the marriage tax penalty for a majority of those who suffer it.

Secretary RUBIN. No, our question on the marriage tax penalty——

Mr. WELLER. Also, Mr. Secretary, you did not answer my question on the long-term tax credit and the disabled care tax credit.

You created a new marriage tax penalty, and if you are sensitive

to this issue, I was wondering why you want to add one more marriage tax penalty to the Tax Code.

Secretary RUBIN. No, I think what I was saying, Mr. Weller, was

that we have always been in favor of dealing—and by the way, I

think that the long-term care tax credit is a very important credit,

and I think that—we have always been in favor of dealing with the

marriage tax penalty. I think that the question that you always

have in these situations is what sorts of priorities do you have and

what sorts of weighing and balancing you do of these things. If we

can find room in the budget, Mr. Weller, it is something that we

would be very happy to work with you on.

But I do think that if we are going to have the kind of economy

in the future that we have had in the past, that we have to continue on a very disciplined road of fiscal discipline, and that is

what our budget is directed to do. But we would be delighted to

work with you to try to create room in the budget for a marriage

48

tax fund, or rather for dealing with the marriage tax penalty. It is

something that we are very much in favor of doing.

Chairman ARCHER. The gentleman’s time has expired.

Mr. Secretary——

Secretary RUBIN. But you have to ask, what are you going to do

instead of it.

Chairman ARCHER. Would you inform the Chair as to what your

schedule constraints are for the rest of the day?

Secretary RUBIN. I have a couple of things in the afternoon, and

I have a 7:30 dinner this evening, Mr. Chairman. [Laughter.]

Chairman ARCHER. I don’t think that we will go that long, Mr.

Secretary.

Secretary RUBIN. That is my schedule as I recollect it.

Chairman ARCHER. Let’s say in the next hour.

Secretary RUBIN. I can think of no better place to spend the next

hour than right here. [Laughter.]

Just like the last 21⁄2 hours.

Chairman ARCHER. Would the Secretary like to take a break?

Secretary RUBIN. I think that a 5-minute stretch wouldn’t be a

bad thing.

Chairman ARCHER. All right.

Secretary RUBIN. Usually, because of your rules, that is not a

problem, because you all have to run off and vote.

Chairman ARCHER. The Committee will stand in recess for 5

minutes.

[Recess.]

Chairman ARCHER. The Committee will come to order.

As soon as the Secretary returns, we will recommence the hearing. In the meantime, the Chair would invite guests and staff and

Members to take their seats.

Mr. Cardin is recognized.

Mr. CARDIN. Thank you, Mr. Chairman.

First, Secretary Rubin, let me congratulate you as the principle

architect of the fiscal policy that has been so successful in our

country. I also really want to applaud you for the theme of your

presentation today, which you have said over and over again, is to

improve national savings, and the President’s budget is aimed at

improving national savings.

You have pointed out numerous times that we have gone from

large deficits to projected surpluses. The unemployment rate is low.

Interest rates are low. Inflation is low. But you have also pointed

out that our National savings ratios are going in the wrong direction. We have actually been reducing the amount of money that we

have put away for savings. So I really applaud you for proposing

that we use the surplus to bolster our savings ratios for future economic growth in our Nation.

I want to call attention to a proposal that Congressman Portman

and I are working on to improve existing retirement and savings

plans that we have in our Nation to make them more effective for

individuals putting more money away personally for savings. I also

want to applaud your use of the surplus for creation of the USA

accounts, because, as you point out, and I think it is worth underscoring, if we spend the surplus, whether on government spending

or tax cuts, it is going to do little to improve national savings. But

49

if we use it as a tax cut like the USA account, targeted to individuals putting money away for savings, then we have accomplished

two major objectives. We have reduced taxes and we have increased national savings.

So, I just really wanted to just compliment you on that theme

that you have brought forward.

Secretary RUBIN. Can I just say one thing, Mr. Cardin, because

I think it has been somewhat understressed in the discussion that

we have had this morning.

In my view, and I think that a lot of commentators who have no

stake in this one way or the other have commented similarly, I

think that in many ways the most significant thing that this budget does, and I must say that it is not something that I could not

have imagined 6 years ago when I came to Federal Government,

over 6 years ago when I came to the Federal Government, is to

substantially reduce the Federal debt held by the public.

The Federal debt, as I think I mentioned in my opening remarks,

and if I didn’t I should have, as a percentage of the GDP was about

50 percent when the President was elected and is about 14 percent

at the end of this program. That is a remarkable contribution to

national savings, and also a remarkable improvement in terms of

the ability of the Federal Government to access markets if need be.

I think sometimes that gets lost a little bit in our discussion.

Mr. CARDIN. I think that your proposal also allows for the reduction of publicly held debt and still allowing for a very modest investment by the Social Security Trustees into private investments.

Secretary RUBIN. I think that I misspoke. In 2014, it will be 7

percent of the GDP.

Mr. CARDIN. That is even better.

Secretary RUBIN. That’s even better.

Mr. CARDIN. If I have one suggestion on the proposal for private

investments, I would say that you are too conservative. If you look

at what private retirement plans do as far as investing in equities,

they are over 60 percent. If you look at government retirement

plans, State and local government, they are over 60 percent. You

are suggesting, I believe, 15 percent. If you look at how large these

accounts are. The State of California has well in excess of $100 billion in their accounts. The Fidelity investments are over $500 billion currently. So the dollars that you mentioned may seem large

in absolute numbers, but relative to what is happening in the market, the chances of a concern about the Federal investment is so

modest if you incorporate the type of protections that Congressman

Levin mentioned and that you have mentioned in your presentation.

So I would encourage you that you have fiduciary responsibilities

as Trustees of the Social Security Trust system. You need to look

at it from the point of view of the future performance and ability

of our Nation to pay Social Security benefits. That requires us to

be a little bit bolder in looking how to get a better return for our

seniors.

And last, let me just make a point on the surpluses. There has

been a lot of talk about the use of the surplus in the last Congress.

I don’t want to belabor the point, but we complied with the budget

rules. I would agree with the Chairman that the budget rules

50

should be changed. It is interesting that I was the representative

of this Committee on the Budget Committee last year along with

Mr. Nussle, and we have come out with bipartisan recommendations that would adopt some of the Chairman’s concerns by having

us budget for the annual emergencies the best that we can. It still

has the safeguard that if there are emergencies beyond what we

project that we are able to go ahead and provide for that because

you have to.

And it is interesting that if these new budget rules were in effect

last year, the surplus would be about exactly the same as it is now

because we allowed for the caps to increase in order to fund for

emergencies.

So, I just really wanted to set the record straight. You complied

with the budget rules. We saved the surplus for the Social Security

system, and now we can talk about a proposal that can get bipartisan support, resolve the Social Security issues, and allow us to continue the high performance of our economy.

Secretary RUBIN. I agree, Mr. Cardin.

I might add that I thought that the work that you and Mr.

Portman did last year under the aegis of the Chairman with respect to the Internal Revenue Service, in reforming the Internal

Revenue Service, is a good example of how bipartisan work can

really make progress and really contribute to our National wellbeing.

Mr. CARDIN. Thank you.

Chairman ARCHER. Mr. Hulshof.

Mr. HULSHOF. Thank you, Mr. Chairman, and Mr. Secretary.

Thank you for sticking with us during this hearing today.

The gentleman from New York, the Ranking Minority Member,

during his colloquy with you, I thought elicited from you a statement that I hope you will clarify, that the administration would not

consider a tax cut until a Social Security proposal is proposed. Is

that what I heard your statement to be?

Secretary RUBIN. Let me tell you where we are. I don’t actually

remember what I said to the Minority Member, not Minority Leader, Ranking Member.

Mr. RANGEL. All of those things. [Laughter.]

Secretary RUBIN. In any event, Mr. Rangel.

We have in our budget, fully paid for, give or take $34 billion of

tax cuts, paid for with revenue raisers of one sort or another. Those

tax cuts are part of the regular budget and obviously should proceed at pace.

With respect to tax cuts that are paid for out of the surplus, we

propose one which is the USA accounts. We don’t think that that

should be enacted until Social Security has been addressed.

Mr. HULSHOF. Thank you for clarifying your earlier statement.

I want to focus a bit on what the Chairman opened the hearing

with, and that is talking about what I think every Member desires

of the Committee, that we do hope that children can attend school

in a safe, secure environment. The Chairman talked about that in

his opening statement.

You are familiar with the Taxpayer Relief Act of 1997. We, in

fact, included a provision, the issuance of about $800 million of

qualified zone, academy bond authority $400 million, I think, in

51

1998, $400 million in 1999. I recognize that the proposal of the administration is a little bit different, but there are some similarities.

So let me ask you a couple of questions.

Can you tell the Committee, Mr. Secretary, how many schools

have been improved under the qualified zone, academy bonding authority?

Secretary RUBIN. I do not know, but I certainly can get you the

information, and we can get back to you.

[The following was subsequently received:]

Through January of 1999, issuances have been made to benefit two schools: one

in Chicago, Illinois, and the other under joint control of school districts in Fresno

and Clovis, California.

Mr. HULSHOF. Well, let me ask you. Last year’s IRS reform legislation that you just complimented Mr. Cardin and Mr. Portman on

also included a provision calling for complexity analysis to accompany any tax legislation before you bring it to Congress, especially

before this Committee. Did the Treasury Department do a complexity analysis of either school bond proposal?

Secretary RUBIN. You mean of the school construction proposal

that we are making right now?

Mr. HULSHOF. Yes, sir.

Secretary RUBIN. By the time we present you with legislation, we

will obviously have it. Well, let me say that we strongly believe in

having, and we will have a complexity analysis in accordance with

the law. But we also, let me just say, believe in having complexity

analysis.

Mr. HULSHOF. It is my understanding that the proposal that you

are asking us to consider, again talking about the school——

Secretary RUBIN. You are talking about the school construction

tax credit?

Mr. HULSHOF. Yes. That that proposal calls for the Department

of Education actually approving a school district’s plan to rehabilitate or construct public schools.

Secretary RUBIN. Yes, there is actually—my recollection of this

is that, if I remember correctly, there is a formula allocation, and

then the Department of Education gets involved, I believe.

Mr. HULSHOF. Can you tell us what expertise or experience the

Department of Education brings to the table in regard to public finance?

Secretary RUBIN. Well, public finance, I don’t know how much or

how fully they are involved in public finance. But my recollection,

I may be wrong in what I am going to say, but my recollection of

the allocation was 50 percent of that was going to be allocated to

the 100 largest school districts in the country as measured by the

number of poor children that they had in them. I think that is

right.

Mr. HULSHOF. Based on school lunch percentages?

Secretary RUBIN. Yes, however it was going to be determined,

but it was the number of poor children. And then the second was

the other 50 percent of them was going to go to localities to be alloVerDate 11-SEP-98 10:09 Dec 03, 1999 Jkt 056396 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 F:56396 W&M3 PsN: W&M3
52

cated as they saw fit. That is my recollection of how that was supposed to work.

Mr. HULSHOF. Is there any truth to the reports that at least

some of us have been receiving that the markets have been, to be

kind, less than receptive regarding the qualified zone academy

bonds?

Secretary RUBIN. I haven’t spoken to anybody in the market. It

is my own judgment, for whatever it is worth, that this is a good

idea, but I can’t tell you how markets have reacted.

Mr. HULSHOF. Specifically regarding the administration’s proposal or the Chairman’s proposal?

Secretary RUBIN. No, I am talking about our proposal. If you are

asking me whether our proposal—we have a school construction

bond proposal, and then we have the academy zone proposal. You

are talking about those two proposals, right?

Mr. HULSHOF. Yes.

Secretary RUBIN. In my judgment, at least they are good proposals, and I think that they will be effective in the market.

Mr. HULSHOF. I would appreciate, and I know Ms. Mathews is

probably jotting notes, that if the Treasury could provide us with

some information.

Secretary RUBIN. Ms. Mathews might actually like to respond as

well.

Ms. MATHEWS. The only thing that I would add is that on the

qualified, those bonds are actually part of the school construction

proposed. There is an increase in those as well.

Mr. HULSHOF. Would you be able to follow up, as my time has

expired, of specific instances where qualified zone academy bonds

have been used, because I think that number is probably not very

many.

Secretary RUBIN. Well, we are involved in a new program, but I

think that if we were to put in place the expansion of those plus

the school construction bonds, at least my judgment, which could

turn out to be wrong, is that I think you could actually see a very

substantial contribution to school construction, which, as the Chairman said, is a very important national issue.

Mr. HULSHOF. Thank you, Mr. Chairman.

Chairman ARCHER. Mr. Lewis.

Mr. LEWIS of Kentucky. Thank you, Mr. Chairman.

Thank you, Mr. Secretary, for testifying today.

Just recently, as you know, we had Alan Greenspan here. Mr.

Greenspan said that the best of all worlds would be to not spend

the surplus. The second best thing would be tax relief for the

American people. He said the worst thing of all would be more

spending, more government spending.

Well the President’s budget is in direct contradiction of Mr.

Greenspan’s testimony because there is more spending. There is

$200 billion in more domestic spending, 40 new mandatory programs, and 80 new discretionary programs. There are $108 billion

in new taxes and fees.

Secretary RUBIN. Are you talking about the year 2000 budget? Or

the 5 years?

Mr. LEWIS of Kentucky. Over 5 years.

53

And there is no net tax reduction, no broad tax relief. So, none

of this jives with Mr. Greenspan’s testimony.

Secretary RUBIN. I actually don’t agree with that, but go ahead.

Mr. LEWIS of Kentucky. And the other day, the President was

speaking to a group of taxpayers, and he said, ‘‘You know, we could

return some of this surplus money back to you, but if you don’t

spend it wisely then there could be a problem.’’

My question is, does the President or do you agree with that,

that the American people, if we give them tax relief, really can’t

handle their own affairs and can’t spend their own money wisely

that they have worked very hard to earn?

Secretary RUBIN. But that, Mr. Lewis, was not the President’s

point. I think that the President’s point was, and it is the same debate that we have had for over 6 years now within the Federal

Government, to what extent should we have tax cuts, and to what

extent should we focus on improving the fiscal position of the U.S.

Government and increasing national savings. It has been our view

for this whole 6 years plus now that if our objective was to promote

jobs and to increase standards of living, that the best path toward

that is also I will acknowledge the hardest path, which is fiscal discipline. That is precisely what this budget is about.

Eighty-nine percent of this surplus, if you enact the budget as

proposed, will actually go to increase the national savings, which

will be an extraordinary accomplishment for our country.

The President wasn’t saying that the American people don’t use

their money wisely. He was saying that while all of us would like

to have tax cuts, there is a harder path to tread which is to tread

a path of fiscal discipline which has led us to where we have been

over these 6 years, an extraordinary 6 years, and it is the harder,

but in our judgment, the sounder path of going forward. That was

basically where we are.

Mr. LEWIS of Kentucky. Don’t you think that probably the reason

that we are moving in the right direction in this country is because

of tax relief to the American people, and the balanced budget, and

the fiscal responsibility that we have tried to instill in the budget

over the last years?

Secretary RUBIN. What I think?

Mr. LEWIS of Kentucky. Yes.

Secretary RUBIN. I think that the Nation changed fiscal direction

in 1993. In 1992 there was a projected deficit of $290 billion. I remember exceedingly well during the transition when Dick Darmon

came out with his projections going forward, and they were enormous. And we went to the President during the transition and said,

‘‘Mr. President, you’ve got to decide. You’ve got to make this your

threshold issue.’’ And he said, ‘‘I don’t have a choice because we

will never get this economy going again unless we get this deficit

down.’’

And we put forth a budget in 1993. It was very controversial, as

you probably remember. But what it did do, was it produced a lot

of deficit reduction. That, in turn, created economic growth. The

two interacted, and there is the path that we have been on ever

since.

54

Mr. LEWIS of Kentucky. Then why did the President’s projections

for the next indefinite years would have been continued enormous

deficits if the 1993 budget was supposed to solve the problem?

Secretary RUBIN. No, what the 1993—you are talking about the

1993?

Mr. LEWIS of Kentucky. You are speaking of the 1993 largest tax

increase that was supposed to solve the problem. But the projections were that that was——

Secretary RUBIN. No, the 1993—my recollection, this is now 6

years, but my recollection is that the 1993 deficit reduction program was as a matter of policy designed to produce about $500 billion, I think it was, of deficit reduction, about half in spending cuts

and half in tax increases. The actual number turned out to be

much larger. I think that the reason that the turnout was larger

was precisely because of the underlying theory that caused us to

be there in the first place, which is the deficit reduction would generate economic growth and the two would interact.

Mr. LEWIS of Kentucky. Let me just ask a quick question. The

55 cent sales tax on tobacco.

Secretary RUBIN. I am sorry, I didn’t hear you.

Mr. LEWIS of Kentucky. The 55 cent sales tax on tobacco. My tobacco farmers in Kentucky are going to be devastated. With the

State lawsuits, you know there is going to be an increase already

of 45 cents on a pack of cigarettes. The President requested and got

a 15 cent increase in cigarette tax just a couple of years ago. Now

a 55 cent tax, a Federal lawsuit against tobacco companies. This

will absolutely destroy the small tobacco farmer in Kentucky.

Secretary RUBIN. Mr. Lewis, what the President has proposed is

that we determine, and what we have done is to determine the

costs generated. In fact, I think that there is a chart on this in the

budget some place, the cost created for the Federal Government by

smoking, and then to require that that be paid by virtue of an excise tax. That is where the tobacco tax comes from.

Mr. LEWIS of Kentucky. It seems like it is a law of diminishing

returns.

Chairman ARCHER. The gentleman’s time has expired.

Mr. Foley.

Mr. FOLEY. Thank you very much, Mr. Chairman.

I just want to thank Secretary Rubin for his dedication to this

country. You could clearly be in the private sector making quite a

bit more money, and with the prosperity on Wall Street, I am certain that you yearn at times for that nice opportunity. I also want

to thank you and encourage you in your hiring of Ray Kelly as Undersecretary of Treasury. He has done a wonderful job working

with us on Coast Guard issues, Customs issues in Florida, and

these are extremely important.

One thing that I do want to question is, back in the debate when

we were advancing the notion of reducing capital gains tax rates

in order to stimulate the economy, there was quite a notion by

yourself and the administration that this was merely a tax cut for

the rich and that we were not going to necessarily stimulate the

economy and not, certainly, help the average American taxpayer.

I think that over the years, we have noticed an increased trend by

average consumers, baby boomers, and others, to invest in Wall

55

Street and to find an opportunity to have equities as part of their

portfolio.

We changed the capital gains rate, and I think that clearly we

have demonstrated that there have been significant gains made by

Treasury as a result of that prudent policy. Has your reflection on

the last several years since we adopted that policy changed your

opinion at all? And would you also comment on the question, would

reducing the holding period of an asset class from the 12-month period to a much less time period potentially increase opportunity?

Secretary RUBIN. I don’t think, Mr. Foley, that I would agree

with some of the posits of your question, if you will.

We did decrease the capital gains tax. At the time, I think that

I said that it was my view and I think that there is a lot of academic literature to support this. Let me put it differently, that the

academic literature predominantly suggests that that is unlikely to

increase the national savings rate. I don’t think that there is anything to suggest the contrary.

I spent 26 years on Wall Street. I never believed that a capital

gains tax reduction would have much effect, if any, on savings

within the framework of current tax structures. Obviously if you

had 70 percent individual rates or something it would be a different situation. So, I am talking roughly speaking of the current

framework.

There has been a very large increase in capital gains taxes paid,

but I don’t think that that has anything to do with capital gains

taxes. In fact, I suspect that had capital gains taxes been higher

we probably would have collected more. It has been a function of

the stock market having done so well, and that stock market, for

better or for worse, rightly or wrongly, and I am not saying that

I believe it is rightly or wrongly or anything else. I am just saying

that stock market was doing very well before the capital gains tax

was enacted, and it has done very well since the capital gains tax

was enacted.

Whether the market is at the right level or the wrong level is

something that I am not commenting on, but I do think that the

stock market basically responds to fundamentals over time. The

key, it seems to me, with respect to our tax revenues is that we

have had very good economic fundamentals in this country.

Mr. FOLEY. But don’t you think, that having less of a tax burden

on people will cause them to sell their securities, potentially then

increasing income for all—the stock broker, the brokerage firms,

transactional operations, and entities?

Secretary RUBIN. There may be, if you reduce the holding period.

I don’t know, and I would really have to speak to the estimators,

whether that would increase the incidence of turnover. Whether it

is desirable to increase the incidence of turnover is another question. As you know, there have been many economists hold that

view that one of the problems in our country is a lack of patient

capital, that our capital turns over—that the focus is to short-term

rather than to long-term. So, I am not sure that would be desirable

even if that were so.

Mr. FOLEY. It sometimes, though, seems arbitrary to me to trap

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vantage of the gain, an arbitrary capital gains tax burden on them

would keep them from exercising their right to cash in and profit.

Secretary RUBIN. They can always cash in. The question is do

they pay ordinary income tax rates.

Mr. FOLEY. But that may, in fact, affect their decision to sell.

Secretary RUBIN. Yes.

Mr. FOLEY. They might look at it and say that they would be better to hold it 12 months. But then if the gain evaporates over that

12-month arbitrary period, then you have locked yourself out of

that profit.

Secretary RUBIN. I suppose that you have to start, Mr. Foley,

with the basic question of whether you think having a preferential

capital gains tax rate is desirable or undesirable. I at least think

that it is pretty difficult to establish that it contributes to our National well-being. Now I know that the Chairman and many others

have a very different view of that.

Mr. FOLEY. Let me ask one final question. Looking at the economy, particularly in Asia, Japan, and Latin America, there are a

number of problems abroad that need our direct attention. I think

that our own economic projections look quite rosy and optimistic.

But you see any chance with these collapsing economies and currency fluctuations elsewhere that we really will not be able to meet

the expectations of either side of the aisle on the budget?

Secretary RUBIN. Well, the actual assumptions on which the

budget is based, I think are generally viewed as being pretty conservative. The CBO, I recollect, came out with a higher projected

surplus than we did, didn’t they?

Ms. MATHEWS. About $155 billion over the——

Secretary RUBIN. But having said that, I think that you are raising a very good question. There are lot of risks in the world, and

life doesn’t always go one way. I think that one reason why this

budget is so important for the future of our country is that what

it focuses on is fiscal discipline, paying down publicly held debt. So

that if, in fact, conditions turn out to be worse than what I think

are rather prudent, conservative assumptions, then the Federal

Government will be in a far better position than it would be otherwise to access capital markets if need be, and national savings will

be larger, which presumably will have generated greater economic

growth than would otherwise be the case.

Mr. FOLEY. Thank you, Mr. Chairman.

Chairman ARCHER. Thank you.

Mr. Tanner.

Mr. TANNER. Thank you, Mr. Chairman, and Mr. Secretary,

thank you. I will try not take all of my time.

I want to thank you, in starting off, for this budget document as

it addressed the REIT problems that we talked about last year. I

think that it is positive, and I appreciate that.

I want to talk about—we’ve heard of national savings rate, debt,

deficits and so on. This is a new world. I came here 10 years ago,

and at that time all I heard was people saying please do something

to stop the deficits and please do something to pay off the national

debt. It is too high, it is leaving our children and our grandchildren

in a position where some substantial portion of the money that

would be coming into the Treasury would be obligated in the form

57

of interest payments, some say as much as 15, 16, 17, perhaps 18

cents on the dollar if we didn’t do something about deficit spending

and talk about debt.

Now as it relates to our National debt, there is publicly held debt

represented by the Social Security Trust Fund, for example, investing in Treasury obligations with an interest factor there and inneragency publicly held debt, if one wishes to choose those words.

There is also something called privately held debt, and that is held

by individuals, held by foreign companies who have invested in our

Treasury obligations in times gone by. It seems to me, in keeping

with what Mr. Greenspan said when he was here a week to 10

days ago that his preference, and you may or may not agree, but

his preference was to pay down the debt with the surplus, that that

would leave the country’s bank account in better shape, not only

for all the good things that come with the government not hogging

the money that is available for borrowing, but also leave us in a

better position in the future if we were to use the surplus to pay

down debt.

I would ask you to articulate on the difference between the inneragency publicly held debt, as it were, and that debt, which I understand it is about $2.6 or $2.7 trillion that is actually held and could

be retired were we to use some of the surplus to pay that off. What

would happen and how do you think that might affect our future

economic potential as opposed to tax cuts or as opposed to any

spending programs or anything that we have heard so far in this

new world of surpluses.

Thank you. It is a long question.

Secretary RUBIN. No, but I think it is a very important question.

I tried to address it to some extent in my opening remarks, but I

used slightly different nomenclature than you did, though.

Debt that is held externally to—debt that is held by outside

creditors of the U.S. Government, under this proposal, would be reduced to some 7 percent of the GDP in the 2014. That is a direct

contribution, to, or increase of, if you will, national savings. What

it basically—it’s reverse crowding out. What it basically means is

that the Federal Government would be making a much smaller

claim on the available savings pool. The Federal Government is

making a smaller claim on the national savings pool. What that

means is that private investors will have more capital available or

a larger percentage available to them, which both makes it more

available and should lower interest rates, precisely what we have

been trying to do over the last 6 years. And the lower interest rates

will generate more economic growth, more jobs, higher standards

of living, and the rest. And that is really the guts, if you will, of

this budget.

In addition, it does, I guess it was Mr. Foley who raised the

point, it does put the Federal Government in a stronger position to

access markets in the future if, in fact, things turn out worse than

we would hope and expect.

The claims within the unified budget have no effect on anything

that we just discussed. They simply are claims against the general

revenues, and then uses of the general revenues in the future

years, and they have no impact at all on anything that we have

just discussed.

58

Mr. TANNER. That was my thing. I believe that would be something that ought to be considered as a use of the surplus, and that

is the paying down of this externally held debt, if one wants to use

that nomenclature, because—am I correct in saying in so doing we

directly save Social Security first, if that was what one wanted to

relate to, how the obligations of the Federal Government in the future, however they are characterized, there is a finite out of money

coming into the Treasury no matter what kind of tax this is called,

whether it is payroll tax, capital gains taxes, income taxes, excise

taxes, there is a finite amount of money coming to the Federal

Treasury.

There is an obligation, under law, to Social Security, to several

other entitlements as well as the things that we have to do from

the discretionary side in terms of military preparedness and readiness and so on.

And so, how ever one characterizes what is going to happen in

the future, it seems to me that the less money that we owe at that

date, the stronger the country will be in terms of its financial integrity as it relates to that future date. Am I correct in——

Secretary RUBIN. That is correct.

Mr. TANNER. It is a simplistic notion.

Secretary RUBIN. No, but it is correct. I don’t think that it is simplistic at all, but I think that it just goes to the heart of what this

budget is about. And it also, as you said, and I don’t think that this

has actually come up at the hearing yet, it does strengthen Social

Security by strengthening the ability of the Federal Government to

access capital markets if need be, to meet Social Security commitments. So that is a point that did not come up yet, and it is correct.

Chairman ARCHER. Mr. Collins.

Mr. COLLINS. Thank you, Mr. Chairman.

Thank you, Mr. Secretary.

I consider this whole episode as kind of like a game of checkers,

and based on law, the administration at present had to move first

in this checker game, and you are here to explain his move. We all

know that his move basically could be defined as just in general

terms and not in so many specifics as we get into Social Security

and the other areas that you have discussed.

It kind of reminds me of the Baptist preacher who stepped out

of the boat and walked toward shore. It looked like he was walking

on water. Basically he just knew where the stumps were and didn’t

sink because of walking on the stumps. We walk on the stumps as

we get passed the first move. And now it is our move.

You and I have discussed this before. I have read that you are

a good budget person, an excellent budget person, but you are not

very high on tax relief as you demonstrated just a few minutes ago

with your position on capital gains. But in kind of a little takeoff

from Mr. Tanner, he said that the less money that we owe the better off that we are. I consider that to be very true, but I also consider that whether it is privately held debt or publicly held securities.

But listening to Mr. Lew yesterday, he mentioned, and he had

a chart that indicated that in the year 2014, the interest portion

of the budget would be 3 percent of the budget based on national

debt at the time. Do you agree with that?

59

Secretary RUBIN. I think that number is right. Yes, that is the

right number, I believe. Let us check. One thing is to be sure, the

interest portion would have been 27 percent, and it looks like it is

2 percent actually, as a percentage of——

Mr. COLLINS. Now, after we got into it, though, and he agreed,

he stated that that interest didn’t include the interest that would

be owed on the portion that is held by the securities that are held

by the trust fund.

Secretary RUBIN. Well, because I think that you get into the very

same issue that we were just discussing.

Mr. COLLINS. Yes, but that is still debt whether you owe—well,

he used publicly held, which we consider the private sector, or government held which would be the trust funds. But it is still debt,

and if you continue to spend and the national debt increases year

after year, as it is projected to do, then how do you redeem those

securities to meet those Social Security benefits in those out years?

Secretary RUBIN. That is the right question. That is precisely I

think the right question. How do you redeem the securities, that

is I think precisely. I don’t think it is debt in the sense, in fact I

am sure it is not debt in the sense of the kind of external debt that

Mr. Tanner was just talking about. The question I think is precisely—and it goes—the same question with respect to the interest

as with respect to the principal: How do you redeem?

As we discussed a bit ago, if you look within the framework of

the unified budget, what you will find is that you have, but what

I am telling you you already know, but I will just repeat it if I may.

You have existing Social Security commitments. Then, you have

the judgment that we made which we could agree about or disagree

about, that we should create a first claim against general revenues

in the future to meet those Social Security payments.

And then the question is, how do you pay those first claims? The

question is what will be available in the future to do that? If you

look at this budget, what you will find until at least 2039, and

there is some question after 2039, let’s leave aside for the moment,

that at least until 2039, you can make the—there is a surplus in

the overall unified budget. Therefore, what is happening is that the

cash is being transferred from the general revenues to the Social

Security Trust Fund, to pay the Social Security benefits, all of

which is done without a tax increase or a spending cut because the

general revenues are sufficient to create a surplus.

Mr. COLLINS. I follow that pie in the sky.

Secretary RUBIN. No, no.

Mr. COLLINS. But wait a minute now. My light, yellow light is

on already because I talk too slow. But you are spending the

money. You are increasing the debt. And the money is owed. So in

order to redeem those, you have got to reverse that pilot and go

back to the public sector for borrowing the money.

Secretary RUBIN. No, Mr. Collins, could I say one thing?

Mr. COLLINS. Let me go over one other thing. One other thing

now? Now, what?

Secretary RUBIN. Yes, actually, that is factually not true.

Mr. COLLINS. I want to say——

Secretary RUBIN. I will bet you——

Mr. COLLINS. I want to say one other thing.

60

Secretary RUBIN. I will bet you a bunch that I can, that if we get

six people to listen independently to both of us making our case,

that they will decide that that isn’t the case.

Mr. COLLINS. You bet me right out of time. That is what you bet

me out of.

Secretary RUBIN. Well, time is worth more than money or money

is worth more than time. I don’t know. Go ahead. [Laughter.]

Mr. COLLINS. We will talk about it on another day because there

will have to be another day that you will sit before us and explain

again one more move by the President. Thank you.

Secretary RUBIN. OK, thank you, Mr. Collins. Could we give Mr.

Collins an extra moment here? I did waste his time. I didn’t waste.

I think I used——

Chairman ARCHER. Well, maybe you can do it privately, Mr. Secretary. We are really imposing on your time, and we have already

gone through the lunch hour. But I sure don’t need anything more

to eat. I don’t know about the rest of you all.

Mr. Hayworth.

Mr. HAYWORTH. How fitting you would call on me at lunchtime,

Mr. Chairman. As we have said before, there is a preponderance

of physical evidence that I can miss the midday meal and then

some.

Mr. Secretary, thank you for joining us today. I listened with

great interest to your efforts, as a historian, in evaluating the state

of the economy when you told my colleague from Kentucky that

what many of us I believe have accurately described as the largest

tax increase in American history—what my good friend, the Democratic Senator from New York, described as the largest tax increase

in the history of the world—that that tax increase is why we now

experience such great prosperity and fiscal discipline. It is a very

different outlook than many of us have.

I also noted, and not to review history, and obviously you were

at a different role in the early days of this administration, when

that almost Keynesian big government economic theory was at

work, that $19-plus billion emergency stimulus package that many

of us in the private sector at that time considered to be pork was

wisely denied by then the liberal-controlled Congress. But good

people can disagree on history and the cause and effect of a variety

of different actions or inactions taken by the Federal Government.

Secretary RUBIN. I don’t think though, Mr. Hayworth, there is a

lot of disagreement anymore about the importance of the 1993 Deficit Reduction Program in terms of what has happened to this economy.

Mr. HAYWORTH. Oh, then I am sure you would join us in going

on the record publicly regarding the effect of the change in the

Congress of the United States and a return to true signals both to

Wall Street and Main Street, that were serious.

Secretary RUBIN. True what? True what?

Mr. HAYWORTH. True signals and actions taken by the Federal

Government, including a new approach to fiscal discipline by a conservative Congress, that that signaled to both Main Street and

Wall Street we were serious about dealing both with the problem

of the deficit. Followed by the very wise compromise to cut taxes

on working Americans in our famous budget agreement, that we

61

have been able to work things out. But, of course, there is credit

enough to go around, and I won’t quibble about history with you,

Mr. Secretary.

But I would ask you again, because I was interested in your response to my colleague from Florida, and you noted a fundamental

disagreement that a reduction in the capital gains rate, and this

was not your term, but if I misunderstood, please correct me, has

a negligible effect on our economy. To my understanding, according

to figures released last spring by the Congressional Budget Office,

some $11.1 trillion essentially sits dormant in our economy, for

those who possess that capital have a disincentive to put it to work

because of the current capital gains encumbrances.

Do you believe it is better to simply have that money inactive,

if you will, or held in vaults rather than put to work for the American people, injected into the economy to create jobs and new economic enterprises?

Secretary RUBIN. I don’t think, Mr. Hayworth, that—you are

talking about the locking effect, because that is usually the way

that is referred to. I don’t think that you have a substantial impact

on the mobility of capital as a result of the capital gains structure.

In fact, people can do as they see fit with their capital. The only

question is how they weigh the various factors that affect that. But

I don’t think that you are having a material impact on the mobility

of capital.

And I do think that your capital gains preference, and this is the

argument ordinarily made for capital gains preference, I do think

it has relatively little effect on the national savings rate. That is

sort of the core, as you know, of the arguments made by people

who favor capital gains tax cuts.

Mr. HAYWORTH. Well, let’s turn to a more micro, a personal level

of impact of capital and budgeteering and family budgets. Again,

I refer to the President’s comments the day after, if memory serves,

the day after the State of the Union Address, when he traveled to

Buffalo, New York. And again relying on memory and the citation

of my colleague from——

Secretary RUBIN. I might add if you want to put your argument

just a slightly different way, which I think has a lot of—the question I think you are really asking is whether the allocation of resources in our economy is maximally efficient or whether that is

being to some extent affected by the unwillingness of people to sell

assets because they don’t want to pay taxes.

Mr. HAYWORTH. Mr. Secretary, if you would suspend, I would

simply, and I don’t want to leave the purview of or the decorum

of this process, and I know you are trying to be helpful. But I will

reserve the right to ask the questions, rather than having them rephrased or taken in that tone.

Secretary RUBIN. I was just trying to——

Mr. HAYWORTH. I thank you very much for that. I would like to

get back to the question I want to ask, which is, in lieu of, or in

view of, the President’s comments that when it comes to the surplus, we could give it back to you and hope that you would spend

it in the right way. What is the official administration view of the

way in which Americans should save, spend, or invest their money?

62

Do you have a conduct card now for the citizenry to suggest how

they best spend or invest?

Secretary RUBIN. No, that was not the point of the President’s

comment. The point of the President’s comment was that we always face within our society, the tension between the desire to

have tax cuts and more money to use as we see fit, which he is

very much in favor of. As you know, it is always good to cut taxes.

And the much more difficult path, the politically much more difficult path, is fiscal discipline.

What he was saying is that the economic growth of the last 6

years, the increase in jobs, standard of living, and all the rest, has

been contributed to enormously by taking that difficult path. He

feels that we should stay on that path going forward in order to

continue to have the kind of very strong economy in the years

ahead that we had in the last 6 years. And that is all he was saying.

Mr. HAYWORTH. Again, a fundamental difference, it appears to

me, that there seems to be this trust in government and under the

guise of fiscal discipline choosing for the American people how best

they save, spend, or invest.

Secretary RUBIN. No. What he wants to do with the surplus, I

think 89 percent of it would actually go to just increasing savings,

most of which would consist of paying down the Federal debt.

Chairman ARCHER. The gentleman’s time has expired.

Mrs. Thurman.

Mrs. THURMAN. Mr. Secretary, we do thank you.

I want to just talk about a couple of things, and this is an opportunity because people may be listening to what is going on here

today, and it is timely because people are talking about the President’s proposal. They are talking about it in terms that they understand best. If you are an older person on Social Security and you

remember the crash of the market, you become very concerned

about what is being discussed up here. If you are a younger person

who has watched the market balloon, and there has been a big return for them, they become less concerned about what could happen here.

Just one of the articles that was written within the last couple

of days in the Citrus County paper, it actually has interviewed a

couple of folks, and it is a very mixed review. One person noted

that the government would have the best financial planners and

forecasters. With that in mind, she said the plan could work. Previous to that, she had mentioned that she wasn’t really sure. She

was concerned because of what could happen.

Another one said, you know, I don’t want to do my own investment decisions with Social Security. I am not familiar enough with

the stock market. An investment person said, I might tell my clients to use the stock market as an investment, but I am leery

about the government doing this. Another one said, I would rather

be safe than sorry. I would rather get my 3 or 4 percent they give

you.

So there is a mixed review going on out there, but with concerns

of what could happen. So could you, in talking to the American people today, tell them why they should trust us on this particular

63

issue of potentially putting 15 percent in stock markets or other

places?

Secretary RUBIN. I think it is interesting, Mrs. Thurman, if you

take those articles that you have just read, it seems to me they

frame the issue exceedingly well.

Stocks do have risks. I think that sometimes is underfocused on

when markets have been as good as they have been in the last

some years. On the other hand, it is also true that historically

stocks have had better returns than debt. It doesn’t mean it will

necessarily happen in the future, but it suggests that it probably

will. I think we have sort of found the prudent balance by saying

we would wind up with 15 percent of the trust fund in equities,

and the money wouldn’t be invested by us. It would be invested in

broad-based indexed funds of some sorts, so that you wouldn’t have

individual stock picking. And you basically should perform with the

market, whatever that index may be. This whole process would be

conducted by private sector money managers, not by the government. That is sort of fundamentally how we approach this issue.

But I think your stress, I think you are stressing, at least some

of those quotes are, the importance of being careful and being prudent is I think well taken.

Mrs. THURMAN. And I think that is a huge concern for some folks

out there, because they have lived through different times, and

they have seen different times, so they are concerned about it.

Let me ask you this. Mr. Greenspan had said, as one of our colleagues also said, OK, the first thing you should do is save the surplus. But if you are not going to do that, then you ought to give

tax relief. Would you consider the USAs a tax relief?

Secretary RUBIN. That is a good question. They are a tax cut.

They are refundable tax credits. But they also increase national

saving, because that tax, that refundable tax cut goes into a savings account. If you look at what we have done with, or at least,

we haven’t done anything—what we propose to do with the surplus, we are proposing 89 percent of it will increase national savings, and that within that 89 percent, 12 over the 89, 12 percent

of that within that 89 percent will be in the form of a tax cut that

goes into a savings account.

Mrs. THURMAN. So it is then considered to be a tax cut?

Secretary RUBIN. Yes. Well it would be a tax cut, yes.

Mrs. THURMAN. OK. I am going to bring up a couple of issues

that are probably more narrow—because they are issue that I have

been involved with.

There is some part of the budget that is going to talk about crop

insurance for some of our farmers, and especially with the debate

we just had about emergency funds and things of that nature.

There was a proposal, in a bipartisan manner that Mr. Hulshof and

I did that actually dealt with having funds put aside in good times,

and then used in bad times. I would just throw that out as maybe

some conversation we can have later on. I would like to know if

there is a way we could talk about this as being something important.

The Y2K issue, as far as it relates to small businesses, is another

area that I would like to have some conversation about. And then,

at some other time, I hope we will have a talk, dealing with

64

ESOPs. There is some concern about how the budget was put together and what it might do to those employee owned plans.

I know those are not very general, but I would like to have that

opportunity.

Secretary RUBIN. We would be delighted.

Chairman ARCHER. Mr. Jefferson.

Mrs. THURMAN. OK, thank you.

Mr. JEFFERSON. Thank you, Mr. Chairman. At long last, Mr. Secretary, I get to thank you for your commitment and the President’s

commitment to the communities in our country. What you are

doing with the new markets initiative, investment initiatives, tax

credit programs, and your emphasis on the empowerment zone

issues, and the capital formation matters, that we have been working on so closely for the last few years is very much appreciated.

I want to follow up a little bit on what Ben Cardin talked about

and what Mrs. Thurman talked about a minute ago. When we

started out with this Social Security debate, we had a paradigm.

It had four legs to it. The first was that we could cut benefits. Nobody wants to do that. Second was we could raise payroll taxes.

That was dismissed as out of hand. The third one was we could increase the yield that we now get from currently invested Social Security funds. And the last one was we could do something about

holding more of the surplus to apply to help solve the problem.

Now, when Mr. Greenspan came to speak to us, he took issue

with the equity investment aspect of the administration’s plan, and

he said for two reasons. One, he said that there would be inevitable

political influence involved, which you have answered I believe in

your response to Mr. Cardin’s question. He said another thing,

though, which bears some discussion. He said there would be inevitable inefficiencies in the allocation of capital in the marketplace.

He used the State pension funds as evidence of that saying they

were underyielding compared to private ones, or compared to the

stock indexes that we talked about a minute ago.

But, as I examine this issue of the relative returns for the indexes versus the public pension funds, I find that there really isn’t

that much difference because the yield factors from these indexes

take a hypothetical investor, over a period, who makes an investment which is measured over a certain period of time, during

which he holds the stock for the entire time; and all the dividends

are reinvested. There are no fees or commissions taken out, and so

this constitutes this higher yield. When you examine it, there is not

much difference there.

So I wonder whether our experience with State pension funds

doesn’t give us a very good model for what can happen here. Even

if he were right about the lower yield, it is still a greater yield than

we get under our present system. But I think that maybe there

isn’t very much difference there. And I think it is a strong argument, a powerful one for the fact that public institutions can make

good decisions when they use broadly based indexes, like you

talked about, and get a greater yield for the retirees.

Secretary RUBIN. I think you raise a good point, Mr. Jefferson.

I don’t see any reason, there is nothing inherent in employing this

15 percent in broad-based indexes that should result in an underperformance of any significance with respect to that index. So I

65

guess I am basically agreeing with your point. I am not counting

on State pension funds. That is a separate issue. I am not commenting on your analysis on that, though I presume, I am sure if

you have done it, it is right.

But I am just saying there is nothing inherent in investing this

in index funds that should result in a lesser performance than the

rate of return on the index fund.

Mr. JEFFERSON. My whole point was that these two issues, you

seem to have dealt with very well today, the one about we are not

going to inevitably end up with political influence over the system.

And no, the public system yields do not necessarily show that there

is a lack of attention to return on capital or allocation.

I started out saying I appreciate what you are doing on the capital formation side. I hope that this commitment to our communities will be really pressed this time in the budget issues and that

we will come out with most of what you have here, because that

is so important. The job creation and wealth creation, this whole

capital formation issue, and the idea of creating patient capital in

those markets is the most important thing I think the administration can do to continue growth in the country.

Secretary RUBIN. Well, you have been involved with that issue

for a long time, Mr. Jefferson. I think that is how I first met you

5 or 6 years ago. And I agree that it is a very important issue, and

I think we have good proposals, in part, because of the input that

you provided, particularly on the SSBICs.

Mr. JEFFERSON. Well, thank you, Mr. Secretary.

Chairman ARCHER. Mr. Becerra.

Mr. BECERRA. Thank you, Mr. Chairman, and Mr. Secretary and

Director Mathews. Thank you for staying for such a long time. If

you have got a few more minutes of voice left, I will ask you to address a couple of issues, because you have answered most of my

questions. Perhaps I could ask you to concentrate a little bit on

what my colleague, Mrs. Thurman, asked a bit about, and that is

the USA accounts.

My understanding is that for quite some time we have had difficulty trying to persuade or provide an incentive for moderate income individuals to save, and they are usually the folks that most

need it upon retirement. In fact, we find that they are the ones,

once retired, are most reliant upon Social Security to provide them

with the bulk of their income in retirement.

What does the USA account do for that population of America,

the under $30,000 folks that, in your mind or in the President’s

mind, makes it beneficial?

Secretary RUBIN. I think you have gone to the heart of, well, to

the very important part of what the USA accounts are about. By

having a flat, nonrefundable tax credit, the same amount to everybody, it basically will be providing a tax cut going into a savings

account for people who unfortunately, given their income levels,

aren’t able to save. Second, as an incentive for them to save further, there will be a match, I guess I should have mentioned this,

maybe I didn’t, the match will be higher, the lower your income.

So it is again an attempt to provide incentive for low-income people

to save.

66

Mr. BECERRA. So does that mean that if you are at, say, a

$20,000, $25,000 income range that whatever we all come to agreement on would be the match, it would be greater than someone

who is earning $75,000 or $100,000?

Secretary RUBIN. That is absolutely correct. In fact, yes, that answer is absolutely correct.

Mr. BECERRA. And I know within the Federal system that we

have, the Thrift Savings system where, there is a matching incentive component that I know, at least I know I take advantage of

it and I think others would as well, because it helps to push that

dollar that you put in further along in savings.

Let me ask another question. It relates to some of the comments

that were made earlier about the share of the money that the

President would propose of the 60 percent of the surplus that

would be used for Social Security. That one-fifth of that that would

be used for investing in the private markets, in the equity markets.

The President, you as well, seem to be very confident that having

the government place those moneys into the equity market won’t

cause the intrusiveness or the difficulties that the private sector

might fear in having the government have a substantial, although

it is small compared to the relative size of the market, but a substantial investment into the private market. Give us, give me a

sense of why you are so confident that there won’t be any problems

in having the Federal Government do that?

Secretary RUBIN. Because I think, Mr. Becerra, that what we can

do and what we have to do is to develop some structure for doing

this so that the investment process itself is conducted solely by the

private sector. No government. Zero. And second, that there will be

an apolitical oversight and selection of the managers, and I think

I mentioned earlier in the hearing if you look at the independence

of the Fed over many decades, it does suggest that it is possible

in our system to create that kind of independence. I think we need

to do precisely the same thing with respect to this investment.

Mr. BECERRA. And it is somewhat ironic that the Chairman of

the Federal Reserve, an institution that has so much independence

from the Federal Government, is somewhat critical of that type of

an institution, when, in fact, you can show the independence can

be had.

Secretary RUBIN. Well, he is raising what I think is a very legitimate concern. I guess the reason I feel comfortable where we are

is I think we can meet the concern that he and others have raised.

Mr. BECERRA. Mr. Chairman, in respect of Mr. Secretary Rubin’s

and Director Mathews’ patience and indulgence, I will yield back

the balance of my time.

Chairman ARCHER. Thank you, Mr. Becerra. Mr. Secretary,

thank you for being so generous with your time today, and I probably owe you a lunch. We will try to make that happen some time.

But thank you for coming and being with us.

Secretary RUBIN. I would be delighted. Thank you, Mr. Chairman.

Chairman ARCHER. Also our gratitude to Ms. Mathews for her

contribution.

May I, before you leave, ask one quick question? It is very short.

67

There was a lot of discussion about the steel situation, and we

are all concerned about that. We are struggling to find the right

way to approach it. There is a proposal before the House, sponsored

by Representative Visclosky. Are you familiar with that, his approach?

Secretary RUBIN. I am not, Mr. Chairman.

Chairman ARCHER. OK. Well, if you’re not, then I can’t ask you

the question.

Secretary RUBIN. If those are the quotas, I just didn’t think of

it in that term.

Chairman ARCHER. Yes, OK. Could you let me know whether you

oppose or support that proposal?

Secretary RUBIN. Let me do two things if I may, Mr. Chairman.

In responding to Mr. Crane, I tried to provide some, at least my

personal view as to how to think about such an issue. Let me get

back to you if I may, but I think——

Chairman ARCHER. OK, this is a specific proposal that we may

well have to deal with, and I would really be benefited by knowing

whether you are for it or against it.

Secretary RUBIN. Let me say, Mr. Chairman, as a general matter, as you know, we are on the one hand very concerned about the

steel situation.

Chairman ARCHER. I understand.

Secretary RUBIN. On the other hand, we are strong supporters of

open markets here and abroad.

Chairman ARCHER. I understand, and you and I are in general

agreement on all that.

Secretary RUBIN. Yes, I suspect we are.

Chairman ARCHER. But we still have to deal with this specific

thing.

Secretary RUBIN. Let us look at it, and we will get back to you.

Chairman ARCHER. All right. Thank you very much.

[The following was subsequently received:]

As the Administration indicated on March 16, 1999, we strongly opposed H.R. 975

because it was not in the Nation’s economic interest and would have violated U.S.

international obligations under the World Trade Organization. Because of these concerns, the President’s senior advisors would have recommended that the President

veto the bill.

Question received from Hon. Wally Herger, and Subsequent Response from

Secretary Rubin

Mr. Secretary, I would like to take this opportunity to acknowledge the change that

you have proposed in the definition of qualifying biomass for the Section 45 tax credit. It is my understanding that no one has ever claimed the current Section 45 tax

credit for electricity produced from biomass because of its overly restrictive rules. The

credit simply does not work. Your proposed definition, which I believe mirrors the

bipartisan language I introduced along with Mr. Matsui last year as H.R. 4407,

would provide substantial benefits both to the environment and to rural and agricultural communities across the country. Would you and your staff please work with me

and Mr. Matsui in the weeks to come to continue to refine the proposal we introduced

last year?

Yes.

68

CONGRESS OF THE UNITED STATES

HOUSE OF REPRESENTATIVES

February 5, 1999

Mr. Robert E. Rubin

Secretary of the Treasury

Department of the Treasury

1500 Pennsylvania Ave., N.W.

Washington, D.C. 20220

Dear Secretary Rubin:

Thank you for testifying before the Committee on Ways and Means on the President’s Fiscal Year 2000 Budget. Unfortunately, I was unable to ask you a number

of important questions regarding the President’s budget and specific actions on the

Internal Revenue Service (IRS).

First, I am concerned about recent efforts by the IRS to require taxpayers to capitalize many costs that have previously been deducted without an IRS challenge.

You may recall that I, together with nine of my colleagues on this Committee, wrote

to you last June about a specific example of this action, involving sales commissions

paid by cellular telephone service providers to sales agents for signing up new customers. We never received a reply from you. Rather, we got a letter from an Assistant Chief Counsel at the IRS.

Mr. Secretary, I believe the IRS is being overly aggressive in its treatment of

these expenses. The direct result of these actions affects the competitive positions

of these companies, many of which are on the cutting edge of innovative communications technology. The IRS position is contrary to current law. Moreover, it would appear inadministrable.

These are important tax policy issues. They should be decided by you, not an IRS

Assistant Chief Counsel. I ask for your commitment to review them and respond to

me, in writing, as soon as possible.

My second question concerns the President’s policy on Social Security reform. It

is my understanding he intends to transfer 62 percent of the surplus over 15 years

to the Social Security system. Please elaborate as to what these funds consist of?

Are they FICA taxes only or does it include interest on the trust fund? Does this

transfer include funds from general revenue? Does the President really want future

taxpayers to finance Social Security with their income taxes?

Finally, does the President’s proposal guarantee that Social Security benefits will

not be cut, the wage base increased or taxes raised to save Social Security?

Once again, thank you for your expedited consideration of these matters.

Sincerely,

SAM JOHNSON

Member of Congress

Question: First, I am concerned about the recent efforts by the IRS to require taxpayers to capitalize many costs that have previously been deducted without an IRS

challenge... I believe the IRS is being overly aggressive in its treatment of these expenses... The IRS position is contrary to current law. Moreover, it would be appear

inadministrable... I ask for your commitment to review them and respond to me, in

writing, as soon as possible.

A: As you are probably aware, the heightened interest in capitalization issues

began, in part, with the Supreme Court’s 1992 decision in INDOPCO, 503 U.S. 79,

in which the Court clarified that the creation or enhancement of a separate and distinct asset is not a prerequisite to capitalization. Rather, the Court held that a taxpayer’s realization of significant benefits beyond the year in which the expenditure

is incurred is important in determining whether an expenditure must be capitalized

or may be deducted.

The Treasury and IRS have repeatedly reassured taxpayers that the INDOPCO

decision did not change the fundamental legal principles for determining whether

a particular expenditure can be deducted or must be capitalized. Since that decision,

the Service has published eight revenue rulings, all holding that the particular exVerDate 11-SEP-98 10:09 Dec 03, 1999 Jkt 056396 PO 00000 Frm 00071 Fmt 6633 Sfmt 6602 F:56396 W&M3 PsN: W&M3
69

penditures at issue (such as advertising, repairs, training, certain environmental remediation, and Year 2000 costs) are deductible despite an incidental future benefit.

We recognize that additional issues remain.

Because these capitalization issues are highly factual, they are best addressed on

a case-by-case basis. The 1999 Treasury and IRS Priority Guidance Plan indicates

Treasury’s intent to aggressively study and publish formal guidance on capitalization issues during 1999. In particular, the Plan includes potential guidance regarding the treatment of sales commissions paid to obtain new customers, investigatory

costs, ISO 9000 costs, the costs of removing property that is replaced with other

property, cyclical maintenance costs, loan origination costs and mutual fund launch

costs. We intend to continue to discuss the relevant facts and issues with potentially

affected taxpayers and their representatives before proceeding further on these

projects.

Question: My second question concerns the President’s policy on Social Security reform. It is my understanding that he intends to transfer 62 percent of the surplus

over 15 years to the Social Security system. Please elaborate as to what these funds

consist of. Are they FICA taxes only or does it include interest on the trust fund? Does

this transfer include funds from general revenue? Does the President really want future taxpayers financial Social Security with their income taxes?

Answer: The President’s plan would transfer 62 percent of the projected surpluses

over the next 15 years to Social Security and invest about a fifth of this amount

in equities. These two actions will close a bit more than half of the long-term funding gap that is faced by Social Security today, and extend the life of the Social Security trust fund to 2055.

In essence, the President is proposing that we use the Social Security (and Medicare) trust fund as a ‘‘lock box’’ to assure that the bulk of surpluses projected over

the next 15 years are secured for debt reduction. Using Social Security and Medicare in this way will have three effects. First, it will substantially raise the probability that we will actually use most of the projected surpluses to pay down debt

held by the public. Second, it will strengthen significantly the financial condition of

the Social Security and Medicare Trust Funds. Third, it will substantially increase

national saving.

The transfers to the Social Security Trust Fund would earn interest just like any

amounts added to the trust fund. Thus, the accumulation of the transfers in the

trust fund would include interest payments.

Question: Does the President’s proposal guarantee that Social Security benefits will

not be cut, the wage base increased or taxes raised to save Social Security?

Answer: The President’s plan envisions a bipartisan effort to close the remainder

of the financing shortfall in order to restore 75-year actuarial balance to Social Security. That effort will require tough choices on benefits and Social Security income

sources.

[Whereupon, at 1:31 p.m., the hearing was adjourned.]

[Submissions for the record follow:]

Statement of American Farm Bureau Federation

PRESERVE INTEGRITY OF SOCIAL SECURITY

Farmers and ranchers support the preservation of the Social Security system as

a safety net to provide workers and their families retirement income, disability protection or assistance because of the early death of a family wage earner. Farmers

and ranchers are concerned, however, about the future and financial soundness of

the Social Security system. Farm Bureau believes that reform is needed to preserve

the integrity of Social Security for retirees and workers paying into the system.

The average age of farmers and ranchers is now 54 years. This means that almost

half of them are at, or near, retirement age. They are very concerned about the return they will receive on a lifetime’s worth of Social Security taxes. The current system is a major portion of their retirement program. They must be able to rely upon

Social Security in their retirement years.

Ninety-nine percent of farms are operated by sole-proprietors and or by family

partnerships. As self-employed individuals, agricultural producers pay the full 12.4

percent payroll tax, usually as one lump sum along with their income tax payment.

70

1 Note: Where appropriate, the BCSE identifies legislation that was introduced in the 105th

Congress which includes similar or identical language to that recommended here.

They are painfully aware of the high taxes needed to fund the current system and

realize the urgency of saving the Social Security system.

CHOICE OF RETIREMENT SYSTEMS

While Farm Bureau supports preserving the Social Security system, we believe

people should have the option of contributing to private retirement systems. For

years we have recognized each individual’s right to participate in pension plans in

addition to Social Security. We believe that people should also be able to invest in

private plans within the Social Security framework using the same deposit percentages and withdrawal age rules as the regular Social Security program. People

should have the right to choose to stay in the standard Social Security program or

shift to private retirement accounts.

PROGRAM FUNDING

We oppose an increase in Social Security taxes. Social Security, either the standard plan or new private retirement plans, should be funded by payroll taxes. We

oppose any proposal to finance Social Security retirement income benefits out of

general revenue. Social Security taxes should continue to appear as a separate deduction of Federal Insurance Contribution Act (FICA) taxes to make them clearly

identifiable.

All employees, both in the private and public sector, should be included in the Social Security program. Employers and employees should continue to share equally

in the payment of Social Security taxes. Low-income taxpayers should not be exempted from paying Social Security taxes because of their level of incomes.

THE TRUST FUND

Social Security taxes collected should be placed in a restricted interest-bearing

fund to be used only for Social Security. Because we support placing Social Security

funds in interest bearing accounts and private retirement accounts, we oppose government investment of Social Security Trust Fund money in stocks of private companies.

BENEFITS

Benefit levels should be preserved for retirees and those that are near retirement

and, when in need of adjustment, should be changed based on a percentage of the

annual decrease or increase in average wages. Benefits, both in the standard plan

and in alternative private plans, should be based on an individual’s contribution to

the system. We oppose means testing as a way to limiting Social Security benefits

for those that have contributed to the system. We oppose earned income restrictions

for those receiving Social Security benefits.

SUMMARY

Farm Bureau supports reforms to the Social Security system. The integrity of the

system must be maintained for retirees and near retirees while giving workers the

opportunity to invest their Social Security taxes in private retirement accounts. We

oppose tax increases and government investment of Social Security Trust Funds in

equities markets.

Statement of Business Council for Sustainable Energy 1

INTRODUCTION

The Council is pleased to offer testimony to the House Ways and Means Committee on our proposed incentives to encourage the expanded use of clean energy technologies throughout the nation.

The Council was formed in 1992 and is comprised of businesses and industry

trade associations which share a commitment to pursue an energy path designed

to realize our nation’s economic, environmental and national security goals through

the rapid deployment of efficient, low- and non-polluting natural gas, energy effiVerDate 11-SEP-98 10:09 Dec 03, 1999 Jkt 056396 PO 00000 Frm 00073 Fmt 6633 Sfmt 6602 F:56396 W&M3 PsN: W&M3
71

ciency, and renewable energy technologies. Our members range from Fortune 500

enterprises such as Enron, Maytag, and Sempra Energy, to medium-sized organizations such as Trigen and KeySpan Energy, to expanding entrepreneurial businesses

such as Bergey Windpower, to national trade associations such as the Integrated

Waste Services Association, the Hearth Products Association, and the American Gas

Association. The following coalition consensus highlights the need for a tax proposal

from the Committee which includes a broad array of clean energy technologies,

which will enhance the nation’s economic, environmental, and national security

goals in the twenty-first century.

ENERGY EFFICIENT HOMES

Provide a Flat $2,000 Credit

The BCSE supports the adoption of a flat $2,000 credit which will ensure that

all homes will be constructed or renovated to be energy efficient, not merely the

most expensive models. With the implementation of this credit, builders will have

an incentive to construct modestly-priced, energy efficient homes and low and

middle-income homeowners will be encouraged to renovate their homes with new

energy efficient technologies.

Offer New Home Credit to the Home Builder

Rather than provide an incentive directly to the new home buyer, the Council supports a flat $2,000 tax credit for the new home builder, who can pass it along to

the buyer at closing. A tax credit to the builder will encourage the construction of

a large number of new energy efficient homes, which will expand the percentage of

energy efficient homes in the marketplace, thereby stimulating additional builder

and consumer interest in these dwellings. A credit for the home builder will also

reduce the financial burden of using existing technology to increase energy efficiency.

Offer Existing Home Credit to the Home Owner

The Council supports a tax credit for the owner of existing homes that have been

upgraded by the home owner to be 30 percent or more efficient than the IECC. To

achieve a 30 percent increase in energy efficiency will require a major effort by the

homeowner, and the $2,000 credit will only cover a small percentage of the marginal

cost of upgrading home energy efficiency, relative to the new home credit.

Employ 1998 International Energy Conservation Code

Instead of relying on the 1993 Model Energy Code as a measure of energy efficiency, the Council supports the 1998 IECC, given this measure’s accuracy in accounting for the impact of seasonal and climatic variations on energy efficiency. This

reduces the likelihood that one region of the country will have an advantage in the

measurement of energy efficiency. The BCSE also supports other conservation tools

which use total energy efficiency analysis.

Utilize Systems of Energy Efficient Technologies

Rather than provide incentives for specific technologies within new and existing

energy efficient homes, the BCSE recognizes that a wide array of energy efficient

natural gas, windows, insulation, lighting, geothermal, and photovoltaic technologies

can be used in concert to enable new and existing homes to be 30 percent more efficient than the IECC. Examples of energy efficient technologies which could be used

to achieve the 30 percent standard could include advanced natural gas water heaters, heat pumps, furnaces and cooling equipment, fiber glass, rock wool, slag wool

and polyisocyanurate insulation, energy efficient exterior windows, geothermal heat

pumps, and fluorescent and outdoor solar lighting.

ENERGY EFFICIENT BUILDING EQUIPMENT

The BCSE is pleased with the Administration’s proposal which provides a 20 percent tax credit for fuel cells, natural gas heat pumps, high efficiency central air conditioners, and advanced natural gas water heaters (subject to a cap). However, the

Council recognizes the need for incentives for energy efficient building technologies

to be broadened for the benefit of consumers and the environment. The BCSE recommends consideration of a 20 percent tax credit for advanced natural gas water

heaters with an energy factor (EF) of .65, a 20 percent tax credit for natural gas

cooling equipment with a coefficient of performance of .6, and a 20 percent tax credit

for advanced natural gas furnaces with an annual fuel utilization efficiency of 95

percent. Given the significant reduction in greenhouse gas emissions which can be

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achieved through the expanded use of small-scale distributed generation technologies, the BCSE supports a 20 percent tax credit for all fuel cells, regardless of

their minimum generating capacity. Other technologies which could be included in

a broadened tax incentive package include variable frequency drives and motors,

building automation systems, and compressed air systems.

ALTERNATIVE FUEL VEHICLES

While the BCSE recognizes the Administration’s efforts to provide tax incentives

to encourage consumer demand for vehicles with two and three times the base fuel

economy of vehicles on the road today, we are concerned that it has not provided

an incentive for natural gas vehicle (NGV) technology. While NGVs are more expensive than gasoline and diesel vehicles, these technologies reduce CO emissions by

30 percent below that of gasoline vehicles currently on the road. The BCSE supports

a 50 cent per gallon income tax credit for each ‘‘gasoline gallon equivalent’’ of natural gas, compressed natural gas, liquified natural gas, liquified petroleum gas, and

any liquid with at least 85 percent methanol content used in a newly purchased

alternative-fueled vehicle which meets applicable federal or state emissions standards. These tax incentives will increase demand for clean fuel vehicles, especially

in fleet markets, accelerate production of NGVs, and lower the initial purchase cost

of the technology.

WIND ENERGY

The BCSE supports the Administration’s proposal to provide a straight 5-year extension (through July 1, 2004) of the existing wind energy production tax credit

(PTC) provision providing a 1.5 cent per kilowatt hour tax credit (adjusted for inflation) for electricity generated by wind energy. An extension of the current credit

prior to its expiration on June 30, 1999 will stimulate investments and current

project planning that are now threatened due to the uncertainty surrounding the

PTC’s extension. In addition to the Administration’s proposal, legislation was introduced during the 105th Congress (H.R. 1401/S. 1459) to provide a 5 year extension

for the wind energy PTC. The Council also supports a 30 percent tax credit for small

wind turbines with generating capacities of 50 kilowatts or less. (H.R. 2902) which

was introduced during the 105th Congress. The goal of the new program is to stimulate the U.S. domestic market, increase production volumes and reduce production

costs. Growing export markets for small wind turbines provide effective leverage of

the federal investment in job creation.

BIOMASS

The BCSE supports the expansion of the biomass energy PTC from its current

‘‘closed loop’’ definition to include a 1.5 cent per kilowatt hour tax credit for electricity produced from landfill gas, wood waste agricultural residue, and municipal

solid waste. In addition to offsetting greenhouse gas emissions, the use of biomass

energy can address problems of landfill overcapacity, forest fires, and watershed

contamination.

COMBINED HEAT AND POWER SYSTEMS

The following points should be added to the Administration’s proposed investment

tax credit for combined heat and power systems.

‘‘The proposed definition of a qualified CHP system in the Administration’s proposal is equipment used in the simultaneous or sequential production of electricity,

thermal energy (including heating and cooling and/or mechanical power) and mechanical power.’’

Language in the current proposal could be construed to limit the credit solely to

those taxpayers that produce mechanical power in conjunction with electric or thermal energy production. In addition, specificity is needed as to what ‘‘equipment’’ is

included in the CHP definition. A better definition of a qualified CHP system is:

equipment and related facilities used in the sequential production of electricity and/

or mechanical power and thermal energy (including heating and cooling). Eligible

equipment shall include all necessary and integral to the CHP process including

prime movers (turbines, engines, boilers), heat recovery boilers, air and water filtration, pollution and noise control, and paralleling switchgear but may exclude buildings, fuel handling and storage and electrical transmission.’’

Items such as thermal insulation, controls, and steam traps should be included

within tax incentives for CHP systems. Tax credits instituted from a systems standpoint will enhance the overall efficiency of CHP technologies.

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BCSE supports the addition of language concerning thermal distributing networks

to the CHP investment tax credit:

Distribution piping used to transport thermal energy including steam, hot water

and/or chilled water as well as condensate return systems shall be included as part

of a qualifying CHP system. Thermal distribution systems added to existing electricity-only energy facilities which then meet the definition of CHP facilities shall

be eligible for the tax credit.

Furthermore, the BCSE supports the addition of the following language concerning backpressure steam turbines to the CHP investment tax credit:

‘‘Backpressure steam turbines can be highly efficient generators of electricity and

thermal energy. When used in distributed thermal energy systems to replace pressure reducing valves these turbines convert higher pressure thermal energy into

lower pressure thermal energy along with electricity. Backpressure steam turbines

with a capacity of between 50 kw and 3000 kw that reduce steam pressure and generate electricity qualify for the CHP Investment Tax Credit.

WHITE GOOD APPLIANCES

The BCSE supports a 25 percent tax credit for the purchase of Energy-Star-cer- tified white good appliances. Such a credit would give consumers an incentive to

purchase the highest efficiency appliances, expanding the market for the technologies, and encouraging the manufacturer participation in this voluntary program.

At a minimum, the Council would urge the Administration to adopt credits for the

most energy efficient clothes washers and refrigerators which are in the market

today.

RESIDENTIAL BIOMASS

Fuel pellets are a residential biomass technology used to heat residences throughout the U.S. The BCSE supports a 15 percent tax credit for fuel pellets used for

residential home heaters and a 20 percent tax credit for fuel pellets used in residential and commercial water heaters, a market which is not as mature as the market

for residential home heaters.

RESEARCH AND EDUCATION

The BCSE supports a permanent extension of the research and education (R&E)

tax credit. In response to a request by Council member Gas Research Institute, the

Policy Economics Group of KPMG Peat Marwick examined the most recent economic

evidence and official IRS statistical information to determine whether a permanent

extension of the R&E tax credit was warranted. Conclusions were that the credit’s

effectiveness warranted a permanent extension, which may improve its effectiveness. The current short-term approach to subsidizing long-lasting research and development investments imposes unnecessary additional risks on R&D-performing

companies, and does not best serve the country’s long-term economic interests.

RESIDENTIAL SOLAR TECHNOLOGIES

The BCSE supports a tax credit equal to 15 percent of a qualified investment for

neighborhood solar systems which enable energy consumers within multifamily

dwellings, rented housing, and homes with roofs not suitable for direct photovoltaic

(PV) installation to heat and cool their homes. The inclusion of tax incentives for

neighborhood solar systems will reduce the cost of these investments while reducing

overall greenhouse gas emissions. The Council also recommends a flat $400 credit

for residential solar water heating or space heating systems certified by the Solar

Rating and Certification Corporation or comparable agency. The credit could be

added to the Administration’s hot water efficiency credit. The BCSE also supports

a $100 tax credit for pool heaters for family households with income under $85,000

or single households with income under $65,000.

CLEAN AND FUEL EFFICIENT OUTDOOR POWER AND LIGHTING EQUIPMENT

BCSE supports a tax credit for the purchase of clean and fuel efficient outdoor

power and lighting equipment used in residential, commercial, and industrial applications. The credit would equal 10 percent of the purchase price of outdoor power

and lighting equipment. Outdoor power equipment that meets Environmental Protection Agency Tier II emissions standards prior to their implementation or effective

dates would be eligible for this tax credit. The creation of an analogous tax credit

for manufacturers of these technologies could also result in substantial fuel savings

and other environmental benefits.

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Statement of Joint Industry Group

On behalf of the Joint Industry Group (JIG) and its membership, these comments

are submitted to the House Committee on Ways & Means regarding the Clinton Administration’s proposed US Treasury Department budget for fiscal year 2000.

JIG is a member-driven coalition of over one hundred-forty Fortune 500 companies, brokers, importers, exporters, trade associations, and law firms actively involved in international trade. We both examine and reflect the concerns of the business community relative to current and proposed international trade-related policies, actions, legislation, and regulations and undertake to improve them through

dialogue with the Executive Branch and Congress. JIG membership represents more

that $350 billion in trade.

The Joint Industry Group is appalled that the Clinton Administration has contin- ued to be negligent in its federal budget decisions by allocating $0.00 for essential

enhancements to Customs automated processing systems. Instead, the President

proposes an additional ‘‘user fee’’ that industry will pay for the ‘‘privilege’’ of using

Customs automated systems to process its commercial entries. To assuage opponents of this new tax on imports, the Administration proposes using $163 million

of the monies collected from the tax to be used to offset the costs of modernizing

Customs automated commercial operations and to develop Treasury’s International

Trade Data System (ITDS). Such a tax could collect hundreds of millions more than

the $163 million proposed allocation for automation programs.

JIG and its members, who represent a wide cross-section of American industries,

staunchly oppose any proposed new ‘‘user fee’’ or tax to continue funding Customs

automation programs.

Since 1994, the Customs Service has collected $800 million annually through the

Merchandise Processing Fee (MPF). The MPF is assessed on the value of the imported good at a rate of 0.21 percent ad valorem. The money collected through the

MPF is supposed to fund Customs automation programs, but is deposited into the

general treasury fund. Although the government claims the MPF is a ‘‘user fee’’ to

finance Customs operations, it is simply another tax on imports. The money collected through the MPF could have been used to finance Customs automation and

would have avoided the present automation crisis that currently exists. Customs estimates that $1.2 billion is needed to fund the development of the

Automated Commercial Environment (ACE) over a period of four years. ACE is the

system that will replace the overburdened and aging Automated Commercial System (ACS), the automated system responsible for processing $900 billion in imports

every year and collecting over $23 billion in taxes. Failure to replace ACS with ACE

prior to its eventual collapse will shut down the import process and thereby harm

all US importers and manufacturers, particularly those who rely on just-in-time delivery systems. Importers will be forced to file import entry information through a

time consuming paper process rather than through quick and efficient electronic

means. The loss of revenue to the government will be staggering.

Instead of creating a new tax, JIG supports the allocation of funds collected

through the current MPF to fund ACE development. Other Customs operations

should be fully funded in the FY2000 budget. We note media reports of the Treasury

Department’s intention to spend $1 billion over the next five years in replacing its

internal communication systems. We believe that ACE funding is more important

to US industry and the American people than the Treasury Department’s internal

communications system.

In previous policy statements, JIG has expressed its support for Treasury’s ITDS

program. JIG continues to support the concept for ITDS as the ‘‘front-end’’ interface

that the government will use to gather and distribute a minimal amount of international trade data from industry. JIG is concerned, though, that too much emphasis is focused on ITDS development at the expense of ACE. As the ‘‘functional’’ part

of the government’s automated processing system, it is more important to develop

ACE now rather than designing a data interface system. If no ‘‘functional’’ module

operates, the development of the ‘‘front-end’’ interface is irrelevant.

More importantly, however, ITDS lacks trade community support because it is a

program developed by the government and would only satisfy internal government

needs for information. It will continue to delay the development of ACE, add to its

costs, and provide few tangible benefits to its users—the trade community. Thus,

ITDS is an unnecessary distraction from the more important issue of ACE development.

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1 National Realty Committee serves as Real Estate’s Roundtable in Washington on national

policy issues affecting real estate. As Real Estate’s Roundtable in Washington, NRC works with

federal lawmakers and regulatory officials to develop and implement appropriate and needed national policies affecting the commercial real estate industry. NRC members are top business

leaders from more than 200 U.S. public and privately owned companies across all segments of

the commercial real estate industry. They include owners, builders, lenders, managers, advisors

and investors.

We are also concerned that the dividing of responsibilities for development of the

import and export automated systems between the government agency responsible

for the physical control and clearance of the goods and government agencies that

have some regulatory responsibility for those goods is a mistake and will result in

added costs to all parties.

Despite on-going criticisms of the Customs Service’s plans for ACE development,

particularly from the Government Accounting Office, we commend Customs for

working with industry to develop automated processing systems that provide benefit

for both government and trade. We believe that given the needed funding Customs

will design and implement, with the assistance of outside contractors and consultants and its private sector customers, an automated system that will continue to

promote the continued efficient processing of imports and will be able to adapt to

future changes in government and private sector needs. This can only occur, however, if the Administration and Congress come to the realization that funds are currently available to develop ACE in a timely and efficient manner. Continued delays

in appropriating this money only brings closer the day when Customs’ archaic systems fail and the slowdown in US imports incurs a damaging effect to the strength

of the US economy.

The Joint Industry Group and its members thank the House Committee on Ways

& Means for its attention in considering our comments.

Statement of National Realty Committee

National Realty Committee 1 appreciates the opportunity to submit comments for

the record of the February 4, 1999 hearing of the House Committee on Ways and

Means regarding the revenue provisions of the Administration’s fiscal year 2000

budget proposal.

BACKGROUND

The Administration’s budget contains proposals that could significantly affect the

real estate industry and we look forward to working with the Committee as it deliberates on these proposals. Although we welcome those proposals in the Administration’s budget intended to be favorable to real estate, they do not represent a comprehensive and related approach to real estate tax policy. A comprehensive approach is preferable and in this testimony we will comment briefly on some of the

real estate tax policies we believe the Committee should consider. If these tax policies were enacted, current tax impediments that otherwise discourage sound economic real estate decisions would be removed from the Internal Revenue Code and

bring about fairer tax treatment and a more productive flow of real estate capital

and credit.

Overall State of the Commercial Real Estate Industry

Real estate represents about 12 percent of America’s gross domestic product and

accounts for nearly 9 million jobs. About $293 billion in tax revenues is generated

annually by real estate and almost 70 percent of all tax revenues raised by local

governments come from real property taxes. Unquestionably, real estate is a direct,

vital and major contributor to the nation’s economy.

Today’s real estate markets, as a whole, are in overall good health. Interest rates

and inflation are low, availability of capital and credit is good; and demand for work

and shopping space, in most regions, is relatively strong.

However, the financial crisis that erupted this summer in Japan and Russia demonstrated how quickly things can change in the credit markets. The international

credit crisis led to a near shut-down of the commercial mortgage-backed security

(CMBS) market as anxious investors stood on the sidelines forcing yield spreads to

widen to the point that no debt placements were being made. This occurred despite

the underlying fundamentals of real estate investment remaining strong. Clearly,

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this was a financial crisis, not a real estate crisis, but real estate was nonetheless

seriously affected.

Real estate is similarly sensitive to changes in tax treatment. The turmoil in the

industry created by the whipsaw effect of the tax changes of the Economic Recovery

Tax Act of 1981 and the Tax Reform Act of 1986 is evidence of this. Real estate

tax policy changes should be implemented through a carefully thought through and

deliberative course of action that brings about a rational relationship between the

economics of a transaction and its taxation or the intended social or economic outcome.

National Realty Committee Tax Agenda

NRC recommends the Committee adopt, (in addition to those provisions in the

President’s budget we support) the following tax proposals:

10 year depreciation recovery period for leasehold improvements. Today’s depreciation rules do not differentiate between the economic useful life of building improvements, (i.e. internal walls, ceilings, partitions, plumbing, lighting, floor coverings,

electrical and communication outlets and computer data ports), and the life of the

overall building structure. The result is that current tax law dictates a depreciable

life for leasehold improvement of 39 years—the depreciable life of the entire building—even though most commercial lease terms average between 7–10 years.

As a result, the after-tax cost of reconfiguring or building out space to accommodate new tenants, modernize the space or upgrade technology is artificially high and

out of step with the economics of the transaction. The tax implication of this could

negatively impact decisions relating to leasehold improvements—particularly when

extensive improvements are involved. Providing a depreciation life for leasehold improvements that more closely matches the lease terms, (typically about ten years)

would more closely align the tax treatment for these assets and better reflect economic reality.

Current law provides a tax obstacle to reinvesting in existing properties. Without

proper reinvestment, tenants will leave older buildings for more modern buildings

that offer desired amenities and efficiencies. This will enhance new development demand and contribute to a deterioration of existing property. Last year, Representative E. Clay Shaw (FL) introduced H.R. 3500 that provides a 10-year depreciation

period for leasehold improvements. The bill had bipartisan co-sponsorship and Mr.

Shaw intends to reintroduce it this year.

Amortization of Demolition Costs. Current law (Code Section 280B) requires that

demolition expense and the unrecovered basis of the demolished structure must be

capitalized and added to the basis of the land rather than deducted. This tends to

discourage the acquisition of land, including a structure which must be demolished

in order to construct a more suitable property, because the costs of demolition are

not recovered until the underlying land is disposed. A more appropriate tax result

would permit these expenses to be added to the tax basis of the replacement structure and depreciated.

Expensing or Rapid Amortization of Environmental Cleanup Costs. Like demolition costs, costs to cleanup land purchased in a contaminated state must be capitalized and added to the basis of the non-depreciable land. These contaminated sites

are known as ‘‘brownfields’’ and are less toxic than Superfund sites but still must

be remediated prior to redevelopment. The U.S. Conference of Mayors estimates

that there are approximately 400,000 brownfield properties across the country. The

1997 Taxpayer Relief Act provided immediate expensing of brownfield cleanup costs

in empowerment zones and other high poverty targeted areas. This tax treatment

should be extended to non-targeted areas as well. If not immediate deductibility,

then a rapid amortization period such as 60 months would be appropriate. As with

demolition costs, requiring that these costs be capitalized to the basis of the land

is a disincentive to acquisition and redevelopment.

Update the Placed in Service Date for Properties Eligible for the Rehabilitation

Tax Credit. The 1986 Tax Reform Act provided that the only properties eligible for

the rehabilitation tax credit are those placed in service before 1936. Prior to 1986,

a 10% tax credit was allowed for rehabilitation of properties placed in service at

least 20 years prior to the rehabilitation activity. Qualifying a building for the rehabilitation credit based on its age, rather than a fixed placed in service date, is a

preferable approach because it continually adds buildings to the credit eligibility

pool as they reached the required age. The pre-1936 placed in service requirement

excludes all buildings placed in service from 1936 on—regardless of age. Allowing

buildings of a minimum age to be eligible for the credit would update the pool of

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eligible buildings and help achieve the social, economic and aesthetic goals brought

about by rehabilitating and preserving older structures.

At-Risk Rules: Repeal the ‘‘at-risk’’ rules for real estate. Given the significant

changes to real estate taxation designed to eliminate tax shelters (such as the passive activity loss limitation rules and 39 year straight line depreciation), the application of the at-risk rules are redundant and unnecessary. Meaningful tax simplification would be achieved by repealing these rules.

We believe the above-proposed policies, except the repeal of the at-risk rules

which is a simplification issue, comprise a related package of tax changes aimed at

promoting smart growth through redevelopment. In communities across the nation,

rapid land development—often called ‘‘sprawl’’—is having unwanted side effects

such as traffic congestion, higher taxes, loss of open spaces and parks and overcrowded schools. Although the problems and solutions are primarily at the state and

local level, the Federal government can help provide solutions, particularly through

tax policy.

Current federal tax law discourages redevelopment of existing property through

its uneconomic tax treatment of leasehold improvement depreciation, demolition

costs and brownfield cleanup expenses. Enacting the changes proposed above would

mitigate these tax impediments and level the tax implications associated with new

versus re development decisions, thus making redevelopment more viable. Breathing

viability into the rehabilitation tax credit by allowing more buildings to be eligible

also serves to make redevelopment more viable and in turn ease pressure to develop

new space. We look forward to working with the Committee to shape and implement

these real estate tax policies.

REVENUE INCREASES IN PRESIDENT’S BUDGET PROPOSAL

Real Estate Investment Trust (REIT) Proposals

Similar to last year, the President’s budget contains proposal affecting the formation, operation and management of REITs. The securitization of real estate through

REITs that has occurred in the 1990s has been an important factor in the recovery

of the real estate industry which itself is making a significant contribution to the

strength of the overall economy.

One of the primary catalysts in real estate’s recovery in the 1990s has been the

emergence of the REIT as a broad-based public ownership entity. The REIT, along

with the development and growth of the commercial mortgage-backed securities

market, has provided real estate with access to much-needed funding via the public

debt and equity markets. Such access to capital enabled billions of dollars of real

estate to be recapitalized—thus stabilizing asset values nationwide and easing the

tremendous negative pressure being placed on lenders’ portfolios. These positive actions contributed significantly toward setting the nation on a course of job-creating

economic growth.

Over the years, REIT tax laws have been modified and refined by Congress and

the Treasury Department to ensure that REITs are able effectively to fulfill their

mission in a changing economic and business environment. Federal tax policy

should continue to provide this type of flexibility and reflect an understanding of

the benefits REITs provide to the vitality of today’s real estate markets and the

overall economy.

Congress, and notably this Committee, has avoided any dramatic policy shifts affecting REITs, particularly during their recent proliferation and expansion. Your approach toward REIT policy has been measured and thoughtful, as evidenced by: (i)

the liberalization of the independent contractor requirement by the Tax Reform Act

of 1986, which enabled REITs to avoid the unnecessary expense of hiring independent contractors for routine management functions; (ii) the amendment of the closely

held rules, in the Revenue Reconciliation Act of 1993, to allow a ‘‘look through’’ for

pension funds investing in REITs; and (iii) the enactment of the REIT simplification

provisions as part of the Taxpayer Relief Act of 1997. Collectively, these changes

modernized the REIT tax regime, resulting in enhanced ability to raise capital, more

efficient organization and improved flexibility to provide services to tenants, thereby

maintaining the overall competitiveness of REITs.

This carefully thought-through and deliberative course of action should be continued. Our recommendations concerning the Administration’s specific proposals follow.

President’s Budget REIT Related Proposals

Taxable REIT Subsidiary/Preferred Stock Subsidiary Proposal. The Administration is proposing to modify the current REIT rules by: (1) authorizing a REIT to

form taxable subsidiaries that can provide non-customary services to REIT tenants

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and services to third parties and; (2) requiring REITs with preferred stock subsidiaries to convert those entities to taxable REIT subsidiaries. It also proposes that the

ownership restriction for preferred stock subsidiaries be amended so that REITs

could not hold stock in a subsidiary representing more than 10 percent of the voting

rights or value of the corporation. The proposal would be effective on date of enactment. There would be a currently unspecified transition period for preferred stock

subsidiaries to convert.

Recommendation:

We support the concept of allowing REITs to form taxable REIT subsidiaries for

purposes of providing services to tenants and third parties. REITs are evolving into

a customer-oriented service business and require the flexibility to be able to respond

to changing economic and market conditions the same as any other real estate entity. Many of the services that would be provided by the taxable subsidiary are natural outgrowths of traditional REIT operations, such as third party management

and development businesses. A properly formed taxable REIT subsidiary would

allow REITs additional operating flexibility and ensure that income generated by

the subsidiary is appropriately subject to corporate level taxation. It would also ensure that REITs remain focused on owning and operating income producing real estate.

The Administration’s proposal provides that the value of all the REIT’s subsidiaries cannot represent more than 15 percent of the REIT’s total asset value with

the ‘‘qualified independent contractor’’ subsidiary not being able to have value in excess of 5 percent of the total value of all REIT assets. Currently, preferred stock

subsidiaries cannot exceed 25 percent of REIT total asset value. The Administration’s proposal does not explain why it reduces the 25 percent value threshold to

a 15 percent value and imposes the additional 5 percent limitation. We believe this

issue needs further examination and, lacking compelling rationale for the 15 percent

value limitation, should be restored to 25 percent.

Also, the subsidiary would not be allowed to deduct any interest incurred on debt

provided by the REIT, whereas current preferred stock subsidiaries can. This approach is overly restrictive. REITs should be allowed to lend to their subsidiary so

long as adequate earnings stripping provisions are enacted to prevent the subsidiary

from shifting its taxable income to the REIT by incurring excessive deductible payments to the REIT.

If enacted into law, the proposal would require existing preferred stock subsidiaries to convert to a taxable subsidiary within a yet to be specified conversion period. This could be problematic depending on the asset value of the preferred stock

subsidiary (i.e. whether it fits within the 15/5 percent limitations) and whether

there are any financing arrangements between it and the REIT. The better approach would be to allow existing preferred stock subsidiaries the election of converting to a taxable subsidiary or remaining in its current form. The 10 percent vote

or value stock ownership limitation, if warranted, should only apply prospectively.

We would emphasize that there are a number of provisions already existing in

the Internal Revenue Code that effectively prevent REITs from using these preferred stock subsidiaries in ways that avoid taxation on the subsidiary’s earnings.

Some of these provisions include: the rules under Section 482 affecting the allocation of income and deductions among taxpayers; Section 269 disallowing deductions

or credits relating to acquisitions made to evade or avoid taxation; and the requirements under Section 162 for deduction of rental payments and business expenses.

Further, although now discontinued, the IRS, beginning in 1988, issued favorable

rulings on these subsidiaries. Congress also has been aware of these subsidiaries

and found no reason to act upon them even though it recently enacted a number

of REIT reforms.

National Realty Committee looks forward to working with the Committee and the

Administration on the taxable REIT subsidiary and preferred stock subsidiary

issues.

Modify the treatment of closely held REITs. Under this—proposal—which would

constitute an additional requirement for REIT qualification—any ‘‘person’’ (that is,

corporation, partnership or trust) would be prevented from owning stock in a REIT

if the person controls 50 percent or more of the total combined voting power of all

classes of voting stock or 50 percent or more of the total value of shares of all classes of stock.

Recommendation:

It is fundamental to the concept of REITs that they be widely held entities, easily

and economically accessible by small investors. National Realty Committee is in full

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agreement with this. The Administration’s enunciated reason for proposing the additional qualification requirement is a concern about possible tax avoidance transactions involving the use of closely held REITs. However, the Administration’s explanation of the proposal provides little description of the transactions at issue. Before National Realty Committee can constructively comment on this provision, and

certainly before Congress should consider the proposal, further clarification should

be provided as to the perceived abuses targeted by the proposal. We agree with the

Administration’ intent to close potential tax abuses but its proposal appears to be

overly broad.

We are pleased that this year’s version of this proposal, unlike last year’s, would

not apply to ownership by a REIT of 50 percent or more of the stock (vote or value)

of another REIT. Further, we believe pass-through entities such as partnerships,

and mutual funds should not be counted as one entity for purposes for the ‘‘5 or

50’’ rule. The partners or shareholders should be considered the ‘‘persons’’ owning

the REIT for purposes of limits on investor ownership.

Finally, so called ‘‘incubator REITs’’ sometimes have a majority shareholder corporation for a transition period in order to prepare the REIT for going public by allowing it to develop a track record. Corporate majority shareholders of private

REITs are also used for legitimate state and local income and real property tax

planning purposes and as a vehicle for legitimate foreign investment in real estate.

We do not believe these structures lend themselves to tax abuse, and any proposal

on this issue should clarify the same.

National Realty Committee believes that before this Committee takes any action,

the tax avoidance transactions involving the use of closely held REITs generally referred to in the Administration’s proposal need to be more clearly and specifically

set forth. This will help qualify the issue and quantify the extent, if any, remedial

action is needed. Also, it would help insure that legitimate transactions important

to real estate capital formation not be unduly affected.

Repeal tax-free conversions of C corporations to S corporations (or REITs). Under

current law, (Section 1374 of the Code), a C corporation that converts or merges into

an S corporation does not pay tax on ‘‘built-in’’ gains, (the excess of asset value at

such time over tax basis), unless the asset is sold within 10 years of the conversion

or merger. The Administration proposes repealing Section 1374 for large corporations (valued at over $5 million), so that a converting or merging corporation would,

immediately thereupon, pay tax as if it had sold its assets and distributed the proceeds to its shareholders, producing an immediate second level of tax. The Administration’s proposal also would apply to C corporations that convert into or merge with

REITs.

Recommendation:

National Realty Committee, together with a broad coalition of industry and small

business organizations, opposed this proposal when it was put forth by the Administration in each of the last two budget proposals. Our position is unchanged—the

proposal should be rejected. The current rules taxing the ‘‘built-in’’ gain of assets

sold within a 10-year period of electing S corporation or REIT status is a fair standard that effectively prevents tax avoidance. Imposing two levels of tax on built-in

gains likely would affect the economics of most transactions so significantly that

they simply would not go forward. Thus, many C corporations would be precluded

from converting or merging into an S corporation or REIT. The effect would be to

negate the revenue-raising impact of the provision and to impede the continuing recapitalization of commercial real estate through the access to public capital markets

that REITs provide.

Finally, if such a proposal were enacted, at a minimum, the effective date should

be amended to allow fiscal year taxpayers the same amount of time to wind up

pending conversions as calendar year taxpayers. As currently proposed, calendar

year taxpayers have until December 31, 1999. A fiscal year taxpayer with a tax year

ending, for example July 31, will have only until the end of its fiscal year in 1999

to complete a conversion. There appears to be no rational reason for this discrimination against fiscal year taxpayers—and the proposal should be, if not rejected out

of hand, amended to allow an equivalent amount of wind up time before the provision becomes effective.

Other Real Estate-Related Revenue Provisions

Eliminate non-business valuation discounts (for family limited partnerships). The

budget proposal asserts that family limited partnerships are being used to take ‘‘illusory’’ valuation discounts on marketable assets. The proposal contends that taxpayers are making contributions of these assets to limited partnerships, gifting miVerDate 11-SEP-98 10:09 Dec 03, 1999 Jkt 056396 PO 00000 Frm 00082 Fmt 6633 Sfmt 6621 F:56396 W&M3 PsN: W&M3
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nority interests in the partnerships to family members, and then claiming valuation

discounts based on the interest being a minority interest of a non-publicly traded

business. The proposal would eliminate such valuation discounts except as they

apply to ‘‘active’’ businesses.

Recommendation:

National Realty Committee opposes this proposal in concept because it increases

the estate tax burden and specifically because it defines non-business assets as including ‘‘real property.’’ The reference to real property, which lacks any elaboration,

could be interpreted broadly to include much of the nation’s directly or indirectly

family-owned real estate. In all events, further clarification by the Administration

is needed to determine the definition of ‘‘real property’’ and whether it is considered

part of an active business.

Nevertheless, National Realty Committee does not believe that real property or

interests in real property should be included in a proposal targeted at truly passive

investments, such as publicly traded stocks and bonds. We applaud the Committee

for its continuing effort to reduce the estate and gift tax burden. This proposal

would take a number of steps backward and increase the estate tax burden. As a

result, successors in family-owned real estate businesses could be faced with the

troubling scenario of having to sell real property in the estate (often at distressed

value prices) in order to pay death taxes.

Disallow interest on debt allocable to tax-exempt investments. The President’s proposal would expand the definition of ‘‘financial institution’’ in Section 265(b) of the

Code to include ‘‘any person engaged in the active conduct of banking, financing, or

similar business, such as securities dealers and other financial intermediaries.’’ As

a result, a ‘‘financial institution’’ that invests in tax-exempt obligations would not

be allowed to deduct a portion of its interest expense in proportion to its tax-exempt

investments. Under current law, (Revenue Procedure 72–18) taxpayers, other than

financial institutions, are not subject to such limitations provided the average

amount of the tax exempt obligations does not exceed 2 percent of the average total

assets of the taxpayer.

Recommendation:

National Realty Committee opposed a similar proposal last year and opposes this

proposal because it would reduce corporate demand for tax-exempt securities, such

as industrial development and housing bonds. Reducing corporate demand for these

important investment vehicles would increase the borrowing costs of municipalities

throughout the country—thus, hindering urban reinvestment activity—and it would

discourage corporate investment in state and local housing bonds issued to finance

housing for low and middle income families.

Limit Inappropriate Tax Benefits For Lessors of Tax Exempt Use Property. Under

current law, certain property leased to governments, tax-exempt organizations, or

foreign persons is considered to be ‘‘tax-exempt use property.’’ There are a number

of restrictions on the ability of lessors of tax-exempt use property to claim tax benefits from transactions related to the property. For example, such property must be

depreciated using the straight-line method over a period equal to the greater of the

property’s class life (40 years for non-residential real property) or 125 percent of the

lease term. The Administration contends that certain leasing transactions involving

tax-exempt use property are being used to generate inappropriate tax benefits by

creating mismatches of the timing of reported income and expenses. Therefore, the

budget proposes to apply principles similar to the passive loss rules to leasing of

tax-exempt use property. As a result, a lessor of tax-exempt use property would not

be able to recognize a net loss from a leasing transaction involving tax-exempt use

property during the lease term.

Recommendation:

We believe that applying principles similar to the passive loss limitation rules to

transactions involving the sale and leaseback of real property of tax-exempt organizations is overly broad and heavy-handed. The depreciation treatment of such transactions substantially removes the tax shelter motivation and effectiveness of most

transactions. Any losses that result from principally from such unfavorable depreciation treatment could hardly be considered uneconomic losses in need of limitation.

Modify Basis Adjustment Rules for Partnership Distributions. The Administration

has put forth the following five coordinated proposals relating to gain recognition

and basis adjustments upon the distribution of cash or property by a partnership:

(1) A mandatory basis adjustment of undistributed partnership property upon a disVerDate 11-SEP-98 10:09 Dec 03, 1999 Jkt 056396 PO 00000 Frm 00083 Fmt 6633 Sfmt 6621 F:56396 W&M3 PsN: W&M3
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tribution of other property. (2) Modification of basis allocation rules for liquidating

distributions to prevent shifting of basis from non-depreciable assets to depreciable

assets. (3) Modification of rules for partial liquidations of a partnership interests to

prevent a partner from obtaining an inflated basis in partnership property that

would inappropriately defer gain. (4) Repeal Section 751(b) relating to distributions

treated as sales or exchanges with respect to unrealized receivables and inventory

items. (5) Require certain basis adjustments when a partnership distributes certain

stock to a corporate partner that controls the corporation in order to prevent inappropriate deferral of gain. All provisions would be effective for partnership distributions made on or after the date of enactment.

Recommendation:

The basis rules for partnership distributions are among the most complex rules

in the Code. The Administration’s proposals would enhance their complexity significantly. While it make the case that the current rules allow for some potential abuse,

the Administration does not provide compelling evidence that the rules are being

abused to an extent that would require the proposed substantial modifications. As

with other proposals addressed in this testimony, we believe the Administration’s

proposals may be overly broad and perhaps unnecessary. If the Committee decides

it wants to take action in this area, we strongly recommend that hearings be held

so that leading tax professionals and interested organizations, such as National Realty Committee, can provide input into the process.

TAX INCENTIVES IN THE BUDGET PROPOSAL

Tax credit for energy-efficient building equipment. The Administration’s budget

proposes a 20 percent tax credit for the purchase of certain highly-efficient building

equipment, including fuel cells, electric heat pump water heaters, advanced natural

gas and residential size electric heat pumps, and advanced central air conditioners.

Specific technology criteria would have to be met to be eligible for the credit. The

credit would apply to purchases made after December 31, 1999 and before January

1, 2004.

Recommendation:

National Realty Committee believes the immediate objective of this proposal—encouraging energy efficiency in buildings—is appropriate. In preparing for the 21st

century, the real estate industry, like other major industries, is looking for ways to

improve its overall performance from an economic and environmental perspective.

National Realty Committee has taken notice of statistics from the Department of

Energy identifying office buildings as consuming about 27% of the nation’s electrical

supply. If this is an accurate assessment, we are surprised that, of the six specific

tax credit proposals for energy efficient building equipment, only one (fuel cells) has

any practical application to commercial office buildings. More specifically on the

matter of the fuel cell credit, while the amount of the incentive is not insignificant,

it is not yet sufficient to encourage the use of this technology except in limited circumstances.

Furthermore, because of the December 31, 1999 effective date, the credit provides

no incentive to taxpayers considering making energy efficient building equipment

decisions this year. Optimally, the credit should be available for purchases made in

1999. Postponing the credit until 2000 could affect negatively decisions to purchase

certain energy efficient building equipment this year resulting in a missed opportunity for the new building stock coming on line.

Expensing of brownfield remediation costs. The Administration proposes to make

permanent the deduction for brownfield remediation costs. This deduction was enacted as part of last year’s budget and tax law and is scheduled to expire after December 31, 2000.

Recommendation:

National Realty Committee supports this proposal. However, the deductibility of

clean-up expenses applies only to brownfields in specifically targeted areas, such as

empowerment zones. We understand the social and economic policy goals intended

to be furthered by this targeted clean-up provision. However, there are almost

400,000 brownfields across the nation, most of which are outside of these targeted

areas. Allowing some type of deductibility or amortization of clean-up costs for all

of these brownfields would help restore brownfields across America to viable and

productive use.

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Low-income housing tax credit expansion. The budget proposes a major expansion

of the low-income housing tax credit, which could facilitate the construction of

150,000–180,000 new affordable housing units over five years. Under the Administration’s proposal, the annual state low-income housing credit limitation would be

raised from $1.25 per capita to $1.75 per capita, beginning after 1999.

Recommendation:

National Realty Committee supports this proposal. We also support related legislation, H.R. 175 introduced by Representative Nancy Johnson (CT) and cosponsored

by several other Members of the Committee on a bipartisan basis. We are encouraged by the consensus developing between the Administration and key Members of

Congress on the need for increasing the amount of low income housing tax credits

allocated to the states.

Tax credits for holders of Better America Bonds. The Administration is proposing

a tax credit for holders of certain bonds issued by state and local governments for

the purpose of protecting open spaces; creating forest preserves near urban areas;

rehabilitating brownfields; improving parks and reestablishing wetlands.

Recommendation:

Although we have no specific comment on how the Better America Bonds would

or should function from a tax perspective, we believe the Committee should consider

tax policies that would improve the livability of our communities by encouraging redevelopment, protection of open spaces and clean up of contaminated sites. The

NRC tax agenda described in this testimony is intended to achieve a similar goal

and we welcome the opportunity to work with the Committee on these proposals.

CONCLUSION

Again, we thank Chairman Archer and the Committee for the opportunity to comment regarding the revenue proposals in the President’s fiscal 2000 budget. We are

encouraged by the proposals to increase the low income housing tax credit, make

permanent the deductibility of brownfield clean-up costs and implement credits for

energy-efficient improvements for buildings. We agree with the intent of the Administration’s taxable REIT subsidiary proposal but are concerned about their what is

proposed for preferred stock subsidiaries, closely held REITs and C corporation conversions and mergers.

We look forward to working with the Committee to ensure that the provisions of

the Code dealing with REITs do not lead to abuses, yet allow REITs effectively to

fulfill their mission in a continually changing economic and business environment.

Finally, while we object to the proposal to eliminate realistic valuation discounts

in the non-business, family limited partnership situation, we strongly believe that,

in all events, including real property in such proposal is ill-advised and should be

dropped from any further consideration.

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Statement of North Dakota Public Service Commission, Bismarck, ND,

Bruce Hagen

I support President Clinton’s proposal to set aside 62 percent of the budget surpluses over 15 years for Social Security’s cash reserves. I also believe it makes sense

to consider creating individual retirement accounts as well as putting some of the

surplus into Medicare.

I am very concerned regarding the efforts of some interests for tax cuts. I believe

there is a stronger message to start paying off the national debt.

The national debt is now over $5.6 trillion. The fact is both the Republican and

Democratic Parties share a responsibility for creating this debt. The record shows,

for example, as I understand it, over 60 percent was created under Republican

presidents who proposed unbalanced budgets, which Congress eventually passed. So,

today, we have ‘‘defeated the evil empire’’ Russia, but we have a huge debt that

comes, in part, from some of those high-spending years to defeat the Russian bear,

as well as from other costs.

It seems to me to be responsible, we should make a strong effort with both Republican and Democratic Party’s endorsement and support, to pay down the national

debt. When times are good and our budgets are in the black, we should systematically pay down our national debt. If we do this, it helps everybody by reducing the

interest we pay on loans, because the U.S. Government will not be borrowing money

to pay its bills.

I appreciate the tough job Congress has, but I do hope you will seriously consider

my views.

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