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

                  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

                                

                      U.S. GOVERNMENT PRINTING OFFICE
 56-396 CC                   WASHINGTON : 1999
------------------------------------------------------------------------------
                   For sale by the U.S. Government Printing Office
 Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

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

                     A.L. Singleton, Chief of Staff
                  Janice Mays, Minority Chief Counsel

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

                            C O N T E N T S

                               __________

                                                                   Page

Advisory of 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

 
                  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:]

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 statements 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 Scholarship, 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 
governments 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.'' 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 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 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 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 districts 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 
initiative 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 investment 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 proliferated 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 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 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 Initiative'' 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.
      

                                

    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 1\1/2\ 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 
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 Balanced 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.
    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 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----
    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 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----
    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.
    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.
    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 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 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 privilege 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, 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.
    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 tax-
exempt 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 tax-exempt bonds?
    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----
    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 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 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 then-Reagan 
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.
    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 1\1/2\ 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.
    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 Federal 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 understandable, 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 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.
    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.
    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----
    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 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 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.
    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 
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.
    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, 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.
    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 long-term 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.
    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 
numbers 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 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 2\1/2\ 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 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 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 well-being.
    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 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 allocated 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.
    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.
    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 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 people into an investment. If they see a gain and want to 
take advantage 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 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 inner-agency 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 
inner-agency 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.
    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?
    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.
    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 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? 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 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 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 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.
    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.
    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.
      

                                

                          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 expenditures 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. 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.
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    \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.
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    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 efficiency, 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 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.
    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-certified 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.
      

                                

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 continued 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.
    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.
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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.
---------------------------------------------------------------------------

                               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, 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 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 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 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 minority 
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 
distribution 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.

    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.
      

                                

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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