[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
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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
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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.
---------------------------------------------------------------------------
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.
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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.