[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
IMPACT OF TAX LAW ON LAND USE, CONSERVATION, AND PRESERVATION
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 30, 1999
__________
Serial 106-76
__________
Printed for the use of the Committee on Ways and Means
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
__________
U.S. GOVERNMENT PRINTING OFFICE
66-783 WASHINGTON : 2000
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Oversight
AMO HOUGHTON, New York, Chairman
ROB PORTMAN, Ohio WILLIAM J. COYNE, Pennsylvania
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
WES WATKINS, Oklahoma JIM McDERMOTT, Washington
JERRY WELLER, Illinois JOHN LEWIS, Georgia
KENNY HULSHOF, Missouri RICHARD E. NEAL, Massachusetts
J.D. HAYWORTH, Arizona
SCOTT McINNIS, Colorado
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
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unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
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C O N T E N T S
__________
Page
Advisory of September 23, 1999, announcing the hearing........... 2
WITNESSES
U.S. Department of Energy, Hon. Dan W. Reicher, Assistant
Secretary, Energy Efficiency and Renewable Energy.............. 25
U.S. Environmental Protection Agency, D. Reid Wilson, Chief of
Staff.......................................................... 29
U.S. Department of the Treasury, Leonard Burman, Deputy Assistant
Secretary, Tax Analysis........................................ 34
______
American Farm Bureau Federation, and New York Farm Bureau, Inc.,
John W. Lincoln................................................ 69
Blumenauer, Hon. Earl, a Representative in Congress from the
State of Oregon................................................ 8
Gilchrest, Hon. Wayne T., a Representative in Congress from the
State of Maryland.............................................. 14
Hoeffel, Hon. Joseph M., a Representative in Congress from the
State of Pennsylvania.......................................... 5
Johnson, Hon. Nancy L., a Representative in Congress from the
State of Connecticut........................................... 17
Kanjorski, Hon. Paul E., a Representative in Congress from the
State of Pennsylvania.......................................... 11
King County Council, Seattle, Washington, Hon. Rob McKenna....... 87
Land Trust Alliance, Jean Hocker................................. 54
National Association of Conservation Districts, Thomas C.
Spellmire...................................................... 91
Nature Conservancy, Michael Dennis............................... 58
Northeast-Midwest Institute, Charles Bartsch..................... 63
Piedmont Environmental Council, Christopher Miller............... 74
Pitts, Hon. Joseph R., a Representative in Congress from the
State of Pennsylvania.......................................... 21
Real Estate Roundtable, and CenterPoint Properties, John S.
Gates, Jr...................................................... 95
U.S. Forest Capital, LP, E. Thomas Tuchmann...................... 99
SUBMISSIONS FOR THE RECORD
American Wind Energy Association, Jaime Steve, statement and
attachment..................................................... 110
Bond Market Association, statement............................... 114
Friends of the Earth, Peter Kopsco, statement.................... 115
Pacific Forest Trust, Boonville, CA, statement................... 118
IMPACT OF TAX LAW ON LAND USE, CONSERVATION, AND PRESERVATION
----------
THURSDAY, SEPTEMBER 30, 1999
House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 1:01 p.m., in
room 1100, Longworth House Office Building, Hon. Amo Houghton
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
September 23, 1999
No. OV-11
Houghton Announces Hearing on
Impact of Tax Law on Land Use,
Conservation, and Preservation
Congressman Amo Houghton (R-NY), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on the impact of Federal tax laws on
environmental conservation and preservation. The hearing will take
place on Thursday, September 30, 1999, in the main Committee hearing
room, 1100 Longworth House Office, beginning at 1:00 p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include rpresentatives from the Administration, land
conservation and environmental protection organizations, and other
experts. However, any individual or organization not scheduled for an
oral appearance may submit a written statement for consideration by the
Committee and for inclusion in the printed record of the hearing.
BACKGROUND:
The Internal Revenue Code includes a number of provisions that
provide incentives or tax benefits for land conservation and
environmental preservation. Among them are the deductibility of gifts
of land to charitable institutions [sec. 170]; the deductibility of
gifts of conservation easements on land to charitable institutions and
governments [sec. 170(h)]; expensing of environmental remediation costs
[sec. 198]; the deductibility of gifts of land from a taxable estate
[sec. 2055]; the deductibility of conservation easements from a taxable
estate [sec. 2055(f)]; an exclusion from estate taxes for gifts of
conservation easements on lands within 25 miles of a metropolitan
statistical area (MSA), national park or wilderness or within 10 miles
of an urban national forest [sec. 2031(c)]; a deduction for a post-
mortem election to donate a conservation easement in certain areas
[sec. 2031(c)]; a post-mortem election to terminate previously reserved
development rights in certain areas [sec. 2031(c)(5)]; valuation of
agricultural lands at agricultural value for purposes of estate tax, if
the land is family-owned and used for agricultural purposes for 10
years after death [sec. 2032(a)]; and an exclusion from income of
certain government conservation payments [sec. 126].
In announcing the hearing, Chairman Houghton stated: ``So much of
our country's beautiful green space is under development pressure. I am
pleased that the American Farm Protection Act, a bill then-Rep. L.F.
Payne and I introduced, was enacted in the last Congress. We need to
see whether it is working as well as we had hoped. We also need to find
out how the other current tax incentives are working and what further
steps are needed to encourage people to protect land and other
spaces.''
FOCUS OF THE HEARING:
The Subcommittee will examine the impact of tax incentives in
current law, as well as proposals referred to the Committee on Ways and
Means to encourage environmental protections, conservation, and
preservation. The hearing will follow up on the Subcommittee's July 11,
1996, hearing on the impact of Federal tax law on land use.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
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diskette in WordPerfect 5.1 format, with their name, address, and
hearing date noted on a label, by the close of business, Thursday,
October 14, 1997, to A.L. Singleton, Chief of Staff, Committee on Ways
and Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20515. If those filing written statements
wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Subcommittee on Oversight office, room 1136 Longworth
House Office Building, by close of business the day before the hearing.
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Note: All Committee advisories and news releases are available on
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noted above.
Chairman Houghton. The hearing will come to order. Thank
you, gentlemen, for being with us. We look forward to an
interesting afternoon.
We have reviewed the background material for today's
hearing about the deductibility of qualified conservation
interests, an estate tax exclusion for land subject to
permanent conservation easements, expensing environmental
remediation costs, special use valuation, and tax exempt bonds.
Now, it occurred to me that it would be easy to get bogged down
in the minutiae of tax policy and lose sight of our goal, which
is conservation and preservation. So we should be careful,
obviously, not to do so today.
Mr. Gifford Pinchot, the founder of the U.S. Forest Service
under President Roosevelt, used to say that a nation deprived
of its liberty may win it, a nation divided may unite; but a
nation whose natural resources are destroyed must inevitably
pay the penalty of poverty, degradation, and decay.
``Conservation easements'' may not sound exciting, but
preserving the environment for our children and our
grandchildren, as everyone knows, is one of the most important
challenges we face.
Congress enacted the American Farm Protection Act as part
of the 1997 Taxpayer Relief Act. This bill added an exclusion
from estate taxes for gifts of conservation easements. The
relief is targeted. And remember, this provision was enacted in
a time of budget deficits. There will probably be testimony
today as to whether the limitations are too restrictive.
There is no shortage of good thinking about how our tax
laws can be used to encourage people to conserve open spaces.
Several of our colleagues, as well as the witnesses from whom
we will be hearing today, have ideas that are well worth
exploring.
When I testified before this Subcommittee 3 years ago, I
suggested that whenever possible we should find ways to save
open spaces through voluntary action, without the cost of
public acquisition and maintenance, and without taking land off
the local tax rolls. Not every conservation challenge can be
met in this way, but many can be, and are.
So let us keep the benefit of voluntary action and private
stewardship in mind as we hear from our witnesses today. I am
looking forward to hearing their testimony. I would like to
begin by recognizing my good friend, Mr. Coyne, for his opening
statement.
Mr. Coyne. Thank you, Mr. Chairman. Today the Ways and
Means Oversight Subcommittee will hold a hearing to review the
current law tax provisions and pending legislation targeted
toward improvement of this country's environment.
Conservation and preservation of our open land is of great
importance to every American. Protecting our environment can
take many forms: such as the clean-up of toxic sites, the
expansion of publicly-owned parks and recreation areas, or
local ordinances to preserve green spaces. Federal tax
incentives can also be effective tools for encouraging the
remediation of brownfields, the donation of land with
conservation use easements, the use of energy-efficient
consumer equipment, and the acquisition of open space and
wetlands.
I have joined the Administration and many of my colleagues
here in Congress in sponsoring numerous tax bills in support of
environmental conservation and preservation. Among them is H.R.
1630, the Brownfields Clean-Up Act. This proposal, which is
supported by the Administration, would make permanent the
deduction under Internal Revenue Code section 198 for
brownfields remediation costs.
The current law restriction--which requires that
expenditures be incurred before the end of the next year--would
be eliminated under this legislation. Providing special tax
benefits on a permanent basis would remove doubt among
taxpayers as to the future deductibility of remediation
expenditures, and would promote clean-up of contaminated sites
nationwide.
Today we will hear about a number of bills that would use
the Tax Code to achieve important environmental or conservation
goals. Ways and Means Committee Democrats have been actively
involved in developing a number of those bills, and I believe
that there is bipartisan support for such legislation.
I want to thank Chairman Houghton for holding today's
hearing, and I look forward to working with the Chairman and
colleagues on both sides of the aisle to provide incentives in
the Tax Code for pro-environment activities.
Chairman Houghton. Thanks, Bill, very much.
Does anyone else have an opening statement? Would you like
to say something?
Mr. Portman. Just briefly, Mr. Chairman, to thank you for
holding this hearing. It is very important that we begin to
look carefully at all of the various existing tax provisions
and potential tax provisions that can help with regard to land
use, conservation, and preservation.
I am delighted that the legislation I introduced, Mr.
Chairman, H.R. 2880, is part of that. And I look forward to the
testimony from our colleagues and from our experts on it. And
thank you for holding the hearing.
Chairman Houghton. All right, good. Well, again, thanks
very much for being with us. Why do we not start from my right
with Congressman Hoeffel from Pennsylvania. Would you like to
begin the testimony? And then we will just go right down the
line here.
STATEMENT OF HON. JOSEPH M. HOEFFEL, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF PENNSYLVANIA
Mr. Hoeffel. Thank you very much, Mr. Chairman and
colleagues. I appreciate the opportunity to address this
Subcommittee, and I thank you for holding this hearing. And I
thank you for mentioning Governor Pinchot--a great
Pennsylvanian, who helped to start the ``Open Space''
preservation program in our State before he took his good ideas
to the national level.
I wanted to limit my testimony today to H.R. 2446, the
Better America Bonds proposal, that I think offers a wonderful
opportunity for us to preserve open space, to plan for growth,
to manage the growth that is occurring across our country, and
to help revitalize brownfields.
I will not read my testimony that I have submitted in
writing, but I will simply summarize by saying, first off,
revitalizing brownfields is a critically important issue, not
just for the reinvestment that Better America Bonds would
permit in our denser areas, our more developed areas, that are
being abandoned as growth leapfrogs away from the cities out
into the countryside; but every time you save a brownfield, you
literally save a farm field. If you can reclaim an industrial
site and direct investment or attract investment back to that
site, that is one less farm field that will be developed for a
new use. So reclaiming brownfields has many benefits, economic
as well as environmental.
The beauty of the Better America Bonds proposal is for a
relatively small Federal income tax credit--a proposal of
three-quarters of $1 billion--we would be able to generate $10
billion of interest-free loans at the State and local level to
promote open space preservation, planning proposals, regional
planning, growth management strategies, and the revitalization
of brownfields that I just mentioned.
And certainly, we can all agree that the planning and
zoning decisions that we need to make in this country need to
be made at the local level. And no one is trying to change
that. I do not want, and nobody wants, the Federal Government
to make zoning and planning decisions. But there is a role for
us to advocate, to promote--and to help finance through a
Federal income tax credit--that kind of aggressive work at the
State and local level, to plan for the growth that is occurring
in our country.
The second point is, that growth is not happening
everywhere. And that is why I fear Congress is not paying as
much attention as it should. It is essentially happening in our
suburbs; they are growing in population. There are whole
stretches of this country that need more development, would
welcome more industry, would welcome more residential
neighborhoods, but the suburbs of our country--And certainly,
in Montgomery County, Pennsylvania, we are threatened, we are
stressed, by too much development.
Now, we are not going to stop growth, and we do not want
to. Because even where I live, growth means jobs and
opportunities. But we ought to be able to manage it; to direct
growth into certain areas; to preserve farmland in other areas;
to encourage recreational opportunities, both passive and
active recreation, in other areas; and to have some rhyme and
reason to the development that we see in the suburbs of our
Nation's great cities.
This Better America Bonds proposal would enable local and
State governments to finance the kind of bonds that are needed
to do this. As a county commissioner in Montgomery County,
Pennsylvania, I helped start a 10-year, $100-million bond
program, at county expense, to give mostly to our local
governments, on a 90-10 matching grant--90 percent on the
county--the funds to make open space acquisitions. It is the
most popular thing Montgomery County government has done in its
history, and it is working well.
But not all municipalities can do that on their own. The
Better America Bonds Federal income tax proposal gives us a
tool to encourage that around the country. And I would urge the
Committee to give it favorable attention. Thank you, Mr.
Chairman.
[The prepared statement follows:]
Statement of Hon. Joesph M. Hoeffel, a Representative in Congress from
the State of Pennsylvania
Thank you Mr. Chairman. For the record, my name is Joe
Hoeffel and I represent the 13th District of Pennsylvania.
Thank you for recognizing me today to speak in support of
the use of tax incentives for land conservation and
environmental preservation. Specifically, I will address the
need for H.R. 2446, the Better America Bonds Act of 1999. This
bill would create a new tax incentive to preserve green spaces,
develop local parks, protect the quality of our water supply
and cleanup brownfields.
Throughout the country suburban growth continues to consume
farmland and wooded acres. Who among us has not driven down a
country road and seen the familiar sign on the side of a barn
``Land for Sale--Subdivision possibilities?'' In my district,
sprawl has been consuming land at the rate of one acre an hour
for the past twenty years.
We seem to take it for granted that there is plenty of
space in our country for new houses, new industrial parks, new
highways, and new shopping centers. More importantly, we now
need to give serious consideration to what areas need to be
protected from these uses. Open space is not just the space
left over after the development is finished. We need to
actively work to conserve wetlands. We need to identify the
historical areas that must be protected from the wrecking
crews. We need to protect the habitat for the animals and
plants that renew our air and our water.
There are local efforts throughout this country to preserve
and protect the open space that is needed to maintain an
acceptable quality of life. For example, just last week, we
passed a bill that will declare the Schuylkill River Valley, in
eastern Pennsylvania, a national heritage area. Local officials
and private citizens envision a greenway or linear park along
this river, which has long been hidden from our view by
railroads and factories. In June, these citizens traveled the
length of the Schuylkill River by canoe and became aware from
that perspective what valuable natural resource had always been
there. A management plan will be developed to assure that this
resource is preserved. Better America Bonds may provide the
means to execute that plan and develop this resource in a
protected and careful manner.
I believe that fighting sprawl, planning for growth and
preserving open space are primarily issues for state and local
governments. States and municipalities must deal with these
issues, develop their own plans and make local decisions about
what should be saved.
Certainly, though, there is an important role for the
Congress to advocate and promote these policies and to provide
the resources to help local and state governments and non-
profit organizations. We need national vision with local
control to fight urban and suburban sprawl.
When I was County Commissioner in Montgomery County,
Pennsylvania, we were able to establish one of the largest open
space programs in the country. However, I am aware that not all
counties have the means to protect their resources. The Better
America Bonds program provides the means for these investments
that might not otherwise be possible.
I believe it is important for the Congress to establish
programs that provide incentives for preservation and
conservation goals to be achieved. It is appropriate for the
federal tax system to reward those who choose to preserve our
natural resources and protect our environment.
I support the Better America Bonds because:
They establish an incentive for local initiatives
to achieve local goals and save local resources.
They offer the incentive for preservation of open
space and wetlands,
They help localities develop public parks and
greenways.
They provide the borrowing power for remediation
of land that has been abused in the past and may need extensive
cleanup to revitalize entire neighborhoods.
As this committee is well aware, tax incentives can be a
powerful motivator of human behavior. I believe that it is
appropriate and legitimate for the tax system to be used to
support the public policy goals of local governments,
especially when those goals are also consistent with the
national welfare. It is clearly in the national interest to
protect and preserve our natural heritage resources, to protect
and restore the wetlands that are so crucial to the health of
our ecosystems and to encourage the redevelopment of brownfield
properties. Of course, such tax credits must be paid for in the
confines of a balanced budget.
Chairman Houghton. Thanks very much, Joe.
Mr. Blumenauer.
STATEMENT OF HON. EARL BLUMENAUER, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF OREGON
Mr. Blumenauer. Thank you, Mr. Chairman. And I appreciate
the courtesy in being able to join with you today. And I think
of the lineup here on this side of the dais: Each of us is
involved in our own ways with efforts to promote livable
communities. I have had a chance to be in a couple of your
districts--in Mr. McInnis' district and in Mr. Coyne's
district--and I found that people care about these issues in
very profound ways.
There are three ways the Federal Government can make a
difference. One is the traditional fashion, with direct
expenditures. And we have got lots of programs floating around
of dubious benefit and questionable ability on our part to
sustain them, even in these times of prosperity.
The second way that we can make a difference is by leading
by example, where the Federal Government actually behaves in
ways that we are telling the rest of America to play. Like I
want the Post Office to obey the local land use environmental
laws that the rest of America operates under, and I am please
that over 130 of my colleagues in the House have agreed with
that approach legislatively.
The third way is by using creatively the impact of the tax
system. And I commend the Ways and Means Committee. And all of
you were a part of a package that brought forth to the House in
recent tax reform one little element that has not received
enough attention for the impact that it has had in promoting
livable communities across America.
That is when you, in your wisdom, decided that you were
going to increase the tax deduction for the resale of
residential property. And as we know, virtually no one in
America paid it except the dumb, the distressed, and the
divorced. But it had the perverse effect of encouraging people
to always buy more and more expensive homes, or stay put. The
tax system was distorting the housing decisions of American
families. And you helped lead the way in changing that, and it
is having a significant effect in terms of livability in our
communities, sprawl, and intrusion into open space.
You can do the same thing today with legislation that is
before you. I am very much impressed, and am a cosponsor of
legislation by your colleague, Representative Nancy Johnson,
H.R. 2263, part of the thrust of the discussion here today. I
am very supportive of Congressman Coyne's Brownfields Clean-Up
Act, H.R. 1630, which would directly help our communities with
the permanent authorization of the tax provision that allows
those cleaning brownfields in enterprise zones and other areas
a tax deduction on clean-up costs. It would give immediate
benefits, and relieve development pressures on greenfields.
There is H.R. 2380, the Energy Efficient Technology Act
introduced by Congressman Matsui, and as has been referenced,
H.R. 2446, the Better America Bonds, which I also am
cosponsoring.
There are two other items that I would put on this agenda
that I think are a part of this mix that I would hope that you
would consider. One is H.R. 1172, the Historic Home Ownership
Tax Credit, that would permit opportunities to provide
preservation in established neighborhoods, and again avoid
encroachment into open space around the country. When you are a
buyer of real estate, you not only look at the building you are
buying, but the surrounding neighborhood. This would have an
opportunity. In all of our districts, we would find communities
where this would make a big, big difference.
I hope that you would, as you are thinking in these terms,
even though you have passed some activities that relate to the
estate tax that has been vetoed--we are sort of out here
shimmering--I think in the same light that you are bringing
forward your consideration today, looking at some estate tax
provisions that would relieve the burdens on woodlots and farms
at the same time you deal with small family-held businesses--As
long as those are going to retain, in limited ownership and
practice, farming, woodlot, or for that matter small business,
I think you would find that there would be the vast majority of
people in the House who would step forward to support it.
It would relieve pressure, again, on what we are seeing on
the greenfields, open space. I think you would provide a
tremendous benefit. And it would have minimal cost in the
context of what we have been talking about with inheritance tax
reform and other tax benefits.
I know you have got a very full agenda here today, but I
would like to express my deep appreciation for your attention.
I hope you will think about expanding your scope--just a tiny
bit--to include other elements that are in this same basic
thrust. I think it will make a huge difference in our efforts
to promote livable communities across America.
Because in the final analysis, what we are here for in
Congress is for the Federal Government to be a better partner
in making sure that our families are safe, economically secure,
and healthy. I think you are starting along the right line, and
I look forward to working with you in that effort.
[The prepared statement follows:]
Statement of Hon. Earl Blumenauer, a Representative in Congress from
the State of Oregon
I want to thank Chairman Houghton and Ranking Member Coyne
and the Committee for focusing on one of the most important
issues America is facing--how we build and design our
communities to be more livable.
A livable community is one where people are safe, healthy
and economically secure. Our quality of life in large part
depends upon the design and placement of our buildings, parks,
schools, and the access we create to these places. My goal is
for the Federal Government to be a better partner, helping to
give people more and better choices in how they live, work and
travel. How the elements of land use and conservation fit
together make a tremendous difference to our communities.
You have heard from my colleagues about several important
legislative proposals before the committee that I support:
H.R. 2263 by Representative Nancy Johnson that
encourages contribution of property for conservation and
easements
Representative Bill Coyne's Brownfields Clean Act
H.R. 1630, that would directly help my community of Portland,
Oregon with the permanent authorization of the tax provision
that allows those cleaning brownfields in enterprise zones and
EPA pilot project. This tax deduction on the cleanup costs
would give immediate benefits and relieve development pressures
on greenfields.
H.R. 2380 the Energy Efficient Technology Tax Act
introduced by Congressman Matsui that provides for $3.6 billion
in tax incentives over five years in the four major carbon-
emitting sectors of the economy--buildings, industry,
transportation and electricity. Tax credits go towards energy
efficient homes, buildings, hybrid vehicles, and solar and wind
energy technology.
H.R. 2446 the Better America Bonds proposes a new
financing tool generating $9.5 billion in bond authority for
investments by state, local and tribal governments in green
spaces, urban parks, water quality and brownfields cleanup. Tax
credits totaling more than $700 million over five years are
proposed to finance the bonds.
I support these pieces of legislation and I am glad the
committee will be focusing on them in this hearing.
There are two items that I wanted to mention in more
detail:
H.R. 1172 the Historic Home Ownership Tax Credit
The reform of the inheritance tax to promote sound
land use
Since I've been in Congress I've traveled to over 41
communities and I am amazed at how communities are dealing with
the issues of growth and urban flight. Last November voters
dealt with over 240 ballot initiatives that dealt with urban
growth boundaries, land conservation and growth.
There are pushes and pulls to neighborhoods. In the real
estate industry there are factors known as the tipping factor.
The tipping factors are elements that change a good
neighborhood to bad or vice versa. When you are a buyer of real
estate, you not only look at the building you are buying, but
the surrounding neighborhood. Houses and structures that fall
into disrepair or become dilapidated or abandon easily tip a
good neighborhood to a bad.
Many times the renovation of an older structure is harder
to find financing for, or is more costly than buying new. This
is the push factor. It pushes people out to new areas and areas
where they may not be an existing infrastructure.
The Historic Home-Ownership Tax Credit H.R. 1172 expands
the commercial rehabilitation tax credit for historic
properties. It helps pull people back to historic areas where
there is already an infrastructure.
This bill in its current structure as a tax credit gives a
20 percent income tax credit that can be converted to a
mortgage credit certificate to buy down the interest on a
mortgage. The tax credit can be used in Enterprise Zones as the
credit can be converted and applied towards the down payment of
a house.
Keeping this structure as a credit rather than a deduction
keeps it flexible allowing the American consumer who falls into
the middle or lower income range an opportunity to take
advantage of the credit. Restructuring the credit to a
deduction cuts out this portion of the American population.
The credit will help neighborhoods from tipping from a good
neighborhood to a bad neighborhood and may even help restore
many of the unique structures that give character to a
community.
This is another means for the federal government to help
provide more choice for American families and to help preserve
American heritage.
The inheritance tax on small family-owned businesses,
closely-held corporation, wood-lots and farms needs to be
reformed. Family businesses should not be forced to sell
because of the death of a principal. As long as they want to
continue to operate as a closely-held business there should be
no tax liability. If they want to cash out this is a different
discussion.
This is much like the repeal of the capital gains tax on
residential sales. It would have little fiscal impact and would
make a tremendous difference in our land-use patterns, allowing
people to keep and manage property, not driven by financial
decisions motivated by inheritance tax liability.
The federal government should be leading by example with
the placement of federal buildings like the Post Office and
GSA.
I have a little bill, H.R. 670 that requires the Post
Office to obey local land use laws.
While I know the focus of this hearing is on tax credits
and financing, I wanted to mention GSA and the Post Office as
examples of how the federal government with their buildings and
sitings lead by example and are things that I will be talking
to you about personally.
I want to thank the Members of the committee for their
work. There are many good pieces of legislation that I am
looking forward to helping get through the congressional
process. It is my goal in Congress to help make the federal
government a more flexible partner to help give Americans more
choices in how and where they live and move about in their
community. I appreciate all the attention Chairman Houghton and
Ranking Member Coyne and the Committee has given to these
quality of life issues. Given the current mood in Congress and
our budget straight jacket you may have the only show in town.
Chairman Houghton. Thanks very much. I appreciate it.
Now, Paul Kanjorski.
STATEMENT OF HON. PAUL E. KANJORSKI, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF PENNSYLVANIA
Mr. Kanjorski. Mr. Chairman, thank you very much. Mr.
Chairman, I am looking at the Better America Bonds as a
tremendous tool that I have no doubt, regardless of what form
it comes out in, should be pursued, because it has deleted the
best of all elements. It has the private sector involvement; it
has a government forgiveness, but not a direct subsidy, of the
full amount; and it requires those people who are using the
Beter America Bonds to use market considerations in how the
application should be used. So it is the best of all well and
delicately thought-out plans.
However, there are significant problems as it presently is
created, and I would like the Committee to look at correcting
these problems so that it properly applies across the country.
First and foremost, it has a provision calling for the pledging
of full faith and credit of local governments: Obviously
written by an investment bond counsel from Wall Street working
at Treasury. Because there are many ways in which the bond
holder gets secured without having the full faith and credit of
the community or political subdivision issuing the bond. And if
you examine the country, the distressed areas of the country,
it is highly politically unlikely and, in many instances,
without a sufficient basis, to issue full faith and credit
bonds.
So if you leave that provision in there, you are denying
people to get insurance on bonds, or having clever ways of
structuring the bond issue; but, in fact, are favoring the more
sophisticated and the wealthier communities who want to engage
sometimes in a dilettante use of the fund, as opposed to
putting it to hard work. So that is one major place requirement
that we should eliminate.
The Federal Government should not get involved in the risk
factor. If we have people who will buy these bonds, whether
they are insured or however they are protected, or they are
supported by assets, we should not have to require that a
community or political subdivision or an entity issuing these
bonds pledge their full faith and credit.
Second, I think that it is very nice to look at a per
capita allocation, but per capita is grossly disadvantaging the
rural and exurban areas of the country. Because the density is
in the cities, and that is where the major portion of the bonds
will go; whereas the distressed communities and the disturbed
and degraded lands are in the countryside. So if you use a per
capita formula, you are going to concentrate this in the high-
density areas of the United States, which have the least amount
of land to be preserved or reclaimed.
Third, there should be an emphasis on encouraging regional
activities. And when I talk about regional activities, I direct
myself maybe more to Pennsylvania and to New York and the East,
who suffer from the ``small city syndrome,'' if you will.
Right now, Pennsylvania has 2,400 communities. Ninety-five
percent have fewer than 3,500 people. So 95 percent of those
communities lack the professionalism, and the capacity, to put
an application in for Better America Bonds. So by virtue of
just having that restriction in there, only the more
sophisticated urban areas of the State would have the
wherewithal to understand and to use the Better America Bond
concept. And particularly in Pennsylvania, we very often use an
authority system, where groups of communities come together.
And that would cause a regional effect and a regional impact. I
would certainly recommend that.
Finally, I want to address the idea of brownfields. I hope
that term is not used, because ``brownfields'' is starting to
become a word of art. And if you look at most of the EPA
regulations, former mine-scarred lands are not qualified or
defined as brownfields. And to a large extent, in the
Commonwealth of Pennsylvania and through the coal belt of the
United States, a good part of the distressed lands that these
Better America Bonds should be used to correct and help out
would not qualify, because they are not considered brownfields.
And again, as my fellow colleague from Pennsylvania pointed
out, every time we re-use mine-scarred land as an industrial
park, there are that many thousands of acres that do not have
to be taken out of the pristine environmentally clean farmlands
and beautiful areas of the country, even within the same
jurisdictions where this is happening.
Finally, I want to say that I go back to my experiences as
a lawyer before I came to the Congress. And very often, people
who work in government and write this legislation perhaps
should be sent out in the countryside every now and then to
work with it.
There is an anti-arbitrage provision. First of all, I think
that is impractical, to put a set amount of how much time can
be arbitrated. And I would recommend that we give discretionary
power on arbitrage. Because in some communities, by granting
the power to arbitrage, that may be the only way they can
either sell the bond or structure the program.
To put a 3-year limit on arbitrage defines the fact that
the individual writing the statute never put a public works
program together on a municipal level. And in a major part of
my practice before I came to Congress I did sewer systems,
water systems, highway systems, and I could not think of one
that ever was performed within 3 years. You are very lucky if
you have the conceptual idea off the ground, ready to go to the
engineer, in 3 years. All of these concepts we are looking at
are really 10-, 15-, 20-year programs.
Finally, I am very jealous--And I know I am over my time. I
represent northeastern Pennsylvania, the anthracite coal
district. I know the Chairman has to drive through my district.
We have been passed over now for 40 or 50 years. There is no
program in the United States that allows us to buy that land,
reclaim that land, put it in productive use.
The Better America Bonds--if they are properly defined and
the categories are broad enough and discretionary enough--are
ideal partial programs to be used in a concept that will allow
the coal fields of America to finally reclaim their degraded
and devastated land. It would be very unfortunate if the
structure of Better America Bonds helped the sophisticated and
wealthier suburbs preserve their greenway, and forced the
distressed communities of America to continue to live with the
degradation of prior practices, where no relief has come from
the Federal or the State governments, and it is impossible to
come from the local government.
So I urge that a portion of this program be designated for
distressed areas, and that it understand that that is what is
necessary: a program to bring back degraded and misused land of
the past into the present, so that these people, too, can
consider themselves conservationists and environmentalists.
Thank you very much, Mr. Chairman.
[The prepared statement follows:]
Statement of Hon. Paul E. Kanjorski, a Representative in Congress from
the State of Pennsylvania
Mr. Chairman, I appreciate the opportunity to testify
before you and the other Members of the Subcommittee this
morning on the impact of Federal tax laws on environmental
conservation and preservation. I want to express my strong
support for the Administration's Better America Bonds proposal.
While I believe that the Better America Bonds program will give
local communities a tremendous tool to preserve land and clean
the environment, I feel that several changes and/or
clarifications would help to improve its overall design and
implementation.
On that note, I would like to briefly recount the
environmental and land use challenges facing Central and
Northeastern Pennsylvania. The anthracite coal region of
Central and Northeastern Pennsylvania contains approximately
120,000 acres of mine-scarred land that must be reclaimed if
the region is to solve its environmental problems and sustain
economic development. Because most of the region's mining took
place prior to the adoption of strict environmental programs,
much of the land is devastated by dangerous strip pits,
underground mine fires and huge mounds of coal waste. In most
cases, this land is owned by private individuals or companies
which had nothing to do with the deterioration of the land. The
cost of restoring the land often far exceeds the value of the
current value of the land. In time, I am confident that the
many other attributes of Northeastern and Central Pennsylvania
will attract the kind of private sector investment that will
encourage landowners to reclaim their land to put it into
productive use, but the public sector can encourage thoughtful
growth by restoring this land now. The Better America Bonds
could play a key role in the comprehensive restoration of the
anthracite region.
Without land reclamation, Northeastern Pennsylvania will
not be able to address its most pervasive water quality issue:
acid mine drainage. Water flowing from existing and abandoned
mine sites has caused pollution so severe that plant and animal
life that once abundantly existed in streams before mining
began, no longer survives in great numbers. In my congressional
district, for example, mine drainage significantly deteriorates
water quality and prevents the migration of fish from the
Susquehanna River into upstate New York. Further, the U.S.
Environmental Protection Agency has determined that the primary
source of industrial pollution into the Chesapeake Bay comes
from the acid-mine drainage originating in Northeastern
Pennsylvania and delivered by the Susquehanna River. Thus, a
reclamation program supported by Better America Bonds could
have a national and regional impact.
Although the current Internal Revenue Code includes a
number of provisions that provide incentives or tax benefits
for land conservation and environmental preservation none of
these provisions have been successfully accessed to reclaim
mine-scarred land. Better America Bonds would represent the
first genuine effort by the federal government to give
communities a tool to undertake significant land preservation
and protection. For a few select communities, Better America
Bonds will be a tremendous resource. The Administration has
designed the program to address the growing number of
communities struggling to preserve their environmental
resources.
However, it is important for this program to be available
for the purchase and redevelopment of degraded land, which is a
pressing issue for many communities including other areas which
have been adversely affected by past mining. In addition to the
environmental problems associated with mine-scarred lands,
economic development is adversely affected. Companies and their
workers do not want to locate in areas of environmental
devastation. Another insidious result is that ever increasing
amounts of pristine land is falling to development because the
presence of mine-scarred land precludes growth.
In addition to guaranteeing that degraded land is eligible
for Better America Bonds funds, any proposed legislation should
insure that a diverse group of communities is able to
participate in the program. The Better America Bonds program or
any tax incentive should be designed as to allow for
participation by only the most established, financially-
sophisticated, and wealthiest communities. Such a result would
leave those communities who arguably need the resources the
most without the help that they need. If properly designed, the
Better America Bonds program has the ability to achieve a
variety of goals for a variety of community problems. Several
minor changes would create a more encompassing program that
will effectively reach more communities.
By requiring communities to pledge the full faith and
credit section for these bonds, for example, many small and
economically disadvantaged communities will not be able to
apply for them. I would therefore recommend that communities be
able to purchase bond insurance instead of pledging their full
faith and credit. The proposed legislation recommends a per
capita distribution of the bonds, which may not be the most
appropriate allocation method. The government should allocate a
set percentage for economically distressed areas or provide
them with a significant preference in the application process.
When allocating the bonds, the government should also give a
preference to regional initiatives. To support regional
initiatives, regional authorities created under state laws
should be eligible to apply for Better America Bonds. These
small adjustments to the legislation would greatly enhance the
ability of small communities and economically distressed
regions to utilize the bonds.
As the Committee considers the Better America Bonds
legislation, I would recommend eliminating the requirement that
issuers use funds within three years. It may take communities
several years to set in place a major environmental restoration
initiative. As you know, the wheels of government can move
slowly especially at the local level. Finally, a repayment
period of 20 to 25 years may be more appropriate than the
fifteen repayment schedule in the bill.
Once enacted, the Better America Bonds initiative will
create a tremendous resource for local communities to enhance
control of their land use decision-making process, protect the
environment, and promote economic development. I hope that you
will consider the points I have raised about this proposal to
provide tax incentives that adequately address the unique and
diverse needs of all communities.
Although this proposal has been hailed by primarily high-
growth regions of the country seeking to preserve their limited
green space, I believe it can be extremely valuable for regions
like mine which has not experienced intense development.
I look forward to working with the Members of this
Committee to enact bipartisan legislation that will address
both environmental preservation and restoration.
Chairman Houghton. OK, thanks very much, Paul.
Mr. Gilchrest.
STATEMENT OF HON. WAYNE T. GILCHREST, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MARYLAND
Mr. Gilchrest. Thank you, Mr. Chairman. First, I would like
to say that I like the water pitchers in the Ways and Means
Committee hearing room. We will try to get them changed----
Chairman Houghton. Just be sure you do not break them.
[Laughter.]
Mr. Gilchrest. They are very picturesque. We will try to
change the natural resources--water pitchers.
I would also like to say, Mr. Chairman and Members of the
Committee, that the use of tax incentives to encourage
conservation I think is a positive way to bring people together
to protect not only open space--I know we do not want to
overuse the term ``brownfields''--but to understand the nature
of protecting the mechanics of natural processes upon which we
all depend as human beings. And I think tax incentives are a
powerful tool to do that.
First, however, I would like to talk a little bit about
section 508 of the Taxpayer Relief Act of 1997. This is an
excellent piece of legislating. And I commend the Chairman, and
I believe this provision was the result of your efforts.
This section amends section 2031 of the Tax Code to allow a
deduction for estate and gift tax purposes for a contribution
of a qualified real property interest to a qualified
organization exclusively for conservation purposes, provided
the property is within 25 miles of a national park or
wilderness area. All too often, heirs are forced to subdivide
or sell their property just to pay the taxes.
Section 508 holds a lot of promise for my constituents--if
we could only get the Internal Revenue Service to answer a
couple of simple questions: Where does this provision apply?
Did we mean for it only to apply to landowners within 25 miles
of one of the 54 crown jewel national parks? In my district,
Mr. Chairman, we have Assateague, which is a national seashore,
which comes under, I understand, the jurisdiction of the
National Park System. But we also have Blackwater National
Wildlife Refuge.
Now it is my understanding that the Internal Revenue
Service has not issued any criteria upon which a landowner,
especially in my situation, can take advantage of those estate
tax provisions. And we would really like the Committee to look
into that particular prospect, so landowners in my area can
take advantage of that.
One reason with me is a sense of urgency because Assateague
is just south--Mr. Chairman, your grandchildren could hit
Assateague from Ocean City with a stone. The development
pressures in that area are enormous. And if landowners know
they can take advantage of this estate tax provision, I think
it would go a long way in preserving some of that land.
I would also like to talk a little bit about expanding the
idea of this tax incentive provision not only to estate taxes,
not only to agriculture, not only to brownfields, but to the
whole concept, which is usually controversial, of the
Endangered Species Act.
Recently, the Environmental Defense Fund released a report
entitled ``Rebuilding the Ark.'' And in that report, it
stated--which is true--``81 percent of habitat for endangered
species is not on Federal land; it is on private land.'' And
so, while we have preserved the peregrine falcon, the bald
eagle, and other species that are sort of glowing in our minds
as symbols of the United States, the whole biological diversity
of this country is dependent upon everybody participating in
the Endangered Species Act program.
But unfortunately, many people feel that if they find an
endangered species on their property, they are going to be
over-regulated and under-compensated, and then they are going
to bury this or get rid of it. There is no real incentive, I do
not think, other than the idea that ``I want to protect
biological diversity'' for private citizens on private
property.
Now, I am not proposing that we create a tax break to pay
for people to comply with existing law. What I would like to do
is give the Committee some idea that we provide a tax incentive
in the same way for people that have private property and
endangered species that we would for agriculture or any other
land conservation program. But these people, who have to comply
with the law, but maybe want to go a little further by
enhancing habitat, might, because it is of public value, get
some type of tax incentive in order to do that.
Given the success of using tax incentives to encourage
landowners to donate property or conservation easements to
charitable groups, I feel strongly that a similar measure of
success will come from allowing similar tax breaks for
endangered species and management activities.
And I see that the red light is on, Mr. Chairman, and I
thank you for the time.
[The prepared statement follows:]
Statement of Hon. Wayne T. Gilchrest, a Representative in Congress from
the State of Maryland
Mr. Chairman and Members of the Committee, thank you for
the opportunity to testify on the use of tax policy to achieve
environmental conservation goals. Tax breaks are a powerful
incentive for many landowners to work with conservation groups
to put land in perpetual conservation easements to preserve
open space and habitat for wildlife. In many cases, they have
been extremely successful. I believe we should look at
expanding the successful use of tax incentives to encourage
conservation activities.
First, however, I would like to talk a little about Section
508 of the Taxpayer Relief Act of 1997 (P.L. 105-34). This is
an excellent bit of legislating and I commend the Chairman--I
believe this provision was the result of his efforts. This
section amends Section 2031 of the tax code to allow a
deduction for estate and gift tax purposes for a contribution
of a qualified real property interest to a qualified
organization exclusively for conservation purposes, provided
the property is within 25 miles of a national park or
wilderness area. All too often heirs are forced to subdivide
and sell property in order to pay the estate tax bill, often to
the detriment of the environment.
Section 508 holds a lot of promise for my constituents if
we could only get the Internal Revenue Service to answer a
couple of simple questions. Where does this provision apply?
Did we mean for it only to apply to landowners within 25 miles
of one of the 54 crown jewel National Parks, or did we intend a
more broad application? More specifically, do the areas around
Assateague Island National Seashore and Blackwater National
Wildlife Refuge on the Eastern Shore of Maryland meet this
criteria? As you may know, both are federal properties, managed
with conservation as a primary mission. The National Seashore,
in particular, is a unit of the National Park System even
though it is not called a national park. This is a particularly
important question as the area around Assateague is under
significant development pressure and this tool would help
encourage land conservation. I strongly urge the IRS to issue
some guidance on the use of Section 508 to provide certainty
and clarity for landowners seeking to plan their estates.
I look forward to working with the committee to help make
this incentive available to my constituents.
We need to create more such options for landowners in order
to actually restore and sustain our nation's biological
diversity. Recently, the Environmental Defense Fund released a
report entitled ``Rebuilding the Ark: Toward a More Effective
Endangered Species Act for Private Land.'' This report contains
some startling (or perhaps not so startling) statistics. More
than half of the endangered or threatened species in the United
States have at least 81 percent of their habitat on non-federal
land (most non-federal land is in private ownership). Between a
third and a half of the protected species do not occur at all
on federal land. In addition, the authors of the report point
out more than 60 percent of listed species will need active
management measures in order to survive and recover. This is of
particular concern when we consider that over time, while
spending for endangered and threatened species in general has
increased, spending per listed species has declined.
Unfortunately, absent a few glowing examples (peregrine
falcon, bald eagle) the Endangered Species Act is only capable
of keeping species on life support--the Act is simply not
constructed in such a way to recover species that occur on
other than federal land. Federal officials can take recovery
actions on public lands and the law includes prohibitions on
take that apply everywhere. But neither of these will meet the
most pressing need for active conservation and management
measures performed on privately-owned land.
In fact, EDF points out that in some cases the Endangered
Species Act might actually contribute to the further decline of
species and impede collection of information on the status of
listed species--the ``shoot, shovel, shut up'' approach to
wildlife management. The Fish and Wildlife Service is unable to
ascertain the status of over half the species found exclusively
on private land, perhaps because many landowners fear the
result if they allow conservation officials onto their land to
assess how endangered species there are faring.
The Fish and Wildlife Service has implemented a ``safe
harbor'' policy that provides landowners some assurances that
they will not be penalized for activities that attract
endangered species to their property. However, many management
activities impose costs on individuals that are, perhaps, more
properly shared by all Americans.
Am I proposing that we provide a tax break for complying
with the law? No, I feel strongly that we not pay people to
comply with the law. But, where a landowner is willing and able
to take steps to restore and manage a species' habitat, actions
which are above and beyond what the law requires, the public
should share in the cost of restoring public trust resources.
Frankly, these are costs that the public already picks up for
management activities on Federal lands.
Changes in the federal tax code are the most efficient way
for the public to subsidize these activities. To pay federal
estate taxes, the inheritors of large land holdings often are
forced to sell, subdivide, or develop the property, resulting
in the loss of wildlife habitat. In cases where the property
could be managed to benefit endangered species, the heirs
should be given the opportunity to defer part of the estate
taxes by entering into a management agreement with the
Department of the Interior. Also, as currently written, the
federal tax code seldom allows landowners to deduct the costs
associated with maintaining or restoring the habitats of
endangered species (e.g., prescribed burning, weed control,
etc.). Were landowners allowed to claim a tax deduction or
credit for these costs, more of them might be inclined to
undertake such steps.
Given the success of using tax incentives to encourage
landowners to donate property or conservation easements to
charitable groups, I feel strongly that a similar measure of
success would come from allowing similar tax breaks for
endangered species management activities. We are all familiar
with the deeply divided debate over how best to reform the
Endangered Species Act that has made reauthorization nearly
impossible. We need to change landowners perception of what it
means to find an endangered species on their property. Right
now, it is a liability. Unless we make a change, species, and
the public, will continue to lose.
Chairman Houghton. Thanks very much, Mr. Gilchrest.
Now, the star of the Ways and Means Committee: Mrs.
Johnson.
STATEMENT OF HON. NANCY L. JOHNSON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CONNECTICUT
Mrs. Johnson. Thank you very much, Mr. Houghton. And I
thank the Subcommittee, on which I have served for many years,
for having this hearing. I believe it is extremely important to
look at the fact that our Tax Code is not balanced, and
discourages investment in the very areas where we need it most,
and encourages it in the areas where we should not be
encouraging it.
At this particular time, we have a tremendous opportunity.
The COPS grants have made our cities safer, without question.
The Weed and Seed Program, that has been in place now for about
15 years, has begun to deal with some of the urban problems of
demolition and neighborhood problems and replacing old problems
with new economic growth opportunities. So there is a
combination of factors. Welfare reforms impact on small cities,
and HUD's new flexibility.
There are so many things that are now working for the
rehabilitation and the revitalization of at least small urban
areas--but I think neighborhoods in our big cities as well--
that we really have to move to make the Tax Code more city
friendly, more development friendly of our urban areas, and
less a force for eating up valuable, high quality, open space
land or agricultural lands.
So I would like to just testify in support of three bills
that address themselves to this imbalance in our Tax Code. The
first would expand the current deduction for brownfields
remediation, the second would allow a deduction for the
demolition of certain industrial sites, and the third would
increase the deduction for land donations--all to rectify the
balance in our Tax Code that discourages urban development and
encourages urban sprawl into rural areas.
First of all, to the expansion for the deduction for
brownfields: You know, current law allows you to get a
deduction if you are in an empowerment zone. Well, in my
hometown, it means that there are a few blocks where you can
get a deduction, but at the same kind of sites across town, you
cannot get a deduction. And all of these sites need to be
cleaned up.
Talk about urban-rural disadvantages. You know, a
brownfield site in a small town that may have only one or two
parcels that could possibly attract a new business with jobs is
just as much of a problem as a brownfield site in a city. But
because they are rarely in these empowerment zones, they do not
get the benefit of current law. So we need to allow that
deduction for all brownfields, whether they are in an
empowerment zone or whether they are not in an empowerment
zone. They are the same environmental problem, and it is the
same disinvestment to development.
The places where there are brownfield sites are the older
manufacturing communities of the Nation, and they are the ones
that served us well and can only serve again with clean-up. So
it is very important that we look at the disadvantage that we
have put those communities at.
Second, in order to get that deduction you often have to be
at a 20 percent poverty income index. Well, in New Britain we
only have 12.5 percent, but we have a lot of people just above
that poverty index. But the way we have written this law
disadvantages the very small urban communities that have lots
of old manufacturing land, lots of old degraded territory that,
once rehabilitated, can bring development to where the
infrastructure to support that development is, the
transportation and so on. To do that right now, when streets
are now safer in these cities, will give us a tremendous
opportunity to grow business exactly where we need to grow it.
In our state, we have between 622 and 942 brownfields. Now,
there is a big variation in number, because no town wants to
acknowledge that a site is a brownfield and get that bad
publicity, if they can possibly avoid it, because there are so
few resources to clean up. So this is really an urgent matter
for communities of all sizes.
The U.S. Conference of mayors estimates that there are
19,000 brownfields representing 178,000 acres. If we could
encourage development on those 178,000 acres, just imagine the
amount of open space, the amount of fertile land, that we could
protect from development.
If we further couple the brownfields relief with a second
bill that I have introduced to make it easier to demolish old
buildings, then we will really encourage that redevelopment in
the cities. In my legislation, my demolition incentives have
been developed in a way that protects buildings of historic
significance, including residential buildings of historic
significance.
And last, let me just point to my third bill in the
package, which does a better job of rewarding people who are
willing to donate their land for preservation. You all know the
problems the development rights programs in the States are
running into. They are very expensive. States are not funding
them as well as they used to. We are not funding them at all.
We used to fund, put some money in that direction.
And so we do need some new vehicles whereby people with
large farms can donate them for preservation and realize some
benefit to themselves and their heirs, some ability to justify
that decision, some ability to have an income source that will
support them during that period of transition.
So my legislation would increase from 30 to 50 percent of
their income the deduction they could receive in any current
year until the full value of the land is realized, whether that
takes 5 years or more. The current law is only 5 years.
So this package of bills would go a long way. Incidentally,
I should mention that that current legislation that allows the
deduction only allows it if you are within 25 miles of a
metropolitan statistical area, a national wilderness area, or a
national park, or 10 miles from an urban park. Well, this
includes all of Connecticut, so it does not make any difference
to me. It excludes most of the Midwest. So that is where many
of the big open spaces remain. And we are really shooting
ourselves in the foot as a nation to continue to have that
restriction.
Our goal should be to encourage development where there is
the infrastructure to support business and where we can reuse
old lands and create healthy communities, and to discourage
urban sprawl, strip malls, and all those things that have so
compromised both the aesthetic appeal and the integrity of our
small towns. Thank you very much.
[The prepared statement follows:]
Statement of Hon. Nancy L. Johnson, a Representative in Congress from
the State of Connecticut
I would like to begin by thanking Congressman Amo Houghton
for convening this hearing. As well as thank my colleague Mr.
Blumenauer for co-sponsoring my three bills about which I have
come to testify today. I would also like to acknowledge some of
the groups who will testify later in the hearing with whom I
have worked closely in developing my proposals, including
representatives from the Realtors and the Nature Conservancy.
As the former Chairman of the Oversight Committee, I too
discovered what I believe Mr. Houghton has, that our tax code
unfairly encourages development of land that is vital to our
conservation efforts. While Congress often uses the tax code to
promote certain activities, we haven't used it properly to
promote land and wildlife conservation.
My state of Connecticut, like most of its fellow New
England states, is known for its historical beauty. With farms
and homes dating back to our revolutionary days sprinkled
across the state and its many beautiful farmlands and open
spaces, it takes visitors through a tour of our country's past.
However, like so some many communities across the country, we
have seen an alarming amount of farmland and greenspaces lost
to development. More and more strip malls, shopping plazas and
housing complexes are replacing productive farms and valuable
open spaces.
A particulary disturbing aspect of the ``sprawl'' problem
is that most of our cities have the infrastructure, public
transportation and buildings to meet the needs of new
businesses. Yet most new businesses choose to develop outside
of the urban centers.
There are obviously a variety of causes for this move away
from our cities, including local zoning, safety and parking
problems and development costs. But I do not believe that our
tax code should be one of those causes. I have introduced three
pieces of legislation to first expand the current deduction for
brownfield remediation, allow a deduction for the demolition of
certain industrial sites and increase the deduction for land
donations. Our tax code unfairly encourages development outside
of our urban centers absorbing our valuable land, and
discourages development in the very areas that we need to grow
businesses.
Under current law, our tax code provides a deduction of
environmental remediation costs for a brownfield if it is one
of the EPA's designated brownfields, within an area that has 20
percent poverty or is contained within an Empowerment Zone.
While I certainly support allowing the deduction in these
areas, it is needed by all brownfields in all parts of the
country. For instance, the last available poverty rate for New
Britain is 12.8 percent in 1990. That is a staggering number
although it doesn't meet the 20 percent requirement for a
deduction. Once the manufacturing hub of Connecticut, New
Britain is now struggling to keep jobs and bring in new
businesses. Encouraging the reuse of any city business plots is
far preferable to pulling the same acreage out of agriculture
and into development.
Connecticut's General Assembly published a report in
December, 1998 detailing the state's brownfields renewal
efforts. The state uses the Environmental Protection Agency's
definition of brownfield which is an abandoned, idled or
underused industrial and commercial property where expansion or
redevelopment is complicated by real or perceived environmental
contamination. The state found, after surveying its towns, that
there are between 622 and 942 brownfields in the state. The
large gap in the count is in part due to some cities hesitancy
to label a site as a brownfield if the contamination is only
perceived.
The United States Conference on Mayors has done a great
deal of work on Brownfields research and advocacy. In its
annual survey of cities, 180 cities responded that they had a
combined total over 19,000 brownfields representing over
178,000 acres of land. Imagine how many farms we could save,
open spaces we could preserve or parks we could build from the
land we could save from development by encouraging the clean-up
of those 178,000 acres?
This deduction certainly isn't going to inspire the clean-
up of all of the sites. But for a developer on a very tight
budget, being able to expense the clean-up costs may be just
the amount of savings needed to redevelop a site in the city
rather than develop a brand new one in the suburbs.
As the Connecticut General Assembly states in its report:
The price someone is willing to pay for a site is based on
its cost relative to the return the owner expects to receive
from whatever activity is undertaken on the property. In the
case of a brownfield, the cost of the site includes the
expenses associated with the remediation of the property. In
many cases, the cost of remediating a brownfield will be
greater than the cost of adding infrastructure to a comparable
clean site.
Further, when the economy takes a downturn, the expected
revenue from the potential use of the land will decline thus
making remediation a less attractive option as their chances of
recouping those expenses diminish.
There are also sites for which clean-up is not an
appropriate response but demolition may be. I have introduced
legislation to allow a developer to expense the cost of taking
down a building with protections built in for buildings of
historical significance, including residential buildings. While
the cost of demolition may not be determining in many cases, it
can be the difference between developing an existing site or
using an undeveloped piece of land in the suburbs.
Providing incentives for developers to reuse already
developed sites is only half the battle. We must also make
donating land a more financially palatable option compared to
selling it to the highest bidder.
During our last national election, there were over 200
ballot initiatives proposed to preserve open space. States like
Connecticut and New Jersey have embarked on major initiatives
to either buy, or provide grants for the purchasing of land for
conservation or recreation.
In addition to these popular state initiatives, more must
be done to encourage those who are land rich to donate that
land to a nonprofit organization for conservation purposes or
even a government agency. My legislation would increase the
current deduction from 30 percent to 50 percent of their income
until the full value of the land is realized rather than the
current 5-year limit.
Further, language was included in the Taxpayer Relief Act
to permit executors to donate land for a reduction in estate
taxes. However, the proposal is so complicated that it is
rarely used. Adjustments were made through the IRS Reform bill
but not enough. In order to qualify, the property in question
must be within 25 miles of a metropolitan statistical area, a
National Wilderness Area or National Park, or 10 miles from an
urban park. While all of my home state of Connecticut is
included, most of the Midwest is not. My bill would eliminate
the geographic requirement. It should be noted that the Senate
version of this year's tax bill, increased the geographic
boundaries to 50 miles from a metropolitan statistical area and
25 miles from an urban park. My bill also makes other changes
to clarify the language and eliminate restrictions on the value
of the land.
In closing, it is important not to limit choices for our
constituents or dictate to where they should live or work. We
do, however, have a responsibility to help them grapple the
issues affecting their daily lives and sprawl is definitely one
of those. Through some very simple tax measures we can provide
incentives to developers to redevelop existing sites providing
consumers and home-owners more options. We can give back a
little in the form of a tax deduction to those who sacrifice
high profits that come from selling their land to those who
instead donate for the good of us all. The tax code should
promote responsible development and environmentally friendly
uses of our lands and currently it does not do that. My three
bills are a small step in the path to a better, more responsive
tax code.
Chairman Houghton. Thank you, Mrs. Johnson.
Mr. Pitts, good to see you.
STATEMENT OF HON. JOSEPH R. PITTS, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF PENNSYLVANIA
Mr. Pitts. Thank you. Mr. Chairman and Members of the
Subcommittee on Oversight, thank you for allowing us to testify
on this important issue.
As we all know, increased development pressures have had a
drastic effect on farmland throughout the United States,
especially in the Northeast Corridor. We have seen a sharp drop
in our country's farm acreage. In my State of Pennsylvania
alone, farm acreage has dropped from 9 million acres in 1980 to
8 million in 1990, and the numbers continue to decline. Since
1950, the Commonwealth of Pennsylvania has paved over a land
mass equal in size to the entire State of Connecticut. Today in
my congressional district, made up of Lancaster and Chester
Counties, losses around 2,000 acres of farmland each year to
development occur. That figure could rise rapidly in coming
years if the land owned by retirement-aged farmers does not
remain in farming.
Recently, one of my local extension agents asked, ``Could
Lancaster County, the home of the Amish, become the next Los
Angeles?'' With the aging trend coinciding with the years of
depressed milk prices and escalating land values, he believes
this is a possibility. He informed me of the strong
agricultural heritage Los Angeles had before development. In
1944, Los Angeles County ranked No. 1 in the Nation in total
agricultural production, at $129.4 million. Lancaster ranked
15th, at $47 million. In 1992, Los Angeles County ranked 92d
nationally in agricultural production. Lancaster County ranked
13th--although we are No. 1 in non-irrigable products.
To combat this threat to Pennsylvania's economy and quality
of life, the Pennsylvania Agricultural Conservation Easement
Program was developed. This program enables State and county
governments to purchase easements, sometimes called
``development rights,'' from owners of prime farmland. It was
passed into law in 1988, and as of August 30, 1999, 1,140 farms
in the Commonwealth of Pennsylvania have been preserved. That
is 142,000 acres. Roughly $277 million of State and local funds
have been spent to purchase these easements. Implementing such
farmland preservation programs is not only popular in
Pennsylvania, a number of States are enrolling farms in similar
programs.
Please allow me to explain these programs for the record.
Farmland preservation programs are voluntary programs in which
a farm owner foregoes his rights to sell the farmland for
development purposes and enters into a legally binding
covenant. In this covenant, the owner agrees to keep the land
under cultivation for the life of the farm. In return, the
owner receives a one-time payment from the State or local
government. Often, the payment is the difference between the
agriculture value and the development value of the land. The
land can never be used for non-agricultural purposes, such as
housing developments. These restrictions affect all future
owners of that land, and can never be reversed. It is important
to note that farmers who sell their development rights still
own and control every other aspect of their land.
Mr. Chairman, I believe that the Federal Government needs
to do its fair share to preserve our precious farmland. That is
why I introduced the Open Space Preservation Act, legislation
that was originally introduced by my predecessor, Congressman
Bob Walker. The Open Space Preservation Act is very simple: It
repeals estate and capital gains taxes on all farms that are
preserved in farmland preservation programs. Rather than
creating more Federal programs and mandates for land use, I
believe that tax relief is a more effective and less intrusive
way to protect the environment and curb urban sprawl.
Because of the burden of estate and capital gains taxes,
farmers are often forced to sell their farms to developers. The
punitive estate tax has forced the sale of thousands of family-
owned farms in recent decades--many times, just to pay the
estate taxes. I strongly believe that families should not be
forced to visit the undertaker and the tax man in the same
week. By enacting the Open Space Preservation Act and repealing
the estate tax on all farms that are preserved, younger
generations are going to be able to stay in farming, rather
than hand over 55 percent of the legacy a loved one intended
for his family.
By repealing capital gains taxes on preserved farms, our
farmers would be able to save for their retirement, their
children's education, or a better quality of life. And this
would be extremely helpful for owners of preserved farms. If
the Open Space Preservation Act were enacted, a farmer could
finally sell his farm to another farmer, without paying the
exorbitant capital gains tax.
I might mention, when they sell part of the farm to pay
taxes, they reduce their asset base. Farmers do not have a
large cash flow, and they have to get loans. And this asset
base going down limits the loans that they can get for
operation.
Mr. Chairman, I can assure you from my experience in the
Pennsylvania State legislature that farmers greatly appreciate
the opportunities that our Commonwealth's farmland preservation
programs have provided. As a whole, farmers are proud of their
profession. They like farming. They want to continue to farm as
long as they can. At the same time, they realize that
agriculture is a tough profession in which to be economically
successful. Many farmers look upon their farm as their means
for retirement security.
Preservation programs nationwide have allowed farmers to
receive reasonable compensation for their land, while allowing
them to continue in agriculture. The proceeds from their
easement sales may be used to purchase additional farmland or
farm equipment, or may be just for a retirement nest egg. In
any event, farmland preservation has provided farmers a greater
opportunity to be financially secure and continue their
profession.
Although the compensation provided from agriculture
conservation easement sales is welcomed, it is not the only
reason farmers participate in the program. If money were the
only motivator, farmers would sell their properties outright to
a developer and receive a much higher price than the
preservation program.
Why would farmers settle for less than full price for their
farms? I believe the answer is simple. While farming is a
business, farmers do not make decisions on their farm
operations strictly on the basis of dollars and cents. Farmers
see a real value in the preservation of their farm and farming
business for future generations. Farmers want their children to
continue the family farm--if not their children, then
individuals in succeeding generations who are as committed to
farming as they are.
Mr. Chairman, even with Pennsylvania's success in farmland
preservation, much more needs to be done, not only to preserve
farmland, but to preserve the economic integrity of
agriculture. It is my hope that this Committee will lead the
effort to, No. 1, provide meaningful tax relief and, No. 2,
assist state- and local-administered farmland preservation
programs.
The Open Space Preservation Act does just that. It not only
preserves our open spaces, but provides real tax relief to free
hardworking families from the fear of losing their farms. Thank
you, Mr. Chairman.
[The prepared statement follows:]
Statement of Hon. Joseph R. Pitts, a Representative in Congress from
the State of Pennsylvania
Mr. Chairman and members of the Subcommittee on Oversight,
thank you for allowing me to speak before you on this very
important issue. As we all know, increased development
pressures have had a drastic effect on farmland throughout the
United States, especially in the Northeast Corridor.
We have seen a sharp drop in our country's farm acreage. In
my state of Pennsylvania alone, farm acreage has dropped from
nine million acres in 1980 to eight million in 1990. And the
numbers continue to decline. Since 1950, the Commonwealth of
Pennsylvania has paved over a land mass equal in size to the
entire state of Connecticut. Today, my Congressional District,
made up of Lancaster and Chester Counties, loses around 2,000
acres of farmland each year to development. That figure could
rise rapidly in coming years if the land owned by retirement-
aged farmers does not remain in farming.
Recently, one of my local extension agents asked, could
Lancaster County, the home of the Amish, become the next Los
Angeles? With the aging trend coinciding with years of
depressed milk prices and escalating land values, he believes
this is a possibility. He informed me of the strong
agricultural heritage Los Angeles had before development. In
1944, Los Angeles County ranked #1 in the nation in total
agricultural production at $129.4 million; Lancaster ranked
15th at $47 million. In 1992, Los Angeles County ranked only
92nd nationally in agricultural production; Lancaster County
ranked 13th.
To combat this threat to Pennsylvania's economy and quality
of life, the Pennsylvania Agricultural Conservation Easement
Program was developed. This program enables state and county
governments to purchase easements (sometimes called development
rights) from owners of prime farmland. It was passed into law
in 1988, and as of August 30, 1999, 1140 farms in the
Commonwealth of Pennsylvania have been preserved. That's
142,000 acres. (Roughly $277 million of state and local funds
have been spent to purchase those easements.) Implementing such
farmland preservation programs is not only popular in
Pennsylvania--a number of states are enrolling farms in similar
programs.
Please allow me to explain these programs for the record.
Farmland preservation programs are voluntary programs, in which
a farm owner foregoes his rights to sell the farmland for
development purposes and enters into a legally binding
covenant. In this covenant, the owner agrees to keep the land
under cultivation for the life of the farm. In return, the
owner receives a one-time payment from the state or local
government. Often the payment is the difference between the
agricultural value and development value of the land. The land
can never be used for non-agricultural purposes, such as
housing developments. These restrictions affect all future
owners of that land and can never be reversed. It is important
to note that farmers who sell their development rights still
own and control every other aspect of their land.
Mr. Chairman, I believe that the Federal government needs
to do its fair share to preserve our precious farmland. That is
why I introduced the Open Space Preservation Act, legislation
that was originally introduced by my predecessor Congressman
Bob Walker. The Open Space Preservation Act is very simple: it
repeals estate and capital gains taxes on all farms that are
preserved in farmland preservation programs. Rather than
creating more federal programs and mandates for land use, I
believe that tax relief is a more effective and less intrusive
way to protect the environment and curb urban sprawl.
Because of the burden of estate and capital gains taxes,
farmers are often forced to sell their farms to developers. The
punitive estate tax has forced the sale of thousands of family-
owned farms in recent decades. I strongly believe that families
should not be forced to visit the undertaker and the tax man in
the same week. By enacting the Open Space Preservation Act, and
repealing the estate tax on all farms that are preserved,
younger generations are going to be able to stay in farming,
rather than hand over 55 percent of the legacy a loved one
intended for his family.
By repealing capital gains taxes on preserved farms, our
farmers would be able to save for their retirement, their
children's education, or a better quality of life. This would
be extremely helpful for owners of preserved farms. If the Open
Space Preservation Act were enacted, a farmer could finally
sell his farm to another farmer without paying the exorbitant
capital gains tax.
Mr. Chairman, I can assure you from my experience in the
Pennsylvania State Legislature that farmers greatly appreciate
the opportunities that our Commonwealth's farmland preservation
programs have provided. As a whole, farmers are proud of their
profession. They like farming, and want to continue to farm for
as long as they can. At the same time, they realize that
agriculture is a tough profession in which to be economically
successful. Many farmers look upon their farm as their means
for retirement security.
Preservation programs nationwide have allowed farmers to
receive reasonable compensation for their land, while allowing
them to continue in agriculture. The proceeds from their
easement sales may be used to purchase additional farmland or
farm equipment, or may just be used to provide a retirement
nest egg. In any event, farmland preservation has provided
farmers a greater opportunity to be financially secure and
continue their profession.
Although the compensation provided from agriculture
conservation easement sales is welcomed, it is not the only
reason farmers participate in the program. If money were the
only motivator, farmers would sell their properties outright to
a developer, and receive a much higher price than the
preservation program. Why would farmers settle for less than
full price for their farms? I believe the answer is simple.
While farming is a business, farmers do not make decisions on
their farm operations strictly on the basis of dollars and
cents. Farmers see a real value in the preservation of their
farm and farming business for future generations. Farmers want
their children to continue the family farm--if not their
children, then individuals in succeeding generations who are as
committed to farming as they are.
Mr. Chairman, even with Pennsylvania's success in farmland
preservation, much more needs to be done not only to preserve
farmland, but to preserve the economic integrity of
agriculture. It is my hope that this Committee will lead the
effort to 1) provide meaningful tax relief and 2) to assist
state-and local-administered farmland preservation programs.
The Open Space Preservation Act does just that. It not only
preserves our open spaces, but provides real tax relief to free
hard-working families from the fear of losing their farms.
Thank you, Mr. Chairman.
Chairman Houghton. Thank you, Mr. Pitts.
Mr. Coyne. Mr. Chairman?
Chairman Houghton. Yes?
Mr. Coyne. Our colleague from California, Pete Stark, had a
statement he would like to be included in the record.
Chairman Houghton. Absolutely, without objection.
[The information was not available at the time of
printing.]
Chairman Houghton. So, Mrs. Johnson, gentlemen, thank you
very, very much for being part of the panel.
Now I would like to call a second panel: Mr. Burman, who is
Deputy Assistant Secretary of Tax Analysis at the Department of
the Treasury; Mr. Reid Wilson, Chief of Staff at the
Environmental Protection Agency; and Hon. Dan Reicher,
Assistant Secretary, Energy Efficiency and Renewable Energy, of
the Department of Energy.
All right. Mr. Reicher, would you begin your testimony?
STATEMENT OF HON. DAN W. REICHER, ASSISTANT SECRETARY, ENERGY
EFFICIENCY AND RENEWABLE ENERGY, U.S. DEPARTMENT OF ENERGY
Mr. Reicher. Thank you, Mr. Chairman and Mr. Coyne and
Members of the Subcommittee. I am very pleased to have the
opportunity to testify today. And I am going to discuss very
briefly the economic and environmental benefits that can accrue
to the Nation through energy efficiency and renewable energy
technologies. My colleague, Mr. Burman, will discuss how tax
incentives can spur the use of energy efficiency and renewable
energy technologies.
Mr. Chairman, I have a very simple message today: While we
have made great progress over the last two decades in cutting
the costs and improving the performance of renewable energy and
energy efficiency technologies, we have some distance to go
before solar, wind, biomass, and geothermal power, and highly
efficient buildings, vehicles, and industrial processes are
fully competitive in the U.S. market.
Success, Mr. Chairman, requires sustained government
commitment to research and development, and support of
policies, particularly targeted tax incentives, the subject of
today's hearing. Let me quickly give you some examples of our
progress to date, and the remaining challenges.
Wind power in 1980 cost 40 cents per kilowatt-hour. Today,
it is one-tenth of that. With this dramatic cost reduction, and
the availability of the Federal wind production tax credit, we
have seen substantial growth of U.S. wind power capacity.
Wind, however, is still not fully competitive in the U.S.
with fossil fuel power plants. With continued progress in R&D
and renewal of the wind production tax credit, as proposed in
Mr. Matsui's bill, we see this technology competing fully and
successfully in the early part of the next decade. In fact, the
administration's goal is to obtain 5 percent of U.S.
electricity from wind by 2020.
As another example, electricity-producing solar panels in
1980 produced power at more than $1 per kilowatt-hour. Today,
the cost is about one-fifth of that figure. As a result, solar
electric, or photovoltaic, systems are beginning to be
installed in substantial numbers on roofs across the United
States. However, again, we still have a good distance to go to
cut the cost of these panels to under a dime per kilowatt-hour.
In conjunction with further R&D advances, tax incentives for
solar energy, like those in the Matsui bill, will help build a
larger market for solar energy, and cut costs.
In the area of biomass, we have also made great progress,
driving the costs of fuels and power derived from forest and
agricultural crops and waste down to a fraction of what they
were in the past. But again, we have some distance to go.
Tax incentives can definitely help, but I would note that
the so-called ``closed loop approach'' in current law has
spurred no new biopower development in the near term. An open
loop approach, that the Matsui bill moves toward, would be far
more effective.
In the area of the efficiency of our buildings, we have
long known how to build a more efficient home or office. The
issue has been how to do it cost-effectively. Through
government-industry R&D partnerships, along with codes and
standards, we have vastly improved the efficiency and lowered
the cost of heating and cooling systems, appliances, windows,
and insulation.
We have also improved the system efficiency of whole
buildings. But again, we have some distance to go. Additional
R&D, tax incentives like those contained in Mr. Matsui's bill,
and more robust consumer information will quickly lead us to an
area of vastly reduced energy bills and pollution in connection
with buildings.
In the area of industrial energy efficiency, the use of
energy in our most energy-intensive industries like steel,
aluminum, pulp and paper, glass, let me give you a startling
statistic. On average in the United States, it takes three
units of fossil or nuclear derived energy to produce one unit
of electricity; the other two units being lost generally as
heat through cooling towers, discharge pipes, steam vents, and
by other means. The amount lost is about equivalent to Japan's
entire annual energy use, the amount lost from our energy
production system.
Combined heat and power systems link electricity generation
and the use of waste heat in industrial and commercial
settings, raising generation efficiencies from about 35 percent
to 65, 75, even 85 percent levels. These systems are making
inroads in this country; but again, we have some distance to
go. And continued R&D, changes to environmental electricity
regulations, and targeted tax incentives can help.
Last, we have lost ground in recent years in the fuel
efficiency of our vehicles, particularly with the rise of light
trucks and sport utility vehicles. Under the Partnership for a
New Generation of Vehicles, the U.S. Government and the Detroit
auto companies have made good progress toward our joint goal of
an 80-mile-per-gallon, five- to six-passenger production
prototype vehicle by 2004.
We are pursuing hybrid electric-gas, electric-diesel, and
fuel cell automobiles. Meanwhile, some Japanese companies are
introducing two- and four-passenger hybrid vehicles in the U.S.
market over the next several months. Tax incentives like those
in Mr. Matsui's bill, in combination with additional R&D, will
accelerate our progress to an era when 60-, 80-, or 100-mile-
per-gallon vehicles are commonplace. Success in this endeavor
is likely to be highly important to the future competitiveness
of our U.S. car companies.
In conclusion, we have made a great deal of progress in
energy efficiency and renewable energy technologies over the
last few decades, but we have some distance to go. Congress'
support, through targeted tax incentives, in combination with
aggressive R&D, will hasten the day when these technologies and
the economic and environmental benefits that come with them are
commonplace in the United States. Thank you, Mr. Chairman and
Members of the Subcommittee.
[The prepared statement follows:]
Statement of Hon. Dan W. Reicher, Assistant Secretary, Energy
Efficiency and Renewable Energy, U.S. Department of Energy
Mr. Chairman and Members of the Subcommittee, I am pleased
to have the opportunity to appear before you to discuss the
many economic and environmental benefits that can accrue to the
Nation through continued support of energy efficiency and
renewable energy technologies. Although we at the Department of
Energy have a strong interest in tax incentives to spur the use
of clean energy technologies, my colleagues at the Department
of Treasury have provided testimony on current tax proposals
since this lies within their jurisdiction. However, I want to
express my appreciation to Congressman Matsui, and to
Representatives Lewis and Neal from this subcommittee for their
introduction of H.R. 2380, a bill which incorporates many of
the Administration's proposed tax incentives for renewable
energy and energy efficiency. These tax incentives will
encourage the use of energy efficiency and renewable energy
technologies thereby advancing U.S. environmental quality and
economic growth.
Today, I want to share with you some of the exciting
progress that we have made in energy efficiency and renewable
energy over that last 20 years. Twenty years ago renewable
energy was generally produced at a very high cost and in an
inefficient manner. Advanced power delivery system components
and high temperature superconducting materials did not even
exist, and the alternative transportation fuel sector was very
immature. We have come a long way although we have some
distance to go before many of these technologies reach full
competitiveness in the U.S. market. Tax incentives can
accelerate this progress.
For example, the cost of electric power from wind turbines
in 1980 ranged from $0.30-$0.40 per kilowatt-hour (kWh).
Through aggressive R&D by Department of Energy's Office of
Energy Efficiency and Renewable Energy (EERE) and its industry
partners on wind turbine aerodynamics, materials development
and computer-aided design, we have been able to reduce the
costs to between $0.04 and $0.06 per kWh. At this price, wind
systems are beginning to enter the marketplace, expanding from
the early California windfarms to include States ranging from
Vermont to Alaska and from Minnesota to Texas. Wind energy
systems are also poised to expand into other Great Plains and
Northeastern locations, such as Oklahoma, Wisconsin the
Dakotas, Maine, and New York. We are also working on Next
Generation Turbines to reduce the cost of electricity from wind
even further--to as low as 2\1/2\ cents per kWh by 2002. This
cost will enable wind to compete fully across the United
States.
As another example, the first commercially-available
photovoltaic (PV) systems in the early 1980s produced power at
a cost of more than $1.00 per kWh. Today, PV systems are
delivering electricity about $0.20 per kWh--depending upon the
specific technology--making clean, reliable PV systems
competitive in many remote and on-grid sites here in the U.S.
and around the globe. By 2010 we project PV-generated
electricity will drop to $0.10 per kWh. At this price solar
would be a competitive power option in many urban and suburban
areas where transmission and distribution systems are
constrained and also in rural areas across the entire United
States where distribution costs are too high. Improved
materials manufacturing techniques and energy conversion
improvements--most supported by DOE and its laboratories--have
made and will make these cost reductions possible and have
facilitated the resurgence of the U.S. PV industry as the
world's leader in this $1.2 billion global industry, which grew
95 percent between 1995 and 1998.
With large manufacturing plants in Virginia, Maryland,
California, Michigan, Delaware and Massachusetts, the solar
industry is a growing part of the U.S. economy. However, global
competition is fierce. While both domestic PV production
capacity and U.S. product sales are up, the U.S. risks losing
its world market leadership, having dropped from 44 percent in
1996 to 40 percent in 1997 to 35 percent in 1998. Our potential
loss of this growing market is exacerbated by a Japanese PV
budget that is three times what we spend in the U.S. ($240
million in Japan in FY 1999 vs. $72 million in the U.S. in
1999).
We are also making tremendous progress in making solar
water heaters an economically attractive option for families
across the U.S. by 2003. We are developing a new generation of
solar water heaters that is 50 percent less expensive than
today's technology (from $0.08/kWh to $0.04/kWh delivered
energy cost). This would enable a family to buy a solar water
heater for about $1,000 and see their investment returned in
energy savings within four years.
In our geothermal program, we are working with U.S.
industry to establish geothermal energy as a sustainable,
environmentally sound, and economically competitive contributor
to the U.S. and world energy supply. These joint efforts
sponsor research and development that leads to advanced
technologies to improve reliability, reduce environmental
impacts, and lower costs of geothermal energy systems.
Attainment of the five goals of the Geothermal Energy Strategic
Plan for 2010 which have been endorsed by industry will: supply
the electrical power needs of 7 million U.S. homes; provide the
heating, cooling, and hot water needs of 7 million U.S. homes;
meet the basic energy needs of 100 million people in developing
countries; ensure that the United States continues to lead in
geothermal technology; and develop new technology to meet 10
percent of U.S. non-transportation energy needs.
Production of ethanol is also on track for widespread
vehicle use at competitive prices. To compete with today's
inexpensive gasoline, our biofuels program focuses on the
development of facilities that make ethanol from agricultural
and forest wastes and dedicated crops. Construction recently
began in Jennings, Louisiana, on a ``first-of-a-kind''
production plant with 80 percent industry cost-sharing that
will produce ethanol from sugarcane waste. This 20-million
gallon facility is scheduled to come on-line in the year 2000
with initial ethanol production costs of $1.00 per gallon,
putting us well on-track for the program's 2010 production cost
goal of less than $0.75 per gallon. We are also supporting the
development of demonstration plants in California and New York
that will use rice straw and municipal solid waste to produce
ethanol. Additionally, we are studying ways to add facilities
to existing corn-ethanol plants to produce ethanol from corn
stalks and leaves. R&D on ethanol technology is very important
to our future energy security. By 2020 net U.S. oil imports,
which accounted for about 50 percent of domestic petroleum
consumption in 1998, will grow to 65-70 percent of domestic
petroleum consumption--with an annual oil bill ranging from
$130 billion to more than $180 billion in current dollars.
While we are making tremendous strides in these
technologies, we still have much work to do. The competitive
revolution in the power generation sector has led to drastic
decreases in the price of power from new sources of generation.
For example, natural gas-fired combustion turbine technology
produces electricity for about $0.03 per kWh. Given the
currently low domestic market prices of fossil fuels, market
penetration of renewable energy technologies is occurring more
quickly in remote locations domestically and also overseas
where the cost of electricity is generally much higher than in
the U.S. Large-scale penetration of the U.S. electricity market
requires further technological progress and supportive policies
such as tax incentives and federal electricity restructuring
legislation.
In our other major program area, the investments in energy
efficiency made by the Department of Energy and its private
sector partners have had a profound effect on economic
development. They have produced real results that are helping
U.S. industries cut costs and more successfully compete in the
increasingly tough global marketplace. In industries facing
severe international competition--from steel to forest products
to chemicals--EERE technologies are being used to lower
production costs--helping to keep these vital industries
competitive. In the automobile sector, EERE technologies will
not only result in the 80 mile-per-gallon family sedan and a
more competitive domestic auto industry in the next decade, but
have already contributed to the efficiency and competitiveness
of many models on the road today. In buildings, EERE
technologies in lighting, windows, building design, heating,
cooling and materials have increased the efficiency of U.S.
buildings from California to Connecticut. And as our nation
embarks upon a new construction boom, these technologies will
position builders to offer even greater efficiency in both new
construction and renovation of homes, offices and schools. For
example, the 6,000 new schools to be built and tens of
thousands of schools to be renovated in the next decade present
a key opportunity for energy savings--which can mean more money
for teachers and textbooks.
Our programs have a compelling record of success--in
transportation, we are meeting our industry/government
partnership goals and are on schedule to meet the goal of the
ten-year Partnership for a New Generation of Vehicles (PNGV):
the 80 mpg production prototype family sedan. In addition, the
PNGV effort has led to significant engine and materials
technologies being incorporated into current vehicle models.
Also, we have built prototype diesel engines for small trucks
that could be twice as efficient as current sport/utility
vehicle engines with very low emissions. Finally, our work has
helped make possible large-scale deployment of alternative fuel
vehicles--such as natural gas cars and buses.
Through the Industries of the Future program, we are
working with the most energy intensive U.S. industries to
develop technologies that cut their energy requirements,
emissions and production costs and thereby improve their
competitiveness. For example, in the steel industry, we have
developed and demonstrated a portfolio of technologies that
likely will save over $8 million per year at Bethlehem Steel's
Burns Harbor, Indiana, plant and could save nearly $200 million
per year if implemented industry-wide. We have also developed a
wide range of crosscutting technologies that are being applied
across many industries, for example, efficient motor and steam
systems, advanced materials and combined heat and power
technologies. Finally, we have nearly completed the development
of our revolutionary high-efficiency, low-emissions natural gas
turbine for industrial applications. These technologies cut
production costs in the industries America needs to stay
competitive--such as petroleum production, forest products,
agriculture and mining.
In buildings, EERE has supported technologies that have
saved consumers literally tens of billions of dollars to date
in energy costs. In Building America, we have demonstrated to
builders from Pittsburgh to Los Angeles that they can build 50
percent more efficient houses without increasing their
construction cost. Through Rebuild America we have partnered
with communities across the nation to continue energy
efficiency retrofits in 400 million square feet of commercial
buildings that will save over $140 million per year in energy
costs. We have developed a revolutionary natural gas chiller
that significantly increases building cooling efficiency.
Finally, we have reinvented the appliance efficiency standards
process to increase coordination--and the likelihood of
consensus--with industry and other affected stakeholders. As
with our renewable technologies we have made a great deal of
progress on energy efficiency but our challenge in the next
decade is to take these technologies and fundamentally
transform the way we produce and use energy. Again, tax
incentives can accelerate this progress.
Many of the technologies I've discussed today are included
in H.R. 2380. Enactment of tax incentives and a strong,
continuing federal commitment to research, development and
deployment will further enhance the technological benefits to
be gained. By spurring the use of renewable and energy
efficiency technologies, we are investing in the long-term
health of our economy and our environment. Thank you for the
opportunity to testify.
Chairman Houghton. Thank you very much, Mr. Reicher.
Mr. Wilson.
STATEMENT OF D. REID WILSON, CHIEF OF STAFF,
U.S. ENVIRONMENTAL PROTECTION AGENCY
Mr. Wilson. Mr. Chairman and Members of the Subcommittee,
thank you very much for this opportunity to discuss Clinton
administration proposals to use tax incentives to preserve open
space, spur economic redevelopment through brownfields clean-
up, and promote more livable communities.
Across America, communities are searching for ways to
improve their quality of life. In 1998 on the election day,
there were over 240 green ballot initiatives across the
country. Over 150 of them passed. And they authorized more than
$7.5 billion to try and make those communities more livable.
This Administration has proposed creative approaches to
complement these State and local efforts, and I would like to
address two of those today; namely, Better America Bonds, and
the Brownfields Tax Incentive.
One principle is key to both of these proposals, and that
is that the appropriate role for the Federal Government is to
provide tools and resources and information to communities, but
not to interject itself into the decisions that these
communities make. This is about empowering communities, not
dictating decisions to them.
The Better America Bonds program as embodied in H.R. 2446,
would provide States, tribes, counties, and cities $9.5 billion
in bonding authority over 5 years. And I would like to thank
Congressmen Matsui and Doggett, though they are not here, for
their leadership in sponsoring that legislation.
There are three general purposes for Better America Bonds.
One is to protect open space, so a community could create
parks, greenways, and protect threatened farmland. And they
could do this either by acquiring title or by purchasing
conservation easements.
The second general purpose is for brownfields site
assessments and clean-ups. Clearly, there are so many
brownfield sites around this country, and we heard from a
number of the members this morning about that. There is
probably almost never enough money to get to the job of
cleaning them all up. And this proposal would provide more
funds to do that.
And third, Better America Bonds can be used to improve and
enhance water quality. And we are really trying to focus this
toward polluted runoff. We are not talking about building
sewage treatment plants; we have other programs to do that.
This is more about wetlands restoration, planning buffers along
streams, buying sensitive land to protect wellheads, things
like that.
The thing that is great about this proposal for communities
is that it provides them a real bargain. Because this is a tax
credit bond, they would not pay interest on the bonds. The bond
holder would receive a tax credit, in lieu of the interest they
would have received from the community. So it is a deep subsidy
to these communities.
And just one example that the Treasury Department has
provided is that if you had a $1 million bond, a tax-exempt
bond, a community would have to spend roughly $100,000 per year
to service that debt. Under a tax-credit bond, it is only about
$40,000 per year to service the debt; a savings of about 60
percent. And over the 15-year life of the bond, that adds up to
$900,000 in savings for the community. So we believe this
program is a real financial incentive for communities.
Bonding authority would be awarded through a competitive
process. We would plan to run this program much like we do our
successful Brownfields Pilot Grant Program. In that program, we
have provided grants totaling $60 million to 307 communities.
That has leveraged over $1.5 billion, and it helps support
4,000 jobs.
We have done that without writing a single rule or
regulation. And we would want to do Better America Bonds in the
same way; which is a very flexible, easy program to use for
communities. There are no rules or regulations. It has easy to
follow criteria and guidelines about how they would apply for
this bonding authority.
As an example of how this could be used, a city and two
surrounding counties, for instance--and we would want to
encourage regional approaches--could come to us with a proposal
to clean up four brownfield sites in the city, for example, and
to restore some wetlands along the stream that separates the
city from the counties, and also purchase some land along the
stream for parks. So that kind of thing is how Better America
Bonds could work.
It is important to say what the program is not. The Federal
Government will not buy one inch of land. We will not micro-
manage local decisions. It is up to them to decide how they
would use the bonding authority.
And this proposal has strong support from the Conference of
mayors, the National Association of Counties, the National
Realty Committee, the Trust for Public Land, the Garden Club--
very broad support. And on the other side of the Hill, there is
a bipartisan bill sponsored by Senators Baucus and Hatch.
Now, I have got a yellow light, so I am going to turn to
the Brownfields Tax Incentive. We would like to commend this
Committee and Congress for passage of the tax incentive in the
1997 tax bill. It has helped level the field between
redeveloping brownfield sites and developing pristine
greenfield sites.
Under the tax incentive, environmental clean-up costs for
properties in designated areas are fully deductible in the year
in which they are incurred, rather than being capitalized into
the basis of the property. The incentive can reduce the capital
cost of these types of investments by up to half. We regard
this tax provision as an essential element of a comprehensive
brownfields program.
We strongly support H.R. 1630, introduced by Congressman
Coyne--and thank you for your efforts on that--because it would
make this tax incentive permanent. And by doing so, it would
remove a lot of the uncertainty that developers and communities
have about if they will be able to find the funding to clean up
and redevelop these brownfield sites. And we think a permanent
extension is better than another short-term extension, which
would again have a sunset provision. Because that again, at
some point, will increase the uncertainty that communities
face.
One other quick point about the tax incentive is that we
have heard from States and others that to make this more
broadly available we ought to look at changing the definition
of what is a hazardous substance, to include petroleum,
asbestos, and lead paint. And we are working with our
colleagues at Treasury to see if that is indeed workable. They
certainly make some good arguments as to how that would help
them clean up brownfields quicker.
So in conclusion, the Administration has put forth these
two innovative proposals that provide resources to communities
to protect open space, clean up their water, and redevelop
economically by cleaning up brownfield sites. And it allows
them to do this in a way where they set their own priorities
and make their own decisions.
We just want to be there to help them do that. And we look
forward to working with the Committee on these proposals in the
future. And thank you very much.
[The prepared statement follows:]
Statement of D. Reid Wilson, Chief of Staff, U.S. Environmental
Protection Agency
Good afternoon Mr. Chairman and Members of the Committee. I
am Reid Wilson, Chief of Staff at the United States
Environmental Protection Agency (EPA). I am pleased to provide
comment about the Clinton Administration efforts to use tax
incentives to preserve open space, spur economic redevelopment
through brownfields cleanup, and promote more livable
communities throughout America.
Across America, communities are searching for ways to boost
economic growth, protect their environment and public health,
and preserve a high quality of life. They want to see older
neighborhoods revitalized. They want to see their local waters
protected. And they want to preserve farmland and green space
close to home.
In 1998, according to the Brookings Institute and State
Resources Strategies, more than 240 ballot initiatives to
preserve open space, protect water quality, and speed
brownfields cleanup were considered in communities across the
country. More than 150 passed, authorizing $7.5 billion in
state and local spending. These communities were responding, in
part, to the astonishing loss of open space that has occurred
across the nation. According to the American Farmland Trust,
more than 30 million acres of farmland have been lost since
1970. That's like paving over all of Pennsylvania. This loss of
land has substantial environmental consequences. For instance,
a one-acre parking lot generates sixteen times more runoff than
a meadow. This runoff washes toxic chemicals and other
pollutants into our waters, lakes and coastal areas, making
them unfit for families who want to enjoy them and wildlife
that depend on them.
This Administration has proposed creative ways to help
communities further their efforts to promote more livable
communities. I would like to focus on two of these proposals--
the Better America Bonds program and extension of the
Brownfields Tax Incentive. A key principle to both of these
proposals is that the federal government's appropriate role is
to provide tools, resources and information to communities so
that they can grow in ways that are best for them, not to
interject the federal government into local land use decisions.
These proposals are about empowering and assisting communities,
not dictating or micromanaging their decisions.
Better America Bonds
The Better America Bonds program, as embodied in H.R. 2446,
would provide states, tribes, counties, and cities $9.5 billion
in bonding authority over five years to preserve their open
spaces, protect their water, clean up brownfields, and improve
their quality of life, in a manner that works best for them.
Better America Bonds can be used for three general
purposes. First, State, Tribal and local governments can create
or restore parks and greenways, preserve green spaces, and
protect threatened farmland and wetlands, either by acquiring
title or purchasing conservation easements.
Second, Better America Bonds can be used to fund
brownfields site assessments, site cleanups, and provide
flexible funding to boost reuse of these contaminated
properties. The U.S. Conference of Mayors has pointed to a lack
of capital for local governments as the leading barrier to the
cleanup and reuse of brownfields. Better America Bonds will
supplement existing brownfields grant and loan funding with
bond proceeds. This spares green space from development by
reusing already developed properties at a time when over 700
acres of open space and farmland are lost per day to
development.
Third, Better America Bonds can be used to protect and
improve water quality. Rivers, lakes, coastal waters, and
wetlands can be restored or protected, stream side corridors
can be planted or repaired, and land can be acquired to reduce
polluted runoff or protect drinking water sources.
Better America Bonds are structured to provide a deeper
subsidy to communities than traditional tax-exempt bonds. In
short, they are a great bargain for state and local
governments. The bonds are interest-free to communities because
the bondholder receives tax credits from the federal government
in lieu of the interest they would have received from the
community. The Treasury Department and EPA estimate that a
community that issues a one million dollar, 15-year, tax exempt
bond (at an interest rate of 5.8 percent) would pay roughly
$102,000 per year to service the debt. But a community issuing
a tax credit bond would pay only $46,000 per year into a
sinking fund earning interest at the current Treasury rate of
about 6.2 percent. That is an annual savings of $60,000--or
about 60 percent. Over the fifteen year life of the bond, the
savings add up to $900,000.
Bonding authority will be distributed directly to States,
Tribes, and local communities through a competitive process.
EPA plans to administer the Better America Bonds program in
consultation with other federal agencies including the USDA,
Transportation, and Interior. EPA envisions that the program
will be run the same way as our successful Brownfields grants
program, which has provided over $60 million to three hundred
communities to assess contamination of brownfields sites and
plan cleanup activities. This program has leveraged over $1.5
billion in redevelopment funds and supports more than 4,000
jobs. All of this has been accomplished without writing a
single rule or regulation.
The Brownfields program is popular and easy for communities
to use. At the outset, EPA conducted an extensive stakeholder
outreach effort to help us shape the application criteria that
communities use to apply for grants. As with the Brownfields
program, EPA will embark upon a thorough outreach process to
receive advice and input from federal agencies and communities
to help create the application criteria for Better America
Bonds (assuming the program is passed by Congress and signed
into law). In fact, this summer, EPA held Better America Bonds
listening sessions around the country to solicit advice from a
diverse group of stakeholders. We will work closely with
communities to ensure that the program is structured in a way
that meets their needs. We want to preserve green space, not
promote red tape. And, like the Brownfields program, once the
criteria are written and applications are received, we will put
together a panel of federal agencies with relevant expertise to
help review and evaluate applications.
One thing we would like to encourage through Better America
Bonds is regional partnerships. For instance, a city and
several neighboring suburban counties could submit a joint
application to clean up brownfields sites in the city, purchase
open space outside the city, and protect drinking water by
restoring wetlands along a shared stream. We also want to make
sure the program is available to all types of communities--big
and small, suburban, rural, and urban.
It is important to emphasize what this program is not. The
Federal Government will not purchase one square inch of land;
the purpose of the program is to provide resources to
communities so that they can implement decisions they believe
are in their best interests. Nor will the federal government
get involved in local zoning decisions. EPA will not
micromanage decisions included in communities' applications for
bonding authority. Just as in our Brownfields program we do not
tell communities which brownfields sites to assess, we will not
suggest which parcels of land to purchase under Better America
Bonds. It is up to the community to put together a plan that is
best suited to its needs, whether it is brownfields cleanup,
water quality protection, open space preservation, or some
combination. Finally, this program is not mandatory; it is up
to communities to choose whether they want to participate.
Brownfields Tax Incentive
EPA and other Federal agencies are providing resources and
tools to state and local governments to clean up and redevelop
brownfields--abandoned, potentially contaminated properties. As
mentioned before, EPA's pilot grant program has been extremely
successful. In addition, EPA's Brownfields Cleanup Revolving
Loan Fund provides funding for communities to move beyond site
assessment and on to cleanup. So far, 68 communities are
eligible for up to $500,000 each for cleanup activities.
Finally, EPA's Job Training and Development Demonstration Pilot
Program has helped create jobs by training workers to perform
site cleanups in 21 communities so far.
We would like to commend this Committee and Congress for
the passage of the Brownfields Tax Incentive in the last
Congress. Passage of the Brownfields Tax Incentive has enabled
the federal government to help level the economic playing field
between brownfields and previously unused greenfield sites.
Under the tax incentive, environmental cleanup costs for
properties in designated areas are fully deductible in the year
in which they are incurred, rather than being capitalized into
the basis of the property. The incentive can reduce the capital
cost of these types of investments by more than half. We regard
this tax provision as an essential element of a comprehensive
brownfields program and hope it can be made a continuing and
broad tool for brownfields redevelopment in the future. The
Treasury Department estimates that the $.3 billion incentive
will leverage $3.4 billion in private investments and return
some 8,000 brownfields to productive use.
West Chester, Pennsylvania provides a good example of how
the tax incentive can be used to great advantage. The tax
incentive was used there to help a demolition and environmental
service company relocate its headquarters onto a brownfields
property. The site was in a part of town plagued by a 29.6
percent poverty rate, well above the 20 percent poverty
threshold set in Section 198. The company estimates that 100-
200 jobs could be created and that the tax incentive saved
nearly $42,000 in project costs.
Similarly, a company in Portland, Oregon plans the
redevelopment of a brownfields located in an Enterprise
Community along Portland's waterfront. The waterfront location
and large property size made the area perfect for marine-
related activities. The federal tax incentive was a key element
in the efforts to revitalize a site that laid dormant and
derelict within Portland's urban core. If the site is developed
as planned, the company estimates that it will generate more
than 150 jobs, some of which may be filled by residents in the
adjacent community.
Despite these successes, many stakeholders voiced a concern
that the geographic requirements are too restrictive. EPA, in
response, has developed an internet-based mapping program which
will allow taxpayers to determine the eligibility of their
properties for Section 198 election. This mapping system has
shown us that large and widespread tracts of our inner cities
and rural economic corridors are eligible under one or more of
the criteria.
Permanent extension of the Brownfields Tax Incentive is
critical so that more communities can include it in their set
of tools to bring brownfields sites back to vital economic
life.
Conclusion
The Administration is working hard to develop new ideas and
approaches that respond to public concern that we find creative
ways to help communities grow according to their own values,
maintain their quality of life, and enhance economic
competitiveness. This is a challenging task, but innovative tax
proposals such as Better America Bonds and extension of the
Brownfields Tax Incentive will provide communities with
resources they need to protect parks and open spaces, enhance
water quality, and return contaminated properties to productive
economic use. These programs allow communities to set their own
priorities and design for themselves their preferred path
toward economic revitalization and environmental protection. We
look forward to working with the Committee to define common
sense approaches to meet the new challenges that we face today.
Chairman Houghton. Thanks very much, Mr. Wilson.
Mr. Burman.
STATEMENT OF LEONARD BURMAN, DEPUTY ASSISTANT SECRETARY, TAX
ANALYSIS, U.S. DEPARTMENT OF THE TREASURY
Mr. Burman. Mr. Chairman, distinguished Ranking Member, and
Members of the Subcommittee, thank you for inviting me to
discuss the Administration's tax proposals to improve the
environment and help State, local, and tribal governments to
make their communities better places to live and work.
Earlier this year, in the Administration's budget for FY
2000 the President proposed initiatives to help build livable
communities for the 21st century. The Liveable Communities
Initiative aims to provide communities with tools, information,
and resources they can use to enhance the quality of life of
the residents, strengthen their economic competitiveness, and
build a stronger sense of community.
As part of that initiative, the administration proposed a
new financing tool: Better America Bonds. Seven hundred million
dollars in tax credits would make available $9.5 billion in
interest-free tax credit bond authority over 5 years to finance
investments by State, local, and tribal governments. Those
investments preserve green space, create or restore urban
parks, protect water quality, and clean up abandoned industrial
sites.
The Administration also proposed to make permanent the tax
incentive to clean up brownfields and targeted areas, which is
scheduled to expire on December 31, 2000, at a cost of $0.6
billion over 5 years. The Administration's budget also included
a $3.6 billion package of tax incentives over 5 years to
encourage energy efficiency, reduce greenhouse gas emissions,
and develop renewable energy sources. The tax incentives are
part of a larger package of complementary initiatives.
In addition to the $3.6 billion of tax incentives, the
Administration proposed to increase funding for R&D and energy
efficient technology and renewable energy, a new Clean Air
Partnership Fund to boost State and local efforts to reduce air
pollution from greenhouse gases, and $1.8 billion for global
climate change research.
Mr. Wilson has already spoken about the Better America
Bonds program. I want to talk about a few of the technical
details. The Better America Bonds program is modeled after the
existing Qualified Zone Academy Bonds which, after a slow
start, have gained widespread acceptance among many of the
States. The Federal Government would, in effect, pay all of the
interest on Better America Bonds for 15 years, in the form of
tax credits to bond holders. Interest exemption is a much more
valuable subsidy for governments than the tax exemption for
traditional municipal bonds. Mr. Matsui and others have
introduced a proposal for Better America Bonds in H.R. 2446
which, as Mr. Wilson mentioned, we strongly support.
In general, the property that governments acquire with the
proceeds of Better America Bonds must be available only for
public use and use by tax-exempt entities, but not private use.
This is for the benefit of communities. The one exception is
with respect to remediated brownfields, which could be sold to
a private entity for private development, with the sale
proceeds made available to repay the principal.
The Administration proposes $1.9 billion of annual
authority to issue Better America Bonds for 5 years, beginning
in 2000. The EPA would administer an annual open competition
among State, local, and tribal governments for authority to
issue these bonds, subject to EPA's guidelines, which Mr.
Wilson just spoke about.
In the case of brownfields, which are abandoned or under-
utilized properties where redevelopment is complicated by known
or suspected contamination, lenders, investors, and developers
fear the high and uncertain costs of clean-up, so they avoid
developing these contaminated sites. Blighted areas of
brownfields hinder the redevelopment of effective communities,
and create safety and health risks for residents.
The obstacles in cleaning these sites, such as regulatory
barriers, lack of private investment, contamination and
remediation issues, are being addressed through a wide range of
Federal programs, including the tax incentive for brownfields.
The Administration proposed, and the Congress enacted, in
the Taxpayer Relief Act of 1997 a Brownfields Tax Incentive
that permits current deduction of certain remediation expenses.
The qualified contaminated site must be located within a
targeted area: high-poverty Census tracts, designated
Empowerment Zones and Enterprise Communities, or certain EPA
brownfields pilot projects. State environmental agencies
certify eligibility. That provision expires at the end of 2000.
The current law tax incentive was designed to be temporary,
to encourage faster clean-up of brownfields in targeted areas.
But many taxpayers were unable to take advantage of the
incentive because environmental remediation often extends over
a number of years. For that reason, the Administration's budget
proposed a permanent extension of the Brownfields Tax
Incentive, and that proposal was introduced by Mr. Coyne, for
which we are grateful, in H.R. 1630.
Finally, a set of proposed incentives for energy efficiency
and the environment, which Mr. Reicher mentioned briefly, is
contained in H.R. 2380, introduced by Mr. Matsui and others.
The incentives are designed to reduce energy consumption
and greenhouse gas emissions by encouraging the deployment of
technologies that are highly energy efficient and that use
renewable energy sources. The incentives cover buildings and
homes, vehicles, renewable energy, and industrial equipment.
We had to consider a number of different proposals in
putting together this package. And we applied certain criteria
to guarantee that the incentives were as efficient as possible.
First of all, the kinds of technologies qualifying for these
tax incentives had to exhibit superior energy efficiency
compared to conventional equipment. We wanted to avoid using
tax dollars to pay for things that people would be buying in
any event.
Second, there was a high threshold for eligibility. The
energy efficiency standards had to be set sufficiently high
that, although they were manageable, they were pushing the
frontier of what was available, and trying to move the markets
to develop more highly energy-efficient technologies.
Third, there are high up front costs, compared to
conventional equipment. But we did not want to pay for small
items that are widely used, in large part to control the
revenue cost. We wanted to focus on technologies where the high
up front costs were a barrier to acceptance, in the hope that
as they were accepted more, the costs would come down.
These technologies had to be commercially available. And
finally, there had to be a criterion available so that the IRS
could administer the tax incentives. EPA or another agency had
to be able to certify that specific technologies, or specific
pieces of equipment, would qualify.
The proposed incentives for buildings and homes would
encourage investment in highly energy-efficient building
equipment in new homes and solar energy systems. The tax credit
for energy-efficient building equipment would range from 10 to
20 percent depending on the efficiency of the items. The items
covered include electric heat pumps, natural gas water heaters,
electric and natural gas heat pumps, advanced central air
conditioners, and fuel cells.
The higher credit is available for super energy-efficient
models, and the lower credit for items that meet high energy
efficiency standards but do not satisfy the 20-percent
threshold. The tax credit for energy efficient new homes ranges
from $1,000 to $2,000, depending on the home's energy
efficiency. There is also a 15-percent credit, up to $2,000,
for photovoltaic solar energy systems, and $1,000 for solar
water heating systems.
The proposed tax credits for electric and hybrid vehicles
will encourage purchase of vehicles that incorporate advanced
automotive technologies and help move advanced hybrid vehicles
from the laboratory to the highway.
Chairman Houghton. Can I ask you a question? How much
longer are you going to go on? Because the red light is on. We
have got other panels.
Mr. Burman. About a minute, sir.
Chairman Houghton. OK. Fine. Thank you.
Mr. Burman. There is a 10-percent credit for the cost of
electric vehicles and fuel cell vehicles, up to $4,000. That is
supposed to be phased down between 2002 and 2005 under current
law. The proposal would extend the $4,000 credit through 2006.
The proposal would also provide credits up to $3,000 for hybrid
vehicles.
The proposal would extend the wind and biomass tax credit,
and make it available to open loop biomass, and also to energy
produced from cofiring biomass with coal. There is also an 8-
percent tax credit for energy-efficient industrial equipment,
such as combined heat and power systems. There is an 8-percent
credit for that.
The proposed incentives have the potential to significantly
improve energy efficiency and the environment. There are some
examples in my testimony. I will just conclude by saying that
the package of tax proposals put forward by the Administration
would, if enacted, make American communities stronger, cleaner,
and better places to live and work. I applaud the Chairman and
the Ranking Member for holding this hearing on the proposals of
the Members of the Ways and Means Committee to advance these
important priorities. And we look forward to working with you
toward that end.
[The prepared statement follows:]
Statement of Leonard Burman, Deputy Assistant Secretary, Tax Analysis,
U.S. Department of the Treasury
Mr. Chairman, Ranking Member Coyne, and distinguished
Members of the Subcommittee:
I appreciate the opportunity to discuss with you today the
Administration's proposed tax incentives for improving the
environment.
Earlier this year, in the Administration's budget for FY
2000, the President proposed initiatives to help build livable
communities for the 21st century. The Livable Communities
initiative aims to provide communities with tools, information,
and resources they can use to enhance the quality of life of
their residents, enhance their economic competitiveness, and
build a stronger sense of community. As part of that
initiative, the Administration proposed a new financing tool--
Better America Bonds--to help preserve green space and improve
water quality for future generations. The proposed $700 million
in tax credits over 5 years would make available $9.5 billion
in bond authority over 5 years for investments by state, local,
and tribal governments to preserve green space, create or
restore urban parks, protect water quality, and clean up
abandoned industrial sites. The Administration also proposed to
make permanent the tax incentive to clean up brownfields in
targeted areas, generally low-income communities, which is
scheduled to expire on December 31, 2000. The revenue cost of
that proposal is estimated to be $0.6 billion over five years.
The Administration's budget also included a $3.6 billion
package of tax incentives over 5 years to encourage energy
efficiency, reduce greenhouse gas emissions, and develop
renewable energy sources. The tax incentives are part of a
larger package of complementary initiatives. In addition to the
$3.6 billion of tax incentives, the Administration proposed to
increase funding for R&D in energy efficient technology and
renewable energy, a new Clean Air Partnership Fund to boost
state and local efforts to reduce air pollution and greenhouse
gases, and $1.8 billion for global climate change research.
My comments today will focus on an explanation of the
Administration's tax initiatives for improving the environment.
Better America Bonds
Americans are concerned that the quality of the environment
surrounding their communities is threatened by sprawl, that
scenic vistas are being lost, that watersheds are eroding and
contaminated, and that public access to outdoor recreation is
diminishing.
To address these concerns, the Administration proposed the
creation of a new financial tool--referred to as ``Better
America Bonds''--for use by state, local, and tribal
governments, often in partnership with non-profit
organizations, in securing more livable communities. Better
America Bonds are modeled after the current-law provision for
Qualified Zone Academy Bonds. The federal government would, in
effect, pay all the interest on Better America Bonds for
fifteen years, thereby significantly lowering the cost of
financing below that attainable by state, local, and tribal
governments issuing traditional tax-exempt bonds. Mr. Matsui
and others have introduced a proposal for Better America Bonds
in H.R. 2446.
Interest would effectively be paid to holders of Better
America Bonds in the form of a credit that could be claimed by
the bondholder against Federal income taxes otherwise due. The
credit rate would be set by the Treasury Department on a daily
basis based on aa corporate yields of comparable maturity. The
credit rate set for the day on which the bonds were sold would
apply for the life of the bonds. (This method of setting credit
rates was established by Treasury regulations for Qualified
Zone Academy Bonds sold on or after July 1, 1999.) Issuers of
Better America Bonds would pay no interest for the 15-year term
of the bonds; their only obligation would be for repayment of
principal after 15 years.
H.R. 2446 is designed to enhance the marketability of
Better America Bonds by allowing buyers of the bonds to strip
the ``coupons,'' in the form of the tax credits, from the
obligation to repay principal and sell the two pieces
separately, much the same way that Treasury obligations are
stripped. This would permit non-taxable entities, such as
pension funds and endowments, to benefit from the gain between
the current value of the stripped principal and the repayment
of principal at par upon redemption, while another taxable
investor claims the tax credit.
The proceeds of Better America Bonds could be used for the
following purposes:
1. Acquisition of land for open space, wetlands, parks, or
greenways. Acquired land would be owned by a government or a
tax-exempt entity whose exempt purposes include environmental
protection.
2. Construction of public access facilities such as
campgrounds, hiking and biking trails on publicly-owned land or
land owned by a tax-exempt entity whose exempt purposes include
environmental protection.
3. Remediation of publicly-owned parks and open space to
improve water quality by planting trees or other vegetation,
creating settling ponds to control runoff, or remediating
conditions caused by the prior disposal of toxic or other
waste.
4. Acquisition of permanent easements on privately-owned
open land that prevent commercial development and any
substantial change in the character or use of the land. Such
easements could be held by governments or tax-exempt entities.
5. Environmental assessment and remediation of brownfields
owned by state or local governments under certain
circumstances.
In general, property acquired with the proceeds of Better
America Bonds would be available only for public use and use by
tax-exempt entities, but not private use. The one exception is
with respect to remediated brownfields, which could be sold to
a private entity for private development, with the sale
proceeds made available to repay principal.
After the expiration of the 15-year term of the bonds, tax-
exempt entities whose purpose includes environmental protection
would have first option to buy any land acquired with Better
America Bond proceeds if the government decided to sell the
land for development or otherwise convert it to a non-
qualifying use. A tax-exempt entity's option to buy could be
exercised at the original price of the land, rather than its
current market price. The tax-exempt entity would be required
to hold the property in its qualifying use in perpetuity.
The Administration proposes $1.9 billion of authority to
issue Better America Bonds each year for 5 years beginning in
2000 (i.e., a total of $9.5 billion of bond authority). The
Environmental Protection Agency (EPA) would administer an
annual, open competition among state, local, and tribal
governments for authority to issue these bonds, subject to
published EPA guidelines. H.R 2446 stipulates that, as part of
the competitive application process, the EPA should try to
distribute the credits among the states in proportion to their
populations.
Projects qualifying for Better America Bonds, with the
exception of remediated brownfields converted to private use,
could be financed by tax-exempt bonds under current law.
Indeed, states and localities occasionally use tax-exempt bonds
for these purposes. But more needs to be done. Benefits from
environmental projects are often so diffused over time and
distance that taxpayers within particular local jurisdictions
are reluctant to finance such projects with conventional tax-
exempt bonds.
Compared to traditional tax-exempt bonds, Better America
Bonds would significantly reduce the financing costs to local
taxpayers of environmental projects. For example, annual
payments of principal and interest on a traditional 30-year, $1
million tax-exempt bond issue would, at current interest rates,
be about $71,000. In comparison, the annual payments into a
sinking fund that would repay after 15 years the $1 million
principal of an issue of Better America Bonds would be about
$42,000. A state or local government issuing the bonds would
thus save about $29,000 per year over the initial 15 years, and
$71,000 per year over the remaining 15 years of a 30-year
bond's term. Better American Bonds would cost state and local
governments only about half of what a tax-exempt bond would (in
present value terms). This is a powerful tool for financing
investments to make our communities better.
Brownfields Remediation Costs
Brownfields are abandoned or underutilized properties where
redevelopment is complicated by known or suspected
contamination. Because lenders, investors, and developers fear
the high and uncertain costs of clean up, they avoid developing
contaminated sites. Blighted areas of brownfields hinder the
redevelopment of affected communities and create safety and
health risks for residents. The obstacles in cleaning these
sites, such as regulatory barriers, lack of private investment,
contamination and remediation issues, are being addressed
through a wide range of Federal programs that includes the tax
incentive for brownfields remediation.
To encourage the clean up of contaminated sites, the
Administration proposed, and the Congress enacted in the
Taxpayer Relief Act of 1997, a brownfield tax incentive that
permits the current deduction of certain environmental
remediation costs. Environmental remediation expenditures
qualify for current deduction if the expenditures would
otherwise be capitalized (generally costs incurred to clean up
land and groundwater that increase the value of the property)
and are paid or incurred in connection with the abatement or
control of hazardous substances at a qualified contaminated
site. A qualified contaminated site must be located within a
targeted area, i.e., census tracts with at least 20 percent
poverty rates (and certain contiguous industrial or commercial
tracts), designated Empowerment Zones and Enterprise
Communities, and the 76 EPA brownfields pilot projects
designated before February 1997. In order to claim a current
deduction, the taxpayer must obtain a statement from a
designated state environmental agency that the qualified
contaminated site satisfies the statutory geographic and
contamination criteria of a brownfield. The provision applies
to qualified environmental remediation expenditures paid or
incurred in taxable years ending after August 5, 1997, and
before January 1, 2001.
The current-law tax incentive is designed to be temporary
to encourage faster clean up of brownfields in targeted areas.
However, many taxpayers are unable to take advantage of the
incentive because environmental remediation often extends over
a number of years. For that reason, the Administration's budget
proposed a permanent extension of the brownfields tax
incentive. That proposal was introduced by Mr. Coyne and
several cosponsors as H.R. 1630.
Reclaiming brownfields would encourage the redevelopment of
targeted communities by making unused or underutilized land
productive again. Extending the special current-law rule on a
permanent basis would eliminate uncertainty regarding the
future availability of the incentive and encourage long range
investment in the targeted areas. The revenue cost of the
proposal is estimated to be approximately $0.6 billion for FY
2000-2004. Treasury estimates that the tax incentive would
induce an additional $7 billion in private investment to return
18,000 brownfields to productive use over the next ten years.
Energy Efficiency and the Environment
Individuals and businesses do not invest enough in energy-
saving technologies that produce benefits to society in excess
of their private returns. If a new technology reduces pollution
or emissions of greenhouse gases, those ``external benefits''
should be included in the decision about whether to undertake
the investment. But potential investors have an incentive to
consider only the private benefits in making decisions. Thus,
they avoid technologies that are not profitable even though
their benefits to society exceed their costs. Tax incentives
can offset the failure of market prices to signal the desirable
level of investment in energy-saving technologies because they
increase the private return from the investment by reducing its
after-tax cost. The increase in private return encourages
additional investment in energy-saving technologies.
The proposed tax incentives for energy efficiency and the
environment are designed to reduce energy consumption and
greenhouse gas emissions by encouraging the deployment of
technologies that are highly energy efficient and that use
renewable energy sources. The proposed incentives are also
designed to minimize windfalls for investments that would have
been made even absent the incentives and to facilitate tax
administration.
The design of the tax incentives incorporates the following
considerations:
1. Superior energy efficiency compared to conventional
equipment. The eligible items should meet higher standards for
energy efficiency than conventional equipment or use renewable
energy sources. This ensures that tax benefits promote energy
efficiency and reduce greenhouse gas emissions.
2. High threshold for eligibility. The energy efficiency
standards should be set sufficiently high so that eligible
items presently account for a small share of the market. This
minimizes windfalls for purchases that would have been made
absent the credit.
3. High up-front costs compared to conventional equipment.
The targeted technologies have significantly higher purchase
prices than conventional equipment and, at current market
prices, have limited cost effectiveness. These high up-front
costs are another reason relatively few items incorporating the
targeted technologies would be purchased without the credit.
4. Commercially available. The items should be commercially
available or near commercialization. This ensures that the
incentives encourage the deployment of new technologies that
private markets have already developed.
5. Ease of administration. The items must be able to be
defined precisely enough so that the IRS can administer the
incentives. This helps to ensure that tax benefits are claimed
only for items for which they are intended.
The tax incentives the Administration has proposed cover
buildings and homes, vehicles, renewable energy, and industrial
equipment. Mr. Matsui and others introduced these proposals in
H.R. 2380.
Buildings and Homes
This sector currently accounts for about one-third of
energy consumption and the related greenhouse gases. The
proposed tax incentives would encourage investment in highly
energy efficient building equipment and new homes, and solar
energy systems.
Tax credit for energy efficient building equipment. A tax
credit of 10 percent or 20 percent would be provided for energy
efficient equipment, depending upon the efficiency of the
equipment. This credit encourages the purchase of equipment
that will improve the energy efficiency of both residential and
commercial buildings. The items covered are electric heat pump
and natural gas water heaters, electric and natural gas heat
pumps, advanced central air conditioners, and fuel cells.
The credit would be 20 percent of the cost of super energy
efficient models, subject to a cap. It would be available for
the period 2000 through 2003. A 10 percent credit would be
available for electric heat pumps, central air conditioners and
natural gas water heaters that meet high efficiency standards,
but do not satisfy the standards for the 20 percent credit. The
smaller credit would be available for the period 2000 through
2001.
Items eligible for the 20 percent credit are top-tier
technologies that are much more energy efficient than
conventional equipment. For example, compared to typical units
on the market, the eligible advanced air conditioning systems
and electric heat pumps are 40 percent more efficient, and
eligible electric heat pump water heaters and natural gas heat
pumps are about twice as efficient. Items eligible for this
credit embody new, cutting-edge technologies that have
substantial purchase prices and limited in their cost
effectiveness. They generally account for less than one percent
of market sales. Therefore, the credits would benefit very few
purchases that would have been made absent the credit. The 10
percent credit provides a more widely available incentive for
purchases of highly energy efficient items, as well as state of
the art technology, during the period 2000 through 2001. Some
makes and models of qualifying items are currently available.
Existing energy efficiency standards for the designated classes
of equipment have been used to define eligible items precisely
enough for IRS to administer the credit.
The revenue cost of this incentive is estimated to be $1.5
billion for FY 2000-2004. The credit is estimated to increase
purchases by nearly 10 million items of highly energy efficient
building equipment through 2009.
Tax credit for energy efficient new homes. Residences
account for about one-sixth of U.S. greenhouse gases and offer
one of the largest sources of energy saving potential. Over one
million new homes and manufactured homes are built and sold
each year. Some states and certain Federal programs require new
houses to meet certain energy code standards for insulation and
related construction standards, and for heating, cooling and
hot water equipment. However, the energy efficiency of new
homes could be improved significantly through the use of more
energy efficient building practices and more efficient heating
and cooling equipment that exceed current efficiency standards.
A tax credit equal to $1,000 to $2,000 (depending upon the
home's energy efficiency) would be provided to encourage
consumers to purchase energy efficient new homes. The tax
credits would be: (1) $1,000 for homes that use at least 30
percent less energy than the standard under the 1998
International Energy Conservation Code (IECC); this credit
would be available for homes purchased during the period 2000
through 2001; (2) $1,500 for homes that use at least 40 percent
less energy than the IECC standard; this credit would be
available for homes purchased during the period 2000 through
2002; and (3) $2,000 for homes that use 50 percent less energy
than the IECC standard; this credit would be available for
homes purchased during the period 2000 through 2004.
Homes qualifying for the credit would use 75 percent to 85
percent less energy than existing housing and as much as 50
percent less energy than typical new housing. The revenue cost
is estimated to be $0.4 billion for FY 2000-2004. The credit is
estimated to result in purchases of over 250 thousand new
energy efficient homes through 2009.
Tax credit for solar energy systems. Solar energy systems
accounted for 0.02 percent of electricity generation in 1996.
These systems produce no greenhouse gas emissions. The tax
credit for the purchase of rooftop photovoltaic (PV) systems
and solar water heating systems would be 15 percent of the cost
up to a maximum credit of $2,000 for PV systems and $1,000 for
solar water heating systems. The tax credit for PV systems
would be available for the period 2000 through 2006, and the
tax credit for solar water heating systems would be available
for the period 2000 through 2004.
The revenue cost of this incentive is estimated to be $0.1
billion for FY 2000-2004. This incentive will help to achieve
the President's goal of one million solar energy roofs by 2010.
The credit is estimated to reduce electricity production from
non-solar sources by 3 billion kilowatt hours through 2009.
Vehicles
Cars and light trucks (including minivans, sport utilities,
and pickups) currently account for 20 percent of greenhouse gas
emissions. Those vehicles also account for about 20 to 40
percent of urban smog-forming emissions and 40 percent of total
U.S. petroleum consumption. Almost all cars and trucks use a
single gasoline-fueled engine.
Hybrid vehicles, which have more than one source of power
on board, and electric vehicles have the potential to reduce
greenhouse gas emissions, air pollution, and petroleum
consumption. The proposed credits will encourage the purchase
of vehicles that incorporate advanced automotive technologies
and will help to move advanced hybrid vehicles currently under
development from the laboratory to the highway. These vehicles
can significantly reduce emissions of carbon dioxide, the most
prevalent greenhouse gas.
The proposal would extend the present tax credit for
electric vehicles and fuel cell vehicles. Under current law, a
10 percent credit is provided for the cost of qualified
electric vehicles and fuel cell vehicles up to a maximum credit
of $4,000. The maximum amount of the credit is scheduled to
phase down in 2002 and be phased out in 2005. The President's
proposal would extend the tax credit at its $4,000 maximum
level through 2006.
The proposal also would provide tax credits of $500 to
$3,000 for certain hybrid vehicles, depending upon requirements
for the vehicle's design and performance. A qualifying hybrid
vehicle is a road vehicle that can draw propulsion energy from
both of the following on-board sources of stored energy: (1) a
consumable fuel, and (2) a rechargeable energy storage system.
The tax credits would be available for vehicles purchased
during the period 2003 through 2006. The credit amounts--
available for all qualifying vehicles, including cars,
minivans, sport utility vehicles, and pickup trucks--would be:
$500 if the rechargeable energy storage system
provides at least 5 percent but less than 10 percent of the
maximum available power;
$1,000 if the rechargeable energy storage system
provides at least 10 percent but less than 20 percent of the
maximum available power;
$1,500 if the rechargeable energy storage system
provides at least 20 percent but less than 30 percent of the
maximum available power, and
$2,000 if the rechargeable energy storage system
provides 30 percent or more of the maximum available power.
If the vehicle actively employs a regenerative braking
system, the amount of the credit shown above would be increased
by:
$250 if the regenerative braking system supplies
to the rechargeable energy storage system at least 20 percent
but less than 40 percent of the energy available from braking
in a typical 60 miles per hour (mph) to 0 mph braking event;
$500 if the regenerative braking system supplies
at least 40 percent but less than 60 percent of such energy to
the storage system; and
$1,000 if the regenerative braking system supplies
60 percent or more of such energy to the storage system.
Hybrid vehicles eligible for the largest credit would be 50
percent to 100 percent more fuel efficient than a conventional
vehicle of the same size and power. Doubling a car's fuel
economy reduces its emissions of carbon dioxide by about 50
percent. The revenue cost of this initiative is estimated to be
$0.9 billion for FY 2000-2004. These credits are estimated to
result in purchases of 13 million electric and hybrid vehicles
through 2009.
Renewable energy
Wind and biomass currently account for about 2 percent of
electricity generation from renewable sources. These renewable
energy sources produce virtually no greenhouse gas emissions.
To make electricity produced from wind and biomass price
competitive with other forms of electricity generation, the
proposal would extend the current-law tax credit for wind and
biomass for five years, expand eligible biomass sources, and
allow a credit for electricity produced from cofiring biomass
with coal.
Current law provides a tax credit of 1.5 cents per kilowatt
hour (adjusted for inflation after 1992) for electricity
produced from wind and closed-loop biomass (organic material
from a plant that is grown exclusively to fuel a qualified
electricity generation facility). The current tax credit covers
the first ten years of production from facilities placed in
service before July 1, 1999.
The proposal would extend and expand the tax credit for
electricity produced from wind and biomass. It would:
Extend the current wind and biomass credit for 5
years to cover facilities placed in service before July 1,
2004.
Expand the definition of eligible biomass for the
1.5 cent credit beyond closed-loop biomass to include certain
forest-related resources and agricultural and certain other
sources. This change would apply to facilities placed in
service after June 30, 1999 and before July 1, 2004.
Allow cofiring biomass with coal. This proposal
adds a 1.0 cent per kilowatt hour tax credit for electricity
produced by cofiring biomass in coal plants after the date of
enactment and before July 1, 2004. Only the portion of
electricity associated with biomass would be eligible for the
credit.
The revenue cost of this incentive is estimated to be $0.3
billion over FY 2000-2004. This incentive is estimated to
increase electricity production from renewable energy sources
by 32 billion kilowatt hours through 2009.
Industry
The proposal would promote energy efficiency in industry by
encouraging investments in combined heat and power (CHP)
systems. These systems use the thermal energy that is otherwise
wasted in producing electricity by more conventional methods.
These systems increase energy efficiency, lower the consumption
of primary fossil fuels, and reduce greenhouse gas emissions
compared with conventional methods.
To encourage and accelerate investment in CHP equipment, an
8 percent tax credit would be provided for eligible CHP
investment. A qualified CHP system would be required to produce
at least 20 percent of its total useful energy in the form of
thermal energy and at least 20 percent in the form of electric
or mechanical power, and would have to meet certain efficiency
standards. The credit would apply to property placed in service
between 2000 and 2002. Eligible CHP systems should reduce input
energy requirements by about one-third compared to conventional
systems. The revenue cost of this incentive is estimated to be
$0.3 billion for FY 2000-2004. The credit is estimated to
increase cogeneration electrical capacity by more than 1.2
gigawatts through 2009.
Environmental benefits of the proposal
The proposed incentives described above encourage
businesses and consumers to increase their investment in
energy-efficient items, new technologies, and renewable energy
sources. The investments induced by the credits would be long-
lived and, therefore, would produce energy savings and
greenhouse gas reductions for many years after the investment
is undertaken. The induced increase in the market penetration
of energy-efficient technologies, new technologies, and
renewable energy sources may lead to lower cost production and
increased awareness of the benefits of such technologies that
could have lasting effects.
The cumulative reduction in greenhouse gas emissions
attributable to the tax incentives is estimated to be between
100 and 150 million metric tons of carbon equivalent (MMTCE)
over the lifetime of the investments undertaken from 2000
through 2009.\1\ Over one-third of the emissions reduction is
attributable to the tax credits for electric and hybrid
vehicles and over one-fourth to the tax credits for building
equipment.
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\1\ According to the Department of State, Climate Action Report,
July 1997, US greenhouse gas emissions are estimated to be 1,646 MMTCE
in 2000, 1,742 MMTCE in 2005, 1,837 MMTCE in 2010, 1,998 MMTCE in 2020.
---------------------------------------------------------------------------
Reductions in greenhouse gas emissions, however, are not
the only benefits that will be realized from these incentives.
The incentives will also reduce local air pollution. In
addition, the proposals will produce private benefits, such as
energy savings for consumers and businesses. The present value
of energy savings for consumers and business over the lifetime
of items purchased through 2009 is estimated to be between $22
billion and $33 billion.
Conclusion
The Administration strongly supports the proposed tax
credits for holders of Better America Bonds, a permanent
extension of the current deduction of brownfields remediation
expenses, and tax credits for energy efficiency and the
environment.
The proposed Better America Bonds provide a new financing
tool that will enable state, local, and tribal governments to
preserve green spaces, create and restore urban parks, protect
water quality and clean up brownfields. Those governments would
be authorized to issue a total of $9.5 billion of Better
America Bonds to finance environmental and conservation
projects. The proposed permanent extension of the current
deduction of brownfields remediation costs will help return
industrial and commercial sites in targeted areas to productive
use. The proposal is estimated to induce an additional $7
billion in private investment and return an additional 18,000
brownfields to productive use over the next ten years.
Together, these initiatives will help to preserve our
environmental heritage and make our communities more livable in
the 21st century.
The Administration's proposed package of tax incentives for
energy efficiency and the environment is designed to achieve
reductions in greenhouse gas emissions and improvements in
energy efficiency. Purchases of items that offer superior
energy efficiency or that use renewable energy sources would be
eligible for a temporary tax credit. The proposed incentives
are estimated to reduce greenhouse gas emissions by 100 to 150
MMTCE over the lifetime of purchases made through 2009 that
were induced by the credits. The benefits of the proposal
should increase significantly in the years beyond the ten-year
budget window, through the transformation of markets after the
credits are no longer in effect. Moreover, the proposed
incentives also may generate other benefits to society, such as
cleaner air.
In conclusion, Mr. Chairman, we believe that the
Administration's proposed tax initiatives represent sound
policy that can produce significant environmental benefits over
the next ten years and for decades to come. The proposals
represent investments that will generate long-term benefits for
the Nation. We look forward to working with the Congress on
these initiatives.
This concludes my prepared remarks. I would be pleased to
respond to your questions.
Chairman Houghton. Likewise. Thanks very much. I am sorry
to push you along here.
Mr. Burman. That is fine.
Chairman Houghton. We just have a few other people.
So I am going to ask Mr. Coyne if you would like to start
the questioning.
Mr. Coyne. Thank you, Mr. Chairman. I wanted to ask Mr.
Burman whether, in your assessment, the Better America Bonds
will be a good financial product and will have the ability to
attract investors?
Mr. Burman. I believe they will. As was mentioned, I think
by Mr. Wilson, these bonds provide tax credits in lieu of
interest for 15 years, a 15-year duration of the bond issue. By
comparison, tax-exempt bonds reduce the cost of borrowing, but
communities still have to pay the interest on those loans. We
did some calculations that suggested that a locality would pay
off the bond issue over the first 15 years with lower payments
than they would make on a 30-year bond, substantially lower.
In the case of the Qualified Zone Academy Bond program,
there has been an increasing public acceptance of that program.
I think it was stimulated by the fact that Treasury recently
issued regulations that set the interest rate at a more
reasonable level, at the rate for corporate AA bonds. And
recent bond issues have been trading at or near par. Several
States have actually exhausted their bond authority. I think
California is one.
Mr. Coyne. Thank you.
Mr. Burman. Thank you.
Mr. Coyne. Thank you, Mr. Chairman.
Chairman Houghton. Thank you, Mr. Coyne.
Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman. I would like to start
by asking Secretary Reicher, if I could, a couple of questions
about his testimony, in particular, wind power.
I understand from your testimony that you believe wind
power is close to being competitive in the United States, but
that we still have some distance to go, because of the cost.
And I guess what I would like to know is, given your
experience, how are we doing in wind power development,
particularly in farm country? And how would the extension of
the production tax credit which is, as you know, one of the
things we are talking about in the extender package to do yet
this year--how would that assist with regard to wind power
development?
Mr. Reicher. Mr. Portman, we are doing well in the
development of wind power. First of all, it is a huge resource
in this country. Two States alone, Texas and North Dakota,
could easily supply the entire electricity needs of the
country. Costs have come down. As I said, they are a tenth of
what they were in 1980. The production tax credit has helped.
We are seeing real growth: States like Iowa, Minnesota,
Wisconsin, the Dakotas, Texas, Colorado, Wyoming, Vermont. And
in fact, Mr. Coyne and Mr. Houghton, there will be new wind
facilities, major ones, built both in New York and Pennsylvania
over the next year.
California is not even on the list of the top 15 wind
States in the United States in terms of the resource potential.
States that I have mentioned, even New York State for example,
has a greater developable resource than California in terms of
wind.
The important point, referring to Mr. Portman's question
about wind power, is that it is a wonderful addition to farm
country. I visited Iowa recently and Minnesota recently. And
there, the wind developers are paying $2,000 to $3,000 per
turbine per year to farmers for the use of their land. They
plant crops right up to the base of the turbine. They graze
their cows right up to the base. And as one of the farmers said
to me, ``This is a real cash crop.'' And it is an important
cash crop when farm country is in such crisis.
So it is a wonderful, wonderful addition. And the key is
that we are not quite there, in terms of the cost of this
technology. Combined cycle natural gas produces electricity at
about 2 to 3 cents a kilowatt-hour; wind is about 4 to 5 cents.
Production tax credit is critical to make up that gap, as we
continue through R&D to bring the cost down.
It is a multi-billion-dollar-a-year industry worldwide. We
do not lead it; the Danes and the Germans do. We would like to
recapture our place in that industry. We have new factories
being built in North Dakota, in Illinois. In Mr. Portman's
district there is a gear box manufacturer.
And we just think the tax credit is absolutely essential to
moving this technology--the cheapest of the renewables--
forward, and gaining the benefits, both economic and
environmental, that we see from it.
Mr. Portman. Just a quick follow-up. The production credit
is what? One-and-a-half cents?
Mr. Reicher. Yes.
Mr. Portman. And you are saying it is 4 to 5 cents per
kilowatt-hour now, which does not allow it to be competitive
with the most efficient uses of other sources of energy, but it
is now within striking distance. How much longer do you think
the tax credit would be needed, if we were to reinstate it?
Mr. Reicher. I think that the 5-year extension, we would be
there with that 5-year extension. As I said, the natural gas
plants are 2 to 3 cents. We are at 4 to 5 cents. Our R&D
trajectory has us getting down to 2 to 2\1/2\ cents for wind in
the next few years. So a 5-year extension would comfortably get
us there.
And I tell you, this is a terrific technology, and brings
real economic benefits to so many areas of the country. I spoke
to Congressman Boehlert recently. There will be a major
installation in his district. And the farmers there are very
much looking forward to the sort of payments they get as they
struggle, for example, with the loss of the dairy industry.
Mr. Portman. When you look at it from a big-picture
perspective, comparing it to other sources of alternative
energy, including solar and biomass and other areas within your
jurisdiction at the Department of Energy, would you say that
wind has the most potential?
Mr. Reicher. Wind is today the cheapest of the renewable
energy sources. So in the near term, it has the greatest
potential in adding large-scale megawatts of clean energy to
the U.S. base. We are making great progress in solar, in
biomass, in geothermal, but wind is the cheapest of those, and
the production tax credit there. And I would also encourage you
as well in biomass and solar. That will move those down those
cost curves and make those important parts of our energy mix,
as well.
Mr. Portman. Thank you, Mr. Secretary. Thank you, Mr.
Chairman.
Mr. Reicher. Thank you, Mr. Portman.
Chairman Houghton. Thank you very much.
Ms. Dunn.
Ms. Dunn. Thank you very much, Mr. Chairman.
Mr. Wilson, I wanted to ask you, with the brownfields
initiative and the tax incentives that you have been using, is
this bringing people together in communities, like the one that
I represent, the Seattle area? Are you finding success there as
local governments work with the Federal Government and
conservancy constituencies get involved, too?
Mr. Wilson. Are you speaking just of the tax incentive, or
sort of the overall brownfields?
Ms. Dunn. The program.
Mr. Wilson. In terms of the brownfields program, we are
seeing in cities around the country really great emerging
partnerships between developers and community groups and local
governments to figure out ways to identify the areas they need
to clean up to be able to bring in redevelopment, whether it is
housing or businesses or a park for the neighborhood. We have
seen that all over the country.
And in terms of the Brownfields Tax Incentive in
particular, because it is newer, because there is some
uncertainty with it, because it is going to sunset under
current law, we have not seen it used as much as the other
brownfields programs.
But for instance, in Westchester, Pennsylvania, there is a
great example where the local developers and community people
have said to us over and over again that the tax incentive has
been a real boon to them putting together the deal to redevelop
a neighborhood that is in a very poverty-stricken part of
Pennsylvania. If the plans go forward as they think they will,
they might be able to hire as many as 200 people. And because
of the tax incentive, they believe they will save over $40,000
in clean-up costs.
And I think if we can make this tax incentive permanent,
you are going to see more and more examples of that around the
country, because people will be more willing to get into it
because they know it is going to be there reliably in the
future.
Ms. Dunn. How much time do you expect it would take to
evaluate whether people will take advantage of the incentive?
Mr. Wilson. Well, in the law as it is currently written,
there is no provision to sort of go out and collect information
about how well it is being used. The States have surveyed their
localities. And we have found 30 or 40 of these sites,
brownfield areas, have really been worked well and are using
the tax incentive.
In the future, I think we would want to look at ways that
we can get a better sense of exactly where this is being used,
because in current law we do not have a mechanism to go out and
find exactly how extensively it is being used.
Ms. Dunn. All right. Thank you.
Mr. Wilson. We have imperfect information right now.
Ms. Dunn. You have what?
Mr. Wilson. Imperfect information, because we just have not
been able to get information back from everyone who is using
it.
Ms. Dunn. Thank you very much. Thank you, Mr. Chairman.
Chairman Houghton. Fine.
Mr. Weller.
Mr. Weller. Thank you, Mr. Chairman. I want to commend you
for the subject matter of this hearing. This is a very, very
worthwhile hearing, discussing something that I think we all
care about in a bipartisan way.
On the issue of brownfields, I represent a pretty diverse
district, representing the South Side of Chicago and the south
suburbs and Will and Cook Counties and a lot of farm
communities and bedroom communities. And brownfields are an
issue that affects every one of those types of communities,
whether you are in a rural area or a suburban or a city-type
community.
And, you know, it can be anything from an abandoned gas
station to hundreds of acres of abandoned industrial parks. In
the tenth ward of Chicago, I have the largest brownfield in
Illinois, the former Republic Steelworks. And then, of course,
neighboring to that is the former Wisconsin Steelworks; and
then the Joliet Arsenal, a larger former military facility,
which is a brownfield; and a lot of smaller ones. It is
estimated, I think, there are over 2,000 brownfields in the
Chicago region, alone.
Mr. Wilson, you had indicated in your testimony, you were
discussing the current tax provision, and I was one of those
who worked to get that in the 1997 Balanced Budget Act, working
with mayor Daley and others to have that included. You had
indicated that the current provision would essentially benefit
about 8,000 brownfields across this country.
Now, I have seen statistics that there is almost an
estimate one-half a million--an estimated 500,000--brownfields
across the country. What is necessary, do you believe, to be
able to achieve the goal of eliminating, cleaning, up and
revitalizing all brownfields; not just the 8,000 that would be
targeted by the existing provision, but to eventually clean
them all up?
Mr. Wilson. Well, it is clearly a huge task. I mean, just
in the Chicago area alone, you have pointed out, there are
2,000 of these sites. For one, I do believe that if Congress
was to make permanent the Brownfields Tax Incentive, you would
get more of these brownfields cleaned up, because developers
would be able to save money on their clean-up costs. That 8,000
figure is over a 5-year period. So if it is used and used and
used into the future, you are going to keep being able to clean
up more of these brownfields.
In addition, the Better America Bonds program, I think,
complements this very well. One of the three general uses for
the bonding authority is to clean up brownfield sites.
Mr. Weller. Mr. Wilson, the Better America Bonds, is that
targeted in the same way, a community's ability to use those,
to the restrictions that were in the 1997 Act? Because when it
comes to the Brownfields Tax Incentive, being able to expense
those clean-up costs, you know, those were targeted, that
benefit, solely to essentially low-income Census tracts,
neighboring Census tracts, and Empowerment Zones.
Now, the Better America Bonds, are they restricted and
targeted in the same way? Or can any community, whether it is
New Lennox, Illinois, or Ottawa, or the tenth ward of Chicago,
be able to use them?
Mr. Wilson. They are not limited in the same way at all.
Any community that had a brownfield site that wanted to either
assess the contamination or clean it up, or both, could apply
for bonding authority under Better America Bonds. So there is
no restriction in that way.
And getting back to your other comment, I think there is a
perception out there that the current restrictions on the
Brownfields Tax Incentive, whether it be the poverty
restriction or the geographic, are really restrictive. And we
have looked at that. And I think it is largely a perception at
this point.
We have done a mapping program that is available to
communities, for them to be able to identify, ``Here is where I
live. Here is where this brownfield site is. Can it use the tax
incentive?'' And indeed, it is much more widely available than
I think people think. And we should probably do a better job of
letting people know exactly how they can figure out if they are
eligible.
Mr. Weller. Well, my understanding is the redevelopment of
the Joliet Arsenal, which is a 24,000-acre former military
facility--there is a tall grass prairie there, the Abraham
Lincoln National Cemetery--about 3,000 acres were set aside for
industrial use. One of our later witnesses, of Center Point
Properties, has taken on one of those industrial parks for
redevelopment on the Joliet Arsenal.
And my understanding is that the Joliet Arsenal
redevelopment, which has always received bipartisan support, is
not eligible for this Brownfields Tax Incentive. So I would be
interested in seeing those maps.
But the question I have for you--and perhaps I should
direct it to Mr. Burman--is, would the Administration support
changing this tax incentive so that any community, whether it
is rural, city, suburb, or a middle-class community, regardless
of the economic nature or whether or not it is in an Enterprise
Zone, can be eligible for this Brownfields Tax Incentive?
Mr. Burman. Obviously, we would like to work with you on
the targeting of the tax incentive, to make sure it is reaching
its intended use. The Brownfields Tax Incentive was limited to
the targeted areas, because in higher-income areas market
incentives should result in properties being redeveloped. The
land is worth more than the cost of remediation.
The real concern is that in high-poverty areas the land,
after being remediated, might not be worth as much as it cost
to do the remediation.
Mr. Weller. You know, Mr. Burman, one thing I have always
found is that all of us, I think, as we drive through
communities, regardless of how prosperous they are, we all have
noticed that gas station that used to sit there that closed a
few years ago and that has never been redeveloped. And of
course, that is a brownfield. And that is the cost of the
financial liability of that clean-up.
And I just do not understand why we have a bias against a
middle-class community, or a community of any other economic
standard, on whether or not they could take advantage of this
tax incentive. The question I have is, why not allow any
community
anywhere the opportunity to use this tax incentive to
revitalize and clean up abandoned brownfields?
Mr. Burman. As you pointed out, the Better America Bonds
program does have a special provision in the case where
property is not worth the clean-up cost and it is taken over by
State or local government. Because it is abandoned, that
government can use Better America Bonds to redevelop the
property, and then move it back into commercial use.
Mr. Weller. Of course, tax incentive is an incentive for a
private developer, not the local government. But a private
developer will take it on and recover their expenses and put it
back to productive use.
Mr. Chairman, thank you for the little bit of few extra
seconds there. And I look forward to working with you and the
administration to solve this challenge.
Chairman Houghton. Thank you, Mr. Weller. Thank you very
much, Mr. Burman.
Mr. Neal.
Mr. Neal. Thank you very much, Mr. Chairman. And again,
thanks for holding this hearing in a bipartisan spirit.
Mr. Reicher, Mr. Wilson, or Mr. Burman, if you would like
to take a stab at this question, do you get concerned at all
that some of the zeal for open space preservation is also
intended to say ``No more growth; no more housing''? I mean,
some people would argue that the best use of a piece of land is
to put a house on it.
Mr. Wilson. There may be some who think that way. We do not
count ourselves among them.
Mr. Neal. Do you prefer ``snob zoning'' that would keep
some housing out?
Mr. Wilson. Pardon me? I did not hear your question. Sorry.
Mr. Neal. Do you prefer the application of some ``snob
zoning'' that would prevent people from building homes?
Mr. Wilson. No. In fact, we want to stay as far away from
local zoning decisions as possible. That is the job of local
governments, not the Federal Government. But in terms of open
space, we think there is value in open space, whether it is in
urban area, a rural area, a suburban area. And one of the
things we are going to try and do, assuming this Better America
Bonds becomes law, is to make sure that all types of
communities have access to this bonding authority, so that if
they want to protect open space or create a park inside of a
city, they are able to do that.
But it is up to them to decide which open space they would
want to preserve. And so if a community cannot really
demonstrate that it has broad community support for that idea,
we would have to look at that closely.
Mr. Neal. Well, ``broad community support'' could be
interpreted as ``No more growth,'' could it not?
Mr. Burman. One point that is important is that this is
just one of many tools that we are proposing to provide to
State and local governments to help them decide what is best
for their communities. Also in the budget is a proposal to
increase the low-income housing tax credit, which is important
for providing housing in lower income areas. There is also a
proposal for the new markets tax credit.
Mr. Neal. So you are arguing for more low-income housing in
more low-income areas?
Mr. Burman. I am sorry, low-income housing wherever it is
built. The point is, I think we are trying to provide tools to
help local governments to deal with the challenges that they
are facing. Among them, and certainly in some places, is the
issue of sprawl and congestion and pollution.
Mr. Neal. Look, I am sympathetic to what you want to do.
But I think it is also important to take a look at how some of
these patterns are developing. And some of these patterns are
developing with the support of people who do not have a lot of
interest in open space or environmental needs; they are
interested in shutting the door on any more growth in those
communities. And I think that that ought to be part of any
discussion that takes place here. And I think you should be
mindful of that as these deliberations ensue. In addition to
that, you can make the argument that some
low-income neighborhoods are saturated with low-income housing.
Mr. Wilson. I think that is a valid point. And I think that
one of the reasons why we want to encourage regional
partnerships to come forward to us with applications is so we
are not pitting one jurisdiction versus another, or one
neighborhood against another; but that there is a sort of a
comprehensive look at a city and its surrounding areas, or a
rural area or a small town and its surrounding rural counties.
Mr. Neal. Yes, I think that that is the tack to adopt,
primarily because I have witnessed that a lot of people who
show up--and I do not have these responsibilities any more--but
I have witnessed that a lot of people who show up have no
environmental interests or leanings, but all of a sudden
develop a fascination with open space.
Mr. Wilson. Right.
Mr. Neal. So the point that I try to raise is that growth
is important. And I still think that in a lot of vacant areas,
putting a house on a piece of land helps an awful lot of
people, and not just real estate people. It helps people who
are desirous of finding that first-time home purchase.
Mr. Wilson. Right. Yes, this program is not about no-
growth. It is about providing tools to communities to grow in
the ways that they think are best for them.
Mr. Neal. Enlightened growth.
Mr. Wilson. Yes.
Mr. Neal. Thank you.
Chairman Houghton. All right, thanks, Mr. Neal.
Mr. Hulshof.
Mr. Hulshof. Thank you, Mr. Chairman. Thank you, gentlemen,
for being here.
You know, one of the challenges of being a Member of
Congress is that often we will start with a good idea or a
laudable goal of something that we would like to see happen,
and then in our zeal and clamor to get there, we sort of forget
the steps that have to go into place to get to that goal. And
specifically, maybe we do not examine whether or not the path
to that goal is the best one.
And where I want to specifically focus--And Mr. Burman, I
have got Treasury's description of the FY 2000 Budget that
talks about tax credits for holders of Better America Bonds.
And at page 30 it talks about the structure of Better America
Bonds is identical to those proposed for the Qualified Zone
Academy Bonds. And I think you have made reference in your
testimony to the QZABs.
Now, for those folks who are not familiar with QZABs, this
was bonding authority in the amount of $400 million in 1997,
and an additional $400 million in bonding authority for 1998,
for a total of $800 million in bonding authority available. And
yet, you would agree with me, I think, because you made
reference to it at the tail end of your remarks, that the
markets have been less than receptive. And I think that may be
kind, but I do not want to characterize it. Would you agree
with me that the markets have been less than receptive in using
QZABs?
And I see some people behind you shaking their heads
``No,'' but I will take your answer as a ``Yes'' or a ``No.''
Mr. Burman. Well, let me see if I can remember their
talking points. [Laughter.]
Mr. Burman. There was slow take-up for Qualified Zone
Academy Bonds in the first place. It was a brandnew program. It
was just enacted in 1997. State and local governments had to
figure out how to deal with these bonds, how to issue them; as
did bond markets. And the credit rate, which was supposed to be
the market interest rate, was set too low.
Once we adjusted the credit rate so that it was equal to
the corporate AA bond rate, similar to the pre-tax rate that
would apply to tax-exempt bonds, there has been, I think,
fairly wide acceptance for Qualified Zone Academy Bonds. There
have been several bond issues in California, I think Indiana--
and I am just going to make up a list here, but I will be
wrong--Illinois, Oklahoma, Texas, and Virginia. And there are
numerous other States that are planning to issue bonds.
So I think for a new program, the experience has not been
disappointing.
Mr. Hulshof. I appreciate your having done your homework on
this issue, anticipating these questions. The most recent
letter that I have gotten, that I requested and received a
response to from your former boss, Mr. Rubin, indicated, at
least as of April 29 of this year, some months ago, I think
about a total of about $30 million issued. You are telling me
that there are some additional states that you mentioned,
Illinois, for instance, and some others. Do you have the most
recent amount of QZABs that have actually been issued--
generally, a ballpark number?
Mr. Burman. So far, it is about $50 million.
Mr. Hulshof. Fifty million, out of an $800 million
authority?
Mr. Burman. Right. But there are a number of other bond
issues that are in the pipeline.
Mr. Hulshof. The other thing, and you mentioned this at the
tail end of your remarks, Mr. Burman, and I take it in the
spirit that it is given. And you probably anticipated this
question as well, regarding par value. And at least early on,
for instance, there was an issue sold for a school in Chicago
that was 97 percent of par. There was a second issue, a project
in the Fresno and Clovis school districts in California, at 91
percent of par. How do we get beyond those discounted measure?
Mr. Burman. The Treasury Department issued regulations in
July that reset the credit rate exactly in response to those
concerns. Since July that there has been a groundswell of
interest in the program. So we think we have solved that
problem.
Mr. Hulshof. Let me, in the remaining time--Mr. Wilson, not
to let you get off the hot seat, with one question. Again, and
I mean this with much respect, but it is my understanding the
proposal calls for the U.S. Environmental Protection Agency to
review and approve each application. And I have got to tell
you, I do not know anything about your background; maybe you
are a finance major. But can you tell me what special expertise
the EPA has regarding the issuance of financial instruments?
Mr. Wilson. Sure. Let me do it a little more broadly. The
Administration believes it makes sense for EPA to be sort of
the lead agency on reviewing applications, for several reasons.
No. 1, the stated purposes of the Better America Bonds are
brownfields clean-up, water quality enhancement, and open space
protection.
Clearly, we already do a lot in the realm of brownfields
assessment and clean-up. We have several different programs
that have been very successful. And we plan to model this
program along the lines of how we run that one, in terms of a
competitive process and reviewing applications; and reviewing
applications not just by ourselves, but with a panel of other
Federal agencies who have relevant expertise, whether it is
Treasury on tax and financial issues, or Interior on land-use
issues, things like that. So it is not going to be us alone.
Second, we actually do have some experience on financial
matters, because we have the Clean Water State Revolving Loan
Fund, and the Drinking Water State Revolving Loan Fund. So we
have a team of people at EPA who are extremely well versed in
the issues of bonding and those kinds of things.
So one part of the answer is we have a lot of experience in
these issues. And two is, it is not just alone; it is going to
be us and other agencies.
Chairman Houghton. Fine. Thanks very much.
Mr. Hayworth.
Mr. Hayworth. Thank you, Mr. Chairman. Gentlemen, thank you
for your time today and coming in to visit. One of the
advantages of a hearing format like this is that we talk,
obviously, about the matter of most concern in terms of
taxation and tax policy and where we are heading, in terms of
the environment.
But there are also some housekeeping notes that I would be
remiss if I did not share with each of you gentlemen. If you
gentlemen would go back to your respective secretaries and
directors, and pass along this helpful hint: When a Member of
Congress writes them a letter directly requesting a response,
that duly elected, constitutional officer is entitled to an
acknowledgement of the receipt of the letter.
I have sat here and my colleague to my left--figuratively
speaking--I was pleased to see that departing Secretary Rubin
was courteous enough to write him back. On several occasions, I
would write Secretary Rubin, and he would fail to respond. And
Mr. Burman, perhaps now, with Secretary Summers, we will see an
improvement in that relationship. But perhaps Secretary Rubin,
in preparing to return to the private sector, rediscovered
responsiveness to be to his benefit. And I am glad that he
responded to my friend, Congressman Hulshof.
On several occasions, I wrote to Director Browner. Letters
were referred to other folks. I finally had an oral
communication with her the night of the State of the Union
Message, and she responded that, ``Oh, yes, I have let other
people know about it.'' But it is just good sense and common
courtesy to respond directly to the member that the
communication is acknowledged and other people are working on
it.
Mr. Wilson, with reference to the EPA--and I do not want to
get too far afield--let me thank your agency for packing up and
leaving New River, Arizona, as the regional office did in San
Francisco. Because once that happened, we were able to solve
the problem affecting the people of New River. And that may be
the subject of oversight for another Committee at another time
in another venue. And we appreciate all three of you gentlemen
coming down.
A point I would like to make here today deals with overall
tax policy, especially in the wake of the President, who did
have the courtesy to communicate his veto to us last week of
broad-based tax relief. It deals with the death tax. The sixth
district of Arizona in square mileage is about the size of the
Commonwealth of Pennsylvania. And while there are urban areas
there, there are vast reaches of rural lands and lands that
have been preserved, and also lands that have been farmed and
ranched.
And this death tax, and our failure to repeal it, present a
major obstacle to the family farmers and ranchers in my
district. And I think we have seen this nationwide. These folks
want to pass their land and their assets--in essence, their
family businesses--on to their heirs. The imposition of this
death tax too often forces large parcels of environmentally
valuable land to be sold off in smaller, and some would say
less environmentally friendly, parcels.
That is especially true in Arizona. And again, in my
district there is great diversity. Yes, as you might suspect, a
fair amount of desert; but also, cotton farms, dairy farms,
cattle ranches, that have run for generations. And the sad fact
is, now there are many fewer of these enterprises than there
were when I was elected in 1994.
Time and again, when I go to my constituents and ask them
why the change, they tell me this death tax is to blame. The
patriarch of the family passes away; the family has no choice
but to liquidate their assets to pay the tax. And the irony is
that virtually in every case, to liquidate the estate, the land
is sold and it is developed. Never again will it be prime farm
land or ranch land. It becomes part of the problem of urban
sprawl.
The bottom line is this, gentlemen. We appreciate your
attendance here today. And, my colleagues, I think we have to
ask this question: How can anyone testify that this
administration really seeks to preserve the environment? Just
last week, with his veto of death tax repeal, the President
took off the table what I believe to be the most effective
weapon to reduce the single most prominent factor in breaking
up family-owned farms and ranches. Because, as we have seen,
and as I see acutely in Arizona, we have over-development and
ever-increasing sprawl, because families have no choice.
And with that, I thank the Chairman, and yield the balance
of my time.
Chairman Houghton. OK, thanks very much.
Gentlemen, thank you very much for being on our panel. We
certainly appreciate your time.
I would like to call the third panel: Ms. Jean Hocker,
president of the Land Trust Alliance; Michael Dennis, vice
president and general counsel of the Nature Conservancy;
Charles Bartsch, senior policy analyst, Economic Development,
of the Northeast-Midwest Institute; John Lincoln, board of
directors, American Farm Bureau Federation; and Christopher
Miller, president of the Piedmont Environmental Council in
Virginia.
Well, thank you very much for being with us. Ms. Hocker,
would you like to begin the testimony?
STATEMENT OF JEAN HOCKER, PRESIDENT,
LAND TRUST ALLIANCE
Ms. Hocker. Yes, thank you very much. Mr. Chairman and
Members of the Subcommittee, I really appreciate your holding
this hearing. It is important to us, and to the country.
I am Jean Hocker. I am president of the Land Trust
Alliance, which is the national umbrella organization for local
and regional land conservation organizations that are known as
land trusts. These are the grassroots groups, by and large--
some small--some large, that are working with landowners all
across the country to help protect open space in their
communities. Together, these grassroots groups have protected
over 4 million acres--actually, nearly 5 million acres--of open
space.
The Ways and Means Committee has helped enormously in this
work through the tax incentives that you have initiated over
the last 25 years. But with sprawl overtaking open space in
communities all across the country, there is a lot more that
needs to be done and that can be done.
I do want to thank Representatives Johnson and Portman and
Dunn for sponsoring legislation to provide additional tools for
conservation in the Tax Code, and to thank those members who
have joined them in sponsoring their bills. I have included a
chart with my testimony that enumerates and summarizes all of
those. And it is truly an impressive collection of tax
proposals to support open space, so we thank you.
I want to focus on two of those proposals today, although
many of them are worthy of support. The first is section 2(a)
of Representative Johnson's bill, H.R. 2263, which would make
the provisions of the American Farm and Ranch Protection Act
apply uniformly to conservation land in every part of the
country. Currently, those provisions are limited to certain
areas. We think they ought to be available to all landowners
who want to protect their land, regardless of where they live.
As you know, the Farm and Ranch Protection Act--which Mr.
Houghton, we thank you for, and others on the Committee who
helped pass it into law in 1997--now section 2031(C) of the
Code, does two really very important things. First, it provides
for an election to exclude from the taxable estate to 40
percent the value of land subject to a qualified conservation
easement. And second, this Act allows the executor of an estate
to grant a qualifying conservation easement on property after
the decedent's death, and thus to receive these benefits.
Now, I want to digress for just a minute here. I do know
that many Members of this Subcommittee are committed to ending
the estate tax altogether, and that the tax bill Congress
passed several months ago would have done that. But let me
point out, as you know, that that bill would have taken 10
years to totally eliminate the estate tax. And I want to point
out how much 10 years can do to land that deserves
conservation.
Of the 2.3 million acres protected by conservation
easements held by local and regional and national land trusts,
80 percent of those easements have been put in place in the
last 10 years. So even if the next decade is the last one for
estate taxes, it is going to be too late for a lot of land that
needs to be protected. Our focus now is on tools that will get
land protected in the next decade, because after that a lot of
important lands will not be available for protection.
The tools in the American Farm and Ranch Protection Act are
limited currently to the lands only within 25 miles of a
metropolitan statistical area or a national park or wilderness
area. They should be extended to all parts of the country.
Indeed, it is the lands that are just outside the envelope of
intense pressure today that we should be targeting for
protection. These are the lands that will be under pressure
very quickly, if recent history is any guide. We should
encourage vision and foresight by those landowners that want to
protect them today, not penalize them.
Likewise, the post mortem election is another very
important conservation tool that gives heirs a choice now. Now,
when Congress was considering the American Farm and Ranch
Protection Act, the Joint Tax Committee raised some concerns--
about potential costs. The results were the geographic
limitations I referred to.
In my testimony and in front of you now is a map that shows
the lands that are covered by the Act today, prepared by The
Nature Conservancy in consultation with our staff. Sixty-four
percent of the lower 48 states are covered, but landowners in
36 percent of the Nation are unable to use these tax
incentives.
The tax bill passed earlier this year did include a
provision that more than doubled the area, and that provision
was scored by the Joint Committe on Taxation as costing $175
million over 10 years. But even that map leaves a lot of holes
in the country. Senator Baucus asked the Committee to score
simply eliminating all of the geographic limitations, and the
Joint Tax Committee said it would cost $279 million over 10
years. I have attached that estimate to my written testimony.
We think that this overstates the cost. But even so, it is a
very modest cost for the land conservation it can deliver over
the next decade.
The second issue I want to refer to briefly--is
Representative Portman's H.R. 2880, which would reduce by half
the capital gains tax on the sale of land or easements for
conservation. Many landowners cannot afford to make outright
gifts of land. But if they had a choice between selling for
development or selling for conservation, they probably would
like to choose conservation. This provision would make that
choice much easier for landowners. And I encourage you to make
this change. It will be extremely important for conservation in
this country. I believe it will lead to a great deal of
conservation that would not take place otherwise.
In summary, let me just thank you again for your interest
in this, for your action on land conservation, and for your
ability to understand that the Tax Code of this country can
have an important benefit for conservation. These tax
incentives produce tangible, visible, and permanent results.
You and your constituents will be able to see the lands that
you have helped people protect as open space, and share in the
joy of having protected this land for future generations. Thank
you very much.
[The prepared statement follows:]
Statement of Jean Hocker, President, Land Trust Alliance
Mr. Chairman and Members of the Subcommittee:
Thank you for the opportunity to appear before the
Subcommittee today, to discuss the impact of tax laws on
environmental conservation and preservation. I am Jean Hocker,
President of the Land Trust Alliance, the national organization
that guides and serves the more than 1,200 land trusts in the
United States. These are local and regional nonprofit
conservation organizations that work with private landowners to
protect open space in their communities through voluntary
methods. Together, these grassroots groups have protected more
than 4 million acres of open land all across the country.
The Ways and Means Committee has helped that work
enormously over the last 25 years by initiating tax incentives
that help landowners who want to protect open space. The
existing incentives--charitable deductions for donations of
land or of conservation easements, and recognition that those
easements reduce the taxable value of a landowner's estate--are
helping preserve open space in every part of the country.
But there is a great opportunity to help us do more. I want
to thank Representatives Nancy Johnson, Rob Portman, and
Jennifer Dunn for sponsoring legislation to provide additional
tools for conservation in the tax code, and to thank those
Members who have joined them in cosponsoring their bills. We
are particularly grateful to Representative Johnson for her
bill, H.R. 2263, which compiles a wide variety of measures
which would help voluntary land conservation. I have included a
chart with my testimony that summarizes the range of land
conservation tax measures that have been proposed in this
Congress. We applaud and support these efforts and your
recognition that open land, once paved over, will never again
be available as productive farms, ranches and forest land, or
as critical natural areas and habitat.
Today I want to focus on two of those proposals, which we
especially hope will soon become law.
The first is Section 2(a) of Representative Johnson's bill,
H.R. 2263, which would make the provisions of the American Farm
and Ranch Protection Act apply uniformly to owners of
conservation land in all parts of the United States. Currently,
the provisions are limited to landowners whose property lies
within specifically-defined areas, leaving many critical
conservation lands ineligible for its compelling conservation
incentives.
The Farm and Ranch Protection Act, which Mr. Houghton and
others on the committee helped pass into law in 1997 and which
is now section 2031(c) of the Internal Revenue Code, does two
very important things:
First, it provides an election to exclude from the taxable
estate 40 percent of the value of open land subject to a
qualified conservation easement. The exclusion, which is capped
at $200,000 today, rises to a $500,000 cap in 2003.
Second, the Act allows the executor of an estate to grant a
qualifying conservation easement on appropriate conservation
property after the landowner's death, and thus to elect the
benefits of Section 2031(C).
I know that many members of this subcommittee are committed
to ending the estate tax altogether. The tax bill the Congress
passed several months ago would have done that. But it would
have taken 10 years to do it. That ten years can be critical to
land conservation. Of the 2.3 million acres protected by
conservation easements held by local and regional land trusts,
80 percent were protected in the last decade. Even if the next
decade is the last one for estate taxes, in ten years it will
be too late for much of the farm and ranch land, forest
property, and key habitat that is under pressure today or soon
will be. We need to perfect the tools we have today, to make
sure time does not run out for critical conservation parcels.
The tools provided by the American Farm and Ranch
Protection Act are important ones. Currently they are available
only to lands within 25 miles of a Metropolitan Statistical
Area or a national park or federal wilderness area, or within
10 miles of a National Urban Forest. They need to be extended
to all parts of the country.
Indeed, the additional exclusion provided in the Farm and
Ranch Protection Act is of particular relevance for people
whose land is just outside the envelope of today's immediate
development pressure. For a farmer in this kind of area, whose
land today may be valued for development at only 30 percent
more than its value as farmland, a donation of a conservation
easement may not yield a great deal in current income tax
benefits. Yet this is precisely where it is most important for
conservation to take place--where development hasn't already
made inroads that will make it very difficult for farming,
ranching, forestry, or wildlife lands--to remain. Section
2031(c) addressed just these situations, by allowing an extra
reduction in the taxable estate where an easement reduces the
value of lands by 20 percent or more. This encouragement ought
to protect open space values wherever landowners want to choose
conservation.
The other key provision of 2031(c) is the ability it gives
heirs to land to consider conservation as an option. This
provides something enormously valuable--a second chance at
conservation. So long as we have an estate tax, 2031(c) gives
the heirs to land the potential to plan for conservation, even
when the previous owner, for whatever reason, failed to do
that. This choice, too, ought to be fairly available to all
heirs of conservation lands.
But when Congress was considering The American Farm and
Ranch Protection Act, the Joint Tax Committee raised concerns
about its potential cost. The result were the geographical
limitations I referred to earlier. My testimony includes a map,
prepared by The Nature Conservancy in consultation with our
staff, showing where 2031(c) applies, and where it does not.
The map shows that 65 percent of the lower 48 states are
covered, leaving landowners in 45 percent of the nation unable
to use these conservation incentives.
Unfortunately, it does not include areas where important
conservation work needs to be done. Representative John
Tanner's district, to take one example, includes seven National
Wildlife Refuges--but the lands around those refuges are not
covered by 2031(c). On close inspection, many members of the
Ways and Means Committee will see that some or all of their
districts are not covered under the current terms of 2031(c).
The tax bill which passed this year included a provision
that more than doubled the area covered by 2031(c). It was
scored by the Joint Committee on Taxation as costing $175
million dollars over 10 years. But even that still leaves lots
of holes in the map--places that aren't covered. Senator Max
Baucus asked the committee to score simply eliminating the
complex geographic limits. The Joint Tax Committee says it
would cost $279 million over ten years. I have attached that
estimate to my written testimony.
We believe these estimates overstate the cost of applying
the law across the country. But even if not, this is a very
modest cost for the land conservation it can deliver by
providing additional incentives for the donation of
conservation easements.
The second issue I want to focus on involves the sale of
land for conservation, because donations alone will not be able
to protect every special place. Not every landowner can afford
to donate land or a conservation easement on land. More and
more, we find our members involved in the purchase of
easements, or the purchase of fee title to lands. Increasingly,
they are working with local governments in this effort.
Last November, 143 referenda were on local and state
ballots to provide funding for acquisition of lands and
easements to protect open space. Of those, 124 won--84 percent.
Many were general obligation bonds. Many were direct votes on
taxes to fund these programs. I have included in my testimony a
copy of the results of those elections. The total funding
committed in the measures that passed exceeded $6.28 billion.
Since November, there have been a number of special
elections for the same purpose. This November, Maine will vote
on a $50 million bond for land protection. Next March, there
will be a $2.1 billion environmental bond issue in California,
and in November, 2000, a $1.5 billion bond issue in the state
of Washington.
It is wonderful that state and local governments are taking
up this cause. You can help them, quite directly. Virtually
every time a landowner sells property, or sells a conservation
easement on their property, they are paying capital gains tax
on it--even though the sale is to a public entity, for a public
purpose. Representative Portman's bill, H.R. 2880, would cut
capital gains in half on such sales. It would be a boon to
every single one of these jurisdictions, as well as to the
landowners. There is probably no other single proposal that
will have as direct an effect on local land conservation. When
landowners are faced with a choice of buyer, this provision
will encourage them to sell for conservation.
In summary, let me thank the subcommittee for this
opportunity to ask your continued help to make the most of the
opportunities we have to conserve the landscapes that people
love and that they identify with their communities. The federal
government has been a partner in that effort, through the tax
code and in many other ways. Together, we have the opportunity
to do more, and we ask you to help us. Tax incentives for
conservation produce tangible, visible, permanent results. You
will be able to see the lands that you have helped people
protect as open space, and share in the joy of having protected
that land for future generations.
Thank you.
[Attachments are being retained in Committee files.]
Chairman Houghton. Yes, thank you, Ms. Hocker.
Mr. Dennis.
STATEMENT OF MICHAEL DENNIS, VICE PRESIDENT AND GENERAL
COUNSEL, NATURE CONSERVANCY, ARLINGTON, VIRGINIA
Mr. Dennis. Thank you, Mr. Chairman. The Conservancy
appreciates the opportunity to speak with you today. And also,
our sincere thanks to you for having the foresight to support
and sponsor the American Farm and Ranch Protection Act, a very
important piece of legislation.
I am the general counsel and land acquisition director for
The Nature Conservancy. The Nature Conservancy is a global
conservation organization that identifies and protects
important habitats for plants and animals. We use a full array
of protection tools: We buy land outright; we acquire gifts of
conservation easements; we negotiate management leases; and
more and more, we are working with local communities to build
conservation capacity within the local community.
A couple of examples of types of projects that we work on:
In the North Woods in the Adirondacks, over the past decade we
have protected several hundred thousand acres of lands, using
the deductible conservation easement as a tool.
Recently, in Arizona we acquired a cattle ranch, the San
Rafael Cattle Co., which is right down on the Mexican border.
And we are in the process of transferring a conservation
easement to the State of Arizona. And then we are selling the
ranch, with the restriction that it cannot be developed but it
can be ranched. And we are blending protecting the natural
resources with ranching. And of course, with the easement on
the property, it substantially reduces the purchase price, so a
rancher can come in and afford to keep ranching.
Another project that I work on extensively is referred to
as the Malpai Borderlands Group. This is an area of the country
in the Southwest, the boothill of New Mexico and the southeast
corner of Arizona, right on the Mexican border, where we have
helped set up a local land trust. The trustees are all local
ranchers. And working with them, we are experimenting, and
actually successfully utilizing a whole bunch of new
conservation techniques: grass banks in exchange for easements,
low-interest loans. The whole thrust of the program is to keep
the ranchers on the ground. Hopefully, they will have a viable
ranching operation, and it will be done in a way that is
consistent with protecting the landscape. And this has been a
very successful program.
And I might add, a couple of you may pick up the accent: I
am from Boston. And the first time I went down there, there was
one other Bostonian who had located down there. And they all
thought he had a speech impediment, until they heard me talk--
and then they figured we all talk this way.
That was a joke, by the way. [Laughter.]
Mr. Dennis. Thank you. We are losing species in open space
at alarming rates, as everyone knows. And while the Conservancy
over the past 15 years has protected, with its partners, over
6-mllion acres of land, it is an uphill battle.
We have done a ``back-of-the-envelope'' estimate, and we
figure, although we are only looking at targeting less than 5
percent of the landscape, it could cost in excess of $10
billion over the next decade. We clearly need additional tools,
protection tools. And that is why we are here, The Nature
Conservancy is here today, in support of tax incentives for
conservation.
In my written testimony we talk about three different
categories of tax incentives. One group is incentives that will
encourage landowners to sell or exchange or donate conservation
lands to conservation agencies, public and private.
Another category is tax incentives that would encourage a
private landowner to take certain actions on his or her land to
enhance it as conservation land and provide some type of tax
credit or deduction. For example, if one were to do wetland
restoration on one's land, they would get a tax credit for that
activity, for those expenses.
The third category is enhancing some of the estate tax
rules--death taxes, as Congressman Hayworth had referred to
them earlier--and enhancing section 2031(c), as has already
been mentioned here a little earlier today.
I would like to highlight one particular provision, and
that is in H.R. 2880, which has been sponsored by Congressman
Portman. This is the provision that excludes one-half of the
capital gain on a sale of conservation land to a conservation
agency. We think this is a very important provision. It is
voluntary. It actually is a provision that benefits people who
cannot afford to make gifts. The only provisions in the Tax
Code right now for conservation are oriented toward wealthy
people who can make gifts. This is a provision for people who
cannot afford to make gifts.
And it would apply to sales of conservation restrictions.
With many of the projects that I am doing down in the Malpai
region this would be an additional incentive for a rancher to
transfer it to sell restrictions on his or her ranch and to
continue ranching.
And finally, the cost factor on this was about $65 million
a year, and we think it will leverage $85 million to $100
million a year in conservation.
In closing, I wear a lot of hats in the conservation
community. I am from Boston, and I started out as a general
counsel for The Nature Conservancy; I still am. I am also the
general counsel for the Malpai Borderlands Group. And I have
served as council member of the North American Wetlands
Conservation Council since its inception.
All three of these organizations operate a little bit
differently. But the thing that binds all three of them is, No.
1, they are all interested in protecting the landscape; and No.
2, these tax incentives that we have proposed today in the
written testimony and that you have heard about today, all of
them, will enhance their ability to do a better job in
protecting the landscape.
We appreciate the opportunity to testify, and we are
available to work with any of you who would like to pursue
these further. Thank you very much.
[The prepared statement follows:]
Statement of Michael Dennis, Vice President and General Counsel, Nature
Conservancy, Arlington, Virginia
Mr. Chairman and Members of the Committee, thank you for
the opportunity to present testimony on the critically
important issue of tax incentives for land conservation. I am
speaking today on behalf of The Nature Conservancy, a private
conservation organization that protects the land and water
needed to protect the diversity of life on earth. For nearly
half a century, we have worked with the private sector, using
the tools of the market place and the best available scientific
information, to conserve the special places that ensure the
survival of plant and animal species. To date, we have helped
protect more than 10 million acres of land in the United
States. Our experience working hand-in-hand with landowners in
diverse communities has led us to seek changes in the federal
tax code that would more effectively encourage and reward
private conservation actions.
I am here today to explain the federal tax code changes
that The Nature Conservancy recommends, and which would provide
the most benefit for land conservation. I will present a fairly
comprehensive set of recommended changes for the committee's
consideration. These proposals are based on input from field
staff who work with landowners on a daily basis and understand
the major obstacles to land conservation. Among these various
proposals, our top priority is the capital gains exclusion for
sales of land for conservation purposes. This proposal,
discussed in more detail below, was introduced in the House and
Senate as the Conservation Tax Incentives Act of 1999 and
enjoys bipartisan support.
The Conservation Problem: Preserving Quality of Life
Healthy communities are made up of complex systems of
forests, wetlands, deserts, productive soils, rivers and other
interdependent resources. The cumulative effect of seemingly
unrelated activities such as deforestation, the paving over of
agricultural land, the filling in of wetlands and urban sprawl
has been to fragment the landscape and strain the fabric of
wild and human habitat. The sustainability and quality of life
in every region of the country is in danger. The rate of the
development of land exceeds by far both the rate of population
growth and the rate of open space conservation.
The Landowner's Problem: Safeguarding Financial and
Environmental Assets
Federal and State environmental protection laws and
regulations such as the Endangered Species Act, the Clean Water
and Clean Air Acts, are important tools to help preserve the
environmental quality of land, but they can place economic and
regulatory burdens on individual landowners. Government cannot,
and should not, have the sole responsibility for maintaining
and preserving the public benefit of open spaces. If
conservation efforts are to succeed, private landowners must be
active and willing participants. In the United States,
approximately 70 percent of the land is privately owned. Well
over half of all imperiled species are found on private land,
and many exclusively so. The species found on private lands are
declining more rapidly than are those on publicly held lands.
Landowners have a stake in the quality of their community's
environment. They also have a right to realize economic
benefits of their investment in land. Tax incentives for
conservation provide a mechanism for meeting both of these
interests.
Solution: Tax Incentives
Two kinds of tax incentives for conservation currently exist in the
federal tax code. One provides an income tax deduction for charitable
contributions of partial interest in land for conservation purposes;
the other provides an estate tax exclusion for gifts of conservation
easements in certain geographic areas. These benefits can make it
possible for landowners to meet both conservation and financial goals
if they have an income sufficient to utilize the tax deduction. But
there are many landowners with income too low, or land so valuable,
that these provisions are not financially beneficial. For example, for
many farmers near metropolitan areas the fair market value of their
land is a primary financial asset that cannot be relinquished. Market
conditions can mean that the sale of the land for development is the
only viable choice in order to realize a full economic return.
Existing conservation tax incentives are important but, given the
rate at which land is disappearing and species are lost, they are not
sufficient. New tax incentives are needed to encourage the protection
of additional private lands. To address this need, The Nature
Conservancy supports a range of conservation tax incentives that fall
into three general categories:
1. Incentives to encourage the sale, gift or exchange of land or
easements for conservation;
2. Incentives to encourage private land to be managed for
conservation benefits; and
3. Incentives to prevent the break-up of large land-holdings.
Within each of these categories, we have proposed specific
tax changes that will provide benefits to both landowners and
conservation. They are as follows:
(1) Incentives to Encourage the Sale, Gift or Exchange of
Land or Easements for Conservation
(a) Capital Gains Reduction for Conservation Sales. This
proposal, which would be implemented by H.R. 2880, would reduce
the amount of capital gains tax if land is sold for
conservation purposes, thereby providing a landowner with a
more attractive financial return from such sales.
H.R. 2880, sponsored by Congressman Rob Portman, and
cosponsored by Congresswoman Nancy Johnson and Congressmen
Robert Matsui and John Tanner, is The Nature Conservancy's top
priority.
I would like to congratulate Congressman Portman for his
leadership on this issue. His legislation is a fiscally
conservative, market-based approach to land conservation. It
achieves environmental objectives without imposing new land use
regulations. The provision is strictly voluntary,
administratively simple, and uses definitions and tests for
conservation purposes that are already contained in the tax
code. It provides capital gains tax relief for sales of land
for conservation to government agencies or qualified
conservation nonprofits. The bill would allow landowners to
preserve permanently their property's environmental value
without foregoing its financial value. It would exclude 50
percent of any gain realized from private, voluntary sales of
land or interests in land for conservation. The land must be
used to protect fish, wildlife or plant habitat or open space
for agriculture, outdoor recreation or scenic beauty.
Congressman Portman's bill also helps state and local
governments leverage funds and accomplish more with their tax
dollars. Estimates indicate that, for every dollar of lost
revenue from this tax provision, almost two dollars worth of
land would be protected. Sales of land to state and local
governments for conservation would qualify, in addition to such
sales to federal agencies and conservation nonprofit
organizations. Citizens who vote to increase their taxes to
fund bonds for land conservation will benefit because the funds
raised will go farther toward reaching the community's
conservation goals.
(b) Increase the Value of Gifts of Land or Easements Made
for Conservation. This proposal would change the individual and
corporate charitable giving laws to make the tax value of
conservation gifts more valuable, particularly for the ``cash
poor-land rich'' landowner.
Congresswoman Nancy Johnson's legislation, H.R. 2263, would
promote this objective by increasing from 30 percent to 50
percent the amount of the taxpayer's adjusted gross income that
could be offset by a conservation donation, and by allowing the
unused deduction to be carried forward indefinitely. The
Conservancy strongly supports this legislation.
(c) Enable Conservation Transactions to Qualify for Low-
Cost Financing. This provision would allow conservation
organizations to qualify for tax-exempt financing or to issue
tax-exempt installment obligations to a seller when purchasing
land.
The Community Forestry and Agriculture Conservation Act of
1999 (H.R. 1863), sponsored by Congresswoman Dunn, would create
a targeted version of this incentive. It would allow tax-exempt
financing of working timber and agricultural lands by
nonprofits, requiring permanent conservation easements to
ensure sustainable use of the land. The Nature Conservancy
endorses this proposal, and commends Congresswoman Dunn for her
leadership in this legislation.
We recommend broadening the legislation with a slight
modification so that it would apply not only to the acquisition
of working lands, but also to the acquisition of other
conservation lands. We would like to see this type of tax-
exempt financing used for any conservation land acquisition
made by qualified land trusts and conservation organizations.
This change could be accomplished with small additions to HR
1863. The Conservancy would be happy to work with Congresswoman
Dunn to develop such language.
(d) Encourage Private Capital to Make Investments in
Conservation Land. The basic idea is to create incentives
(greater deductions, tax credits or loan guarantees) for
private, third party financing for conservation transactions;
for investments in geographic areas (ecological enterprise
zones); or incentives to match conservation ``investors'' who
would buy tax-favored conservation easements with landowners in
need of cash and willing to give up such easements.
(e) Change Corporate Liquidation Rules Where Conservation
Lands are Involved. This proposal would allow small
corporations whose primary asset is land to donate such land
for conservation purposes without triggering a tax, as is the
case under current law.
(f) Revise the Rules for Land Exchanges Where Conservation
Lands are Involved. This revision would lengthen the time for
qualifying exchanges and/or broaden the types of property that
could qualify for treatment as a like-kind exchange involving
conservation lands.
(2) Incentives to Encourage Management of Private Land for
Conservation
(a) Make Conservation Management Expenses More Valuable for
Private Landowners. Provide tax credits for habitat management
expenses such as prescribed burns, exotic species removal,
riparian and habitat restoration.
(b) Provide Habitat Conservation and Management Insurance.
Create a subsidized insurance program whereby landowners who
agreed to manage land in furtherance of a conservation plan
would be held harmless (using the insurance proceeds) from the
potential loss in value of their land from implementation
activities under the plan.
(c) Make Private Ownership of Conservation Land Affordable.
Make property taxes paid on land subject to conservation
easements eligible for treatment as a tax credit.
(3) Incentives to Prevent the Break-Up of Large Land-
Holdings
(a) Provide Estate Tax Relief for Conservation Landowners
and their Estates. Extend the geographic application and
financial benefits of recent estate tax changes to encourage
conservation. Allow estates with conservation lands to donate a
conservation easement and use the value of such an easement to
offset the estate tax that would otherwise be due.
The American Farm and Ranch Protection Act, now section
2031(c) of the federal tax code, was sponsored by Chairman
Houghton, endorsed by The Nature Conservancy, passed in 1997
and was expanded in 1998. This legislation was the first new
tax incentive for conservation since the enactment of the
conservation easement donation incentive in 1976, and it has
the potential to save a great deal of land that would otherwise
have been subdivided and sold for development in order to pay
estate taxes. We support efforts to perfect and strengthen
2031(c) so that it can realize this potential.
First, we have estimated that approximately one third of
the continental U.S. is currently not covered by the statute.
The current boundaries omit critically important areas with
national natural resources. For example, National Wildlife
Refuges, BLM designated lands of critical environmental
concern, Wild and Scenic River designated areas, and other
categories of Federal resource lands are excluded by the
geographic restrictions. There is no clear rationale for
omitting these lands from those included in the Act. In
addition, land in or near state and local protected areas are
not included even though they may be under severe pressures.
The land that is excluded from coverage under the Act is
likely to have, on average, low fair market values because it
is located in predominately rural areas. Therefore, the
marginal cost of including such land under the statute should
be small. This small cost to the public is greatly outweighed
by the land conservation benefits to be derived.
Finally, the American Farm and Ranch Protection Act's
effectiveness would be substantially improved if the financial
limitations on its use were removed. With the caps in place,
the provision has a limited ability to serve as a conservation
incentive on large landholdings that may have values inflated
by nearby development. These are the very resources that the
original legislation intended to reach.
(b) Provide Incentives Against Habitat Fragmentation
Actions. Create incentives to prevent open land from being
converted or fragmented; reward landowners who refrain from
habitat fragmentation causing actions and seek to remove
existing incentives in the tax code that encourage landowners
to subdivide and fragment their lands.
Conclusion
Land conservation is a growing national need. Private
landowners hold the future of biodiversity in their hands. The
tax incentives the Conservancy recommends would provide
interested landowners with the tools to conserve their land and
contribute to the public interest in the preservation of the
diversity of life.
We appreciate the leadership of Congressmen Portman and
Congresswomen Johnson and Dunn and encourage the other members
of Congress to support the innovative, voluntary tax proposals
that we are discussing today.
Chairman Houghton, as the House sponsor of the American
Farm and Ranch Protection Act, deserves our thanks for this and
other advances in land conservation legislation. The
Conservancy is eager to work with the Chairman and other
members of this committee in support of new tax incentives for
conservation. Thank you for the opportunity to present
testimony before you today.
Chairman Houghton. Thanks, Mr. Dennis.
Mr. Bartsch.
STATEMENT OF CHARLES BARTSCH, SENIOR POLICY ANALYST, ECONOMIC
DEVELOPMENT, NORTHEAST-MIDWEST
INSTITUTE
Mr. Bartsch. Mr. Chairman and Members of the Subcommittee,
thank you for the opportunity to testify. I am Charles Bartsch,
senior economic development policy analyst at the Northeast-
Midwest Institute. And my focus in the next few minutes will be
on issues relating to the brownfields expensing tax incentive.
Since 1991, the Institute has worked closely on brownfield
issues with the bipartisan Northeast-Midwest Congressional
Coalition, which is currently chaired by Representatives Bob
Franks and Marty Meehan. And we have examined site reuse
activities in more than 50 cities in New York and Pennsylvania
and Ohio and other States. A key focus of this analysis has
been the link between environmental contamination and economic
development.
First, how has the brownfields issue changed, and why do we
need an incentive? Well, during the last few years, the way in
which we deal with brownfields has evolved, as States and
communities have gained more familiarity with the environmental
aspects of brownfield situations. Now it takes on more of an
economic development, dollars-and-cents urgency in most places.
Costs and financing have emerged as the common predominant
concerns that prospective site users must address.
According to case studies from Cleveland and elsewhere,
total site preparation costs per acre for long-time industrial
sites in inner city areas can be quadruple those of a site of
the same size in a new pristine development. And in fact, the
mere presence of contamination has increased the time and
effort needed to put financing packages together, which has
increased lending costs more than threefold in real-dollar
terms since 1980, according to some bankers. So clearly,
financing gaps are a primary deterrent to reuse.
Second, how has Congress addressed these critical financing
issues? Congress has recognized that no single approach fits
the financing needs of all brownfield projects, which vary by
project situation and type of developer, level and type of
contamination, and the needed rate of return.
Bipartisan efforts to explore various ideas date back to
the 104th Congress. At that time, the link between
environmental concerns and real estate markets and financing
emerged, and it became clear that new approaches would be
needed to address this issue. And in fact, several Members of
this Oversight Subcommittee were active early on. In the 104th
Congress, for example, Representative Coyne first advanced his
proposal to establish tax credits to offset site remediation
expenses. In mid-1995, Representative Weller cosponsored Mr.
English's bill that proposed two tax incentives to encourage
clean-up of contaminated sites. And Chairman Houghton
cosponsored a bill in early 1996 to allow brownfield clean-up
costs to be deducted from income in the year that such costs
occur, which is really the forerunner of the existing
brownfield expensing incentive.
In August 1997, as part of the Taxpayer Relief Act,
Congress approved a potentially significant brownfield
expensing tax incentive, which is just now starting to work its
way into the redevelopment process and mindset. Its quicker
cost recovery was intended to help offset the cost of site
clean-up and level the economic playingfield between
brownfields and greenfield sites which do not have to bear such
costs.
Third, what role have tax incentives played in brownfield
reuse? Brownfield incentives have objectives similar to
traditional tax incentives for economic development purposes.
They aim to overcome capital market imperfections and channel
economic activity to achieve the greatest possible public
benefit.
At the State level, tax incentives have played a major role
in strategies to promote brownfield reuse, and they show how
Federal efforts could enhance site redevelopment. About 22
States have some sort of brownfield tax incentive or tax credit
initiative in place. And these programs, in combination with
other public sector brownfield initiatives, have really started
to tally some encouraging results, according to an Institute
survey of State program managers.
For example, Missouri has approved $16.5 million in tax
credits for 13 sites, where new business activity has created
2,000 jobs. Ohio's efforts have brought more than 1,400 acres
of brownfields back to productive use, creating about 7,100
jobs. Pennsylvania's program has encouraged clean-up of some
7,000 acres in 60 of the State's 67 counties, leading to nearly
15,000 new jobs at more than 300 sites. And other States have
seen similar results.
So clearly, resources for clean-up are a paramount need.
And clearly, tax incentives have stimulated brownfield reuse,
as the track record from the States suggests. So why has the
Federal brownfield expensing provision gotten so little use so
far?
Only a couple of dozen sites have used the incentive as of
summer 1999, and there are several key reasons for this.
Initially, Federal agencies were slow to market the incentive,
and they may have misjudged the willingness and ability of the
private development market to make an effort to understand how
it could work and the benefits it could bring to a project's
bottom line.
Although EPA and HUD have provided ample information, many
in the private development industry were skeptical, because
they saw the credit as cumbersome, with requirements that could
trip them up. And no developer wants to be caught in a
``Gotcha'' situation. Essentially, the real estate developers
who are viewed as key players in brownfield reuse and prime
targets for the brownfield incentive simply do not operate in
terms of Census tracts and poverty levels, and their education
process is taking a long time.
If I could just have a few more seconds, please.
Chairman Houghton. Very well.
Mr. Bartsch. And now the incentive sunset date poses a
deterrent to more widespread use. Local economic development
officials are concerned that the 15 months remaining is not
time enough to carry out reuse projects, and this makes them
hesitant to promote the incentive's use.
Finally, why should the incentive be retained and made
permanent? Let me offer three reasons: First, for purposes of
both planning and comfort, developers and investors need the
certainty that permanence will bring. Given the length of time
that it can take to get large-scale multi-year projects
underway and completed, permanence means that the developer can
count on the incentive, even if unanticipated delays slow down
the redevelopment process.
Second, the brownfield expensive incentive is one of the
few redevelopment tools that focus on the private-sector side
of the reuse equation, and provide help in meeting clean-up
costs, the No. 1 financing need of most brownfield sites.
And third, after a slow start, Federal agencies' technical
assistance and outreach capabilities, such as site and Census
tract maps and support for State agency staff, are now in place
to promote and implement the program and allow it to move
toward the $1.5 billion level authorized in 1997.
I have got more examples and information in my written
statement. I thank you for the extra time, and I thank you for
the opportunity to speak. And I look forward to your questions.
[The prepared statement follows:]
Statement of Charles Bartsch, Senior Policy Analyst, Economic
Development, Northeast-Midwest Institute
Mr. Chairman and Members of the Oversight Subcommittee,
thank you for the opportunitiy to testify about the financing
issues affecting the productive reuse of older, often
contaminated industrial and commercial sites. I am Charles
Bartsch, senior economic development policy analyst at the
Northeast-Midwest Institute. Since 1991, the Institute--working
closely with the bi-partisan Northeast-Midwest Congressional
Coalition, currently chaired by Reps. Bob Franks and Marty
Meehan--has examined the relationship between environmental
contamination and economic development. At that time, we
recognized the severity and potentially devastating impact of
neglected brownfield sites on long-established communities with
a legacy of manufacturing. Both organizations began to identify
case examples where environmental and redevelopment obstacles
had been successfully addressed. The issue has come a long way
since then; as this hearing underscores, many Members have
worked hard this year to bring brownfields to the Congressional
front burner.
The Institute has analyzed site reuse activities in more
than 50 jurisdictions--large cities like Pittsburgh, Chicago,
Dallas, Los Angeles, Seattle, and Cleveland; mid-sized cities
like Buffalo, Kansas City, Sacremento, and Worcester; and small
towns like Meadville, Pennsylvania, Glen Cove, New York, and
Wyandotte, Michigan. Our research has indicated that, while the
problems surrounding reuse of contaminated sites are critical
ones in the nation's traditional industrial centers, they are
by no means confined to such communities. The issue of
brownfields is widespread, having surfaced in every state
across the country, and in numerous small towns as well as most
large cities. To meet it, communities need practical tools and
approaches with broad applicability and appeal.
4What are the key issues surrounding brownfield sites?
Successsful brownfield reuse projects must overcome several
critical barriers, which have been well documented. These
include the lack of process certainty and finality; liability
concerns; added expenses of environmental cleanup; and lack of
redevelopment financing resources available for brownfield
projects.
The brownfield issue has evolved over the past few years,
as states and communities have gained more familiarity with the
environmental aspects of brownfield situations, and it has
taken on more of an economic development urgency in most
places; cost and financing have emerged as the common,
predominant concerns that prospective site users must address.
The procedural and legal steps needed to address brownfield
barriers--testing, acquiring, cleaning, and redeveloping
contaminated older sites--can be complicated, expensive, and
time-consuming.
In practice, the brownfield reuse issue boils down to one
of simple dollars and cents. In one scenario, a developer can
acquire an untouched greenfield site, probably in a new
industrial or business park far from the central city, and
build a facility to suit with minimal fuss. Or, that same
developer can acquire a previously used site in an old, often
abandoned central city industrial district. The latter site,
almost assuredly a brownfield, is probably available at little
or no cost. However, the developer will then need to spend time
and money having it tested to determine exactly what substances
it might contain, spend time and money cleaning it up and
preparing it for construction, spend months pleading with
bankers to lend on it, and likely spend more time and money for
additional documentation and site monitoring. According to case
studies from Cleveland and elsewhere, in fact, total site costs
per acre for long-time industrial sites in inner city areas can
be quadruple those of a site of the same size in a new exurban
development.
What is the real-dollar impact of this contamination?
Cleaning up contamination adds to the cost of any reuse
project, often significantly. In fact, in most areas adequate
financing to carry out both cleanup and redevelopment
activities is not available at affordable costs. This drives
development to greenfield locations in undeveloped areas, away
from established economic and population centers. The mere
presence of contamination has increased lending costs--more
than three-fold in real dollar terms since 1980, according to
some bankers. More time and staff work is required to put
financial packages together, and prospective borrowers must pay
for environmental assesments and more detailed appraisals--
before they even begin the cleanup process.
This undermines efforts to revive brownfield sites in two
ways. On one hand, higher transaction costs can make loans
prohibitively expensive to obtain, particularly for small
business owners or prospective purchasers with no collateral
other than the site itself. On the other hand, depending on the
extent and type of contamination, cleanup costs often exceed
$50,000 and may top $1 million or more. While new insurance
products can help guard against costly surprises during the
remediation process, they do not reduce the initial costs. And
these up-front expenses are not easily recovered as part of the
normal course of doing business, placing brownfield sites and
facilities and a tremendous competive disadvantage with
greenfield locations.
Clearly, financing gaps are a primary deterrent to reuse.
However, the public sector can do much to help balance the
playing field between greenfield and brownfield sites.
Creatively designed and carefully targeted incentives and
assistance can help advance cleanup and reuse activities and
achieve significant community benefits.
How has Congress addressed critical financing issues?
Members from both parties began exploring ways to address
specific financing barriers to brownfield development back in
the 104th Congress. At that time, the link between
environmental concerns and real estate markets and financing
emerged, making it clear that new approaches would be needed to
address this issue. Several Members of this Oversight
Subcommittee were active early on; in the 104th Congress, for
example, Rep. Coyne first advanced his proposal (HR 2846) to
establish tax credits to offset site remediation expenses. In
mid-1995, Rep. Weller introduced a bill (HR 1799) proposing two
types of tax incentives to encourage cleanup of contaminated
sites. Chairman Houghton co-sponsored a bill in early 1996 (HR
2919) to allow brownfield cleanup costs to be deducted from
income in the year such costs occur--the forerunner of the
existing brownfield expensing incentive.
In the 105th Congress, Members introduced nearly 30
different bills dealing with some aspect of the brownfield
financing or re-development processes. Thes efforts laid a good
foundation for the ongoing consideration of legislative answers
to complex brownfield questions in the 106th Congress; Members
of both parties have introduced nearly a dozen bills already
this session. This activity cuts across many committees and
transcends party and ideology; bills offered by both
Republicans and Democrats have similar--often identical--
objectives and approaches. Conceptually, there is a lot of
agreement on ways to meet critical brownfield process and
financing needs.
Over the past five years, Congress has recognized that no
single approach fits the financing needs of all brownfield
projects, which vary by project situation, type of developer,
level and type of contamination, and needed rate of return. In
general, bills to support brownfield financing have fallen into
one of three broad categories:
process related initiatives, to offer further
protection to prospective purchasers and adjoining landowners,
which can play a critical role in determining whether
brownfield redevelopment financing is secured;
direct capital support efforts, typically taking
the form of grants for site assessment, planning, and to
capitalize revolving loan funds for actual site cleanups
themselves--activities usually not financed by private sources;
and
tax incentives, which can help attract affordable
private investment and provide a cash-flow cushion for
companies undertaking brownfield reuse projects.
In August, 1997, Congress approved a potentially
significant brownfield tax incentive, which is just now
starting to work its way into the redevelopment process. Known
as the brownfield expensing provision, it allows new owners of
brownfield sites to write site clean-up costs off their taxes
in the year they incur them, rather than having to capitalize
them over a longer period of time. This quicker cost recovery
is intended to help level the economic playing field between
brownfield and greenfield sites, which don't have to bear such
costs. Currently, the expensing incentive--scheduled to sunset
at the end of 2000--is the focus of a couple of bills.
What role have tax incentives played in brownfield reuse?
Incentives focused on brownfield sites have similar
objectives to traditional tax incentives for economic
development purposes--they aim to overcome capital market
imperfections and channel economic activity to achieve greater
public benefits. Incentive programs can enhance a project's
cash flow, by allowing revenue to be used for site cleanup and
redevelopment activities, rather than for taxes or other
purposes. This, in turn, can help a project's financial look in
the eye of a lender. Tax incentives focused on environmental
cleanup and reuse could help level the economic playing field
between old brownfield sites and new greenfield locations.
At the state level, tax incentives have played a major role
in strategies to promote brownfield reuse, and they show how
federal efforts could enhance site redevelopment. About 22
states have some sort of brownfield tax incentive or credit
initiative in place, notably the following.
Ohio is working to level one aspect of the site
selection playing field by offering a state franchise or income
tax credit for Phase I and II assessment and cleanup costs.
Site owners can claim the lesser of 10 percent or $500,000 for
these purposes.
Illinois provides a 25 percent income tax credit
of up to $150,000 per site, available to developers who spend
at least $100,000 to restore contaminated sites, and these
credits are transferable to new owners. Florida offers a 35
percent credit, up to $250,00 per site, which also is
transferable.
New Jersey brownfield site owners in designated
Environmental Opportunity Zones can negotiate with local
communities and arrange to use some of their annual property
tax levy to cover up to 75 percent of their site clean-up
costs, instead of paying it to local tax coffers.
Missouri's brownfield redevelopment program offers
a flexible ``menu'' of tax incentives, based on new investment
and job creation, up to 100 percent of remediation costs.
In addition, Pennsylvania this year enacted its Keystone
Opportunity Zone programs, in which all taxes may be forgiven
for up to 12 years. And, Massachusetts this year joined
Wisconsin in offering remediation tax credits of up to 50
percent of cleanup costs.
These programs, in combination with other public-sector
brownfield incentives, have started to tally some encouraging
results, according to an Institute survey of state program
managers. For example, Missouri has approved $16.5 million in
tax credits for 13 sites--on which new business activity has
creatd 2,000 jobs. Ohio's efforts have brought more than 1,400
acres of brownfields back to productive use, creating about
7,100 jobs. Michigan's extensive brownfield incentive programs
point to $459 million in new private investment, including 750
housing units, that have generated nearly 5,500 jobs.
Pennsylvania's program has encouraged cleanup of some 7,000
acres in 60 of the state's 67 counties, leading to nearly
15,000 new jobs at more than 300 sites. Colorado attributes
more than 6,200 jobs and 2,800 residential units to the 146
sites that have gone through the state's voluntary cleanup
program.
Why has the federal brownfield expensing provision gotten so
little use so far?
Initially, EPA and Treasury had estimated that the $1.5
billion in tax expenditure authority the 1997 law provided
would be used at 30,000 sites over the three-year life of the
incentive. However, only a couple of dozen sites have used the
brownfield expensing incentive as of summer, 1999. There are
several key reasons for this.
Initially, federal agencies were slow to market the
incentive, and may have misjudged the willingness and ability
of the private development market to make an effort to
understand how it could work and the benefits it could bring to
a project's bottom line. Although EPA and HUD made ample
information on poverty and locational eligibility available to
the public--including GIS maps and census tract data--many in
the private development industry were skeptical because they
perceived the credit as featuring complicated and cumbersome
qualification and targeting requirements that could trip them
up. Essentially, the real estate developers viewed as key
players in brownfield reuse and prime target beneficiaries of
this incentive simply do not operate in terms of census tracts
and poverty levels, and the education process is taking a long
time. In addition, it took a long time for developers to get
comfortable with the notion that EPA actually wanted to be
their ally in brownfield endeavors; their long-held views of
the agency as adversary were slow to change. Many developers
were reluctant to approach EPA and state environmental agencies
to pursue the expensing incentive.
Now, the incentive's sunset date poses a deterrent to more
widespread use. The closer we get to the end of December,
2000--when cleanups need to be completed to qualify--and the
expiration of the credit, the less likely developers will
attempt to use it. Local economic development officials are
concerned that not enough time remains now to bring projects
through the brownfield acquisition/cleanup/redevelopment phases
in time for new users to take advantage of the incentive. This
makes them hesitant to promote its use, even though it could
play an important role in making specific sites more viable
candidates for reuse. Similarly, even though more private
developers now have a grasp of the incentive and its benefits,
they are reluctant at this time to factor it into their
project's financial calculations--brownfield redevelopment,
especially on a large scale, is a complicated process, and they
are concerned that an unforseen delay in their project schedule
will push them past the sunset date, and that they will have to
forfeit the benefits they had anticipated.
In addition, private developers have noted that a couple of
specific provisions of the expensing incentive also inhibit its
use. One concerns lessors of facilities; while lease holders
are technically eligible to take advantage of the incentive, in
practice they are discouraged from using it because the law
does not mention a specific length of lease term--which leads
to uncertainty and discourages use. The law could be clarified
to specify that new site users who opted for a long-term lease,
say 30 years, would qualify for the incentive if they cleaned
up the site they leased, even if they did not take title. This
could encourage more private redevelopment activity on publicly
owned sites.
A second provision that deters use of the expensing
provision is the requirement that the recapture of incentive
value be taxed as ordinary income. It discourages developers
who will not be the end-users (such as those converting sites
to retail or commercial use) from taking on brownfield sites.
Since their business is real estate development and subsequent
sale, this provision mitigates the benefits that the incentive
brings. An alternative would be to tax the recapture as capital
gains income, or allowing the incentive to be transferable to a
new owner (as several states do), so that the developer could
retain some of the value through its reflection in the purchase
price.
Why should the incentive be retained and made permanent?
Clearly, the incentive has great potential and needs to be
extended permanently, so that this tool can be better used to
restore brownfields to productive, tax-and job-generating uses.
For purposes of both planning and comfort,
developers and investors need the certainty that permanence
will bring. Given the length of time that it can take to get
large-scale, multi-year projects underway and completed,
permanence means that developer can count on the incentive,
even if unanticipated delays slow down the redevelopment
process.
The brownfield expensing incentive is one of the
few redevelopment tools that focus on the private-sector side
of the reuse equation, and provide help in meeting cleanup
costs--the number one financing need at most brownfield sites.
After a slow start, federal agencies' technical
assistance and outreach capabilities--such as site and census
tract maps and support for state agency staff--are now in place
to promote and implement the program.
To close, let me reiterate that site assessment and cleanup
require financial resources that many firms lack and find
difficult to secure. And without financing, brownfield reuse
projects can not go forward, further undermining efforts to
revive distressed, older industrial areas. The combined efforts
of the public and private sectors will be needed to move
properties into the realm of economic viability, and ultimately
bring prosperity back to them. Therefore, Members of Congress
are to be commended for their willingness to consider and
promote different approaches to the complex issue of brownfield
finance. While much attention is given to state and local
initiatives, it is the federal government--whose programs,
policies, and regulations form the foundation on which many
state and local financing incentives--that must play a strong
role if private financing for brownfield redevelopment is to
become more widely available.
Thank you for the opportunity to speak, and I look forward
to your questions.
Chairman Houghton. Mr. Bartsch, thank you.
Mr. Lincoln, it is great to see you. Thanks very much for
coming.
STATEMENT OF JOHN W. LINCOLN, PRESIDENT, NEW YORK FARM BUREAU,
INC., AND MEMBER, BOARD OF DIRECTORS, AMERICAN FARM BUREAU
FEDERATION
Mr. Lincoln. Very nice to see you. Good afternoon. My name
is John Lincoln. I am a dairy farmer from Bloomfield, New York,
where I own and operate Linholm Farm. I serve as the elected
president of the New York Farm Bureau, and I am a member of the
board of directors of the American Farm Bureau.
Our farm, Linholm Farm, is a family farm. It is operated by
myself and my wife, our daughter, and son-in-law, and son. So
many of the issues that I will speak to you about will have a
great impact upon whether that farming operation is able to be
transferred to the next generation.
Like most farmers in New York, I have a special interest in
land conservation because of the amount of farmland lost each
year in my State. Because my farm is located near Rochester, I
know firsthand how development and urban sprawl can turn farms
and open space into housing projects and shopping centers.
The Farm Bureau commends you, Chairman Houghton and the
Subcommittee Members, for calling attention to the impact of
tax law on land use. I am pleased to be here today to make this
statement on behalf of the American Farm Bureau.
The estate taxes are at the top of Farm Bureau's list of
tax policies that cause changes in land use. The estate tax
rates of 37 to 55 percent can force the sale of farmland,
because heirs must come up with cash to pay the onerous tax.
What farm businesses have is land, not cash. And often land has
to be sold to generate the money to pay estate taxes. More
often than not, the highest bidder is a developer, and not a
farmer.
Over the years, attempts have been made to try and lessen
the impact of estate taxes on farmers and ranchers. In 1997,
the family business estate tax exemption was established.
Special use valuation has been part of the Code since the mid-
seventies. While these targeted provisions are helpful, they
are very complex, and require huge investments in time and
money for estate tax planning. This expense discourages their
use, and takes money needed by farmers and ranchers to run
their businesses.
The Farm Bureau believes that estate taxes should be
eliminated. Other efforts to reduce estate taxes should be
viewed as incremental reform, and be designed to lead to the
eventual elimination of estate taxes.
The capital gains tax is another tax that has a tremendous
impact upon the conservation of farm and ranch land. Many
agricultural producers near or in retirement want to sell their
land to younger farmers and ranchers, including family members;
but capital gains taxes encourage farmers and ranchers to hold
property until death, triggering the sale of land to pay estate
taxes.
When farmland is sold, capital gains taxes also encourage a
land use change. The selling price of land is typically set to
recover capital gains taxes from the buyers. Developers, not
farmers, can more easily afford the higher price. The transfer
of land out of agriculture will accelerate if the stepped-up
method of valuating property is replaced with the carryover
method, because the change will cause a huge capital gains tax
increase on farmland.
The Farm Bureau supports the elimination of capital gains
taxes, and supports the retention of the stepped-up method for
valuing property at death. Until the tax is eliminated, the
capital gains tax rate should be lowered to no more than 15
percent.
There are many proposals to provide tax incentives; either
tax reductions, or credits. To farmers and ranchers who act to
conserve their land, the effectiveness of tax incentives is
limited, however, because they only have value if the farmer or
rancher is making money and paying taxes. This leads me to my
final point. The best way to conserve farm and ranch land is to
keep farming and ranching profitable, and keep agricultural
producers on their land.
Congress is considering several tax proposals that would
help farmers and ranchers manage risks caused by uncontrollable
weather and markets. Enactment of the risk management tools,
like farm and ranch risk management accounts, is a priority for
the Farm Bureau.
Again, thank you for the opportunity to speak today. And I
would be glad to answer questions.
[The prepared statement follows:]
Statement of John W. Lincoln, President, New York Farm Bureau, Inc.,
and Member, Board of Directors, American Farm Bureau Federation
My name is John Lincoln. I am a dairy farmer from
Bloomfield, New York, where I own and operate Linholm Farm with
my wife Anne, daughter Julie and son-in-law Michael. I serve as
the elected President of the New York Farm Bureau and I am a
member of the Board of Directors of the American Farm Bureau
Federation.
Like most New York farmers, I have a special interest in
land conservation. My farm is located in Ontario County near
Rochester. I serve on the Farmland Protection Board of Ontario
County and know first hand how development and urban sprawl can
turn farms and open space into housing projects and shopping
centers. Thank you for the chance to present the views of Farm
Bureau on the impact of tax law on land conservation.
The American Farm Bureau Federation's interest in tax
policy and its impact on land conservation is keen. Production
of food and fiber by farmers and ranchers requires the use of
large amounts of land. Roughly 43 percent of the land in this
country is farm and ranch land. When the lands owned by federal
and state governments are subtracted, farm and ranch land
accounts for almost 70 percent of the privately owned land.
While tax policy is usually made with the intent of doing
good, often little thought is given to the ``unintended
consequences'' of tax policy on land use. Our comments will
address both intended and unintended consequences of the
current tax system.
Federal Estate Taxes
At the top of the list of concerns of farmers and ranchers
about unintended consequences on land conservation from the
current tax system is the federal estate and gift tax. Farms
and ranches are ongoing businesses. Many of these businesses
are multi-generation family businesses. The death of one member
of the family can directly impact the ability of remaining
members of the business to carry on operations after paying
estate taxes. Land that would normally remain in the family and
be devoted to agricultural production is then available to be
put to other uses. Thus, the current federal estate tax law
has, at times, the unintended consequence of forcing family-
owned farms out of business and shifting agriculture land to
other uses.
Owners of these multi-generation farms and ranches often
seek legal advice for estate planning to structure their assets
and operations to minimize the estate tax consequences of the
death of a member of the family. These actions are costly and
may reduce the economic efficiency of day-to-day operations.
Land is not easily gifted in small blocks to avoid the gift tax
on yearly transfers, therefore, limiting the usefulness of
gifting as an estate planning tool.
Farm Bureau policy has long called for the elimination of
estate and gift taxes. This would be the simplest, cleanest
approach to cancel the impact of estate taxes on land use. If
elimination of the estate and gift tax is not politically
feasible, there are ways to lessen the unintended consequence
of forcing farmland to be sold and possibly shifting to a
different use.
The current per person exemption for assets in an estate is
$650,000. Current law will increase the per person exemption to
$1 million by 2006. Farm Bureau policy calls for increasing
that exemption to $5 million per person. Exact figures are not
available, but it is a reasonable estimate that as high as 99
percent of the farmers and ranchers would be exempt from estate
taxes if the per person exemption was increased to $5 million
and then indexed for future changes in the overall price level.
These farms could then be kept in the family and continued as
ongoing businesses.
The changes in estate taxes in 1997 created a family-owned
business exemption of $1.3 million. This is helpful, but we
continue to be concerned about how this section is administered
so that as many families as possible qualify for the exemption.
In addition, this section of the law is very complex and its
use necessitates extensive and expensive estate tax planning.
Farmers and ranchers worry that even with careful planning,
their estate may be fail to meet all the eligibility criteria
at their death making a bad situation even worse. Increasing
the regular per person exemption would remove some of these
uncertainties.
Another way to lessen the potential for the estate tax to
force a change in land use is through special-use assessment
under section 2032A. This provision allows for land to be
valued for estate tax purposes at its agricultural value rather
than its market value. Current law limits the special use
evaluation to a reduction in value of $750,000 (indexed for
inflation). Removing the limit, or at least increasing the
minimum, would reduce the potential for land to change uses to
meet the cost of estate taxes, especially near large urban
areas and around protected areas such as national parks.
The yearly gift allowance should be increased to $50,000
per year so that land could be transferred before the death of
the owner. Farm property that is restricted by a voluntary
conservation easement, while actively farmed by the heirs,
should be exempt from estate taxes.
The best way to lessen the impact on estate taxes on land
use would be to repeal the estate and gift tax. The second best
would be to increase the personal exemption to the point that
most farms and ranches would not be adversely impacted by the
estate tax. The third best solution is to expand the number of
ways that estate taxes can be reduced or delayed.
Establishment of Basis
The tax package that was passed by the House and Senate
this summer and recently vetoed by President Clinton had
important estate tax changes supported by Farm Bureau. The
estate tax would have been repealed in 2009 and replaced by a
capital gains tax when property is sold. Of great concern to
farmers and ranchers was the loss of stepped-up basis for
capital gains tax purposes. Under current law, the basis for
capital gains tax purposes is stepped-up for the heirs to the
value of the assets at the time of death of the decedent. The
heirs only pay capital gains taxes on the increase in value of
assets during the time they own the assets. The recently vetoed
legislation would have made the original basis of the decedent
the basis for the heirs. This would have significantly
increased capital gains taxes for heirs who sell assets.
If the assets of a multi-generation farm are not sold,
basis is not an issue. But in many cases the loss of stepped-up
basis will impact whether or not land stays in farming or is
moved into other uses. Often one sibling in a family remains in
farming and/or ranching while other siblings pursue off-farm
employment. The farm or ranch is often the principal or only
asset of the older generation. At death, the farm or ranch is
divided among the siblings. The sibling that has remained in
farming or ranching has to buy, lease or rent the portions
owned by the other siblings. If the other siblings wish to sell
and use the money for other purposes, they will face
substantial capital gains taxes based on the original basis for
the property. This makes it more difficult for the actively
farming sibling to buy the land. If the basis was stepped-up,
the taxes would be less and the sibling wishing to buy would be
in a better position to purchase the land and keep it in
farming or ranching.
In many situations, none of the heirs wish to continue
farming or ranching and all wish to sell. A capital gains tax
based on the carry over method increases the cost of buying
land for younger farmers just getting started and those wanting
to expand their farming or ranching businesses. When new or
neighboring farmers and ranchers can't afford to buy farmland,
selling the land for alternative uses becomes the only option.
Capital Gains Tax
The capital gains tax is another tax that has unintended
consequences for land use and is closely tied to estate and
gift taxes. The capital gains tax is a tax on asset transfers
from one form to another, such as from farmland to certificates
of deposits in a bank. The tax can be avoided by simply not
making the asset transfer.
Many farmers and ranchers nearing retirement or in
retirement are interested in selling land to younger farmers
and ranchers, including family members involved in the farm or
ranch operations. The current 20 percent capital gains transfer
tax is a large impediment to taking such action. Rather than
making an orderly transition of land ownership from one
generation to the next, the land is often held by the older
generation until death and then caught in the estate tax web
discussed earlier.
Part of the problem with the capital gains tax is that it
is a tax on the total dollar gain in value, including the
portion of the gain that simply reflects the change in the
overall price level for the economy as a whole. For example,
farmland is often held for 30 years or more. The overall price
level is roughly four times what it was 30 years ago. Land
valued at $500 per acre in 1969 would have to sell for $2,000
per acre in 1999 for it to have the same purchasing power as
the $500 had in 1969. Any increase beyond the $2,000 would be
the ``real'' gain in the value of the land. Capital gains taxes
are paid on the entire increase in the value of the land, not
just on the real gain. Once again, this law leads to economic
inefficiencies and unintended consequences of forcing land use
changes.
As with the estate and gift tax, the best policy reform
approach would be to eliminate the capital gains tax. If that
cannot be done, the gain should be indexed for the change in
the overall price level and the real gain taxed at a lower rate
of 15 percent. Another option would be to allow retiring
farmers and ranchers to sell land and put the money into an
IRA-type account and pay taxes when the money is withdrawn from
the account. Another option to provide capital gains tax relief
would be to make current exclusion of the first $500,000 of
gain on the sale of a principle residences to apply to sale of
a farm.
All of these approaches would allow for an orderly
transition of land from one farmer to another and increase the
potential for land to remain in production agriculture rather
than be shifted to other uses.
Tax Incentives for Environmental Mandates
Tax incentives should be provided for expenses required to
meet mandated environmental policies. For farms and ranches
with slim operating margins, mandated environmental expenses
can turn operating profits into operating losses. If these
losses continue for a few years, selling the land may be the
only option for survival. Other farmers and ranchers are
reluctant to assume the risk of expenses to meet the
environmental mandates on the land. Thus, selling for non-
production agriculture uses may be the only viable option.
Providing tax incentives should help meet environmental policy
goals while keeping land in agriculture, a positive intended
consequence.
One drawback of tax incentives for mandated environmental
actions is that they only have value if the farm or ranch is
making money and paying taxes. It is important--to recognize
during these difficult economic times in agriculture that tax
incentives may have little to no value. They are not an
adequate substitute for cost-sharing that provides direct
assistance to farmers and ranchers to carry out environmental
mandates.
Incentives for Voluntary Conservation Easements
While harboring the same drawbacks as other tax incentives,
tax deductions or credits for voluntary conservation easements
is another way to meet environmental policy goals while keeping
land in agricultural uses. The easement could be to a public
agency or a private conservation group and should apply to both
donated easements and easements that are purchased. As stated
previously, the bulk of a farmer's net worth is in land. The
separation of development rights from property can decrease
land value tremendously. It is therefore difficult to devise a
tax credit that will adequately compensate farmers and ranchers
for donated easements, limiting their effectiveness.
Farm Profitability and Land Use
Farms and ranches that are profitable will remain in
agriculture therefore preventing changes in land use. Farmers
and ranchers must deal with volatile income swings that result
from unpredictable weather and markets. Tax code provisions
that allow the matching of expenses with income are of great
help.
Enactment of Farm and Ranch Risk Management Accounts (FARRM
accounts) that allow farmers and ranchers to reserve part of
their income for bad financial years is a Farm Bureau priority.
FARRM accounts were included in the Taxpayer Refund and Relief
Act passed by Congress but vetoed by the President. Repeal of
the alternative minimum tax would simplify the tax system for
farmers and ranchers and allow them to more effectively manage
their tax burden. Cash accounting is an important financial
management tool. Recent changes to allow income averaging have
been helpful.
Many other tax law changes would help farmers and ranchers
stay on the land and reduce the potential for the land to shift
to other uses. Two Farm Bureau priorities are allowing for the
full deductibility of health insurance premiums paid by the
self-employed and increasing the amount that small businesses
can expense each year.
Implications for Future Tax Policy
This Subcommittee faces a major challenge in considering
the impact of federal tax policy on land use. Current tax law
has a major impact on land conservation because the overall tax
load is large enough to cause landowners to seek legal means to
reduce that tax load. Farmers and ranchers whose families have
worked hard to accumulate assets in land do not want to pay
confiscatory tax rates. Thus, they seek alternatives that may
directly impact land conservation.
Two choices are available to deal with these problems. One
option is to continue to add features to the current tax system
to try to offset the negatives in the system. We have proposed
some ways to do that for issues of particular concerns to
farmers and ranchers.
The other option is to start working toward reform of the
entire federal tax system. We have made some suggestions for
that approach as well.
We applaud the subcommittee for recognizing that inactivity
is not a realistic option and encourage changes that will help
keep farmers and ranchers on the land and keep land in farming
and ranching.
Thank you.
Chairman Houghton. Thanks very much, Mr. Lincoln.
Mr. Miller.
STATEMENT OF CHRISTOPHER MILLER, PRESIDENT, PIEDMONT
ENVIRONMENTAL COUNCIL, WARRENTON, VIRGINIA
Mr. Miller. My name is Christopher Miller. I am president
of the Piedmont Environmental Council, a 26-year-old land use
and land conservation organization located in Warrenton,
Virginia, serving an area of Virginia approximately the size of
the State of New Jersey. We appreciate very much the
opportunity to testify before the Oversight Subcommittee on the
successes of the American Farm and Ranch Protection Act and our
suggestions of how to make a good law better.
After looking hard at the questions of environmental
degradation and land use, we believe that sprawl--the loss of
farmland, forest land, ranches, other open space--is probably
the single greatest threat to the environment. For those
families that wish to remain in farming and continue ownership
of open space lands, the effect of sprawl patterns of
development is intense. In the short term, farmers and other
open space landowners are faced with local property taxes that
are increasing rapidly and combined with appreciating land
values. This effect is amplified by many local governments
increasing property tax rates to cover the direct costs of
sprawl. Since farm income has not increased as quickly, and in
many areas is declining, landowners are often faced with the
prospect of selling land to pay local property tax bills. Added
to the immediate pressure of increasing property taxes is
Federal tax law, and in particular the enormous penalty of
estate tax law.
We thank Chairman Houghton for his sponsorship and
stewardship of the American Farm and Ranch Protection Act,
which was enacted as part of the Taxpayer Relief Act of 1997.
This vital legislation was a first step toward creating an
important incentive for landowners to protect open space and
the farming tradition on a voluntary basis.
The Farm and Ranch Protection Act enables America's farm
and ranch families to continue what they do best: take care of
America's rural lands. It lessens the Federal Government's
interference in the family's decision on whether to maintain
the farm, ranch, or forest. It does so without regulation,
without taking the land off the local and State tax rolls, and
without imposing on the American taxpayer the costs of
acquisition, administration, and maintenance of the land.
The estate tax incentives are part of an entirely voluntary
approach for a rural landowner to preserve the land for rural
purposes. The bottom line is conservation easements are working
where the benefits are most needed, among small farmers and
ranchers. Since the effective date of the American Farm and
Ranch Protection Act, the rate of easement donation in the
Virginia Piedmont has nearly doubled, as measured both in terms
of the number of easements recorded, and the total acres
recorded, during the year 1998.
By the end of 1999, we expect over 200 applications by
individual landowners to donate easements on approximately
20,000 to 30,000 acres of land. That is adding to a total that
we have already protected of about 105,000 acres, all still in
private ownership. Our understanding is that the experience in
other States is similar, particularly in the West.
By increasing the benefits to a level where the impact is
substantial, relative to the overall estate tax liability,
Congress provided a tremendous hand in the efforts to combat
sprawl and to protect rural lands. As such, the goal of the
Congressional urban sprawl agenda should be to further expand
and reform the American Farm and Ranch Protection Act.
And here are some suggestions. The current law restricts
the estate tax exclusion for land placed under easement to 40
percent of the value of the estate, with a limitation of
$400,000 on the amount that can be excluded for the purposes of
estate tax. The limitation would increase to $500,000 for 2002
and beyond. In order to provide a meaningful improvement in
this important provision, the objective of Congress should be
100-percent exclusion from the estate tax, with no limitation,
regardless of the size of the estate.
We also support the expansion of the area. We find that the
areas under pressure are approximately 50 miles driving
distance from a metropolitan region. And that might do a lot to
include the areas that others felt have been left out by the
previous limitations.
We also believe that there should be elimination of the
valuation threshold. It would serve to improve the provision
and enhance both the benefit and administration of the
provision. Strict tests exist in law to determine whether land
qualifies for a conservation easement. The valuation test adds
a level of uncertainty and inconsistency, because assessors
value land differently. Protecting pristine lands, even in
cases where the conservation easement does not cause a drastic
drop in land values, should be encouraged, rather than
disqualified.
There are some technical issues with amendments which would
be addressed by amendments we have proposed to clarify the
prohibition on commercial recreational use and to correct the
deletion of historic land as being qualified for exclusion. We
also hope that Congress will look at other tax incentives to
help protect open spaces, including creation of funds for the
purchase of conservation easements on private land.
I appreciate your time, and would be happy to answer any
questions.
[The prepared statement follows:]
Statement of Christopher Miller, President, Piedmont Environmental
Council, Warrenton, Virginia
The Piedmont Environmental Council appreciates the
opportunity to testify before the Oversight Subcommittee of the
House Ways and Means Committee on the success of the American
Farm and Ranch Protection Act and its strengths and weaknesses.
In particular, we commend the Committee for evaluating the
impacts of the American Farm and Ranch Protection Act and other
tax provisions on the broader effort to slow the loss of farm,
ranch and other open space lands to sprawl patterns of land
development.
The Piedmont Environmental Council, a 26-year-old non-
profit organization located in Warrenton, Virginia, serves an
area of Virginia approximately the size of New Jersey. Our
mission is to promote and protect the rural economy, natural
resources, history and beauty of the Virginia Piedmont. For 27
years we have worked hard to better understand the pressures
facing rural landowners and rural communities. From our
experience, the most serious threat is the sprawl pattern of
land development that is typified in Northern Virginia and so
many other metropolitan regions in the United States.
The most serious environmental problem facing America today
is the loss of farmland, forest-land, ranches, and other open
space to sprawl patterns of development. By consuming land at
four times the annual rate of populations growth, the costs of
sprawl far outweigh the benefits of the associated economic
development. Time and time again, studies by PEC and other
organizations have demonstrated that the net fiscal and
economic costs of providing services to rapidly growing and
widely dispersed development far outweigh additional tax
revenue and economic activity.
The most obvious costs of sprawl are the dramatically
higher expenditures for transportation, new schools, and other
infrastructure investments. The current estimate in Virginia of
additional tax revenue required for the next generation of
interstates, highway expansions and bypasses of new urban areas
is $70 billion over 20 years. This is in addition to the
increased levels of transportation funding authorized last year
by TEA-21. The story in the case of school construction is even
more daunting; not only must we find the revenue for new school
construction in areas of sprawl development but we must also
replace the revenue lost from declining urban and inner-
suburban neighborhoods necessary to maintain and remodel the
existing schools. [One estimate of the immediate needs in
Virginia was $26 billion.]
An indirect cost to the Federal government is the cost of
controlling air and water quality. The failure to meet air and
water quality standards has forced state and federal government
officials to pursue increasingly onerous regulatory programs,
at considerable expense to the taxpayer and American
businesses.
In places like Northern Virginia, the improvements in
emissions controls on cars has been off-set by the steady
increase in the number of vehicles and vehicle miles traveled.
As our communities become more widely dispersed, we rely on
cars for more often and we drive them further each trip. As a
result, air quality is deteriorating, not improving, relative
to the levels in 1991 when the latest amendments to the Clean
Air Act were enacted. During the past summer, Northern Virginia
experienced nearly 40 violations of the .08 ppm 8 hour average
for ozone, meaning that the public was exposed to dangerous
levels of air pollution nearly one out of every three days.
In the case of water quality, sprawl patterns of land
development is responsible for a large portion of the
sedimentation that is identified nationally as the single
largest threat. The water quality reports for streams across
the United States, required by section 303(d) of the Clean
Water Act, consistently identify sedimentation as the greatest
threat. Land development disturbs huge areas, and combined with
loss of forest cover, results in an increase in the total
sediments eroding into the nation's streams.
Less tangible, perhaps, is the impact of sprawl on the
American family and its values. Many of the social ills facing
our communities, such as road rage, increased juvenile
delinquency, and persistent unemployment in urban and inner
suburban communities, can be attributed in part to the effects
of sprawl patterns of land development. Road rage is directly
related to the traffic congestion that results from more people
driving greater distances. Juvenile delinquency is, at least in
part, due to the fact that parents are commuting nearly three
hours per day, meaning children and teenagers are frequently
unsupervised in the afternoon and evening. And finally, the
unemployed and under-employed are unable to afford the
transportation costs to reach increasingly dispersed jobs on
the outer edges of expanding metropolitan regions.
The phenomenon of sprawl is an increasingly common one. All
across the country, farms, ranches, forests and wetlands are
forced to give way to the pressures for new office buildings,
shopping malls and housing developments. America is losing over
four square miles of land to development every day. Much of
America's historically and environmentally significant land is
under development pressure. This is often out of proportion to
the expected demands of population growth, as sprawl leapfrogs
development far beyond metro centers.
For those families that wish to remain in farming and
continue ownership of open space lands, the effect of sprawl
patterns of development is intense. In the short term, farmers
and other open space landowners are faced with the local
property tax impacts of rapidly appreciating land values. This
effect is amplified by many local governments increasing
property tax rates to cover the direct costs of sprawl. Since
farm income has not increased as quickly and in many areas is
declining, landowners are often faced with the prospect of
selling land to pay local property tax bills.
Added to the immediate pressure of increasing property
taxes is Federal tax law, in particular the enormous penalty of
estate tax law. Specifically, the value of land in those parts
of the country where ranches, farms and forests traditionally
have flourished has skyrocketed to the point where landowners'
children can no longer afford the estate tax bill after their
parents die. The result is predictable. Family land holdings
are split up and sold. The problem of course is that their land
is often some of the best and most productive agricultural land
in the nation.
The trend is alarming: since 1950, Pennsylvania has lost
more than 4 million acres of farmland; an area larger than
Connecticut and Rhode Island combined. Metropolitan Phoenix now
covers an area the size of Delaware. It is estimated that over
the next 45 years, sprawl in the Central Valley of California
will affect more than 3.6 million acres of America's most
productive farmland. Added to this is the fact that, in some
areas of the country, more than 60% of the land will experience
inter-generational transfer in the next ten years. And this is
only the tip of the iceberg.
In Washington's own ``back yard,'' the Piedmont region of
Virginia, like many urbanizing areas across America, is
characterized by dramatically inflating real estate values.
Farmland which once sold for $500 an acre in the 1960's now
sells for $10,000 to $15,000 an acre. In central Loudoun
County, the second fastest growing county in America, land that
in the 1960s and 1970s was exclusively in farming, now has
speculative development values of more than $50,000 an acre.
This spillover effect is manifested in many counties by intense
pressure for development which sprawls across open country at
low densities, wasting land and further increasing the pressure
for farm conversion.
Recognizing this development pressure, and the threat to
America's farmers, ranchers and open space, the Piedmont
Environmental Council has worked with Congress to develop
solutions which combine the best aspects of public and private
involvement. Working with Chairman Houghton, Senator Chafee and
countless other Members of Congress and citizen groups, this
effort culminated in the enactment of the American Farm and
Ranch Protection Act in 1997, which created a conservation
easement incentive under Internal Revenue Code section 2031(c).
We thank Chairman Houghton for his sponsorship and
stewardship of the ``American Farm and Ranch Protection Act''
to enactment as part of the ``Taxpayer Relief Act of 1997.''
This vital legislation was a first step toward creating an
important incentive for landowners to protect America's open
space and farming tradition on a voluntary basis by placing
their lands under easement in exchange for relief from the
estate tax, which often threatens our farmers and ranchers.
The American Farm and Ranch Protection Act enables
America's farm and ranch families to continue to do what they
do best: take care of America's rural lands. It lessens the
Federal government's interference in a family's decision of
whether to maintain the farm, ranch, or forest. In other words,
the American Farm and Ranch Protection Act protects farm, ranch
and forest land and the families who own it. It does so without
regulation, without taking the land off the local and state tax
rolls, and without imposing on the American taxpayer the costs
of acquisition, administration, and maintenance of the land.
This important new law also provides an entirely voluntary
approach for a rural landowner to preserve the land for rural
purposes. This, in turn, contributes greatly to the larger
public good of conserving America's increasingly threatened
rural lands.
The impact of the American Farm and Ranch Protection Act on
the rate of voluntary land conservation is difficult to
isolate, since it is one of several tax benefits that result
from donating a conservation easement. The addition of this new
incentive, however, has clearly spurred increased interest in
voluntary land conservation. Since the effective date of the
American Farm and Ranch Protection Act, the rate of easement
donation in the Virginia Piedmont has nearly doubled, as
measured in numbers of easements recorded and total acres
recorded in 1998. We expect that the rates for 1999 will be the
same or greater. One interim measure in Virginia is the number
of easement applications under consideration by the Virginia
Outdoors Foundation, which estimates that over 175 applications
have been received in 1999.
Most importantly, it is greatly benefitting the family
farmer, enabling smaller farms to protect almost the entire
operation from the estate tax. As the son of one farmer in
Orange County put it during a discussion as to whether to take
advantage of easement donation, ``If you don't do it, Dad, I
won't have a chance of staying in farming. I will have to sell
the farm to pay the estate taxes.''
In other farming and ranching communities across the
country, including Wyoming, Montana, and Pennsylvania, the
story is similar. The Jackson Hole Land Trust reports that
``The Jackson Hole Land Trust has experienced a significant
increase in the number of easements that have been closed since
the passage of the American Farm and Ranch Protection Act. The
American Farm and Ranch Protection Act is a significant
contributor to the increase. It's definitely been something
that keeps people at the table and it has definitely given
prospective easement donors a reason to follow through--it
really works for people. Particularly in concert with other
estate planning techniques.'' The Montana Land Reliance has
relied on the additional incentives resulting from the American
Farm and Ranch Protection Act to generate thousands of acres in
easements in 1998. The Lancaster Farmland Trust and the
Brandywine Conservancy also believe that section 2031(c) has
increased both the interest in easement donation and the rate
of donations.
The bottom line is conservation easements are working where
the benefits are most needed--among small farmers and ranchers.
By increasing the benefits to a level where the impact is
substantial to overall estate tax liabilities, Congress could
lend a tremendous hand to efforts to combat sprawl and protect
our farms and open space. As such, the goal of the
congressional urban sprawl agenda should be to further expand
and reform the American Farm and Ranch Protection Act.
Due to revenue constraints during the original debate, the
conservation easement provision was scaled-back (i.e., 40
percent exclusion from the estate tax up to $400,000 with a
ramped-up limitation of $500,000 by 2002 and thereafter) and a
cumbersome threshold test was established (i.e., value
threshold test for determining ``threatened land''). The
ultimate provision provided desperately needed immediate
conservation incentives and has served as a ``foot-in-the-
door'' for future expansion and reform efforts while the
``pilot'' program was evaluated. The overwhelming success of
2031(c) in providing relief to farmers and ranchers, coupled
with the ever-growing problem of urban sprawl, presents
Congress with a rare opportunity to build on a program that
works.
Expansion of the American Farm and Ranch Protection Act
Current law restricts the estate tax exclusion for land
placed under easement to 40 percent of the value of the estate
with a limitation of $400,000 on the amount that can be
excluded for purposes of the estate tax. The limitation would
increase to $500,000 for 2002 and beyond. In order to provide
the most meaningful improvement in this important provision,
the primary objective of Congress should be a 100 percent
exclusion from the estate tax with no limitation regardless of
the size of an estate. Not only would this simplify the current
system, it would serve to provide an additional incentive to
landowners to create conservation easements on a voluntary
basis. The rancher in Colorado who owns 2000 acres of land
hardly finds relief in a $400,000 provision. It is unfortunate
that the law compels him to sell the land , almost always to
developers, to pay the estate tax because farming does not
produce the revenues to either pay the estate tax or remain
viable if debt is incurred to cover the estate tax liability.
The provision adopted in 1997 limits eligible lands to
those within 25 miles of a metropolitan area (as defined by the
Office of Management and Budget), national park or wilderness
area or within 10 miles of an urban forest (as designated by
the Forest Service). While these areas represent the most
threatened lands, urban sprawl is proceeding at such a rapid
pace that protection of open space should not have to wait
until sprawl is knocking on the door (literally). The recently
passed Financial Freedom Act of 1999 would have doubled the
geographic area covered by section 2031(c) to 50 miles and 20
miles respectively. We are very supportive of that effort and
encourage Congress to consider allowing all lands subject to
developmental pressure to qualify for conservation easement tax
incentives. The land we can save today will most certainly be
threatened tomorrow. Acting proactively to protect our farmers,
ranchers and open space is the best way to avoid the decay of
our countryside.
Eliminating the valuation threshold would also serve to
improve the provision and enhance both the benefit and
administration of the provision. Strict tests exist in law to
determine whether land qualifies for a conservation easement.
The valuation test adds a level of uncertainty and
inconsistency (different assessors value differently).
Protecting pristine lands, even in cases where the conservation
easement does not cause a drastic drop in land values, should
be encouraged rather than disqualified or nullified.
Reform of the American Farm and Ranch Protection Act
Since adoption of the American Farm and Ranch Protection
Act, various technical issues have arisen which, if enacted,
would further encourage farmers and ranchers to utilize
conservation easements as envisioned by the legislation. Last
year, Congress began the process of reform by providing
important clarification to the post mortem election and working
to advance certain technical amendments to IRC section 2031(c)
which are widely viewed as improvements to the American Farm
and Ranch Protection Act. These amendments include: (1) clarify
the prohibition on commercial recreational use and correct the
deletion of historic land as being qualified for the exclusion;
and (2) ensure a fair procedure for any determination by the
Secretary of the Treasury that land within 25 miles of a
national park or wilderness area is not eligible because it is
not under significant development pressure. It is our hope that
Congress include these provisions in the soonest available tax
vehicle.
The Need for Other Incentives
The estate tax incentives of the American Farm and Ranch
Protection Act do not meet all the challenges facing rural
landowners. Further, the combination of income tax and estate
tax benefits are of little incentive to the rural family that
is generating only marginal income from open space uses. We
would encourage the Congress, and Members of the committee to
support other efforts to expand and promote conservation
easements as a valuable tool in our fight against urban sprawl.
We are currently working with Members on other relevant
committees and officials at the Departments of Interior and
Agriculture to develop a funding pool for the purchase of
conservation easements on America's valuable farming land.
Keeping the land in the custodial care of farmers and ranchers
and encouraging farms to continue farming is the best way to
ensure that our rich agrarian heritage is maintained and that
our children and grandchildren will enjoy the grandeur of
America's vast open space.
In closing, the best caretakers of America's land are the
farm and ranch families who have owned and cared for it for
generations. Once these families are displaced from their land,
no amount of regulation or government spending can replace
their productive stewardship of the land. Chairman Houghton's
strong support of the American Farm and Ranch Protection Act
ensures the nation's farmers and ranchers will maintain their
important role in conserving America's open space our great
agrarian tradition.
Chairman Houghton. Fine. Thanks, Mr. Miller.
Mr. Coyne, would you like to ask a question?
Mr. Coyne. Thank you, Mr. Chairman.
Mr. Bartsch, given the brownfields time in existence, the
legislation that was passed--that is, the tax incentive portion
of it--and it has only been available for a year and a half
now, could you tell us just what activities have been
undertaken as a result of that to date?
Mr. Bartsch. Well, about 20 or 25 projects have actually
used the incentive. I think what is important, again, is the
timing. Large-scale redevelopment of brownfield sites takes a
long time. And when you start to introduce a new incentive into
the mix, again, there is an education process. People need to
understand how it would work, and why it would work, and what
benefits it would bring.
I think we have not had enough time to let that play
through. There is more interest now. I think a good analogy to
this is when Congress passed the rehabilitation tax credit for
historic structures a number of years ago. That took a while,
too, to get worked into the redevelopment process so that
people could understand what would happen. But that has been
very successful. And I think there is a lot of potential for
the brownfield tax incentive to grow in usefullness in the same
way.
Mr. Coyne. So it takes a while to get geared up, and if
there is not enough time allotted, before you know it, the
program expires.
Mr. Bartsch. The program will expire. What has happened now
is more people are interested in it. But again, they are now
looking at the fact that reuse projects can take a long time;
there may be unforeseen delays. And they are just really
worried that they are not going to get through completion
before the expiration, and that will throw off their financial
calculations for the project. And it just makes them a little
nervous. The uncertainty makes them very concerned.
Mr. Coyne. Thank you.
Chairman Houghton. Thanks very much.
Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman, and thanks to the
panel for the good testimony. I would like to ask a few
questions, if I might, about priorities and what might be the
most cost-effective way to get at the same result, particularly
Ms. Hocker and Mr. Dennis, with regard to land conservation and
the various proposals that you talked about.
As I heard your testimony, Mr. Dennis, you talk about three
kinds of incentives. First, is I guess what you might call
transfer or gift encouragement; somebody giving land that is
being utilized for private purposes to a conservation easement,
or actually selling the land to a conservation use, State,
local, Federal Government, or non-profit.
Second would be how to manage your own land without
transferring it. And I think one of the interesting things
about the Member testimony earlier that you may have heard was
Mr. Gilchrest's comments about the Endangered Species Act and
the disincentive that many landowners currently feel to
protecting endangered species because they feel they will be
over-regulated and burdened by having an endangered species on
their land; rather than having the right incentive, which is to
help protect that endangered species on the land.
And then the third one was the notion of a death tax, as
you said, and how to deal with sort of break-up prevention, so
that when someone dies you do not have the land being broken
up. And we also talked about that in terms of the farms with
Mr. Lincoln.
But my question to you is, could you prioritize those three
for us? And maybe, if it is easier, prioritize the specific
proposals that might be within those three in the order of
which one has the maximum impact on what you are trying to
achieve.
Mr. Dennis. No matter how I answer that question, I am
going to get in trouble.
Mr. Portman. You are going to get in big trouble, yes.
Mr. Dennis. Well, I will say----
Mr. Portman. You can forget about H.R. 2880. I mean, I do
not have a vested interest in this.
Mr. Dennis. Well, I do not want to ingratiate myself with
you, but that was----
Mr. Portman. Do not bother.
Mr. Dennis. We happen to feel that the exclusion of one-
half of the capital gain is at the top of the list.
Mr. Portman. Do you really think that would be the most
effective?
Mr. Dennis. We went out to all of our people in the field
who are in the land business, and we gave them a menu of
different types of tax incentives. And we asked them to get
back to us and rank them.
Mr. Portman. Yes.
Mr. Dennis. And that was right at the top of the list.
Everyone put that at the top of the list.
Mr. Portman. That was ahead of estate tax?
Mr. Dennis. That was ahead of estate tax. And the reason
was a couple of things. First of all--now, remember, these are
people who are entrepreneurs out trying to acquire land--it is
not a very expensive provision, and in this day and age, we
have to be real sensitive to the revenue cost.
Mr. Portman. Right.
Mr. Dennis. And we felt that that provision gives us a
competitive edge if we are out there negotiating for land,
which is real simple. It allows you to beat someone else to
that piece of property. And it is incredibly important to us.
Mr. Portman. The 50-percent exclusion is adequate to create
that competitive advantage?
Mr. Dennis. Well, do you want to make a better offer?
[Laughter.]
Mr. Portman. Remember, we are trying to keep it
inexpensive.
Mr. Dennis. We feel good about the 50 percent. And we are
not greedy. We just want a competitive edge. We really do feel
it would make a big difference.
Mr. Portman. But the price of the land is more competitive
for you to purchase at that 50 percent. It still takes an
intent on behalf of the seller to want to conserve the land.
Mr. Dennis. Well, of course, when negotiating for the land,
the first thing we would do is back down from the purchase
price that 50 percent.
Mr. Portman. Right.
Mr. Dennis. And then work from there.
Mr. Portman. Right.
Mr. Dennis. And that way we would probably end up splitting
the savings with the seller.
Mr. Portman. Yes.
Mr. Dennis. So we would be able to get the property at a
discount. You know, this has been our experience in this
business. So I am not too sure if that answers that. I do want
to talk about some of the other provisions.
Mr. Portman. Yes, sure.
Mr. Dennis. Just to make sure you understand it.
Mr. Portman. But that is important. And just back on one
thing you said in your testimony, which I think I have talked
to your group about, but one of the reasons we have pursued
this, as compared to the deduction, is that a lot of people
cannot use the deduction.
Mr. Dennis. Yes.
Mr. Portman. I mean, you have to have income to use the
deduction. So we thought this might broaden the scope of who
could be potentially interested in using it.
Mr. Dennis. That is a very important part of it, too. There
are not that many provisions in the Tax Code that are targeted
to conservation tax incentives. The ones that we see used most
often, of course, are the ones that relate to conservation
easements and deductibility.
Mr. Portman. Right.
Mr. Dennis. And that does require income to shield. You
have to have income. This provision is geared more for someone
who does not have the ability to make a gift--the rancher or
the farmer or the average person.
Mr. Portman. Right.
Mr. Dennis. We are working in rural communities, and that
is the profile of the average seller of land.
The other thing I did want to talk about is, when I say
``death taxes,'' when I went out West, the minute I started
talking about estate taxes, they looked at me and, ``What are
you talking about?'' And they said, ``You mean death taxes.''
And I do feel lifting the exclusion on estate taxes would be
very important.
Mr. Portman. The exemption?
Mr. Dennis. The exemption. Because in the ranching
community, for example, the average rancher that I deal with in
the Malpai region has--You talk about cash poor; these are
people who go out and blade roads and drive schoolbuses to make
ends meet. They do have a piece of land that is worth a
considerable amount of money. And if they get hit with the
estate taxes, that land is gone. So I happen to think raising
that cap to 4 or 5 million dollars--or maybe even beyond that--
would be very important to that community.
I also want to talk just briefly about tax-exempt bonds, a
proposal that has been put forward.
Mr. Portman. Yes.
Mr. Dennis. It does not go far enough. We would love to be
able to issue tax-exempt bonds to be used for conservation in
general. Conservation is not just timber. I know that now I am
reaching. That is very expensive. We understand that there is a
revenue impact there.
Mr. Portman. Yes.
Mr. Dennis. But that is another provision we feel very
strongly about.
Mr. Portman. It has a much larger expense, interestingly,
than the tax proposals we are talking about.
Mr. Dennis. I am sorry?
Mr. Portman. The cost to the Federal Treasury is much
higher over the 5-year period, at least for the proposal, the
Better America Bonds, that we have been talking about.
Mr. Dennis. Yes. We have not run the numbers on that. I
think other people have. But it would be considerably more
expensive than the capital gains provision, for example.
Mr. Portman. Well, thank you. Ms. Hocker, I am sorry, my
time has expired, but thank you for the good work you are doing
out there with all those land trusts.
Chairman Houghton. Thank you.
Mr. Hulshof.
Mr. Hulshof. Thank you, Mr. Chairman.
Mr. Lincoln, welcome. Welcome to all of you, but Mr.
Lincoln especially. I want to talk just a little bit, and I
want to respond really to a good point that you make on page 3
regarding our discussion on, in fact, the $792 billion tax cut
that was vetoed last week which included the death tax repeal.
Just for informational purposes, you make an excellent
point about the step-up in basis. And I had a lot of folks who
talked to me at home about that over the August break. In fact,
my family was just in exactly the same scenario as you put out
in your written testimony; that is, my mother's mother passed
away, my grandmother, and then passed along a piece of
property. And of course, even though we are actively engaged in
farming, we did not want to take that small piece of land. And
so the sale or the rent of it--It is exactly as you said.
I will just tell you that as the tradeoff, what we came up
with was allowing that land to be subject to only capital gains
tax rates, as opposed to the 37 to 55 percent on the estate
tax. And that was sort of the tradeoff. Were this an ideal
world, and were you and I kings for a day, we could get rid of
not only the death tax, but the capital gains tax as well. But
your point was well taken in your testimony.
Mr. Dennis, what I would say to you is that, as Benjamin
Franklin once said, the only two sure things in life are death
and taxes. I do not think he meant them in that order, or that
the Federal Government would combine those two traumatic events
through the death tax; but we are working on it.
What I do want to spend some time with--And Mr. Miller, I
think probably I am going to pick on you a little bit. I do not
know if you were here during the questions of the previous
panel that I had regarding the Treasury Department's idea of
Better America Bonds, and they wanted to mirror the QZABs. And
I just do not see the proof in the pudding yet, as far as how
those have been successful.
Do you think--let me just ask your comment--do you think
that the idea of Better America Bonds meets the objective of
promoting smart growth?
Mr. Miller. I think that it could be vastly improved, if
that is the goal. If the goal is to stimulate brownfields
redevelopment, that is OK, that is good, but that is not
necessarily smart growth. One of the problems is that
brownfields are not necessarily located in the smartest
locations, and so you may be stimulating redevelopment of
property that should not be developed if your concern is sprawl
or your concern is the pattern of land use.
Similarly, land conservation is not always a smart growth
technique. I mean, in general, it is, but there is a difference
between environmental quality improvements, park land creation,
and smart growth. It requires a careful analysis of regional
and local land use patterns, all the other things. And so
targeting and having criteria that really provide targeting are
a critically important element.
Mr. Hulshof. Well, let me ask you, because you work at the
local and you mentioned the regional level. Then what would you
give us as guidance as the appropriate level of Federal
involvement?
Mr. Miller. Well, I think the Federal involvement, the
incentives are good. I mean, it would be nice to have the
Federal Government providing additional incentives to smart
growth. So a more targeted Better America Bonds program could
work, potentially.
I think that the other thing that the Federal Government
should look at is existing tax programs, to be sure that they
are not encouraging the sprawl that they are then trying to
correct. One of the things we have run into--and we are in an
exurban area, just at the end--is the use of industrial
development bond authority and sewage treatment plant bond
authority to encourage sprawl. And those are something that I
think needs to be reevaluated. Are we giving tax breaks for the
right uses? That is one area.
Another area is to look carefully--and this is not
necessarily tax policy--where we put our infrastructure
dollars. And I will just give you a quick example. In Virginia,
the proposals for highway construction that would provide the
infrastructure for sprawl are estimated at $70 billion in
additional tax revenues over the next 20 years by the State.
That is on top of the additional revenues provided by T-21 in
the last Congress. So if we do not look carefully at those
issues, something like the Better America Bonds is trying to
offset a whole series of Federal policies that create more of a
problem.
Mr. Hulshof. As a last comment, maybe if you want to follow
up--or any of you--our State legislature in Missouri recently
enacted a bill that, especially as we see the development
taking over--and Mr. Lincoln, as you mentioned, urban sprawl is
getting closer to you--our State legislature made it
appropriate for farms to be valued at the agricultural value
for property tax purposes. And that was challenged. Our supreme
court recently ruled in favor of the agriculturalists; and that
is that it should be the lower property tax value.
I do not know if that is something that should be done on
an individual State legislature basis, or if it is something we
can do. But I really do appreciate all of you and your input
today. Thank you, Mr. Chairman.
Chairman Houghton. Thank you very much, Mr. Hulshof.
Mr. Weller.
Mr. Weller. Thank you, Mr. Chairman. And the question I
would like to put out there--and I think I will address it to
Mr. Dennis with The Nature Conservancy; it is a group I have
worked with on some initiatives back in Illinois--and
particularly in the south suburbs in the State of Illinois,
open space and farmland preservation particularly have been
priorities over the last several years. We enacted the Illinois
Land Conservation Act, redeveloping the Joliet Arsenal, setting
aside 19,000 acres for the national tall grass prairie. And
that doubled the amount of open space in Will County. Will
County also passed a $50-million referendum for open space land
acquisition this past fall, and Governor Ryan succeeded in
convincing the State legislature to approve a $160-million
bonding program for open space.
The question I would like to ask of you--and if others on
the panel would share your opinions--is, there is always a
debate of how best to use those dollars. Do we purchase
development rights, leave it in the hands of the local farmer
to continue farming it but you purchase development rights so
that they cannot subdivide it or develop it for commercial
purposes? Or do you purchase the land outright? Taking it off
the tax rolls, of course, is of great concern to the local
school district in many cases, because of property taxes role
when it comes to funding our local public schools.
From your perspective, what is the best use of those
resources? You have a limited amount of money, limited budget,
limited number of tools available. What is the best approach to
get the most efficient use of those resources to preserve open
space and prime farmland?
Mr. Dennis. That is a very good question. We at the
Conservancy, any time we answer a question like that we go back
to what our mission is. And our mission is preserving important
habitats for fish and wildlife, and that is the starting point.
The next thing we would do is we would look at that
particular habitat or system and try to determine what are the
threats, what are the stresses, to that particular habitat? And
then we will develop strategies that respond to those stresses.
And those strategies, if you are tying them to the stresses, if
you are dealing with farmland, it may be that a no-development
restriction may be the very best thing you could do with that
property, and that is what you do.
If you are dealing with a piece of property that has got
the last known rookery on it or something, and it is a very
fragile area, you may want to buy the property outright because
that is the best way to control it.
So what we would do is, we go through that analysis
whenever we are talking about spending money--whether it is our
money or an agency's money. What are you trying to protect?
What are the stresses to what you are trying to protect? And
then, what strategies do you develop? And that is what is going
to drive whether you buy it outright, you lease it, you work on
a management plan, or you negotiate for an easement on the
property.
Mr. Weller. Mr. Lincoln, what is the perspective of the
Farm Bureau on that question?
Mr. Lincoln. Well, I think when you consider the limited
resources--We use purchase of development rights in New York,
and I think Suffolk County on Long Island was probably one of
the initial uses. And I would say it has been very effective
there. And in other parts of New York, too, conservation
easements are used, south of Rochester.
But I think as my testimony--When you look at the overall
impact and what causes farms to go out, estate taxes rank very
high on that list. And that is why the American Farm Bureau--
which, as you know, the Farm Bureau is a grassroots
organization, and through our county development, State
development, policy development, and at the national level,
estate taxes and capital gains, and the fact of when you have
multi-family members who may have to sell part of that estate
either to the other family members so the capital gains comes
into play.
But I think overall the best way to keep farms in business
is to have them profitable. And that is why my final comment on
the farm accounts to me makes a lot of sense, being able to set
aside up to 20 percent of your income during a good year--
which, as a dairyman, most dairymen had a great year last year.
You know, next year may not be.
Mr. Weller. Sure. You know, Mr. Lincoln, of course, Kenny
Hulshof, who just stepped away, has been leading the fight for
those farm accounts. Unfortunately, the President vetoed those
farm accounts when he vetoed our effort to lower taxes and
simplify the Tax Code this past week.
You know, your point about some of the initiatives, you
know, one of my biggest disappointments--the Conservation
Reserve Program. We talked about wildlife habitat and taking
fragile farmland out of production that perhaps should not be
in production. And this Congress authorized over 36-million
acres for the Conservation Reserve, but they have only enrolled
about 31 million. So that means there are 5-million acres of
unused CRP that could be used to take fragile farmland out of
production, create more wildlife habitat and, of course,
preserve highly erosive farmland. And of course, when corn and
soybean prices in Illinois are one-fourth lower than they
should be, farmers are hurting. And of course, a lot of them
are saying, ``Why do we not have this land taken out of
production?'' And that is an important question, and we are
still waiting for an answer from the Administration. Thank you,
Mr. Chairman.
Chairman Houghton. Thank you very much.
Mr. Bartsch. May I add a quick comment on that, please?
Chairman Houghton. Yes, go ahead.
Mr. Bartsch. I think your question really shows how a lot
of these incentives are really linked. Because the extent to
which we bring back thousands of acres of brownfields using the
expensing incentive or whatever, well, that really gives
choices and options, and that may relieve some pressures on
farmland that is subject to being used for new development.
Chairman Houghton. Thank you. Thanks very much. We are sort
of in a push for time, so I really appreciate your being part
of this thing, and we will consider your testimony in all our
deliberations. So I thank you very much.
And I would like to ask the next panel to come up, if I
could. This would be Hon. Rob McKenna, the Council Member of
the King County Council in Seattle; Tom Spellmire, who is with
the National Association of Conservation Districts in Ohio;
John S. Gates, president of Center Point Properties in
Illinois, on behalf of The Real Estate Roundtable (formerly
National Realty Committee) and Thomas Tuchmann, principal and
vice president of Resource Management, U.S. Forest Capital, in
Portland, Oregon.
Now, gentlemen, let me just make a quick statement here.
You know, you have come a long way, and I really appreciate it,
but we are going to end this meeting by 4 o'clock. We have got
to. And so therefore, anything you can do to sort of condense
those statements and hit the high points, so that we can get on
to the questions, we would certainly appreciate it.
So I would like to call on Mr. McKenna.
STATEMENT OF HON. ROB McKENNA, COUNCIL MEMBER, SIXTH DISTRICT,
KING COUNTY COUNCIL, SEATTLE, WASHINGTON
Mr. McKenna. Thank you very much, Mr. Chairman. And I will
try to set a good example for the entire panel by paraphrasing
my comments. I thank you very much and the members for holding
this hearing today. And I want to extend a special ``Thank
You'' to Congresswoman Dunn, who is one of my constituents, and
with whom I have worked closely on a number of issues of
importance to King County, including H.R. 1863, the Community
Forestry and Agriculture Conservation Act, which I am here to
testify in support of today.
H.R. 1863 is a powerful combination of tax-exempt
financing, private capital, timber and agricultural harvesting
using best management practices, in order to save working
forests and farmland, while protecting private property rights,
providing liquidity to landowners, and while respecting
critical environmental values such as habitat conservation and
water quality.
H.R. 1863 would achieve those goals through the use of tax-
exempt revenue bonds issued by a private non-profit which would
be repaid with revenues from the low-impact harvest of timber
or agricultural products.
H.R. 1863 is of great interest and importance to King
County and to many parts of this country. King County is 2,200
square miles in size, with a population of 1.7 million. The
eastern third of the county is covered with rural working
forest lands. But King County is also a crossroads of
traditional manufacturing, such as Boeing and PACCAR, alongside
software, biotechnology, and other high-tech companies such as
Microsoft and Immunex.
We have an abundance of natural resources that my
constituents value very highly, just as they value the great
economy and the job opportunities they have. But the two values
of natural resources and economic growth have come into
conflict to some extent. Over the last 25 years, 107,000 acres
of forest land have been converted to development in the
Seattle area in King County.
We have taken a lot of steps locally to deal with that. We
have spent over $200 million locally to acquire forest lands,
habitats, and other sensitive areas. And we continue to spend
millions of dollars a year for acquisition. But every year it
becomes tougher, the challenge becomes greater.
We are facing tremendous pressures to convert working
corporate forest lands to non-forest uses such as rural forest
residences. These are the 5- and 10- and 20-acre mini-estates
that are increasingly in demand by the folks who are cashing in
all those stock options.
Second, we are trying to enhance water quality standards to
comply with the Endangered Species Act listing of the Chinook
and other anadromous fish.
Third, the policy climate for forest protection in the
Northwest is somewhat of a zero-sum mentality. And there is
more conflict than there is cooperation frequently.
And fourth, all levels of government and the philanthropic
community can never come up with enough cash to buy all the
land outright with government dollars and with charitable
dollars. And so we have been looking for another tool that
would allow us to preserve working forests, and also to
preserve environmental values.
And 1863 helps us do that. It is a simple concept. We would
create a new ownership category, a non-profit which is private,
which would provide an alternative to outright preservation,
intensive timber production, and development. This private non-
profit would be required to exceed relevant environmental
statutes and have a board makeup consisting of environmental
representatives, large commercial landowners, and local
government officials. They would work together, and would
leverage scarce taxpayer dollars with this tax-exempt financing
to generate hundreds of millions of dollars nationwide in
investment capital, private capital, that could be used to
acquire working forests and to keep those forests in
production.
We have been working in King County for the last 2 years
testing this concept. We actually went out and put together
three case studies using actual large tracts of land in
cooperation with the commercial property owners. And what we
found when we applied the tax-exempt and commercial lending
rates to these three different parcels is that we can generate
the cash flow to pay off both the principal and the interest on
the bonds with the tax-exempt rates, even while only applying
fairly light forest harvests.
On the other hand, at taxable rates, you have to harvest at
commercial rates of harvest in order to be able to repay the
debt. So you end up with clear cuts and other fairly intensive
commercial harvest practices.
We have a special opportunity, I think, now as a country,
and certainly in the Pacific Northwest, to keep forests in
production, while also harvesting it in a sensitive way that
protects the environment, harvesting it more lightly, but
protecting those jobs, and ultimately protecting the open space
because once the bonds are retired, we can choose not to
harvest the land again.
So I appreciate very much the opportunity to come and talk
to you about 1863. It is a reasonable cost of $78 million over
5 years that could protect hundreds of thousands of acres. And
at that cost I think actually it would be significantly less
expensive than the Better America Bonds, which are another good
idea. So again, thank you. And thank you for allowing me to
speak to you as a representative of local government.
[The prepared statement follows:]
Statement of Hon. Rob McKenna, Council Member, Sixth District, King
County Council, Seattle, Washington
Mr. Chairman and members of the Subcommittee, my name is
Rob McKenna. I represent the Sixth District on the Metropolitan
King County Council in Washington State. Thank you for holding
this hearing on the relationship between tax law and
conservation. I would also like to extend a special thank you
to Congresswoman Dunn with whom I have had the pleasure of
working on many issues of importance to King County including
H.R. 1863--The Community Forestry and Agriculture Conservation
Act which I testify in support of today.
King County is located in northwest Washington and includes
both metropolitan Seattle and ``edge cities'' like Bellevue and
Redmond which are home to hundreds of high tech companies such
as Microsoft. At 2,200 square miles in area and with a
population of 1.7 million, King County is one of the nation's
largest counties. The eastern parts of the county include many
rural and mountainous forestlands. My constituents care deeply
about those forests. King County is a crossroads of traditional
manufacturing industries such as Boeing and PACCAR alongside
software, biotechnology and other high-tech companies. This
powerful combination has resulted in explosive economic growth
that has produced a high standard of living. King County also
features an abundance of natural resources that provide a
quality of life that continues to attract new residents. From
Puget Sound in the west to the Cascade Mountains in the east,
King County residents love their natural resources and
environment.
But, as recognized more and more in the press, this
explosive growth has not come without its challenges. In the
Seattle area, forestland has been reduced by approximately
107,000 acres in the last 25 years. As the County continues to
grow, the King County Council has worked to develop new tools
that will continue to provide jobs for our constituents while
managing growth in such a way that our quality-of-life is
maintained. These tools have included a nationally recognized
forestland, habitat and open space conservation program that
has invested over $200 million in land acquisitions over the
past three decades. These programs, coupled with philanthropic
and state and federal technical and financial assistance, have
helped us achieve some real gains in open space protection.
Yet, so much more needs to be done, especially given the
increased rate of growth in forested areas. The tougher
challenges we face in the years ahead are driven by four
primary factors.
First, there are increasing pressures to convert working
corporate forestlands to non-forest uses. These corporate
forestlands sit between the Mount Baker-Snoqualmie National
Forest to the East and the City of Seattle to the West. These
lands have long served as an economic buffer for small rural
forest -dependent communities and as an environmental buffer
between the Cascade uplands and Puget Sound lowlands. However,
as our population and the wealth of that population grows, we
are seeing increasing development on the urban boundary and
increasing fragmentation in rural areas as more and more
citizens are interested in rural forest residences. We need to
provide both green space and expansion in a mutually acceptable
manner.
Second, King County is facing unprecedented pressures to
enhance water quality standards in response to the listing of
anadromous fish under the Endangered Species Act. We are
working hard to do this without the divisiveness that has
occurred among various parties in the past. And we have, in
fact, made some progress, adopting a Sensitive Areas Ordinance
to govern development standards and Best Management Practices
for our roads maintenance program, among other measures. Yet
again, one of the keys to our success will be assuring that
non-point water sources flowing from the county, state and
national forests through our cities will meet water quality
standards. The working forests buffer I just spoke about, with
the right management regime, provide a very attractive
environmental means to achieve our endangered species goals
under the listings without creating stricter regulatory
mandates or impacting private property rights.
Third, the current policy climate, notwithstanding my
explanation above, has been less than cooperative, especially
when it comes to forestry issues. This has made it difficult to
bring people together, especially when one party or another has
a stake in the issue, but may not be in a decision-making role.
Fourth, all levels of government and the philanthropic
community just do not have the kind of funding that is needed,
given other public policy needs, to achieve the level of
conservation that so many of my constituents support. I know we
are not alone and that local, state and federal entities share
this challenge.
So what do we do about it? Time is running out in King
County. Mr. Chairman, and members of the Subcommittee, we
desperately need you to support H.R. 1863--The Community
Forestry and Agriculture Conservation Act because it is the
only tool that will address the challenges above in a manner
that is doable today.
Community forestry and agriculture bonds will allow private
non-profit entities to issue tax-exempt revenue bonds for
conservation purposes if the forestland they buy will have a
permanent conservation easement placed on it and if the
management plan they approve exceeds relevant environmental
laws. While the transactions are complex and must be
professionally managed, the concept is simple and responds to
the challenges I outlined above in the following ways:
For the first time an ownership category--private
non-profit--provides an alternative to outright preservation,
intensive timber production, and development. A private non-
profit entity will have the philosophical and financial
wherewithal to acquire large forested ownerships in an
unfragmented state.
The private non-profit will be required to exceed
relevant environmental statutes and will have the board make-up
and financial flexibility too not only meet the standards for
anadromous fish protection, but exceed them if community
economic objectives are met.
For the fist time, environmentalists, industry,
financial and local opinion leaders will have the opportunity
to make decisions together regarding a large forested
ownership.
For the first time, a conservation entity will be
able to leverage scarce taxpayer dollars with private
investment to generate the large sums--tens to hundreds of
millions of dollars--that are needed for large scale working
forest protection.
King County is so supportive of this concept that we have
been working for the last two years to test its feasibility and
to create a financially sound and environmentally worthy non-
profit in anticipation of using this tool.
The feasibility analysis was completed by the County's
Department of Natural Resources and tested both the financial
and policy effectiveness of the tool. From a financial
standpoint, we took actual data from corporate timberlands and
applied three different forest management scenarios to those
lands. Then we applied both tax-exempt and commercial lending
rates to those scenarios to see if we could generate the cash
flow to pay off the principal and interest on the bonds. We
could, even under the lightest forest harvest. We also tested
this tool with a wide range of constituents as well. While they
stressed the need for accountability, they also were supportive
of moving forward with forestland acquisitions.
Last year the King County Council passed a resolution in
support of the Congresswoman Dunn's Community Forestry and
Agriculture Conservation Act. In June my colleague
Councilmember Larry Phillips and I--as private citizens--joined
two prominent conservationists and the University of
Washington's forestry dean to create a non-profit in
anticipation of taking advantage of community forestry bonds.
We are working to identify an individual with financial
experience to join the board and we are keeping a seat open in
case a forestland seller would like a seat on the board. This
will be quite a groups, with conservationists and landowners--
reflecting an array of philosophical and political beliefs--
joined together to manage forestlands. We eagerly wait for the
time when we can move forward with a transaction.
And time is running out. In the two years we have been
working on this concept, more and more forestland has been
converted and those lands that have not been converted are
seeing their land values skyrocket. Even with tax-exempt rates,
we still need to be able to service bond debt through
sustainable forest harvests and the longer we wait, the more
difficult it will be for us to achieve our goals. More
importantly, the more pressing the challenges outlined earlier
will become and the more costly those resolutions will become.
Mr. Chairman and Members of the Subcommittee, we have had
enough fighting about our forests. I urge you and your
colleagues to provide us with a market -based conservation
vehicle that doesn't require landowners or investors to leave
money on the table to protect the environment. Please help us
bring people together in support of our working forests. If
not, I am afraid that we will be back in a more contentious
setting that in the end will cost a lot more money and cause a
lot more divisions.
Thanks you for providing me with this opportunity to
testify today and I would be pleased to answer any questions
you may have.
Chairman Houghton. Thank you very much. You have been a
great example. That is wonderful.
Mr. Spellmire--Wait, wait just a minute. Excuse me. I am
sorry. I want Mr. Portman to talk about you a little bit.
Mr. Portman. Sorry, Mr. Spellmire. You need a brief
introduction. This is a friend and constituent of mine, Mr.
Chairman, from Ohio. And he is listed here as ``Thomas C.
Spellmire, Legislative Committee, National Association of
Conservation Districts.'' He has also, though, been very
involved not only at the national level but the local and State
level in these issues, and was a member of the Ohio Farm
Preservation Task Force, and has been a good adviser to me and
other local officials on preservation of farmland in Warren
County and that area. So welcome, Mr. Spellmire.
STATEMENT OF THOMAS C. SPELLMIRE, MEMBER, LEGISLATIVE
COMMITTEE, NATIONAL ASSOCIATION OF CONSERVATION DISTRICTS,
LEBANON, OHIO
Mr. Spellmire. Thank you, Mr. Portman. Mr. Chairman,
Members of the Committee, my name is Thomas Spellmire. I am a
farmer by occupation, from the State of Ohio. We currently farm
about 2,400 acres. It is all leased property. We used to farm
3,100 acres, but they have since built two successive ``Home-
arama'' sites on ground that we used to lease.
I would like to cover two land use issues in my
presentation here: farmland preservation and conservation
practices and suggested changes to the Tax Code. Well, I am
going to just start with the issue of farmland preservation.
And in my opinion, three changes could be made with the IRS Tax
Code that would give current and future owners of farmland more
options.
The first recommendation deals with the issue of unintended
consequences of the current tax law and how addressing this
issue would also address retirement issues and it would also
aid in the transfer of farmland from one generation to the
next, as well as encourage more land ownership by owner-
operators.
My second recommendation deals with the issue of allowing
an agricultural buyer of land with development value to bid
more competitively for that land.
The third recommendation deals with a proposal that would
allow contributions from a larger sector of the U.S. population
that I hear is doing very well to create opportunities for the
agricultural sector, which seems to have been left out of the
current economic boom.
The first recommendation is for creation of a capital gains
deferred tax account. Please note, this is a recommendation for
deferred tax collection, not elimination of tax. What I am
proposing here is merely deferring the collection of capital
gains taxes to some later point in time.
Under the current Tax Code, like-kind exchanges are exempt
from capital gains taxes. If a tract of land is sold, the
seller has so much time to reinvest the money in land to avoid
capital gains taxes. The unintended consequence is that now you
have more agricultural land being owned by individuals who have
demonstrated a willingness to sell land for a non-agricultural
use.
A deferred capital gains tax would also aid in the transfer
of farm land from one generation to the next, and allow for
more owner-operators to actually own the land that they farm.
My recommendation No. 2 is to increase the tax
deductibility of gifts of conservation easements on land to
charitable institutions and governments. Under the current Tax
Code, the charitable contribution as a tax deduction is allowed
if a conservation or agricultural easement is placed on the
land and the easement is donated to a qualified organization.
This is a donation that can be utilized by farmers, and allows
them to bid more competitively for the purchase of land that
has development potential but is not yet developed.
If this tax deduction were increased by a factor of two or
more, the cash value of this deduction would be more in line
with the value of the deduction. This would then be a more
viable option, and allow the agricultural bidder to bid more
competitively.
Recommendation No. 3 is creation of a tax deduction for
contributions to build capital to fund link-deposit revolving
loan funds. To encourage such contributions, the deduction
should be 200 percent or more of the actual value of the
contribution.
I personally like the idea of low-interest loans on
farmland in exchange for conservation and agricultural
easements. This would allow those who wish to purchase land for
agricultural use to bid more competitively. What I am proposing
is the Federal Government providing the mechanism, through the
use of an increased tax incentive, to allow land trusts and
other non-profits dedicated to conservation to raise capital to
fund link-deposit revolving loan funds.
Now, moving on to conservation practices, this is a
proposal to increase the allowable tax deduction for the cash
expenses incurred during the installation of certain
conservation practices, from 100 percent to 200 percent, or any
percent greater than 100 percent.
I have been a supervisor on my local conservation board of
supervisors for the past 12 years. We now have an agricultural
as well as a land developer customer base. These are two very
different customer bases, but when it comes to conservation and
land stewardship these two groups have some common ground.
Both the agricultural community and the development
community have a certain segment of their respective members
that truly embrace sound conservation practices on the land.
These are profitable entities, and a tax incentive would
further increase the survivability of these companies. I
believe we would all benefit if more companies and individuals
with a conservation ethic were given an extra tax incentive to
make them more competitive.
I would like to close by again thanking the Subcommittee
for inviting me here today. I would like to thank Congressman
Rob Portman for his support in encouraging this hearing. And
finally, I would like to thank the Chairman for holding this
hearing, because I feel these issues greatly impact our
standard of living in this country. Thank you.
[The prepared statement follows:]
Statement of Thomas C. Spellmire, Member, Legislative Committee,
National Association of Conservation Districts, Lebanon, Ohio
Mr. Chairman, Members of the Committee, my name is Tom
Spellmire. I am a farmer by occupation from the State of Ohio.
I have for the past twelve years served voluntarily on my local
Soil and Water Board of Supervisors and the local, state, and
national RC&D Council. I had the opportunity to serve on then
Governor George Voinovich's Farmland Preservation Task force of
1996-1997. I currently am a member of the National Association
of Conservation Districts Legislative Committee.
I will cover two land-use issues in my presentation.
Farmland Preservation and Conservation practices and suggested
changes to the tax code.
Allow me to start with the issue of Farmland Preservation.
In my opinion three changes could be made to the IRS Tax Code
that would give current and future owners of farmland more
options. The first recommendation deals with the issue of
unintended consequences of current tax law and how a change
would address retirement issues and aid in the transfer of
farmland from one generation to the next, as well as encourage
more land ownership by owner-operators. The second
recommendation deals with the issue of allowing an agricultural
buyer of land with development value to bid more competitively.
The third recommendation is a proposal that would allow
contributions from the larger sector of the United States
population that is doing very well to create opportunities for
the agricultural sector which seems to have been left out of
this current economic boom.
Recommendation No. 1--Creation of Capital Gains Deferred Tax Accounts.
Please note this recommendation is for a deferred tax
collection, not an elimination of tax. What I am proposing here
is merely deferring the collection of capital gains taxes to
some later point in time. This would help deal with possibly
unintended consequences of the current tax code.
Under the current tax code like-kind exchanges are exempt
from capital gains taxes. I am sure that some would argue, and
rightly so, that this enables landowners who become surrounded
by urban development to sell their property for development and
relocate their farm to another location using the tax-free
like-kind exchange option. One problem with this scenario is
that in some cases when the landowner goes to buy land in
another location they are bidding just to avoid paying capital
gains taxes. This gives them the ability to out-bid other
potential buyers of the land. These buyers are more than
willing to bid more than agricultural value for the property
just to avoid paying capital gains tax. Once the sale is
complete at the new location another potential scenario
evolves. These new landowners in a farming community now have
ties to the development community and view their purchases a
little differently than an agricultural buyer. Are these new
landowners really farmers or are they more accurately land
speculators who happen to farm? You now have more agricultural
land being owned by individuals who have demonstrated a
willingness to sell land for a non-agricultural use.
It is this willingness to allow land to be converted to
non-agricultural use that fuels the attitude that the best way
a community can help its farming sector is to create the right
atmosphere for development to non-agricultural use. When
landowners with this attitude are approached by developers the
cycle repeats itself over and over thus this desire to avoid
capital gains taxes has created the unintended consequence of
contributing to urban sprawl. Those who had intended to
purchase the land and keep it in agriculture are very much
overwhelmed by this whole process. A process that was triggered
by an individuals desire to avoid capital gains taxes.
I am not proposing doing away with like-kind exchanges but
rather creating another option for sellers of land subject to
capital gains tax. A capital gains deferred tax account fund
could be a viable investment option for a seller of land. The
seller would deposit the proceeds from the sale of the land
into the qualified fund. The investor would be subject to
ordinary income tax rates on ``interest'' earned and withdrawn
from the fund and subject to capital gains rates on any
``principal'' withdrawn. Thus, the tax on the sale merely would
be deferred.
Another scenario that demonstrates the need for a capital
gains deferred tax account is that farmers who are nearing
retirement may need to sell their farm to provide retirement
income. Unlike other people who build up a retirement nest egg
and are able to withdraw retirement funds over a long period of
time (and therefore defer the payment of tax on that retirement
nest egg), such farmers are forced with an immediate capital
gains tax. Under current tax law, a retiring farmer cannot
practically utilize the like-kind exchange provisions of the
Internal Revenue Code, because reinvesting in land does not
meet their retirement needs.
Again, incentives could be implemented by amending the
existing like-kind exchange provisions of the tax law to allow
anyone selling real estate to defer payment of tax if sale
proceeds are invested in a qualified fund. The investor in the
fund could select from various payment options so that the
investor would be taxed on payments from the fund when
received. The investor would be subject to ordinary income tax
rates on ``interest'' earned and withdrawn from the fund and
subject to capital gains rates on any ``principal'' withdrawn.
Thus, the tax on the sale merely would be deferred. Also, this
would provide a mechanism that will specifically address the
needs for retirement income of a farmer nearing retirement.
This would allow a farmer to utilize the full value of the sale
price of the farm to fund their retirement rather then the
current system of after tax value. If the tax were deferred
this would allow a landowner to seriously consider a bid that
may reflect the agricultural value rather then be forced to
consider only development bids knowing that the sale proceeds
are subject to capital gains taxes. A deferred capital gains
tax would also aid in the transfer of farmland from one
generation to the next and allow for more owner-operators to
actually own the land they farm.
Recommendation No. 2--Increase the Tax Deductibility of Gifts of
Conservation Easements on Land to Charitable Institutions and
Governments.
Under the current tax code, a charitable contribution tax
deduction is allowed if a conservation or agricultural easement
is placed on land and the easement donated to a qualified
organization. The amount of the tax deduction is the difference
between the appraised fair market value and the agricultural
value. This deduction is limited to no more than 50 percent of
adjusted gross income per year but can be spread out over a
period of up to five years. The actual cash value of this
deduction is dependent on the tax bracket rate of the
individual multiplied by the value of the deduction. This is a
tax deduction that can be utilized by farmers and others so as
to allow them to bid more competitively for the purchase of
land that has development potential but not yet developed. The
inequity that I see is in a scenario when a farmer is bidding
against someone taking advantage of the like-kind exchange
option of capital gains the advantage goes to like-kind
exchanges. In this scenario an individual utilizing the like-
kind exchange option can bid 20 percent higher for the land
with no restrictions on the land use. For the sake of example
this 20 percent is also the difference between the fair market
value and the agricultural value. The farmer cannot bid as
competitively because his tax incentive is limited to his tax
rate times the value of the deduction. If this tax deduction
were increased by a factor of two or more the cash value of the
deduction would be more in line with the value of the
deduction. This would then be a more viable option and allow
the agricultural bidder to bid more competitively. This is
another tool that would also aid in the transfer of farmland
from one generation to the next and allow for more owner-
operators to actually own the land they farm.
Recommendation No. 3--Creation of a Tax Deduction for Contributions to
Build Capital to Fund Link-Deposit Loan Funds. To Encourage Such
Contributions the Deduction Should be 200 Percent or More of the Value
of the Contribution.
Allow me to explain by starting with some background
information first.
Low interest loans on farmland in exchange for conservation
or agricultural easements would allow those who wish to
purchase land for agricultural use to bid more competitively.
The federal government does not have a very good track record
when it comes to administering low interest loan programs in
the agricultural sector. What I am proposing is the federal
government providing the mechanism through the use of an
increased tax incentive to allow Land Trusts and other non-
profits dedicated to conservation to raise capital to fund
link-deposit revolving loan funds. Contributions to non-profits
are currently tax deductible so this is a proposal to increase
the incentive by allowing the contributions to be deducted at
more than face value to qualified non-profits. The Land-Trusts
and other non-profits would be required to enter into link-
deposit agreements with various financial institutions and
banks. The banks would agree to administer the loan funds for a
fee. This would mean that it is the bank that determines the
credit-worthiness of potential borrowers not the non-profits.
In exchange for the fee the bank would guarantee the principal
amount and a nominal return on the deposit to the non-profits.
The liability for any delinquent loans would be the bank's
responsibility. The loan funds deposited by the non-profits
would be secured by the financial security of the bank. The
non-profits could receive a nominal return on the fund to
provide operating capital. The Land-Trusts and non-profits
would set the overall parameters of the loan program and be
responsible for holding the conservation or agricultural
easements. Under this scenario if the non-profit agreed to a 1
percent return on capital and the bank agreed to a 2 percent
administrative fee the farmer could borrow the funds at a 3
percent interest rate. This would allow the farmer to bid more
competitively for land to purchase and keep in agricultural
production. This would also allow the sons and daughters of
retiring farmers to purchase the family farm for a price that
allows the older generation to fund their retirement and the
younger generation to service the loan from the proceeds from
the farm. This is another tool that would also aid in the
transfer of farmland from one generation to the next and allow
for more owner-operators to actually own the land they farm.
Conservation and Land Stewardship Issues and the IRS Tax Code
This is a proposal to increase the allowable tax deduction
for the cash expenses incurred during the installation of
certain conservation practices from 100 percent to 200 percent
or any percent greater than 100 percent. Again, allow me to
start with some background information. Nationally Conservation
Districts have a long tradition of administering voluntary
conservation programs mainly targeted at the agricultural
community. The Natural Resource Conservation Service provides
the technical expertise for these voluntary measures. Some
agricultural producers do not consider these to be voluntary
since some of these are required for participation in USDA
commodity programs. In more recent history some Conservation
Districts have been administering local construction site
erosion control measures. These measures usually fall under the
heading of urban sediment control measures and have been
adapted by their perspective counties. These are not voluntary
conservation measures and are targeted at land developers. I
have been a supervisor on my local Conservation Board of
Supervisors for the past twelve years. During that time our
district has added the element of administration of urban
sediment and erosion control regulations for our county. We now
have an agricultural as well as a non-agricultural customer
base. These are two very different customer bases but when it
comes to conservation and land stewardship these two groups
have some common ground. Both the agricultural community and
the development community have a certain segment of their
respective members that truly embrace sound conservation
practices on the land. There are a number of individuals and
companies that project the image that they have incorporated
conservation and land stewardship into their vision statements.
These are profitable entities and a tax incentive would further
increase the survivability of these companies. I believe we all
would benefit if more companies and individuals with a
conservation ethic were given an extra tax incentive to make
them more competitive. For some reason people respond to tax
deduction incentives disproportionately to the actual cash
value and I believe now is a good time to utilize this option
to promote conservation and land stewardship. A tax incentive
would encourage more conservation practices to be implemented.
It would also encourage more research and development into more
efficient ways to meet conservation objectives. It is my
understanding that the United States now has a budget surplus
and at the same time Congress is trying to operate under the
budget caps. By utilizing the tax code we would in effect be
increasing the expenditures for conservation practices and at
the same time Congress could operate under the budget caps. By
initiating such a change to the IRS tax code the Conservation
Districts efforts to initiate and implement conservation
practices would be much easier.
I would like to close by again thanking the subcommittee
for inviting me here today. I would like to thank Congressman
Rob Portman for his support in encouraging this hearing.
Finally, I would like to thank Chairman Amo Houghton for
holding this hearing for these are issues that greatly impact
our standard of living in this great country. Again, Thank You
for giving me this opportunity.
Chairman Houghton. Thank you very much, Mr. Spellmire.
Mr. Gates.
STATEMENT OF JOHN S. GATES, JR., PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CENTERPOINT PROPERTIES, OAK BROOK, ILLINOIS, AND
MEMBER, THE REAL ESTATE ROUNDTABLE
Mr. Gates. Mr. Chairman and Members of the Subcommittee, my
name is John Gates. I am president and chief executive officer
of Center Point Properties, which trades on the New York Stock
Exchange. I am here today on behalf of The Real Estate
Roundtable, and am joined in this by eight other national real
estate organizations.
Center Point Properties has a portfolio of more than 30
million square feet of industrial property in Chicago, making
us by far the largest owner and developer of industrial
property in the Nation's largest industrial property market. We
are quite experienced in inner city and existing community
redevelopment.
And redevelopment of existing sites is an important
component of any community's growth and development plan.
However, several Federal tax and non-tax policies are very
serious impediments to redevelopment; particularly the
redevelopment of the brownfield sites.
The U.S. Conference of mayors currently estimates that
there are over 400,000 brownfield sites across the Nation.
Development of these sites would help restore many blighted
areas, create jobs where unemployment is high, and ease
pressure to develop beyond the fringes of our existing
communities. Small urban centered businesses often benefit most
directly by this type of redevelopment.
Many brownfields properties are located in inner cities,
precisely where many businesses currently want to be. The
economics are right; critical infrastructure, including
existing transportation resources, is already in place; and the
work force is in close proximity.
I know that Congressman Weller is very aware of these
dynamics, because he has played an enormous role in initiating
and helping Center Point to work through the Byzantine Federal
rules and policies necessary to recycle the contaminated and
now dormant Joliet Military Arsenal into a 25,000-acre national
park, veterans cemetery and, adjacent to it, a 2,000-acre
transportation, manufacturing, and distribution complex.
Unfortunately, while many of these sites have great
potential, they remain a province of Federal policies such as
Superfund that perpetuate the legacy of urban decay by
inhibiting the very kinds of investments our company and many
others like us are in the business to make.
The potential of open-ended Superfund liability for
prospective purchasers of brownfields, no matter how remote, is
an imposing Federal impediment to brownfields redevelopment,
and often a deal killer. If Federal policies were changed so
that the potential liability for would-be purchasers would
become clearer, the real estate community would be far more
ready, willing, and able to invest private capital in
brownfields redevelopment. Additionally, we need more certainty
that clean-up decisions made at the state level are also
recognized as final determination under Federal law.
With respect to tax policies affecting redevelopment, it is
important to focus on current tax treatment of environmental
remediation costs. These costs primarily involve brownfields,
but also
include clean-up for leaking underground storage tanks,
asbestos removal, and lead-based paint abatement.
Current law generally requires that clean-up costs be
capitalized and added to the basis of the asset, which in most
cases is the land. Since the land is not depreciable, these
costs cannot be recovered unless the property is sold. This
discourages long-term ownership and long-term investment.
Recognizing the burden that this tax treatment imposes,
Congress recently enacted an important exception for
Empowerment Zones, Enterprise Zones, and certain targeted high-
poverty areas, that allows the costs to be deducted in the year
that they are incurred.
We are pleased that many Members of this Committee
recognized what a serious impediment the tax treatment of
environmental remediation costs is to clean-up and
redevelopment. Mr. Weller's bill, H.R. 997, is particularly
notable, because it would allow the immediate expensing of up
to $500,000 of remediation costs, and a 5-year amortization of
costs exceeding that amount. This approach would provide
meaningful cost recovery, particularly to smaller redevelopment
projects; yet is measured enough so as not to stimulate tax-
driven development.
There are various other types of impediments to
redevelopment, including the current depreciation rules on the
depreciation of lease-hold improvements and the requirement
that demolition costs must be capitalized.
In conclusion, we would urge Congress to act to remove
Federal policies that are impediments to redevelopment.
Brownfields remediation and redevelopment will particularly
benefit if the dual impediments of Superfund liability and
capitalized cost treatment are removed.
The result will be the injection of new capital into
rehabilitation projects. Many small urban center businesses
will benefit, resulting in substantial job creation and
economic revitalization. Also, the viability of existing space
will improve, and ease the pressure to develop greenfields,
allowing for the preservation of far more open space. Thank you
very much.
[The prepared statement follows:]
Statement of John S. Gates, Jr., President and Chief Executive Officer,
CenterPoint Properties, Oak Brook, Illinois, and Member, The Real
Estate Roundtable
Introduction
Mr. Chairman and Members of the Subcommittee, my name is
John Gates. I am President and CEO of the CenterPoint
Properties, a Chicago-based real estate investment trust, or
REIT, publicly traded on the New York Stock Exchange. I am here
today on behalf of The Real Estate Roundtable. The Real Estate
Roundtable is the successor to the National Realty Committee,
an industry organization which has advocated economically based
real estate tax policies for three decades. Joining The Real
Estate Roundtable in these comments is the American Seniors
Housing Association; Building Owners and Managers Association,
International; International Council of Shopping Centers;
National Apartment Association; National Association of
Industrial and Office Properties; National Association
Realtors; National Association of Real Estate Investment
Trusts; and National Multi Housing Council.
CenterPoint Properties is metropolitan Chicago's largest
owner of industrial property. The Chicago region has more than
1.2 billion square feet of industrial property, making it the
nation's largest and most diverse industrial property market.
Centerpoint Properties and a number of other members of the
real estate organizations joining these comments, have
substantial experience with environmental remediation and
redeveloping brownfields. Several federal tax and non-tax
issues play a role in brownfields redevelopment and
redevelopment in general.
Federal Policies Impede Redevelopment
In our view, Congress and federal agencies should reform
those laws and policies that impede the abilities of states and
local communities to develop and grow as they deem in their own
best interests. Redevelopment of existing sites and properties
is an important component of any community's development plans.
A number of federal policies--including federal tax policies--
are impediments to redevelopment and other forms of so called
``smart growth.''
Brownfields remediation is a highly visible area where
federal policies are hindering redevelopment where it is often
needed most. The U.S. Conference of Mayors estimates that there
are over 400,000 brownfields sites across the country.
Development of these sites would help restore many blighted
areas, create jobs where unemployment is high and ease pressure
to develop beyond the fringes of communities. Small, urban
centered businesses often benefit most directly by this
redevelopment.
Many brownfields properties are located in inner cities--
precisely where many businesses want to be. The economics are
often right. Critical infrastructure, including transportation,
is already in place and the workforce is in close proximity. I
know Congressman Weller is very aware of these dynamics because
he has played an invaluable role in helping CenterPoint work
through the Byzantine federal rules and policies necessary to
recycle the now dormant Joliet military arsenal into a thriving
economic development.
Unfortunately, while many of these sites have great
potential, they remain the province of federal policies, such
as Superfund, that perpetuate a legacy of urban decay by
inhibiting the very kinds of investments our company and many
others are in business to make.
The potential of open-ended Superfund liability for
prospective purchasers of brownfields--no matter how remote--is
an imposing federal impediment to brownfields redevelopment and
often a deal killer. If federal policies were changed so that
the potential liability of would be purchasers became clearer,
the real estate community would be far more ready, willing and
able to invest private capital in brownfields redevelopment.
Additionally, we need more certainty that cleanup decisions
made at the state level are also recognized as final
determinations under federal law.
To that end, we urge Congress to swiftly enact the kinds of
reforms contained in H.R. 1300--the bipartisan Superfund bill
sponsored by Congressman Boehlert and recently passed out of
the House Transportation Committee 69 to 2. We also support the
efforts of Congressman Greenwood to advance similar legislation
in the Commerce Committee.
Proper Federal Tax Policies Can Aid Redevelopment of Existing
Properties
With respect to tax policies affecting redevelopment, it is
important to focus in the current tax treatment of
environmental remediation costs. These costs primarily involve
brownfields but also include clean up for leaking underground
storage tanks, asbestos removal and lead based paint
treatments.
Current law generally requires that clean up costs be
capitalized and added to the basis of the asset--which in many
cases is land. Since land is not depreciable, these costs
cannot be recovered until and unless the property is sold.
Recognizing the burden that this tax treatment imposes,
Congress recently enacted an important exception for
contaminated sites in empowerment zones or certain targeted
high poverty areas. In those cases, the costs may be deducted
in the year they are incurred.
We are pleased that so many Members of this committee
recognize what a serious impediment the tax treatment of
environmental remediation costs is to clean up and
redevelopment. Mr. Weller's bill, H.R. 997, is particularly
notable because it would allow immediate expensing of the first
$500,000 of remediation costs and a 5 year amortization of
costs exceeding that amount. This approach would provide
meaningful cost recovery, particularly to smaller redevelopment
projects, yet is measured enough so as not to stimulate tax
driven development. We also applaud Mrs. Johnson's efforts in
the recently vetoed Taxpayer Refund and Relief Act of 1999 to
broaden the definition of brownfields qualifying for
deductibility treatment under Section 198. Further, we consider
H.R. 1630, a bill sponsored by Mr. Coyne and Mr. Rangel to make
permanent the current law ability to deduct remediation
expenses in empowerment zones, important and support its
passage.
Other tax impediments to redevelopment include 39 year
depreciation of leasehold improvements and the capitalization
of demolition costs. We urge the immediate enactment of H.R.
844, Mr. Shaw's bill to change the depreciation treatment for
leasehold improvements to 10 years. It is cosponsored by almost
every member of the Ways and Means Committee and would more
closely align the tax depreciation of the improvements with the
economics of the lease transaction. This would help keep
buildings modern and ease the pressure to develop new sites.
Mr. Neal and Mr. English, the co-chairs of the Real Estate
Caucus, have been particularly supportive of this bill.
Demolition can be an expensive cost component of a
redevelopment project. Similar to environmental remediation
costs, demolition costs must be capitalized to the land and
this unfavorable tax treatment is an impediment to
redevelopment. We believe demolition costs for non-historic
structures costs should, at a minimum, be added to the basis of
the building and depreciated. Mrs. Johnson has been supportive
in this area and we look forward to working with her and other
Members of the Committee on this issue.
Conclusion
In conclusion, we urge Congress to act to remove federal
policies that are impediments to redevelopment. Brownfields
remediation and redevelopment will particularly benefit if the
dual impediments of Superfund liability and capitalized cost
treatment are removed. The result will be the injection of new
capital into rehabilitation projects. Many small, urban
centered businesses will benefit resulting in substantial job
creation and economic revitalization. Also, the viability of
existing space will improve and ease the pressure to develop
``greenfields'' allowing for the preservation of more open
space.
Chairman Houghton. Thank you so much, Mr. Gates.
Mr. Tuchmann.
STATEMENT OF E. THOMAS TUCHMANN, PRINCIPAL AND VICE PRESIDENT,
RESOURCE MANAGEMENT AND ENVIRONMENTAL AFFAIRS, U.S. FOREST
CAPITAL, LP, PORTLAND, OREGON
Mr. Tuchmann. Thank you, Mr. Chairman, and thank you,
Members of the Subcommittee, for having this hearing today. And
a special ``Thank You'' to Congresswoman Dunn and Congressman
Tanner for your leadership on the Community Forestry and
Agriculture Conservation Act and rural forestry and natural
resource issues.
It is late, and I am last, so I will stick to three points.
No. 1, there urgent policy issues that create a foundation for
this discussion today on the minutia related to tax policy. And
these issues relate to folks with strong values regarding
private property rights, resource management, and resource
protection. That is tearing at the fabric of rural communities
throughout the Nation.
No. 2, we have a real restructuring of the forest products
industry throughout this country. It is not driven by
environmental issues. It is actually driven by business
decisions. 10.6 million acres have been sold, or are under
contract domestically over the last 1\1/2\ years. That compares
to about 500,000 acres historically. This high disposition
rate, is being driven by Wall Street demanding higher rates of
return from commercial forest lands.
The bottom line on this is, those lands are going into more
intensive forest management at a time when more conservation is
being demanded. And it establishes incentives for those forests
to be fragmented to non-forest uses.
So what do we do about this? And that brings me to my third
point. Congresswoman Dunn and Congressman Tanner, along with
your colleagues, have introduced the Community Forestry and
Agriculture Conservation Act. The Act allows, as Mr. McKenna
said, the establishment of non-profit private organizations to
be established with environmental, industry, financial, and
other opinion leaders from communities. The non-profits work to
develop management plans for forest lands; they can acquire by
issuing tax exempt debt through private marketplace at very low
costs of capital. Tax exempt debt will provide great
conservation benefits at very low cost to the taxpayer. It is a
win-win, and it is one we think whose time has come.
Our company is working with communities across the country,
from King County with Mr. McKenna to Mendocino County, which is
home of the Headwaters Forest--which many of you have heard
about--to Jacksonville, Florida. And we have also spoken with
folks in Tennessee, for example, and New England, as well.
Throughout the country we have seen a new demand for
conservation-related provisions that this Committee can play a
large role in helping us achieve.
We urge you to pass H.R. 1863--The Community Forest and
Agriculture Conservation Act.
I would be happy to answer any questions you might have.
[The prepared statement follows:]
Statement of E. Thomas Tuchmann, Principal and Vice President, Resource
Management and Environmental Affairs, U.S. Forest Capital, LP,
Portland, Oregon
Mr. Chairman and Members of the Subcommittee, my name is
Tom Tuchmann, Principal and Vice President of Resource
Management and Environmental Affairs with U.S. Forest Capital,
LP. I want to thank you for your leadership in holding this
hearing on the impact of tax law on land use, conservation and
preservation. I would also like extend a special thanks to
Congresswoman Dunn, along with Congressmen Tanner, Herger and
Matsui, whose strong leadership on this issue have allowed
communities from Florida to Washington to explore new ways to
protect their environment and help stabilize rural forest-
dependent communities. Your interest in developing new tools
that will bring people together on these difficult
environmental issues is sorely needed and greatly appreciated.
I am honored to appear before you to testify in support of H.R.
1863, The Community Forestry and Agriculture Conservation Act
of 1999.
By way of background, U.S. Forest Capital is a forestland
investment services company servicing commercial and
conservation landowners in acquisitions and dispositions,
organizational development and resource management, and
environmental affairs. Our company's expertise in the tax-
exempt bond and capital markets, together with experience in
natural resource policy, management and forest economics, has
attracted us to innovative financial tools like the tax-exempt
revenue bond concept being considered by this Committee.
Conservation Today
It is no secret that forestland conservation is a popular
but often controversial subject that inspires passionate debate
among people. This debate began in earnest in the 1870s and
continues 130 years later. At issue then as it is today, is the
amount of land that should be publicly protected and the
management intensity that should be allowed on private forests.
Over the years, local, state, and federal governments have
created public policy remedies that recognize conservation.
These conservation programs are supported through: the tax
code; federal regulatory, financial and technical assistance
programs; state and local zoning and land use programs; and,
state and local general obligation bond authorizations.
One hundred and thirty years of policy making have, thus,
created a mosaic of land ownership patterns and land ownership
objectives. While some may disagree, I believe that this mosaic
is one of our nation's greatest assets. From commercially
managed forests which provide products that people demand to
our National Park and Wilderness systems that protect special
places for their ecological and spiritual values, Americans
enjoy unprecedented environmental and economic values.
Few would argue with the successful legacy of these
efforts. Yet, governmental and philanthropic funding sources
are limited at best, and regulatory efforts are often
controversial and entail difficult tradeoffs with private
property rights. Moreover, these programs, in our view, do not
address one of the most pressing conservation needs of the next
century; namely, halting the fragmentation of working forests
throughout the nation and helping rural forest-based economies
compete with capital investments that favor pavement over
conservation. The challenge has been to develop new win-win
conservation tools that:
Create real conservation gains on private working
forests;
Do not require further governmental regulation;
Protect property rights;
Sustain rural employment; and,
Provide cost efficient solutions for investors,
landowners and governments.
Conservation Need
Fragmentation--Forest fragmentation and conversion to non-
forest uses is taking place at alarming rates. For example,
according to American Forests, a national conservation group,
107 acres or 50 percent of the Seattle, Washington, area has
been converted to non-forest uses since 1973. In the Baltimore-
Washington corridor, forestland has declined by 265,000 acres
or 32 percent.
While conversion lands must be allocated for economic
growth, this growth should also be balanced with natural
resource conservation in a manner that protects both our
environment and our rural natural resource dependent economies.
Unfortunately, current programs do not provide the tools to
generate the financial resources to manage fragmentation in a
politically acceptable manner. Clearly, we should be able to
generate a mutually acceptable way to keep working forests
working. Meaning, those private forests that have been
intensively managed for commercial products in the past will be
protected in their forested condition in the future, along with
the water quality and recreational and employment
opportunities.
Forestland Dispositions--Dramatic changes taking place in
the integrated forest product and pulp and paper industries
create both a new need and opportunity for conservation-related
forestland transactions. Historically, the forest products
industry owned their forestlands as standing inventory to
supply raw material for mills. As such, companies rarely valued
these forests for their pure investment potential. Since the
mid-1980s, this perspective has changed as pension funds and
others investors have bought and managed forestlands to
diversify their investment portfolio and reap their independent
economic value. Their successes--returns on investment
approaching 20 percent--and paper stocks' poor performance--in
the low single digits--have not gone unnoticed on Wall Street.
Thus, since 1997, more than 10.6 million acres of forestland
have either sold or are currently under contract for sale
nationwide. The combined value of these lands is approximately
$6 billion. Over the past eighteen months alone, 8.7 million
acres of forestland have either sold or are approaching sale.
And these are only transactions of $50 million or greater.
U.S. Forest Capital expects the fundamentals that drive
these forestland dispositions to remain strong for the next
five years. Moreover, we expect that many of the 10.6 million
acres that have been sold since 1997 will be refinanced and/or
carved out for real estate disposition. In either case, the
financial pressures on some of these lands could trigger
significant pressure to increase harvest or further fragment
the existing domestic forestland base.
Community Forestry and Agriculture Bonds
People continue to debate how much forestland should be
protected and how much should be commercially managed. We
believe one land ownership category that could bring people
together has not been fully explored; namely, private non-
profit forestry entities that can harness the power of the
market place in a way that keeps working forests working with a
``light on the land'' approach. This is a tall order for sure,
but also one that holds great promise for people that hold both
environmental and commercial perspectives.
The Concept--For three years, U.S. Forest Capital has been
working closely with experts from the environmental, landowner,
and financial communities to explore how to conserve working
forests by bringing often disparate parties together to jointly
manage their operation. The result is a new conservation tool
that meets these objectives while protecting landowner property
rights and local communities' economic well being. In short,
tax-exempt revenue bonds are issued to allow for the
acquisition of forest and agricultural land by private non-
profit, 501(c)(3) entities. The low-cost bonds would be revenue
bonds, backed by the revenue stream generated by the low-impact
management of the land. The land would be owned by the private,
non-profit entity and the public benefit would be afforded by
the:
Lower cost of capital associated with tax-exempt
bonds;
Diversity of decision makers on the non-profit
board; and,
Lack of need to maximize financial returns.
To issue the tax-exempt bonds, the non-profit board must:
Place a permanent conservation easement on the
property;
Exceed relevant environmental laws;
Complete a multi-resource management plan;
Provide for a qualified third-party to hold the
easement; and,
Provide the third-party easement holder with
adequate funds to monitor and enforce the easement.
Monitoring and enforcement of the public benefits outlined
above are achieved through:
Local government hearings prior to bond issuance;
Internal Revenue Service approval of the 501(c)(3)
and on-going review of conservation purposes for which the non-
profit was established;
Legally binding bond documents which are drafted
to assure investors that the non-profit's activities will
remain tax-exempt;
The third-party easement holder who will be paid
by the land owning non-profit to monitor and enforce the
easement;
Conservation and public interests on the non-
profit board of directors; and,
Normal local, state and federal regulatory
compliance.
Attachment 1 summarizes the primary activities that are
needed to achieve a successful tax-exempt transaction.
Power of Tax-Exempt Debt--If a non-profit meets the stated
requirements, it can raise hundreds of millions of dollars from
private investors at a very low cost to the federal treasury.
The tax-exempt market is well established with approximately
$150 billion issued annually for public benefit entities such
as hospitals, education facilities and transportation
infrastructure. Premier municipal underwriting companies such
as Seattle Northwest Securities and San Francisco's Stone &
Youngberg believe that demand for conservation based bonds will
be significant.
See Attachment 2 for an analysis of the present net value
of timberlands--at tax-exempt and commercial rates--which can
be supported by three different harvest scenarios for property
in King County, Washington. These numbers were generated from
real forestland data that was provided by a potential seller.
Public Benefits at Low Public Cost--Currently public and
non-profit organizations fund acquisitions through annual
appropriations, philanthropic contributions and tax incentives.
As outlined above, these programs have and are continuing to
protect some of the nation's most special places. Yet, as also
outlined above, these tools have limited utility for
acquisitions over $50 million in that there just is not the
level of revenue on an ongoing basis to generate the funds
needed given the current disposition rate.
By allowing private, non-profit entities to access the tax-
exempt debt markets, the Federal government can achieve the
conservation benefit that people are demanding, while doing so
at a fraction of the cost. No other financial vehicle provides
the public leveraging of private investment like tax-exempt
bonds. For example, the Redwood Forest Foundation--a non-profit
established in anticipation of taking advantage of Community
Forestry Bonds--would like to issue $200 million in tax-exempt
bonds to buy up to 200 thousand acres of working forests in
Northern California. Such an issue would only cost the Federal
treasury $66 million in foregone tax revenues over a 40-year
period. This represents a modest investment by the taxpayer for
significant conservation gains that will be achieved for
current and future generations.
Policy Benefits
While no conservation tool can provide all things to all
people, community forestry and agriculture bonds can
comprehensively provide more benefits to more people on large
scale working forests than currently exist. Community forestry
and agriculture bonds:
Work for landowners and the timber industry because:
Property rights are maintained as all transactions
will be completely voluntary and no regulatory entity at any
level exists to force transactions;
Landowner liquidity is enhanced at fair market
value;
Timber supply will be maintained for either the
seller or other buyers depending on the seller's fiber needs;
Collaborative forums with a market-based tool will
be established, and,
Goodwill opportunities will be expanded.
Work for the environment because:
Forestlands throughout the nation will be
permanently protected from conversion to non-forest uses;
Non-timber benefits such as water quality, fish
and wildlife habitat, and non-commercial forest-dependent
biological species will be greatly enhanced;
Environmentalists will serve on decision making
boards that oversee management of large-scale forests; and,
Scarce public and philanthropic resources
dedicated to conservation will be leveraged to allow more acres
to be protected over time.
Work for communities because:
Community officials become facilitators among
constituents as compared to judges that must choose among lose-
lose options;
Environmental compliance opportunities will be
enhanced;
Forestry operations that provide a sustainable
supply of forest products will help stabilize the economic
stability of rural forest dependent communities; and
The bulk of acquisition costs will be borne by the
investor, thus there will be little or no cost borne by the
local governmental budgets.
U.S. Forest Capital is currently working with two non-
profits comprised of environmental, landowner, financial and
elected officials who are seeking to protect working forests
and provide additional conservation benefits to their rural
forests. The first is the Redwood Forest Foundation, mentioned
above, which is located in Mendocino County, California, and
the second is the Evergreen Forest Trust in Washington state.
We have also begun working with the Mayor of Jacksonville,
Florida to scope out opportunities for their working forests as
well.
Legislative Needs
Current law allows qualified non-profit organizations to
have tax-exempt debt issued for public benefits. However, the
asset that is purchased or constructed with bond proceeds must,
in general, be owned and used appropriately by the non-profit
during the term of the bonds. In addition, the term of the
bonds cannot be significantly longer than the useful life of
the financed property, with land being deemed to have a useful
life of 30 years. This makes sense for hospitals, for example,
in which the building financed with bond proceeds may not be
sold or leased during the term of the bonds, and the term of
the bonds generally matches the useful life of the building.
For renewable resources like forests, however, a clarification
is needed because the trees (and land) for which the bonds were
issued must be harvested, in the manner outlined above, to
service the debt, and the financed asset, by its very nature,
has an extremely long useful life. Current law is silent on
these points; therefore, for community forestry and agriculture
bonds to be sold, the law must be clarified to allow the debt
service on long-term bonds to be paid with timber harvest
revenues.
H.R. 1863, The Community Forestry and Agriculture
Conservation Act clarifies the tax code to allow tax-exempt
revenue bonds to be issued for conservation purposes. The bill
clarifies that standing tress and tree growth may be harvested,
mandates what public environmental benefits must be achieved
and includes provisions that prohibit abuse. The bill is
supported by a wide range of groups including, among others,
the: World Wildlife Fund, Trust for Public Lands, Land Trust
Alliance, Society of American Foresters, American Sportfishing
Association, Plum Creek Timber Company, Mendocino Redwood
Company, Harwood Forest Products, King County Council and the
Mendocino County Council.
H.R. 1863 is the only tool available today that can
leverage the power of Wall Street and private investment to
generate the capital needed to allow private non-profit
entities to engage in large scale transactions for conservation
purposes. Tax-exempt revenue financing would be a fantastic
tool to use in concert with Congressman Portman's bill (H.R.
2880) and other ideas that focus on smaller scale but equally
important lands owned primarily by non-industrial landowners.
It would also be a great complement to currently authorized
conservation tools such as the Land and Water Conservation
Fund.
Mr. Chairman, and Members of the Subcommittee, on behalf of
the many communities around the nation who are seeking to keep
working forest and agricultural lands working, I urge you to
pass H.R. 1863. Time is running out.
Again, thank you for holding this hearing. I would be
pleased to answer any questions you may have.
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[GRAPHIC] [TIFF OMITTED] T6783.002
Chairman Houghton. OK. Thanks very much.
Mr. Coyne.
Mr. Coyne. No questions.
Chairman Houghton. All right.
Ms. Dunn.
Ms. Dunn. Thank you very much, Mr. Chairman. I congratulate
all you gentlemen for coming in from such long distances to
join us today. And we are very glad to have you here.
Obviously, my question will be going to Mr. McKenna, and also
to Mr. Tuchmann.
You gentlemen have both talked in your testimony about
bringing people together and getting elements of our society to
work together as we look toward setting aside important pieces
of agricultural or forest property. Tell me what that really
means.
Mr. McKenna. Well, bringing people together, first of all,
will occur when we form these non-profits. These non-profits
will have boards--in fact, we have already formed one--that
will include conservationists, representatives of large
commercial landowners, local government officials. These are
representatives of many of the competing interests that often
clash over forest policy.
It will bring those competing interests together on a
larger scale, as well, because 1863 gives us a tool that
advances all of our interests. It will provide liquidity to
these large commercial property owners who often in King County
own land which is too close to the urban area to be intensively
commercially harvested, but is outside of the urban growth area
so it cannot be intensively developed for homes either because
it is outside of that urban growth boundary.
But it will provide values to the environmental community
and to all of us who are concerned about environmental values
like water quality, by keeping the forests in production but at
a much lighter rate, and by keeping the forests out of
commercial development for housing, for example.
And so, it strikes the common ground among all of those
competing interests, and literally brings them together to put
together deals, such as deals that we are actually working on
today with those large commercial landowners and with
conservation groups.
Ms. Dunn. Mr. Tuchmann.
Mr. Tuchmann. Yes, I would just add that one of the
problems in natural resource policy right now is many Americans
want decision making input on lands that they only have
peripheral control of, whether it is public lands or private
lands. For the first time, these non-profits will allow the
environmental community and the industry to share environmental
and economic responsibilities. The conservation community will
have the opportunity to implement an environmentally-oriented
management plan and be required to generate only enough
revenues to service the debt. The industry will have a
responsibility to protect those environmental attributes and at
the same time maintain timber supply and jobs. So, together, on
a board of directors of a private non-profit they will protect
the environment, provide jobs, and provide a good investment
vehicle.
Ms. Dunn. And that is important because there is some cost
related to this provision, and we want to make sure that the
taxpayers get the benefits of that cost back.
Mr. McKenna, are there any particular pieces of property in
your area and my area, the Seattle area, that you are currently
working on?
Mr. McKenna. Yes. We are working with one large commercial
landowner, a forest company, on a parcel which is several
thousand acres in size. And it is outside of the urban growth
boundary, but it is close enough that it really cannot be
intensively commercially harvested. There would be a huge
outcry if it were clear cut--unlike their lands farther up in
the mountains which are under the usual commercial practices.
At the same time, although it cannot be developed for
subdivisions because of our growth management policies, it is
in 5- and 10- and 20-acre zoning. And what that means is that
folks who want to buy their 5- or 10- or 20-acre estates are
out there actively seeking these properties.
And what happens when they build their mini-estates is that
the forests become fragmented, they are taken out of working
forest status. But the ecology is fragmented as well, as we cut
roads in to serve those homes. And inevitably, there are
impacts on water quality. And of course, as that property goes
into private home ownership, it is really lost as open space.
And it loses a lot of its value as wildlife habitat as well.
So it is that land that is between the mountains, the
national State forest lands, and the suburban and urban areas,
that we are really focusing on here.
Ms. Dunn. Thank you. Mr. Chairman, I do hope that we can
encourage the Committee to take a serious look at H.R. 1863.
These properties are slipping away from us every single year,
and it is just so important. Those of us in the Northwest are
particularly concerned about what is happening. And as you
know, we are facing the prospect of the first urban listing of
an endangered species, and that is of great concern to us. But
we must protect these properties. And I think that this
proposal is a very, very good one.
And I thank you gentlemen, for coming to testify.
Chairman Houghton. All right. Thanks very much.
Look, we have got about 2 minutes here. So if anybody has a
question? John, have you got a question? Could you ask it
quickly, and then we will move on.
Mr. Tanner. Yes, thank you, Mr. Chairman. I want to thank
you for holding this hearing, and I want to thank the panel.
And I want to ask Mr. Tuchmann, how does 1863, in your view,
complement the Land and Water Conservation Fund? And also, how
does it relate to the other bill we are considering, 2446, the
Better America Bonds Act?
Mr. Tuchmann. Congressman, just real briefly, they
complement very well. The Land and Water Conservation Fund and
Better America Bonds are focused primarily on preservation of
special places the urban-rural interface. Our effort is more
focused on working forests that are being converted to non-
forest uses. They could complement each other very well, in
terms of leveraging both public and private moneys.
Chairman Houghton. Mr. Portman.
Mr. Portman. Mr. Spellmire, thanks again for your
testimony. Your focus a lot was on capital gains. And I just
wondered, you had not commented on some legislation that came
up earlier in the hearing, and that is H.R. 2497, by
Congressman Pitts.
It is called the Open Space Preservation Act of 1999. And
it deals with both estate tax and capital gains, but it
excludes from income the revenues from the sale of a property
covered by a qualified covenant that restricts the land to
farming use only.
I just wondered, Tom, if you had any time to look at that
legislation; if so, if you had any thoughts on it?
Mr. Spellmire. I have not really looked at it, other than
the briefing that I was given. To me, though, it sounds like it
is something that would address part of this issue anyhow. A
lot of farmers are looking for a way that they can make these
transitions and not be subject to the capital gains.
Part of the problem with capital gains is, a lot of people
that own ground--I mean, there are legal ways to circumvent
capital gains, through charitable remainder trusts and all
these other tools that are out there. But a lot of farmers, for
some reason, the people who actually own the ground, feel very
uncomfortable using those tools.
Mr. Portman. Yes.
Mr. Spellmire. They need a much more direct approach. And
that sounds like a much more direct approach.
Mr. Portman. Thank you again for your testimony and for
coming.
Chairman Houghton. Thanks, Mr. Portman.
Mr. Weller.
Mr. Weller. Mr. Chairman, thank you. I do have one question
I want to direct to Mr. Gates. But I was also going to ask
unanimous consent of the Committee if I were to submit some
additional questions of Mr. Gates, that his answers be put into
the record.
Chairman Houghton. It is just a function of time. Time is
in your hands.
Mr. Weller. OK. Thank you. Mr. Gates, thank you very much
for traveling all the way from Oak Brook, Illinois, to be here
today and to participate in today's panel. And I also want to
commend you and all of the good people in your organization
that I have had the opportunity to work with in redevelopment
of the Joliet Arsenal and to restore the jobs that were once at
the Joliet Arsenal, as well as some of the other projects that
you are involved in on the South Side of Chicago and the south
suburbs. I want to thank you for that, and for participating
today.
And I am going to direct one question, and I will submit to
you some additional questions, which I would ask if you could
respond to. And we will submit them to the record for the
purpose of this hearing.
But one of the focuses of this hearing today has been on
the tax incentive that we provided for brownfields
redevelopment and brownfields clean-up that was in the 1997
Balanced Budget Act. And that was, of course, targeted to
specific types of communities, tending to be low-income
communities or Empowerment Zones or areas adjacent to low-
income Census tracts.
And I am an advocate, of course, for expanding that tax
incentive so any community anywhere in Illinois or the United
States would be able to enjoy that tax incentive to clean up a
brownfield in the community. And I was wondering, what is your
recommendation, as a businessperson, as the best way to improve
the tax incentive so it would work toward the goal of
redeveloping brownfields, restoring jobs, doing the
environmental clean-up that is necessary; but also be workable?
Do you have some specific suggestions?
Mr. Gates. Yes. What you are trying to do is level the
playingfield. One is considering making a choice between
approving a greenfield site, where one can begin to develop
immediately, versus a brownfield site, where there are delays
and significant up front costs for clean-up. You are trying to
level the playingfield to make the economic options or the
economic viability of the two be roughly the same. You do not
want to over-incent, however, brownfields situations and as a
result spur development which is not driven by the marketplace
overall.
I do actually like the piece of legislation that you have
proposed, 997, because it does strike a balance between the
two. It provides, particularly for smaller sites, a very easy
way of compensation for the up front costs; but yet it is
capped at a level that does not encourage, I am going to call
it, uneconomic development, like maybe some of the tax laws we
had in the 'eighties.
But I think it is also very, very simple to administer. It
is simply something that is done in your tax return. It does
not require special, unusual financial instruments that do not
trade in the public markets. It does not require a lot of
consultants, so on and so forth. So I think if that type of
incentive were broadened out of the specific Enterprise Zones
into maybe other existing communities, you would certainly see
a lot of these 400,000 brownfield sites get more attention than
they are currently getting.
They are there, but it is just too easy to go into a virgin
piece of ground, as opposed to dealing with all the hassles of
clean-up and consultants and the regulatory environment.
Mr. Weller. Well, the point you brought up about the
greenfields is a good one, because it is estimated that for
every greenfield industrial site, it consumes five times as
much land as an existing brownfield, if you were to redevelop a
brownfield. That is one of the statistics I have seen.
I would like to provide some additional questions in
writing to you, if you would provide answers. And we will
submit them to the record.
I recognize we are beyond the hour of 4 o'clock so, Mr.
Chairman, thank you for allowing me to answer that question.
Mr. Gates, thanks for being here today.
Mr. Gates. Thank you.
Chairman Houghton. Thank you. Thank you, everybody. The
hearing is adjourned.
[Whereupon, at 4:04 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
Statement of Jaime Steve, Legislative Director, American Wind Energy
Association
The American Wind Energy Association or AWEA, respectfully
submits this testimony in support of H.R. 750, Rep. Bill
Thomas' legislation providing for a five-year extension of the
wind Energy Production Tax Credit (PTC). (Language identical to
the text of H.R. 750 is contained in H.R. 4538, theEnergy
Efficient Technology Tax Act).
One of the pro-business, pro-environment provisions
contained in H.R. 4538 is a five-year extension of the existing
1.5 cent per kilowatt-hour Production Tax Credit (PTC) for
electricity produced using wind energy resources. (Section 45
of the Internal Revenue Code). An immediate extension of this
provision is crucial if we are to see significant growth in the
domestic wind energy industry.
Strong Bi-Partisan Support for Wind Energy Tax Credit Extension
A five-year PTC extension bill by Rep. Bill Thomas
(H.R. 750) has attracted more than 175 sponsors, including 27
of the 39 members of the Ways and Means Committee.
A companion bill by Sen. Chuck Grassley (S. 414)
has attracted 25 Senate sponsors including 10 members of the
Finance Committee.
A four-year extension of the PTC was contained in
the $792 billion Congressional tax package (H.R. 2488).
A five-year PTC extension is part of the
Administration's FY 2000 budget request. (The same provision
was contained in the FY 1999 request).
Cost: $76 million over five-year (source: Joint
Committee on Taxation).
Wind PTC Not Included in Current House Extenders Package
The wind energy Production Tax Credit (PTC) extension was
deleted from the Ways and Means Committee tax extenders package
adopted by the Committee on Friday, September 24.
Explanation of Current Law
The Production Tax Credit (PTC) provides a 1.5 cents per
kilowatt-hour credit (adjusted for inflation) for electricity
produced from a facility placed in service between December 31,
1993 and June 30, 1999 for the first ten years of the
facility's existence. The credit is only available if the wind
energy equipment is located in the United State and electricity
is sold to an unrelated party. Under current law, the tax
credit qualification date expired on June 30, 1999. A five-year
extension would create a new sunset date of June 30, 2004.
The Energy Policy Act of 1992 (EPAct) enacted the PTC as
Section 45 of the Internal Revenue Code. The credit is phased
out if the price of wind generated electricity is sufficiently
high. In report language accompanying EPAct (H. Rpt. 102-474,
Part 6, p. 42), the Ways and Means Committee stated, ``The
Credit is intended to enhance the development of technology to
utilize the specified renewable energy sources and to promote
competition between renewable energy sources and conventional
energy sources.''
Since its inception, the PTC has supported wind energy
development and production. In the 1980's, electricity
generated with wind could cost as much as 25 cents per
kilowatt-hour. Since then wind energy has reduced its cost by a
remarkable 80 percent to the current levelized cost of between
4 and 5 cents per kilowatt-hour.
The 1.5 cent per kilowatt-hour credit enables the industry
to compete with other generating sources being sold at 3 cents
per kilowatt-hour. The extension of the credit will enable the
industry to continue to develop and improve its technology to
drive costs down even further and provide Americans with
significantly more clean, emissions-free electricity
generation. Indeed, experts predict the cost of wind equipment
alone can be reduced by another 40 percent from current levels,
with an appropriate commitment of resources to research and
development and from manufacturing economies of scale.
Contributions of Wind Power
Wind is a clean, renewable energy source which helps to
protect public health, secure a cleaner environment, enhance
America's national security through increased energy
independence, and reduce pollution. In fact, reducing air
pollutants in the United States will necessitate the promotion
of clean, environmentally-friendly sources of renewable energy
such as wind energy. Further, renewable energy technologies as
wind power should play an important role in a deregulated
electrical generation market.
Wind power alone has the potential to generate power to
provide the electric energy needs of as many as 10 million
homes by the end of the next decade. The extension of the PTC
will not only assure the continued availability of wind power
as a clean energy option, but it also will help the wind energy
industry secure its position in the restructured electricity
market as a fully competitive, renewable source of electricity.
Significant Economic Growth Potential of Wind Power
The global wind energy market has been growing at a
remarkable rate over the last several years and is the world's
fastest growing energy technology. The growth of the market
offers significant export opportunities for U.S. wind turbine
and component manufacturers.
The World Energy Council has estimated that new wind
capacity worldwide will amount to $150 billion to $400 billion
worth of new business over the next twenty years. Experts
estimate that as many as 157,000 new jobs could be created if
U.S. wind energy equipment manufacturers are able to capture
just 25 percent of the global wind equipment market over the
next 10 years. Only by supporting its domestic wind energy
production through the extension of the PTC can the U.S. hope
to develop the technology and capability to effectively compete
in this rapidly growing international market.
Finally, we must stress that the immediate extension of the
PTC is critical to the continued development of the wind energy
industry. Since the PTC is a production credit available only
for energy actually produced from wind facilities, the credit
is conditioned on permitting, financing and construction of the
facilities. The financing and permitting requirements for a new
wind facility often require 2 to 3 years of lead time. With the
lapse of the credit on June 30, 1999, utilities, investors, and
wind energy developers have been reluctant to commit to any new
projects.
The American Wind Energy Association appreciates the
opportunity to submit written testimony on this matter. We
stand ready to assist the Committee in any way regarding the
five-year extension of the wind energy Production Tax Credit.
Thank you.
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Statement of Bond Market Association
The Bond Market Association appreciates the opportunity to
comment on the impact of tax laws on land use, conservation,
and preservation, and in particular, on issues related to the
innovative financing of land preservation projects. The Bond
Market Association represents approximately 200 securities
firms and banks that underwrite, trade, and sell debt
securities both domestically and internationally. We are
pleased that the Committee has chosen to explore ways to
encourage land conservation and preservation using innovative
financing solutions--without increasing the financial burden on
our nation's states and localities.
Benefits of Tax-Exempt Financing
Tax-exempt bonds are one of the most important sources of
funding available to state and local governments for the
financing of vital public projects. Tax-exempt bonds are
efficient and well-understood, are popular among investors, and
have an established market infrastructure with a history that
dates back to colonial times. Moreover, tax-exempt bonds are an
important form of federal assistance to states and localities.
Because the federal government foregoes the tax revenue on
interest earned by investors on tax-exempt municipal bonds,
investors demand a much lower rate of interest than they
otherwise would. States and localities benefit through a lower
cost of capital.
Tax-exempt bonds are not plagued by any of the problems
that would affect the success of tax-credit bond programs for
environmental purposes, such as the ``Better America Bonds''
(BABs) program proposed by the Administration. Under the
Administration's plan, state and local governments would have
to apply to the Administrator of the Environmental Protection
Agency (EPA) for the authority to issue tax-credit bonds. The
EPA Administrator, in consultation with other federal agencies,
would then review applications and award allocations to the
applicants. The holder of a tax-credit bond would receive
annual federal income tax credits equal to the applicable
credit rate multiplied by the amount held on its anniversary
date.
The Bond Market Association believes that a better, more
efficient financing approach is one that involves the tax-
exempt bond market. The municipal bond market is a large and
established market with a broad base of investors, so secondary
market trading is relatively active and liquid. Additionally,
interest rates are set efficiently according to market-based
rates of return. Finally, using tax-exempt financing, state and
local governments can retain the authority and control of their
land preservation projects, without having to get approval from
federal authorities. Tax-credit bond programs, while
commendable for their desire to finance land preservation,
would create another level of federal bureaucracy and would
intrude into a decision-making process that is best left to
states and localities. In short, municipal bonds are well-
tailored to providing tax-preferred financing for conservation
and land preservation purposes, and would preserve the autonomy
of state and local governments.
Public-Private Partnerships
The Bond Market Association has consistently supported
responsible proposals that would employ the use of public-
private partnerships to expand the amount of capital available
to finance vital public projects--ranging from school
construction and highways, to parks and the environment.
Through the utilization of innovative financing techniques,
minimal federal resources are required to support state and
local initiatives. By empowering the private sector to take
more responsibility for public projects, the demand on the
federal government is lessened. In addition, by designing
programs that are self-supporting, financial risks are
minimized, and all levels of government inevitably bear less
financial burden.
Current Law
Currently, state and local governments can issue tax-exempt
bonds without limit for environmental purposes as long as no
more than ten percent of the proceeds are used by private
entities in a business and no more than ten percent of the debt
service is secured by private businesses, or no more than five
percent of the bond proceeds are lent to private businesses or
individuals. Under current law, private entities generally
cannot borrow on a tax-exempt basis. However, an exception is
provided for certain types of so-called private-activity bonds,
including bonds issued by tax-exempt, 501(c)(3) organizations.
Private-activity bonds are generally subject to certain
issuance limitations and certain restrictions on investment.
Bonds issued by 501(c)(3) organizations are subject to some of
the restrictions, but exempt from others. For example,
501(c)(3) bonds are exempt from the annual unified volume cap
restriction that limits the issuance of other allowable
private-activity bonds. Interest earned on 501(c)(3) bonds is
also not subject to the individual alternative minimum tax.
However, certain restrictions do apply to 501(c)(3) bonds. For
example, private-activity bonds, including 501(c)(3) bonds, may
be issued for uses consistent with their charter. Tax-exempt
financing is allowed for the purchase of land and related
property used in the exempt activities of the 501(c)(3).
However, for environmental organizations, the leasing of timber
and other renewable land use rights to finance the purchase of
land is not a permitted purpose under existing law.
Pending Legislation
Legislation pending in the House (H.R. 1863) and Senate (S.
1085) proposes the use of innovative financing techniques to
facilitate access to capital markets in a cost-efficient
manner. Under the legislation, tax-exempt revenue bonds could
be issued to finance the purchase of forest and agricultural
lands by non-profit 501(c)(3) organizations. Government
entities would issue the bonds on behalf of the non-profit
organization, and the non-profit would typically obtain the
ownership rights to the property. The benefits of this
innovative approach would be several. First, local communities
will be able to ensure that renewable resources will be
protected by partnering with non-profit entities to acquire
land that would otherwise be too expensive to finance. Second,
non-profit entities could manage the renewal process of the
land and collect revenues from the harvesting of the resources
to pay for bonds issued to finance the land acquisition,
thereby ensuring the conservation of the land for the long
term. Meanwhile, original landowners would be compensated for
the sale of their land at fair market values. Finally, the
federal government would not take ownership of the land, so
ownership would stay in the private sector.
Conclusions
The desire to preserve America's renewable resources is a
laudable goal. Careful planning for the harvesting and renewal
of resources will provide numerous economic and public
benefits. The Bond Market Association fully supports proposals
to finance environmental projects using innovative financing
techniques such as those contained in H.R. 1863 and S. 1085. We
urge Congress to act on this legislation quickly, and we look
forward to working with Members of this Subcommittee as the
legislation advances.
Statement of Peter Kopsco, Tax Policy Analyst, Friends of the Earth
Introduction
Friends of the Earth, a global environmental advocacy
organization with organizations in 54 countries, supports
expanding tax incentives for land preservation. It is very
encouraging to see such a broad bipartisan effort to find
solutions to the vexing problem of urban sprawl. This hearing
comes at an ideal time. It is high time we shifted the focus
from tax cuts at any cost to providing tax cuts that benefit
those people and businesses that choose to benefit the
environment.
Tax policy is a powerful tool to effect social change. One
of the most important challenges facing us as a nation today is
sprawling land use. The affects are widespread, and include:
deterioration of traditional community centers;
increased pressure on family farmers;
unhealthy air and water pollution as a result
paving of roadways and parking lots, and an increase in
automobile traffic;
dangerous traffic congestion;
loss of open space for the enjoyment of people;
and
fragmentation, conversion and depletion of habitat
for species.
Friends of the Earth feels that it is time to maximize this
powerful tool to control this threat by discouraging sprawl
style development and encouraging protection of open-space and
by investmenting in tradition town centers.
There are two advantages to using the tax code to help
control this threat to our communities and our environment. One
is that the tax code provides incentives for people to take
action voluntarily. The other is that by taking such steps
voluntarily, landowners reduce the need for imposition of
regulatory restrictions.
Many measures currently in place are helpful. Many measures
under consideration today are steps in the right direction. As
Congress moves forward, Friends of the Earth urges Members of
Congress to consider whether tax legislation advances the goals
of conservation of land, or instead merely benefits industries
that degrade and pollute the environment.
Current Provisions in the Tax Code
Friends of the Earth supports many of the measures
currently in place. However, one need only look around many
American towns and suburbs to see that there is plenty of room
for improvement. Therefore, Friends of the Earth believes these
measures should be expanded and new ideas should be nurtured.
Deductions for Donations of Conservation Easements
The deduction for charitable donations of conservation
easements creates an incentive to preserve land for open space
and to protect natural habitat. This makes such donations
attractive and is a valuable program. But for little cost, in
terms of revenue, Congress could could expand its effect. One
proposal to do so is before you today. Representative Johnson's
bill would increase the size of this deduction across the
board. Another approach, introduced in the Senate, would
accelerate the deduction for conservation easements to benefit
threatened and endangered species. Considering that
preservation of land and protection of species diversity
provides a public benefit incentives to private individuals to
participate is worth the taxpayer investment. Friends of the
Earth supports each of these measures and would advocate
combining them. By sharing information and working together we
can come up with new and powerful tools to slow down wasteful
growth.
Exclusions for Donations of Conservation Easements
Another item that is currently in the tax code that
benefits the environment is the exclusion from estate taxes of
land subject to a conservation agreement. This provision fills
two important roles. One, it provides an incentive to preserve
land for endangered species. Another is that it insures that
the land is managed properly.
This provision has a significant limitation, however -it is
limited geographically. The exclusion currently applies only to
land within 25 miles of a metropolitan area, national park or
wilderness area; or 10 miles of an Urban National Forest. The
result is that almost one-third of the continental United
States is not eligible for the exemption. Not included are
areas near national wildlife refuges and areas that have not
yet reached the dubious status of metropolitan area. These
restrictions exclude many pristine and sensitive lands near
parks and many fast-growing areas that are not yet sufficiently
developed to qualify as metropolitan areas. In many cases it is
just these types of places that we most need to protect.
Some in Congress have advocated eliminating the estate tax.
Under tax legislation passed in 1997, estate tax rates are
already set to decline over the next seven years. The estate
tax actually serves as a significant inducement to promote land
conservation because donations of land for conservation
purposes can reduce the estate tax burden. Conservationists
believe that estate tax relief should be used as an incentive
to encourage property owners to permanently protect land as
habitat for wildlife, recreation, and open space. Cutting the
estate tax without adding collateral incentives for
conservation will reduce the overall amount of convervation.
Rather than cutting the estate tax altogether, Congress should
target cuts to encourage environmental benefits.
Differential Valuation of Agricultural Land
The differential valuation of agricultural land, already in
place in the tax code is highly beneficial because it helps
farmers and it helps fight sprawl. It helps farmers by enabling
family farms stay in business from generation to generation. It
does so by reducing pressure on families to sell their
inheritance to pay estate taxes that can saddle large tracts of
land. The result is preservation of traditional American
communities, with farm and forestlands surrounding livable town
and city centers. Again more can be done to relieve the
pressure these farming families face. Friends of the Earth
encourages this Sub-Committee to enact strong legislation to
help maintain this sort of land use.
There are certainly many other provisions in the code that
give citizens the ability to help out. Friends of the Earth
encourages the Sub-Committee to find ways to expand and improve
them.
Support for Selected Proposals Before the Sub-Committee
H.R. 2263, Charitable contribution deduction and
exclusion for conservation easements: This bill would simply
increase the incentives for charitable contributions of
interests in land. This is a very common-sense approach that
Friends of the Earth heartily supports. Doing so will increase
participation and increase the amount of land we preserve. By
taking such steps voluntarily, landowners reduce the need for
imposition of regulatory restrictions.
H.R. 2497, Open Space Preservation Act: This
strong piece of legislation would be very helpful for families
who wish to continue farming their land. It provides generous
tax relief to farming families who chose to forever farm their
land. First, it excludes from income all gains from the sale of
farmland subject to an irrevocable covenant which permanently
restricts the land to agricultural uses only. Second, it
excludes from a decedent's gross estate the value of farmland
subject to one of these irrevocable covenants. These will be
very helpful for families dedicated to the farming way of life
and will preserve open space for years to come.
H.R. 2880, Conservation Tax Incentives Act of
1999: Often times landowners who cannot afford to donate
property or who cannot use a deduction still want to conserve
their land. In fact, this includes many farmers who may own a
lot of land, but who do not have a lot of cash on hand. This
bill provides such landowners with a way to conserve land by
selling it for conservation purposes for less than they would
do to developers. The provision allows these individuals to
still come out ahead thanks to the tax savings. This is the
sort of innovative and common-sense measure needed.
H.R. 2380, Energy Efficient Tax Act: Among other
things, this bill will promote the development of new energy
efficient technology for homes, wind and biomass electricity
production, and for electric and hybrid vehicles. Discussion of
incentives for these new technologies fits-in well with
discussion of incentives to fight sprawl because these
technologies help to curb the pollution and resource depletion
associated with sprawling development-especially the provisions
relating to cars. As vehicle miles traveled continue to
increase, we need to find cleaner ways to commute.
H.R. 1863, Community Forestry and Agriculture
Conservation Act: Friends of the Earth supports conserving
forestlands. Friends of the Earth also supports sustainable
timber management in private forestlands. Primarily, Friends of
the Earth supports the values represented by forestland, such
as habitat, and recreation. In cases where forests would
otherwise be doomed to be developed or clear-cut it makes sense
to preserve them using strategies like those created by this
legislation. This bill has potential and Friends of the Earth
advocates giving this innovative proposal a closer look.
H.R. 1630, Brownfields Cleanup Act: Section 198 of
the Internal Revenue Code allows taxpayers to deduct
environmental remediation expenditures. It will expire in 2001.
This bill simply extends the life of this measure indefinitely.
This is a positive step that will increase participation by
creating increased certainty for businesses engaged in these
activities. Friends of the Earth supports brownfield
redevelopment so long as the resources are spent wisely on our
downtowns and on land that is forsaken. Taxpayer money should
not be used simply to subsidize cleanup or redevelopment that
would happen anyway.
H.R. 2446, Better America Bonds Act: Creating tax
exempt bonds for acquisition of open space, projects to improve
water quality, and remediation of brownfields is a great idea
and should be enacted. However, what is uncertain is whether
this program will be taken advantage of by those who qualify,
and whether the money will pin-point only those projects where
public financing is necessary and not act as a subsidy for
activities that fit the criteria but do not need the public
money. This proposal deserves more exploration.
Other Measures to Consider
This Sub-Committee is to be commended for considering these
proposals. Dialogues like this one will only increase support
for common sense incentives that promote our environmental
goals by increasing voluntary action by people on behalf of the
environment. Ultimately, this will reduce the expensive burden
government bears when we enact regulations instead.
Here are some other approaches Friends of the Earth
supports.
A land gains tax that discourages short term
speculation of real estate. Short term speculation on land,
contrasted with long term land stewardship, frequently results
in increased land fragmentation and conversion. The result is
fragmentation of habitat, open space and ultimately the
degradation of an area's character. This tax incentive
discourages land speculation by removing a significant
percentage of the capital gains made on these short term
transactions, which are often times the result of government
improvements anyway. Land gains taxes have proven to be very
effective in Vermont.
H.R. 1172, The Historic Homeownership Assistance
Act, is another measure that we should continue to explore.
This measure would grant a credit to owners of historic homes
in urban downtowns. As such it would encourage the resettling
of older buildings in urban centers.
Conclusion
Friends of the Earth is encouraged by this hearing and the
attention this Sub-Committee is giving to concerns about
sprawl, conservation, energy efficiency and open space. We
appreciate the opportunity to submit testimony.
Statement of Pacific Forest Trust, Boonville, CA
The Pacific Forest Trust (PFT) applauds Chairman Houghton
and the Oversight Subcommittee for taking up the important and
timely topic of federal tax law impacts on environmental
conservation and preservation. PFT appreciates this opportunity
to submit its views on this important topic.
PFT is a non-profit, 501(c)(3) organization dedicated to
restoring, stewarding, and preserving the private, productive
forests of the Pacific Northwest, with a primary focus on
California, Oregon, and Washington. PFT works with landowners,
forest managers, public agencies, local communities, and others
to sustain private forest lands for the wealth of goods and
services they provide. PFT believes that private forests will
only be protected if they remain productive and can only be
productive if protected.
Background
The Pacific Forest Trust has worked for years to promote
sustainable forest management and conservation in the Pacific
Northwest. Yet, our experience has shown that the existing
incentive structure is simply inadequate to reverse the trend
towards deforestation. The trends at work in Pacific forests
are reflected elsewhere across the nation, especially in the
Southeast and Northeast--which also are home to highly
productive forests. In fact, studies project a loss of 25
percent of Southeastern forest lands over the next decades if
action is not taken. It is a sad irony that just as ecologists
and forest scientists have begun to more fully understand the
valuable and inter-connected services provided by forests, the
loss of forests has accelerated nationally.
A Missing Tool: The Forest Conservation Tax Credit
In order to conserve these valuable forest resources and
stem the tide of forest conversion, a new incentive is
required. A new tax credit--made available to forest landowners
who enter into voluntary agreements to permanently conserve and
steward forests--will protect the diverse services that intact
natural and sustainably managed forests provide for society at
large.
Such a tax credit should build upon the successes of
existing tools and conservation principles that are familiar
and fair to landowners and return real public benefits.
Specifically:
Tax incentives should be provided for landowners
who voluntarily choose to protect and sustainably manage--over
the long term--forest land. Incentives also should be provided
for measures that reforest deforested areas, or turn
agricultural land to forest cover.
Significant tax incentives should only be provided
for permanent forest conservation through conservation
easements, which have proven their effectiveness in conserving
land nationwide, and are flexible enough to meet the management
goals for productive parcels.
A focused tax credit that promotes the long-term
conservation of forest lands will help reverse this trend.
While forests provide many benefits for society, the market
does not adequately reward forest landowners who manage their
forests to produce these benefits. However, tax incentives can
provide a valuable inducement for forest landowners to improve
their stewardship. Such a public investment will prove to be a
wise one, maintaining the public benefits of private forests
available for future generations.
PFT has nearly completed its work of drafting a forest
conservation tax proposal that reflects the principles outlined
below.
The Public Benefits of Productive Private Forest Conservation
Protecting undeveloped areas--Forests provide an important
limit to urban sprawl, protecting ``open space'' and
undeveloped tracts of land at urban fringes and beyond. As open
space protection becomes a priority for communities and
policymakers, protecting forested conservation lands is a way
to secure multiple benefits with those conservation
investments.
Conserving clean water and protecting watersheds--
Approximately 60 percent of the total streamflow in the United
States originates on forest land, most of which is privately
owned. A number of urban areas--from New York to Seattle--long
ago recognized the importance of publicly acquiring parts the
forested watersheds that supply their drinking water. New York
recently adopted a program that will utilize some $300 million
to acquire land and conservation easements. Such expenditures
are estimated to save between $4 and $6 billion in water
treatment facilities, plus several hundred million in annual
operating costs (Budrock 1997, Revkin 1997). While few new
opportunities for conserving watershed areas as public lands
may exist today, increased incentives for stewardship of
private forest lands will protect water quality for residential
uses. Protecting forests and reducing watershed erosion not
only benefits drinking water supply, but also conserves
important habitat for fish, including habitat for rare and
endangered salmon and trout species.
Providing wildlife habitat--At least 90 percent of federal
threatened and endangered species have some or all of their
habitat on non-federal lands, while forests provide an
estimated 50 percent of the habitat for imperiled species (NRC
1998). Slowing or halting the conversion of nonfederal forests,
and increasing their connectivitiy, will play critical role in
the conservation of biological diversity. Conserving key
forested habitats for endangered species also will
significantly complement the current public and private
resources being spent on wildlife and endangered species
conservation programs.
Providing energy security--Protecting the forested land
base, as well as promoting long-term, sustainable forest
stewardship means secure long-term supplies of the renewable
forest products and biomass. In addition to traditional forest
wood products, forests can be sources for sustainable biomass
fuels that increase our long-term energy security.
Providing jobs in sustainable forestry--Private forests
support the vast majority of this country's 1.2 million forest
industry workers (NRC 1998). With sustainable practices and
increases in long-term forest stewardship, this job base could
remain stable or even expand. On the other hand, if forest area
and sustain ability continues to decline, these forest jobs
will significantly decrease in number.
Sequestering carbon--Forests are a major tool to reduce the
buildup of carbon dioxide, the most prevalent greenhouse gas,
storing carbon as biomass and in forest soils. It is estimated
that non-federal forests store nearly 40 billion metric tons of
carbon, sequestering more than 100 million metric tons of
carbon annually. Older natural forests--including old-growth
stands--hold vast amounts of carbon, and continue to sequester
additional carbon often for hundreds of years (Franklin 1999).
Supplying alternative products--Some 450 specialty
products--ranging from pinecones and floral greens to the raw
materials used to produce pharmaceuticals--are gathered off of
non-federal forests each year, yielding millions of dollars in
sales. Worldwide trade in certain specialty forest products
such as floral greens reaches into the billions of dollars
annually. Observers estimate that such non-timber forest
products will increase significantly in value in the years to
come (Molina et al. 1997).
Providing critical opportunities for public recreation--
Private forest lands provide significant opportunities for
public recreation--about a quarter of all non-industrial
private forest land, as well as considerable amounts of
industrial forest land is used by the recreating public (NRC
1998). With increasing urbanization, these recreational
opportunities will only become increasingly valuable over time.
Development and conversion of resource lands to other uses
are the result of many forces, ranging from subsidizing
development costs in rural areas to resource management
practices. Given this diversity of drivers, it follows that a
variety of public policy tools should be crafted to reduce
undesirable development patterns and better conserve valuable
but threatened natural resources. A number of these policy
tools are before the Committee.
However, the package of existing and proposed tools does
not adequately address the threats to highly significant
forested ecosystems and land uses. Forests provide many
essential services to all U.S. citizens--timber, water,
recreation are but a few--but forests are being lost at an
alarming and unacceptable rate. PFT would therefore like to
draw the Committee's attention to the problem of forest
fragmentation and loss, and put forward a recommendation to
redress this problem.
The Problem of Forest Fragmentation
Forests cover approximately a third of the land area of the
Untied States. About 60 percent of those forests are privately
owned, while nearly three quarters of the productive
timberlands are privately owned (timberlands are defined as
forests capable of producing 20 cubic feet of marketable wood).
During the 20th century, more than 276 million acres of US
forest land has been lost, with 55 million acres of forests
converted to other uses since 1978 alone (NRC 1998, DOE 1998).
Such forest conversion is the result of many pressures,
including suburban sprawl, leapfrogging development to rural
areas, and unsustainable forest practices that degrade forests,
making development a higher and better economic use of once-
forested land.
The loss of productive private forest land in this country
has repercussions that ripple through our economy and affect
the resource base upon which both rural and urban communities
depend. Forested lands are critical natural resource lands,
conserving many different human and natural resources ``under
one roof.'' While much of that private forest land base has
been lost, much still remains and should be the focus of
protection efforts. Roughly 424 million acres of private
forests are at stake--nearly 20 percent of the land area of the
United States. Policies that promote sustainable conservation
of these critical forest lands will pay significant dividends
with numerous public and conservation benefits.
We look forward to working with members of this Committee
to refine and carry that proposal forward with other
appropriate tools to conserve important resource lands and open
spaces in this country.
Thank you for the opportunity to submit this testimony.
literature cited
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