ACTION

FROM THE COMMITTEE ON WAYS AND MEANS

FOR IMMEDIATE RELEASE, Contact: (202) 225-3625
September 18, 1998
No. FC-32A

Archer Announces Committee Action
on H.R. 4579, the "Taxpayer Relief Act of 1998,"
and H.R. 4578, a Bill to Establish the "Protect Social Security Account"

Congressman Bill Archer (R-TX), Chairman of the Committee on Ways and Means, today announced that on Thursday, September 17, 1998, the Committee ordered favorably reported, as amended, H.R. 4579, the "Taxpayer Relief Act of 1998," by recorded vote of 23-15, and H.R. 4578, a bill to establish the "Protect Social Security Account," by voice vote.

DESCRIPTION OF H.R. 4579 AS APPROVED:

Title I--Family Tax Relief Proposals

• Marriage Penalty Tax Relief--The bill would increase the basic standard deduction for a married couple filing a joint return to twice the basic standard deduction for a single return in each taxable year beginning after December 31, 1998. Also, under the proposal, the basic standard deduction for a married taxpayer filing separately would be increased so that it would equal the basic standard deduction for singles. Also, the proposal would increase the additional standard deduction for married individuals who are elderly or blind to the same amount allowed for singles and heads of households. These amounts would be indexed for inflation.

• Partial Exclusion for Interest and Dividends--The bill would provide an exclusion from income for individuals for up to $200 ($400 for married couples filing jointly) of combined interest and dividends received in a taxable year. The provision would be effective for taxable years beginning after December 31, 1998.

• Treatment of Personal Credits Under the Individual Minimum Tax--The bill would allow nonrefundable personal tax credits to offset both the individual's regular income tax liability and the minimum tax liability. The proposal would also repeal the rule that reduces the additional child credit and the earned income credit by the amount of the minimum tax liability. The proposal would be effective for taxable years beginning after December 31, 1997.

• Exclusion of Gain on the Sale of a Principal Residence by a Member of the Uniformed Services or the Foreign Service of the United States--The bill would suspend the test period for ownership and use during certain absences due to service in the uniformed services or the Foreign Service of the United States. Specifically, the five-year period ending on the date of the sale or exchange of a principal residence would not include any periods during which the taxpayer or the taxpayer's spouse was on qualified official extended duty as a member of the uniformed services or the Foreign Service of the United States and serving at a place of duty at least 50 miles away from the taxpayer's principal residence or under orders compelling residence in Government furnished quarters. Extended duty would be defined as any period of active duty pursuant to a call or order to such duty for a period in excess of 90 days or for an indefinite period. The proposal would be effective for sales or exchanges of principal residences after the date of enactment.

Title II--Education and Infrastructure Proposals

• Permit Private Higher Education Institutions to Establish Qualified Prepaid Tuition Programs--The definition of a "qualified tuition program" would be expanded to include programs established and maintained by one or more private educational institutions. The proposal would be effective for taxable years beginning after December 31, 1998.

• Expand Exception from Arbitrage Rebate for Tax-Exempt Bonds Issued to Finance Public School Construction--The bill would liberalize the permitted expenditure period of the present-law construction bond exception in the case of bonds issued to finance the construction of public schools. Amounts spent for the acquisition and improvement of land that is functionally related and subordinate to a school, the construction of which is financed with proceeds of the bond issue, would be treated as spent for construction. Under the proposal, no rebate would be required on the construction proceeds of these public school construction bonds if the proceeds (less presently allowed retainage) were spent within four years after the bonds are issued, and the following intermediate spending targets are satisfied: (1) 10 percent or more of the construction proceeds is spent within one year after the bonds are issued, (2) 30 percent or more of the construction proceeds is spent within two years after the bonds are issued, and (3) 50 percent or more of the construction proceeds is spent within three years after the bonds are issued. The proposal would apply to bonds issued after December 31, 1998.

• Increase State Volume Limits on Private Activity Tax-Exempt Bonds--The bill would increase the annual State private activity bond volume limits to $75 (from $50) per resident of each State, or to $225 million (from $150 million) if greater. The proposal would be effective beginning in calendar year 1999.

Title III--Small Business and Farmer Tax Relief Proposals

• Acceleration of Increased Exemption From Estate and Gift Tax--The bill would accelerate the scheduled increases in the applicable exemption amount so that the exemption equivalent would be $1,000,000 for decedents dying and gifts made after December 31, 1998.

• Increase Deduction for Health Insurance Expenses of Self-Employed Individuals--The bill would increase the deduction for health insurance of self-employed individuals to 100 percent for taxable years beginning in 1999 and thereafter.

• Accelerate Increase in Expensing for Small Business--The bill would increase the maximum dollar amount that may be deducted under Internal Revenue Code (Code) section 179 to $25,000 for taxable years beginning in 1999 and thereafter, without the present-law phase-in rule.

• Permanent Extension of Income Averaging for Farmers--The bill would make permanent income averaging for farmers.

• Extend the Net Operating Loss (NOL) Carryback Period for Farmers--The bill would allow NOLs attributable to a farming business to be carried back five years, whether or not incurred in a Presidentially declared disaster area. The carryforward period would remain at 20 years. A taxpayer may elect to not apply the five-year carryback period. The NOL rule attributable to a farming business would be coordinated with the other NOL rules. The provision would be effective for net operating losses arising in taxable years beginning after December 31, 1997.

• Production Flexibility Contract Payments Not Included in Income Prior to Receipt--Agricultural Market Transition Act payments for fiscal year 1999 would not be included in income until actually received. The provision would be effective for Agricultural Market Transition Act payments for fiscal year 1999.

• Designation of 20 "Renewal Communities"--The bill would authorize the designation of 20 "renewal communities" within which special tax incentives would be available. The tax benefits available in "renewal communities" generally would be effective for the seven-year period beginning January 1, 2000, and ending December 31, 2006.

Title IV--Extension of Expiring Provisions

• Extension of Research Tax Credit--The research tax credit would be extended for the period July 1, 1998, through February 29, 2000. In addition, the credit rate applicable under the alternative incremental credit would be increased by one percentage point per step, that is from 1.65 percent to 2.65 percent when a taxpayer's current-year research expenses exceed a base amount of 1 percent but do not exceed a base amount of 1.5 percent; from 2.2 percent to 3.2 percent when a taxpayer's current-year research expenses exceed a base amount of 1.5 percent but do not exceed a base amount of 2 percent; and from 2.75 percent to 3.75 percent when a taxpayer's current-year research expenses exceed a base amount of 2 percent.

Taxpayers would be permitted to elect the alternative incremental research credit regime under Code section 41(c)(4) for any taxable year beginning after June 30, 1996, and such election would apply to that taxable year and all subsequent taxable years unless revoked with the consent of the Secretary of the U.S. Department of the Treasury. Extension of the research credit would be effective for qualified research expenditures paid or incurred during the period July 1, 1998, through February 29, 2000. The increase in the credit rate under the alternative incremental credit would be effective for taxable years beginning after June 30, 1998.

• Extension of Work Opportunity Tax Credit-- The bill would extend the work opportunity tax credit through February 29, 2000. The provision would be effective for wages paid or incurred to a qualified individual who begins work for an employer on or after July 1, 1998, and before March 1, 2000.

• Extension of the Welfare-to-Work Tax Credit-- The bill would extend through February 29, 2000, the welfare-to-work credit for wages paid or incurred to a qualified individual.

• Extend the Deduction Provided for Contributions of Appreciated Stock to Private Foundations--The bill would extend permanently the special rule contained in Code section 170(e)(5). The provision would be effective for contributions of qualified appreciated stock to private foundations made on or after July 1, 1998.

• Public Inspection of Private Foundation Annual Returns--Under the provision, private foundations would be subject to the public inspection requirements of Code section 6104(e) that currently apply to all other tax-exempt organizations that file annual information returns. Private foundations would no longer be subject to the publication requirements of Code section 6104(d). The proposal would be effective for taxable years ending after December 31, 1998.

• Exceptions under Subpart F Certain Active Financing Income-- The bill would modify the present-law temporary exceptions from subpart F for income that is derived in the active conduct of a banking, financing, insurance, or similar business. These exceptions (as modified) would be applicable only for taxable years beginning in 1999.

With respect to income derived in the active conduct of a banking, financing, or similar business, the proposal differs from the present-law temporary exceptions in the following significant respects. First, the proposal would require a Controlled Foreign Corporation (CFC) to conduct substantial activity with respect to its business in order to qualify for the exceptions. Second, the proposal would add certain nexus requirements which would require that income which is derived by a CFC or a Qualified Business Unit (QBU) from transactions with customers would be eligible for the exceptions if, among other things, substantially all of the activities in connection with such transactions are conducted directly by the CFC or QBU in its home country, and such income is treated as earned by the CFC or QBU in its home country for purposes of such country's tax laws. Third, the proposal would modify the tests for determining whether a CFC is predominantly engaged in the active conduct of a banking, financing, or similar business, including modifications for income derived from a lending or finance business. Fourth, the proposal would extend the exceptions to income derived from certain cross-border transactions, provided that certain requirements are met. Fifth, the determination of where a customer is treated as located would be made under rules prescribed by the Secretary of the Treasury. Finally, the look-through rule that was included in the present-law provision for purposes of determining the income eligible for the exceptions would be eliminated.

In the case of insurance, the proposal differs from present law in the following significant respects. In addition to the exception for certain income of a qualifying insurance company with respect to risks located within the CFC's country of creation or organization that is provided under present law, the proposal would provide additional exceptions. First, the proposal would provide temporary exceptions from insurance income and from foreign personal holding company income for certain income of a qualifying branch of a qualifying insurance company with respect to risks located within the home country of the branch, provided certain requirements are met under each of the exceptions. Further, the proposal would add additional temporary exceptions from insurance income and from foreign personal holding company income for certain income of certain CFCs or branches with respect to risks located in any country other than the United States, provided that requirements for these exceptions are met. The proposal would apply only to taxable years of foreign corporations beginning in 1999, and to taxable years of U.S. shareholders with or within which such taxable years of foreign corporations end.

• Extension of the Generalized System of Preferences (GSP)--The bill would reauthorize the GSP trade program through February 29, 2000. Refunds would be authorized, upon request of the importer, for duties paid between July 1, 1998, and the date of enactment of the bill. The proposal would be effective for duties paid on or after July 1, 1998, and before March 1, 2000.

Title V--Revenue Offset Proposal

• Treatment of Certain Deductible Liquidating Distributions of Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs)--Any amount which a liquidating RIC or REIT may take as a deduction for dividends paid with respect to an otherwise tax free liquidating distribution to an 80-percent corporate owner would be includible in the income of the recipient corporation. The includible amount would be treated as a dividend received from the RIC or REIT. The liquidating corporation would be able to designate the amount treated as a dividend, as a capital gain dividend or, in the case of a RIC, a dividend eligible for the 70-percent dividends received deduction, to the extent provided by the RIC or REIT provisions of the Code.

The bill would not otherwise change the tax treatment of the distribution to the parent corporation or to the RIC or REIT. Thus, for example, the liquidating corporation would not recognize gain (if any) on the liquidating distribution and the recipient corporation will hold the assets at a carryover basis. The bill would be effective for distributions on or after May 22, 1998, regardless of when the plan of liquidation was adopted. No inference would be intended regarding the treatment of such transactions under present law.

Title VI--Social Security Provisions

• Increases in the Social Security Earnings Limit for Individuals Who Have Attained Retirement Age--The bill would increase the earnings limit for those between full retirement age (currently age 65) and age 70 in calendar years 1999-2001, as follows:

Senior citizens between full retirement age (currently age 65) and 70 who earn over the given earnings limit for the year would continue to lose $1 in benefits for every $3 earned over the limit. After 2008, the annual exempt amounts would be indexed to growth in average wages. The bill would be effective for the taxable years ending after 1998.

• Recomputations of Benefits after Normal Retirement Age--Recomputation of benefits resulting from earnings in the year after a worker reaches normal retirement age (currently age 65) and later would be reflected in the recipient's benefit check, effective with the January of the second year after the year of the earnings one year later than under current law. An exception would be provided for recipients who have one or more "zero" years of earnings in their wage averaging computation. Earnings would continue to be credited as under current law for purposes of establishing entitlement. The bill would be effective for earnings beginning in 1998.

DESCRIPTION OF H.R. 4578 AS APPROVED:

The bill would create a new Treasury account, the "Protect Social Security Account" into which would be deposited a portion of the unified budget surplus beginning in fiscal year 1998. At the end of each fiscal year, amounts would be paid into the account by the Secretary of the Treasury so that over the fiscal year 1998-2008 period, 90 percent of the budget surplus, ($1.6 trillion according to Congressional Budget Office estimates) would be deposited in the account. Prior to the first deposit, the Secretary of the Treasury, in conjunction with the Office of Management and Budget, would estimate the budget surplus for the period.

Payments to the account would be made in anticipation of legislation correcting the long- term insolvency of the Social Security system. Deposits to the "Protect Social Security Account" would be made in the same form of Federal securities as deposits into the Social Security Trust Funds (non-marketable securities).