Advisory of March 14, 2001, announcing the hearing

American Council for Capital Formation, Margo Thorning, presented Allen Sinai, Decision Economics, Inc.

American Farm Bureau Federation, Bob Stallman

Barcia, Hon. James A., a Representative in Congress from the State of Michigan

Center on Budget and Policy Priorities, Wendell Primus

Chicago Public Schools, Paul Vallas

Decision Economics, Inc., Allen Sinai, presented by Margo Thorning, American Council for Capital Formation

Detzel, Lauren Y., Dean Mead Egerton Bloodworth Capauano & Bozarth, P.A.

Family Research Council, Charles A. Donovan

Hutchison, Hon. Kay Bailey, a United States Senator from the State of Texas

Independent Sector, and YMCA of the USA, Kenneth Gladish

National Federation of Independent Business, and C.J. Coakley Company, Inc., Maria Coakley David

Rebuild America's Schools, Robert P. Canavan

Savings Coalition of America, and Merrill Lynch & Co., Inc., Edward O'Connor

Seattle Times, Frank A. Blethen

Weller, Hon. Jerry Weller, a Representative in Congress from the State of Illinois

SUBMISSIONS FOR THE RECORD

Abrams, Howard E., Emory University, Atlanta, GA, statement and attachment

Air Conditioning Contractors of America, Arlington, VA, Larry Taylor, statement

Cal-Fed School Infrastructure Coalition, Sacramento, CA, Terry Bradley, letter

College Savings Plans Network, Lexington, KY, Georgie Thomas, letter

Morella, Hon. Constance A., a Representative in Congress from the State of Maryland, statement

National Association of Realtors, Linda Goold, letter

National Automobile Dealers Association, Robert J. Maguire, statement

National Center for Policy Analysis, Bruce R. Bartlett, statement

Nature Conservancy, Arlington, VA, Michael Dennis, statement

Niche Marketing, Inc., Newport Beach, CA, and Professional Benefit Trust, Woodstock, IL, Judith A. Carsrud, and Tracy Sunderlage, joint statement

Responsible Wealth, Boston, MA, Charles E. Collins, statement

Simpson, Hon. Alan K., Washington, DC, statement

Washington Council Ernst & Young, LaBrenda Garrett-Nelson, Phillip D. Moseley, and Robert J. Leonard, statement

White House Conference of Small Business, Debbi Jo Horton, East Providence, RI; Joy Turner, Piscataway, NJ; Jill Gansler, Baltimore, MD; Jack Oppenheimer, Orlando, FL; Paul Hense, Grand Rapids, MI; Tommy Bargsley, Austin, TX; Edith Quick, St. Louis, MO; Jim Turner, Salt Lake City, UT; Sandra Abalos, Phoenix, AZ; and Eric Blackledge, Corvallis, OR, letter

House of Representatives,
Committee on Ways and Means,
Washington, DC.

The Committee met, pursuant to notice, at 10:05 a.m., in room 1100 Longworth House Office Building, Hon. Bill Thomas (Chairman of the Committee) presiding.

[The advisory announcing the hearing follows:]

Chairman THOMAS. Good morning. Today, the Committee proceeds with its second hearing on President Bush's tax relief plan, and today we are going to look more closely at the President's proposals addressing the marriage tax penalty problem in the tax code, the question of the estate or the death tax, the child credit, and other provisions in the President's tax relief plan. Obviously, there are members who were advocating positions in these areas prior to the President's plan being presented, in fact for a number of years laboring in the vineyards, and we are going to hear their suggestions, as well.

According to the Congressional Budget Office, almost 25 million married couples pay an average of about $1,400 in higher taxes just because they are married. That is not fair. Last year, President Clinton vetoed a strong bipartisan bill written in large part by our colleague from Illinois on the Committee, Mr. Weller. In fact, 48 Democrats in the House of Representatives voted for our balanced approach, and we believe, working together in a bipartisan way, we will see a similar support in fixing the marriage tax penalty once again. The difference, of course, is that if it does arrive at the President's desk in a bipartisan way, this President will sign that legislation.

Likewise, the House passed strong bipartisan legislation written by the team on this Committee of the gentlewoman from Washington, Jennifer Dunn, and the gentleman from Tennessee, Mr. Tanner, that repealed the estate or death tax. Sixty-five Democrats in the House voted for that approach in the last Congress. Our goal, obviously, is to make sure that something similar to that is placed on this President's desk. We believe if we are able to do that, that, too, will be signed.

In 1997, Congress passed with overwhelming support the $500 per child tax credit to help those families with children help make ends meet. The President has proposed doubling that $500 credit, phasing it in to the $1,000 limit. We think we need to look at that portion of the President's tax proposals, as well.

There are other portions of the President's plan, including the education saving incentives, the charitable giving, the permanent extension of the research and development tax credit, and other areas where Americans can increase savings and investment.

Finally, let me say that notwithstanding all of the suggestions of additional changes in the tax code, I do find it rather remarkable that the initial statement was that no plan should be offered until the budget resolution is passed and we now find, especially in the other body, a number of our colleagues on the other side of the aisle rushing to the microphone with the latest plan to make changes in the tax code, notwithstanding the fact that a budget resolution has not passed the Budget Committee and it has not passed the floor. I fully intend to have any provisions that we have pass on the floor of the House after a budget resolution passes the floor of the House.

I do welcome, and I think all of us welcome, our colleagues in looking at new and additional ways in which we can reduce the tax burden on hard-working American income tax payers, those who are married and those who are not, those who have children and those who do not. The key here is to come together, move product, place it on the President's desk, and let the American people know that we understand we need to change the burden of taxation on income tax-paying Americans and then continue with the fine work in this Committee in the other areas of jurisdiction of this Committee.

With that, I would recognize the gentleman from New York, the ranking member, Mr. Rangel.

[The opening statements of Chairman Thomas and Mr. Ramstad follow:]

Mr. RANGEL. Thank you, Mr. Chairman. Mr. Chairman, yesterday, you indicated that there may be a markup on certain legislation either on Thursday or Friday. Could you share with us whether or not these hearings today would have any relationship at all with legislation that you intend to mark up, and if so, what would the connection be? Are we to assume that whatever testimony we hear today may be the subject of a bill to be marked up this week?

Chairman THOMAS. I would tell the gentleman that as we are looking at the other portions of the President's tax plan, having moved the permanent marginal rate reduction, to other areas that this Congress had involved itself with prior to the election of President Bush, the marriage penalty and the death tax aspect are represented in large part by, for example, some of the members in front of us.

We believe that between now and when we have our next markup, we can incorporate a number of ideas of the President's, but also our colleagues' ideas, and I look forward to working with the gentleman from New York. As he knows, we have already supplied him with significant information in terms of the direction that we believe we are going to take.

I am never, however, surprised of the valuableness of hearings and information provided to us by witnesses which, of course, can be incorporated in any markup as long as we have about 24 hours prior to the markup. So I look forward to hearing the witnesses, listening carefully to what they have to say, digesting it, and then if, in fact, we do find information that is very useful that we had not anticipated, including it in a markup.

Mr. RANGEL. Mr. Chairman, I am embarrassed not to fully understand what you said.

Chairman THOMAS. What I said was we ought to listen to the witnesses carefully, see what they have to say, and if we agree they have something worthwhile to say and we have not anticipated it in legislation, to include it.

Mr. RANGEL. But I was only talking, Mr. Chairman, about whether or not their gems of wisdom would be of assistance to us with a bill since we have yet to know what is in the bill that we may mark up tomorrow or Friday. I guess that was my partisan way of requesting, do we have the slightest clue as to what the language would be in a bill that we may mark up on Thursday or Friday, and what the cost would be, so that we could more intelligently ask questions of these witnesses?

You mentioned the death tax. I assume you mean the estate tax repeal. If that is going to be something that we are marking up this week, then, of course, we would want to ask questions about this when having these expert witnesses here. And, of course, if you have no intention of marking up bills that relate to their expert testimony then we would listen and absorb it, but we would not waste a lot of time asking questions on a bill that we are not marking up tomorrow or the next day. But, of course, if you feel more comfortable not answering any questions, then I will just not inquire any further.

Chairman THOMAS. Great. And with that, we will--

Mr. RANGEL. That is the end of my opening statement, Mr. Chairman.

Chairman THOMAS. And with that, we will turn to the panel.

Mr. CAMP. Mr. Chairman, if I might just have a minute.

Chairman THOMAS. The gentleman from Michigan?

Mr. CAMP. I just wanted to briefly welcome the panel, including my colleague and friend from Michigan, Congressman Barcia. We have adjoining districts. I look forward to your testimony. Thank you, Mr. Chairman.

Mr. CRANE. Mr. Chairman?

Chairman THOMAS. I thank the gentleman. The gentleman from Illinois?

Mr. CRANE. May I welcome my distinguished colleague from Illinois, Mr. Weller.

Mr. RANGEL. Mr. Chairman, I would like to welcome the Senator and my colleagues for whatever wisdom they can share with us from now and to the end of this session, because we will never know when we will have a chance to use their advice. We thank you for sharing your views with us now.

[Laughter.]

Chairman THOMAS. The chair is constrained to say, though, it is much more difficult in picking up the pearls of wisdom from our witnesses if the members are not here, so I anticipate full attendance through the entire hearing.

Now, it is my pleasure to turn to the gentleman from Illinois and the gentleman from Michigan on the House side and the Senator from Texas, who has been a champion for a long time on examining the tax code in which there ought not to be punishment for the act of marriage. And with that, I will turn first to the Senator from Texas and indicate that if you have any written testimony, we will make it a part of the record and you can address us in any way you see fit.

I will also tell you that you have to turn the mike on and it is very uni-directional in terms of its sound. You have to speak into it.

STATEMENT OF THE HON. KAY BAILEY HUTCHISON, A UNITED STATES SENATOR FROM THE STATE OF TEXAS

Mrs. HUTCHISON. Thank you very much, Mr. Chairman. I do appreciate your holding this hearing and I do hope there will be a markup soon on marriage penalty relief.

I want to start by saying that I have introduced every iteration of marriage penalty relief in the last four years in Congress, and I want to acknowledge that Congressman Weller has done the same thing on the House side. He has really been a leader. We have worked together and, of course, have passed marriage penalty relief twice, only to see it vetoed. But this time, I believe we can work on a bill that will be signed by the President and will give measurable tax relief to married couples who now suffer a penalty. And I want to welcome Congressman Barcia, also, to help us in this effort so that we can have a bipartisan effort.

Of course, 21 million American couples do suffer a marriage penalty tax in this country and there should be zero tax to being married. Let me give you an example from Texas.

Heather Diederich and Willie Simmons live in Tyler, Texas. They are engaged to be married May 26, so when the distinguished ranking member says, why are we talking about this today, are we really going to do something, I hope we are going to do something before May 26 for this couple. They both work for a local grocery store chain. Heather is a single mother of a three-year-old boy. She makes $20,000 a year. Willie makes $19,000 a year. When they get married, they will be hit with a marriage penalty of $1,600. Mr. Chairman, this is wrong and we could do something about it to help this couple before the end of the year, after they have gotten married.

I think we need to talk about what is possible within the range of the President's plan of $1.6 trillion. Based on my experience and on what we have been able to pass through Congress before, I think it is important that we do something simple and fair, not something that is going to add layers in the reporting requirements, layers in forms or any more complicated responsibility for filing.

I believe increasing the standard deduction for a married couple filing jointly so that it is twice that of a single person and widening the 15 percent tax bracket so that we can at least alleviate the pain at that lowest level and it will give some relief to every couple that either does not itemize and takes the standard deduction or anyone who is paying taxes would get some relief from the 15 percent bracket.

Now, this has been tested. We have passed it through Congress twice before. I think it is very important--and, in fact, Chairman Grassley on the Senate side is trying very hard to stay within the President's allocations. Based on the most recent allocation of the OMB, the President's proposal would reinstate the ten percent second earner deduction and it would cost $112 billion. If we do both the 15 percent bracket doubling and the standard deduction doubling, it would cost about $183 billion. But if we phase it in slower, it would come about within the President's cost. So we would not be having to take away from any of the other tax cut proposals that you have already passed and are in the President's plan.

Now, I think it is important that we do this, but I want to just regress for a moment here and say, after what we have seen in the stock market and in the economy in general in the last two months, I think we need to do something more bold, Mr. Chairman. I think we need to look at actually front end loading all of our tax cuts more. I think we need to send real relief to our taxpayers so that we can spur this economy which is sinking every day and which, I think if we take a bold move, we can do.

The income tax withholding surpluses, not even looking at Social Security are increasing even for this year. So I think we could increase both the marriage penalty relief and the tax bracket relief even more this year, and I would encourage us to do that. I think the failure to do so is unfair, and I thank you for taking this as a priority and I hope very much that it will be in the next one or two bills that will be passed by the House and I hope that we can act expeditiously in the Senate. Thank you, Mr. Chairman.

Chairman THOMAS. Thank you very much, Senator.

[The prepared statement of Mrs. Hutchison follows:]

Chairman THOMAS. Now I will turn to our colleagues. Any written testimony you have will be made a part of the record and you can take the time and share it to talk about your bill or your desires in terms of marriage penalty reform in any way you see fit. Mr. Weller?

STATEMENT OF THE HON. JERRY WELLER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS

Mr. WELLER. Thank you, Mr. Chairman, Mr. Rangel, members of the Committee. Thank you for your warm welcome this morning and the opportunity to work with all of you as we work to bring fairness to the tax code.

I also want to acknowledge my friend, Senator Hutchison, and my friend, Congressman Barcia, for their good work on working to eliminate the marriage tax penalty. Clearly, this is an issue that should be addressed in a bipartisan way and I am proud to bring before this Committee a bipartisan bill that we will discuss today.

I also want to acknowledge that President Bush has recognized the need to address the marriage tax penalty and included a provision in his package. We like his provision. However, many of us believe we should do more than the President proposes in addressing the marriage tax penalty.

I believe that the whole issue of the marriage tax penalty is best framed by asking some basic questions of fairness, and that is, is it right, is it fair that under our tax code, 25 million married working couples, on average, pay higher taxes than they would if they stayed single? Is it right, is it fair that 25 million married working couples, on average, pay $1,400 more in higher taxes just because they are married?

And if you think about it, I represent the south side of Chicago and the south suburbs. Fourteen-hundred-dollars is real money back home in Illinois. It is a year's tuition at a community college, several months worth of car payments. It is three months' worth of day care at a local child care center in Joliet, Illinois.

Working to address the issue of the marriage tax penalty, I joined with my colleagues, Representatives Barcia, Capito, Kerns, and almost 230 other bipartisan members in this House and introduced H.R. 6, legislation designed to address the marriage tax penalty. We offer a solution. We offer a solution in H.R. six which provides broad marriage tax relief, wiping out the marriage tax penalty for the vast majority of those who suffer it. We do it in several ways.

First, we double the standard deduction for joint filers to twice that of singles. That helps those that do not itemize their taxes.

Second, we widen the 15 percent bracket so that joint filers can earn twice as much in the 15 percent bracket as a single filer. That helps those who itemize their taxes, such as average middle class married couples who happen to own a home and, of course, itemize their taxes.

In H.R. 6, we help the working poor by addressing the marriage tax penalty under earned income credit, helping the working poor, and we also recognize the need to address the AMT, the alternative minimum tax consequences through our solution and we work to make our proposal, of course, holding those harmless and ensuring that no one suffers higher consequences because of our solution.

The bottom line is, we want to eliminate the marriage tax penalty. It is an issue of fairness. I was proud when this House and the Senate this last year sent twice to the President a solution which wiped out the marriage tax penalty. Unfortunately, the previous President chose to veto those bills. I was also very proud that our legislation was bipartisan. Fifty-one Democrats joined every Republican House member in voting to eliminate the marriage tax penalty this past year when we sent that legislation to the President. Building on that, I believe we have a real opportunity.

I am joined today by Jim Barcia, a friend of mine from across the aisle, a Democrat from Michigan, a great guy, someone who has been working as my partner in the House on working to eliminate the marriage tax penalty, and Mr. Chairman, with your permission, I would like to yield the remainder of my time to Mr. Barcia to present the merits of our legislation.

[The prepared statement of Mr. Weller follows:]

STATEMENT OF THE HON. JAMES A. BARCIA, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN

Mr. BARCIA. Thank you, Mr. Chairman and distinguished Committee members. It is a privilege for me to join with my good friend, Congressman Weller, and the distinguished Senator Kay Bailey Hutchison, in presenting testimony in favor of H.R. 6 this morning. I want to thank you for granting me this opportunity to testify before you on this issue that is of such critical importance to our nation's married couples. My comments will be brief, although I see I have about a minute left, I will try to stay in that range.

Chairman THOMAS. In the bipartisan way, we will give you a full five minutes.

Mr. BARCIA. Thank you, Mr. Chairman. As the lead Democratic cosponsor of the Marriage Tax Elimination Act, I first would like to recognize the leadership of Congressman Weller and I want to thank him for giving me the opportunity to do my part to ensure that, one day, the marriage penalty is taken out of the Federal tax code. It has truly been an honor and a pleasure to work with him. Without his leadership, vision, and perseverance, as well as that of Senator Hutchison on the other side of the Capitol, frankly, we would not be here this morning.

Let me begin by saying that, fundamentally, the marriage penalty is an issue of tax fairness. Congressman Weller once said that the only form someone can file to avoid the marriage tax penalty is the paperwork for a divorce. That is not the message that this Congress, nor any Congress, should send to working families across our nation. Marriage is a sacred institution and our tax code should not discourage it by making married couples pay more.

As you know, the marriage penalty occurs when a couple filing a joint return experience a greater tax liability than would occur if each of the two people were to file as single taxpayers. The Congressional Budget Office estimates that more than 25 million married couples suffer under this financial burden. The penalty harms the pocketbooks of working families, with an average couple losing about $1,400 under the current system.

The bill that we recently introduced will fix the grave injustice of our current tax code that results in married couples paying higher taxes than they would if they had remained single. For me, this bill strikes to the heart of middle-income tax relief. These are the people who are the backbone of our communities. These are the people who need tax relief the most.

With a record budget surplus, the time is long overdue for Congress to remove the marriage penalty from the tax code. This bipartisan bill achieves that goal, and I know that all of us present here today who support the measure will not stop working until this legislation is signed into law.

I will not be redundant in terms of the two distinguished colleagues who have articulated the framework of the legislation, but wanted to add my support for the good work this Committee is doing in helping to correct this injustice in our Federal tax code and want to thank you, Mr. Chairman, for the attention and time that you are devoting to this issue and your leadership, as well as the members of the Committee, on this very important issue that, hopefully, Congress will pass expeditiously. Thank you for the time.

[The prepared statement of Mr. Barcia follows:]

Mr. WELLER. Mr. Chairman, may I reclaim 30 seconds of the time that I yielded to Mr. Barcia, if I could just briefly? I do want to acknowledge Shad and Michelle Hallihan, two public school teachers who are an example--

Chairman THOMAS. The gentleman's time has expired.

[Laughter.]

Mr. WELLER. Two public school teaches who suffer the marriage tax penalty and they are looking to us to solve that problem today. Thank you, Mr. Chairman.

Chairman THOMAS. I actually would tell the gentleman, I believe I know them--

[Laughter.]

Chairman THOMAS. And the gentleman has done an excellent job.

Does the gentleman from Florida wish to inquire?

Mr. SHAW. No, Mr. Chairman. I just want to congratulate each one of the witnesses on the good work that they have done and their persistence in seeing that this does become law. Having four kids who are struggling to raise a family, all of whom, I am pleased to say, are happily married, I am very hopeful we will be able to do it, and I hope we can do it before this couple has grandchildren. I yield back, Mr. Chairman.

Chairman THOMAS. I thank the gentleman.

Does the gentleman from California, Mr. Stark, wish to inquire?

Mr. STARK. I just wonder if any of the witnesses know what we can anticipate we will be looking at. What is going to be in the bill? Do you know, Jerry? What is going to be in the bill? What are we going to mark up? Do you know?

Mr. WELLER. Mr. Stark, we have made suggestions to Chairman Thomas, who has been very inclusive in this process, and, of course, when he is prepared to release the mark, we will take a look at it. But we have suggested in H.R. 6--

Mr. STARK. Are you going to vote for it, whatever it is?

Mr. WELLER. Chairman Thomas has been very receptive to many of the ideas we have been suggesting to him.

Mr. STARK. That was not what I asked. You will vote for whatever it is?

Mr. WELLER. I certainly expect and hope to vote for the proposal we vote on later this week.

Mr. STARK. Senator, you would support it without knowing what it is going to be?

Chairman THOMAS. Would the gentleman yield?

Mr. STARK. Happily.

Chairman THOMAS. The bill that has been introduced in the House by the two gentlemen who are in front of us will be the base text.

Mr. STARK. Aha.

Chairman THOMAS. However, as is usually the case in this Committee for as long as I have been on this Committee, there is a chairman's substitute which will be offered. So if the gentleman is concerned about what the base bill is going to be, the gentleman only needs to consult H.R. 6, introduced at the beginning of the--

Mr. STARK. What is going to be the chairman's substitute?

Chairman THOMAS. The gentleman will see the chairman's substitute, as has been the case, when the majority, who were the Democrats, the day before the markup.

Mr. STARK. So we call that a pig in a poke, I think, but you may call it a substitute.

Senator, will you vote for whatever form of marriage penalty the chairman decides will finally be in his substitute? Are you willing to say that today?

Mrs. HUTCHISON. Mr. Stark, I do not know that you have ever heard a Senator agree to vote for a bill just as it came out of the House, so that would be sort of a different kind of a question.

Mr. STARK. So you are not sure, either.

Mrs. HUTCHISON. Let me say, I know what you are doing. I think we all do. I am working very hard with the chairman and ranking member of the Finance Committee and trying to make some very simple points, and those are that we should try to affect as many married couples as we possibly can.

Mr. STARK. What limits us from being completely fair? You do not change the upper brackets in any of your bills. Is it perhaps that you do not think we have enough money to do this completely?

Mrs. HUTCHISON. I think we have competing priorities and that is why we have the opportunity--

Mr. STARK. Would you rather have a drug benefit for seniors or would you rather have a bigger marriage tax penalty relief?

Mrs. HUTCHISON. They are not mutually exclusive, Mr. Stark.

Mr. STARK. Oh, they are both money. You cannot have them both.

Mrs. HUTCHISON. I disagree with you totally. I think tax relief should be a first priority, because--

Mr. STARK. Before drug benefit for seniors?

Mrs. HUTCHISON. No, Mr. Stark. I do not think they are mutually exclusive, and as soon as you are able to, in an orderly way, take up each issue as it comes, we have a budget, we have tax relief, we have--

Mr. STARK. I beg to differ with the--

Mrs. HUTCHISON. We have Medicare reform, and I do think Medicare reform--

Mr. STARK. I beg to differ with you, Senator. We do not have a budget.

Mrs. HUTCHISON. Mr. Stark, I do think Medicare reform--

Mr. STARK. We do not have a budget, Senator.

Mrs. HUTCHISON. Needs to be done as a whole and not piecemeal.

Mr. STARK. Senator, we do not have a budget. Do you?

Mrs. HUTCHISON. We are working on a budget, yes.

Mr. STARK. But you do not have one, do you?

Mrs. HUTCHISON. Mr. Stark--

Mr. STARK. So, in effect, you do not know what you are talking about when you talk about a budget.

Mrs. HUTCHISON. Mr. Stark, I would just say that we have very good estimates on what our surplus is going to be--

Chairman THOMAS. Senator--

Mrs. HUTCHISON. And, in fact, those surpluses are going up.

Chairman THOMAS. Senator, if you would refrain for just a minute, I understand the gentleman's exuberance and frustration at being in the minority, but that should not replace common courtesy in terms of responding to a fellow colleague who is a Senator. Would the Senator--

Mr. STARK. I would repeat my question, Senator. Do you know what you are talking about when you talk about a budget?

Mrs. HUTCHISON. I assure you that I do.

Mr. STARK. You do? What is your budget, then?

Mrs. HUTCHISON. And I do know that--

Mr. STARK. How much is budgeted?

Mrs. HUTCHISON. The estimates are, on our surplus and what we are going to have in the way of--

Mr. STARK. How much is your tax bill going to be, Senator?

Mrs. HUTCHISON. Our tax bill is going to be $1.6 trillion--

Mr. STARK. All right.

Mrs. HUTCHISON. And we are going to have $1 trillion in added capacity for spending that we plan to encourage spending in Medicare, in public education, and national defense.

Mr. STARK. And how much is your drug benefit going to be for the seniors?

Mrs. HUTCHISON. Mr. Stark, I know what you are trying to do and I think $1 trillion set aside for added spending needs and priorities is quite responsible.

Mr. STARK. That is not what I asked you. You may think that, but I asked you if you have any idea what you are going to spend on a drug benefit for seniors, and I think the answer is you do not.

Mrs. HUTCHISON. Mr. Stark, I think it is very important that we--

Mr. STARK. Senator, do you or do you not know what you are going to spend on a drug benefit?

Mrs. HUTCHISON. We are able to address any issues--

Mr. STARK. I am asking for a yes or no response. I do not need any help from pipsqueaks on this side of the aisle, Mr. Chairman. You can ask a question on your time, son.

Chairman THOMAS. The gentleman's time has expired.

Does the gentleman from New York wish to inquire?

Mr. HOUGHTON. I would like to ask Mr. Stark whether he intends to vote against the bill without having seen it.

Mr. STARK. Unlike Mr. Houghton, not being a Republican, I am unable to make statements about things that I may or may not do.

Chairman THOMAS. I think the gentleman wants a yes or a no.

[Laughter.]

Mr. STARK. Mr. Houghton, I do not intend to vote for any bill until there is a budget and I know what the priorities are and what the effects will be on the American people and whether the seniors will have a drug benefit or not, or is it just a few thousand wealthy Republicans who will get huge tax breaks under the chairman's bill. So that is where I am. If your children and my children are just waiting there panting to get their hands on estates, that may be one thing. I do not intend to do that, discrediting the people who need a drug benefit.

Mr. HOUGHTON. You know, Mr. Stark, you tend to pull in my children with your children on almost every opportunity. Thank you very much.

Chairman THOMAS. Does the gentleman from California, Mr. Matsui, wish to inquire?

Mr. MATSUI. I would just like to thank Mr. Weller for the photo because I miss that couple. I have not seen them in a while.

[Laughter.]

Mr. MATSUI. Actually, I have no questions at this time, Mr. Chairman.

Chairman THOMAS. Thank you. Does the gentleman from Louisiana wish to inquire?

Mr. MCCRERY. No questions.

Chairman THOMAS. The gentleman from Pennsylvania? Does the gentleman from Michigan wish to inquire? The other gentleman from Michigan?

Mr. LEVIN. I do not think so, except the question has been raised about when we will see the details of a proposal, and maybe you can let us know, Mr. Chairman, when we are going to see the legislation, your mark, that is proposed to be handled either tomorrow or Friday. Really, I think this legislation is much too important for us to go in without being fully aware of the details. So maybe you could let us know. We have not seen it. I do not think some of your colleagues on the Republican side have seen it. At least we on the Democratic side have not seen it. So when do you intend to give us your mark?

Chairman THOMAS. I will tell the gentleman that he apparently is chafing under the rules that this Committee has operated under for a number of years.

Mr. LEVIN. I am not chafing. Mr. Chairman--

Chairman THOMAS. We are following exactly the rules that the gentleman's party followed when they were in the majority, and that is you have been supplied with the base text two days before the markup. The chairman's mark or the substitute is to be supplied one day before the markup with revenue tables. This is the day before the markup. You will receive the substitute and the revenue tables today. The gentleman is complaining that I am not meeting his time table, but rather I am meeting the rules of this Committee. That is the gentleman's problem.

Mr. LEVIN. Mr. Chairman, I am not chafing and I do not think anybody else should. It is suggested that we mark up a bill involving hundreds of billions of dollars and you say--I am not sure what rules you are talking about. I think there is a 48-hour rule, is there not?

Chairman THOMAS. I will tell the gentleman he received it 48 hours before the markup if the markup is to occur on Thursday. If, in fact, we decide to have the markup on Friday, he will then have an additional 24 hours in which to consider the base text under the rules. The base text is H.R. 6. Not only is it not unfamiliar to us, but it passed the House just a year ago by a very large bipartisan majority. We are focusing primarily on the marriage penalty structure in H.R. 6. There may be some revisions to bring it current and to make other adjustments that have come to us since the bipartisan passage of that marriage penalty legislation.

Mr. LEVIN. All right. And also, there is a child credit proposal that is going to be in the mark?

Chairman THOMAS. We are going to try to put a child credit provision, which is the President's doubling of that child credit phased in with, again, modifications, in part, as the gentleman well knows, from the marginal rate reduction bill. There is a problem with the alternative minimum tax exacerbated by the gentleman's tax bill of 1993 which has not been dealt with, but we are dealing with it so that no income taxpayer who gets a tax cut inadvertently gets an increase in their taxes because of the alternative minimum tax.

Mr. LEVIN. Right.

Chairman THOMAS. That will be part of the adjustment in dealing with the child credit.

Mr. LEVIN. And the estate tax, will that--

Chairman THOMAS. That will not be marked up this week.

Mr. LEVIN. And so you are saying that sometime today--it could be as late as five or six or seven o'clock--we are going to receive your mark?

Chairman THOMAS. The gentleman will receive the day before the markup the chairman's substitute or the mark, as has been done traditionally in this Committee for years.

Mr. LEVIN. Well, okay. I--

Chairman THOMAS. I understand the gentleman's frustration with--

Mr. LEVIN. I am not frustrated--

Chairman THOMAS. With not getting the information as soon as he would like to release to the press and others. But we are going to follow the rules of this Committee.

Mr. LEVIN. Mr. Chairman, I think it is still my time, so let me just say--

Chairman THOMAS. I thank the gentleman for yielding.

Mr. LEVIN. It is not a question of yielding. I am glad to yield to you at any point. It is not a question of giving information to the media. This Committee has a responsibility. We are talking about a $1.6 trillion, I think, plus, tax proposal, and now the second chunk is supposed to be marked up. We are talking about hundreds of billions of dollars and I think we should not worry so much about the past but argue about or discuss what is an intelligent way to proceed in the present.

And all I am saying is for us to receive a mark, which is the precise proposal we would be considering and perhaps amending, less than 24 hours before you want us to mark up, I think is not reflective of due consideration of major tax policy.

Chairman THOMAS. I will tell the gentleman if he will examine in his packet a description of the Marriage Penalty and Family Tax Relief Act of 2001, which was provided to the gentleman's staff yesterday, he might become familiar with--

Mr. LEVIN. I have read it.

Chairman THOMAS. Oh, okay. You have read it. Fine.

Mr. LEVIN. That is not the bill that will be before us tomorrow.

Chairman THOMAS. Does the gentlewoman from Washington wish to inquire?

Ms. DUNN. Thank you very much, Mr. Chairman. I have no questions but I simply want to congratulate Congressman Weller and Senator Hutchison for taking leadership on this very important issue of marriage penalty tax relief. I appreciate the chairman's comments that we will have the budget on the floor of the House before we act on this particular bill on the floor of the House, and I think that is important in terms of priorities.

So I just want to thank you both very much for doing something, and Congressman Barcia, for doing a lot of work on an issue that my constituents are very, very interested in seeing done. This is the year to do it. We have the dollars in the surplus. We have budgeted the dollars for marriage penalty tax relief and I congratulate you both for being successful.

Chairman THOMAS. Does the gentleman from Washington wish to inquire?

Mr. MCDERMOTT. Thank you, Mr. Chairman. I am sorry I am a little bit late because I was over at the Budget Committee, where I was walking through the budget for the first time. What I am having trouble understanding is how do you know which figures to use, because we just got the budget last night at ten o'clock, and how do you know that there is money in here to do the tax cuts that you are asking for? Where are you getting your figures from, or are you just deciding how much money you want to give and--

Mrs. HUTCHISON. Mr. McDermott, I would just answer by saying that we get the figures from OMB and the Congressional offices, the Congressional Budget Office, and we know how much surplus we are going to have over the next ten years. Our proposal is to spend $1.6 trillion of that proposed $5.6 trillion surplus in giving money back to the people who earned it. That is a decision that we have made and I think that there is no question that the budget is going to go through in a timely manner and so are the tax relief bills that are going through both houses of Congress and I am very pleased that they will be.

Mr. MCDERMOTT. Does it trouble you at all that you are using the Medicare surplus as a part of this tax cut?

Mrs. HUTCHISON. I do not think we are going to not address the Medicare issue. We have been trying to address that issue, quite frankly, for the last few years, and not only has Congress not been able to agree on the right approach, but we have not had support from the President. So I think all of us would like to address the issue and I hope we can do it in a bipartisan way on an expedited basis and that we will use some of the $1 trillion surplus that we are setting aside for spending priorities.

Mr. MCDERMOTT. Five-hundred-and-sixty-five billion of which is from Medicare. If we demonstrate in the process of this budget hearing that you are using the Medicare trust fund for funding of the tax cut, would you vote against that?

Mrs. HUTCHISON. I do not think that you will be able to make that case. I think--

Mr. MCDERMOTT. I understand that, but if I can, if we do, will you vote against it?

Mrs. HUTCHISON. Well, let me just say that you used the term $565 billion and we know we are going to have $1 trillion left over if we stick with the $1.6 trillion tax cut, so there will be plenty of money if that is our priority to address the issue.

Mr. MCDERMOTT. I know you can construct a $1 billion. We have got charts and all kinds of stuff in here. But the fact is, you have to use the Medicare trust fund to create that contingency fund, as the President calls it, or as it appears in the budget document. I think that that is going to become clear. I think that a lot of people are going to get into a position where they have committed themselves to tax cuts, and then they are going to stand up and say, well, I voted for H.R. 2, because everybody in here voted for H.R. 2. We said, we are putting this in a lockbox and we are not going to take any of that hospital trust money and use it for anything else except for Medicare.

Mr. MCCRERY. Will the gentleman yield?

Mr. MCDERMOTT. Just a moment. We are going to now change that definition of what Medicare is from hospitals to everything in the whole of the Medicare program. We are changing the concept of the tax that the people in America are paying into Medicare or the Part A hospital trust fund. And in using that money for other things, you are simply spending Part A money on other things in the budget. There is no way to avoid it, given the numbers that are here.

Mr. MCCRERY. Will the gentleman yield?

Mr. MCDERMOTT. Yes, I yield to the gentleman.

Mr. MCCRERY. I understand what the gentleman is trying to say, and I know that he does not want to mislead anybody, so I want to make it clear that nobody is proposing that the Medicare trust fund be violated. In other words, the gentleman knows that the trust fund is composed of government securities--not cash, government securities--and I believe what the gentleman is referring to is the cash--

Mr. MCDERMOTT. You are saying that it is not fungible? Come on, Jim.

Mr. MCCRERY. I believe what the gentleman is referring to is the cash surplus that is used to buy those government securities and place the government securities in the trust fund. Nobody is going to take those government securities out and spend them. That would be spending the trust fund. Now, if the gentleman is referring to the cash surplus that the trustees use to buy those securities, that is a different matter. But I know the gentleman does not mean to imply that we are going to violate the Medicare trust fund. Nobody is proposing that and I know the gentleman knows that.

Mr. MCDERMOTT. I guess my time has expired, so I will not answer that any more than to say you can do all the monkeying you want with the budget figures, but the fact is that the money is being used for the tax breaks.

Chairman THOMAS. Does the gentleman from Pennsylvania, Mr. English, wish to inquire?

Mr. ENGLISH. No questions.

Chairman THOMAS. Does the gentleman from Wisconsin, Mr. Kleczka, wish to inquire?

Mr. KLECZKA. Dare I? Mr. Weller, how does your marriage penalty relief differ from the President's proposal, and could you also give me the five- and ten-year cost?

Mr. WELLER. The proposal the President puts forward, and first, I want to acknowledge that I am pleased with--

Mr. KLECZKA. Do not acknowledge. I only have five minutes.

Mr. WELLER. I recognize that, and I am giving you the abbreviated answer. Let me first acknowledge we have a President who wants to address the marriage tax penalty and he, in his proposal, provides roughly $100 billion in marriage tax relief over ten years, and the way he does it is he provides for a second earner deduction of ten percent of up to $30,000 of the second earner's income, which means a $3,000 deduction. That would provide about $700 in marriage tax relief for those who are able to use that.

The average marriage tax penalty is about $1,400. Shad and Michelle Hallihan suffer the average marriage tax penalty, and what we propose doing is to ensure that those who--

Mr. KLECZKA. Mr. Weller, what is the cost of your H.R. 6?

Mr. WELLER. The proposal that we offer is roughly $180 billion over ten. We, of course, solve the marriage tax penalty and essentially eliminate the marriage tax penalty for the vast majority of those who suffer it in several ways.

Mr. KLECZKA. And the further question is, when can a married couple anticipate receiving the full $1,400 relief, because I believe your bill is phased in, also.

Mr. WELLER. Our legislation is phased in. The standard deduction, we double the standard deduction for joint filers. That would be immediately available in the 2001 tax year. Actually, our proposal is retroactive, so it would be available this year.

Mr. KLECZKA. When can a married couple expect the $1,400?

Mr. WELLER. Well, those who use the standard deduction would see benefit this year under our proposal because we do make it retroactive.

Mr. KLECZKA. Okay.

Mr. WELLER. Those who itemize their taxes, it is phased in over five years, so the widening of the 15 percent bracket. Those who benefit from the EIC would see benefit in the first year.

Mr. KLECZKA. So a couple would see the $1,400 possibly in 2006, is that accurate?

Mr. WELLER. Once fully phased in, that is correct.

Mr. KLECZKA. Thank you very much. My colleague, Mr. McDermott, talked about this contingency fund, and I know Senator Hutchison also indicated that we are going to have $1 trillion available even after the tax cuts for star wars, for a drug benefit, for education, for all sorts of other programs which a lot of members are looking forward to supporting.

However, I think in discussions we had in this Committee and discussions we had yesterday with the trustee for the Social Security and Medicare trust fund, what we found out, Senator, is that over one-half of that $1 trillion you talk about being a contingency fund is the Medicare HI trust fund. Well, here we go again, and I guess we can debate it, but the figures and facts that we have indicate that $526 billion of this $1 trillion or whatever the amount is is counting that surplus from the Medicare HI trust fund. So I think we can keep talking about $1 trillion being available, but in essence, that is not really accurate. Let me thank the chair.

Chairman THOMAS. Does the gentleman from Arizona wish to inquire?

Mr. HAYWORTH. I thank the chairman for the time and I thank my colleagues from the House and our friend from the Senate, the lady from Texas, for coming down to visit with us this morning.

Mr. Chairman and my colleagues, listening to some of the comments here today reminds us of a road we have been down before, and we heard it yesterday with the interesting questions going to the Secretary of the Treasury. Though Halloween is some months away, it appears that we are getting the sequel to so many cheap horror films today with perhaps a misunderstanding of the budgetary process and perhaps an honest difference of opinion.

Senator Hutchison, I think we all can appreciate passion and differences of opinion, and goodness knows I have had my share of passionate exchanges with people where we have profound disagreements. I will lament the fact that there are those here who perhaps did not want to hear your answers and so I feel compelled to apologize on their behalf, because I know they seek civility in what we do here.

I also thank my colleague from Michigan for pointing out the fact that this is a bipartisan bill, and I would address my inquiry to Mr. Barcia. Jim, what are you hearing from your constituents? What are they telling you about the marriage penalty and why did you feel compelled to join with Congressman Weller and Senator Hutchison in offering this piece of legislation?

Mr. BARCIA. Thank you, Congressman Hayworth. When this legislation was introduced, we, of course, sent out a news release in our district. It was carried extensively by our electronic and print media throughout our region of the State and I received a lot of positive comments about people who, as Congressman Weller mentioned, could use that additional $1,400 to $1,600 of annual tax relief to apply to the cost of tuition for their children, or themselves if they are being retrained if they have recently lost their employment.

We are seeing the signs of the economy slowing down in Michigan, and for the first time in quite a while now, we are seeing layoffs in my district. So a lot of people certainly would appreciate having that additional tax relief to either pay down perhaps some credit card debt, to perhaps address the increased energy costs which we anticipate in this next winter season, both Michigan being a major tourism State and relying on tourism for the economic health of many of our shoreline communities in my district. The cost of gasoline is expected to rise again, as well as home heating costs may be a serious issue for many families throughout Michigan and the frost belt States.

So I think a lot of people, when they read that we have a surplus at the Federal level, that they feel that this would be one way to target tax relief to working families, especially those where both spouses work to sustain the family economically. So I am very pleased and honored to be able to join Congressman Weller and the other Democrats and Republicans on this legislation to--what we hope to achieve is to have a fairer Federal tax code. Yes, it will provide tax relief, but there is simply no rationale why a couple should be punished for being married if a couple that lives together without the benefit of marriage is not susceptible to that same tax burden.

So I guess that is why I joined with Congressman Weller, and I want to thank my Democratic colleagues who serve on the Committee also for giving me a pass on some of these difficult questions today. I am here because I think the issue is one of tax fairness and I am honored to lend my support. We do have a lot of Democratic cosponsors and we have reached out to many in my caucus to join in this effort.

Mr. HAYWORTH. I thank my colleague from Michigan and I do believe that despite some of the rather provocative protestations of some of my friends on the other side, we are seeing a bipartisan consensus on this issue, because after all, Mr. Chairman and my colleagues, I believe in all 50 of our States when people apply for marriage licenses, they are not asked their party registration in the intent for that civil union.

So I look forward to moving forward and I thank the chairman also for operating under the time-honored regular order and rules of this Committee, despite, again, some of the rather passionate protests we are hearing today. It is as if institutional history failed to exist, and I would also acknowledge that we are not being uncivil when we follow the rules. I thank the chair.

Chairman THOMAS. I thank the gentleman.

Does the gentleman from Georgia, Mr. Lewis, wish to inquire?

Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman. Thank you so much. Let me thank my colleagues from the House and friend from the Senate for being here today, and let me say to my colleague from the great State of Arizona, civility and peace is not the absence of tension and conflict. It is the presence of justice and fairness.

Mr. Chairman, I want to say to you, sir, this member is not frustrated. I am not frustrated, not at all. But I do not understand, I do not understand for the life of me, how do we plan to do all these things with such a massive tax cut, pay down the national debt, save Social Security, take care of Medicare, educate all of our children, and look out for the basic human needs of our people? I do not understand how we are going to do it. I wish you could tell me.

But as a member who believes in the philosophy of non-violence and passive resistance, I do not have any questions. I yield back the time, Mr. Chairman.

[Laughter.]

Chairman THOMAS. I thank the gentleman. I can assure him, he just needs to vote "yes" as these measures come up.

Does the gentleman from Colorado wish to inquire?

Mr. MCINNIS. Thank you, Mr. Chairman. I do. First of all, Senator and colleagues up there, it is interesting that when the cameras are in the room, the Committee sometimes takes on an atmosphere of a little more courtroom drama, including some of the examination that took place. I would assure our guest from the other side of the Capitol that rudeness is not routine on the Committee and I think it is unfortunate that we saw a display of it this morning.

We all have a lot of interest in what to do with our economy as we go through here. I am reading Newsweek, and I get to page, about 36, before they quit talking about the economy. We have got a serious problem out there.

And I would say to my colleague, my respected colleague from the State of Georgia, this is not a massive tax cut. We have a massive problem on our hands that is taking place as we now speak. We have got to get some money out there to the people that are going to bring this consumer confidence back up, and $1.6 trillion over a ten-year period of time is not what could be classified as a massive tax cut.

We are going to be able to take care of more needs than we have ever taken care of in the history of this country. But at the same time, I think we have fiscal responsibility that we need to exercise and I think that the bill that is in front of us, the proposals that are being discussed in front of us which will later accumulate into a bill, are a step in that right direction.

I would also say to my colleagues that I have heard some discussion about, well, maybe sometime this afternoon they are going to get a copy of a bill and they do not have time to read it or things like that. I think that is a little unfair description of what is occurring. The content, the chairman has said repeatedly during this meeting, that you can pick up a good portion of the content, so you can get kind of a head start on your reading this evening by looking at the content of the previous bill last year, which was vastly supported, and I would venture to say that the bipartisanship demonstrated today in the support of this bill will also be demonstrated on the House floor when the final vote comes down, although it may not be demonstrated here in this Committee. But once it leaves the Committee, it will be.

The fact is, all of us can get a start on what the substance of this bill is by simply reading it. I mean, there is a lot of material here that will prepare you. So I do not think anybody is going to get caught off guard. I think we all have a good idea of what is coming forth and I would hope that we move forward in a little more bipartisan fashion and with a little more teamwork.

And again, I commend members of both parties sitting up there that are sponsors of this bill and thank the Senator for coming over. Mr. Chairman, I yield back my time.

Chairman THOMAS. I thank the gentleman.

Does the gentleman from New York, Mr. McNulty, wish to inquire?

Mr. MCNULTY. I do. Thank you, Mr. Chairman. I thank the chairman and the ranking member. I thank our witnesses this morning.

I will not ask a question, Mr. Chairman, just want to take a moment to express the same concern that was expressed by my colleague, John Lewis, with regard to the overall amount of the tax cut, and I continue to make this simple point. The numbers do not add up. If you assume a $5.6 trillion surplus over the next ten years and you do what the President said in his address to the joint session of Congress by subtracting $2 trillion for debt reduction, which is something I support, and then if we keep our word on the lockbox, $2.5 trillion in Social Security trust fund and $400 billion in the Medicare trust fund, you are down to $700 billion. And then if you have a $1.6 trillion tax cut, you are back into a deficit situation. We did that before. I do not want to go back to the days of deficit spending, but I do want to work with the chairman, the ranking member, and the other members of the Committee in having some reasonable tax cut proposal. Thank you, Mr. Chairman.

Mrs. HUTCHISON. Mr. Chairman?

Chairman THOMAS. I thank the gentleman. Yes, the gentlewoman?

Mrs. HUTCHISON. Could I just say one point on the numbers. I think you are doubling up on the debt reduction and the Social Security lockbox and that is where you get the deficit.

Mr. MCNULTY. And I want to respond to that, because I still have time, then. That is the same rhetoric we keep hearing, and my good friend from Louisiana makes that point, too. But when I talk about the Social Security trust fund, I am talking about the cash. The President of the United States said in a meeting directly with me that he wants to take care of these funds and he said that it is a crisis that we are facing in the years ahead, especially when the baby boom generation retires.

Now, we cannot solve that problem, Senator, by putting a bunch of IOUs in that lockbox. In that lockbox to me means money, and if we stop stealing the Social Security trust fund money, which we have been doing for 30 years--and listen, Senator, I am an equal opportunity critic on that, because during most of those years, we had Republican Presidents. During most of those years, we had Democratic Congresses. If we want to point the finger, there is enough blame to go around for everybody.

That is not what I am about. I am talking about the future. I am talking about avoiding this crisis that we are talking about in the future with regard to Social Security, and the best way to do that, Senator, is to stop stealing the money.

Mrs. HUTCHISON. Mr. McNulty, I would just say that you have to use accurate math, and part of paying down the debt is in the Social Security side and you just cannot double count it.

Mr. MCNULTY. We have another whole $1 trillion, Senator, that we owe to the Social Security trust fund from before. This is the projected surplus in the fund we ought to leave there to take care of this impending crisis. And on top of that, we still owe $1 trillion to the fund in IOUs. Let us not put more IOUs in the box. Let us leave the cash in the box.

Mrs. HUTCHISON. I would just say, if you are looking toward the future, paying down the debt and strengthening Social Security is an important part of this whole package.

Mr. MCNULTY. Senator, somebody is using the money twice, but it is not me.

Chairman THOMAS. Does the gentleman yield back the balance of his time?

Mr. MCNULTY. I do, Mr. Chairman.

Chairman THOMAS. I thank the gentleman.

Does the gentleman from Florida wish to inquire?

Mr. FOLEY. Thank you very, very much, Mr. Chairman. I am indeed sorry I missed the bipartisan retreat. I wonder if the moderator was Jerry Springer.

Mr. Weller, you sound like you are interested in obviously eliminating the marriage penalty, but you also sound like you are willing to compromise with the President. Is that what I hear you say today?

Mr. WELLER. We, of course, not only want to work with the President to eliminate the marriage tax penalty, but we also want to make it a bipartisan effort, and that is why I appreciate the good work of Mr. Barcia and his colleagues on his side of the aisle, our colleagues on his side of the aisle who are working with us.

The bottom line is, the President has a plan. It eliminates about half the marriage tax penalty. Many of us believe we can and should do more. We believe it will fit in the framework of the $1.6 trillion in tax relief over ten years, and we have got a $5.6 trillion surplus of extra tax revenue. The President proposes taking a portion of that, essentially less than one-fourth, to provide tax relief, and a key part of his tax relief proposal not only is helping our economy, but also bringing fairness to the tax code.

I, for one, and I know many in this House agree that the most unfair consequence of our complicated tax code is the marriage tax penalty. It is just wrong that 25 million couples pay $1,400 more in higher taxes just because they are married. My hope is that we will continue to have bipartisan support. I would note that 51 Democrats voted for the proposal that every House Republican voted for this past year, and unfortunately, the previous President vetoed it.

But we have a new President who, at the time that President Clinton vetoed our effort to eliminate the marriage tax penalty, said had the same bill reached his desk and he was sitting in the Oval Office, he would sign it into law. Of course, H.R. 6, the base bill that we have before you today, is legislation that President Bush said he would have signed had he received it had he been President last August.

Mr. FOLEY. Mr. Barcia, we have heard a lot this morning about failure to have a budget before we consider tax relief. Can you tell me what was in the thinking of the Democratic Caucus when they offered a substitute proposal last week, because it would seem to me if the budget is the hold up and they are accusing us of constructing this fictitious document of tax relief without a budget, how did your side come to the floor with an alternative proposal?

Mr. BARCIA. I think the feeling was that the expenditures would be less, but I understand your point, and perhaps some members of the Committee might--

Mr. POMEROY. Will the gentleman yield?

Mr. BARCIA. Sure.

Mr. POMEROY. We constructed our alternative within a framework that allowed one-third of the projected surplus for progress on eliminating the debt, one-third for tax relief for the American people, one-third held in contingency in case these ten-year projections do not all come in, as well as for the critical investments that we made. So we recognized it was out of order, but we felt that at least trying to get it back into a framework that allowed a balance was the appropriate way to proceed.

Mr. FOLEY. Reclaiming my time, so it was a political response. Nobody wanted to be outside the box. No one wants to go home on Sunday to tell your members of the congregation you voted against marriage penalty.

Senator, during the debate on capital gains reduction, I remember Mr. Rubin and Mr. Clinton and others roundly criticizing us, saying if we cut capital gains, it would have a huge effect on the economy. We would blow up the deficits. We would cause irreparable damage to the economy. Was not the response of the reduction of capital gains the opposite? Was it not stimulative? Did we not see income to the Treasury that was dramatic and increasing revenues to the Treasury?

Mrs. HUTCHISON. That is correct, Mr. Foley. It was the opposite. There was not only no loss, there was actually a gain in revenue when capital gains were lowered and many people are talking about adding that to a tax cut package because we do need a response, as Mr. McInnis pointed out, to the real crisis we are facing in our economy. It has been shown that lowering capital gains taxes is a positive factor and I think it would give a lot of people more incentive to invest and save.

Mr. FOLEY. And we have studied, obviously, the economic projections. We have looked very carefully. We have used CBO, OMB in order to determine the scope of our initiative today, have we not?

Mrs. HUTCHISON. Well, of course. We would not be talking about tax relief if we had not had growing surpluses being put forward. In fact, when we first started talking about tax cuts, the surplus was $3 trillion. Now it is $5.6 trillion, and the surplus for this year is also being now looked at and revised upward toward $90 to $100 billion this year. I hope we can front end load some of these tax cuts.

Mr. FOLEY. Thank you, Senator. How many Democratic cosponsors are there of this initiative on marriage penalty? Are you--

Mr. BARCIA. We lost two recently. We have, I think, close to 40--50--excuse me, 15. We expect more to join when we see the actual language that is reported from the Committee.

Mr. FOLEY. So there is bipartisan support, no question?

Mr. BARCIA. There will be, and as I think Congressman Weller pointed out, 51 Democrats last year on the floor voted for it. I think as more discussion occurs on the issue of the fairness of the marriage penalty, or the unfairness of the marriage penalty, perhaps we will be joined by more Democrats. We have some new members that may be lending their support, as well.

Mr. FOLEY. I want to thank you all for your courtesy today and for your complete answers and for your testimony.

Chairman THOMAS. Does the gentleman from Louisiana wish to inquire, Mr. Jefferson?

Mr. JEFFERSON. Yes, briefly, Mr. Chairman. Thank you for the allowance.

Mr. Weller, let me ask you, I suppose you have looked at President Bush's proposal in this area compared to your own. What do you think are the major shortcomings, if there is one, or the major shortcoming, if there is only one, of President Bush's plan as opposed to yours with respect to attacking this question?

Mr. WELLER. Thank you, Mr. Jefferson. I think to begin with, number one, I think it is important to acknowledge we have a President who wants to address the marriage tax penalty and that is progress. The President's proposal, which provides a second earner deduction, essentially would eliminate about half the marriage tax penalty for the average couple who is able to use the second earner deduction.

Many of us feel we need to do more, and the proposal, the bipartisan proposal in H.R. 6 that we are presenting today would essentially wipe out the marriage tax penalty for the vast majority of those who suffer it. I would point out, it is phased in. It will not happen immediately. But under our proposal, we, of course, provide for a doubling of the standard deduction, which will help those who do not itemize. That would be available immediately. We propose phasing in a widening of the 15 percent bracket so that joint filers could earn twice as much in the 15 percent bracket as single filers, and those who benefit from this, and this is why it is so important that we widen the 15 percent bracket, are those who itemize, who are homeowners. You give to your church or your synagogue or own a home, you itemize your taxes.

Mr. JEFFERSON. Before my time is gone on this, I am satisfied with your answer so far. Which half of the taxpayers are left out from the President's proposal? Is it not the tax that is on the lower end of the income scale and is it not the half, really, that needs this relief the most?

Mr. WELLER. The President's proposal would benefit all those where you have two-earner households. So if you have a lower moderate income family with two earners in the household, they would benefit from the President's proposal. But I would point out that in the proposal that we offer, we not only double the standard deduction and widen the 15 percent bracket, but we also help those who utilize the earned income tax credit because there is a marriage tax penalty under the EIC and we adjust the eligibility threshold for joint filers, eliminating the marriage tax penalty for them, and that will help those who suffer the EIC.

And last, if I could, just to complete the description of the bill, we also address any AMT consequences that would occur from the adjustments we make in the tax code.

Mr. JEFFERSON. Do you not think if we are going to provide relief here and if the President is only going to let us take care of half of the married couples that we ought to take care of the half that needs this help the most? Your bill does do, as you just pointed out, some things through EITC, which, of course, is going to be helpful to that lower end of the income scale. We are going to end up with this bill being slanted, as we did with the rate adjustments, geared more to people who are the upper income and that is not where we should be going with this, I do not believe, Mr. Weller. Thank you, Mr. Chairman.

Chairman THOMAS. I thank the gentleman.

Does the gentleman from Texas wish to inquire?

Mr. BRADY. Thank you, Mr. Chairman. I want to thank Congressmen Weller and Barcia for your leadership in this effort and I want to also welcome my Senator, Kay Bailey Hutchison, to the Committee. I also, Senator, want to apologize for the conduct and behavior of my colleague specifically from California. As you know, sometimes when your argument lacks substance and intellect, you resort to rudeness and interruption and badgering a witness.

Now, you are a Senator from a major State. You have been involved in eliminating the marriage penalty long before some of our born-again repealers have gotten involved. You know how people act. But what bothers me is the thought that there may be young people in this Committee room, or because our hearings are so often televised, watching on TV, who think that some of the leaders of our nation with such big responsibility can be so small in stature. So let me apologize again to you.

I am somewhat astonished at the point that keeps being raised and demanded of you, where is the money, stop stealing our money. I know that there is quite a bit of dollars in this budget. I cannot tell you exactly where it is, but I can tell you where it has gone.

I know that we went on a $50 billion spending spree the final weeks of Congress up here, not that we do not need another Lawrence Welk museum, not that the "big dig" should not soon approach the cost of the international space station, not that we should not--and this is what we did--we actually funded a program to give lifelong housing and health care to chimpanzees who have been used in research. Lifelong health care and homes for chimpanzees, but not a dime for the long-term reform of Medicare. How dare we demand from you where the money is. I think the taxpayers ought to be demanding from us, where is our money? Where are your priorities?

It seems to me we finally have a President who has said, we cannot go on a spending spree. If we say no to a program, Washington, D.C. will not slide off into the Potomac, and we have got a President who understands first things first and that he has put his priorities together.

So I appreciate the fact that you are trying to restore fairness to our tax code. It is wrong to tax people more for being married. And yes, we do have the money to restore fairness. Thank you, Senator.

Mr. HERGER. Would the gentleman yield?

Mr. BRADY. Yes.

Mr. HERGER. Thank you. I want to thank the gentleman from Texas for pointing out how we have not managed many of our tax dollars in the past, and I would also like to point out another distinction and that is we have heard from some of our good friends on the other side of the aisle that they think perhaps this tax reduction, allowing people, couples like we see over here that are married, that are paying a penalty of $1,400 a year more than they should, that somehow we are allowing them to keep too much. One-point-six trillion is too much, we hear argued, and I would argue that it is not nearly enough. If we put it into perspective of what other tax reductions have been over the years, and as the gentleman knows, in 1963, the Kennedy tax reduction, this is only half of what it was equivalent to that time, or in 1983, the Reagan tax reduction is one-third of what it was equivalent at that time. And so if anything, during this time of turmoil in our economy, if anything, the taxpayers, this couple and every other couple that is married that is being penalized--

Mr. MCNULTY. Would the gentleman yield?

Mr. HERGER. We should allow them more. It is not my time to yield, but I appreciate your bringing it out and I yield back my time to the gentleman from Texas, who controls the time.

Chairman THOMAS. Does the gentleman from Tennessee, Mr. Tanner, wish to inquire?

Mr. TANNER. Thank you very much, Mr. Chairman. I would just like to make the observation that we are being asked to vote on a tax plan that is phased in over five or six years based on ten-year projected numbers. However one puts the pieces together, that is what we are being asked to do.

Now, the uncertainty of this ten-year projection is unassailable, in my view, by any reasonably sane human being. Nobody knows what the next ten years hold for this country. People are surprised when you tell them that only 29 percent of this ten-year projection is supposed to even show up here in the next five years. Last year, we spent $205 billion in interest checks we wrote. All of the corporate income taxes in the country amounted to $207 billion. Said another way, all of the corporate income taxes that corporations in this country pay go to pay nothing but interest. Over 20 percent of every dime that we send in personally, in our personal income tax returns next month, will go, 20 percent or a little better, to pay nothing but interest on the national debt.

Now, when we are talking about why we need a budget first, if we do not have a budget, everything fits. Now, the Secretary of the Treasury was over here two, three weeks ago. He said $1.6 trillion is the number for the tax cut, and if I cannot hold it to that, I ought to leave town. Those are his words, not mine. The chairman of the Budget Committee a couple of days ago said $1.6 trillion is merely the floor. The majority leader a couple of days ago said the $1.6 trillion figure is irrelevant. Without a budget, everything fits.

Now, in the President's plan, we do not have, for example, the alternative minimum tax provisions that many of us think ought to be included. We added over here to his plan a retroactive feature to the marginal rate reductions that cost $150 billion to as much as $300 billion, depending on who you talked to and how quickly it is phased in. We do not have in the President's plan Portman-Cardin, which I think will do more for this country in terms of aligning people to put aside $5,000 into an IRA account and make a tax deduction on their tax return for that. I think that is much more valuable to working people than a marginal rate reduction for some guy that makes $50 million playing basketball or baseball, but that is another question we could talk about.

I believe that a 100 percent self-employment deduction for health care insurance premiums is a great boon to this country, just as the saving rate would be increased by Portman-Cardin, but this would allow people to deduct for health insurance premiums. We desperately need more money in the health system. People are talking about a capital gains reduction. That is not in the President's $1.6 trillion.

So my point is, all of this discussion is terrific. All of us want a tax cut of some kind, but without a budget, all of this stuff fits and all of us know that it cannot. So when people say, well, we need a budget passed in the House, we do need a budget passed in the House, but that is like taking a dollar bill and tearing it in half. You have got to have the other half, and that is the Senate budget resolution, before you have a dollar to spend. That is not going to occur for another couple of months.

So what some of us have asked, and begged for, really, in many respects, is we are interested in marginal rate. We are interested in everything the President has got. We are interested in marriage penalty. We are interested in AMT. We are interested in R&D extenders. They re not in the President's plan. Everybody knows we have done it forever. It is good for business in this country. It keeps business and laboratories in this country. It ought to be done.

But without a budget, again, to sound like Johnny one-note, everything fits and we all know that it cannot and we all know that we have this cloud of debt hanging over the country. I have argued that as long as we are paying 14 cents out of every dollar in interest on this country, people in this country, including our children, are going to be overtaxed. They have to be because they are dragging around this mortgage on their backs.

Now, I do not know that we can do anything about it today. I commend you fellows and Senator Hutchison for being here this morning. I would hope that you would see the wisdom of what some of us are trying to say as it relates to a universe, a business plan, a budget, so that we can make the trade-offs between the marriage penalty, between R&D, between capital gains, between Portman-Cardin, between whatever you want to put in it. But until we reach that point, we are being asked to vote on tax measures that are based on ten-year projections phased in over five or six years, and that is a very, very difficult position to be in. Thank you.

Chairman THOMAS. I thank the gentleman.

Does the gentleman from Wisconsin wish to inquire?

Mr. RYAN. Yes, Mr. Chairman. I just wanted to commend my colleagues for coming here today. Hopefully, this can continue to be a bipartisan issue. I was blessed with the ability to be married three months and 19 days ago, so I would like to just voice my support for a chairman's mark that eliminates the marriage tax penalty retroactive to December 2, 2000. If that is possible, I would be for that.

But in all seriousness, I am learning how this Committee works. This is a good lesson today. I am concerned about some of the rhetoric I hear in this Committee. Hopefully, we can still work together to pass things that I think we all basically believe in, and Mr. Barcia, seeing you here today is a great thing because it tells me that in the United States Congress, in our conferences, there is broad and deep bipartisan support. It is not a Republican issue. It is not a Democratic issue. It is an issue of fairness to repeal the marriage penalty. So I hope that when this bill gets to the floor of the Congress, those principles and that support will be reflected, and thank you for your participation today.

Chairman THOMAS. Does the gentlewoman from Florida wish to inquire?

Mrs. THURMAN. Thank you, Mr. Chairman. Mr. Weller, I want to go back a little bit and let us talk about what happened last year, because I think it is important because I think we are losing or leaving out some very important steps that took place.

Last year, if I remember correctly, the total of your bill was somewhere around $283 billion. Is that about right, by the time it got to the floor?

Mr. WELLER. The conference report.

Mrs. THURMAN. Okay. And then there was a substitute that was offered on the floor for marriage tax penalty, is that right?

Mr. WELLER. You are talking about the Democratic substitute?

Mrs. THURMAN. Correct.

Mr. WELLER. Yes. The Democratic substitute only addressed marriage tax penalty for those who do not itemize. So if you are a homeowner, they would have been left out under the substitute.

Mrs. THURMAN. But some believe that it was fixing the penalty and not going beyond the penalty.

Mr. WELLER. Well, if you actually analyze that proposal, the alternative failed to help millions of middle class married couples who are homeowners, and because they are homeowners, they itemize their taxes, and the only way to help those who itemize their taxes is actually to broaden the bracket itself, and that is why we proposed broadening the 15 percent bracket so that joint filers could earn twice as much as a single filer and stay in the 15 percent bracket. That will help those who give money to church and charity. That will help those who itemize their taxes because they own a home.

Mrs. THURMAN. And point well taken, but on the other side of it, it did help us with a marriage tax penalty. I mean, you cannot deny that there was. And that was about $90 billion, if I remember correctly. This year, you have the President who has put in one for about $100 billion.

What I am concerned about is the way this debate is characterized. We could have had a marriage tax penalty bill passed and signed into law, maybe not everything you wanted, certainly not everything that everybody wanted, but one that would have done something for married couples. Mr. Barcia, would you agree with that?

Mr. BARCIA. Well, I think there is sentiment in our caucus to address some of the inequities in the marriage context.

Mrs. THURMAN. But the fact of the matter is, we got the signal from the President that, in fact, he would accept some compromise on this piece of legislation that many of us--all of the Democrats on this Committee--voted for, both in this Committee and on the floor. In fact, 198 Democrats voted for this bill on the floor to try to take care of a marriage tax penalty.

So in the spirit of bipartisanship and in the spirit of moving ahead, we could have had a bipartisan bill if we would have had some Republicans come over to the other side and help support a bill that would have gone to the President that would have been passed--

Mr. WELLER. Could I respond?

Mrs. THURMAN. And we could have been back up here this year, maybe extending it with the other tax bills, because we are all talking about brackets again. We are doing an awful lot of the same kind of thing that might have been accomplished in the bill last year.

But let me just suggest to all of us that while neither one of those bills passed, neither one of them were signed into law, the fact of the matter is, the American public still became the beneficiary of these bills not passing because we took those dollars of tax cuts that were not spent and we put them in paying down the debt. So we helped every American family in some ways.

But I just did not want it to be characterized that the marriage tax penalty was and could not be passed. This is an art of compromise. There is not a constituent in this country that does not understand that. The difference is, in bipartisanship, there becomes compromise. Bipartisanship is not just taking one side and not having another being able to participate. Thank you.

Mr. WELLER. May I respond?

Chairman THOMAS. Sure.

Mr. WELLER. Your point is well taken. I am very proud that this Congress has paid off $600 billion in national debt and we are on track to eliminate the available national debt by the end of the decade. I am proud of that and that was a great accomplishment we can all be proud of.

And as you pointed out, there was an alternative which was supported only by one party, and I would note that the proposal we have brought before the Committee today in H.R. 6 is the proposal which received bipartisan support. H.R. 6 received the votes of 51 Democrats as well as all Republicans, so you had support from both sides of the aisle under this bill. It went through the House and Senate. There were a half a dozen or so Democrats in the Senate that voted for this proposal.

So we have kind of vetted it through the process, and when it comes to marriage tax penalty, there are about 63 different consequences in the code and that consequence suffered by joint filers is the biggest marriage tax penalty and that is what we addressed, as well as the earned income credit marriage penalty, in our proposal.

So I believe that the proposal we have before you today in H.R. 6 is the bipartisan proposal, and the fact that we have 15 Democrats under the leadership of Mr. Barcia that have joined as original cosponsors of this bill, we have almost 230 members of the House cosponsoring this legislation, I think we have a tremendous opportunity with a President who said he would have signed it into law now, that he would sign H.R. 6 once we put it on his desk. So I appreciate the opportunity to discuss this. Thank you.

Chairman THOMAS. The gentlewoman's time has expired.

Does the gentleman from Texas wish to inquire?

Mr. JOHNSON OF TEXAS. Thank you, Mr. Chairman.

Chairman THOMAS. I would tell the Committee that it appears as though we have a four-vote sequence. The gentleman from Texas will probably be the last inquirer on this panel. I will make sure that the other gentleman from Texas and the gentleman from North Dakota will be the first inquirers on the next panel, and I apologize because somebody else controls the time. The fact that we have multiple members from States indicates that I was referring to the Republican following the Democrat, the gentleman from Texas, Mr. Sam Johnson.

Mr. JOHNSON OF TEXAS. Thank you, Mr. Chairman.

Mr. Brady, that is my Senator. She is yours, too, and yours too, Doug, and she is a great one and a great representative for the State.

Listen, I just want to tell you guys, we are arguing about peanuts here. What we have got is tax relief for married couples and it applies across the board. We are not trying to reduce taxes for those people who do not pay any taxes. We are trying to reduce taxes for people who pay taxes--families, people with children, husbands and wives, whether they work or not. And I think that it is something we have to do for America.

They talk about Portman-Cardin. We are going to do Portman-Cardin. It is just not in the tax bill that we are talking about today. It is not in the President's proposal that we are talking about today. We need to work with this administration, we need to work with the United States Senate, people like Senator Hutchison who can get the job done, and pass marriage penalty relief. I do not think it makes a tinker's dam whether we have a budget or not. You guys are focusing on the wrong thing. The emphasis ought to be on tax relief for the American people because we have a tax surplus out there and the people of America need their money back. Would you agree, Ms. Hutchison?

[Laughter.]

Mrs. HUTCHISON. Since you are my Congressman, I agree wholeheartedly.

[Laughter.]

Mrs. HUTCHISON. Certainly, I do appreciate so much the comments of everyone. I think that it is very clear that if there is a priority for tax relief, the inequity in the tax code should be addressed, and that is the marriage penalty tax. We are not even talking about lowering taxes. We are talking about bringing equity back into the tax code for people who get married. And I think it should be marriage penalty relief for people who are two working people getting married or for two people who are married and one spouse is staying at home raising children. We are paying too much in taxes and people deserve to have the relief, and I thank you for the support and I know this Committee is going to do what is right.

Mr. JOHNSON OF TEXAS. Thank you, Senator, and thank you, Mr. Chairman. I yield back the balance of my time.

Chairman THOMAS. I thank the gentleman.

I do want to thank this panel, especially for their perseverance. The chair will indicate that we will now go to a series of votes and the chair intends to reconvene the hearing about five minutes after the last vote has ended. The Committee stands in recess.

[Recess.]

Chairman THOMAS. The Committee will reconvene. Our guests will find their seats, and if we can find Mr. Donovan. Dr. Primus, our biorhythms are much more in tune with the Committee based on the years you spent with us. Thank you very much, Mr. Donovan.

Our next panel consists of Charles Donovan, Executive Vice President of the Family Research Council, and Wendell Primus, Director of Income Security, Center on Budget and Policy Priorities, a longtime staff member, someone who should be familiar with most of us.

With that, I would indicate to each of you that any written statements you may have will be made a part of the record and you can address us in the time that you have in any way you see fit. We will start with Mr. Donovan and then go to Dr. Primus. Dr. Donovan?

STATEMENT OF CHARLES A. DONOVAN, EXECUTIVE VIDE PRESIDENT, FAMILY RESEARCH COUNCIL

Mr. DONOVAN. Thank you, Mr. Chairman. I want to thank you and the members of the Committee for holding this hearing on marriage penalty relief. This time of year, we watch the National Collegiate Athletic Association tournament with some wonder, and one of the phrases we will undoubtedly hear is about teams that do not make it all the way to the championship game or make it and do not win the game. And the cliche that is applied to them is they are always a bridesmaid and never a bride.

I think there is some feeling with respect to marriage penalty relief that the proposals that have been advanced over the last five years qualify as bridesmaids. We have had several proposals, as Senator Hutchison outlined this morning, that have made it through the Congress and all the way to the President's desk. We believe that there is really no more urgent cause in the tax code, no more urgent need than to provide relief from this penalty for married couples.

The bill last year fits, we think, very nicely with the ambition of finding this relief for married couples, regardless of the work arrangements they may make in order to earn the income their families require. Last year during the political campaign, now-President Bush indicated that if he had been in the Oval Office when the legislation that passed Congress last year had reached his desk, that he would have signed it. He asked the rhetorical question, what kind of tax code imposes a penalty on a couple for deciding to get married, and his answer was, a bad tax code does that.

Vice President Cheney on another occasion in debate about marriage penalty relief indicated his concern that the tax code not do too much to require certain behaviors on the part of couples or individuals in order to earn a tax benefit. It is for that reason, that specific reason, that we believe that marriage penalty relief should make no distinction between and among the multifarious work arrangements that couples make in order to earn the income they need to support their household and raise their children.

There was in the middle of the 1990s a pretty considerable debate about the "mommy track," about whether or not it was better for a mother to be in the home, at what ages for the children this was best, and so forth. We believe that there ought to be a truce called in that debate, and maybe in some ways there has been. The real issue is marriage and whether or not our tax code--and it does, in fact, now--continues to provide a disincentive to marriage.

The urgency is apparent in the birth data that we continue to see. There are some 30 percent of all children who are born without benefit of a father married to the mother. When you throw in family disintegration, something like four out of ten children will face a period in their lives when they will not have a father in the home. The costs exacted on society in the well-being of children, in economic costs, in educational deficits, and there is considerable evidence with respect to delinquent behavior among adolescents, all of these things suggest that there are considerable cost impositions on the failure to deal with the need to encourage marriages to occur and to stay together. Tax policy obviously cannot do all of this, but it can do something, and the marriage penalty is the prime thing that it does.

The other reason we have to get away, in my opinion, from debates about how much and where work is performed by couples in a marriage is that in most cases, in most marriages, couples themselves go through cycles. When married, typically both husband and wife are working. Through the years in which children are born, even the data now show that the vast majority of women raise children up until age five. And the work patterns after that may vary tremendously, from part-time work to tag-team parenting, where the couple makes sure that one parent is with the child at all times. All of these things are just evidence that there is no single family model out there for work relationships and, therefore, tax relief, in our view, the elimination of the marriage penalty ought to help all couples regardless of how they make their work and family arrangements.

We would urge that there be a generous effort to relieve the marriage tax penalty, that now, in these times of budget surpluses, is the time to take this step, and that it should begin with a decisive down payment on reclamation of the two-parent married household. We believe the time to act on these measures is now and we want to express our appreciation to the Committee for its interest in debating this subject and moving it forward. Thank you, Mr. Chairman.

Chairman THOMAS. Thank you very much.

[The prepared statement of Mr. Donovan follows:]

Chairman THOMAS. Dr. Primus?

STATEMENT OF WENDELL PRIMUS, DIRECTOR, INCOME SECURITY, CENTER ON BUDGET AND POLICY PRIORITIES

Mr. PRIMUS. Thank you, Mr. Chairman and members of the Committee, for the opportunity to come back and testify today on two aspects of President Bush's tax plan, the expansion of the child tax credit and marriage penalty relief.

As you know, the President's proposal doubles the current child tax credit, but it provides no benefit to families who currently owe no income tax. It also makes eligible for the first time families with two children who have incomes between $130,000 and $300,000. Approximately 24 million children, 33.5 percent of all children in this country, would not benefit from this expansion of the child tax credit. Two-thirds of the children excluded from the expansion, almost 16 million children, live in families where earnings exceed $5,150, the amount equivalent to working half-time for the entire year at the minimum wage.

Fifty-five percent of African American children and 56 percent of Hispanic children would receive nothing from this expansion. And if you look at this by State, there are numerous States where over 40 percent of the children would not benefit, including Arizona, California, Georgia, Louisiana, New York, North Dakota, Tennessee, and Texas, for example.

A married family of $25,000 with two children gets nothing from this expansion, while such a family with $150,000 will get $2,000 from the child credit provision. This is because the President's proposal extends the child tax credit to many families with high incomes that currently receive no credit. The percentage of children left out under the Democratic proposal is significantly less, 14 percent versus 33.5 percent under the President's.

There are four reasons, Mr. Chairman, why working families that do not pay Federal income taxes should benefit from the tax legislation. The first is that in the context of a strong economy and the "make work pay" policies of EITC and child care, many single-mother families have responded to your welfare reform bill by working harder. Yet, their overall income gains have been small. They deserve an income boost.

For example, mothers in the second quintile of female-headed families, the second-to-lowest fifth, who have income between 86 and 127 percent of poverty, on average, increased their earnings by $4,600. Yet, their income only increased by $1,555. Female-headed families in the middle of that distribution, with incomes between 127 and 173 percent of poverty, also average earned about $4,550 more, yet their disposable income increased by less than 40 percent.

The second reason is that this approach fails to reduce high marginal tax rates that many of these low-income families face--and I know all the members of this Committee are concerned about high implicit marginal tax rates. A large number of low-income families that confront some of the highest marginal tax rates of any families in the nation would not have their marginal tax rates reduced as a result of this proposal. It is one of the reasons that these families are working harder but their income gains have not gone up. I have an example in the testimony from Maryland where a mother who has child care expenses and increases her earnings from $10,000 to $15,000, her marginal tax rate is 70 percent. As her earnings increase from $15,000 to $20,000, she faces a 60 percent marginal tax rate.

The third reason is that these families owe other income taxes. They also owe State income taxes, gasoline, property taxes, and sales taxes. You can fix this by making the child tax partially refundable, let us say 5 to 10 to 15 percent of earnings up to the maximum credit allowed, or you could do this by changing the EITC. Phasing the EITC out at a lower rate would alleviate some of these marginal tax problems.

Finally, Mr. Chairman, as my colleague here at the table indicated, about a third of the births in this country are to unmarried women. Half of these children now come home to a two-parent unmarried family, but most of those families have very low incomes and would not benefit from the marriage penalty relief that is in the President's proposal.

So in conclusion, what I would like to say is our analysis finds that a third of these children do not benefit, yet these families pay taxes and face high marginal tax rates. Similarly, the proposal provides no marriage penalty relief to the families that face the highest marriage penalties as a percent of income and does nothing to equalize the tax treatment of marriage and cohabitation for a family with children in the part of the income range where cohabitation rates are the highest. I would respectively urge the Committee to design alternatives that address those shortcomings.

Chairman THOMAS. Thank you very much.

[The prepared statement of Mr. Primus follows:]

Chairman THOMAS. I thank both of you for your testimony.

Mr. Donovan, I understand how you feel with your analogy, always a bridesmaid and never a bride, although I would believe that the appropriate phrase in the 106th Congress was that you were left at the altar. You were, in fact, ready to go to the wedding ceremony and were not allowed. It is my strong belief that following the November elections, we will move marriage penalty reform out of the House, out of the Senate, and present it to the President and the President will sign it.

Dr. Primus, you indicated that the President's plan is deficient in a number of areas and I want to focus in on, if you will help me, in terms of, if you will, a prioritization of where, if the Committee were to focus on adjustments or a better understanding of where the inequities are the greatest. If you looked at, for example, the marriage penalty, are you familiar with H.R. 6 in terms of the adjustment on the earned income marriage penalty aspect of H.R. 6?

Mr. PRIMUS. Yes.

Chairman THOMAS. Would that be a step in the right direction vis-a-vis the rate adjustment program of the President?

Mr. PRIMUS. My understanding, Mr. Chairman, is that particular proposal would only affect families who pay income taxes and, therefore, would not affect families who are hit by the highest marriage tax penalties because of the EITC design.

Chairman THOMAS. All right. So you are still looking for, and obviously the President has indicated that we are going to address the payroll tax question when we look at Social Security and other areas.

Let us turn to the child credit, then. If you were to pick the aspect of the President's plan that probably needs to be focused on most, what would you put as the number one concern?

Mr. PRIMUS. I would probably put as number one reducing the marginal tax rates for mothers at the beginning of the EITC phase-out, the mothers from $13,000 to about $20,000 of earnings, because they have an EITC phase-out of 21 percent. They can have their food stamps being phased out. In the case of Maryland, child care copays in the State were going up.

Chairman THOMAS. Okay. We have in current law, under the current child credit, a provision which partially adjusts on the basis of the child credit. Are there flaws with the current law adjustment?

Mr. PRIMUS. Yes, Mr. Chairman. I think it is very complicated. For one, it only applies to families, as you know, with three or more children.

Chairman THOMAS. You have been behind the scene on a lot of activities. I know this was after your time. Why was it structured to apply to families with three or more rather than families with one or two?

Mr. PRIMUS. I do not know. There was some attempt to increase the refundability of the child tax credit in 1997, but this was a very, very narrow approach to increasing that refundability. Also, it only takes into account, Mr. Chairman, the employee portion of the payroll tax, and I think all economists agree that low-income families pay both the employer's and the employee's share of those payroll taxes.

Chairman THOMAS. I think most economists would say every employee, whether they are low income or not, pay all of those costs, notwithstanding the pay stub saying that is divided.

Mr. PRIMUS. Okay. We agree.

Chairman THOMAS. So would a step toward making it fairer be to move it to any number of children rather than just above three?

Mr. PRIMUS. That would be a very small step in the right direction.

Chairman THOMAS. I understand. What other aspects of the President's proposal would you change if you could on the child credit?

Mr. PRIMUS. Well, as I indicated in my testimony, I would like to make the child tax credit partially refundable against earnings, so that, for example, if you picked a simple ten percent rate, then a mother who earned $10,000 would get ten percent of $10,000 or $1,000. If she had two children, she would not get the full credit of $2,000. But that is what I would do first with respect to the child tax credit.

Chairman THOMAS. And what would you do next?

Mr. PRIMUS. What I would do next is try to do something on the EITC. But in terms of the child tax credit, making it partially refundable, I think, is the right thing to do.

Chairman THOMAS. And then what would you do next?

Mr. PRIMUS. Then I would do some of the marriage--

Chairman THOMAS. No, on the child credit.

Mr. PRIMUS. Do something to reduce--

Chairman THOMAS. We are still on the child credit.

Mr. PRIMUS. Okay. Some have advocated full refundability. My sense is that proposal probably is not going to get the vote of a majority of this Committee. But I talked about the families that face the highest marginal tax rates, those families that have, again, responded to your welfare reform bill and are working harder. I think they need an income boost and that is for families in the $10,000 to $20,000 range. You can do that by lowering and do a kink like Mr. Cardin and others have--

Chairman THOMAS. Yes, but those are all permutations of your earlier points and I understand that, so we have exhausted the suggested changes to the President's plan as far as you are concerned?

Mr. PRIMUS. Yes.

Chairman THOMAS. Otherwise--

Mr. PRIMUS. Oh, I also--

Chairman THOMAS. We will keep it in place as he proposed it.

Mr. PRIMUS. I would not extend it to families of very high income levels. Since you have provided lots of tax relief in the rate reduction bill that has already passed the House, I am not convinced that families above $130,000 need more tax relief.

Chairman THOMAS. But that is current law, is it not?

Mr. PRIMUS. Yes. It ends at $130,000.

Chairman THOMAS. So you would not extend it beyond current law?

Mr. PRIMUS. That is correct.

Chairman THOMAS. Okay. Obviously, I want to get the input, because if we are looking at changing the President's proposal, I want to make sure, given your background knowledge and involvement, that I get an exhaustive list of changes from you so that if, in fact, we make those changes, my colleagues on the other side of the aisle will be able to readily recognize where those suggestions came from in terms of trying to fashion a package that is fairer and more equitable, and I appreciate your comments.

The gentleman from California?

Mr. STARK. Is it in order for me, Mr. Chairman, as long as we are dealing with a bill we have not seen, for me to ask unanimous consent to incorporate Dr. Primus' ideas in the bill that we will see soon?

Chairman THOMAS. The gentleman can certainly try. First of all, the chair wants to apologize to the other gentleman from Texas, because I had told him that he would be first off, and frankly, four votes and lunch blurred my memory.

Mr. STARK. Let me, then, by all means, yield to my colleague from Texas, if I may, Mr. Chairman.

Chairman THOMAS. I appreciate the gentleman allowing me to honor the commitment that I made to him and to his colleague, but since his colleague is not here, we only have to allow the gentleman from Texas.

Mr. STARK. I yield to him.

Mr. DOGGETT. Let me just ask, as a preface to my questions, Mr. Chairman, I understand what you said this morning about this description of the Marriage Penalty and Family Tax Relief Act, that while you would be perfecting it further through the benefit of witnesses like this, you anticipate that the subjects that will be included in the bill we will mark up in a few hours would be limited to the five that are included in the description?

Chairman THOMAS. I will tell the gentleman, a few hours means tomorrow--

Mr. DOGGETT. Yes, sir.

Chairman THOMAS. And my characterization of tomorrow is one I prefer rather than a few hours.

Mr. DOGGETT. Tomorrow, then.

Chairman THOMAS. Yes. I will tell the gentleman that he is substantially correct, with the exceptions of testimony that may allow us to make some adjustments that would make the package more relevant.

Mr. DOGGETT. On the same subjects?

Chairman THOMAS. Exactly.

Mr. DOGGETT. We are not getting into--

Chairman THOMAS. That is correct.

Mr. DOGGETT. Retirement or estate tax or capital gains tomorrow?

Chairman THOMAS. No, that is correct.

Mr. DOGGETT. Just these? Okay.

Chairman THOMAS. The base text will be H.R. 6, as adjusted with a child credit, subject to modification based upon the excellent testimony of the witnesses.

Mr. DOGGETT. I understand and thank you for your clarification.

Mr. Donovan, our colleague, Mr. Weller, made clear earlier this morning that he found the proposal by President Bush on the marriage penalty to be deficient, but as I read your written testimony, it is much stronger than your testimony you just gave us. In no uncertain terms, you condemn President Bush's proposal on marriage tax penalty and, in your words, say that it is so bad that "it would be better to do nothing about the marriage penalty than to do this." Does that written testimony still reflect your position, sir?

Mr. DONOVAN. That is my written testimony. Let me state our views on the bill overall.

Mr. DOGGETT. Well, does that reflect your views, since my time is limited? You stick by your written testimony that his proposal is so bad that it would be better to do nothing than to adopt the Bush proposal, is that correct?

Mr. DONOVAN. The deficiency in the proposal is that--

Mr. DOGGETT. Well, let me just ask you if it is correct or not, your written testimony.

Mr. DONOVAN. I have stated that that is my testimony and--

Mr. DOGGETT. I appreciate it.

Mr. DONOVAN. I need to give to the Committee the words around it, if I may.

Mr. DOGGETT. I want to ask you one further question to clarify that, then. Is it your feeling, coming as someone who has been married myself now for 32 years and has an appreciation for the institution of marriage, that the institution of marriage is so important that we should, in writing our tax laws, seek to discriminate against those who are not married?

Mr. DONOVAN. I think that we should provide tax relief to the American people.

Mr. DOGGETT. Do you believe that our--just tell me. I understand you may want to elaborate to other members, but do you or do you not believe that we should discriminate as we write our tax laws against those people that do not have the good fortune, such as myself, to have been married, in my case, 32 years?

Mr. DONOVAN. Congressman, I think that married people and the children they raise, if they raise them successfully, they provide a wealth of benefits to single people, including paying for the Social Security benefits of that rising generation to whom a non-married person with no children does not.

Mr. DOGGETT. I could not agree with you more.

Mr. DONOVAN. I think that there is no discrimination--

Mr. DOGGETT. I could not agree with you more that families who--

Mr. DONOVAN. As a result of policies that favor families with children.

Mr. DOGGETT. Yes, sir. Reclaiming my time, I could not agree with you more that married families contribute greatly to our society, and I take your answer, then, to be that you do think that it is appropriate in designing our tax laws that we should discriminate against those people who are not married.

Mr. DONOVAN. I believe that we should provide preferences for families with children to raise their children, yes.

Mr. DOGGETT. A preference to me as a married person means that someone who does not enjoy my good fortune is taxed at a higher rate, and as you know, there are many single individuals who are taxed at a higher rate, and if we adopt the proposal that you advance, we will discriminate against them even more. And my feeling, Mr. Donovan, is that a widower, an abused and abandoned spouse, someone who is single by choice, might well contribute as much as someone who is married, that a single mom who is out there who is trying to make ends meet and who is single through no fault of her own and has kids to support and is working and trying to get them through school and do the job of two parents, does not deserve to have to pay higher taxes and be discriminated against just because of your belief and my belief in the value of the institution of marriage and all that it contributes to our society.

But that is one of the problems that I have had with the bills that have been introduced, is that they are not written on a neutral basis because groups such as yours are so committed to the institution of marriage that they are willing to have our tax laws written deliberately to be discriminatory against single individuals in our society and, in fact, at the conclusion--

Chairman THOMAS. The gentleman's time has expired, but go ahead and finish your sentence.

Mr. DOGGETT. It was a mighty fast five minutes. In my district, in Travis County, Austin, Texas--

Chairman THOMAS. Time goes fast when you are having fun.

Mr. DOGGETT. It does.

In Austin, Texas, I actually have more individuals who stand to not gain and be potential beneficiaries from this proposal, who are either divorced, separated, widowed, or live as single individuals, than those who do not. And it seems to me that the goal ought to be to treat everyone equitably and fairly without regard to their choice of being married or not being married. Thank you.

Chairman THOMAS. The gentleman's time has completely expired.

Does the gentleman from Florida wish to inquire?

Mr. SHAW. Thank you, Mr. Chairman. Wendell, it is good to welcome you back to the Committee where you spent so many years, both on the majority and the minority side as the winds of change went about changing much of that. I have always valued your opinion on many things. I count you as a friend and perhaps would characterize you as an honest liberal, and that is not an oxymoron. I think you sincerely believe what you say and you are a good advocate for it, and I think you make a lot of sense a lot of times and I enjoy your testimony. I particularly enjoy the dialogue back and forth with the chairman.

As you recall, we worked together, and I think there was good bipartisan support for the earned income credit. It was EITC back then. We have changed the name of it. But I want to be sure that the record is complete in many areas. Right now, the EIC payment, someone earning, a family with two kids earning, say, $10,000 a year, they would receive back, I think under EIC, $4,000, which is more than the payroll tax that they would pay in.

I also think the record should be clear that low-income people, because of the progressivity of the Social Security payment schedule, that they get a better deal than the high-income people when it comes to retirement and Social Security.

You are nodding yes, and I assume that I can put a "yes" in the record, that you do agree with what we are saying.

Mr. PRIMUS. Yes. They ultimately will benefit from some of those payroll tax payments.

Mr. SHAW. Now, also, is it your opinion--and this is getting a little bit out of your scope of direct testimony, but I think you are certainly qualified to answer the question--is it your opinion that if we pass these bills and put money back into the paycheck or refund, as the case may be with the EIC, that this would go a long way towards helping to stimulate the economy by putting money back into the economy? Is that your opinion, particularly at the lower income level?

Mr. PRIMUS. Yes. I appreciate all those kind words, Mr. Chairman. I am getting a little nervous about where this conversation is going.

Mr. SHAW. Oh, I think--

Mr. PRIMUS. I firmly believe, yes, that increasing the EITC--I mean, the purpose of the EITC was, as you know, to refund or rebate some of the payroll taxes at the bottom end of the income distribution, but it was also--

Mr. SHAW. It was also to reward work.

Mr. PRIMUS. To give an earnings supplement. Rather than increasing the minimum wage, the Congress made decisions that said--because sometimes an increase has adverse employment effects--the right way to help low-income wage earners was through the EITC, which then became an earnings supplement and an alternative way of rewarding their wages, if you will.

And just because that says they should not be paying Federal income taxes does not necessarily mean that these families should not get some benefit from the expansion of the child tax credit.

Mr. SHAW. In other words, then, if you go back to the minutes of the meetings that we had and the hearings that we had, the purpose, I believe, as it was framed, was to reward work. And I think that the Human Resources Subcommittee did an awful lot of work back then in seeing that that happened.

I do have one simple question that I would like a yes or no from you. I just want to get it on the record. Is welfare reform a success, yes or no?

Mr. PRIMUS. For some mothers, yes; for others, no.

Mr. SHAW. That is a yes or no, I guess.

Mr. PRIMUS. I also think that is pretty close to the truth.

Mr. SHAW. Well, I think all of us know that overall it has been a tremendous success in getting people off the welfare rolls, getting them to take control of their life and getting them on the track towards a better life. Even though it may be a struggle for some at the beginning, at least it is a beginning for all. And I think that you would agree with that.

Mr. PRIMUS. Yes. And as I said in my testimony, I mean quite amazingly, these mothers are earning a lot more money. More of them have gone into the labor force. But the other effect is they are not getting as much of increased earnings reflected in their income gains as I think you and I would like to see. I mean, if you earn an additional $4,500 but only get $1,500 more in income, that is not a very good return for all that extra earnings.

Mr. SHAW. Well, at least it is earnings and it is productivity, and it has really tremendously done a lot for the self-esteem of particularly these single moms out there that were really at the bottom rung of the economic ladder as well as the ladder of self-esteem.

Thank you, Mr. Chairman. I yield back.

Chairman THOMAS. I thank the gentleman.

The gentleman from California, Mr. Stark. Thank you for your courtesy.

Mr. STARK. Certainly. I have been taking a back seat to some Texans here. I would like to talk to my colleague from Texas, Mr. Doggett. I refuse to take a back seat any longer. I presume that if he is going to get credit from Mr. Donovan's organization for being married, I then would get three or four times the credit that he is getting. And if this is a linear sort of thing, I probably then should get three or four times the tax credit. I like that idea.

Wendell, your appendix suggests that, if I read it correctly, you talk about non-beneficiaries of the tax cut proposals, which I presume are those before us. Do you include in that table a combination of both the earned income tax credit and the marriage penalty? Is this a compendium or is it only one of those two?

Mr. PRIMUS. It reflects the President's proposal of the child expansion, the marriage penalty, et cetera. It reflects all of the President's proposals.

Mr. STARK. Okay. So what you are telling me is that under the President's proposal, there would be 24,148,000 children who would not benefit from this proposal. How many children are there?

Mr. PRIMUS. About 71 million.

Mr. STARK. So more than a third of the children in the United States would receive no benefit from either of these or the combination of these proposals.

Now, to be bipartisan, under our Democratic proposal there would be almost 10 million who would not also, so that this is not--but it remains that more than two and a half times more children would be left out of this.

Now, can you characterize for me, if it isn't a random selection, who are those 71 million children that this bill would discriminate against?

Mr. PRIMUS. Well, most of those, I think about 80 percent of the children excluded, have an earner. Two-thirds have an earner who is earning at least half-time.

Mr. STARK. Excuse me. Have an earner? You mean one--

Mr. PRIMUS. Have some earnings in that family where the child resides.

Mr. STARK. Okay.

Mr. PRIMUS. Two-thirds of those children excluded, again, 16 million, reside in families that earn more than half time, full year, at minimum wage. So these families have earners and have substantial amounts of earnings.

Mr. STARK. Could you bracket that? I mean, 20, 30, 40? How much earnings? I am trying to get a picture of--

Mr. PRIMUS. Well, they clearly have earnings between 5,150 and--where they start to pay Federal income taxes. That range of income, if you will, is where two-thirds of the children excluded reside.

Mr. STARK. So under 25,000 bucks.

Mr. PRIMUS. Yes.

Mr. STARK. I guess that is what I am getting at.

Mr. PRIMUS. That is the right number for a family of--a married family with two children, approximately.

Mr. STARK. So basically we are leaving out of our--in this bill, and would the suggestions that you made to the chairman alter that? I know this is a rough cut, but if we are leaving out 24 million children in the lowest-income group of Americans, just to save them the embarrassment of giving all this money to the richest couple of thousand if we got rid of the death tax, how could we save the Republicans from themselves and allow them to do something for the lower-income children? Would your suggestions to the chairman take care of that?

Mr. PRIMUS. Well, obviously, the suggestion that says make the credit partially refundable against earnings would only leave out then the children where the household doesn't earn a thing. And that is a very small percentage; probably 20 percent of the children now left out would be left out if you made the credit partially refunded against earings. Obviously, then, if you start the credit at higher income levels or make it partially refundable at higher income levels, that percentage, as you can see from the Democratic alternative, which really targeted families at about $8,000 and higher, roughly, left out 14 million children.

Mr. STARK. Mr. Donovan, do you think Mr. Primus' idea is good?

Mr. DONOVAN. To be honest with you, I haven't studied that proposal. I would like to read his testimony and have a chance to respond in writing.

Chairman THOMAS. The gentleman's mike is not on. It is hard to hear the response.

Mr. STARK. He is not familiar with it.

Thank you, Mr. Chairman.

Chairman THOMAS. Thank you.

Does the gentleman from Louisiana wish to inquire?

Mr. MCCRERY. Yes. Thank you, Mr. Chairman.

I will put this question to both of you. What do you think the purpose of the child tax credit is? Why do we have a child tax credit? Mr. Donovan?

Mr. DONOVAN. I believe the child tax credit is appropriate recognition of the important investment that society and parents make in their children. It is a recognition of the extreme costs of raising a child in the world today, from providing food and shelter, the traditional things, and also the expectations these days that children will have the best of education, and parents are responsible, first and foremost, for providing that. Five hundred dollars is not a huge step in that direction for most parents.

Mr. MCCRERY. Do you agree with that, Dr. Primus?

Mr. PRIMUS. Yes, I think the rationale, as the President has said, it is not just simply tax relief, but to help families rear and support their children. I think it is an important public function to help families raise their children.

Mr. MCCRERY. I agree, and I also agree with your statement, Mr. Donovan and Dr. Primus, of the rationale for the public policy of the child tax credit. And if that is the rationale, then it seems to me, Mr. Chairman, that this Committee ought to try to give that advantage in the tax code to everybody that has children that pays taxes, whether it is income tax or payroll tax. And so I think that our friends on the other side of the aisle and Dr. Primus make some good points. And I would hope that this Committee could maybe look at the President's proposal and massage it a little bit to make sure that that sound public policy of helping people to rear their kids is extended to all parents with children who pay taxes.

Thank you.

Chairman THOMAS. I thank the gentleman.

Does the gentleman from Pennsylvania, Mr. Coyne, wish to inquire?

Mr. COYNE. Thank you, Mr. Chairman.

Dr. Primus, you may have given this statistic, but I guess it would be worth repeating. How many more low- and moderate-income families would receive benefits in earned income tax credit under the Democratic alternative than under President Bush's plan? Do you have those figures?

Mr. PRIMUS. Because you do all of your additional tax relief at the bottom through the EITC, that difference is approximately 10 million children.

Mr. COYNE. Ten million more children would receive the benefit--

Mr. PRIMUS. No, no. Fourteen million more children.

Mr. COYNE. Would receive the benefit than under President Bush's plan. Thank you.

Chairman THOMAS. I thank the gentleman.

Does the gentleman from Michigan, Mr. Camp, wish to inquire?

Mr. CAMP. Thank you, Mr. Chairman.

Either Mr. Donovan or Mr. Primus, can you talk a little bit, if you are able to, about the ability of the IRS to administer a refundable child tax credit? And have you done any research or do you have any information on the ability to keep that program with integrity and to make sure that it does really get to the people who need it and deserve it?

Mr. PRIMUS. I think the IRS is capable of administrating a refundable child tax credit. Most of those families do get some benefit from the EITC. We can always try to do a better job, but there is no doubt in my mind that the IRS could administer a refundable, as Congressman McCrery indicated, credit that gave some relief to all families who paid income or payroll taxes.

Mr. CAMP. Have you done any research or any studying on that area? I realize your supposition, you think they can do it. Is there anything you have examined that would support that, or have you--

Mr. PRIMUS. Well, they do administer the refundable credit of the EITC, which--

Mr. CAMP. And there are problems with that in administering it, would you agree?

Mr. PRIMUS. And there are some problems with that.

Mr. CAMP. So why would this not be any different?

Mr. PRIMUS. I think the major problem in the earned income tax credit is which family should receive tax relief because of a child. There are some very complicated provisions of the EITC.

For example, in a household with three generations, let's say a grandmother makes $25,000, but the mother makes $15,000, and they would file separate returns today. The EITC doesn't go to the mother. She is ineligible for the EITC because it is supposed to go to the grandmother in that household. So that is one example.

So I think there are ways that some of the very complex rules surrounding the EITC--the Treasury has put forward some proposals that--for example, lots of time non-custodial parents are taking advantage, of the EITC when they are eligible. We could make sure that doesn't happen by matching IRS information against the child support registry data and immediately calling it a math error and adjusting the return. I think those are some of the provisions that would reduce the EITC error rate considerably.

Mr. CAMP. That would assume any parent paying support doesn't have custody, which isn't always the case. The registry doesn't distinguish in terms of where the child is physically living. But I understand your point and--

Mr. PRIMUS. In most cases, I wouldn't expect a parent who has custodial status--you know, where the kid is residing with that parent, shouldn't be paying child support. I mean, either there is something wrong with the child support system then where the dad is paying child support to himself because the kid is residing with him. That doesn't make sense.

Mr. CAMP. Well, in a lot of the joint custodial relationships now, that is different. Anyway, I know my time--Mr. Donovan, any comment on the refundability of the child tax credit and its--

Mr. DONOVAN. No, I have no data on the difficulty in applying it. I know that there has been some error. We do support refundability against Social Security taxes, both employer and employee.

Mr. CAMP. All right. Thank you.

Thank you, Mr. Chairman.

Chairman THOMAS. I would just interject briefly. It seems to me that--and I agree with the gentleman from Michigan that there has been an error rate problem with the earned income credit. But I think that is largely to the extent of the fact that a number of these people have multiple employers and that it is the flow of income and that, as a matter of fact, in any system that says you get more relief if you claim more income, whether you actually make it or not, there is a perverse incentive there.

But in dealing with the child credit, I think everyone would have to agree that the determination of whether or not there is a child is an easier determination in which to verify, much the same as indicating that you are filing married jointly. No one would do that now because of the penalty. But, in fact, they may want to file separately, notwithstanding the fact that they may, in fact, be married.

Both of those, I think, are far easier to detect if someone is trying to commit fraud on a tax form. It is a question of degree, but I believe we are pushing the argument quite a ways if we are dealing with the child credit or marriage penalty, as opposed to falsifying income for the purpose of actually getting more back, claiming that you made more than you actually did. That to me is the real perversity of the earned income credit in terms of the way in which you can defraud the system.

Does the gentleman from Massachusetts wish to inquire? Mr. Neal?

Mr. NEAL. Thank you, Mr. Chairman.

Dr. Primus, I had an opportunity to talk with President Bush about a month ago about the AMT issue, and he described it as "a huge problem." Based upon the chairman's bill here, do you think that there is any legitimacy to the argument that the same benefit that is being promised in the bill will actually be denied based upon implementation?

Mr. PRIMUS. I think the issue of the AMT is a huge problem. My understanding from the Joint Tax Committee is that about 1.5 million taxpayers are hit this year, and under current law that goes up to 21 million by the year 2011, and that the President's proposal increases that an additional 15 million or so.

I know that in the bill that passed the Committee and was taken up by the full House, there were some provisions to address that. But my understanding is those provisions made very small differences in the number of families who would be affected by the AMT.

Mr. NEAL. Let me follow up on that. As I understand it, and perhaps as you understand it, the bill that passed the Committee here continues the current law waiver of AMT limitations for the child credit but not for other non-refundable credits such as the education credits.

Is it possible that a family with children in college would actually find their taxes going up next year compared to their taxes in 2001?

Mr. PRIMUS. Yes. Again, many families in this situation currently can use the full amount of the education credits, the HOPE and the lifetime learning credit, if they have two children in college. But if you don't continue this waiver, their taxes will go up.

Mr. NEAL. My interest here, once again, is not in trying to draw any partisan fire on this issue as much as it is to acknowledge that the President is right that it represents a huge problem. And as much as we have discussed it here, I don't think any of us really like the solution offered to date.

Mr. PRIMUS. Right. I think you know all this very well. The alternative minimum tax was set up to make sure that some very high income families wouldn't take undue advantage of tax preferences. It was supposed to affect a very narrow band of high-income families.

I don't believe the majority or the minority on this Committee is going to let the AMT affect millions and millions of families, which means they have to do two calculations.

Mr. NEAL. Thank you, Mr. Chairman.

Chairman THOMAS. Not only new calculations but to spend money to make sure that people do not fall into the trap of the AMT, which was exacerbated in the 1993 tax bill and which we have not addressed, and now discovering in giving people tax relief, in fact, on the back side, they will not be getting that relief. And I can assure you as we move these different pieces of legislation, we will do our best to include provisions beyond the one mentioned to hold those individuals harmless until we can sit down and fundamentally address the problem of the alternative minimum tax.

But no one, no new individuals, if we can help it, should fall into the alternative minimum tax by virtue of the tax relief packages that we will be moving through, whether it is the marriage penalty, child credit, or any other area of tax relief.

Does the gentleman from Minnesota wish to inquire?

Mr. RAMSTAD. Thank you, Mr. Chairman. Just very briefly.

Good to see you again, Dr. Primus and Mr. Donovan. I liked Mr. Shaw's characterization of the honest liberal, and I think it is healthy when a honest liberal and an honest conservative are showing such a concurrence of views on some very important elements of our tax relief that we are trying to get to the American people. And I think that reflects the bipartisan nature of this tax relief. Certainly that was reflected in the vote last year on the bill to eliminated the marriage penalty, to phase it out, a large number of people from the other side, members from the other side of the aisle.

I wanted to thank you particularly, Mr. Donovan, for the work that you and your organization have done. It will benefit 80,000 couples in my 3rd Congressional District of Minnesota, 80,000 married couples right now paying an average of $1,400 more in taxes. So I appreciate Mr. Weller's leadership on the panel and certainly your organization's efforts as well.

I just want to take a minute to respond to the colloquy, Dr. Primus, that you had with Mr. Shaw on welfare reform, just one minute.

That question, I think, was best answered, for me at least, not in the statistic that, in fact, 49 percent fewer people are on the welfare rolls nationally--in Minnesota, it is a little less, 40 percent fewer welfare recipients than before welfare reform. But that was answered for me up close, anecdotally, by a former welfare mother who became a friend of mine through a group I go to every week to stay sober, a group of recovering people. And she was a very diehard opponent of welfare reform: What are you doing? I have two children and you can't take this welfare away.

At Christmas and Hanukkah season, I was back home at this meeting, and she came up to me and was very, very warm and jubilant. And I said, What has gotten into you? And she said, I just want to thank you for welfare reform; because of it, I have a job now, I am not on welfare. I was able to learn computer skills, and for the first time since my kids started school, they didn't wear hand-me-downs the first day of classes in September. I went to Target and got them clothes, and I am making more money than I ever thought possible.

You could just see the dignity, I could just see the dignity and self-worth, self-respect. So, for me, that is a resounding yes, and I am glad to see at least partially, Dr. Primus--and I have always appreciated your views even though they diverge with mine on some of the issues. But I respect you and appreciate your honest answer to that question of Mr. Shaw's. I just couldn't let the opportunity go by without addressing that.

Thank you again, both of you, for your input here today, and I appreciate, as I said, the concurrence of your views, surprisingly, on some of the very important issues that this bipartisan tax relief package addresses.

Thank you. I yield back, Mr. Chairman.

Chairman THOMAS. I thank the gentleman.

Does the gentlewoman from Washington wish to inquire?

Ms. DUNN. Thank you very much, Mr. Chairman. And I, too, want to applaud Mr. Weller for the good work he has done on keeping the importance of the marriage penalty before us in what has turned out to be a very positive era where we have the dollars that we can do this thing, this right thing, and we can do it in the right way.

A point on welfare reform. Having served on that Committee, having helped to write that legislation, I am absolutely delighted in the results it has had over the last few years. We took great care as we were writing welfare reform to make sure that we considered how we could be helpful in moving women from welfare into work. And now as we consider the reauthorization of that bill, we have a chance to observe, as I have done over the years in meeting with welfare moms and dads, to find out what is going right and what may not be going right with this legislation. We have a chance now to make sure that nobody falls through the cracks on welfare reform.

But I guess I am most grateful to Mr. Weller because he has been persistent on this issue, and at many points he could have phased out his support. It will be because of him--Mr. Weller--that we will have been successful at the time that we pass this off the floor of the House. I think myself personally that it is time we honor marriage, not tax it.

I yield back.

Chairman THOMAS. I thank the gentlewoman.

Does the gentlewoman from Florida wish to inquire?

Mrs. THURMAN. Thank you, Mr. Chairman.

I am sorry to both of you that I missed the opening statements and obviously some exchanges that happened here. But, Dr. Primus, I just have one question. We are a political body, and we all have to go back home, and we have to explain to our constituents why we did or did not vote for something. And I found your Table 1 very interesting, particularly as it relates to each State, and particularly the amount of children that would or would not be in it.

And you may have gone over this in your testimony, and I hope that my colleagues will just let me ask you to kind of walk us through here and give us an idea of, as we put a bill together, what is--how do we make the largest impact on children with families so generally all children would be covered?

Mr. PRIMUS. Well, Congresswoman, as that table shows, in the State of Florida 1.2 million children, or thereabouts, would not benefit from the expansion of the child tax credit or even the lowering of the income tax rate because those children live in families that don't pay income taxes. And most of those children would have an earner. Obviously, under a proposal that started to give those families something as they started to earn money, that number would shrink. And under the Democratic proposals in Florida, it shrunk to 462,000; or thereabouts, from 35 percent of kids to 13 percent of kids.

Mrs. THURMAN. Is this proposal on all of the tax issues or any one in particular? Is this the marriage tax? Is this the bracket change or the marginal--I mean, does this include everything that has been talked about or--

Mr. PRIMUS. It includes everything that has been talked about as it affects children or families with children. So it is not looking at couples without children, et cetera. It is saying 1.2 million children in Florida don't get any help from the way the President's tax proposals are designed.

Mrs. THURMAN. Okay.

Mr. PRIMUS. And you can do something about that, and as I have indicated in the colloquy with Mr. Shaw, a lot of these mothers are working harder. And even though their earnings have gone up $4,500 on average, their income only went up $1,500. I think, they deserve an income boost. They deserve help in raising their children. They have done what you wanted them to do, in essence, but they didn't get much of an increase in income.

Mrs. THURMAN. And these would be some of the same children that have lost some of their medical benefits, other areas that we would be very concerned about.

I just might let the Committee know that I was actually in Tallahassee on Monday. We have a Federal-State summit, and I found something very interesting, that they have asked for a waiver from Medicaid, and that was to allow the State employees of that State to participate in the CHIP program because they actually would meet the financial criteria that we have set for children for medical services. So, you know, here is an idea that if some of this was given back, they would have an opportunity to buy some of that insurance, do some of the things that we are asking them to do that we have actually taken away from them in the past.

So, Dr. Primus, thank you very much.

Chairman THOMAS. I would tell the gentlelady, perhaps she wasn't here when the Chair invited Dr. Primus to indicate where he thought changes could be made. He indicated that he thought the current law upper-income level was more appropriate than the President's proposal. Obviously, as has been discussed a number of times, that child credit shouldn't apply just to income but it should apply to other taxes, such as payroll tax offset. And I inquired about the current law in terms of low income, which sets it at three or more children, and that I asked him why it was not one or two. We didn't really have a good answer and that it seems to me we will be looking at the question of why not have it apply to the first child, second child, and so on.

So he has provided a number of options for us to examine any child credit program, to perfect a program to address the concerns the gentlewoman has indicated, and a number of other colleagues on your side.

Mrs. THURMAN. Mr. Chairman, would that also include some of the issues--I know that it has been stated that even in the earned income tax credit, the marriage penalty was also included, I think, even in Mr. Weller's and all of the others. So as we put this bill together tomorrow, those would be considerations?

Chairman THOMAS. We would be looking for adjustments in that area as well, always mindful that we are going to have to, as the gentlewoman well knows, pay down the AMT cost so that people would not find the insidious aspect of getting a tax reduction but, in fact, on the alternative minimum tax winding up paying more.

Mrs. THURMAN. Well, Mr. Chairman, I believe we have moved a long way, then.

Chairman THOMAS. I believe that is one of the reasons we have hearings, notwithstanding the reaction of my colleagues earlier, to hear testimony which may, in fact, produce the product that will be before us shortly.

The gentleman from Illinois I know wants to inquire.

Mr. WELLER. Thank you, Mr. Chairman, and thank you for conducting this hearing today as we talk about discrimination in the tax code, particularly as it affects married couples. I note with some interest some of the comments by some of my colleagues to talk about if we pass legislation to eliminate the marriage tax penalty, somehow that discriminates against single people. Well, today under our tax code, if two single people choose to get married, they are going to pay higher taxes as joint filers; whereas, if they stay single, they pay less in taxes. So, clearly, our tax code today discriminates against married couples, and we, of course, are looking today for solutions to eliminate that penalty on families who work and suffer the marriage tax penalty.

I have a couple of questions I would like to ask, Mr. Chairman. First, I would like to direct my first question to Dr. Primus.

Dr. Primus, you noted in your testimony that legislation that we sent to the President last year that President Clinton vetoed addressed the marriage penalty that earned income tax credit participants participate in. Are you familiar with H.R. 6, the legislation that we reintroduced this year, which is modeled after that legislation?

Mr. PRIMUS. Yes, somewhat.

Mr. WELLER. Okay. Well, we adjust for joint filers for the EIC, we adjust the income threshold by $2,000, which eliminates that marriage tax penalty.

Based on your expertise, for those who suffer the marriage tax penalty under the EIC, what would that mean in change in their income, making that adjustment in the income threshold?

Mr. PRIMUS. Well, it doesn't eliminate the marriage tax penalty. It lowers it. When you expand the phase-out by about $2,000, you are lowering that marriage tax penalty by about $400, which is $2,000 times the phase-out rate of 21 percent.

Mr. WELLER. It would mean an additional $400 a year.

Mr. PRIMUS. That is right.

Mr. WELLER. In income for that married couple.

Mr. PRIMUS. That is right.

Mr. WELLER. Thank you.

Mr. Donovan, some have said why not just double the standard deduction for joint filers to twice that for singles as a solution to the marriage tax penalty and forget about the other things. You know, if we were solely to double the standard deduction which is used by those who do not itemize, it would not affect those who itemize their taxes.

From your perspective and your organization, what are the benefits of widening the 15 percent bracket as we propose in H.R. 6 to married couples who suffer the marriage tax penalty? Who would benefit directly, and what would be the benefit?

Mr. DONOVAN. Well, it would certainly benefit a large number of families who may have just acquired a home, which is probably the first significant step they have taken financially since getting married. They work hard to get to that place in life. The expansion of that bracket is not going to help upper-income families in any way, shape, or form.

I was asked earlier about discrimination between single people and married couples. The most dramatic difference between being single and being married is the number of people you have to care for. The typical family earning the median income or up to $50,000 or $60,000 a year is caring for three or four people, not one person. If you look at in terms of the tax relief they would get by expanding that 15 percent tax bracket, on a per capita basis they are probably still paying more taxes than a single person.

So we believe it is essential to reach a large swath of married couples who need the relief and also the growing group of individuals who are living together without benefit of marriage and need an incentive to marry. We would favor that. We think that tax policy ought to encourage that, not discourage it.

Mr. WELLER. What would you consider to be a typical married couple? Do you have an example that you could use which would be a typical married couple suffering the marriage tax penalty?

Mr. DONOVAN. Well, we have talked in terms of averages. The average is about a $1,400 penalty for a married couple. The median family income I believe is in the upper $30,000 range. That family has one or two children, typically. And if they were not to be assisted by this tax relief, they would incur that penalty.

Mr. WELLER. I know some have said that many of those who suffer the marriage tax penalty are rich people. I find that the average couple that usually brings the marriage penalty to my attention when I am back home are a construction worker and a school teacher making about $65,000. They have a child. They own a home. Their average marriage tax penalty is $1,400, and that is real money. Where I come from, that is a year's college tuition; $1,400 is several months' worth of car payments for many families; it is 2 to 3 months of child care at a day-care center. If both mom and dad work, many times they need day-care, and that would pay for 2 to 3 months' worth of day-care per child.

Mr. Chairman, I see my time has expired, and I do want to thank you again for conducting this hearing.

Chairman THOMAS. I thank the gentleman.

Does the gentleman from Texas, Mr. Brady, wish to inquire?

Mr. BRADY. Mr. Chairman, we have had a very thorough discussion today, and I appreciate the panelists here. But in the sake of time and the other two panels we still have to go, I would yield the balance of my time.

Chairman THOMAS. The Chair thanks the gentleman, and I do want to thank the panel. We appreciate your testimony, especially in providing very specific assistance to the Committee in suggesting some changes that would make a better package. I want to thank you very much.

At this time the Chair would ask the next panel to please come forward: Maria Coakley David, chief financial officer of the C.J. Coakley Company; Bob Stallman, president of the American Farm Bureau Federation; Frank A. Blethen, publisher of Seattle Times; Lauren Y. Detzel, who is an attorney; and I believe Margo Thorning will be with us because, unfortunately, Dr. Allen Sinai could not get out of Logan Airport because of the weather. But I would call to my colleagues' attention the materials submitted by Dr. Sinai that perhaps will be commented on.

Before I turn to the panel, however, though, I would like to recognize the gentlewoman from Washington for the introduction, a special introduction, of one of the members of the panel. The gentlewoman from Washington?

Ms. DUNN. Thank you very much, Mr. Chairman, and I welcome the panel.

Today we are going to hear from a panel of people regarding the repeal of the estate tax, better known as the death tax. Some of the members of this panel are going to tell you the story of how the death tax has begun to impact middle-income people. I think that is a story that is not often told, and the reason that I and my cosponsor, Mr. Tanner, have not chosen to take time away from this panel is because these folks can tell the story a lot better than we can. They are on the front lines. So you will be hearing something about that today.

You will hear about the death tax impact on businesses, family-held businesses, family farms, small businesses that are owned by families, and probably you will hear how current law almost totally ignores the health of these operations.

You will also hear how the compliance cost to provide for paying the death tax after the head of a household dies extracts huge amounts of money through compliance out of our economy, some say almost as much money as the death tax brings into the government itself.

So I am very grateful that we have this panel here so that you can listen with objectivity, as our Committee always does, but so you can also question these folks.

It is a particular pleasure that I introduce to you Frank Blethen who is the publisher and one of the owners of our major daily newspaper in Washington State, the Seattle Times. He has worked on this issue for a number of years. He knows the ins and outs from personal experience. He speaks on behalf of four other owners of this newspaper and on behalf of five generations of folks who have been in the same family that owns the Seattle Times.

I yield back my time, Mr. Chairman. Thank you for that opportunity.

Chairman THOMAS. I thank the gentlewoman.

I would tell each of the panel members, any written testimony that you may have will be made part of the record, and during the time that you have available to you, you can address us in any fashion you see fit.

I will start with Ms. David, and then we will simply move across the panel. And you need to turn the microphone on.

STATEMENT OF MARIA COAKLEY DAVID, CHIEF FINANCIAL OFFICER, C.J. COAKLEY COMPANY, INC., FALLS CHURCH, VIRGINIA, ON BEHALF OF THE NATIONAL FEDERATION OF INDEPENDENT BUSINESS

Ms. DAVID. Thank you, Ms. Dunn, thank you, Mr. Chairman, and thank you, members of this Committee. On behalf of the 600,000 members of the National Federation if Independent Business, NFIB, I appreciate the opportunity to present the views of small business owners on the subject of death taxes.

My name is Maria Coakley David. I have had the honor and privilege to watch the American dream unfold before my eyes. My parents founded a family business. It is known as the C.J. Coakley Company, Incorporated, which is a commercial construction company based in Falls Church, Virginia.

I have four children. My oldest is 16, and I hope that one day I will be able to pass on our family business down to our third generation.

My father and mother are first-generation Irish Americans. They started our business with 10 employees in 1962 out of the basement of our home in Arlington, Virginia. My father was laid off from his job as a plasterer at the time. I was 2 years old.

Running a family business is hard work. In fact, the likelihood of a small business passing successfully to the first generation is about 3 in 10, and passing again to the next generation is only 1 in 10.

With hard work and luck, we have built a solid, successful company, but through thick and thin, one overriding challenge has never been conquered. Its existence threatens our livelihood and the livelihood of our employees. It threatens the tax base of our community, our growth, and our ongoing charitable acts. The threat I am referring to is the death tax.

As many on this Committee know, the death tax taxes the same assets twice. As an honest citizen, I have paid taxes my whole life. Annually, I pay income taxes, employment taxes, property taxes, local taxes, Social Security taxes, Medicare taxes, and excise taxes, just to name a few. And after I pay all my taxes, I make a choice to invest these after-tax dollars into the business.

Sadly, the death tax will take away in after-tax dollars much of what we have built over the last 39 years. The death tax endangers both my family's business and the jobs of our valuable employees because much of our assets are tied up in the equipment, inventory, and other assets that are necessary to run our company. If we do not have cash assets available to pay the death tax, we will be forced to sell critical parts of the business or the entire business outright in order to cover these tax liabilities.

My experience with the death tax is extensive. I would estimate in my 17 years with our family business I have spent between 6,000 and 8,000 hours studying the estate tax law and what it is going to do to our company.

My father passed away 2-1/2 years ago. Today, my mother is 72. While I pray that she will live a long life and outlive all of us, we know that a day will come when the business must move from its first generation to the next. When that day comes, the last thing I want on my mind is a critical business decision. But today, I am left with little choice. The Federal Government demands that I visit the undertaker and the IRS within months of each other.

I have been keeping tabs on this debate over the past two decades, and I often read that only 2 percent of American taxpayers actually pay this tax. However, I have also read that 77 percent of Americans feel this is an unfair tax.

Mr. Chairman and members of the Committee, I can assure you that way more than 2 percent of Americans do pay this tax, not necessarily to the Federal Government but to lawyers, accountants, and life insurance agents. My family alone pays thousands of dollars a year in life insurance premiums to cover the liability in the event of my mother's death. Plus, I would estimate that annual legal and accounting fees cost us thousands more.

It is important to realize that this is money that is not available to be spent on growing our business, on providing better employee benefits, like better health care and better 401(k) benefits.

I know that opponents of repeal say that small business owners don't need to worry about the death tax because there is a special provision in the law to protect small businesses. Unfortunately, the small business exemption that we have on the books is useless. Very, very few people qualify. That is why NFIB and I support the full repeal, not a patchwork of reforms.

Additionally, I have heard opponents say that we should all just use insurance products to mitigate the effects of the death tax. Well, unfortunately, my father was uninsurable for many years of his life, as are countless other Americans. We have purchased a policy on my mother, but as you have heard, these products are extremely expensive.

In addition, the value of a family business is a moving target, dramatically impacted by our economy. This makes the liquidity issue that insurance addresses only a partial solution.

Personally, I would rather spend my time focusing our family company on growth, on employee benefits, and on community relationships. Since 1975, C.J. Coakley Company, Inc., has sponsored many charitable causes. One such cause was the philanthropic entity called Seton Centers, which my mother founded in 1975. This organization focuses on diagnosing and assisting children with learning disorders. We also are involved in supporting activities and scholarship at many universities, including Marymount University, Clemson University, Maryland University, and many others.

We do all of this and more because we truly are about these causes, not because a lawyer told us we could avoid taxes in doing so. For example, my brother suffered from dyslexia when he was growing up, and this was why our family was compelled to create the Seton Centers, which helps students in elementary and high schools throughout Northern Virginia.

Mr. Chairman, I hope you and the Committee will ignore the scare tactics surrounding the issue of charitable giving. Most Americans are generous to their fellow neighbors. We Americans give because we care, and, of course, we will continue to do so.

Finally, we all know that there are people out there on the other side of this issue who say we should keep the death tax. I could not disagree more. The death tax kills jobs, small business growth, and the incentive to work hard and take risk.

I implore you to stop holding family businesses hostage to the death tax. It is quite simply unfair to tax someone a second time at their death.

In closing, Mr. Chairman, I would like to strongly encourage this Committee and Congress to bury the death tax once and for all. I understand that a majority of members in the House of Representatives has expressed support for completely eliminating the death tax by cosponsoring H.R. 8, the Death Tax Elimination Act. I hope this support will translate into action in the very near future on legislation that repeals this unfair tax on small business and on the economy as a whole.

I thank the chairman of this Committee for holding this important hearing, and I thank all of you for the opportunity to present my views before you today.

[The prepared statement of Ms. David follows:]

Chairman THOMAS. Thank you very much.

Unless anyone does not believe that the American Farm Bureau does to have political acumen, it is my pleasure to introduce the national president of the American Farm Bureau from Columbus, Texas, Mr. Stallman.

STATEMENT OF BOB STALLMAN, PRESIDENT, AMERICAN FARM BUREAU FEDERATION

Mr. STALLMAN. Thank you, Mr. Chairman, distinguished Committee members. My name is Bob Stallman. I am a rice and cattle producer from Columbus, Texas, and do serve as the elected president of the American Farm Bureau Federation. Thank you for the opportunity to explain why Farm Bureau believes that the death tax should be repealed.

Eliminating death taxes is the top tax priority of the American Farm Bureau Federation. Families own 99 percent of our Nation's farms and ranches, and unless death taxes are repealed, many of these family farms are at risk.

The impact of death taxes with rates as high as 55 percent is so severe that its imposition can destroy farm businesses. When this happens, open space can be lost. Surviving family members can be displaced. Employees can lose their jobs, and rural communities can lose their economic base.

Excessive tax rates are not the only reason that death taxes are so damaging to farm and ranch operations. Farm operations are capital-intensive businesses whose assets are not easily converted to cash. In order to generate the funds that are needed to pay hefty death taxes, heirs often have to sell parts of the businesses. When parts are sold, the economic viability of the business is destroyed.

Death taxes can also affect the longevity of farm and ranch businesses while the owner is still alive. Children must decide whether or not they intend to continue the family business. When faced with the realization that their family farm may not survive death taxes, many choose to voluntarily leave farm operations. Without children interested in the business, it is common for farmers to sell. Where there are alternative uses for farmland, land is often developed for those other uses and open space is lost.

An increase in the estate tax exemption is not the answer. Only repeal can erase the burden and uncertainties of estate tax planning. Because it is often difficult to predict the future net worth of a farm or ranch operation, many farmers and ranchers feel compelled to spend money for estate planning and/or life insurance. This expense is a drain on ongoing farm operations, and for some, particularly given the economic conditions we face in agriculture today, the cost prohibits estate tax planning. Even with the best of plans, no attorney or accountant can guarantee that the plans farmers pay for will actually save their farms.

Death tax relief that targets farmers and small businesses isn't the answer either. Congress tried to provide relief to just family businesses in 1997 when it created the qualified family-owned business exemption. Even though well intended, the provision is so complicated that it is not widely used. Attempts to target death tax relief make the law even more complex and necessitate even more extensive and expensive death tax planning. Even with the best advice, estates may fail to meet eligibility criteria at death, making a bad situation even worse.

Those who support death taxes often say that the tax should not be repealed because only 1 to 2 percent of estates are subject to the tax. Farm and ranch estates pay taxes at a much higher rate than the population at large. In a 1997 report, USDA estimated that over 14 percent of our most productive farms would owe Federal death taxes. Farm Bureau considers the loss of the most productive of our Nation's farms and ranches unacceptable.

Farm Bureau supports H.R. 8, the Death Tax Elimination Act of 2001, introduced by Representatives Dunn and Tanner. The bill phases out death taxes by lowering rates 5 percent a year until death taxes are gone. The legislation offers the added benefit of doubling the exemption as a way of providing immediate relief while we wait for the phase-out to be completed.

Farm Bureau also supports H.R. 8 because it continues the stepped-up basis. This is important to farmers and ranchers because of the relationship between basis and the capital gains taxes that farmers pay. Complete elimination of stepped-up basis would impose a new, potentially huge capital gains tax on farmers and ranchers. This would occur because farmers and ranchers hold their land for as long as they are in business. Statistics show that 79 percent of a typical farmer's or rancher's assets is land that has been held for 30 years while increasing in value 6 times.

Capital gains taxes increase the price of land, making it more difficult for children to take over the farmers while their parents are still alive. The tax makes it harder for farmers to acquire land to expand so that additional family members can enter the business. In addition, capital gains taxes also make it more difficult for family members who want to keep farming to buy out their non-farming relatives who may have inherited part of the farm.

Last year, Congress passed a death tax elimination bill with Farm Bureau's support that provided a limited step-up in basis of $5.6 million per couple. If a change in basis is unavoidable, improvements in last year's bill are needed to make sure that businesses with assets that are held for long periods of time are not subject to excessive taxation. Farm Bureau recommends increasing the threshold and taking steps to make sure that taxes are not triggered on highly leveraged property at death.

Farmers and ranchers and other small businessmen are not alone in their support for death tax repeal. Last year, Congress overwhelmingly passed the Death Tax Elimination Act of 2000. This year, over half of the House has cosponsored H.R. 8. Public opinion polls consistently show that seven of ten Americans think that death taxes should be repealed. Now is the time for Congress to eliminate death taxes.

Thank you.

[The prepared statement of Mr. Stallman follows:]

Chairman THOMAS. Thank you very much, Mr. Stallman.

Mr. Blethen?

STATEMENT OF FRANK A. BLETHEN, PUBLISHER, SEATTLE TIMES, SEATTLE, WASHINGTON

Mr. BLETHEN. Thank you, Chairman Thomas.

I am the fourth-generation publisher of a 104-year-old independent, family-operated newspaper, the Seattle Times. We are the largest newspaper in the Pacific Northwest. We employ over 2,500 people. We are known as a model workplace. We have been named 9 years in a row to Working Mother magazine's top 100 list. We are one of the few employers in the Pacific Northwest with an on-site day-care center, which we started 13 years ago.

We are also known for our journalism. We won three Pulitzer Prices and were a finalist seven other times in the past decade.

We are committed to diversity and racial justice. We have one of the Nation's five most diverse newsrooms. In 1999, the Washington, D.C.-based Leadership Conference on Civil Rights awarded me the Chairperson's Award for Special Merit for my family's fight against I-200, the anti-affirmative action initiative in Washington State.

We are a values-based organization that puts our public service stewardship ahead of profits. The average public newspaper industry profit margin is more than twice what we will accept. The average industry newsroom has one employee for every 10,000 circulation. We have two. This is because, like most other independent and family businesses, we choose to invest in our company, our employees, and our community.

There are 5 family shareholders in our fourth generation and 11 in the fifth. Nine of us are actively involved. One is terminally ill, and the others are still in school.

Having worked with three generations on estate planning for 30 years, I have seen firsthand why the death tax kills most family businesses after the first generation and the rest after the second generation. I have experienced the disincentive to build the business and to create jobs.

When I started my career, the newspaper industry was dominated by locally owned newspapers that served our democracy with a wide variety of voices. Today, out of about 1,500 daily newspapers, there are fewer than 300 independents left.

During my career, I have watched the death tax kill this wonderful community service and diversity of voices by driving ownership into a handful of absentee conglomerates who worry about profit margins rather than local communities and the First Amendment.

There are other reasons independent businesses don't survive, but the root problem is clearly the death tax, a tax which takes the incentive out of investing in the business or developing competent successors.

Family newspaper owners have few choices when moving beyond the second generation and planning for the death tax. None of them are good for their employees or communities and all of them hurt job creation and investment.

My good friends, publisher Alexis Reeves and Alejandro Aguirre, will tell you the death tax is just as devastating to small- and medium-sized businesses as it is to larger companies. Alexis is a third-generation publisher of the twice weekly inner-city Afro-American newspaper, The Atlanta Daily World. She employs about 20 people. Alejandro is the second generation in the largest Spanish language newspaper in Miami. The existence of both newspapers is threatened if the death tax isn't repealed.

I urge you to ask: Why aren't there more multi-generation, independent family businesses in all industries?

In an era when we lament the corporatization and impersonalization of America, we have an ineffective tax that favors absentee public corporations over independent local ownership. Yet these disadvantaged businesses are where the bulk of living-wage job creation takes place in America.

Unfortunately, much of this job creation is currently offset by the rampant public company downsizing and layoffs hammering our national economy and our local communities today.

By repealing the death tax, you have an opportunity to repeal the one tax that would turn our tax system around to one that seeks to preserve, perpetuate, and protect independent businesses and all the jobs and investments that go with them.

Our economy is comprised of two parts: the publicly traded sector and the private, non-publicly traded sector. Federal taxes should be neutral in regards to these sectors. Unfortunately, the Federal inheritance tax is not neutral. It severely penalizes the most important sector for job creation: the private, non-publicly traded sector. And it is a tool for the publicly traded sector to competitively overwhelm and often eliminate private sector competition.

Repealing the death tax would be excellent public policy, strongly favored by a strong majority of voters. Repeal will finally level the playing field between public and private companies, and repeal will stimulate the economy by encouraging all sizes of multi-generation family businesses and entrepreneurs to grow their business through investment and job creation.

Thank you.

[The prepared statement of Mr. Blethen follows:]

Chairman THOMAS. Thank you, Mr. Blethen.

Dr. Thorning?

STATEMENT OF ALLEN SINAI, CHIEF GLOBAL ECONOMIST, CENTER FOR POLICY RESEARCH, AMERICAN COUNCIL FOR CAPITAL FORMATION, AND PRESIDENT, DECISION ECONOMICS, INC., AS PRESENTED BY MARGO THORNING, AMERICAN COUNCIL FOR CAPITAL FORMATION

Ms. THORNING. Thank you, Mr. Chairman. My name is Margo Thorning. I am the chief economist and senior vice president for the American Council for Capital Formation. For over 25 years, the ACCF has focused its attention on tax policies to encourage saving, investment, and economic growth.

Mr. Chairman, I appreciate the chance to appear before this Committee and to share with you the results of a new study which I would like to ask be included in the record, "Macroeconomic and Revenue Effects of the Elimination of the Estate Tax."

Chairman THOMAS. Without objection, and any written statements on the part of any of the witnesses will be made a part of the record.

Ms. THORNING. This new study is based on an analysis by Dr. Allen Sinai, an internationally respected macroeconomic modeler, frequent consultant to the Federal Reserve Board, and other Government agencies. The Sinai-Boston Model, which the analysis uses, includes considerable detail on the demand, the supply side, financial flows, capital flows, and other macroeconomic variables.

Using a model like Dr Sinai's, it is possible to estimate the impact of a change in tax policy on all sectors of the economy. Since I have limited time, I just want to give you the principal findings, and then I would be pleased to answer questions if you have any.

Dr. Sinai modeled five different options for estate tax repeal or reform, and the uniform conclusion is that under repeal and reform options he looked at, gross domestic product increases by a range of $90 billion to $150 billion over 8 years compared to the baseline forecast. Furthermore, job growth increases in the range of 80,000 jobs to 165,000 jobs per year compared to the baseline forecast. New business incorporations rise in the range of 45,000 a year to as much as 190,000 per year. Finally, tax receipts, excluding estate tax receipts, increase due to the stronger economy. We see higher corporate tax receipts, higher income tax receipts, more capital gains, more payroll taxes. Dr. Sinai estimates that we get back 20 cents for every dollar we lose for estate tax reductions.

One of the options he modeled, which was immediate repeal and loss of step-up in basis, actually raises revenue, total Federal tax revenues, compared to the baseline forecast.

So, in conclusion, his model allows us to glimpse the direction of change that the major variables in the economy would show if we repeal or substantially reform the death tax. And I think his model rather well captures the stories that have been told to us by Ms. David, Mr. Stallman, and Mr. Blethen.

So, with that, let me stop and I would be pleased to answer any questions.

[The prepared statement of Mr. Sinai follows:]

Chairman THOMAS. Thank you very much.

Ms. Detzel?

STATEMENT OF LAUREN Y. DETZEL, ATTORNEY, DEAN MEAD EGERTON BLOODWORTH CAPAUANO & BOZARTH, P.A., ORLANDO, FLORIDA

Ms. DETZEL. Thank you. My name is Lauren Detzel. I am an attorney from Orlando, Florida, and I have specialized in estate and tax planning for almost 25 years, and I am a former Chair of the Tax Section of the Florida Bar. I represent, among others, business owners, ranchers, citrus growers, and real estate developers, but I am here today representing the public sector for the sole purpose of bringing attention to some possible consequences of pending legislation dealing with the estate tax that may be overlooked or overshadowed by other testimony.

First, repeal may cost much more than $236 billion. While the White House administration claims that the proposed phase-out of the estate tax would cost the Federal Government $236 billion over the next 10 years, it may cost much more in lost revenue. How so?

Well, first, repeal of the gift tax will compromise the income tax because it will permit taxpayers to shift income to lower tax brackets. The present Federal gift tax system was adopted not just to supplement the estate tax, but also to preserve the integrity of the Federal income tax system. If the gift tax is repealed, the income tax will be compromised because it will permit taxpayers to give income-producing assets to others in lower income tax brackets at no gift tax cost and to reacquire the income again without tax. This will shift a heavier burden of taxes to those who work because this shifting of this tax can only be done with investment income, not earned income.

Second, continued step-up in basis for inherited assets will erode the income tax even further by allowing individuals to show low-basis assets to others who will die soon. Under current law, the income tax basis of an asset is changed to its fair market value when the owner dies. This is what has been referred to today here as a step-up in basis. Without a gift or estate tax, property owners will transfer their appreciated assets to others who will die soon and arrange fairly easily to reinherit the property in order to secure the step-up in basis. Neither the gifts to the others nor the reinheritance will be subject to gift or estate tax.

Income taxation of life insurance proceeds will have to be changed or carryover basis will be a hollow victory. Under current law, proceeds paid by reason of the death of an insured are not included in gross income. Unless this provision is repealed, individuals can move a significant portion of their wealth to life insurance policies to avoid income tax if a carryover basis system is enacted. Again, this favors those with investment type assets because this mechanism of moving assets to inside an insurance product umbrella would not be available to those owning farms, small businesses, real estate development, et cetera.

Carryover basis will represent a new complex tax system, which Congress has previously rejected. In 1976, Congress adopted a carryover basis system for inherited wealth. Four years later, and after much study and analysis, it retroactively repealed that system, in large measure because it was regarded as too complicated and because it required too much recordkeeping by taxpayers. Nothing has changed, and the same will be true today.

Widows and many others will pay more tax with a carryover basis system and no estate tax. Today, a widow may inherit assets, pay no estate tax, due to the unlimited marital deduction, and secure a complete step-up in basis and assets so that no income tax is paid either. If carryover basis is enacted, along with the repeal of the estate tax, that same widow will now pay more tax. She will pay the income tax on assets sold during her lifetime.

Widows will be adversely affected by repeal of the estate tax in other ways. In addition to the added income tax burden, widows also may likely lose in two other ways if the estate and gift tax is repealed.

First, most States allow a widow to demand a minimum share of her deceased spouse's estate, but this share can be diminished in many States by her husband making gifts at least one year before death. This doesn't occur now because that would cost a gift tax. If the barrier of gift tax is taken down, individuals who want to disinherit their spouses will be able to do so much more easily.

Second, most married persons leave their entire estate to or in trust for their surviving spouses, primarily because no estate tax has to be paid under that arrangement until the surviving spouse dies. If there is no estate tax, fewer married decedents will choose to have their entire estate dedicated to their surviving spouses.

Severe complexity will arise from a phased-in repeal of estate tax. Many of the bills would phase in repeal of the estate tax. Such proposals would represent an enormously complicated system for individuals. Each person would have to prepare new dual track wills, providing at a minimum for different dispositions of their wealth upon death, depending upon whether they or their spouses die before or after the estate tax is totally repealed. Further, many taxpayers will be forced to do planning to save estate taxes now because they can't be assured that they are going to outlive the phase-in period. And after repeal, they will have to do planning again in many cases to attempt to unwind the planning that they have to do now. So they will get to pay me now and they will get to pay me later. Also, a carryover basis system will likely require as much or more planning for individuals.

A more sensible approach should be adopted. Virtually everyone agrees that the Federal estate tax system should be improved. It shouldn't apply to small family farmers, businesses, and others whose wealth is relatively modest. Provisions currently in the code can be changed to accomplish that. What is critical is for Congress to thoroughly study the overall social, fiscal, and economic impact of any significant change to such an important part of our Nation's tax laws.

Thank you for your consideration.

[The prepared statement of Ms. Detzel follows:]

Chairman THOMAS. Thank you very much. This is the kind of panel that allows us to allow you to discuss among yourselves the arguments that are presented so that we can listen, and I appreciate the panel's willingness to present their positions.

I probably better understand Ms. Coakley David's position from a real-world situation, I guess, and, Mr. Stallman, I am little more familiar with farms and the problems especially of busting up farms and the inability to try to sell the pieces off to make them economically viable and that downturn, and I guess a family-owned newspaper.

So if the panel will allow me for my time, I would like to turn to Dr. Thorning and ask her, first of all, to respond to some of the points that Ms. Detzel made and then give Ms. Detzel an opportunity to respond back.

In the spirit of expanding on the question of repeal/not repeal, rather than some interim position, which I think most of us can envision, which would basically be raising the threshold, would you comment on the arguments that Ms. Detzel made about the complications and difficulties of repeal, Dr. Thorning?

Ms. THORNING. Thank you, Mr. Chairman. I think it is possible to get there from here, basically. I think it would be possible to repeal the tax. The issue about step-up in basis, as the point was made at the Senate Finance Committee hearing last week, if a provision were structured so that relatively small estates don't have to keep track of the cost basis of assets, you would find the middle- or higher-middle-income people with their estates being able to keep track of the cost basis of their assets, especially given the change over the past few years in the composition of those assets. More and more wealth is held in the form of equities, and it is relatively easy to keep track of the cost basis of those.

So if a provision were structured to exclude a certain amount from the estate tax, I think most people would certainly be able to keep track of the basis. So I think that the fear of complexity from giving up step-up in basis should not be a reason to say that we don't repeal the estate tax. I think it can be addressed and can be handled.

Second, with respect to the overall impact of repeal of the estate tax, the estate tax is a tax on capital, it is a tax on business. It requires enormous planning to avoid. The efficiency cost of the estate tax is probably much greater than the revenue, $30 billion a year, that is being collected.

Many of our competitors around the world, including Canada and Australia, don't have an estate tax, and they seem to function just fine. And most other countries have much lower estate tax rates.

So for what we are getting, $30 billion a year, we are spending enormous amounts wasting society's resources trying to avoid it, and as the results of Dr. Sinai show and Professor Douglas Holtz-Eakin, who is also at Syracuse University in New York, has also done some work indicating the drag that this tax has on our economy in terms of job growth and GDP growth and other economic variables.

So it seems to me we can get there from here, and we certainly ought to do it.

Chairman THOMAS. Ms. Detzel, what about it? You argued that it costs a lot of money. Dr. Thorning and others are arguing that, in fact, it doesn't lose nearly as much and there may be an adjustment. Do you want to respond to any of the points?

Ms. DETZEL. Well, let me just say--

Chairman THOMAS. Microphone, please. It is hard to hear.

Ms. DETZEL. Let me just say that if we end up with a system that is something in between a full step-up and a full carryover, we have just now made the most complicated thing we could possibly do. A lot of people will spend a lot of time planning to utilize, whether it is 1.3 or 2.8 that is currently in the Kyl bill, whatever the partial step-up is, there will be a lot of planning that will be done to utilize that step-up in basis, and that will effectively erode the carryover basis.

In addition, if we bring in carryover basis, I thought I heard one of the gentlemen dealing with family farms was against the carryover basis because of all the problems that it gives for farms, particularly debt-financed farms. We would have to bring in some very complicated, difficult provisions in order to avoid having problems with debt-financed real estate. And if you do that, then you allow--if you have an exception for debt in the carryover basis, then you are going to give planners a great opportunity to completely avoid carryover basis by simply borrowing before death.

So every one of these impacts on something else, and my point here is not to be for or against one thing or the other, but simply to recognize that we have had the estate and gift tax code for 80-some years and it is integrally related with the income tax, and we must analyze what changes we make there, what that will have on other parts of our tax code.

Chairman THOMAS. And the fact that if we, in fact, make a decision, a better decision--it is always driven by revenue to a certain extent--would be to do whatever we do fairly quickly and fairly cleanly so that people can begin to transition into the system, although that is a function of revenue available with a number of other draws.

Ms. DETZEL. I would say that the absolute worst situation for my clients is a phased-in repeal, because they absolutely have no idea what to plan. We don't have any idea what to plan right now. So I would hope that whatever it is that we are going to end up with, we would end up with it quickly.

But a phased-in repeal, most people are going to have to plan, anyway. How can you take the chance that you are not going to outlive the 8 or the 10 years? So you are going to have to plan. You are going to spend those dollars. You are going to make transfers that are irrevocable, create trusts that you can't terminate, because you really can't afford to buy life insurance products, because you can't afford not to. And then when the estate tax has phased out, you are going to do it all over again.

Chairman THOMAS. Well, my question would be to those who are in the very real-world situation of planning for that, you are planning under the current system, anyway. Is it that complicated?

Mr. BLETHEN. With all due respect, we are doing all that right now.

Chairman THOMAS. Yes.

Mr. BLETHEN. And the worst possible case is to not repeal the death tax, whether it is phase-out or immediately.

Chairman THOMAS. The idea being that you are doing all of that now and eventually you realize at some point someone won't have to do it if it is not you?

Mr. BLETHEN. And we are not only doing that, we are making decisions to not invest in our businesses and to not create jobs because of it.

Ms. DETZEL. Well, let me just say that the planning, this planning, as I am sure you all can appreciate, is ongoing. It is not something that you do, you put over in the safety deposit box, and you are done. This is something that you have to keep up with every year.

Mr. BLETHEN. I have been doing it for 30 years. I know it.

Ms. DETZEL. And so my point is that a phased-in repeal, you will have to continue to make these payments. It is not something you can just plan now and quit. You will be making these plans, paying these premiums, or paying me for practically the entire time of the phase-in.

Mr. BLETHEN. Right. But--

Ms. DETZEL. So I would say that a phased-in repeal is--

Chairman THOMAS. Let the gentleman who is living it now respond.

Mr. BLETHEN. You know, there is one consistency in all this, that the people who benefit are the insurance companies and the planners.

Chairman THOMAS. And even if it is a phase-out, it at least eventually comes to an end? Is that--

Mr. BLETHEN. Well, she is right. I mean, we have got to continue all that complexity with the phase-out. But at least there is a light at the end of the tunnel, and at least we can begin making investment decisions and decisions that will start in stimulating the economy. The sooner the phase-out, the more benefit we will get, and the more economic stimulation we will get.

Chairman THOMAS. Any last comments? My time is up.

Ms. DAVID. I would just say I would agree, and I think ideally a complete repeal immediately is the best scenario, because it stops all of this spending and all of this wasted time that business owners would prefer to invest in their employee benefits and economic growth.

Chairman THOMAS. And we would all like to pay cash for our house, too. You just have to deal with a lot of desires within a structure to try to make it as meaningful as possible, and we will take that advice.

Does the gentleman from Pennsylvania wish to inquire?

Mr. COYNE. Thank you, Mr. Chairman.

Ms. Detzel, as you know, the Democrats have proposed a $2 million per person exclusion in the proposal they have made relative to the estate tax. I wonder if you could describe who would be left if that were to be adopted. What types of payers would be left if that $2 million exemption was given?

Ms. DETZEL. Well, I am a member of the American College of Trust and Estate Council. It is an organization comprised of estate planning attorneys, and we have been monitoring this closely. You will see a number of our members who have submitted comments on this legislation on both sides of this argument for as long as it has been proposed. And I would say that we spend a fair amount of time discussing that, and I think it is a pretty good consensus by most of us estate planners around the country that if you adopted an immediate $2 million or $2.5 million per person exemption, the vast majority of our clients would be exempted from the estate tax. And that would, you know, eliminate most of the planning, most of the problems for a large part of our clients.

Mr. COYNE. Could you explain more why you estimate in your testimony that the true cost of the estate tax repeal is nearly double than was originally estimated?

Ms. DETZEL. Well, I think that there are--first of all, I think that it is very difficult to estimate. I am not an economist. It is very difficult to estimate what the estate tax revenue will be year by year. But I know that from my practice I have seen more and more over the last few years. Since we adopted the unlimited marital deduction in 1981, of course, for the first years there was a significant reduction in estate tax revenue, and those revenues have been picking up, in large part because the second spouse--that gave us a deferral of estate tax until the second spouse died. And now the second spouses are beginning to die, and so we are seeing a lot more revenue. And, of course, assets have increased in value. That has increased the revenue.

Beyond the additional estate tax that I think will probably be raised because of these factors, there is a lot of income tax to be lost. A lot of income tax to be lost. I can tell you that if we get a repeal of gift tax, a lot of my clients will pay a lot less income tax. It will be very easy to avoid paying income tax or to move income tax down to lower bracket taxpayers.

All we have to do is create a--one example, one easy example is to create a family limited partnership with my investment assets. I am the general partner. I give away the limited partnership interest to my children or other family members in lower income tax bracket. I am the general partner. I control distributions. I control the disposition of those assets entirely. But the income tax, most of the income tax flows through a partnership to its partners. And so that would go to the limited partners who are in lower income tax brackets, and I could--and the reason why that is not done now is because there is a gift tax that is associated with giving away those limited partnership interests.

So we can give those partnership interests away gift-tax-free, and then we can even get the income, if any is ever distributed to those lower bracket taxpayers, back through a gift that doesn't cost anything either. That is just one simple example of how income tax could be greatly disadvantaged by a repeal of a gift tax.

In fact, there was one statistic that was published last month or in January in Tax Notes that 70 percent of all individuals who file tax returns pay no income tax or are in the 15 percent bracket. That is 70 percent of America that can be used by the other 30 percent to reduce their income tax.

Mr. COYNE. Thank you.

Chairman THOMAS. Thank you.

Does the gentleman from Michigan wish to inquire?

Mr. CAMP. Thank you, Mr. Chairman. Thank you all for your testimony. And I understand there are differences of opinion on this issue, but when I think of lost income tax or lost estate tax revenue, it is assuming that this is the Government's money to lose. And, frankly, this is not the Government's money. It is the people's money.

So I come down on the side of trying to make sure that we preserve family-owned farms and family businesses because I think something is lost in the corporate structure that we have seen with a lot of our businesses that might have remained true to different principles or to their employees. So there is an intangible there.

Dr. Thorning, I just want to say I appreciate this report that you have brought to the Committee because the scoring that we have around here tends to show that full repeal is a large revenue loss, because we score under these very strict rules that don't really look at the real world. And so I think particularly your report is very helpful to show that employment would go up and that under some scenarios actually revenues to the Government would go up under a full repeal plan. So I appreciate that very, very much.

Mr. Stallman, do you have any comment on an exemption amount or level that you would support or feel comfortable with?

Mr. STALLMAN. Changing the exemption really doesn't address the fundamental problem that we see with the death tax. It is a tax policy that discourages saving and investment in favor of consumption, one that makes the hurdles higher for entrepreneurs to be successful who create most of the jobs in this country; and probably from our point of view, it is a tax that disproportionately and negatively impacts the most productive farms and ranches in this country.

No matter where you set an exemption, it is still going to have a definite negative impact on those most productive farms and ranches in this country who produce most of the agricultural products. And you don't do away with the burden of planning. You don't know what asset values are going to do for the future, and so you haven't really solved much of the problem. That is why we strongly support repeal of the death tax.

Mr. CAMP. I appreciate that, particularly also your comments on the fact that many agricultural assets are long-held, many have had debt, significant amounts of debt, and the distortion effects of not having a step-up in basis for those particular farms and ranches is a real problem.

Anyway, thank you all for your testimony, and I yield back the balance of my time.

Chairman THOMAS. I thank the gentleman.

Does the gentlewoman from Florida wish to inquire?

Mrs. THURMAN. Thank you, Mr. Chairman.

Mr. Stallman, and also to Ms. David, you know, last year we did have a piece of legislation, as you know, that would have gone to the President and that, in fact, would have been signed into law that would have put it at about $5 million or $4 million.

One of the things that I find interesting is that the plan that we have looked at over the years is something that is gradually going to go into effect over a 10-year period of time. We have seen what that potentially could do in damaging.

In offering something that could have gone into effect, quite frankly, I would have appreciated your support last year on that because--and I think some of your farmers and your small businesses would have appreciated that, because there are people who are now being affected in the fact that it wasn't done. And so the very same people you are here to protect may be the ones that fell or had a death in their family where this happened to them and they got no effect from any kind of a repeal in looking at this.

But in saying that, I will tell you that I would probably support that bill again. I probably cannot support the full repeal. Mr. Camp's issue about it being the people's money, he is absolutely correct. It is the people's money. But, Mr. Stallman, let me just suggest to you that one of the issues that we have been talking about on the Democratic side in the budget and something that I have looked at over the years in the agriculture area has been you come to us constantly to use the people's money to help strengthen agriculture, to do things such as research, disaster. This year you are asking--and have actually jumped up from $18 billion. So we are spending the people's money in ways that you have also asked us to do to support.

And, Ms. David, as well, if I look at all of the tax issues, we have small business tax exemptions for all kinds of things: health care, meals exemption, travel. We do a lot of things in the code today to try to, in fact, take care of those kinds of issues.

So I think that while I don't disagree--and I certainly have farmers who would be beneficiaries. Actually, one family that has come to me most recently very concerned because they can't pay the death tax of $2 million. But you know what? If this law had been in effect when we wanted it to be, they wouldn't be sitting in that situation.

So I think that is a real downfall that we are looking at in any of these proposals or what has happened, and that is the immediateness of the issue. So I would appreciate it.

Ms. Detzel, I appreciate the fact that you have come here by yourself and the only one that seems to be kind of looking at this issue all the way across the income tax part of it. And in your remarks you said there are some things we could do to put into effect something that would be beneficial for all income taxpayers. Could you expand a little bit on that for us?

Ms. DETZEL. I am sorry. What--

Mrs. THURMAN. You had just said I think in part of your testimony--

Chairman THOMAS. Ms. Detzel, would you turn your microphone on?

Mrs. THURMAN. In part of your testimony, you talked a little bit about that there were things that we might could do to help people such as your clients, and maybe you have already had this--

Ms. DETZEL. Well, I can tell you that my clients would--and I represent a very broad base of individuals from small citrus growers to very, very wealthy people in the entertainment industry in central Florida. But the majority of the clients at my firm and most of my friends who are attorneys would really like to see an immediate increase in the exemption now. And whether that is $2 million or $5 million, I don't know. But a several-million-dollar increase in the exemption is, I think, extremely important to come in now.

I am just like you. I have a number of clients that I am filing tax returns for, people who, if the bill had gone in last year, we wouldn't be paying those checks. And they are not terribly thrilled that it is taking forever to get this relief, and they would like to see the relief at the lower level, not at bringing rates down gradually for the highest taxpayers over a number of years, but let's give the exemption to the people who need it the most, the ones that are just over the $675,000 level.

So I think that my clients would like to see something done quickly and something done that increases the exemption right away.

Mrs. THURMAN. I appreciate those comments, and I know I didn't give you all a chance to respond because I needed to get this other part in, but as you can see, I think that kind of made our point. Thank you.

Chairman THOMAS. Does the gentlewoman from Washington wish to inquire?

Ms. DUNN. Thank you very much, Mr. Chairman. I am listening, and I am intrigued by your testimony, Ms. Detzel, and I just am curious. It seems to me that if you do advocate an increase in an exemption--and I didn't see that in your written testimony, but I am hearing you saying now--that all these moves that you make to sound very fraudulent are going to still occur. What is to say that they won't?

Ms. DETZEL. There are tradeoffs with all of these, okay? And I am not advocating anything in particular. I am not advocating complete repeal, a phased-out repeal, exemption increase. My testimony was to understand that with every single thing that we attempt to do, there is an impact on others. And it will be choices. What you all do all the time is make choices between things. And I simply wanted everyone to understand what was the effect of particular choices.

Ms. DUNN. Good, thank you very much.

Ms. DETZEL. So every single thing has--

Ms. DUNN. That is interesting to me. Let me ask you another question. You talk about provisions already in the Internal Revenue Code reduce or eliminate a State tax on farms and other closely-held businesses. I assume, in that one that you are referring, to the 1997 exemption, I would like to ask Mr. Blethen what he thinks about that.

Mr. BLETHEN. That was the stepped up basis that they--I am sorry.

Ms. DUNN. It was in 1997 we provided, the best of intentions, a $1.3 million exemption for family-held businesses.

Mr. BLETHEN. Oh, excuse me.

Ms. DUNN. And I am curious to hear--and certainly, the other panelists can answer too--I am curious to hear how effective that has been for you.

Mr. BLETHEN. Well, it has not been effective at all. While it would certainly benefit my family personally, it would not be very good public policy. The issue for us is one of what is the best public policy that creates economic stimulation and job creation? And when you look at the private, independent, non-publicly traded business sector, I can just use my industry as an example of why raising the exemption doesn't work.

If the IRS were to value the smallest newspaper, daily newspaper in the State of Washington, from little Ellensburg, the value would be $10 million. Family-owned newspapers in Eugene, Oregon and Bangor, Maine, at today's prices, if the family owners were to die, will probably be valued at 75 to 100 million by the IRS. Family-owned papers in Bakersfield, California, Spokane, Washington and Portland, Maine, would be valued around 200 million by the IRS. These are family businesses that all mirror what my testimony was. They have more employees than you have in public companies. They invest more. They have lower profit margins. They create jobs and they create investment. And today we all hold off on investment decisions and job creation decisions, and in our case, $200,000 a year just to pay the insurance companies and the planners so that we can have a chance of surviving another generation.

Mr. STALLMAN. As I said in my testimony, the Qualified Family-Owned Business Exemption was well intended, but the hoops you have to jump through in terms of definitions of active engagement of the owner, of the length of time the assets have to be held in production and several others, doesn't allow the flexibility you need in today's modern farming operations and family structures to make the changes you need. So it has been--hasn't been used just because of that complexity.

Ms. DUNN. In fact, between 1 and 3 percent of family-held businesses have qualified for that exemption,a nd two-thirds of them have been challenged by the IRS, so I think you make a very good point.

I am concerned about the discussion of an exemption level, and I would just mention this to Ms. Thurman, because she is interested in that, and a proposal that came out last year. Any exemption level is going to be arbitrary, and I think you start with that as a base level of unfairness.

There is, for example, in my hometown, Seattle, Washington, an $80 million company, and you would think that sounds like a wealthy company. They employ 1,000 people. It is called GM Nameplate. They are going to be forced, if we are not able to phase out this death tax, to repeal, to sell that company. And then you have to wonder, because it has happened over and over, and we all know of companies in our own communities that have been forced to sell because capital gains tax rates are lower than death tax rates and the family decides it cannot survive--

Mrs. THURMAN. Will the gentlewoman yield?

Ms. DUNN. But this is the kind of risk that we run into. Let me yield, when I am finished with my questions, to Ms. Thurman.

I would say too, as we discuss this setting arbitrary limits, people will try to stay within those limits. That is what compliance costs are all about. We are seeing compliance costs in the market right now, dollars being taken out of the private sector, to purchase life insurance policies, or to--to go to your business, Mrs. Detzel, and hire you for your services--that are huge amounts of money that aren't being used to stimulate job increase or to provide medical benefits to employees in companies. And I think we run into that danger if we don't take the opportunity we have now to phase this out.

I yield back, Mr. Chairman.

Chairman THOMAS. The gentlewoman's time has expired. We will pick you up. We have got some folks coming.

Does the gentleman from Pennsylvania, Mr. English, wish to inquire?

Mr. ENGLISH. Thank you, Mr. Chairman, I do. I am very intrigued by the testimony that this panel has presented. And, Ms. Detzel, I am curious about some of the details in your testimony, or lack thereof. You make the assertion that the--as I understand it, that the elimination of the estate and gift tax will have a significant impact on charities. And what you quote as a source on that is a New York Times article recently. Are you aware of any--and excepting that you have presented yourself not as an economist--are you aware of any economic studies that would support your position on that?

Ms. DETZEL. No, sir. And I deliberately stayed away from discussing the issue of impact on charities because it is a very controversial issue, as to whether the repeal of the estate of the gift tax will have impact on charitable giving. There are a number of different people who are commenting one way or the other. My personal viewpoint, from my own personal practice, is that the majority of charitable planning that is done in my firm is tax motivated, and whether that is what is around the country, I can't tell you. I know a number of people have commented. I know of no economic study.

Mr. ENGLISH. On that point, as I assume you are aware, Mr. Bush has also proposed some changes in the charitable tax treatment of charitable giving. Are you aware of that?

Ms. DETZEL. Yes, I am. And I guess I am a little confused, because it seems a little inconsistent to say that--

Mr. ENGLISH. Really?

Ms. DETZEL. Well, the provision in particular that says we are going to give an above-the-line deduction for income tax purposes, which generally lower brackets, we need to do that as an incentive for charitable giving. We need to give that tax incentive. But we are not recognizing that when we take away a 55 percent benefit, that that might be a disincentive. I mean, we are saying on one hand we need to give the people an incentive to make gifts, but on the other hand we take away that tax incentive.

Mr. ENGLISH. Do you think that Mr. Bush's plan might, by providing a new charitable tax incentive, be compensating for the elimination of the estate tax, and isn't that good tax policy?

Ms. DETZEL. Well, again, I am not a politician or an economist, but I can simply say that the estate tax and gift tax rates are at the top end or at 55 percent, and the loss of a gift--individuals, if they are not able to take advantage of a 55 percent deduction, they may not make the charitable gifts that they otherwise would, and whether that will be compensated or not by the other ones, I can't tell you.

Mr. ENGLISH. Ms. Detzel, let us be clear, I only brought this up because it is referenced in your testimony. So you are the one who has raised the issue of the impact on charitable giving, which apparently you are not prepared to quantify.

Dr. Thorning, have you studied this issue, and are you aware of any scholarly work on the likely economic impact on charities of the repeal of the death tax?

Ms. THORNING. Yes, Mr. English. Let me just mention that this report issued by the Joint Tax Committee on March 21st contains some good scholarly references, and I believe the implication--

Mr. ENGLISH. More scholarly than a New York Times article?

Ms. THORNING. I think so. I mean, they are citing Jim Peterba at MIT and people like that. So this Joint Tax Committee document makes the case that charitable giving might actually increase with the repeal of the death tax. Furthermore, there was a Harris Poll recently that concluded that 71 percent of the people polled said that they would increase charitable giving if the estate tax were repealed. So I think there is at least a strong possibility that charitable giving would be positively impacted by estate tax repeal, and there is no real reason to conclude that it would drop off.

Mr. ENGLISH. Now, Ms. Detzel, in your testimony, you also intimated that the repeal would likely cost more than $236 billion, and the reason being in part, you indicate that income tax revenues would actually drop because of assets being transferred to other individuals who have lower tax rates and might even be transferred offshore.

Dr. Thorning, you have analyzed this. Would you care to comment on whether that is a serious issue?

Ms. THORNING. The question of how much repeal would cost, I noticed I Ms. Detzel's testimony, she suggested that repeal might cost a trillion dollars over 10 years, as opposed to the--I think it is $266 billion dollars associated with the President's proposal. So I was wondering about that myself, and it seems to me, based on the macroeconomic analysis we have seen, for every dollar of estate tax repeal, we will probably get back at least 20 cents on the dollar. So you already shaved 50 billion off the 266 billion static revenue cost. And when you take account of other factors that may come into play, it seems to me that the case can be made that with a stronger economy and more jobs, we are likely to see something much less costly than even the static revenue estimate.

Mr. ENGLISH. Well, doctor, my time has expired, but I would recommend to all of the panelists, and in fact, all of my colleagues on the Committee, a fine thin book by a constituent of mine, Dr. Hans Senhols, now retired, formerly of Grove City College. He wrote a book a number of years ago called "Death and Taxes", which suggests that perhaps the repeal of the estate tax might actually generate even more revenue than the estate tax currently generates through increased economic activity through the balance of the tax system.

But I thank you, I thank all of you for your testimony, and I yield back, having no time, to the Chair.

Chairman THOMAS. I told you I eagerly await an autographed copy of the book.

Does the gentleman from Missouri wish to inquire?

Mr. HULSHOF. I do, and thank you, Mr. Chairman. Thank all the panelists for being here. Several of you that I have met and had a chance to converse with on other occasions, and welcome.

I am mindful, Mr. Stallman, I think, of something you said as far as the consumer-driven nature that we are as a society. Our next-door neighbors, my wife and mine, in Columbia, Missouri, they are an elderly couple. They have got this huge RV, and a bumper sticker on that RV that says, "I'm spending my kids' inheritance." And of course, they go to Florida about three months every year, probably much to the chagrin of their children, who we know as well.

Ms. Detzel, let me ask you this, and this is really more of a rhetorical question. But I am the only son of a farm family in Missouri. My parents are both healthy, alive and well, and actively engaged in farming. We have a 600-acre farm. My question would be, does my father and mother need an estate plan? And that is a rhetorical question because probably the answer you would give me would say, "Well, it depends." It depends on many things. It depends on things within the decision-making control of my parents, depends on some things out of their control. For instance, if we were to draw an arbitrary line and say that family farms up to $1.3 million and below are not subject to the death tax, a 600-acre farm at $2,000 an acre, which is not that far afield, just the farmland itself would come underneath that arbitrary figure. On the other hand, if improvements were made to that farm and it were $2,500 per acre, that same 600-acre farm would be over the exemption at $1.5 million, and really, fair market value, is something that--and again, I am using this on personal example. But, Mr. Stallman, in your situation, or any farmer's situation, there are some things completely within the control of the individual or family owning the estate, and some factors completely out of the control, including, of course, when their time on earth is gone, and some who have not put those estate plans in place.

So my real question to you is actually something that Dr. Thorning suggested, and I quoted Dr. Thorning's words, "wasting society's resources", and again, an anecdotal situation that occurred yesterday is the reason that I bring it before this Committee.

A representative of a family winery in my congressional district, second generation winery, and they are hopeful that it will be in the family to pass on to the next generation. They were very candid with me and said that they expend about between 30,000 and $50,000 a year on term life insurance, the proceeds of which would go to pay potentially the death tax. Now, I think that falls right in line with Dr. Thorning's representations, and others, who have said--Mr. Blethen, yours, that certain decisions about investments or whether to make them or not, or how to commit certain resources or not, is driven by the fact that we have this estate tax. Any comments on that, and not necessarily my family--I am not asking for a free estate plan here--

Ms. DETZEL. I have some ideas.

Mr. HULSHOF. But specifically, I mean, isn't that--in the example of my constituents say, that spending 30 to 50,000 a year in term life insurance, isn't that a waste of resources?

Ms. DETZEL. Well, I would absolutely agree, and I think that--

Chairman THOMAS. Ms. Detzel, I will have to remind you again, you need to turn the microphone on.

Ms. DETZEL. Sorry. I thought it was on. Excuse me.

I would have to say that I agree with you, and that I think that--and the worst situation that your parents would be in would be they don't know where they fall, they don't know whether they are going to outlive whatever the repeal phase-in period might be, and wouldn't they be better served by having certainty of knowing that the estate tax is either repealed, or they have some large exemption, that they know what it is going to be and be able to fall within, and not be in this world of maybe this and maybe that, so maybe I have to buy term insurance for a while.

Mr. HULSHOF. And my comment--because my time is short--I do appreciate your willingness to be here and have us think about some of these issues, but I think you have hit--really, you have come to the crux of the matter, and that is, so long as we maintain some sort of estate tax, there will always be that uncertainty. It could be that a new interstate is built alongside someone's farm and suddenly the value of that farm has skyrocketed well beyond someone's knowledge at the time that they created a estate plan. So my belief is--recognize the Chairman's tapping of the gavel--as a final comment would just be, that as long as the United States Tax Code, the Internal Revenue Code, continues to have estate taxes, there will always be that uncertainty as to whether or not a family farm or family business would come within that estate tax, and therefore, is a compelling reason, as far as this representative is, to the need to see its complete repeal.

Thank you, Mr. Chairman.

Chairman THOMAS. Thank the gentleman. Does the gentleman from North Dakota wish to inquire?

Mr. POMEROY. Yes, Mr. Chairman. I will begin by yielding 20 seconds to the gentlelady from Florida.

Mrs. THURMAN. Thank you, Mr. Pomeroy.

Back to Ms. Dunn. I just want to say first of all, we set limits on all tax bills. We always have 130, 150, 300,000, whoever, number one. And secondly, that was not an arbitrary number. It was based on the findings that it took in about 98 percent of small business farmers, which was about 2 percent of the estate tax payers, and that is how that exclusion came up, which was how the whole dialog started, small businesses and farmers.

Mr. POMEROY. I thank the gentlelady, reclaiming my time.

Mr. Stallman, good to see you again. Used to see you up there on the Ag. Committee, reminded you that it was North Dakota's three votes in that exciting Farm Bureau election that put you in as president, so I know you will be very interested in the view from the northern plains.

Actually, there are two views from rural America about repeal of the estate tax, and the minority actually sought to have another farmer on this panel, but one with a very different position than yours, one opposing repeal. And I would just--you know, there is an awful lot of loose talk about the family farm in this estate tax debate. I just would like to put it into perspective.

In 1998 about 2 percent of all estates were taxable. Of that 2 percent, 1.4 of the 2 percent had 50 percent of their assets in farmland. And so we are talking about 642 estates nationwide. Now, in your testimony, Mr. Stallman, you talked about these being the most productive farmers. You know, I don't necessarily agree that the biggest farmers are the most productive, the very, very biggest few, you talk about them producing most of the produce. They don't produce most of the produce. Most of the produce in this country is produced by family-sized farmers, whose problem is having any net worth, not having a taxable net worth at estate tax time.

I appreciate so the leadership though that you brought to your organization relative to farm program. You have asked for--actually, in January you signed a letter that indicated we ought to double ag. spending up to $18 billion a year. And your most recent position is we need $9 billion in emergency relief this year, an additional 12 billion over each of the years of the 9 years in this period, a total of 105 billion over 10 years over the baseline. I agree with you. I think we need that kind of new investment in agriculture. Unfortunately, it is not reflected in the President's budget.

And this really calls into focus, I think, what we are talking about with the tax bill. There are tradeoffs. We pass a larger tax bill, there is less we can do in other areas. Now you have said that repeal of the estate tax is your number one tax priority. Well, how does it compare to your priority of increasing the investment in agriculture along the lines that you have outlined? Would you say that building a farm bill with counter-cyclical price protection is a bigger priority for you than repealing the estate tax?

Mr. STALLMAN. We could probably debate farm policy far beyond the tolerance of the Chairman.

Mr. POMEROY. And that is why I didn't even ask you that question. I asked you a pretty straightforward one, estate tax repeal or price protection in the farm program?

Mr. STALLMAN. Well, my point would be that with respect to farm policy spending, where do those benefits go? You have a society where consumers spend the lowest amount of their disposable income of any society in the world. That is how you can--

Mr. POMEROY. In court, Mr. Stallman, we would say that is a non-responsive answer. Let us see you get one of these two priorities. I am just trying to understand your organization. Is improving the farm program your biggest priority of this Congress, or is repealing the estate tax your biggest priority of this Congress?

Mr. STALLMAN. Those are both our priorities. We don't assign rankings on those priorities.

Mr. POMEROY. So they are equal priorities. That is helpful. Let us say that the repeal, because of cost factors, would include carryover basis replacing the present stepped-up based. Under that circumstance, would you support repeal with carryover basis, or would that give you cause to look at maybe increasing the exclusion instead?

Mr. STALLMAN. Well, at the present time we are in support of the Dunn-Tanner Bill, and we don't speculate as an organization, about where we would be on particular issues or priorities until we see the legislation actually in place. We have an internal--

Mr. POMEROY. That is fair.

Mr. STALLMAN. We have an internal process--

Mr. POMEROY. Do you oppose carryover basis?

Mr. STALLMAN. Yes, we want to keep the stepped-up basis.

Mr. POMEROY. Again, to put it in perspective, I don't think the debate before this Congress is going to be repeal versus doing nothing, it is repeal versus reform. I favor a $5 million exclusion. I believe that the alternative considered will be in that range. Now, at that point in time, I mean USDA tells us 1-1/2 percent of all farms exceed 3 million. Let us take it up to 5. We are clearly dealing, in terms of the issues impacting the farmer, with the greatest issues that they face.

Now, you mentioned that the estate tax is just so doggoned unfair we ought to repeal the thing. Do you think it is--you know, I got a lot more farms being lost and inter-generational transfer being disrupted due to nursing home costs than I do impact of estate costs. Do you think it is unfair that a family farm can't pass from one generation to the other due to nursing home costs?

Mr. STALLMAN. I think anything that prevents the inter-generational transfer of a farm and ranch is probably not, quote, "fair."

Mr. POMEROY. I absolutely agree with you. So then I think we need to deal with those points of unfairness interrupting transfer, that impact the greatest number of farms. I thank the gentleman.

Chairman THOMAS. I thank the gentleman. I thank the panel. I appreciate very much--oh, I am sorry, the gentleman from Texas, Mr. Brady.

Mr. BRADY. Thank you, Mr. Chairman, especially since we have a Texan on the panel, which I personally would like to point out, I like to have Texans on every tax relief panel that we have if we get a chance. Thank you, Mr. Chairman.

Ms. Detzel, thank you for making the most articulate argument for substantial reform of the Tax Code that I have heard in some time, and thank you too for exposing the flaw in our Democratic friends' proposal. It is time for Washington to stop picking winners and losers in the Tax Code.

And under their proposal, Mr. Stallman, many of your farmers we like under that proposal, so you win.

Mr. Blethen, I am sorry, you don't fit our type, you lose. It is time for us to stop picking winners and losers in our Tax Code.

Dr. Thorning, you made a very valid point, that if we look at it economically, repealing the death tax helps grow the economy, helps create more jobs, helps create new businesses, and actually helps pay for itself. Those are pretty strong arguments.

Mr. Blethen, you made a point, or inferred one, that is real important. Today minority--the two fastest business types, minority and women-owned businesses, fastest-growing, some are building wealth the first time their generation, are now finding that they cannot pass that new wealth, those new businesses, those farms, down to their next generation. It is very critical we given them a chance, for a lot of reasons, to do that.

Mr. Stallman, you know, it is easy. One of our former Presidents, in visiting Kansas City said, "It's easy to be the farmer when you're 1,000 miles from the field. You've got a pencil for a plow." That happens here all the time, and while we talk about the cost of death tax repeal, I don't think people realize the cost to our communities when we lose our family farms. I don't think they understand, even have a clue, as how devastating it is.

And my belief is we were asking you to make priorities here, but it seems to me if maybe we would just allow farmers to compete around the world for business, you wouldn't have some of these priorities that come up here. So thank you for being a leader in this effort.

Finally, Ms. Coakley David, let me tell you my story, in one minute, Mr. Chairman. I had a nursery from our district come up here to Washington, all the way to Washington, and the two children who worked in the family nursery, had for a long time--one of the brothers didn't--but they just went through on paper how the death tax worked for them. And what they showed me, was even with the improvements we made a couple years ago, that basically, if they could afford enough life insurance, and if they could get a loan when their parents died, they might be able to keep their family nursery. Now, think what they were telling me. "If we can make enough money off our parents' death, and if we can go back into debt, which we have worked a lifetime getting out of, by the way, then we might be able to keep our own business." That is wrong, and it is terribly unfair. And people have different visions of what Washington should be, but the least, we ought to be fair to people, and our Tax Code ought to reflect that. So I just want to thank all the leadership that you have given to NFIB and the farm bill, your personal perspective, Mr. Blethen, and thank the panelists.

Thank you, Mr. Chairman.

Chairman THOMAS. I want to apologize to the gentleman from Texas, and I do once again want to thank the panel. It was especially informative, especially your willingness to discuss each other's positions. It is very valuable for the Committee to see that sort of interaction. I know a lot of members would like to simply have it go one way, but having a three-way discussion allows us to better understand it from a real-world point of view. And I want to thank the panel very much for their time and consideration.

At this time the Chair would call, as we say, the last but certainly not the least, a panel, Mr. Edward O'Connor, First Vice President, Retirement and Education Savings at Merrill Lynch, and he will be representing the Savings Coalition of America. Mr. Kenneth Gladish--Dr. Kenneth Gladish, National Executive Officer, YMCA of the United States, speaking for the Independent Sector. Mr. Robert Canavan, who is Chairman of Rebuild America's Schools Coalition, accompanied by Mr. Vallas, who is the CEO of the Chicago Public Schools System.

Given the way you sat down, I would tell you that each of you, if you have written testimony, it will be made a part of the record, and you can address us in any way you see fit. And perhaps we will start to your right and my left with Mr. Vallas, and then work to Mr. O'Connor and Mr. Gladish.

The microphone needs to be turned on, and you need to speak directly into it.

STATEMENT OF ROBERT P. CANAVAN, CHAIRMAN, REBUILD AMERICA'S SCHOOLS

Mr. CANAVAN. Mr. Chairman, just very briefly, I am Robert Canavan, chair of Rebuild America's Schools, and if I may, I will submit my written testimony for the record. Mr. Vallas, the chief operating officer of the Chicago Public Schools will present the Coalition's oral testimony.

Thank you for having us here, Mr. Chairman.

[The prepared statement of Mr. Canavan follows:]

Chairman THOMAS. Thank you for coming.

Mr. Vallas?

STATEMENT OF PAUL VALLAS, CHIEF EXECUTIVE OFFICER, CHICAGO PUBLIC SCHOOLS

Mr. VALLAS. Well, fine. Thank you very much.

As a member of the Coalition, I was asked to come here today to really put a human face on how school construction support can be of benefit to local school districts.

Very quickly, and I will certainly try to be quick, just a perspective on the Chicago Public Schools. Chicago has 601 schools, 435,000 students. In 1995, when the mayor was given full responsibility over the schools, only 10 percent of those schools were in good condition and about a fifth of our schools were built right around the turn of the century and hadn't been renovated in decades. Today, 5 years later, we have 70 new schools, additions and annexes and over 500 major renovations. And by September of next year, all of my high schools will be fully wired and fully "Internetted" in virtually every single classroom.

If you are familiar with what has happened in Chicago, with the rising test scores, and the increasing graduation rates, and increasing enrollment, clearly, the success is, in part, due to the fact that our schools have been renovated, and most of them have been renovated, and they are modern facilities. But we still have about $2.5 billion in need. We have come close to addressing about 60 percent of our needs. Eighty-one percent of all of the money that has gone into renovating our schools, we have already spent close to $3 billion, has come from local effort, mainly property taxes--18 percent from the State and only 1 percent from the Federal Government.

Our additional needs are to provide us with overcrowding relief, to continue to renovate our obsolete buildings, to upgrade facilities for our E-rate qualifications and to upgrade facilities for the ADA requirements, which remains an underfunded Federal mandate.

Let me point out that I would like to make a few comments about Johnson-Rangel proposal. First of all, we have been strongly in support of this proposal we consider it to be far-reaching. It also allows us, as a school district, to leverage a considerable amount of money at a modest cost to the Federal Government. I think it is $6.8 billion over 10 years. Twenty-five billion would be raised. For Chicago, alone, that could generate $537 million and cut our borrowing costs in half.

We have been, in Chicago, strongly supportive of financial support to parochial and private schools. We share many facilities. We support parochial school charters. We don't oppose vouchers. We have a growing charter school population in Chicago, so it is not a public-parochial school issue.

The proposal requires local effort. We have to issue the bonds in order to take advantage of the tax breaks, so the local effort is there, and it also is a proposal that places maximum effort on local autonomy and local control. So, to a certain extent, school districts still control their own destiny because they are the ones who have got to decide whether or not they are going to make that a local effort.

Now, that said and done, that does not mean we are in opposition to other measures. We support the use of the tax code to promote investment in school construction and repair, whether they are things like investment tax credits or doing something through the capital gains or doing something through private activity bonds. But the bottom line is, each of those proposals will always have a limited impact of the limited market. We think a combination of proposals will make a difference. We truly believe that the Johnson-Rangel bill is most far-reaching and will have the broadest impact, as pointed out by my testimony.

In the 1950s, the Eisenhower administration built the interstate highway system in the name of the national security, and of course Governor Stratton, who recently passed away in Illinois, Republican governor, was also instrumental using the national security issue to do the local investment in the interstate highway system. We certainly consider education and the building of the school infrastructure no less a national security issue today than the interstate highway system was in the 1950s. We certainly think it is something that is going to have a long-term far-reaching impact.

But we are a school district that has invested a considerable amount of money. We do need support to finish the job. There are districts in far worse shape than us who have not even begun to do their renovations, and we are certainly here to be supportive and cooperative in any way. We think, ultimately, a smorgasbord of proposals will probably be needed on the part of the Federal Government to truly help the locals complete the job, but the Johnson-Rangel bill we think can be the cornerstone of any comprehensive approach to help local school districts, deal with their critical infrastructure needs.

Thank you very much.

[The prepared statement of Mr. Vallas follows:]

Chairman THOMAS. We thank the Coalition very much.

Mr. O'Connor?

STATEMENT OF EDWARD O'CONNOR, FIRST VICE PRESIDENT, RETIREMENT AND EDUCATION SAVINGS, MERRILL LYNCH & CO., INC., ON BEHALF OF SAVINGS COALITION OF AMERICA

Mr. O'CONNOR. Thank you, Mr. Chairman and the Committee, for the opportunity to express our strong support for the President's proposals to promote education savings.

I am Ed O'Connor, first vice president of Retirement and Education Savings at Merrill Lynch & Company. I see day in and day out the challenges people face in trying to save for their children's education and for their own retirement. I must say I have been in the business for 15 years, and I have really sensed very recently the additional stress that American families are having in being concerned about retirement and education savings, more than any other time in my career.

I am here today on behalf of the 75-member organizations of the Savings Coalition of America that have joined together to support incentives to increase personal savings. At the outset, I would like to commend the President for his proposals to provide individual tax relief. One positive way to reduce the tax burden on Americans is to reduce the anti-savings bias in the Federal tax law. By giving incentives to save, we will not only reduce the individual tax burden, but also ensure that important future education and retirement needs are met and generate increased national savings that will fuel continued economic growth.

Mr. Chairman, your leadership on savings issues, including IRAs, is well-known. My testimony today focuses on the critical task of helping American families prepare for the cost of higher education, but before I discuss those issues, I would like to encourage this Committee to continue its great efforts to enact the truly bipartisan retirement savings legislation, like the bill introduced by Representatives Portman and Cardin.

Increasing retirement savings must be a critical national priority. Changes should include four key elements: The first is to increase the IRA contribution limit to $5,000; the second is to increase allowable contributions to the various salary reduction plans we have; thirdly, we should allow meaningful catch-up contributions to IRAs and salary reduction plans for those who are approaching their retirement; and, fourth, we should enhance the portability of the various retirement programs.

Efforts in the retirement area would address a very important issue for Americans, and efforts in education savings addresses the other one. The high cost of attending college is well-documented. In the past, most families have been forced to fund college through a combination of pay-as-you-go financing and pay-after-you-go student loans. Until recently, Federal Government education programs focused only on financial aid and loans. Please don't get me wrong. Students loans have helped many millions of Americans, including myself, to attend college and should continue to play a part in financing higher education, but a college education financed merely with student loans can place a significant financial burden on an American family as they strive to build their career and/or their family.

A dear friend of mine and neighbor is just this week making her final student loan payment. She is a mother of three, and she is 46 years old. Just last year, she put her oldest daughter into college. So here she is beginning a new financial burden before she finished her first financial burden.

We believe that the best way to finance college is to save as much as possible and as soon as possible. If the Federal Government provides meaningful saving incentives, millions of more Americans will begin to save more and start sooner, and be able to meet all or most of the college costs that are in front of them.

Only in the last few years, with the creation of the Education IRA and Section 529-qualified State tuition plans, has the signal been sent that saving for college ahead of time is important. While both the education IRA and Section 529 plans have helped, they have the potential to do much more than they do today. My written testimony highlights a number of relatively modest changes that would improve education savings substantially. I will highlight two.

To date, the education IRA has had only a limited impact on education savings, and this is, in large part, because of the unrealistically low $500 annual contribution limit. Five hundred dollars per year clearly is not enough. For a child born to day, if the maximum $500 contribution were made to a child's education IRA each year, that child will be lucky to have enough just saved for the first year of school in college. We support the President's proposal to allow at least $2,000 per year in education IRA contributions.

The second proposal is regarding Section 529 programs. These are, as you do know, the State-run tuition programs, and they have become an effective savings tool for higher education, but here also certain modest improvements could greatly increase their effectiveness. In particular, distributions from Section 529 plans that are used for higher education expenses should not be subject to Federal tax. American families should not have to save additional after-tax dollars to pay taxes on dollars dedicated for college.

Thank you, Mr. Chairman and the entire Committee. Let us not forget that retirement savings is preparing for our future, and education savings is investing in our future.

Thank you.

[The prepared statement of Mr. O'Connor follows:]

Chairman THOMAS. Thank you very much, Mr. O'Connor.

Mr. Gladish?

STATEMENT OF KENNETH GLADISH, PH.D., NATIONAL EXECUTIVE OFFICER, YMCA OF THE USA, ON BEHALF OF INDEPENDENT SECTOR

Mr. GLADISH. Thank you, Mr. Chairman and members of the Committee. I am Ken Gladish, national executive director of the YMCA of the USA. I am honored to testify today on behalf of the nation's 2,500 YMCAs (I might say, parenthetically, YMCAs in each of the districts of the Congressmen represented here) and on behalf of Independent Sector, a nonpartisan, nonprofit coalition of over 700 national voluntary and philanthropic organizations.

We are heartened by President Bush's call for increased charitable giving and community involvement, and we strongly endorse his proposal to provide tax incentives to increase charitable donations by all taxpayers, not just those who itemize their deductions.

The YMCA itself reaches 17 million people across the country and provides a wide range of vital community services in such areas as child care, juvenile delinquency prevention, health and wellness classes, teen centers and family programs. To ensure that our programs are available to people of all faiths, ages, and abilities, and incomes, YMCAs collectively raised more than $682 million last year across the country to provide scholarships and subsidies for those in need. Every dollar of this makes a difference, and a lot of it comes a dollar at a time.

Take New York City, population 8 million. The YMCA of Greater New York, which I understand was Congressman Rangel's alumni YMCA, raised $1,700,000 last year in one particular program to provide low-income youth with financial assistance and subsidies. This $1.7 million came from 6,106 donors. Ninety-four percent of those donors gave $1,000 or less, 66 percent of those donors gave $100 or less. As a matter of fact, the most common contribution was $20.

Now look at Dubuque, Iowa, population 60,000. Last year, the YMCA of Dubuque raised $44,000 for their campaign called Partners for Youth. Average contribution: $100. This holds true in YMCA's throughout the country and for many not-for-profit entities and organizations of all kinds. A huge amount of our support comes from what most of you would consider small gifts and small givers. It is these small gifts we rely on, and it is this type of people that we need more of.

Our tax code is the most powerful tool available to send a message that we, as Americans, highly value and strongly support charitable giving, but today this message goes only out to the 30 percent of taxpayers who itemize their deductions. Mr. Chairman, the nonitemizer deduction would provide a strong stimulus for increased giving and new givers. My written testimony cites a recent report by PricewaterhouseCoopers which showed that had the President's nonitemizer charitable deduction been in effect in 2000, total charitable giving would have increased by $14.6 billion, an increase of 11.2 percent. And perhaps more importantly, 11 million Americans who are not currently givers would have been inspired to begin the habit of giving. And once you start giving and you see the amazing impact you can have on the life of another person, it is hard to stop.

When the Clippard family of Colerain Township outside of Cincinnati first started giving to the YMCA, their annual gift was about $100 a year. Over the years, their contributions slowly increased, the number of hours they spent volunteering slowly increased, and now thanks to a large to a large and generous gift, this same family that started at $100 has named the new Clippard Family Branch of the YMCA serving Colerain Township.

I know that this Committee will be working to provide major tax relief for America's hardworking low- and middle-income families. The nonitemizer deduction is an extremely attractive means of providing part of this needed tax relief since the deduction would achieve three important social goals rather than just one. It would reduce taxes, target those cuts to low- and middle-income taxpayers who make up the majority of nonitemizers and encourage increased charitable giving to the thousands of community-based and faith-based nonprofits that are on the front lines of helping our neediest citizens.

I mentioned earlier that YMCA has raised $682 million last year to provide programs for those in need. While we consider $682 million a good start, more needs to be done. We want more families to be able to afford high-quality child care; we want more teens to have safe and structured activities after school and in good school programs; we want more elderly people to be able to participate in our health and wellness programs.

Mr. Chairman and Committee members, allowing nonitemizers to take the charitable tax deduction will be a powerful tool in helping charitable organizations address the pressing needs of communities and citizens throughout the country.

Thanks for the opportunity to share our views on this important provision in the President's tax plan to encourage increased charitable giving.

I speak on behalf of the YMCA of the USA, our 18 million members, and our colleagues of the Independent Sector.

[The prepared statement of Mr. Gladish follows:]

Mrs. JOHNSON OF CONNECTICUT. [Presiding.] Thank the gentleman and thank the panel.

Mr. McCrery?

Mr. MCCRERY. Thank you, Madam Chair, and I want to thank the panel for your testimony.

Mr. O'Connor, with respect to the Portman-Cardin proposal that would increase the opportunity to save and invest, you have mentioned that you considered this to be something that Congress could do to stimulate the economy. Could you go into a little more detail as to why the Portman-Cardin provisions would stimulate economic activity.

Mr. O'CONNOR. Let us look at the history. Today we have approximately $12 trillion that Americans have saved in some form of a retirement plan. That has been accumulating over the past 20 years, and I do not think that it is a coincidence that we have just experienced unprecedented economic expansion.

My previous position in Merrill Lynch, just to give it from another perspective, was an international assignment. And I must tell you, if you are not aware of this, that all of the other major countries in the world look at our retirement system and want to emulate it. However, when you look at our savings rate, as you well know, it is the lowest out there from all of the developed countries.

What I see in behavior, and this is from my marketing experience with Merrill Lynch, is today about 35 to 40 percent of the people who can make an IRA contribution do. The rest do not, for various reasons. We have done extensive research on why you do not do something that is good for you, and it comes down to complexity. Quite frankly, it is only $2,000 a year, and over the last 20 years inflation has eaten away at that value. So, hence, to grow it to $5,000 is just merely to begin to give back some of that inflation that is taken away from us.

I believe that if we increase the IRA contribution to $5,000, not only will the people who currently save $2,000 put more in, possible as much as $5,000 if they can afford it, then many other Americans that have forgotten about the IRA will also be stimulated to save. And I see trillions more that will be saved in retirement plans that are securing the retirement of Americans in the future and providing capital to our small businesses and large businesses going forward.

Mr. MCCRERY. So, when people save, that helps small businesses and other businesses to expand and produce jobs; is that what you mean by the last statement?

Mr. O'CONNOR. Yes. Yes, clearly.

Mr. MCCRERY. Well, your speaking was a little fast for somebody from Louisiana, but I think I caught most of it. The gist of it is that Portman-Cardin would be good for the economy and would be a boost to economic activity.

Mr. O'CONNOR. Yes.

Mr. MCCRERY. Even maybe this year, in the anticipation that it would be coming.

Mr. BRADY. Would the gentleman yield?

Mr. MCCRERY. I would be glad to yield.

Mr. BRADY. I didn't catch quite all of it. What percentage did you say of those who can save do use IRAs?

Mr. O'CONNOR. There are two percentages, actually. The best way to compare this, there are two studies that were done.

In 1986, when we put the income limitations on the IRA, 40 percent of the people who could make an IRA deduction in the subsequent year, stopped making IRA deductions--people with an income far below the income limitation. There have been studies done, and we have researched that, that once they saw an extra complexity coming into play, it scared people away. And some of the comments I heard earlier with regard to the death tax and the complexities that scare people away and cause more burden on people than you realize. I think that is what happened with the IRA.

Mr. BRADY. So we scared 40 percent of the proven savers away.

Mr. O'CONNOR. IRA contributions dropped 40 percent once we instituted the income limits.

Mr. BRADY. Thank you, Mr. McCrery.

Mr. MCCRERY. Mr. Chairman, thank you.

Mr. O'CONNOR. Was that slow enough?

[Laughter.]

Mr. MCCRERY. It could be better, thanks.

Mrs. JOHNSON OF CONNECTICUT. Thank you very much.

Mr. Coyne?

Mr. COYNE. Thank you.

Mr. Canavan, Mr. Vallas, we appreciate your testimony on behalf of the school construction and bond legislation, and Mr. Rangel from New York, I know, appreciates your endorsement of that concept and would have been here except that he was called to another meeting.

Mr. O'Connor, I wonder what extent your proposal, relative to the help with education bonds and education efforts, is geared towards the moderate and low income of the country?

Mr. O'CONNOR. Well, I believe a $2,000-a-year education IRA clearly is for middle class America.

Mr. COYNE. What about the lower income than middle class America, how would you--how would you describe your efforts on behalf of those people who don't consider themselves middle income?

Mr. O'CONNOR. Well, there are other programs that are helping lower income families.

Mr. COYNE. Are they a part of your recommendation

Mr. O'CONNOR. I am sorry?

Mr. COYNE. Are they a part of your recommendation here?

Mr. O'CONNOR. Certainly, certainly. The education IRA today you can put away as little as you can afford, and we encourage you to put away whatever you can if you can, in fact, save. Today, though, if you are fortunate enough to save as much as $500, it is still not enough. And what we are really looking to do here is help middle-class Americans to be able to save for college.

Mr. COYNE. Well, if you are a family of four, with a $22,000-a-year income, it is very difficult to be able to put away $2,000 for education purposes.

Mr. O'CONNOR. It is very difficult.

Mr. COYNE. Yes.

Mr. O'CONNOR. But today--

Mr. COYNE. So your proposal, is there anything that addresses that instance, where the family has an income of $22,000, a family of four?

Mr. O'CONNOR. Well, I guess the best way to answer that, you are absolutely right, for that example of a family of four, at $22,000, it would be very difficult to put away that much money. But, today, with the anti-savings bias we have, it is impossible for them today to put away that much money.

Mr. COYNE. All right. Thank you.

Mr. O'CONNOR. It is much more difficult.

Mr. COYNE. Thank you.

Mrs. JOHNSON OF CONNECTICUT. Mr. English?

Mr. ENGLISH. Thank you, Madam Chair.

This is an excellent panel. Mr. O'Connor, I appreciate your testimony, and I would be particularly interested if you could elaborate on a couple of points. For example, one of the points in your testimony relates to the income eligibility limits for participation not only in education IRAs, but also other IRAs. Can you comment, your experience has been that by putting in artificial income limits, for an instrument that is intended to attract people who are going to invest in the long term, that, as a practical matter, it ends up making the instrument substantially less attractive to the individual, as I understand your testimony. Would you care to comment on that, and how much more attractive would education IRAs be if we were to take income limits off them entirely?

Mr. O'CONNOR. Well, again, let us point to the history again. I will give you two examples. I will mention again the experience of 1986, where 40 percent of people who were eligible to make an IRA contribution who did the previous year stopped because of the additional complication that was applied to an IRA.

In Merrill Lynch's own business with their clients, we have noticed that it is closer to 66 percent of our own clients, who are essentially middle-class Americans who are eligible to make an IRA contribution each and every year, do not. And what we believe, also, we found with the education IRA, there are two reasons we believe, from our research, that has not become as popular as it should have. One is it is, again, only $500 a year, and it is something they realize is not nearly enough to save. So, again, it dissuades them from even considering it.

And, again, I really believe that complication, that there is an income limit, it is funny, and you would think people would be more rational, but clearly, from the behavior we have seen, once you put complications such as income limits, and again perhaps let us talk about the previous panel and the death tax, you put complications, it adds much more of a burden to an American family than you would think otherwise.

Mr. ENGLISH. One of the reasons why we put these income limits on is a concern that these provisions might ultimately come to benefit the affluent taxpayers. I am not sure why that bothers us as much as it does, but it certainly seems to figure large in the debate.

I noticed Mr. Bush's proposal, with regard to QSTPs, would substantially make them much more attractive, take much of the tax burden off of participants in State tuition assistance plans of various sorts. I have long supported liberalizing the tax treatment of these particular State-managed programs. But I noticed in 1997 the Treasury came out very strongly, at the last minute, against our inclusion of new tax breaks for the State programs, and the rationale that was provided was, to me, an astonishing one, that somehow these QSTPs could become a tax break for the affluent, a loophole.

Can you visualize any situations where Bill Gates, for example, could utilize one of these tax-exempt--well, one of these tax-advantaged, and we hope in the future, tax-exempt programs to avoid the payment of taxes? Can you see any ways that these programs could be gamed from a tax standpoint?

Mr. O'CONNOR. It is very hard to visualize. If you treat these as education savings vehicles, which they are, and if you want to call it tax-favor treatment only applies to qualified expenses of a student going to school, I don't see how it could be created as a tax shelter for some other purpose.

Mr. ENGLISH. And I can't really picture that either, but that certainly has been a concern in the past. If we were to liberalize the tax treatment of QSTPs, say, make them completely tax free, which would be my preference, question one is should we include any income limitations, and question two is should we allow private institutions, for example, an association of private universities, to set up competing plans and manage plans with the same tax advantage, offering the same benefits to students?

Mr. O'CONNOR. Well, the Savings of Coalition of America is pro-savings. So any time we do hear about an income limitation of any sort, again, my previous discussion about what that does to the overall interests of Americans to the plan.

With regard to qualified State tuition plans and the ability for private institutions to have a plan, again, the Savings Coalition of America is pro-savings, and any vehicles that again provide tax incentives, really, I delay, when I say tax incentives, because we really start with a biased system for savings, and any of these programs to help alleviate that bias, we are for, for all income levels and from all sources.

Mr. ENGLISH. Thank you very much.

Mrs. JOHNSON OF CONNECTICUT. Mr. Hulshof?

Mr. HULSHOF. Thank you, Madam Chairwoman.

Earlier today, probably long before you all came into this magnificent hearing room and we were discussing the marriage penalty, maybe some of you were here, but our colleague, Mr. Ryan of Wisconsin, as we were discussing a marriage penalty, pointed out the fact that he has been now happily married for 3 months, and I think 16 days, and how that changed his perspective, as we were talking about the marriage penalty.

My wife and I have a 16-month-old daughter, and I will tell you, Mr. O'Connor, we seem to be focusing our entire questioning with you, but how our perspective has changed, as we think way down the road about college or education expenses. I was extremely pleased that in the last session of Congress the speaker asked me to take forward H.R. 7, which was the Education Savings and School Excellence Act, and we are working on that legislation again on this side. I know the Senate Finance Committee considered it last night.

So a couple of points I want to really echo and then maybe ask you to comment on. I think, and do you have any statistics to bear out the fact that there is a $500 annual contribution limit, that if we were to increase that, say, to $2,000 per year, the additional savings that might occur? Do you have any numbers or statistics to help in that regard?

Mr. O'CONNOR. Additional savings, meaning additional savings--

Mr. HULSHOF. For education savings accounts.

Mr. O'CONNOR. Oh, no, we really don't because this is a new program. We suspect it will be a significant increase, significant for two reasons. One, as you may have noticed, when the education IRA was first passed, a lot of our colleagues in the industry, our competitors, didn't even bother to advertise the $500 education IRA because, quite frankly, we are profit-making enterprises, and it was very hard to justify significant advertising. So the awareness of education IRAs is still quite low.

I am, personally, proud of Merrill Lynch because we have been very active in telling our clients that we do have a vehicle here and we have been advertising it. Now, in our advertising, we have acquired approximately 60,000 families who have opened up an education IRA with us, and we are very proud of that.

I really don't want to try to put a number to this, but I believe that if we increase the education IRA to $2,000, not only would Merrill Lynch be more successful in acquiring accounts and getting families to save more, but many more financial service providers would get involved, and it would be manyfold more in savings, manyfolds.

Mr. HULSHOF. Let me pass along, at least, the best information that we have, at least under last Congress's bill, H.R. 7. First of all, if we were to increase the contribution limit to $2,000 and, as you also know, Mr. O'Connor, there are some limitations. You mentioned that the education expenses have to be qualified expenses--

Mr. O'CONNOR. Yes.

Mr. HULSHOF. And, of course, right now under current law, back in 1997, is that it is just the tax buildup or the interest buildup that is going to see the tax savings. I mean, these are after-tax dollars going into an education savings account. It is the compound interest that is derived over the life of this education savings account, and it can only right now, under present law, be used for a public college. And so we are trying to expand that option of not just public college, but any college or any K through 12 expense, regardless of where the child goes to school or whether the child is home schooled.

And some of the numbers that we have received in analysis by either Joint Tax or Congressional Budget Office is that 70 percent of the tax savings from an expanded education savings account would go to families with children in public schools making less than $70,000 a year. And so I think it really undercuts the argument. In fact, my colleague from Pennsylvania talked about there seems to be some skepticism of expanding these accounts because it would got to the more affluent, and I think, at least the best analysis that we have is that predominantly these tax savings go to middle-income families or those making up to or below $70,000 a year--roughly, 14 million families, of which about 11 million families have children who would attend public schools.

And, again, that is part of this discussion is people say, well, we can't do this because it is taking somehow money away from public schools into private schools, when, in fact, this has nothing to do with the amount of money we allocate or appropriate every year through the appropriations process. These are additional dollars not being committed to educating our kids that would now be part of the educational process, over and above what we are allocating and appropriating every year.

And so I want to thank you, particularly, and all of you for your viewpoints today, and thank the chairman for yielding.

Mrs. JOHNSON OF CONNECTICUT. Mr. Brady?

Mr. BRADY. Thank you, Madam Chairwoman.

Dr. Gladish, growing up in a small to medium town, I can tell you the YMCA had a very positive impact on my life. We need to do what we can to keep encouraging contributions to organizations like yours.

Mr. Vallas and Mr. Canavan, I am not quite yet convinced about the Federal Government's role in local school construction, but for the sake of not having the chairwoman hit me in the head with her gavel, let me move on quickly to Mr. O'Connor on savings.

[Laughter.]

Mr. BRADY. For the life of me, I don't understand why we tax savings. We encourage people to save for the future, but we tax them when they do. We say, "Don't rely on Social Security for retirement. Build your own retirement plan," but we say you can only save this much without us taking our share of it.

And it seems like with Congressman Hulshof's bill, if education, if we save early, the interest works for us, the money builds for us, and it helps us reach our American dream.

I have a 27-month-old child, just a little older than Kenny's daughter, and so I am concerned about it, too. But if you wait or in a situation where you have to borrow, the interest and the money works against you. It makes it harder to reach that dream. It just makes good sense to encourage people, especially middle-income families. Thankfully, we have programs for a family that makes $22,000 with four children. Thankfully, we have Pell grants and student loans, work study programs and scholarships.

Those on the other end of the spectrum, who have plenty of money, don't worry about it. But it is a lot of middle-income families who really look at the cost of education and college these days and just swallow hard. I mean, how are they ever going to save enough money for that? And the only way they are going to stand a chance to do that is if we allow them, and get out of the way, to allow them to save.

And my final point is people say that savings reform is tax relief. I don't think it is tax relief for us to remove an artificial barrier for people saving their own money for their future, and I dare someone to call that tax relief. That is simply getting out of the way so that people can save their own hard-earned money, which has already been taxed at least once, and to allow them to move forward.

Any comments you have?

Mr. O'CONNOR. Well, just to add to that, you may recall, in the beginning of my oral statement, in the 15 years I have been in this business, in trying to help people save for college, save for retirement, it really, in the last few years, it has really become a very big issue for Americans, and I am talking middle class Americans--middle class Americans who, because of a greater share of their income today than 10 years ago is taxed, because financial aid for college is down, housing costs are up, all of the other costs that are on a middle class family, and inflation of college has grown 1- to 2-percent faster than regular inflation and 2- to 3-percent faster than their incomes.

Education savings is a big issue for middle-class America, and I see it every day in my job.

Mr. BRADY. A final note. As you have noted before, even in our best economic times, we seem to be saving less and less. Since we have scared off 40-percent of our proven savers in 1986, we ought to try to do our best to attract them back into the savings effort.

Mr. O'CONNOR. I agree.

Mr. BRADY. So thank you, Madam Chairwoman.

Mrs. JOHNSON OF CONNECTICUT. Thank you.

Mr. Canavan, I do want to thank you for your intense interest in the issue of schools and their ability to build the schools that we need now and for communities and their ability to build the schools that we need now and to repair and modernize that our schools are in.

Would either you or Mr. Vallas like to comment on the difference between the money we appropriated last year, which I believe was $1.2 billion, which is a fair amount of money, and this leveraged approach that we are proposing in the bill that Charlie Rangel and I have sponsored? What is the relative impact of these two approaches?

Mr. VALLAS. Well, if I can just speak insofar as Chicago is concerned, we have once again, just to put it into perspective, we have 601 schools, 435,000 students. We are the third-largest school system in the country.

The emergency bill that was passed last year generated $25 million for Chicago. And, of course, it required really no local contribution. It was an allocation to us. The Johnson-Rangel bill would generate $537 million in reduced borrowing costs.

Mrs. JOHNSON OF CONNECTICUT. In other words, the local communities would still have to make--

Mr. VALLAS. That is correct.

Mrs. JOHNSON OF CONNECTICUT. Roughly the investment they are planning to make now, but by lifting the interest costs from their investment, just like a family who had a 25- or 30-year mortgage, the interest cost is often as much as the mortgage.

Mr. VALLAS. In effect, on like 30-year notes, it would reduce our borrowing costs by half, which would enable us to build twice as many new schools.

In Chicago, for example, while we have built 70 new buildings, and the price of an elementary school is roughly between $15- to $18 million, the price of a middle school is $20- to $22 million, and the price of a high school is $30- to $35 million.

Mrs. JOHNSON OF CONNECTICUT. And what were those prices about 10 years ago?

Mr. VALLAS. The prices are going up. I would say that the prices were about one-third less, but the ability to borrow now and to build now saves us money over the long term because the costs just continue to climb, and the ability to raise the money now and to invest now allows us to accelerate the progress that children have made academically.

Because let me tell you there is a direct correlation between the quality of the facilities, whether they are wired for the Internet, whether they are modern facilities, and the maintenance, the upkeep. For example, when I build new schools, when we built our 70 new buildings, our utility costs in those schools were cut in half, in part because we now have modern, efficient buildings. Despite the gas crunch, the natural gas crunch that everybody experienced over this past year, my utility costs last year went down about 15 percent, largely because we had so many new buildings online and because they were much more efficient. So investing now not only benefits us from an academic standpoint, but it actually saves school districts money over the long term.

But $537 million, the beauty of the Johnson-Rangel bill is it requires local match. It requires that local investment be made. It simply doesn't say we are going to give you money, and you don't have to exercise any local effort, and the fact that it leaves autonomy at the local level so that school districts can make their own choices about what to build, what to renovate, what to replace, and I think that is the great advantage of the proposal.

Mrs. JOHNSON OF CONNECTICUT. The great number of schools that a city like Chicago has to manage and the need to replace so many old schools, as well as repair and modernize, is simply an extraordinary need.

I believe that you said it went up a third in the last 10 years.

Mr. VALLAS. Yes.

Mrs. JOHNSON OF CONNECTICUT. If you look at the last big round of school building, I think costs have gone up more like double because of the greater code requirements, the greater wiring requirements, and in some places, earthquake requirements and so on.

Mr. VALLAS. In Chicago, we have been able to maintain very tight controls because we have, we take full advantage of the market, and while there is clearly school control and oversight over our construction programs, we have privatized much of the management of our construction programs.

For example, we have built--those prices I gave you are the prices that we spent on schools for the last 5 years--we have had maybe 5.5-percent change orders on our construction project. This is very well-managed. So there has been no controversies about the costs of our buildings. But for many smaller school districts--we are a large district, and it gives us the ability to leverage our resources. It gives us the ability to negotiate rate reductions on utility costs because we are so large.

But when you get into smaller districts, rural districts, downstate districts, they don't have that capacity. When a district just wants to borrow enough to build one new school or two new schools or maybe to renovate a half a dozen schools, they don't have the capacity to control the costs because they don't dominate the market. We are so big, and we are building so many new things, that we can literally, it becomes a buyer's market, and that gives us the ability to leverage.

But, certainly, some of the smaller districts, the rural districts, the suburban districts where you have three or four schools, their costs, their per-unit, per-classroom construction costs are probably increasing at a much faster rate than we are. The suburban schools have been built at more expensive cost to the school district than the city schools have been.

Mrs. JOHNSON OF CONNECTICUT. Thank you.

Bob, did you want to ask--

Mr. CANAVAN. Yes, thank you very much, and I will be extremely brief because I know it is the end of the day.

But one thing I wanted to point out on the strength of your bill and Mr. Rangel's bill is that you pay particular attention to the needs of rural school districts. Thirty-eight percent of the students in the United States are actually attending schools in rural areas. The balance that the Johnson-Rangel bill provides through these bonds is that urban districts, as well as rural districts, have the opportunity to use the tax credit to leverage their investment in schools in such a way that, in effect, in our opinion, it is local property tax relief because every dime of leverage they get from Federal support is one less dime they have to ask the local taxpayers to provide.

Mrs. JOHNSON OF CONNECTICUT. I think that is a very important point. Having been born and raised in Chicago, I understand the enormity of your challenge. But lots of the towns that I represent have had literally no growth in their property tax base in the last decade, and they aren't likely to have much, but the costs of school building continues to rise. And I would rather have good local schools than regional elementary schools.

And if we are going to be able to maintain that tradition of kids going to school close to where they live, we are going to have to find some way to create a partnership that is not just State and local in school building, but that is State, local and Federal.

Mr. O'Connor, I did want to close by asking you one question. Does it concern you that 50 percent of the workers in America have no access to pension plans?

Mr. O'CONNOR. Yes, it does concern me very much.

Mrs. JOHNSON OF CONNECTICUT. And does it concern you that, of that 50 percent, probably 30 percent of them, under today's rules, couldn't afford to save?

Mr. O'CONNOR. I am sorry, could afford to save?

Mrs. JOHNSON OF CONNECTICUT. Could not afford to save. In other words, they don't make enough really to save, and there is nothing we do that actually helps them save.

Mr. O'CONNOR. That is a very big concern.

Mrs. JOHNSON OF CONNECTICUT. Well, I really share that concern, and it is for that reason that I do worry about having no income limit on, and sort of Government incentives to savings. If you make lots of money, you can save whether we encourage you to save or we don't encourage you to save. You can still buy stocks, and the people still do. I mean, lots of their money is put into investments that are not rewarded through the tax code.

And I think we are doing such a very poor job of looking at how we might help people of very minimal means save for their retirement, much less their children's education. But I think we really have to look at how can we more creatively reach not only--and Portman-Cardin will change the rules so a lot more employers will be able to offer their employees a pension savings vehicle--but they all know, and we all know this is true, it is like health benefits, small employers are no margin, but low-income employees are not, those folks are not going to be able to save for their retirement unless we find a way to, in a sense, assist them in the same way we are assisting middle- class and upper-middle-class families in savings.

And I hope that you and your firm would be thinking about how we might do that.

Mr. O'CONNOR. We would do that. What I would suggest, though, we are very much pro-savings, and I am speaking here for both my firm and the Savings Coalition of America. We are pro-savings for all income groups because it is vitally important, particularly in the group you are discussing.

Mrs. JOHNSON OF CONNECTICUT. Yes.

Mr. O'CONNOR. But what I would recommend is, when we look at that, that we try to integrate that into current savings retirement plan systems we have today.

Mrs. JOHNSON OF CONNECTICUT. But in being pro-savings, I think your groups, and I am pro-savings, but I have come to be very sensitive to the amount of money that we are expending to encourage savings.

Mr. O'CONNOR. Uh-huh.

Mrs. JOHNSON OF CONNECTICUT. And it is all increasingly among the group that are saving. Now they are not saving enough, but we have got to, in addition to encouraging savings, in general, we have got to be sensitive to the fact that we need to broaden the savers' base, and to do that we need a broader array of approaches. And I really think you guys have got to take far more seriously what are the kinds of subsidies, like the earned income tax credit really helped people get off welfare because it reduces their tax burden even through the payroll tax.

But we have to find some way to help people save, even on low salaries, because Social Security is not going to be enough to live on, and if they don't have some additional income stream. In the same way, I would ask your thoughts on whether it might not be wise to tax reward, annuity-type vehicles, more than we tax reward just straight savings. Because Social Security is not going to be enough to live on, there is a social interest in making sure retirees are secure. Don't we have a higher responsibility to make sure that people develop a retirement income to complement Social Security than simply that they save so when they get to 65, they can buy a yacht? I mean, is there no social merit difference here?

Mr. O'CONNOR. Well, there is a social merit that perhaps we are not considering here. I think the best program would be for more jobs to be generated, better jobs to be generated, and that if there was more savings by all income groups, our economy would, in fact, be stronger, and there would be better jobs for everyone going forward. And, hence, they would maybe perhaps be able to save for themselves better than they can today. That I think is the best program.

Mrs. JOHNSON OF CONNECTICUT. But that program is just more of what we have got, and more of what we have got are not helping a third of America's workers save, and they are not differentiating between savings that could create real retirement security and just savings that could buy a nice second home on retirement or buy a big sailing ship or whatever.

And I would say that when something is publicly subsidized, there ought to be a public purpose. So I am no longer, as I once was, comfortable with your position that savings is savings, and we ought to just foster more and more of it. We have got to look at the fact that there is a big slice of working America that can't afford to save, and their not being able to save is going to be a public burden when they retire because Social Security is going to be inadequate. It is inadequate now, but it is going to be really inadequate then and that we have to begin looking at this, and that, secondly, there is a different public policy benefit in making sure that people have a parallel income stream to Social Security than that they just have a lot of money on retirement.

So I think you guys need to start thinking deeper, more deeply, about this issue of savings. I want savings for jobs, too, but you know and I know that most of the investment capital in America just comes from people investing money in stocks, and they are not Government-incentivized savings. So, as important as Government-incentivized savings plan are, and I think they are terribly important, our policy is too narrow and too broadly focused.

Now I think the education issue is separate because that is another one of these issues in which we really need to help people save more because the product has gotten so expensive, but I think we need to begin to differentiate between savings, savings, savings and subsidizing savings versus who are we helping to save, how much of America is being benefitted by Government savings policy, and are there some savings that are a greater public policy purpose than other savings?

So I just hope that your group will be more aggressive in thinking more broadly about the needs of America because just sitting here yesterday, the estimates were that by 2030, that is 29 years from now, Social Security, Medicare and Medicaid will take every single dollar of revenue, every single dollar of Federal revenue. Now no society can sustain that. We can't let that happen. But it does tell you how big our problems are for retirees and for the working families of the future. And I think we can no longer be quite as simplistic about things as we have been in the past, and I would encourage your group, who has been so important to our thinking through savings, to begin thinking through savings, who is saving and what are they saving for.

Thanks.

Mr. O'CONNOR. We will do that. Thank you.

[Whereupon, at 3:46 p.m., the hearing was adjourned.]
[Submissions for the record follow:]

Abrams, Howard E., Emory University, Atlanta, GA, statement and attachment

Air Conditioning Contractors of America, Arlington, VA, Larry Taylor, statement

Cal-Fed School Infrastructure Coalition, Sacramento, CA, Terry Bradley, letter

College Savings Plans Network, Lexington, KY, Georgie Thomas, letter

Morella, Hon. Constance A., a Representative in Congress from the State of Maryland, statement

National Association of Realtors, Linda Goold, letter

National Automobile Dealers Association, Robert J. Maguire, statement

National Center for Policy Analysis, Bruce R. Bartlett, statement

Nature Conservancy, Arlington, VA, Michael Dennis, statement

Niche Marketing, Inc., Newport Beach, CA, and Professional Benefit Trust, Woodstock, IL, Judith A. Carsrud, and Tracy Sunderlage, joint statement

Responsible Wealth, Boston, MA, Charles E. Collins, statement

Simpson, Hon. Alan K., Washington, DC, statement

Washington Council Ernst & Young, LaBrenda Garrett-Nelson, Phillip D. Moseley, and Robert J. Leonard, statement

White House Conference of Small Business, Debbi Jo Horton, East Providence, RI; Joy Turner, Piscataway, NJ; Jill Gansler, Baltimore, MD; Jack Oppenheimer, Orlando, FL; Paul Hense, Grand Rapids, MI; Tommy Bargsley, Austin, TX; Edith Quick, St. Louis, MO; Jim Turner, Salt Lake City, UT; Sandra Abalos, Phoenix, AZ; and Eric Blackledge, Corvallis, OR, letter