SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 5006 words

COMMITTEE: HOUSE WAYS AND MEANS

HEADLINE: TAX INCENTIVES FOR OPEN SPACE PRESERVATON

BILL-NO:

 

H.R. 1439             Retrieve Bill Tracking Report


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H.R. 960             Retrieve Bill Tracking Report


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H.R. 2290             Retrieve Bill Tracking Report


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H.R. 4             Retrieve Bill Tracking Report


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TESTIMONY-BY: PAMELA F. OLSON,, ACTING ASSISTANT SECRETARY FOR

AFFILIATION: TAX POLICY, U.S. DEPARTMENT OF THE TREASURY

BODY:
Statement of

Pamela F. Olson, Acting Assistant Secretary for Tax Policy, U.S. Department of the Treasury

Testimony Before the Subcommittee on Select Revenue Measures of the Committee on House Ways and Means

Hearing on Tax Incentives for Land Use, Conservation and Preservation

April 30, 2002

Mr. Chairman, Mr. McNulty, and Members of the Subcommittee:

I appreciate the opportunity to discuss with you today the Administration's proposed tax incentives for improving the environment. I would like to start by thanking the Subcommittee for holding a hearing on this important issue. I also commend Ms. Dunn, Ms. Johnson, Mr. Neal, Mr. Portman, and Mr. Weller of this committee, as well as Mr. Blumenauer and Mr. Isakson, for their thoughtful comments and for their leadership in introducing legislation to encourage responsible stewardship of America's land. This is a goal the President shares. Reflecting the President's firm commitment to conservation and the environment, the President's Budget for FY 2003 includes a number of proposals that will encourage land conservation and preservation. The budget includes the following initiatives for environmental conservation and stewardship: (1) over $910 million to fully fund the Land and Water Conservation Fund to support natural resource conservation and outdoor recreation, including $200 million for State grants ?? this proposal recognizes that Federal land acquisition is not the only way to conserve land and other natural resources, and allows funds to be used for conservation easements; (2) $665 million for the National Park Service to address the park maintenance backlog; (3) $67.5 million for Natural Resource Challenge, a science?based initiative to strengthen natural resource management throughout the National Park System; (4) $376 million for wildlife protection and public use opportunities at our National Wildlife Refuges; (5) $100 million for a new Cooperative Conservation Initiative to protect and conserve the environment by awarding challenge grants to landowners, environmental groups, land?user groups, communities and State and local governments; (6) $50 million for the Landowner Incentive Program, which provides funds to States, tribes and territories to make cost?sharing grants for the protection of habitat for endangered, threatened or other at?risk species on private or tribal lands; (7) $70 million for the Forest Legacy program to protect against the loss of forests from development; (8) $10 million for the Private Stewardship grant program to provide technical and financial assistance to landowners engaged in local, private and voluntary conservation efforts for the benefit of Federally listed or other imperiled species; and (9) $200 million ?? twice the FY 2002 level of funding ?? for the Environmental Protection Agency's brownfields program, $171 million of which is for grants to States and local communities.

The Budget proposes making the brownfields tax incentive permanent. Under current law, this incentive is scheduled to expire on December 31, 2003. The revenue cost of a permanent extension is estimated to be $1.1 billion over five years. The Administration also proposes to provide an exclusion for 50 percent of the gain when land (or an interest in land or water) is sold for conservation purposes. The proposal would apply to land sales after December 31, 2003, and its revenue cost is estimated to be $328 million over five years.

The President's Budget includes other proposals that will benefit the environment. These proposals are part of an overall environmental policy aimed at encouraging economic growth in ways that protect the environment. In February, the President announced the Clear Skies Initiative to cut power plant emissions of the three worst air pollutants ?? nitrogen oxides, sulfur dioxide, and mercury ?? by 70 percent. This initiative will improve air quality using a proven, market?based, cap?and?trade approach. The Budget also provides $4.5 billion for activities related to global climate change, including the first year of funding for a five?year, $5.0 billion commitment to tax incentives to encourage energy efficiency, reduce greenhouse gas emissions and develop renewable energy sources.

Thanks in large part to the leadership shown by the Ways and Means Committee, many of the Administration's tax proposals have been enacted or are included in legislation that the House passed last summer. We look forward to working with this Subcommittee as it considers the remainder of the Administration's environmental initiatives.

The remainder of my testimony will provide a more detailed discussion of the Administration's tax proposals.

LAND-RELATED INCENTIVES

Current law tax incentives for land conservation

As the Chairman noted in announcing this hearing, the Internal Revenue Code currently includes a number of incentives to encourage responsible stewardship of the land. They include the deductibility of brownfields remediation costs, special rules for qualified conservation contributions, an estate tax exclusion for qualified conservation easements, an exclusion for certain conservation cost-sharing payments, and rules permitting the issuance of tax?exempt bonds for land conservation and preservation purposes.

Brownfields remediation costs

A brownfield site is real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant. Because lenders, investors, and developers fear the high and uncertain costs of cleanup, they avoid developing contaminated sites. Blighted areas of brownfields hinder the redevelopment of affected communities and create safety and health risks for residents. The obstacles in cleaning these sites, such as regulatory barriers, lack of private investment, and contamination and remediation issues, are being addressed through a wide range of Federal programs, including the tax incentive for brownfields remediation.

To encourage the cleanup of contaminated sites, the brownfields tax incentive permits the current deduction of certain environmental remediation costs. Environmental remediation costs qualify for current deduction if the expenditures would otherwise be capitalized (generally costs incurred to clean up land and groundwater that increase the value of the property) and are paid or incurred in connection with the abatement or control of hazardous substances at a qualified contaminated site. A qualified contaminated site generally is any property (1) that is held for use in a trade or business, for the production of income, or as inventory; (2) at or on which there has been a release, threat of release, or disposal of a hazardous substance; and (3) that is certified by the appropriate State environmental agency as to the release, threat of release, or disposal of a hazardous substance. Sites that are identified on the national priorities list under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) do not qualify as qualified contaminated sites. The brownfields tax incentive applies to expenditures paid or incurred before January 1, 2004.

Qualified conservation contributions

To encourage charitable donations, tax law provides a charitable contribution deduction not only for outright gifts but also in certain cases where the property is sold to a charity for less than its fair market value (that is, a "bargain sale"). In general, however, a charitable deduction is not allowed for income, estate, or gift tax purposes for a contribution of less than the donor's entire interest in property. There is an exception, however, for qualified conservation contributions. A qualified conservation contribution is a contribution of a qualified real property interest to a governmental unit or public charity exclusively for any of the following conservation purposes: (1) the preservation of land areas for outdoor recreation by, or for the education of, the general public; (2) the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem; (3) the preservation of open space (including farmland and forest land) where such preservation is (i) for the scenic enjoyment of the general public or (ii) pursuant to a clearly delineated Federal, State, or local governmental conservation policy; or (4) the preservation of an historically important land area or a certified historic structure. A real property interest is qualified for this purpose only if it is (1) the donor's entire interest other than a retained interest in subsurface oil, gas, or other minerals and the right of access to such minerals, (2) a remainder interest, or (3) a perpetual restriction on the use that can be made of the property.

Estate tax exclusion for qualified conservation easements

For Federal estate tax purposes, up to 40 percent of the value of land subject to a qualified conservation easement may be excluded from a decedent's estate at the election of the executor. The maximum exclusion permitted for qualified conservation easements is $500,000. In addition, if the value of the conservation easement is less than 30 percent of the value of the land (determined without regard to the value of the easement and reduced by the value of any retained development right), the exclusion percentage is reduced by two percentage points for each percentage point (or fraction thereof) by which the value of the qualified conservation easement is less than 30 percent of the value of the land.

A qualified conservation easement must meet the following requirements: (1) the land must be located within the U.S. or a possession of the U.S.; (2) the land must have been owned by the decedent or a member of the decedent's family at all times during the three?year period ending on the date of the decedent's death; and (3) a qualified conservation contribution of a qualified real property interest (see above) must have been granted by the decedent, a member of the decedent's family, the executor of the decedent's estate, or the trustee of a trust holding the land no later than the date of the executor's election. For this purpose, preservation of a historically important land area or a certified historic structure does not qualify as a conservation purpose. In addition, the qualified real property interest must include a prohibition on more than a de minimis use for a commercial recreational activity.

Property financed with acquisition indebtedness is eligible for the exclusion only to the extent of the net equity in the property, and the exclusion does not extend to the value of any development rights retained by the decedent or donor. To the extent the value of the land acquired at death is excluded from the decedent's estate under the qualified conservation easement rule, the land will receive a carryover rather than a stepped-up basis.

Cost-sharing payments

To further conservation, Federal and State governments implement a number of programs to share in taxpayers' costs of making improvements to land. These costs do not normally improve the income?producing capacity of the property. To encourage participation in these programs, taxpayers may exclude certain payments received under these programs from their gross income. To qualify for exclusion, the payments must be made primarily for the purpose of conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife and may not increase substantially the annual income derived from the property. Taxpayers claiming the exclusion may not increase the basis of the improved property by the excluded amount and may not claim any deduction or credit for any expenditure associated with the excluded payment.

Tax-exempt bonds

States and local governments may issue tax-exempt bonds for land conservation and preservation purposes so long as: (1) no more than ten percent of the bond proceeds is used by private entities in a trade or business if payments or security associated with that use are available to pay principal or interest on the bonds; and (2) no more than five percent of the bond proceeds is loaned to private businesses or individuals. If these private activity requirements are not met, tax-exempt private activity bonds may nonetheless be issued, subject to per?State volume limits, for the following land conservation and preservation purposes: water, sewage, solid waste disposal, and hazardous waste facilities; and redevelopment infrastructure in blighted areas if the bonds are supported by incremental property taxes.

Administration budget proposals

The President's Budget for FY 2003 includes two proposals to improve upon these tax incentives and further encourage the restoration and preservation of America's land.

Brownfields remediation costs

The Administration believes that encouraging environmental remediation is an important national goal. The brownfields provision encourages the cleanup of contaminated brownfields, thereby enabling them to be brought into productive use in the economy and mitigating potential harms to public health. The current?law incentive was made temporary to encourage faster cleanup of brownfields. Experience has shown, however, that many taxpayers are unable to take advantage of the incentive because environmental remediation often extends over a number of years. For that reason, the President's budget proposed a permanent extension of the brownfields tax incentive. Extending the special treatment accorded to brownfields on a permanent basis would remove doubt among taxpayers as to the future deductibility of remediation expenditures and would promote the goal of encouraging environmental remediation. The Administration's brownfields proposal was introduced by Mr. Coyne and Mr. Weller as H.R. 1439.

The revenue cost of the proposal is estimated to be $1.1 billion over FY 2003?2007. Treasury estimates that the proposal, at a $300 million annual cost, will leverage approximately $2 billion per year in private investment and will return 4,000 brownfields per year to productive use.

Conservation sales

Some landowners may want their land to be protected for conservation purposes but cannot afford simply to donate either the land or an easement on the land, especially if the land is the landowner's primary salable asset. By adding an incentive for sales to qualified conservation groups, the President's Budget complements the existing provisions that encourage charitable donations. This proposal would encourage the sale of appreciated, environmentally sensitive land and land rights to qualified conservation groups, thus achieving conservation goals through voluntary sales of property, rather than imposing government regulation on land use. The proposal would achieve this goal by strengthening the ability of conservation groups to compete with other potential buyers of appreciated, environmentally sensitive land.

Under the Administration proposal, when land (or an interest in land or water) is voluntarily sold for conservation purposes (as defined below), only 50 percent of any capital gain would be included in the seller's income. The 50?percent exclusion is based on what the gain would have been without taking improvements into account (that is, the taxpayer may exclude 50 percent of the excess of (a) the purchase price allocable to the property other than improvements, over (b) the basis allocable to the property other than improvements). To be eligible for the partial exclusion, the sale must be to a qualified conservation organization. A qualified conservation organization is either a governmental unit or a charity that is a qualified organization under section 170(h)(3) and that is organized and operated primarily for conservation purposes. Conservation purposes are the preservation of land areas for outdoor recreation by, or the education of, the general public; the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem; or the preservation of open space where the preservation is for the scenic enjoyment of the general public or pursuant to a clearly delineated Federal, State, or local governmental conservation policy.

The buyer must provide a written statement representing that it is a qualified conservation organization and that it intends to hold the property exclusively for conservation purposes and not to transfer it for valuable consideration other than to a qualified conservation organization in a transaction that would qualify for this 50 percent exclusion if the buyer/transferor were taxable. The partial exclusion would not be available for sales pursuant to a condemnation order but would apply to any gain recognized in a sale that is made in response to the threat or imminence of such an order. If the property sold is less than the taxpayer's entire interest in the property, it must satisfy requirements like those applicable to qualified conservation contributions under section 170(h). In addition, the taxpayer or a member of the taxpayer's family must have owned the property sold for the three years immediately preceding the date of the sale.

Similar proposals were introduced by Mr. Kolbe as H.R. 960 and by Mr. Portman (with a number of cosponsors) as H.R. 2290.

The provision would be effective for sales taking place on or after January 1, 2004. The revenue cost of the proposal is estimated to be $328 million over FY 2003-2007.

ENERGY-RELATED INCENTIVES

Current law tax incentives for energy efficiency and alternative fuels

Tax incentives currently provide an important element of support for energy?efficiency improvements and increased use of renewable and alternative fuels. Current incentives are estimated to total approximately $800 million for fiscal years 2003 through 2007. They include a tax credit for electric vehicles and expensing for clean?fuel vehicles, a tax credit for the production of electricity from wind or biomass, a tax credit for certain solar energy property, and an exclusion from gross income for certain energy conservation subsidies provided by public utilities to their customers.

Electric and clean?fuel vehicles and clean?fuel vehicle refueling property

A 10-percent tax credit is provided for the cost of a qualified electric vehicle, up to a maximum credit of $4,000. A qualified electric vehicle is a motor vehicle that is powered primarily by an electric motor drawing current from rechargeable batteries, fuel cells, or other portable sources of electric current, the original use of which commences with the taxpayer, and that is acquired for use by the taxpayer and not for resale. The full amount of the credit is available for purchases prior to 2004. The credit begins to phase down in 2004 and does not apply to vehicles placed in service after 2006.

Certain costs of qualified clean?fuel vehicles and clean?fuel vehicle refueling property may be deducted when such property is placed in service. Qualified electric vehicles do not qualify for the clean?fuel vehicle deduction. The deduction begins to phase down in 2004 and does not apply to property placed in service after 2006.

Energy from wind or biomass

A 1.5?cent?per?kilowatt?hour tax credit is provided for electricity produced from wind, "closed?loop" biomass (organic material from a plant that is planted exclusively for purposes of being used at a qualified facility to produce electricity), and poultry waste. The electricity must be sold to an unrelated person and the credit is limited to the first 10 years of production. The credit applies only to facilities placed in service before January 1, 2004. The credit amount is indexed for inflation after 1992.

Solar and geothermal energy

A 10-percent investment tax credit is provided to businesses for qualifying equipment that (1) uses solar energy to generate electricity, to heat or cool or provide hot water for use in a structure, or to provide solar process heat or (2) is used to produce, distribute, or use energy derived from a geothermal deposit.

Ethanol and renewable source methanol

An income tax credit and an excise tax exemption are provided for ethanol and renewable source methanol used as a fuel. In general, the income tax credit is 53 cents per gallon for ethanol and 60 cents per gallon for renewable source methanol. As an alternative to the income tax credit, gasohol blenders may claim an equivalent gasoline tax exemption for ethanol and renewable source methanol that is blended into qualifying gasohol.

The income tax credit expires on December 31, 2007, and the excise tax exemption expires on September 30, 2007. In addition, the ethanol credit and exemption are each reduced by 1 cent per gallon in 2003 and by an additional 1 cent per gallon in 2005. Neither the credit nor the exemption applies during any period in which motor fuel taxes dedicated to the Highway Trust Fund are limited to 4.3 cents per gallon. Under current law, the motor fuel tax dedicated to the Highway Trust Fund will be limited to 4.3 cents per gallon beginning on October 1, 2005.

Energy conservation subsidies

Subsidies provided by public utilities to their customers for the purchase or installation of energy conservation measures are excluded from the customers' gross income. An energy conservation measure is any installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand with respect to a dwelling unit.

Administration budget proposals

The Administration's budget for FY 2003 proposes a number of tax incentives for renewable energy and more efficient energy use. The budget also proposes to modify the tax treatment of nuclear decommissioning funds. The Administration's budget proposals are described below.1

Electricity from wind and biomass

The President's Budget proposed to extend the credit for electricity produced from wind and biomass for three years to facilities placed in service before January 1, 2005. This proposal has since been enacted, in part, by the Economic Security and Worker Assistance Act of 2002, which provides a two?year extension of the credit. In addition, the President's Budget proposes to expand eligible biomass sources to include certain biomass from forest?related resources, agricultural sources, and other specified sources. Special rules would apply to biomass facilities placed in service before January 1, 2002. Electricity produced at such facilities from newly eligible sources would be eligible for the credit only from January 1, 2002, through December 31, 2004. The credit for such electricity would be computed at a rate equal to 60 percent of the generally applicable rate. Electricity produced from newly eligible biomass co?fired in coal plants would also be eligible for the credit only from January 1, 2002, through December 31, 2004. The credit for such electricity would be computed at a rate equal to 30 percent of the generally applicable rate.

Residential solar energy systems

The President's Budget proposes a new tax credit for individuals who purchase solar energy equipment used to generate electricity (photovoltaic equipment) or heat water (solar water heating equipment) for use in a dwelling unit that the individual uses as a residence. The credit would be available only for equipment used exclusively for purposes other than heating swimming pools. The proposed credit would be equal to 15 percent of the cost of the equipment and its installation. The credit would be nonrefundable and an individual would be allowed a lifetime maximum credit of $2,000 per residence for photovoltaic equipment and $2,000 per residence for solar water heating equipment. The credit would apply only to solar water heating equipment placed in service after December 31, 2001, and before January 1, 2006, and to photovoltaic systems placed in service after December 31, 2001, and before January 1, 2008.

Fuel from landfill methane

The President's Budget proposes to extend the section 29 credit for fuel produced from landfill methane produced at a facility (or portion of a facility) that is placed in service after December 31, 2001. Fuel produced at such facilities would be eligible for the credit through December 31, 2010. The proposal would also expand the credit by permitting the credit for fuel used by the taxpayer to produce electricity. The credit for fuel produced at landfills subject to EPA's 1996 New Source Performance Standards/Emissions Guidelines would be limited to two?thirds of the otherwise applicable amount. In the case of landfills with facilities that currently qualify for the section 29 credit, this limitation would not apply until after 2007.

Ethanol and renewable source methanol

The President's Budget proposes to extend the income tax credit and excise tax exemption for ethanol and renewable source methanol through December 31, 2010. The current law rule providing that neither the credit nor the exemption applies during any period in which motor fuel taxes dedicated to the Highway Trust Fund are limited to 4.3 cents per gallon would be retained. As under current law, the credit and the exemption would each be reduced by 1 cent per gallon in 2003 and by an additional 1 cent per gallon in 2005.

Hybrid and fuel cell vehicles

The President's Budget proposes to provide temporary tax credits for certain hybrid and fuel cell vehicles.

A credit of $250 to $4,000 would be available for purchases of qualifying hybrid vehicles after December 31, 2001, and before January 1, 2008. A hybrid vehicle is a vehicle that draws propulsion from both an on?board internal combustion or heat engine using combustible fuel and an on?board rechargeable energy storage system. To qualify for the minimum credit, a hybrid vehicle would be required to derive at least 5 percent of its maximum available power from the rechargeable energy storage system. Larger credits would be available for vehicles that derive larger percentages of power from the rechargeable energy storage system and for vehicles that meet specified fuel economy standards.

A credit of $1,000 to $8,000 would be available for the purchase of qualifying fuel cell vehicles after December 31, 2001, and before January 1, 2008. A fuel cell vehicle is a motor vehicle propelled by power derived from one or more cells that convert chemical energy directly into electricity by combining oxygen with on?board hydrogen (including hydrogen produced from on?board fuel that requires reformation before use). To qualify for the minimum credit, a fuel cell vehicle would be required to meet a minimum fuel economy standard for its weight class. Larger credits would be available for vehicles that achieve higher fuel economy standards.

Combined heat and power systems

To encourage more efficient energy usage, the President's Budget proposes to provide a 10?percent investment credit for qualifying combined heat and power (CHP) systems. CHP systems are used to produce electricity (and/or mechanical power) and usable heat from the same primary energy source. To qualify for the credit, a system would be required to produce at least 20 percent of its total useful energy in the form of thermal energy and at least 20 percent in the form of electrical and/or mechanical power and would also be required to satisfy an energy efficiency standard. The credit would apply to CHP equipment placed in service after December 31, 2001, and before January 1, 2007.

Nuclear decommissioning funds

The President's Budget proposes to repeal the current law provision that limits deductible contributions to a nuclear decommissioning fund to the amount included in the taxpayer's cost of service for ratemaking purposes. Thus, unregulated taxpayers would be allowed a deduction for amounts contributed to a qualified nuclear decommissioning fund. The Administration also proposes to permit funding of all decommissioning costs (including pre?1984 costs) through qualified nuclear decommissioning funds. Contributions to fund pre?1984 costs would be deductible except to the extent a deduction (other than under the qualified fund rules) or an exclusion from income has been previously allowed with respect to those costs. The Administration's proposal would clarify that any transfer of a qualified nuclear decommissioning fund in connection with the transfer of the power plant with which it is associated would be nontaxable and no gain or loss will be recognized by the transferor or transferee as a result of the transfer. In addition, the proposal would permit taxpayers to make deductible contributions to a qualified fund after the end of the nuclear power plant's estimated useful life and would provide that nuclear decommissioning costs are deductible when paid.

SAFE Act

The Administration is pleased that the House, following the lead of this Committee, has passed H.R. 4, the Securing America's Future Energy Act of 2001. The Administration said, when the House was considering H.R. 4, that it was an important step in ensuring the Nation's energy security. We should also note that the inclusion in H.R. 4 of incentives from the President's budget to encourage conservation, energy efficiency, and the use of renewable and alternative energy sources advances vital elements of the Administration's environmental initiatives.

CONCLUSION

Mr. Chairman, we believe that the Administration's proposed tax initiatives represent sound policy that can produce significant environmental benefits for decades to come. While this concludes my prepared testimony. I will be pleased to answer any questions you or other members of the Subcommittee may have.



LOAD-DATE: May 3, 2002