Report text available as:

  • TXT
  • PDF   (PDF provides a complete and accurate display of this text.) Tip ?
105th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 1st Session                                                    105-332
_______________________________________________________________________


 
         EDUCATION SAVINGS ACT FOR PUBLIC AND PRIVATE SCHOOLS

                                _______
                                

October 21, 1997.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

_______________________________________________________________________


    Mr. Archer, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 2646]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 2646) to amend the Internal Revenue Code of 1986 to 
allow tax-free expenditures from education individual 
retirement accounts for elementary and secondary school 
expenses, to increase the maximum annual amount of 
contributions to such accounts, and for other purposes, having 
considered the same, report favorably thereon with an amendment 
and recommend that the bill as amended do pass.

                                CONTENTS

                                                                   Page
  I. Summary and Background...........................................3
          A. Purpose and Summary.................................     3
          B. Background and Need for Legislation.................     3
          C. Legislative History.................................     3
 II. Explanation of the Bill..........................................4
          A. Education Savings Act for Public and Private Schools     4
          B. Employer Deduction for Vacation Pay.................     6
III. Vote of the Committee............................................9
 IV. Budget Effects of the Bill......................................10
          A. Committee Estimates of Budgetary Effects............    10
          B. Budget Authority and Tax Expenditures...............    11
          C. Cost Estimate Prepared by the Congressional Budget 
              Office.............................................    11
  V. Other Matters To Be Discussed Under the Rules of the House......13
          A. Committee Oversight Findings and Recommendations....    13
          B. Summary of Findings and Recommendations of the 
              Committee on Government Reform and Oversight.......    13
          C. Constitutional Authority Statement..................    13
          D. Information Relating to Unfunded Mandates...........    14
          E. Applicability of House Rule XXI5(c).................    14
 VI. Changes in Existing Law Made by the Bill, as Reported...........14
VII. Dissenting Views................................................18

    The amendment is as follows:
    Strike out all after the enacting clause and insert in lieu 
thereof the following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Education Savings Act for Public and 
Private Schools''.

SEC. 2. MODIFICATIONS TO EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.

  (a) Tax-Free Expenditures for Elementary and Secondary School 
Expenses.--
          (1) In general.--Section 530(b)(2) of the Internal Revenue 
        Code of 1986 is amended to read as follows:
          ``(2) Qualified education expenses.--
                  ``(A) In general.--The term `qualified education 
                expenses' means--
                          ``(i) qualified higher education expenses (as 
                        defined in section 529(e)(3)), and
                          ``(ii) qualified elementary and secondary 
                        education expenses (as defined in paragraph 
                        (4)).
                Such expenses shall be reduced as provided in section 
                25A(g)(2).
                  ``(B) Qualified state tuition programs.--Such term 
                shall include amounts paid or incurred to purchase 
                tuition credits or certificates, or to make 
                contributions to an account, under a qualified State 
                tuition program (as defined in section 529(b)) for the 
                benefit of the beneficiary of the account.''
          (2) Qualified elementary and secondary education expenses.--
        Section 530(b) of such Code is amended by adding at the end the 
        following new paragraph:
          ``(4) Qualified elementary and secondary education 
        expenses.--
                  ``(A) In general.--The term `qualified elementary and 
                secondary education expenses' means tuition, fees, 
                tutoring, special needs services, books, supplies, 
                computer equipment (including related software and 
                services) and other equipment, transportation, and 
                supplementary expenses required for the enrollment or 
                attendance of the designated beneficiary of the trust 
                at a public, private, or religious school.
                  ``(B) Special rule for homeschooling.--Such term 
                shall include expenses described in subparagraph (A) 
                required for education provided for homeschooling if 
                the requirements of any applicable State or local law 
                are met with respect to such education.
                  ``(C) School.--The term `school' means any school 
                which provides elementary education or secondary 
                education (through grade 12), as determined under State 
                law.''
          (3) Conforming amendments.--Subsections (b)(1) and (d)(2) of 
        section 530 of such Code are each amended by striking 
        ``higher'' each place it appears in the text and heading 
        thereof.
  (b) Increase in Maximum Annual Contributions.--
          (1) In general.--Section 530(b)(1)(A)(iii) of the Internal 
        Revenue Code of 1986 is amended by striking ``$500'' and 
        inserting ``$2,500''.
          (2) Conforming amendments.--
                  (A) Section 530(d)(4)(C) of such Code is amended by 
                striking ``$500'' and inserting ``$2,500''.
                  (B) Section 4973(e)(1)(A) of such Code is amended by 
                striking ``$500'' and inserting ``$2,500''.
  (c) Waiver of Age Limitations for Children With Special Needs.--
Paragraph (1) of section 530(b) of the Internal Revenue Code of 1986 is 
amended by adding at the end the following flush sentence:
        ``The age limitations in the preceding sentence shall not apply 
        to any designated beneficiary with special needs (as determined 
        under regulations prescribed by the Secretary).''
  (d) Corporations Permitted to Contribute to Accounts.--Paragraph (1) 
of section 530(c) of the Internal Revenue Code of 1986 is amended by 
striking ``The maximum amount which a contributor'' and inserting ``In 
the case of a contributor who is an individual, the maximum amount the 
contributor''.
  (e) Effective Date; References.--
          (1) Effective date.--The amendments made by this section 
        shall take effect as if included in the amendments made by 
        section 213 of the Taxpayer Relief Act of 1997.
          (2) References.--Any reference in this section to any section 
        of the Internal Revenue Code of 1986 shall be a reference to 
        such section as added by the Taxpayer Relief Act of 1997.

SEC. 3. OVERRULING OF SCHMIDT BAKING COMPANY CASE.

  (a) In General.--The Internal Revenue Code of 1986 shall be applied 
(other than with respect to severance pay) without regard to the result 
reached in the case of Schmidt Baking Company, Inc. v. Commissioner of 
Internal Revenue, 107 T.C. 271 (1996).
  (b) Regulations.--The Secretary of the Treasury or the Secretary's 
delegate shall prescribe regulations to reflect subsection (a).
  (c) Effective Date.--
          (1) In general.--Subsections (a) and (b) shall apply to 
        taxable years ending after October 8, 1997.
          (2) Change in method of accounting.--In the case of any 
        taxpayer required by this section to change its method of 
        accounting for its first taxable year ending after October 8, 
        1997--
                  (A) such change shall be treated as initiated by the 
                taxpayer,
                  (B) such change shall be treated as made with the 
                consent of the Secretary of the Treasury, and
                  (C) the net amount of the adjustments required to be 
                taken into account by the taxpayer under section 481 of 
                the Internal Revenue Code of 1986 shall be taken into 
                account in such first taxable year.

                       I. SUMMARY AND BACKGROUND

                         A. Purpose and Summary

    H.R. 2646, as amended, would expand and modify the 
education savings accounts enacted in the Taxpayer Relief Act 
of 1997 (``1997 Act'') to include elementary and secondary 
education expenses. The bill also provides a revenue offset 
relating to the treatment of the employer deduction for 
vacation pay.

                 B. Background and Need for Legislation

    The bill, as amended, expands the opportunity for use of 
education savings accounts to include elementary and secondary 
school expenses and increases the amount that may be deductible 
to such accounts. The expansion of the education savings 
account is paid for by modifying the treatment of the employer 
deduction for vacation pay.

                         C. Legislative History

    H.R. 2646 1 was introduced by Chairman Archer 
and Speaker Gingrich on October 9, 1997, and was amended by the 
Committee in a markup on October 9, 1997. An amendment in the 
nature of a substitute (offered by Chairman Archer) was adopted 
by a voice vote, with a quorum present. The bill, as amended, 
was ordered favorably reported by a roll call of 19 yeas and 17 
nays on October 9, 1997, with a quorum present.
---------------------------------------------------------------------------
    \1\ An earlier, similar version of this bill was introduced by 
Speaker Gingrich and others on August 1, 1997, as H.R. 2373 (``Parents 
and Students Savings Account Plus Act'').
---------------------------------------------------------------------------

                      II. EXPLANATION OF THE BILL

A. Education Savings Act for Public and Private Schools (sec. 2 of the 
                     bill and sec. 530 of the Code)

                              Present Law

    Code section 530--enacted as part of the Taxpayer Relief 
Act of 1997 (``1997 Act')-- provides that taxpayers may 
establish ``education IRAs,'' meaning certain trusts or 
custodial accounts created exclusively for the purpose of 
paying qualified higher education expenses of a named 
beneficiary. Annual contributions to education IRAs may not 
exceed $500 per designated beneficiary, and may not be made 
after the designated beneficiary reaches age 18. Contributions 
to an education IRA may not be made by certain higher-income 
taxpayers--i.e., the contribution limit is phased out for 
individuals with modified adjusted gross income between $95,000 
and $110,000 ($150,000 and $160,000 for taxpayers filing joint 
returns). No contribution may be made to an education IRA 
during any year in which any contributions are made by anyone 
to a qualified State tuition program on behalf of the same 
beneficiary. 2
---------------------------------------------------------------------------
    \2\ Consistent with the legislative history to the 1997 Act, a 
technical correction is needed to provide that any balance remaining in 
an education IRA will be deemed to be distributed within 30 days after 
the date that the named beneficiary reaches age 30 (or, if earlier, 
within 30 days of the date that the beneficiary dies).
---------------------------------------------------------------------------
    Until a distribution is made from an education IRA, 
earnings on contributions to the account generally are not 
subject to tax. 3 In addition, distributions from an 
education IRA are excludable from gross income to the extent 
that the distribution does not exceed qualified higher 
education expenses incurred by the beneficiary during the year 
the distribution is made (provided that a HOPE credit or 
Lifetime Learning credit is not claimed with respect to the 
beneficiary for the same taxable year). 4 The 
earnings portion of an education IRA distribution not used to 
pay qualified higher education expenses is includible in the 
gross income of the distributee and generally is subject to an 
additional 10-percent tax. 5 However, the additional 
10-percent tax does not apply if a distribution is made of 
excess contributions above the $500 limit (and any earnings 
attributable to such excess contributions) if the distribution 
is made on or before the date that a return is required to be 
filed (including extensions of time) by the contributor for the 
year in which the excess contribution was made. 6 In 
addition, section 530 allows tax-free rollovers of account 
balances from an education IRA benefiting one family member to 
an education IRA benefiting another family member. Section 530 
is effective for taxable years beginning after December 31, 
1997.
---------------------------------------------------------------------------
    \3\ However, education IRAs are subject to the unrelated business 
income tax (``UBIT'') imposed by section 511.
    \4\ For example, if an education IRA has a total balance of 
$10,000, of which $4,000 represents principal (i.e., contributions) and 
$6,000 represents earnings, and if a distribution of $2,000 is made 
from such an account, then $800 of that distribution will be treated as 
a return of principal (which under no event is includible in the gross 
income of the distributee) and $1,200 of the distribution will be 
treated as accumulated earnings. In such a case, if qualified higher 
education expenses of the beneficiary during the year of the 
distribution are at least equal to the $2,000 total amount of the 
distribution (i.e., principal plus earnings), then the entire earnings 
portion of the distribution will be excludible under section 530, 
provided that a Hope credit or Lifetime Learning credit is not claimed 
for that same taxable year on behalf of the beneficiary. If, however, 
the qualified higher education expenses of the beneficiary for the 
taxable year are less than the total amount of the distribution, then 
only a portion of the earnings will be excludable from gross income 
under section 530. Thus, in the example discussed above, if the 
beneficiary incurs only $1,500 of qualified higher education expenses 
in the year that a $2,000 distribution is made, then only $900 of the 
earnings will be excludable from gross income under section 530 (i.e., 
an exclusion will be provided for the pro-rata portion of the earnings, 
based on the ratio that the $1,500 of qualified higher education 
expenses bears to the $2,000 distribution) and the remaining $300 of 
the earnings portion of the distribution will be includible in the 
distributee's gross income.
    \5\ This 10-percent additional tax does not apply if a distribution 
from an education IRA is made on account of the death, disability, or 
scholarship received by the designated beneficiary.
    \6\ A technical correction to the 1997 Act is needed to clarify 
that the additional 10- percent tax will not apply to the distribution 
of any contribution to an education IRA made during a taxable year if 
such distribution is made on or before the date that a return is 
required to be filed (including extensions of time) by the beneficiary 
for the taxable year during which the contribution was made (or, if the 
beneficiary is not required to file such a return, April 15th of the 
year following the taxable year during which the contribution was 
made).
---------------------------------------------------------------------------
    The term ``qualified higher education expenses'' means 
tuition, fees, books, supplies, and equipment required for the 
enrollment or attendance of a designated beneficiary at an 
``eligible educational institution'' (defined by reference to 
sec. 481 of the Higher Education Act of 1965 and generally 
including accredited post-secondary educational institutions 
offering credit toward a bachelor's degree, an associate's 
degree, a graduate-level or professional degree, another 
recognized post-secondary credential and including certain 
proprietary and vocational institutions). The institution must 
be eligible to participate in Department of Education student 
aid programs. Certain room and board expenses also may be 
qualified higher education expenses, but only if the student is 
enrolled at an eligible educational institution on at least a 
half-time basis. Qualified higher education expenses do not 
include elementary or secondary school expenses.

                           Reasons for Change

    The Committee believes that the present-law rules governing 
education IRAs should be expanded to provide a greater 
incentive for families (and other persons) to save for 
educationalpurposes, including for expenses related to 
elementary and secondary school education. The Committee also believes 
that more flexible rules are needed for education IRAs established for 
the benefit of special needs students.

                       explanation of provisions

    The bill increases to $2,500 the present-law annual 
contribution limit of $500 that currently applies to education 
IRAs. Thus, under the bill, aggregate contributions that could 
be made by all contributors to one (or more) education IRAs 
established on behalf of any particular designated beneficiary 
are limited to $2,500 per year.
    In addition, the bill expands the definition of qualified 
education expenses that may be paid with tax-free distributions 
from an education IRA. Specifically, the definition of 
qualified education expenses is expanded to include ``qualified 
elementary and secondary education expenses,'' meaning tuition, 
fees, tutoring, special needs services, books, supplies, 
computer equipment (including related software and services) 
and other equipment, transportation, and supplementary expenses 
required for the enrollment or attendance of a designated 
beneficiary at a public, private, or religious elementary or 
secondary school (through grade 12). ``Qualified elementary and 
secondary education expenses'' also include homeschooling 
education expenses if the requirements of any applicable State 
or local law are met with respect to such homeschooling.
    The bill also provides that, although contributions to an 
education IRA generally may not be made after the designated 
beneficiary reaches age 18, contributions may continue to be 
made to an education IRA in the case of a special needs 
beneficiary (as defined by Treasury Department regulations). 
Moreover, under the bill, in the case of a special needs 
beneficiary, a deemed distribution of any balance in an 
education IRA will not be required when the beneficiary reaches 
age 30.
    Further, the bill clarifies that corporations are permitted 
to make contributions to education IRAs, regardless of the 
income of the corporation during the year of the contribution. 
As under present law, certain higher-income individuals are not 
eligible to make contributions to an education IRA.

                             effective date

    The provisions are effective for taxable years beginning 
after December 31, 1997.

      B. Employer Deductions for Vacation Pay (sec. 3 of the bill)

                              present law

    For deduction purposes, any method or arrangement that has 
the effect of a plan deferring the receipt of compensation or 
other benefits for employees is treated as a deferred 
compensation plan (sec. 404(b)). In general, contributions 
under a deferred compensation plan (other than certain pension, 
profit-sharing and similar plans) are deductible in the taxable 
year in which an amount attributable to the contribution is 
includible in income. However, vacation pay which is treated as 
deferred compensation is deductible for the taxable year of the 
employer in which the vacation pay is paid to the employee 
(sec. 404(a)(5)).
    Temporary Treasury regulations provide that a plan, method, 
or arrangement defers the receipt of compensation or benefits 
to the extent it is one under which an employee receives 
compensation or benefits more than a brief period of time after 
the end of the employer's taxable year in which the services 
creating the right to such compensation or benefits are 
performed. A plan, method or arrangement is presumed to defer 
the receipt of compensation for more than a brief period of 
time after the end of an employer's taxable year to the extent 
that compensation is received after the 15th day of the 3rd 
calendar month after the end of the employer's taxable year in 
which the related services are rendered (the ``2\1/2\ month'' 
period). A plan, method or arrangement is not considered to 
defer the receipt of compensation or benefits for more than a 
brief period of time after the end of the employer's taxable 
year to the extent that compensation or benefits are received 
by the employee on or before the end of the applicable 2\1/2\ 
month period. (Temp. Treas. Reg. Sec. 1.404(b)-1T A-2.)
    The Tax Court recently addressed the issue of when vacation 
pay and severance pay are considered deferred compensation in 
Schmidt Baking Co., Inc., 107 T.C. 271 (1996). In Schmidt 
Baking, the taxpayer was an accrual basis taxpayer with a 
fiscal year that ended December 28, 1991. The taxpayer funded 
its accrued vacation and severance pay liabilities for 1991 by 
purchasing an irrevocable letter of credit on March 13, 1992. 
The parties stipulated that the letter of credit represented a 
transfer of substantially vested interest in property to 
employees for purposes of section 83, and that the fair market 
value of such interest was includible in the employees' gross 
incomes for 1992 as a result of the transfer.\7\ The Tax Court 
held that the purchase of the letter of credit, and the 
resulting income inclusion, constituted payment of the vacation 
and severance pay within the 2\1/2\ month period. Thus, the 
vacation and severance pay were treated as received by the 
employees within the 2\1/2\-month period and were not treated 
as deferred compensation. The vacation pay and severance pay 
were deductible by the taxpayer for its 1991 fiscal year 
pursuant to its normal accrual method of accounting.
---------------------------------------------------------------------------
    \7\ While the rules of section 83 may govern the income inclusion, 
section 404 governs the deduction if the amount involved is deferred 
compensation.
---------------------------------------------------------------------------

                           reasons for change

    Prior to the Tax Reform Act of 1986, an employer could make 
an election to deduct an amount representing a reasonable 
addition to a reserve account for vacation pay earned by 
employees before the close of the current year and expected to 
be paid by the close of that year or within 12 months 
thereafter. As a result of concerns that this rule provided 
more favorable tax treatment for vacation pay than other types 
of compensation or deductible items, the Tax Reform Act of 1986 
limited this special rule to vacation pay that is paid during 
the current taxable year or within 8\1/2\ months after the 
close of the taxable year of the employer with respect to which 
the vacation pay was earned by employees.
    The tax treatment of vacation pay was again changed in the 
Omnibus Budget Reconciliation Act of 1987 (``OBRA 1987''). At 
that time, the Congress was concerned that then-present law 
provided more favorable tax treatment for vacation pay that was 
deferred by employees beyond the end of the year than was 
provided for other deferred benefits. The House and Senate 
bills would have repealed the reserve for accrued vacation pay 
and would have provided that deductions for vacation pay 
generally would be allowed in any taxable year for amounts paid 
during the year, plus vested vacation amounts paid or funded 
within 2\1/2\ months after the end of the year. The conference 
agreement followed a different approach, and provided that 
``vacation pay earned during any taxable year, but not paid to 
employees on or before the date that is 2\1/2\ months after the 
end of the taxable year, is deductible for the taxable year of 
the employer in which it is paid to employees.'' \8\ The key 
difference between the House and Senate provisions and the 
conference agreement to OBRA 1987 is that the conference 
agreement does now allow a deduction for amounts that vest and 
are funded (i.e., are includible in income) within 2\1/2\ 
months after the end of the employer's taxable year.
---------------------------------------------------------------------------
    \8\ H. Rept. 100-495, 921 (Dec. 21, 1987).
---------------------------------------------------------------------------
    The Committee believes that the decision in Schmidt Baking 
reaches an inappropriate result and represents an incorrect 
interpretation of the intent of the Congress in adopting the 
vacation pay provision in OBRA 1987. The Committee believes 
that the intent of that provision was clearly to provide that a 
deduction for vacation pay is not available for the current 
taxable year unless the vacation pay is actually paid to 
employees within 2\1/2\ months after the end of the year. 
Moreover, OBRA 1987 reflects Congressional intent and 
understanding that compensation actually paid beyond the 2\1/2\ 
month period is deferred compensation.
    Further, the Committee is concerned that taxpayers may 
inappropriately extend the rationale of Schmidt Baking to other 
situations in which a deduction or other tax consequences are 
contingent upon an item being paid. The Committee does not 
believe that, as a general rule, letters of credit and similar 
mechanisms should be considered payment for any purposes of the 
Code.

                        Explanation of Provision

    The bill specifically overrules the result in Schmidt 
Baking and provides that, except with respect to severance 
pay,9 the Internal Revenue Code will be applied 
without regard to the result reached in that case. Thus, under 
the bill, the fact that an item is includible in income is not 
taken into account in determining whether or not payment has 
been made. For example, with respect to the determination of 
whether an item of compensation (other than severance pay) is 
deferred compensation, the fact that the item is includible in 
the income of employees within the applicable 2\1/2\ month 
period is not taken into account in determining whether there 
has been payment or receipt by the employees. Rather, the item 
must have been actually paid or received within the 2\1/2\ 
month period in order for the compensation not to be treated as 
deferred compensation.
---------------------------------------------------------------------------
    \9\ A provision that overrules Schmidt Baking with respect to 
severance pay is included in H.R. 2644, the ``United States-Caribbean 
Trade Partnership Act,'' as reported by the Committee on Ways and Means 
on October 9, 1997.
---------------------------------------------------------------------------
    While Schmidt Baking involved only vacation pay and 
severance pay, there is concern that this type of arrangement 
may be tried to circumvent other provisions of the Code where 
payment is required in order for a deduction to occur. Thus, 
the provision is not limited to vacation pay or the 
determination of whether compensation is deferred compensation.
    It is intended that similar arrangements, in addition to 
the letter of credit approach used in Schmidt Baking, do not 
constitute payment, even if there is an income inclusion. Thus, 
for example, payment does not include the furnishing of a note 
or letter or other evidence of indebtedness of the taxpayer, 
whether or not the evidence is guaranteed by any other 
instrument or by any third party. As a further example, payment 
does not include a promise of the taxpayer to provide service 
or property in the future (whether or not the promise is 
evidenced by a contract or other written agreement). In 
addition, payment does not include an amount transferred as a 
loan, refundable deposit, or contingent payment.
    The provision does not affect the determination of whether 
an item is includible in income. Thus, for example, using the 
mechanism in Schmidt Baking for vacation pay still results in 
income inclusion to the employees, but the employer is not 
entitled to a deduction for the vacation until actually paid to 
and received by the employees.
    Similarly, the provision does not affect situations in 
which payment is not required in order for a deduction to 
occur. Thus, the provision does not change the general rule 
that deferred compensation (other than deferred compensation 
provided through certain types of plans), other than vacation 
pay, is deductible in the taxable year in which it is 
includible in the gross income of employees participating in 
the plan.

                             Effective Date

    The provision is effective for taxable years ending after 
October 8, 1997. Any change in method of accounting required by 
the provision is treated as initiated by the taxpayer with the 
consent of the Secretary of the Treasury. Any adjustment 
required by section 481 as a result of the change is taken into 
account in the year of the change.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 2(l)(2)(B) of rule XI of the 
Rules of the House of Representatives, the following statements 
are made concerning the votes of the Committee on Ways and 
Means in its consideration of the bill H.R. 2646.

Motion to report the bill

    The bill, H.R. 2646, as amended, was ordered favorably 
reported by a roll call vote of 19 yeas to 17 nays (with a 
quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative              Yea       Nay     Present    Representative       Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Archer......................        X   ........  ........  Mr. Rangel........  ........        X   ........
Mr. Crane.......................        X   ........  ........  Mr. Stark.........  ........        X   ........
Mr. Thomas......................        X   ........  ........  Mr. Matsui........  ........        X   ........
Mr. Shaw........................        X   ........  ........  Mrs. Kennelly.....  ........        X   ........
Mrs. Johnson....................  ........        X   ........  Mr. Coyne.........  ........        X   ........
Mr. Bunning.....................  ........  ........  ........  Mr. Levin.........  ........        X   ........
Mr. Houghton....................  ........        X   ........  Mr. Cardin........  ........        X   ........
Mr. Herger......................        X   ........  ........  Mr. McDermott.....  ........        X   ........
Mr. McCrery.....................        X   ........  ........  Mr. Kleczka.......  ........        X   ........
Mr. Camp........................        X   ........  ........  Mr. Lewis.........  ........        X   ........
Mr. Ramstad.....................        X   ........  ........  Mr. Neal..........  ........        X   ........
Mr. Nussle......................        X   ........  ........  Mr. McNulty.......  ........        X   ........
Mr. Johnson.....................        X   ........  ........  Mr. Jefferson.....  ........        X   ........
Ms. Dunn........................        X   ........  ........  Mr. Tanner........  ........  ........  ........
Mr. Collins.....................        X   ........  ........  Mr. Becerra.......  ........        X   ........
Mr. Portman.....................        X   ........  ........  Mrs. Thurman......  ........        X   ........
Mr. English.....................        X   ........  ........                                                  
Mr. Ensign......................        X   ........  ........                                                  
Mr. Christensen.................        X   ........  ........                                                  
Mr. Watkins.....................        X   ........  ........                                                  
Mr. Hayworth....................        X   ........  ........                                                  
Mr. Weller......................  ........  ........  ........                                                  
Mr. Hulshof.....................        X   ........  ........                                                  
----------------------------------------------------------------------------------------------------------------

Vote on amendment

    An amendment by Mr. Rangel, that would strike the provision 
which expands education savings accounts and substitute a 
provision that modifies the education zone bond provisions of 
the Taxpayer Relief Act of 1997, to the Chairman's amendment in 
the nature of a substitute, was defeated by a roll call vote of 
15 yeas to 20 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative              Yea       Nay     Present    Representative       Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Archer......................  ........        X   ........  Mr. Rangel........        X   ........  ........
Mr. Crane.......................  ........        X   ........  Mr. Stark.........        X   ........  ........
Mr. Thomas......................  ........        X   ........  Mr. Matsui........        X   ........  ........
Mr. Shaw........................  ........        X   ........  Mrs. Kennelly.....        X   ........  ........
Mrs. Johnson....................  ........        X   ........  Mr. Coyne.........        X   ........  ........
Mr. Bunning.....................  ........  ........  ........  Mr. Levin.........        X   ........  ........
Mr. Houghton....................  ........        X   ........  Mr. Cardin........        X   ........  ........
Mr. Herger......................  ........        X   ........  Mr. McDermott.....        X   ........  ........
Mr. McCrery.....................  ........        X   ........  Mr. Kleczka.......        X   ........  ........
Mr. Camp........................  ........        X   ........  Mr. Lewis.........        X   ........  ........
Mr. Ramstad.....................  ........        X   ........  Mr. Neal..........        X   ........  ........
Mr. Nussle......................  ........        X   ........  Mr. McNulty.......        X   ........  ........
Mr. Johnson.....................  ........  ........  ........  Mr. Jefferson.....        X   ........  ........
Ms. Dunn........................  ........        X   ........  Mr. Tanner........  ........  ........  ........
Mr. Collins.....................  ........  ........  ........  Mr. Becerra.......        X   ........  ........
Mr. Portman.....................  ........        X   ........  Mrs. Thurman......        X   ........  ........
Mr. English.....................  ........        X   ........                                                  
Mr. Ensign......................  ........        X   ........                                                  
Mr. Christensen.................  ........        X   ........                                                  
Mr. Watkins.....................  ........        X   ........                                                  
Mr. Hayworth....................  ........        X   ........                                                  
Mr. Weller......................  ........        X   ........                                                  
Mr. Hulshof.....................  ........        X   ........                                                  
----------------------------------------------------------------------------------------------------------------

                     IV. BUDGET EFFECTS OF THE BILL

                         A. Committee Estimates

    In compliance with clause 7(a) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the estimated budget effects of H.R. 2646 as 
reported.
    The bill, as reported, is estimated to have the following 
effect on the budget:

ESTIMATED BUDGET EFFECTS OF H.R. 2646, THE ``EDUCATION SAVINGS ACT FOR PUBLIC AND PRIVATE SCHOOLS,'' AS APPROVED
                                       BY THE COMMITTEE ON WAYS AND MEANS                                       
                                [Fiscal years 1998-2002, in millions of dollars]                                
----------------------------------------------------------------------------------------------------------------
                                                                                                          1998- 
              Provision                  Effective      1998      1999      2000      2001      2002      2002  
----------------------------------------------------------------------------------------------------------------
1. Extend present-law education IRAs                                                                            
 to primary and secondary                                                                                       
 educational expenses; increase the                                                                             
 contribution amount to $2,500;                                                                                 
 expand to include educational                                                                                  
 savings for special needs students;                                                                            
 allow corporations to contribute to                                                                            
 education IRAs.....................          1/1/98      -115      -485      -644      -700      -636    -2,580
2. Clarify deduction for accrued                                                                                
 vacation pay.......................    tyea 10/8/97       705     1,111       584       120       126     2,646
      Net total.....................  ..............       590       626       -60      -580      -510        66
----------------------------------------------------------------------------------------------------------------
Legend for ``Effective'' column: tyea=taxable years ending after.                                               
                                                                                                                
Note.--Details may not add to totals due to rounding.                                                           
                                                                                                                
Source: Joint Committee on Taxation.                                                                            

                B. Budget Authority and Tax Expenditures

Budget authority

    In compliance with subdivision (B) of clause 2(l)(3) of 
rule XI of the Rules of the House of Representatives, the 
Committee states that the provisions of the bill as reported 
involve no new or increased budget authority.

Tax expenditures

    In compliance with subdivision (B) of clause 2(l)(3) of 
rule XI of the Rules of the House of Representatives, the 
Committee states that the provisions of the bill as reported 
involve increased tax expenditures for the negative amounts 
shown in the revenue table in IV.A., above, and a reduction in 
tax expenditures for the positive amounts shown in the revenue 
table.

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with subdivision (C) of clause 2(l)(3) of 
rule XI of the Rules of the House of Representatives, requiring 
cost estimate prepared by the Congressional Budget Office, the 
Committee advises that the Congressional Budget Office has 
submitted the following statement on this bill.

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, October 17, 1997.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office and the 
Joint Committee on Taxation (JCT) have reviewed H.R. 2646, the 
Education Savings Act for Public and Private Schools. The JCT 
estimates that this bill would increase governmental receipts 
by $590 million in fiscal year 1998, and by $66 million over 
fiscal years 1998 through 2002. CBO concurs with this estimate.
    For a detailed estimate of the H.R. 2646, please refer to 
the enclosed JCT table.
    In accordance with the requirements of Public Law 104-4, 
the Unfunded Mandates Reform Act of 1995, JCT has determined 
that H.R. 2646 contains no federal intergovernmental mandates.
    In addition, JCT has determined that the amendment contains 
one federal private sector mandate. The provision to clarify 
the deduction for accrued vacation pay is estimated to increase 
tax revenue by $2,646 million over fiscal years 1998 through 
2002, which is the estimated amount that the private sector 
will be required to spend in order to comply with this federal 
private-sector mandate. The revenue raised from this provision 
will offset the revenue cost of the education savings 
provisions of the bill.

                                         FEDERAL PRIVATE SECTOR MANDATES                                        
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                                                                          1998- 
                                                              1998     1999     2000     2001     2002     2002 
----------------------------------------------------------------------------------------------------------------
Total Mandate Cost........................................      705     1111      584      120      126     2646
----------------------------------------------------------------------------------------------------------------

    Section 252 of the Balanced Budget and Emergency Deficit 
Control Act of 1985 establishes pay-as-you-go procedures for 
legislation affecting receipts or direct spending through 2007. 
For purposes of enforcing pay-as-you-go procedures, only the 
effects in the budget year and the succeeding four years are 
counted. Because the bill would affect receipts, pay-as-you-go 
procedures would apply. These effects are summarized in the 
table below.

                                          PAY-AS-YOU-GO CONSIDERATIONS                                          
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                                                                          1998- 
                                                              1998     1999     2000     2001     2002     2002 
----------------------------------------------------------------------------------------------------------------
Changes in Receipts.......................................      590      626      -60     -580     -510       66
Changes in Outlays........................................                                                      
(5)Not Applicable                                                                                               
----------------------------------------------------------------------------------------------------------------

    If you wish further details, please feel free to contact me 
or your staff may wish to contact Alyssa Trzeszkowski.
            Sincerely,
                                             June E. O'Neill, Director.
    Enclosure.
                     Congress of the United States,
                               Joint Committee on Taxation,
                                  Washington, DC, October 16, 1997.
Mrs. June O'Neill,
Director, Congressional Budget Office,
Washington, DC.
    Dear Mrs. O'Neill: The staff of the Joint Committee on 
Taxation has reviewed the provisions of H.R. 2646 (``Education 
Savings Act for Public and Private Schools'') as ordered 
reported by the House Committee on Ways and Means on October 9, 
1997. In accordance with the requirements of Public Law 104-4, 
the Unfunded Mandates Reform Act of 1995, we have determined 
that the following provision of the bill contains a Federal 
private sector mandate:
          clarify deduction for accrued vacation pay.
    As indicated in the enclosed revenue table, this provision 
is estimated to increase tax revenue by $2,646 million over 
fiscal years 1998-2002, which is the estimated amount that the 
private sector will be required to spend in order to comply 
with this Federal private sector mandate. The revenue raised 
from this provision will offset the revenue cost of the 
education savings provisions of the bill. This provision will 
not impose a Federal intergovernmental mandate on State, local, 
or tribal governments, as such governmental entities are 
generally exempt from Federal income tax.
    If you would like to discuss this information further, you 
may call me or my staff.
            Sincerely,
                                   Kenneth J. Kies, Chief of Staff.
    Enclosure: Revenue table.

ESTIMATED BUDGET EFFECTS OF H.R. 2646, THE ``EDUCATION SAVINGS ACT FOR PUBLIC AND PRIVATE SCHOOLS,'' AS APPROVED
                                       BY THE COMMITTEE ON WAYS AND MEANS                                       
                                [Fiscal years 1998-2002; in millions of dollars]                                
----------------------------------------------------------------------------------------------------------------
             Provision                  Effective      1998      1999      2000      2001      2002    1998-2002
----------------------------------------------------------------------------------------------------------------
1. Extend present-law education                                                                                 
 IRAs to primary and secondary                                                                                  
 educational expenses; increase the                                                                             
 contribution amount to $2,500;                                                                                 
 expand to include educational                                                                                  
 savings for special needs                                                                                      
 students; allow corporations to                                                                                
 contribute to education IRAs......          1/1/98      -115      -485      -644      -700      -636     -2,580
2. Clarify deduction for accrued                                                                                
 vacation pay......................    tyea 10/8/97       705     1,111       584       120       126      2,646
      Net total....................  ..............       590       626       -60      -580      -510         66
----------------------------------------------------------------------------------------------------------------
Legend for ``Effective'' column: tyea=taxable years ending after.                                               
                                                                                                                
Note.--Details may not add to totals due to rounding.                                                           
                                                                                                                
Source: Joint Committee on Taxation.                                                                            

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

          A. Committee Oversight Findings and Recommendations

    With respect to subdivision (A) of clause 2(l)(3) of rule 
XI of the Rules of the House of Representatives (relating to 
oversight findings), the Committee advises that it was the 
result of the Committee's oversight activities concerning the 
expansion of provisions the education savings provisions to 
elementary and secondary education expenses and a revenue 
offset provision relating to the tax treatment of the employer 
deduction for vacation pay that the Committee concluded that it 
is appropriate to enact the provisions contained in the bill as 
reported.

    B. Summary of Findings and Recommendations of the Committee on 
                    Government Reform and Oversight

    With respect to subdivision (D) of clause 2(l)(3) of rule 
XI of the Rules of the House of Representatives, the Committee 
advises that no oversight findings or recommendations have been 
submitted to this Committee by the Committee on Government 
Reform and Oversight with respect to the provisions contained 
in the bill.

                 C. Constitutional Authority Statement

    With respect to clause 2(l)(4) of rule XI of the Rules of 
the House of Representatives (relating to Constitutional 
Authority), the Committee states that the Committee's action in 
reporting this bill is derived from Article I of the 
Constitution, Section 7 (``All bills for raising revenue shall 
originate in the House of Representatives'') and Section 8 
(``The Congress shall have power to lay and collect taxes, 
duties, imposts and excises, to pay the debts * * * of the 
United States''), and from the 16th Amendment to the 
Constitution.

              D. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
    The Committee has determined that the provision of the bill 
relating to the tax treatment of employer deduction for 
vacation pay will impose a Federal mandate on the private 
sector in the amount shown in the revenue table in IV.A., 
above. This revenue is needed to offset the budget cost of the 
education savings provision. This provision of the bill will 
not impose a Federal intergovernmental mandate on State, local, 
or tribal governments.

                 E. Applicability of House Rule XXI5(c)

    Rule XXI5(c) of the Rules of the House of Representatives 
provides, in part, that ``No bill or joint resolution, 
amendment, or conference report carrying a Federal income tax 
rate increase shall be considered as passed or agreed to unless 
so determined by a vote of not less than three-fifths of the 
Members.'' The Committee has carefully reviewed the provisions 
of the bill, and states that the provisions of the bill do not 
involve any Federal income tax rate increase within the meaning 
of the rule.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In compliance with clause 3 of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman).

                     INTERNAL REVENUE CODE OF 1986

          * * * * * * *

                        Subtitle A--Income Taxes

          * * * * * * *

                  CHAPTER 1--NORMAL TAXES AND SURTAXES

          * * * * * * *

                   Subchapter F--Exempt Organizations

          * * * * * * *

              PART VIII--QUALIFIED STATE TUITION PROGRAMS

          * * * * * * *

SEC. 530. EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.

  (a) * * *
  (b) Definitions and Special Rules.--For purposes of this 
section--
          (1) Education individual retirement account.--The 
        term ``education individual retirement account'' means 
        a trust created or organized in the United States 
        exclusively for the purpose of paying the qualified 
        [higher] education expenses of the designated 
        beneficiary of the trust (and designated as an 
        education individual retirement account at the time 
        created or organized), but only if the written 
        governing instrument creating the trust meets the 
        following requirements:
                  (A) No contribution will be accepted--
                          (i) unless it is in cash,
                          (ii) after the date on which such 
                        beneficiary attains age 18, or
                          (iii) except in the case of rollover 
                        contributions, if such contribution 
                        would result in aggregate contributions 
                        for the taxable year exceeding [$500] 
                        $2,500.
          * * * * * * *
                  (E) Upon the death of the designated 
                beneficiary, any balance to the credit of the 
                beneficiary shall be distributed within 30 days 
                after the date of death to the estate of such 
                beneficiary.
        The age limitations in the preceding sentence shall not 
        apply to any designated beneficiary with special needs 
        (as determined under regulations prescribed by the 
        Secretary).
          [(2) Qualified higher education expenses.--
                  [(A) In general.--The term ``qualified higher 
                education expenses'' has the meaning given such 
                term by section 529(e)(3), reduced as provided 
                in section 25A(g)(2).
                  [(B) Qualified state tuition programs.--Such 
                term shall include amounts paid or incurred to 
                purchase tuition credits or certificates, or to 
                make contributions to an account, under a 
                qualified State tuition program (as defined in 
                section 529(b)) for the benefit of the 
                beneficiary of the account.]
          (2) Qualified education expenses.--
                  (A) In general.--The term ``qualified 
                education expenses'' means--
                          (i) qualified higher education 
                        expenses (as defined in section 
                        529(e)(3)), and
                          (ii) qualified elementary and 
                        secondary education expenses (as 
                        defined in paragraph (4)).
                Such expenses shall be reduced as provided in 
                section 25A(g)(2).
                  (B) Qualified state tuition programs.--Such 
                term shall include amounts paid or incurred to 
                purchase tuition credits or certificates, or to 
                make contributions to an account, under a 
                qualified State tuition program (as defined in 
                section 529(b)) for the benefit of the 
                beneficiary of the account.
          * * * * * * *
          (4) Qualified elementary and secondary education 
        expenses.--
                  (A) In general.--The term ``qualified 
                elementary and secondary education expenses'' 
                means tuition, fees, tutoring, special needs 
                services, books, supplies, computer equipment 
                (including related software and services) and 
                other equipment, transportation, and 
                supplementary expenses required for the 
                enrollment or attendance of the designated 
                beneficiary of the trust at a public, private, 
                or religious school.
                  (B) Special rule for homeschooling.--Such 
                term shall include expenses described in 
                subparagraph (A) required for education 
                provided for homeschooling if the requirements 
                of any applicable State or local law are met 
                with respect to such education.
                  (C) School.--The term ``school'' means any 
                school which provides elementary education or 
                secondary education (through grade 12), as 
                determined under State law.
  (c) Reduction in Permitted Contributions Based on Adjusted 
Gross Income.--
          (1) In general.--[The maximum amount which a 
        contributor] In the case of a contributor who is an 
        individual, the maximum amount the contributor could 
        otherwise make to an account under this section shall 
        be reduced by an amount which bears the same ratio to 
        such maximum amount as--
                  (A) * * *
          * * * * * * *
  (d) Tax Treatment of Distributions.--
          (1) In general.--Any distribution shall be includible 
        in the gross income of the distributee in the manner as 
        provided in section 72(b).
          (2) Distributions for qualified [higher] education 
        expenses.--
                  (A) In general.--No amount shall be 
                includible in gross income under paragraph (1) 
                if the qualified [higher] education expenses of 
                the designated beneficiary during the taxable 
                year are not less than the aggregate 
                distributions during the taxable year.
                  (B) Distributions in excess of expenses.--If 
                such aggregate distributions exceed such 
                expenses during the taxable year, the amount 
                otherwise includible in gross income under 
                paragraph (1) shall be reduced by the amount 
                which bears the same ratio to the amount which 
                would be includible in gross income under 
                paragraph (1) (without regard to this 
                subparagraph) as the qualified [higher] 
                education expenses bear to such aggregate 
                distributions.
                  (C) Election to waive exclusion.--A taxpayer 
                may elect to waive the application of this 
                paragraph for any taxable year.
          * * * * * * *
          (4) Additional tax for distributions not used for 
        educational expenses.--
                  (A) * * *
          * * * * * * *
                  (C) Excess contributions returned before due 
                date of return.--Subparagraph (A) shall not 
                apply to the distribution of any contribution 
                made during a taxable year on behalf of a 
                designated beneficiary to the extent that such 
                contribution exceeds [$500] $2,500 if--
                          (i) * * *
          * * * * * * *

                  Subtitle D--Miscellaneous Excise Tax

          * * * * * * *

               CHAPTER 43--QUALIFIED PENSION, ETC., PLANS

          * * * * * * *

SEC. 4973. TAX ON EXCESS CONTRIBUTIONS TO INDIVIDUAL RETIREMENT 
                    ACCOUNTS, MEDICAL SAVINGS ACCOUNTS, CERTAIN SECTION 
                    403(B) CONTRACTS, AND CERTAIN INDIVIDUAL RETIREMENT 
                    ANNUITIES.

  (a) * * *
          * * * * * * *
  (e) Excess Contributions to Education Individual Retirement 
Accounts.--For purposes of this section--
          (1) In general.--In the case of education individual 
        retirement accounts maintained for the benefit of any 1 
        beneficiary, the term ``excess contributions'' means--
                  (A) the amount by which the amount 
                contributed for the taxable year to such 
                accounts exceeds [$500] $2,500, and
          * * * * * * *

                         VII. DISSENTING VIEWS

    We are deeply committed to the goal of expanding 
educational opportunities in this country. Improving our 
educational system is the most effective way of ensuring that 
all of our citizens have an opportunity to participate fully in 
our economic system. In addition, investments in education are 
necessary for this country to remain competitive in the world 
economy.
    America's children deserve first-class schools that 
emphasize academic excellence in the basics. They need well-
trained, highly motivated teachers to help them achieve high 
standards. Public tax dollars should be used to improve public 
schools--rather than private school ``vouchers'' at public 
expense. We believe in a Federal role in education that 
supports local initiatives for strong neighborhood public 
schools. Every child should have access to a safe, well-
equipped public school.
    We oppose the Committee bill because it is inconsistent 
both with the goal of improving our educational system and with 
our commitment to attaining a balanced budget. The reasons for 
our opposition to the bill can be stated quite simply:
    (1) The Committee bill is a diversion of scarce resources 
for the benefit of a small group of wealthy families. These 
resources should be devoted to the improvement of our public 
school system, which serves approximately 90 percent of the 
students in this country.
    (2) The Committee bill threatens the goal of a balanced 
budget because of its large and growing revenue losses.
    (3) The Committee bill is not administerable and is so 
flawed that it invites taxpayer abuses.
Deficit impact
    The Committee bill results in large and growing revenue 
losses that are inconsistent with the recent budget agreement 
and our goal of a balanced budget. The provision of the bill 
that expands education savings accounts has a revenue loss 
which in the first 5 years increases from $115 million per year 
to over $600 million per year. The bill is funded by a revenue 
offset that is largely a one-time acceleration of receipts into 
the first several years of the budget window. For example, the 
revenue offset is estimated to raise over $1 billion in fiscal 
year 1999, but only $120 million in fiscal year 2001. As a 
result, the bill will produce large and growing revenue losses. 
The Joint Committee on Taxation has estimated that, over a 10-
year budget period, the bill would lose approximately $5 
billion. This means that the annual revenue loss from the bill 
would be well over $1 billion in the later part of that 10-year 
period.
Administerability
    From a technical standpoint, the Committee bill is so 
flawed that it is an embarrassment. The Committee bill is 
largely based on a Senate Floor amendment that was offered by 
Senator Coverdell during the consideration of the recently 
enacted Taxpayer Relief Act of 1997. Like many Senate Floor 
amendments, Senator Coverdell's amendment appears to have been 
developed with some haste, largely for political purposes, and 
with little regard to whether it could actually be 
administered. That is an accurate characterization of the bill 
reported by the Committee.
    The Committee bill would permit taxpayers to contribute 
$2,500 per year, per beneficiary to education savings accounts. 
Income from assets in those accounts would accumulate on a tax-
free basis and that income would be exempt from tax if used to 
pay qualified elementary and secondary education expenses of 
the designated beneficiary. The bill defines qualified expenses 
as being tuition, fees, tutoring, special-needs services, 
books, supplies, computer equipment (including related software 
and services) and other equipment, transportation, and 
supplementary expenses required for enrollment or attendance at 
a public, private, or religious school. The bill provides no 
hint as to how the Internal Revenue Service is to administer 
such a provision or what specifically is included in the broad 
definition of qualified expenses. The technical flaws of the 
bill were convincingly demonstrated during the Committee 
markup.
    Inquiries by Representatives Rangel and Kleczka during the 
markup demonstrated the absurd nature of the Committee bill. In 
response to those inquiries, the Joint Committee staff 
indicated that payments for tutoring would qualify, even if the 
tutoring were provided by a parent or brother or sister of the 
child being tutored and that purchases of cars could qualify as 
transportation expenses in certain circumstances. These are but 
two examples of potential abuses that could occur under the 
careless language of the Committee bill. There are many other 
personal expenses that taxpayers could characterize as 
qualified educational expenses for which tax benefits would be 
provided under the bill. It should be pointed out that this 
opportunity for abuse would be limited to taxpayers with large 
amounts of investment assets.
    The bill purports to limit the availability of educational 
savings accounts to taxpayers with annual incomes of less than 
$95,000 ($160,000 for joint returns). During the markup, 
Representative Becerra inquired whether a wealthy taxpayer 
could avoid this limitation through the simple expedient of 
making a gift to the taxpayer's child, who would then make the 
contribution to the education savings account. Staff of the 
Joint Committee responded that the bill would permit such an 
avoidance technique as long as the child earned less than 
$95,000. In a classic understatement that created laughter in 
the audience, the staff described the bill's income limitation 
as being ``porous.''

Benefits limited to families with wealth

    We recognize that opposing a proposal advertised as 
promoting school choice is not an easy vote for some Members. 
Those Members should examine the substance of the Committee 
bill. If the Committee bill promotes school choice, it does so 
only for a small category of wealthy families.
    1. The only families who would benefit from the legislation 
are families with sufficient investment assets to enable them 
to accumulate income on those assets over a long period of 
time. Families paying educational expenses out of wage and 
salary income would receive no benefit under the Committee 
bill--no matter where those children were schooled.
    2. Families with school-age children would receive little 
benefit. If a family currently has a child in private school, 
that family would receive the full benefit of the Committee 
bill only if it could contribute $2,500 to an investment 
account after paying the current-year costs of the private 
school. With private-school costs averaging over $3,000 per 
year, only a few very fortunate families could afford to make 
such a contribution. In addition, the Committee bill would 
provide substantial benefits only if the money were allowed to 
accumulate in the account over a period of years. Therefore, 
even the few fortunate families able to save for next year's 
tuition costs would receive little benefit.
    3. To receive the maximum benefit, a family would need to 
have both young children (so that there is time to accumulate 
income in the account) and substantial investment assets. The 
following table indicates that few families meet the second 
requirement. The table is based on data collected by the 
Federal Reserve Board in its 1995 Survey of Consumer Finances. 
It shows the median amount of non-retirement investment assets 
held by families in various income categories. Non-retirement 
investment assets include checking accounts, savings accounts, 
and all other financial assets not held in a retirement plan. 
Not surprisingly, it shows that young families and families 
with children have relatively small amounts of non-retirement 
investment assets.

----------------------------------------------------------------------------------------------------------------
                                                                              Median amount of non-retirement   
                                                                                     investment assets          
                                                                          --------------------------------------
                                                               Percent of                 Families     Families 
                       Income category                        families in                headed by       with   
                                                                 income        All       individual    children 
                                                                category     families     under 35     under 18 
                                                                                          years of     years of 
                                                                                            age          age    
----------------------------------------------------------------------------------------------------------------
Less than $10,000...........................................           16         $440         $150          $10
$10,000 to 20,000...........................................           18        1,750          500          400
$20,000 to 30,000...........................................           15        3,000        1,230        1,200
$30,000 to 40,000...........................................           15        5,400        2,500        2,700
$40,000 to 50,000...........................................           10        7,900        3,400        4,950
$50,000 to 75,000...........................................           14       15,800        8,420       10,800
$75,000 to 100,000..........................................            6       27,300       23,200       22,300
$100,000 to 200,000.........................................            5       58,000       43,000       49,200
Over $200,000...............................................            1      255,000      270,000      183,100
----------------------------------------------------------------------------------------------------------------

    We believe that the table above amply demonstrates which 
families will benefit from the Committee bill. The amount of 
non-retirement investment assets is a very good measure of a 
family's ability to take advantage of the Committee bill. 
Without those assets, a family would have to save out of 
current-year wages $2,500 per year, per child to take full 
advantage. We all know how few families can afford to do this.
    If the Committee bill had provided a nonrefundable credit 
available to all taxpayers with children for qualified 
education expenses and that credit were designed to have the 
same revenue loss as the Committee bill, the Joint Committee 
indicated that the amount of that credit would be $15 per child 
per year. This is an indication of the average benefit per 
child received under the Committee bill. The $15 figure is 
merely the amount derived by averaging the large benefits 
received by relatively few taxpayers with the nonexistent or 
nominal benefits received by the overwhelming number of 
taxpayers. Representative McDermott offered an amendment that 
demonstrated this inequitable feature of the Committee bill.

Democratic alternative

    We believe that to improve our public school system we must 
encourage both greater private-sector involvement and provide 
additional resources for our public school system to meet 
pressing needs of school construction and repair, equipment 
purchase, course development, and teacher training. We believe 
the amendment offered by Representative Rangel in the 
Committee,to expand the education zone bond provisions of the 
recently enacted Taxpayer Relief Act, would accomplish both goals.
    Section 226 of the Taxpayer Relief Act of 1997 provides an 
interest-free source of capital for public schools that enter 
into partnerships with the private sector to improve the 
academic curriculum. Those interest-free funds can be used for 
school rehabilitation or repair, purchases of equipment, 
development of course materials, and teacher training expenses.
    The program established under section 226 is targeted to 
the public schools with the greatest needs. To be eligible to 
participate in the program, a school must be located in a 
distressed area eligible for special tax incentives under the 
empowerment zone and enterprise community provisions of the 
Internal Revenue Code or at least 35 percent of the students in 
the school must be eligible for free or reduced-cost lunches 
under the Federal school lunch program. More than half of 
public schools meet those eligibility requirements. In 
addition, a school not meeting those requirements could create 
a special program within the school for disadvantaged students 
and receive benefits for that program.
    The program provides interest-free capital by permitting 
the local government to borrow money from financial 
institutions without interest costs. Under the provision, a tax 
credit is provided to the financial institution equal to the 
interest that would otherwise be required to be paid. The local 
government is required to repay the principal amount of the 
borrowing, but it will receive an interest rate subsidy with a 
value equal to 50 percent of the principal amount.
    Under current law, there is an overall limitation on the 
amount that can be borrowed under the program--$400 million in 
each of the next two calendar years. The amendment offered by 
Representative Rangel would increase that limitation to $4 
billion for each of the next two calendar years. In addition, 
school construction would qualify under the program.
    No benefits would be provided under Representative Rangel's 
amendment to any school unless that school enters into a 
partnership with the private sector to insure that its academic 
program is relevant in today's ever-changing economy.
    We would like to emphasize that all of the benefits from 
Representative Rangel's amendment would flow directly to the 
public school system. The tax credit provided under his 
amendment to financial institutions would merely compensate 
them for the interest that they otherwise would have received 
from the public school system.
    The other point that we would like to emphasize is that 
Representative Rangel's amendment would not be inconsistent 
with our goal of a balanced budget. His amendment would have a 
positive impact on the deficit both during a 5-year and a 10-
year budget window.
    Ninety percent of the students of this country attend 
public schools, and therefore, we should focus our limited 
resources on the public school system.
                                   Charles B. Rangel.
                                   Xavier Becerra.
                                   Richard E. Neal.
                                   Michael R. McNulty.
                                   John Lewis.
                                   Pete Stark.
                                   Ben Cardin.
                                   Wm. J. Jefferson.
                                   Barbara B. Kennelly.
                                   Karen L. Thurman.
                                   Robert T. Matsui.
                                   Jim McDermott.
                                   William J. Coyne.
                                   Sander Levin.