To amend the Internal Revenue Code of 1986 to provide for the proper tax treatment of certain disaster mitigation payments.

Mr. Speaker, I move to suspend the rules and pass the bill (H.R. 1134) to amend the Internal Revenue Code of 1986 to provide for the proper tax treatment of certain disaster mitigation payments.

Mr. Speaker, I ask unanimous consent that all Members may have 5 legislative days within which to revise and extend their remarks and include extraneous material on the bill under consideration.

Mr. Speaker, I yield myself such time as I may consume.

First, let me thank the gentleman from California (Mr. Thomas), chairman of the Committee on Ways and Means, for his consideration and expeditious handling of this bill in allowing us to bring it to the floor. I will include for the Record the statement of the gentleman from California (Chairman Thomas), but first let me read two paragraphs which crystallize the need for the debate.

The gentleman from California states: ``Mr. Speaker, I strongly support H.R. 1134 which embodies the President's budget proposal to provide tax relief to those who will and who have accepted Federal Emergency Management Agency disaster mitigation grants. The bill is necessary to promote effective use of the mitigation grants. These mitigation grants alleviate the severity of the damage caused by unpredictable but anticipated natural disasters. These grants save taxpayer dollars by reducing future Federal disaster relief payments resulting from such disasters.''

If I can read the last paragraph of the statement of the gentleman from California (Mr. Thomas): ``H.R. 1134 will cut taxes by $105 million over the next decade. FEMA estimates that mitigation projects over the past several years have saved our Nation nearly $3 billion in disaster-related costs. Clearly, when one compares the price of H.R. 1134 with what we might pay in future relief efforts, this bill is worth moving forward and passing into law.''

Mr. Speaker, I rise personally in strong support of H.R. 1134. As a member of Florida who has experienced three hurricanes which made landfall in my district and a fourth which came through the panhandle, out across North Carolina, back into the Atlantic, and made its way back to my district, my congressional district in essence suffered four disasters this past year.

I strongly support H.R. 1134 and ask and thank my colleagues on both sides of the aisle for their help and efforts in bringing this to fruition on the floor. It is a very simple bill. It simply says those taxpayers who receive help under FEMA's hazard mitigation grant program will not be penalized under the Tax Code for receiving that help. It exempts these grants from being considered income for tax purposes.

The FEMA mitigation program has been around for 15 years. It has helped property owners who live in disaster-prone areas avoid future disaster damage through mitigation projects in conjunction with State and local government agencies. In its 15 years, it has helped more than 2,500 properties and saved $2.9 billion in property losses. Never once have these grants been taxed, nor were they ever intended to be.

But the IRS decided last summer that unfortunately nothing specifically in tax law allows the tax exemption, and it let people know these FEMA grants would be considered taxable unless Congress directed otherwise. Therein lies the urgency of our effort. That is why 87 Members of the House have signed onto H.R. 1134; and that is why we are here today, to ensure that those who participate in mitigation projects are not punished for doing so.

Mr. Speaker, these grants help save both property and lives from the wrath of tornadoes, hurricanes, floods, earthquake, and other disasters. They also help save the Federal Government money in the long run through emergency disaster spending. To penalize taxpayers for accepting help in mitigating future and costly property damage is simply penny wise but pound foolish. Fifteen years ago Congress authorized these programs, but unwittingly neglected to spell out that they are, indeed, tax exempt, like many, many other disaster grant programs. We are here today to correct that oversight.

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield 2 minutes to the gentleman from Ohio (Mr. Portman), a member of the Committee on Ways and Means.

Mr. Speaker, I yield 2 minutes to the gentleman from Oklahoma (Mr. Istook) who has been extraordinarily helpful in the promulgation of both this bill and, of course, working with the State of Oklahoma in creating safe rooms and other mitigation grant programs.

Mr. Speaker, I yield 2 minutes to the gentleman from Louisiana (Mr. Jindal), a new Member of Congress who has been a very active participant in helping us bring this legislation to the floor.

Mr. Speaker, it is my pleasure to yield 2 minutes to the gentleman from Washington (Mr. Reichert), a new Member and former sheriff of King County.

Mr. Speaker, I yield 2 minutes to the gentleman from Pennsylvania (Mr. Fitzpatrick), a member of the Committee on Financial Services, another active participant in our efforts to get the bill on the floor today.

Mr. Speaker, I yield myself such time as I may consume.

Let me again personally thank the gentleman from Maryland (Mr. Cardin) for both his co-sponsorship and his helping us in bringing this bill to the floor today. I want to thank the gentlewoman from New York (Mrs. Maloney) in her considered comments. I want to thank the gentleman from Ohio (Mr. Portman); the gentleman from Louisiana (Mr. Jindal); the gentleman from Washington State (Mr. Reichert); the gentleman from Pennsylvania (Mr. Fitzpatrick) for their comments; and of course the gentleman from Oklahoma (Mr. Istook), who has worked with me side by side on this measure, bringing it to the floor today.

I think we have heard from all of the speakers the reasons for this important legislation; so I thank my colleagues for taking an active participating interest in this legislation. I thank the 87 co-sponsors who joined with us in urging the leadership to bring this measure to the floor. Again, thanks to the gentleman from Texas (Mr. DeLay) for allowing the bill to be scheduled for consideration; and of course the gentleman from California (Mr. Thomas), the chairman of the Committee on Ways and Means, without whose guidance and help this bill would not be possible.

We know it is important. We believe it helps mitigate against future losses. The record is clear how much we save as a government by providing these mitigation grants that never were intended for taxable treatment. This bill makes that record clear. I underscore and underline the gentleman from Oklahoma's (Mr. Istook) comments concerning reactivity. We believe once this bill is passed into law and signed by the President that those prior acts of governments working together to mitigate disasters will not be taxable items. That should be coming from the Treasury to instruct the IRS relative to that procedure.

Mr. Speaker, I want to also thank my staff, Liz Nicolson. I want to thank the Members of the Ways and Means staff: Bob Winters, Chris Giosa, Shahira Knight, Allison Giles; and of course my colleagues on the Senate side, Senators Bond and Landrieu, for their efforts in bringing this bill to the Senate.

Mr. Speaker, I yield back the balance of my time.

Mr. Speaker, I thank the gentleman for yielding me this time and for his leadership. I am delighted to join my colleague from Florida (Mr. Foley) on the other side of the aisle in support of this legislation. The bill before the House does the right thing for the disaster victims of Florida and Louisiana, but it does wrong, truly wrong, for the New York victims of the September 11 terrorist attacks. I would like to appeal to my colleague on the other side of the aisle to join me in trying to reverse the unfair taxation on grants to the victims of 9/11, specifically the businesses, as we go forward.

When thousands of lower Manhattan small businesses were on the brink of complete failure as a result of September 11 and the terrorist attack against our country, these businesses accepted Federal recovery grants but were then told months later that those grants would be taxed and treated as income. That, in my opinion, wrongful taxation was the straw that broke the back of many small businesses in New York after 9/ 11 and it continues to this day to be a burden on small businesses who were forced to take out loans to pay taxes on disaster recovery grants. Granted it was not a FEMA mitigation grant but it was a disaster recovery grant, so it was in the same feeling or in the same purpose as the legislation before us.

What causes me so much concern today, Mr. Speaker, is that we have sought the same treatment, the exact same treatment for 9/11 victims for more than 3 years that the Members are seeking today for victims in their States. Along with the gentleman from New York (Mr. Nadler) and the bipartisan delegation of New York, I have introduced legislation to reverse taxation on the 9/11 aid grants. We have offered amendments to reverse this taxation with the active support of the gentleman from New York (Mr. Rangel), Ways and Means members and others from the New York delegation. We have testified before the Committee on Rules, made numerous speeches before this body, sought hearings for the legislation and held countless events to seek action from House leaders to reverse this wrongful taxation on 9/11 aid grants. We have been trying for more than 3 years to have the small business victims of 9/11 treated fairly, but this body has not found a way as yet to advance that legislation. Again, I am appealing to my colleagues from Florida and Louisiana to help our constituents as they are helping theirs today.

Now, today, we are watching a bill sail to the floor for passage, without a hearing, without a markup in committee, without any of the months and years of effort that the New York delegation and business leaders from New York City have put into seeking redress for 9/11 disaster victims that were treated unfairly and wrongly.

Let me be absolutely clear that I find no fault with the repeal of wrongful taxation on the recovery grants for Florida and Louisiana victims of disaster. I feel they are entitled. The purpose of disaster relief is to relieve them, to get that money back in the community, to help them restore and be made whole, not to tax it. But I do find fault with the exclusion of 9/11 victims in this bill when we have fought so long and so hard to achieve the exact same fairness for them. If the Federal Government should not collect taxes on aid to hurricane victims, then it should not collect taxes on 9/11 relief grants which is truly the worst disaster that this country has ever suffered. It is an act of war. We are still suffering from that terrible, terrible action against innocent people.

I again want to make clear that I am supporting the legislation. I would like to place in the Record a report from the Joint Committee on Taxation where they estimated that approximately $268 million was sent back to Washington in the form of taxes on the

relief grants following 9/11. It is unfair to New York and to those who suffered the most from the terrorist attacks against our Nation.

I call upon the authors of this legislation and the gentleman from Florida (Mr. Foley), whom I know has many friends in New York and has been a strong ally in working with the recovery of New York after 9/11, and I call upon the House leadership and appropriate committee chairmen to do the right thing for the 9/11 victims. I really implore my colleagues on the other side of the aisle to do the right and fair thing for the victims of 9/11 because of the wrongful taxation on their recovery grants and we call upon this body to treat them with the same attention and care that we are rightfully showing to the victims of disasters in other parts of our Nation today.

Again, I support this legislation. Again, I appeal to my colleagues on the other side of the aisle to give the like, same fair treatment to the sufferers and the victims and the grants for 9/11.

Congress of the United States,

Joint Committee on Taxation,

Washington, DC, June 17, 2003.

Hon. Carolyn Maloney,

House of Representatives,

Washington, DC.

Dear Ms. Maloney. This letter is in response to your

request of June 9, 2003, for a revenue estimate of a proposal

to exclude from gross income certain Federal funds granted as

a result of the terrorist events of September 11, 2001.

In general, under present law, unless income is received

for ``general welfare'' or for compensation for losses that

are not otherwise compensated, grants from the Federal

government are included in income. To the extent not already

excluded under present law by the general welfare doctrine or

otherwise, your proposal would exclude from gross income

payments of certain Federal funds made as assistance on

account of property or business damaged by, and for economic

revitalization directly related to, the terrorist attacks on

the United States that occurred on September 11, 2001.

Assuming that your proposal would be enacted on July 1,

2003, and effective for taxable years ending after September

11, 2001, we estimate that your proposal would have the

following effects on Federal fiscal year budget receipts:

Fiscal years Millions of dollars 2003................................................................-24 2004...............................................................-135 2005................................................................-61 2006................................................................-30 2007................................................................-11 2008.................................................................-5 2009.................................................................-2 2010.................................................................-- 2011.................................................................-- 2012.................................................................-- 2013.................................................................-- 2003-08............................................................-266 2003-13............................................................-268

I hope this information is helpful to you. If we can be of

further assistance in this matter, please let me know.

Sincerely,

George K. Yin.

Mr. Speaker, I strongly support H.R. 1134, which embodies the President's budget proposal to provide tax relief to those who will and who have accepted Federal Emergency Management Agency (FEMA) disaster mitigation grants.

The bill is necessary to promote effective use of the mitigation grants. These mitigation grants alleviate the severity of the damage caused by unpredictable but anticipated natural disasters. These grants save taxpayer dollars by reducing future Federal disaster relief payments resulting from such disasters.

Present law allows an income exclusion for amounts received by individuals as qualified disaster relief payments. This exclusion was enacted by Congress as a response to the disasters that occurred on September 11, 2001. This existing statutory exclusion applies only to amounts received by individuals as a result of a disaster that has actually occurred; thus, mitigation grants do not qualify. Given that an exclusion applies to payments made to victims after a qualified disaster, it is consistent to allow an exclusion for payments made to mitigate future disaster damage.

Prior to the award of any mitigation grant, a cost-benefit analysis is required to ensure that the cost of funding the project is less than the damages expected to be incurred in the event of an actual disaster (absent the mitigation). FEMA mitigation grants are only awarded if projects are determined to be cost effective. Because mitigation is more cost effective for the Federal government than repair after the occurrence of a disaster, the FEMA mitigation programs are intended to translate into net benefits for the government. So, unlike grants which have been made available as income replacements and would be considered taxable income as a result, accepting these funds means taxpayers will face fewer claims for disaster aid later on. FEMA mitigation grants help people avoid the loss of life and property due to natural disasters. Mitigation programs reduce the number of cases where taxpayers would pay for meaningful disaster relief. We want to encourage people to take advantage of these life-saving and cost-saving programs.

But recent IRS pronouncements that disaster mitigation grants are taxable income are discouraging people who live in flood-prone areas and elsewhere from accepting assistance needed to reduce the loss of life and property in future disasters. Some participants may not have the cash necessary to pay the tax imposed on the benefits provided by the mitigation grants. For people in potential disaster areas, the threat of immediate tax on something they have received in kind may be enough to keep them from accepting the help.

H.R. 1134 is relatively simple. If FEMA funds are used to improve a dwelling, for example, the funds (and what they pay for) would not be treated as income when the improvements are made, but the owner would also not be able to get a double benefit by adding the value of the improvements to the cost basis of his property. In some cases, FEMA actually funds buyouts of owners in dangerous areas. Here, H.R. 1134 gives the owner a choice: they can take the benefits which may be available under current law (for example, the exclusion of gains on a principal residence) or they can defer tax using involuntary conversion procedures.

The bill includes several provisions to ensure that the exclusion is not overly broad. Not only does the bill provide that there is no increase in basis on account of amounts excludable under the bill, the bill also provides that no additional deduction or credit is allowed with respect to amounts excluded from income. Amounts received upon the sale of

property for purposes of hazard mitigation are afforded deferral of gain recognition, rather than an unlimited income exclusion.

The exclusion under the bill applies to payments made to businesses because, unlike other grants that are not excludable because they are in the nature of income replacement, FEMA mitigation payments received by businesses are made to ultimately benefit the local community and Federal government.

An income exclusion is appropriate for FEMA mitigation grants as such grants are distinctly different from other government grants. As mentioned, FEMA mitigation grants are only awarded if the projects are determined to be cost effective for the government. In addition, in the case of FEMA grants, if an exclusion is not allowed and individuals choose not to participate in the mitigation programs, the government may face increased spending, not only on behalf of one individual, but on behalf of entire communities in some cases. Finally, in the case of FEMA grants, present law imposes an illogical result in that mitigation grants are not excludable from income, but if mitigation grants are not accepted and a disaster subsequently occurs, payments made by the government to individual property owners could then be excluded from income.

Generally, the proposal would have a prospective effective date. However, with respect to past mitigation payments where the statue of limitations has not expired, the President's proposal provides that the Treasury Department will have administrative authority to apply the policy proposed in the budget and embodied in H.R. 1134 to such cases. I strongly urge the Department of Treasury and the IRS to resolve existing cases in a manner consistent with this legislation so that taxpayers who have already undertaken mitigation will not bear the unexpected burden of extra tax liabilities.

H.R. 1134 will cut taxes by $105 million over the next decade. FEMA estimates that mitigation projects over the past several years have saved our Nation nearly $3 billion in disaster-related costs. Clearly, when one compares the price of H.R. 1134 with what we might pay in future relief efforts, this bill is worth moving forward and passing into law.

Mr. President, last year the Internal Revenue Service hit my State like a Category 4 hurricane when it determined that disaster mitigation benefits from the Federal Emergency Management Agency are taxable. We get hurricane warnings when a storm is coming, we can track their paths as they come out of the Carribean and into the Gulf of Mexico. We didn't get any kind of ``tax warning'' from the IRS, but the financial toll on many of my constituents was devastating.

Let me explain what happened. In June of last year, the IRS chief counsel issued an advice letter that determined that FEMA disaster mitigation benefits were taxable as a matter of law. This ruling applied to a variety mitigation grant programs, covering a wide range of natural disasters. The main disasters that concern us in Louisiana are hurricanes and flooding. They are as much a part of life as crawfish boils and Mardi Gras. The key to our peace of mind is the National Flood Insurance program administered by FEMA. In Louisiana, 377,000 property owners participate in the National Flood Insurance program. It is a real Godsend to the people of my state.

The National Flood Insurance program also provides funding for property owners to flood-proof their homes through the flood mitigation grant program. FEMA distributes these grant funds to the States which then pass them along to local communities. The local communities select properties for mitigation and contract for the mitigation services. Communities use these funds to put homes on stilts, improve drainage on property, and to acquire flood proofing materials. These mitigation grants encourage property owners to take responsible steps to lessen the potential for loss of life and property damage due to future flooding. The grants also have the added benefit of saving money in the long term for the flood insurance program.

But the IRS has turned this valuable disaster preparedness and prevention program into a financial disaster for responsible property owners by making these payments taxable. This tax is unfair, unexpected, and an unfortunate policy decision--unfair and unexpected because no one told my constituents that they would be taxed for accepting FEMA disaster mitigation assistance. The local officials in their parish were just as surprised. This tax is unfortunate policy because in the long term, the IRS will undercut the effectiveness of using mitigation as a means of decreasing future costs to the flood insurance program. It will force people to take risks that they will not be hit by a disaster.

I was pleased that the House of Representatives passed a bill, H.R. 1134, to correct this problem. It says that going forward, disaster mitigation benefits are not taxable. But this legislation is not retroactive. It offers no relief to people who are facing a huge tax bill this Friday, April 15, for mitigation funding received in 2004 or earlier years. Virtually every constituent who has written or called my office about this issue received their grant in 2004. This bill will do nothing for them.

I understand that the sponsors of H.R. 1134 and its Senate version S. 586 claim that once it has been passed, the Department of the Treasury will issue some sort of notice to IRS field personnel essentially making the effect of this bill retroactive. Treasury officials, however, cannot cite a legal justification for issuing such a notice. They claim that they can rely on the floor statements of the chairs and ranking members of the House Ways and Means Committee and the Senate Finance Committee as a basis for issuing the notice.

Mr. President, we cannot legislate on a wink and a nod. The right way to make this relief retroactive is to pass the Baucus-Grassley amendment to H.R. 1134 and send it back to the House. This amendment will extend the tax relief in this bill to all recipients of FEMA disaster mitigation assistance past, present, and future. I am proud to be a cosponsor of the amendment. I thank the chairman and ranking member of the Finance Committee for their leadership in bringing this matter to the floor.

April 15th is 2 days away. I urge the other body to take up and pass H.R. 1134 as amended by the Senate, and send it to the President for his signature. This bill will bring peace of mind to thousands of responsible property owners who face an unfair tax burden. We should not allow April 15th to pass without giving these people relief.

Mr. President, today, we will pass legislation in the Senate that provides tax relief to all Americans receiving disaster mitigation grants from the Federal Emergency Management Agency, FEMA. I am pleased that my good friend, Senator Grassley, and I, along with my colleagues, Senators Landrieu, Bond, Feinstein, Lott, Martinez, Nelson, and Vitter could work together to add a necessary and important amendment to H.R. 1134, which exempts disaster mitigation payments from taxation.

For 15 years, FEMA has awarded natural disaster mitigation grants that assist citizens, businesses and communities to take steps to prevent or mitigate damages from future natural disasters. The grants go towards elevating buildings in floodplains, flood proofing, seismic reinforcement, acquisitions or relocations, wind protections for roofs and strengthening of window protections. These grants provide a long- term benefit to society by reducing future loss of life and increasing public safety. In addition to these life-saving benefits, mitigation grants also provide a net cost benefit to society. FEMA conducts a cost-benefit analysis prior to awarding a grant that ensures the cost of funding a project is less than the damages expected to occur in the event of a disaster. FEMA estimates that for every dollar spent on mitigation, an average of eight dollars is saved in the long run.

Let me take a minute to explain the history of the tax issue at hand. Prior to June of last year, recipients of FEMA mitigation grants generally excluded them from income. The tax code states clearly that post-disaster grants were not taxable. But the tax code doesn't specifically describe the tax treatment of mitigation grants. FEMA assumed mitigation grants were treated the same as post-disaster relief grants. However, on June 28, 2004, the Internal Revenue Service issued a legal memorandum stating these mitigation grants were taxable as income. That means that someone who took advantage of mitigation opportunities to prevent future losses would face a significant tax liability. The average mitigation grant is $83,000. That means the average tax on a grant is tens of thousands of dollars. That isn't fair. It was never intended that taxes be collected under these mitigation programs, but under the legal memorandum issued by the Internal Revenue Service thousands of taxpayers may have to file amended tax returns and pay additional tax. Moreover, the Federal Government changed the rules and never made the recipients aware of the potential tax consequences.

I compliment the House for taking up this issue and passing legislation that helps taxpayers who receive mitigation grants after the date of enactment. However, there is a flaw in the House bill. The bill clearly provides tax relief to ``amounts received after the date of enactment.'' What about taxpayers who received mitigation grants in 2004 or 2003 and before? The chairman of the Finance Committee and I have added an amendment that provides absolute certainty for all taxpayers who received grants in past years. Some have argued that the Department of the Treasury can provide tax relief for those who received grants prior to the date of enactment by using the intent gleaned from floor statements and letters from Members of Congress. Let me be clear, Congress writes laws and the clearest intent is in the letter of the law. If our intent is to provide tax relief for those who received grants before the date of enactment, we should write it into the law. And that is what the amendment my good friend Senator Grassley and I have offered.

Before I finish, I want to thank Senators Landrieu, Nelson and Feinstein for their tireless work. I can tell you firsthand there was a significant amount of pressure to pass this bill as it was sent from the House. We all wanted to pass this bill as quickly as possible, but we also wanted to be sure we got it right the first time. This bill does that.

I sincerely hope the House will do the right thing and pass this bill with the Senate amendment before the tax filing deadline on Friday.