Re H.R. 59. DISTRICT OF COLUMBIA REDEVELOPMENT LAND AGENCY, DEAR MR. MCMILLAN: In response to the request in your letter dated February 1, 1963, following are our comments on the provisions of H.R. 59. We note that although there is reference in the bill's caption to the protection, in urban renewal project areas, of property which is not substandard, there is no such provision in the bill itself. Briefly, the bill provides for incentives for property improvement by owners in the District of Columbia in the form of (1) the abatement for a 4-year period of any increase in real estate taxes on a taxpayer's personal residence which has been rehabilitated, and (2) the granting of a limited income tax deduction for expenses incurred in the rehabilitation or renovation of personal residences. We are certainly in accord with the general purposes of the features of the bill, i.e., the improvement and restoration of residential property. As I am sure you know, one of the benefits of the urban renewal program to the locality is the increase in the tax base as rundown areas are rebuilt or the structures in them rehabilitated. The tax features of H.R. 59 would have an effect on our program. It might be noted in this connection that section 13 of the Redevelopment Act provides for tax payments on property during the period the property is owned by the Agency. It appears to us that tax exemptions would have little effect on the quality of the housing in Washington and that generally alterations to the tax system should be based on broad Government policy rather than on any one objective. We want to improve the quality of housing, but we also need a sound tax system not complicated by numerous exemptions and abatements, which might have little, if any, effect on the problems which they were intended to solve. Since time has not permitted the Agency to ascertain the relationship of this legislation to the program of the President, this report does not constitute a commitment respecting the President's program. Sincerely yours, PHIL A. DOYLE, Mr. WIXON. Mr. Chairman, the Commissioners, although, of course, in favor of any worthwhile proposal which will encourage improvement of owner-occupied houses in the District, nevertheless are constrained to disfavor the enactment of H.R. 679 and H.R. 59 insofar as those bills relate to tax deductions or tax exemptions in respect either of improvements made to owner-occupied homes or to expenses incurred by the owners in the maintenance, renovation, and repair of those homes. The basic reason for the Commissioners' views in this regard is predicated upon the revenue situation of the District of Columbia and the impact upon that situation which would be caused by permitting further exemptions of real property in the District of Columbia or permitting deductions of payments made by owners of property for the necessary maintenance of improvement of their homes. There are certain areas, both in H.R. 59 and in H.R. 679, which irrespective of the matter of tax exemption in the Commissioners' views are not so clear as to perhaps make it possible clearly to apply the bills if they were to be enacted. The Commissioners, a majority of them I should say, are as I have mentioned opposed to section 1 and section 2 of H.R. 679 and to H.R. 59 which relate only to the matters contained in sections 1 and 2 of 679. Mr. Duncan has requested me to advise the committee that he favors the principle expressed in section 1 of H.R. 59 and in section 1 22-387-63 of H.R. 679. However, Commissioner Duncan does not feel that he can favor the enactment of section 1 of either of these bills in heir present form. Therefore, Commissioner Duncan concurs with the other two Commissioners in the view of the Commissioners that they cannot favor the enactment of the sections that I have mentioned. However, I wish to reiterate that Commissioner Duncan has expressly requested me to advise the committee that he is in favor of the principle of encouraging improvement to owner-occupied homes as expressed in section 1 of each of these bills. The remaining Commissioners, however, are of the view that the bills will have such an impact on the revenues of the District of Columbia that they cannot conscientiously recommend the enactment of those two provisions. Nor, Mr. Chairman, in respect of some of the problems which are presented as appears in connection with the language contained in these bills, the Commissioners have set forth some of the areas, not all, in which they find the potentiality of difficulties in administration. For example, the words "repair, alteration, renovation, or restoration" of a residence are not in the view of the Commissioners entirely clear since the word "repair" could include, for example, the application of a nail or some other item to repair a part of a residence. The extent of what is intended here presents in the view of the Commissioners some difficulties, that is to say, of what is a repair to consist of? Is it to consist of anything that may be done to a piece of property by the owner with the view that he is making a repair or some part of it? "Alteration" again is not so clearly set forth that there would be avoided questions concerning what constituted a repair, alteration, renovation, or restoration, for example, within the meaning of section 1 of the bill. Now, there are differences in section 1 of H.R. 59 and H.R. 679. There is one major difference, I should say. H.R. 59 on page 2, starting with line 7, contains the statement: Except that such increase that is to say, increase in value shall not be so disregarded with respect to any fiscal year if at the close of such year the taxpayer who made the repair, alteration, renovation, or restoration is no longer the owner of the property. That language does not appear in H.R. 679 and thus under 679 a question appears to be presented as to whether if the owner of the property, as 679 states, occupies the property at the time the renovation, repair, alteration, or whatever it may be occurs, or within 6 months thereafter, whether the tax exemption will continue even though the owner thereafter no longer occupies the property or disposes of it by sale or by other method. Putting it a little differently, whether one who buys the property after the repair, renovation, alteration, is made will continue to receive the exemption even though he or she had nothing to do with the making of the repair, renovation, alteration, or restoration. Now, section 2 of the bill, of each of the bills, relates to a deduction for income tax purposes of expenses incurred in connection with the personal residence of the taxpayer. Each of the bills uses the word "expenses" and each of them refers to repair, maintenance of, alteration, or additions to the personal residence of the taxpayer involved. Problems would appear to be presented there also because in the maintenance of a home, I would assume, as do the Commissioners, that the broadness of the term might include anything which the taxpayer did in order to continue the property in a livable form. I don't believe this was the intention of the bills but it does appear that maintenance might include, for example, the necessary cost of gasoline to operate a lawnmower. Of course, it uses the word "residence," I realize that, and I assume that what is meant by that is the structure upon the ground, but if it doesn't, then to maintain a home one must do many things. Paint is a normal item in the maintenance of a home. Waxing of floors. The purchases of soaps, the purchases of cord, for example, for venetian blinds. All of those things might well be contemplated as being included within the term "maintenance." The word used is "expenses," and generally speaking an expense is something in the tax field which does not result in a capital improvement, and that was true in business also. Again I mention that "repair" may include a number of things and that the gamut of the things which may be included are such that the taxpayer may be entitled actually under section 2 of each of these bills to deduct every cent he has spent in connection with the property during the taxable year. I repeat, I am certain it was not the intention of either of these bills to permit such a result, but there is very definitely the potential there. There are certain other observations that the Commissioners have made; namely, that one who gets, let us say, a $2,000 deduction of expense in a 5-percent bracket is obviously being benefited a great deal more than one who expends $2,000 but is in a 22-percent bracket. Now, that of course might be one of those things which would be very difficult to cause to be equal as to every taxpayer, but there is that differentiation there in respect of the tax advantages which would result depending upon, of course, the tax bracket of the taxpayer involved. Now, in respect of section 4 of the bill, with the chairman's permission, I should like to have Mr. Bryan appear here and discuss that since he is much more familiar with it than I with it. Mr. MULTER. Mr. Wixon, I think this committee would like to have you submit to us language that you think would be appropriate if we decide to enact this bill. Mr. WIXON. In respect, sir, of sections 1 and 2? Mr. MULTER. Yes. Any of the sections, any of the language you think may give you difficulty. I don't need any language with reference to your statement about maintenance. We either determine that that should be in or out. If we determine it should be out, we will just take out the word "maintenance." I am inclined to agree personally that the cost of upkeep, for instance, which is what is included under the definition of the word "maintenance," is not appropriate for tax incentive exemption. So it may be that all we need do there is take that word out. But with reference to the other items you refer to, I think you ought to give to us the language you think would make clear the intent of the bill and not give you any difficulty in its administration. Frankly, I don't see how they can try to write off as part of expenses for repair living in a hotel or living somewhere else while repairing the premises or building an addition to it. But if there is doubt about that because of your tax experience, give us the language which would exclude that item and then the committee in executive session can determine what if anything to do about it. The reference you make to the tax differential to the man in the higher tax bracket, I think that is one of the desirable features rather than undesirable features. True, the man in the higher bracket gets a better tax break, but he is the fellow who has more money to spend. If we can get him to spend $10,000 because he is getting a $5,000 tax saving or tax deduction, that means there is $10,000 being poured into the economy of the District, giving employment and buying materials, and the like, and I think the tax revenue you receive on that score from the persons receiving the moneys that are being spent will offset the real estate tax deduction. I think the income taxes here in the District on the Federal level are higher than your real estate tax. Mr. WIXON. Well, I simply pointed that out, Mr. Chairman, to show that there would result or could result so far as the tax deduction is concerned a different treatment depending upon the bracket in which the taxpayer fell. Mr. MULTER. That different treatment is implicit in our accelerated tax rates for income tax purposes. Mr. WIXON. That is true. Mr. MULTER. Now, you say you don't say but the Commissioners do say in their report on page 3: The owners of rental properties now have an inducement under both Federal and District income tax statutes to improve their properties. What are those provisions? Mr. WIXON. Those provisions that the Commissioners had in mind, sir, were provisions relating to depreciation allowances, which of course are deductions from income derived from the rentals of the properties, and thus there is a recovery taxwise of the amounts expended to make improvements of the properties. Mr. MULTER. Well, now, we are not dealing with rental property here. This deals with private residences. Mr. WIXON. That is true, sir. Mr. MULTER. On a private residence there is no tax deduction or credit for depreciation. Mr. WIXON. That is true, sir; but the Commissioners were only referring to that in respect of their statement, that the experience of the District Finance Office in connection with improvements of rental properties has indicated that although the tax deduction by way of depreciation is available, there has not appeared to be by that tax deduction any particular inducement to the property owners to make repairs to rental properties. Mr. MULTER. I would like to see some evidence of that conclusion. Mr. WIXON. Well, I doubt, sir, that this is one of those things which is it is the subject of choice, but we have a great deal of rental property here in the District of Columbia which is, as I think everyone is well aware, somewhat less than perfect and one would assume that were the tax deductions which are available to one who improves rental properties, that inducement would have encouraged the better maintenance of the properties. Mr. MULTER. Well, without a study of what the situation is as to individual owners, I don't think anybody can draw any conclusion. Mr. WIXON. It would be very difficult. Mr. MULTER. As a matter of fact, you could just as easily draw the opposite conclusion and say because of the number of buildings that have been repaired and modernized, talking now again about rental properties, they have been doing it having in mind at least partly the increased depreciation they get by way of tax deductions. Mr. WIXON. It is a difficult subject to be positive about, I agree with you, sir. Mr. MULTER. Any other questions? Thank you very much, sir. Mr. MULTER. We will hear Mr. Bryan now. STATEMENT OF IRVING BRYAN, CHIEF, LEGISLATION AND OPINIONS DIVISION, OFFICE OF CORPORATION COUNSEL, DISTRICT OF COLUMBIA Mr. BRYAN. Mr. Chairman, members of the committee, I am Irving Bryan, Assistant Corporation Counsel, and I am directing my remarks I take it the chairman wishes me to discuss section 4 of H.R. 679 first. Mr. MULTER. Yes, please. Mr. BRYAN. And then the other bill dealing with chanceries isn't to be discussed at this point, or is it? Mr. MULTER. Yes, H.R. 5882 should be discussed, too. Mr. BRYAN. Very well, sir. Speaking first to section 4 of H.R. 679, the Commissioners' views officially submitted to the committee are contained in the letter which is already in the record dealing with H.R. 59 and the first two sections of H.R. 679. Beginning on page 5 of the Commissioners' letter dated June 5, 1963, is a discussion of section 4 of H.R. 679. As I say, that letter is already in the record. The views of the Commissioners in regard to that section are as follows. A majority of the Board of Commissioners as well as a majority of the Zoning Commission is of the view, both Boards' majorities are of the view that it is better to treat this problem of the location of chanceries by regulation issues by the Zoning Commission which the Commission has power to do than to do it by legislation. One of the Commissioners, the Chairman of the Board of Commissioners, President of the Board of Commissioners, and also a member of the Zoning Commission, Commissioner Tobriner, has a different view. His view is that he is in favor of prohibiting chanceries from being located in any residential district either by legislation or by regulation. Discussing particularly the wording of the proposed new section which would be added to the Zoning Act of June 20, 1958, by section 4 of H.R. 679, it appears that the probable intent of the section is to bar from residential districts chanceries and other business-type offices or structures used and occupied by foreign governments from being located in areas zoned for purposes other than business purposes. The difficulty that I have referred to with the language is that the section, the proposed new section, states that the provisions of the Zoning Act shall apply to chanceries and other business-type buildings |