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CRS Updates Report on Brownfields Incentive Extension

OCT. 17, 2006

RS21599

DATED OCT. 17, 2006
DOCUMENT ATTRIBUTES
  • Authors
    Reisch, Mark
  • Institutional Authors
    Congressional Research Service
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2006-22557
  • Tax Analysts Electronic Citation
    2006 TNT 214-76
Citations: RS21599

 

CRS Report for Congress

 

Received through the CRS Web

 

 

Order Code RS21599

 

Updated October 17, 2006

 

 

Mark Reisch

 

Analyst in Environmental Policy

 

Resources, Science, and Industry Division

 

 

Summary

 

__________________________________________________________________

 

 

The brownfields tax incentive expired on December 31, 2005. Enacted in 1997, the provision allowed a taxpayer to fully deduct the costs of environmental cleanup in the year the costs were incurred (called "expensing"), rather than spreading the costs over a period of years ("capitalizing"). The provision was adopted to stimulate the cleanup and development of less seriously contaminated sites by providing a benefit to taxpaying developers of brownfield properties. Two bills that received congressional attention contained extensions of the provision; in one case (H.R. 4297, P.L. 109-222), the bill was dropped in conference, and in the other (H.R. 5970), the bill passed the House but failed in the Senate. Nevertheless, in each of its budget proposals since FY2003, the administration has suggested that Congress make the tax incentive permanent.

Information on the extent of use of the brownfields tax incentive cannot be determined from federal income tax returns. However, to take advantage of the tax break, a developer had to obtain a certification from the state environmental agency that the site qualified as a brownfield. CRS surveyed the agencies of all states in 2003 to ask how many applications they had received and approved. Twenty-seven states reported that they had received brownfield tax incentive applications, for a total of 161 applications, of which 147 were approved. The other 23 states reported that they received no requests for certification.

________________________________________________________________

 

 

The brownfields1 tax incentive expired on December 31, 2005. First enacted as part of the Taxpayer Relief Act of 1997 (P.L. 105-34), the incentive allowed a taxpayer to fully deduct the costs of environmental cleanups in the year the costs were incurred (called "expensing"), rather than spreading the costs over a period of years ("capitalizing"). Its purpose was to encourage developers to rehabilitate sites where environmental contamination stands in the way of bringing unproductive properties back into use. (The provision has no application for public sector entities, such as municipalities, that develop brownfields and do not pay income taxes.) The House and Senate versions of the Tax Reconciliation Act (H.R. 4297, P.L. 109-222) would have extended the provision for two years and one year, respectively, but those provisions were dropped in conference. Another bill passed by the House, the Estate Tax and Extension of Tax Relief Act (H.R. 5970), contained the tax break, but the bill failed on a cloture motion in the Senate.

In the case of both bills, the brownfields provision was one of a number of extensions of expiring tax credits, deductions, and taxpayer benefits that were all considered and dropped together. (For more information, see CRS Report RL32367, Temporary Tax Provisions ("Extenders") Expired in 2005, by Pamela Jackson.) It is possible, however, that the brownfields tax break will reappear, either independently or as part of another legislative vehicle.

To take advantage of the brownfields tax incentive, the developer of a property had to obtain a statement from the state environmental agency that the parcel is a "qualified contaminated site" as defined in the 1997 law. Because the brownfields tax deduction did not have its own separate line on either individual or corporate federal income tax returns, the only sources of information on the extent of use of the incentive are the state agencies that certify that the properties are indeed brownfields. CRS surveyed the appropriate agencies in each state in 2003 to determine the number of brownfield certifications they had issued. Twenty-seven states reported that they had received requests for certification, for a total of 161 requests, of which 147 were approved. Twenty-three states reported receiving no formal requests. The state-by-state responses are presented in the table at the end of this report.

Background. Federal tax law generally requires that the cost of improvements to a property must be deducted over a period of years, whereas other expenses, such as repairs, may be deducted in the same year they are incurred. Being able to deduct the costs when incurred is a financial benefit to the taxpayer. A 1994 ruling by the Internal Revenue Service2 (IRS) held that the costs of cleaning up contaminated land and groundwater are deductible in the current year, but only for the person who contaminated the land. In addition, the cleanup would have to be done without any anticipation of putting the land to a new use. Further, any monitoring equipment with a useful life beyond the year it was acquired would have to be capitalized. On the other hand, a person who acquired previously contaminated land, such as a brownfield site, would have to capitalize the costs of cleanup, spreading them out over a number of years.

Cleanup costs are a major barrier to redevelopment of contaminated land. The Taxpayer Relief Act of 1997, which included the brownfields tax incentive, thus had the effect of expanding benefits and allowing developers who had not caused the contamination to deduct cleanup costs from their taxable income in the current year, rather than having to capitalize them.

As initially enacted, the brownfields tax incentive was available only to a property that was located in a "targeted area." The law defined a targeted area as a census tract with greater than 20% poverty, an adjacent commercial or industrial census tract, an Empowerment Zone or Enterprise Community, or one of the 76 brownfields to which the Environmental Protection Agency (EPA) had awarded a brownfield grant at that time. The Consolidated Appropriations Act, 2001 (P.L. 106-170) repealed the targeted area geographic restrictions and extended the tax break to all brownfields ("qualified contaminated sites").

The tax incentive is subject to recapture, which mandates that the gain realized from the value of the property when it is later sold be taxed as ordinary income (rather than at the generally lower capital gains rate) to the extent of the expensing allowance previously claimed. This dilutes the benefit of the tax break and has the effect of postponing a certain amount of the developer's tax liability until the property is resold. As a stimulus to development, the overall value of the brownfields tax break is dependent on a number of factors, including the total cost of the project, the cost of cleanup, how long the developer intends to hold the property before selling it, and the developer's individual tax situation.

Since FY2003, the Bush administration's budget proposals have proposed making the tax incentive permanent. It was in effect continuously from its enactment through December 31, 2005, and had been extended three times, most recently in the Working Families Tax Relief Act of 2004, P.L. 108-3113 (title III, § 308(a)). This extension through 2005, which was enacted on October 4, 2004, was made retroactive to December 31, 2003, when the previous extension expired.

Survey Findings. The CRS survey, conducted between April and June 2003, found that a total of 161 brownfield tax incentive applications were made in 27 states. Of those, 147 were approved and 14 were denied. Seven states had 10 or more applications: Wisconsin had 20; Massachusetts, 17; Delaware, 16; New York, 14; Virginia, 11; and Michigan and Pennsylvania, 10 each. Thirteen states had one to three applications.

Twenty-three states reported that they had received no applications for certification. Many in that group said they had received inquiries but no formal applications, and some of those states added that they had made efforts to publicize the availability of the tax incentive through their websites and at in-person presentations at various meetings.

Table 1, below, presents the results of the survey in detail. The 23 states that reported receiving no applications were:

 Alabama                  Kansas              North Dakota

 

 Alaska                   Maine               Oklahoma

 

 Arizona                  Mississippi         South Carolina

 

 Arkansas                 Montana             South Dakota

 

 Colorado                 Nebraska            Utah

 

 Hawaii                   Nevada              West Virginia

 

 Idaho                    New Hampshire       Wyoming

 

 Iowa                     New Mexico

 

 

        Table 1. Applications for Certification for the

 

                   Brownfields Tax Incentive

 

 

                                                          Average

 

            Number of Applications

 

                                      Reasons for         Estimated

 

 State

 

                                      Denial              Time for

 

             Received Granted  Denied

 

                                                          Decision

 

 California    7       6        1     Site was not in a   12 days

 

                                      targeted area

 

 Connecticut   1       1        0     n.a.                Not

 

                                                          available

 

 Delaware     16      14        2     One property        Not

 

                                      was not a           available

 

                                      brownfield; at

 

                                      the other, the

 

                                      owner did not

 

                                      qualify

 

 Florida       2       2        0     n.a.                Less than 30

 

                                                          days

 

 Georgia       1       1        0     n.a.                3 days

 

 Illinois      3       3        0     n.a.                About 1

 

                                                          week

 

 Indiana       4       4        0     n.a.                30 days

 

 Kentucky      1       1        0     n.a.                About 3

 

                                                          weeks

 

 Louisiana     1       1        0     n.a.                1 or 2 days

 

 Maryland      2       2        0     n.a.                About 2

 

                                                          weeks

 

 Massachu-    17      16        1     Site did not        5-10 days

 

 setts                                contain a

 

                                      hazardous

 

                                      substance

 

 Michigan     10       9        1     Lead                14 calendar

 

                                      contaminant         days

 

                                      level did not

 

                                      exceed state's

 

                                      background

 

                                      level criteria

 

 

 Minnesota     3        2       1     Site was not in a   1 week

 

                                      targeted area

 

 Missouri      6        6       0     n.a.                Within 30

 

                                                          days

 

 New Jersey    2        2       0     n.a.                About 1

 

                                                          week

 

 New York     14       10       4     Sites did not       19 days

 

                                      meet the

 

                                      definition of

 

                                      "qualified

 

                                      contaminated

 

                                      site"

 

 North         2        2       0     n.a.                Within 2

 

 Carolina                                                 weeks

 

 Ohio          5        5       0     n.a.                60 days

 

 Oregon        4        4       0     n.a.                About 3 days

 

 Pennsylvania 10       10       0     n.a.                5-8 business

 

                                                          days

 

 Rhode Island  3        0       3     Two sites were      Within 2

 

                                      not in a targeted   weeks

 

                                      area; the other

 

                                      did not meet the

 

                                      definition of

 

                                      "qualified

 

                                      contaminated

 

                                      site"

 

 Tennessee     2        2       0     n.a.                7 working

 

                                                          days

 

 Texas         8        8       0     n.a.                About 2

 

                                                          weeks

 

 Vermont       1        1       0     n.a.                1 or 2 days

 

 Virginia     11       10       1     Site was not in     Less than 2

 

                                      a targeted area     weeks

 

 Washington    5        5       0     n.a.                Same day

 

 Wisconsin    20       20       0     n.a.                About 2

 

                                                          weeks

 

 Note: n.a. = Not applicable.

 

FOOTNOTES

 

 

1 For purposes of the tax incentive, a brownfield site ("qualified contaminated site") is a property held for use in a trade or business, for the production of income, or as inventory where there has been a release, or threat of release, or disposal of a hazardous substance. Sites on the Superfund National Priorities List are excluded (26 U.S.C. 198(c)).

2Revenue Ruling 94-38.

3 The other renewals were in the Ticket to Work and Work Incentives Improvement Act of 1999, P.L. 106-170 (title V, § 511); and in the Consolidated Appropriations Act, 2001, P.L. 106-554 (Appendix G, title I, § 162).

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Authors
    Reisch, Mark
  • Institutional Authors
    Congressional Research Service
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2006-22557
  • Tax Analysts Electronic Citation
    2006 TNT 214-76
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