The provisions of this bill-including the amendments made by your committee may be summarized as follows: Suspension of the investment credit. The bill as passed by the House temporarily suspended the investment credit for the period from September 9, 1966, through December 31, 1967. As amended by your committee, the bill suspends the credit from October 10, 1966, through December 31, 1967, or for approximately 15 months instead of 16 months. Under the House bill, the investment credit, however, would continue to apply to investments of up to $15,000 made by a taxpayer or a business during the suspension period. Your committee has modified this rule to provide that the investment credit will, during the suspension period, continue for investments of up to $25,000 instead of $15,000. Additionally, your committee has provided an exemption for railroad rolling stock (other than locomotives) so that purchases of this property will continue to be eligible for the investment credit. Furthermore, under both versions of the bill, an exception is made so the suspension will not apply for property acquired or constructed pursuant to a contract binding on the taxpayer at all times after the beginning of the suspension period. Investments for which no credit is allowable, because they represent acquisitions or orders during the suspension period, lower the maximum limitation with respect to which credits may be claimed for investments for the year involved and in that way decrease the amount of other investments for which a credit may be taken during the year either in the form of investments made during the year or as carryovers from other years. Suspension of accelerated depreciation on buildings. The bill, as passed by the House, also suspends the use of accelerated methods of depreciation with respect to buildings (other than those eligible for the investment credit) which are constructed or ordered during the suspension period. Your committee accepted this provision except that it provided an exception for up to $100,000 of construction during the suspension period for which the accelerated depreciation methods will remain available. This $100,000 is available only where the total construction involved is $100,000 or less. Under both the House and your committee's version of the bill, depreciation on buildings where the accelerated methods are denied will have to be computed under the straight line method or the declining balance method at a rate 11⁄2 times the applicable straight line rate (or under some other method which provides a similar reasonable allowance for depreciation). The double declining balance method and the sum of the years-digits method (except for the $100,000 of construction referred to above) will not be available at any time in the future for buildings constructed or ordered during the suspension period. (This is due to the operation of existing law which provides that these accelerated depreciation methods are available to new assets only.) As in the case of the investment credit, an exception is provided for buildings whose construction was begun prior to the start of the suspension period or whose construction was contracted for under the terms of a contract binding on the taxpayer before the start of the suspension period. Rules common to the suspensions of the investment credit and of accel erated depreciation.-As noted, the investment credit and the use of accelerated depreciation methods are not to be denied in the case of property whose physical construction was begun before the beginning of the suspension period. Nor are they to be denied with respect to property constructed or acquired pursuant to a contract which was binding on the taxpayer before the beginning of the suspension period, and at all times thereafter. Under both versions of the bill a building constructed or equipped pursuant to a plan drawn up before the suspension period and not substantially modified during the period, the investment credit or the use of accelerated methods of depreciation, as the case may be, is not to be denied if more than 50 percent (of the adjusted basis) of the depreciable property making up the equipped building is attributable to items whose construction was begun before the beginning of the suspension period, plus items which were ordered under contracts binding on the taxpayer on or before the beginning of the supsension period. Where an "equipped building" qualifies under this rule for the investment credit or for the use of accelerated depreciation, one or the other of these provisions (depending on the type of asset) is also to be available for incidental appurtenances located outside the building which are necessary to the functioning of the equipped building. Your committee has added a rule (somewhat similar to the equipped building rule) relating to a "plant facility" which does not include any significant building structure, yet is a self-contained operating unit or processing operation located on a single site and identified on October 9 in the purchasing and internal financing plans of the company as a single unitary project. The investment credit is to be available where a taxpayer had a plan for such a plant facility on October 9, 1966, and either construction began (generally at the plant site) on the facility before October 10, 1966, or more than 50 percent of the basis of the depreciable property making up the plant facility was attributable either to construction which was begun by the taxpayer before October 10 or property the taxpayer had acquired or had under a binding contract before that date. The bill as passed by the House contained a general rule in determining when machinery and equipment was to be eligible for the investment credit and a special rule applicable in the case of a taxpayer who regularly manufactured or assembled machinery and equipment for his own use. Your committee's amendments substitute a new provision which provides that machinery and equipment is to be eligible for the investment credit where 50 percent of the parts and components were held by the taxpayer on October 9, 1966, or acquired by him under a binding contract in effect on that date. However, for this rule to apply, the parts and components must not be an insignificant portion of the total cost. This report also specifies rules to be followed in determining when the construction of machinery has begun. These rules, in general, provide that the construction of machinery or equipment has begun when significant installation or parts-manufacturing occurs or when assembly has commenced. The investment credit or the use of accelerated methods of depreciation, as the case may be, is not to be denied where a person who is a party to a contract binding on and after the commencement of the suspension period, transfers either the rights to the contract (or the property to which the contract relates) to another person in which a party to the contract retains the right to use the property under a Under the House bill, these contract transfers involving lease arrangements were required to be in connection with financing transactions. Your committee's bill removes this requirement. In addition, the lease arrangements under the House bill had to be longterm leases. Your committee's bill continues this requirement only where the lessor elects to retain the investment credit. The investment credit or the use of accelerated methods of depreciation, as the case may be (subject to certain limitations), is not to be denied to property constructed or acquired under the terms of a lease agreement entered into before the beginning of the suspension period, provided the agreement obligates the lessee or lessor to construct or acquire such property. The House bill also applies this same rule in the case of sales contracts. Your committee's amendments retain this rule but clarify its application. Both the House and your committee's versions of the bill also provide that property transferred at death or in certain other transactions (generally those in which the transferee assumes the transferor's basis in the property) is to have the same status in the hands of the transferee as it had in the hands of the transferor with respect of any binding contracts, etc. The relaxation of certain limits on the investment credit.-The bill also provides that, effective for taxable years beginning after the end of the suspension period (Dec. 31, 1967), the amount of investment credit which may be claimed in any taxable year is to be an amount equal to the entire tax liability up to $25,000 plus 50 percent of any tax liability over $25,000, instead of $25,000 plus 25 percent of any tax liability over $25,000 as is provided by present law. The bill also extends the period in which unused investment credits may be carried forward to 7 years (presently it is 5 years). In the latter case, the extended carryforward period generally will be effective with respect to carryovers from taxable years ending after December 31, 1961. Treasury savings bonds not subject to the interest rate ceiling. This committee amendment authorizes the Treasury Department to issue a new type of retirement and savings bond at whatever rate of interest is deemed appropriate. The bonds are to mature in not less than 10 years but not more than 30 years. II. REASONS FOR THE BILL This bill is part of an overall program designed to moderate the pace of the economy to a level more compatible with the rate of increase in our physical capacity to produce, to begin the return to price stability and to relieve the distortions among various sectors of the economy which arise from widely different rates of growth. By removing certain tax incentives for investment in machinery, equipment, and buildings, the bill will ease inflationary pressures in those sectors where demands for output are straining present productive capacity. This action also will have the effect of reducing pressures tending to raise interest rates and will promote an increased flow of credit into the home mortgage market. Moreover, the bill can be expected to produce a short-run improvement in the Nation's balance-of-payments position as demand for output is brought into balance with the existing capacity to produce the output. The provisions of the bill form an integral part of a broader administration program designed to curb inflationary pressures. The other features of this program-which provide for expenditure reduction and an effort to ease the burden of monetary restrictions-are outlined below. The bill is part of a comprehensive program This bill is a part of a comprehensive program announced by the President to protect the uninterrupted growth of the economy at stable prices. The other elements in this program-a substantial cutback in Federal expenditures and a reduction in issues of Federal securities will complement and strengthen the anti-inflationary impact of this bill. In combination, the various components of this program are highly interrelated and will focus anti-inflationary restraint on those sectors of the economy that require restraint. In his message, the President stated that he would "cut all Federal expenditures to the fullest extent consistent with the well-being of our people." While determination of the precise amount of the overall reduction which will be possible cannot be made until congressional action on the remaining appropriations bills is completed, the President and the Director of the Bureau of the Budget estimate that contracts, new orders, and commitments will be reduced by at least $3 billion in the fiscal year 1967. This amount is equal to approximately 10 percent of that portion of the budget which is not allocated either to the defense effort or to payments fixed by law or which are otherwise uncontrollable. The President has already directed that contracts, new orders, and commitments for lower priority programs be cut by $1.5 billion. Expenditure cutbacks will be achieved in a variety of ways. In the words of the President: Federal civilian agencies have been directed to defer, I am prepared to defer and reduce Federal expenditures— By cutting spending in other areas which have signifi- The third element in the administration's overall anti-inflationary program is a coordinated effort to ease the burden of monetary restrictions and promote the early reduction in interest rates. Your committee's bill will make an important contribution by reducing some of the demand for money, but it is only a part of a broader program. The Secretary of the Treasury has been directed to review all prospective sales of Federal securities in order to reduce to a minimum the volume of such sales in particular sectors of the money market. This effort will serve to curtail Federal demands for long-term capital, S. Rept. 1724, 89–2 thereby releasing more funds for private use. The Secretary of the Treasury stated that progress has already been made under this directive: It has already been decided to cancel the sale of FNMA participation certificates tentatively scheduled for September, and to have no FNMA participation sale in the market for the rest of 1966 unless market conditions improve. Nor will there be any Export-Import Bank sale of participation certificates in the market in the rest of this calendar year. Market sales of Federal agency securities, meanwhile, will be limited in the aggregate to an amount required to replace maturing issues, while new money, to the extent genuinely needed, will be raised through sales of agency securities to Government investment accounts. The President has also called upon banks to handle money and credit equitably and to refrain from charging excessive interest. He has urged them to rely less upon high interest rates to ration available credit and more upon the use of appropriate credit ceilings. Finally, the President has asked the Federal Reserve Board and the Nation's largest commercial banks to seize the earliest opportunity to lower interest rates. This opportunity will not arise, however, if heavy reliance must be placed on monetary policy to restrain inflationary pressures. Prompt passage or H.R. 17607, therefore, is essential to the success of this program. The state of the economy The economy is now in the 67th month of uninterrupted expansion following the recession low reached in February 1961. During this expansion-with the exception of the World War II period, the longest expansion in U.S. business cycle annals-the economy has recorded solid gains. The rate of unemployment in this period has fallen from a high of almost 7 percent to 3.9 percent of the civilian labor force despite the addition of 5.5 million new members to the labor force. Moreover, hourly compensation among nonfarm workers, which rose by only 3.2 percent from 1960 to 1961, rose 5.2 percent from 1965 to 1966. The rate of capacity utilization in manufacturing has risen from 78 percent in the first quarter of 1961 to 93 percent in the second quarter of 1966 despite an increase of more than 25 percent in manufacturing capacity. As a result, the index of industrial production is currently more than 40 percent above its average 1961 level, per capita disposable income is currently running at an annual rate 28 percent above the 1961 average, and corporate profits are currently running at an annual rate nearly 60 percent above the 1961 averag.. Before 1966. The prudent exercise of fiscal policy has been instrumental in sustaining the expansion. The 7-percent investment credit provision of the Revenue Act of 1962 encouraged increased investment in new plant and equipment at a time when the sluggish pace of such investment was a matter of serious, general concern. The enactment of the Revenue Act of 1964 stimulated consumption and investment spending by reducing taxes on individual and corporate incomes by more than $11 billion. The Excise Tax Reduction Act of 1965 provided a further stimulus to the economy by reducing and eliminating Federal excise taxes on a wide range of items including both consumer goods and investment goods. The carefully staged tax reductions and |