HR1134shAPR15

TheWeekInCongress.com

Week Ending April 15, 2005

HR 1134 to amend the IRS Code of 1986 to provide for the proper tax treatment of certain disaster mitigation payments.

BRIEF

Not to be confused with disaster relief grants, the bill would exclude qualified disaster mitigation grants from taxes as gross income. A qualified disaster mitigation payment is one paid from Robert Stafford Relief and Emergency Assistance Act or the National Flood Insurance program for disaster mitigation.

Mitigation grants prevent damages from future natural disasters. Grants are provided to prevent flood damage to properties in floodplains for replacing or strengthening roofs and windows and other measures that would reduce the impact of future storms and problems including earthquake damage. FEMA calculates the potential cost of disaster damage to a facility and then cuts a grant that is less than the expected cost of damage.

Basically home, business or community improvements, the grants for such measures were not taxable as income until 2004 when the IRS revised its rules. The average grant is $83,000.

The bill frees grant recipients from paying any taxes on their grants beginning after the date the bill is enacted.

If you sold your property as a result of the disaster the sale amount is not excluded from taxes.

The Senate amendment extends to the past, the ability of grant recipients to avoid taxes on prior disaster mitigation grants.

The bill is expected to be quickly signed into law by President Bush.

Sponsor: Representative Mark Foley (R-FL-16^th)

Vote: Passed House by voice vote (March 14, 2005). Passed Senate amended by Unanimous Consent (April 13, 2005), Passed House with Senate amendment (April 14, 2005) Signed by President Bush as Public Law 109-7 (April 16, 2005)

Cost to the taxpayers: { UPDATE: A CBO report released May 13, 2005 calculated that this bill "will decrease governmental receipts by $6 million in 2006, $36 million over the 2006-2010 period, and $109 million over the 2006-2015 period."}

MORE INFORMATION

DEPARTMENT OF THE TREASURY,

Washington, DC., March 14, 2005.
Hon. CHARLES GRASSLEY,
Chairman, Committee on Finance, U.S. Senate, Washington, DC.

DEAR CHAIRMAN GRASSLEY: I am writing to express the Administration's support for legislation to provide tax relief to property owners who participate in Federal Emergency Management Agency (FEMA) hazard mitigation projects, specifically H.R. 1134 and S. 586 sponsored by Representative Mark Foley and Senator Bond respectively.

FEMA provides grants through State and local governments to mitigate potential damage from future natural hazards. Examples of mitigation projects include demolition, retro-fitting, and elevation of buildings. As a result, these grant projects are distinguishable from other grant programs in that their goal is to avoid the larger costs of damage that otherwise would be compensated in the future out of the taxpayer funded Disaster Relief Fund, National Flood Insurance Program, other Federal assistance programs, and State, local and private sources. Through hazard mitigation programs, FEMA has funded community mitigation projects affecting individual properties for over fifteen years. In particular, FEMA makes grants under the Flood Mitigation Assistance program, the Hazard Mitigation Grant Program, and the Pre-Disaster Mitigation program.

Under current law, gross income generally includes all income from whatever source derived. Generally, the mitigation grants from FEMA (or construction services paid by grants) represent income to the recipients. Under specific statutory and administrative exceptions, gross income does not include certain government payments made to individuals in response to need resulting from particular disasters. However, grants under the three FEMA mitigation programs described above often are made in anticipation of future disasters and other natural hazards and are not need based. Consequently, the mitigation grants generally do not qualify for these specific exceptions.

Similarly, if a property owner participates in a FEMA-assisted acquisition of his or her property, the property owner generally is required to include in income any gain from the sale of the property (subject to the $250,000/$500,000 exclusion from income of gain from the sale of a principal residence).

By explicitly excluding FEMA mitigation grants from income, the Foley/Bond legislation provides tax relief to home and property owners that receive the grants. Because participation by property owners in FEMA projects is voluntary, there is concern that owners of at-risk properties might decline to participate because of the potential tax obligation under current law, thus adding to long term taxpayer funded recovery costs. This presents a potential impediment to the policy Congress initially sought to implement through these grant programs.

Finally, it is also my understanding that the effective dates of the Foley/Bond legislation are prospective and that the tax exemption for these FEMA mitigation grants will be recognized upon date of enactment of the bill. Because the issue of retroactivity is also one of fairness, it is our hope that Congress, consistent with the Administration's budget proposal, will encourage the Treasury Department to provide retroactive relief to those individuals who have utilized FEMA mitigation grants in the past.

I commend the House for acting quickly to address this issue and urge the Congress to send this legislation to the President for his signature.

Sincerely,

John W. Snow.

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