Brownfields Tax Incentive Extension

Order Code RS21599

Updated January 19, 2007

Brownfields Tax Incentive Extension

Mark Reisch

Analyst in Environmental Policy

Resources, Science, and Industry Division

Summary

The brownfields tax incentive expires on December 31, 2007. 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. In each of its budget proposals since FY2003, the

administration has suggested that Congress make the tax incentive permanent. The 109th

Congress renewed the provision through 2007 (P.L. 109-432) and made it effective

retroactively to December 31, 2005, when the previous extension expired. The law also

made sites contaminated by petroleum products eligible for the tax incentive. The 110th

Congress may wish to consider another extension, or making the incentive permanent,

as well as considering repeal of the recapture requirement.

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 has to obtain a certification from the state environmental agency that

the site qualifies 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 expires on December 31, 2007. First enacted as part

of the Taxpayer Relief Act of 1997 (P.L. 105-34), the incentive allows 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 is to encourage developers to rehabilitate sites where environmental

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)).

CRS-2

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.)

To take advantage of the brownfields tax incentive, the developer of a property has

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

does 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”).

A significant drawback of the tax incentive is that it is subject to “recapture.” This

means that the gain realized from the value of the property when it is later sold must 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

2

Revenue Ruling 94-38.

CRS-3

break and has the effect of simply 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. Repeal of the recapture

provision has been favored by the Real Estate Roundtable and its partner associations

representing various aspects of the real estate industry (architects, building owners and

managers, mortgage bankers, general contractors, and others).

Since FY2003, the Administration’s budget proposals have proposed making the tax

incentive permanent. It has been in effect continuously since its enactment in 1997 and

has been extended four times, most recently in the Tax Relief and Health Care Act of

2006, P.L. 109-432 (Division A, title I, § 109).3 This extension through 2007, which was

enacted on December 20, 2006, was made retroactive to December 31, 2005, when the

previous extension expired. The EPA supports the permanent extension, as does the Real

Estate Roundtable and its partners noted above.

This enactment also broadened the definition of hazardous substances, for purposes

of the tax incentive, to include petroleum products (including crude oil, crude oil

condensates, and natural gasoline).

The brownfields provision is one of a number of tax credits, deductions, and

taxpayer benefits that were considered together. For more information, see CRS Report

RL32367, Temporary Tax Provisions (“Extenders”) Expired in 2005, by Pamela Jackson.

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:

3

The other renewals were in the Ticket to Work and Work Incentives Improvement Act of 1999,

P.L. 106-170 (title V, §511); in the Consolidated Appropriations Act, 2001, P.L. 106-554

(Appendix G, title I, §162); and in the Working Families Tax Relief Act of 2004, P.L. 108-311

(title III, §308(a)).

CRS-4

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

Number of Applications

State

Reasons for

Denial

Average

Estimated

Time for

Decision

Received

Granted

Denied

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

was not a

brownfield; at

the other, the

owner did not

qualify

Not

available

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

Massachusetts

17

16

1

Site did not

contain a

hazardous

substance

5-10 days

CRS-5

Number of Applications

State

Reasons for

Denial

Average

Estimated

Time for

Decision

Received

Granted

Denied

Michigan

10

9

1

Lead

contaminant

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

meet the

definition of

“qualified

contaminated

site”

19 days

North Carolina

2

2

0

n.a.

Within 2

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 a Less than 2

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.

14 calendar

days