Our entire industry not just our members has a stake in smart well-planned growth. I can tell you from personal experience that well-planned communities with strategies for preserving quality open space offer better real estate investment opportunities than communities with less planning discipline. As you may know, many cities today are experiencing a kind of renaissance. The success stories include places like San Francisco, Portland, Boston, New York and Chicago that demonstrate a rich mixture of residential and job-intensive commercial and retail uses, attention to the public realm and plenty of open space. Similarly suburban areas with a strong jobs-housing mix, easily accessible retail and office districts, transit- and pedestrian-friendly neighborhoods, and substantial amounts of open space are also flourishing. In other words, smart growth is already beginning to demonstrate its value in the market place.
For many communities across the country the ability to facilitate smart growth, and the quality-of-life issues encompassed by that term, is not so much a luxury, as it is a necessity. Indeed, it's a matter of competitiveness. In today's tight labor markets, communities that seek to attract top employers must demonstrate that they can offer a quality of life that will help companies recruit and retain the best work force they can. For example, in Atlanta, Georgia, it was a real wake-up call for the city when Hewlett Packard decided not to pursue a substantial campus expansion citing worker complaints over traffic congestion and related problems. NRC Executive Committee member, Michael R. Buchanan, who is a senior executive of Bank of America, noted at a recent Atlanta forum on smart growth that business leaders are sometimes among the first to recognize the serious consequences to their communities of a deterioration in key quality of life indicators.
The first question that needs to be answered is how can communities best accommodate the absolute certainty of additional growth while maximizing its most beneficial elements. No one is against the jobs, local tax revenues, more affordable housing and other amenities that well-planned development can provide. But, at the same time, citizens are increasingly demanding that growth be facilitated without increasing local income taxes to pay for infrastructure costs, without increasing traffic congestion to unacceptable levels and without degrading environmental resources, including open space. As a Californian I am particularly concerned about how to address this issue. The Census Bureau tells us that by the year 2025, California will add the equivalent of the current population of the state of New York. This expected growth as well as growth in other areas around the country can only be accommodated successfully if we are attentive to the principles of smart growth.
The next question is what can Congress and the rest of the federal government do to respond to the public's growing demand for smarter growth and more open space. The answer is that it can advance policies and legislation that will provide state and local governments additional resources to grow smarter; and it can reform existing federal laws and policies that inadvertently impede the ability of states and local communities to grow in smarter ways. While Washington can help, the parameters of the federal role need to be carefully defined to ensure local governments continue to chart their own paths. In addition, it's essential to respect the law of unintended consequences. I don't need to tell you that federal involvement in local land use issues while already significant has sometimes been unpopular, unproductive, or both.
I am not an expert on existing federal programs, but I understand there is a bipartisan effort underway to fully fund some of the most critical existing conservation programs including the federal "Land and Water Conservation Fund." NRC supports that effort. In addition, I suggest the Committee give the Administration's "Better America Bonds" proposal the serious consideration it deserves. Its basic premise seems to me to be a good one: to offer local governments the resources to help gain the leverage that additional bonding authority can provide. With the funds from the bond issues, local governments can make their own decisions about open space preservation, redevelop their own brownfields properties and address other environmental issues. Bond financing whether locally or federally subsidized is, in my view, not only more cost effective but also more equitable than using current appropriations of tax dollars. This is because it allocates the cost of acquiring green space over the life of the bonds. In that way it ensures contributions from the current and the next generation. After all, our children or our children's children will also be benefiting from the preservation efforts we pursue today.
Another constructive step this Committee could take is to ensure federal policies advance rather than inadvertently undermine the efforts of communities to pursue their vision of smart growth. To a degree I know I may be preaching to many of the converted here because the ESA and Superfund bills passed out of this Committee in the last Congress would have gone far to resolve some of the impediments I will touch on here. I'm speaking here especially of the brownfields provisions in Senator Smith's Superfund bill or, for that matter, the very similar provisions in Senator Lautenberg's current stand-alone "brownfields" bill, S.20. I also believe the provisions of the bipartisan ESA bill approved by this Committee in the last Congress dealing with habitat conservation planning and the "no surprises" assurances would facilitate smart growth.
To encourage landowner participation in smart growth planning, federal land-use laws such as the Endangered Species Act (ESA) or the wetlands provisions of the Clean Water Act should offer safe harbors to landowners that participate constructively in achieving the goals of the statute. By that I mean regulatory certainty should be offered to landowners whose projects advance environmental and economic objectives in tandem. With the prospect of greater certainty regarding what the rules are and how long they will remain in effect, landowners become far more motivated and constructive partners with local, state and federal regulators whether the issue is recycling brownfields properties or pursuing habitat conservation planning. Certainly California's experience with development agreements and the experience of other states with so called "vested rights" agreements bear this point out.
More specifically, business, municipal and environmental groups have all pointed out that uncertainty regarding possible Superfund liability no matter how remote remains a factor favoring developments outside of urbanized areas and in so-called "greenfields." By the same token legal concerns regarding the ability of federal regulators to make good on their no-surprises assurances under ESA inhibits some landowners from participating in habitat conservation planning. As for the wetlands program administered by the Environmental Protection Agency (EPA) and the Army Corps of Engineers, no one seems to have proposed a safe harbor for smart growth in that arena. As a result, national policies still favor preserving tiny wetlands in the middle of retail or office projects even when the development occurs in highly urbanized areas. NRC is of the view that smart growth, including in-fill projects, could be advanced if the federal government offered those types of projects greater opportunity to mitigate wetlands impacts off site including use of mitigation banking. In addition, there appears to be new thinking at EPA regarding the Clean Water Act's stormwater runoff provisions which causes us great concern. A potential federal land use program under consideration at EPA may be focused on controlling the way individual projects are planned at the site level. Such a program bears the risk of micro-managing local land use in a very unproductive fashion and on a more comprehensive scale than the wetlands or endangered species program.
Environmental and land use laws are not the only ones that may inadvertently undermine smart growth. Federal tax policies also require reconsideration in light of smart growth objectives. I recognize these laws are not within the immediate jurisdiction of this Committee. However, if you will indulge me I would like to offer some examples of how the IRS code can undermine the kind of development usually characterized as "smart growth." It is the peculiar way the tax code treats the renovation of existing buildings. And it actually adds to the pressure to build new buildings usually in so-called "greenfields" outside existing urban areas. Very briefly, today's depreciation rules for real estate don't differentiate between the economic useful life of improvements to leased space and the tax life of the overall building structure. As a result, current tax law dictates a depreciable life for leasehold improvements of 39 years the depreciable life of the entire building even though most lease terms average only 7 years. The implication of this policy is that the cost of upgrading existing space in existing buildings is artificially high. This increased tax cost adversely affects the modernization of buildings for example, by incorporating more energy efficient components. This enhances demand for brand new development at the suburban fringe and contributes to the deterioration of urban centers with older building stock. To fix this anomaly we recommend a cost recovery period for leasehold improvements of ten years, a period somewhat longer than the average lease term.
Similar problems exist with the tax treatment of demolition costs for non-historic structures and environmental cleanup expenses problems that affect many environmentally desirable in-fill development projects. Under current law, demolition costs and the unrecovered basis of any demolished structure must be capitalized and added to the basis of the land, rather than deducted. This tends to discourage acquisition of land that includes a structure which must be demolished (in part or in full) to construct a more suitable improvement. This is because the cost of demolition is not recoverable until the underlying land is sold. More appropriate tax treatment would permit demolition costs to be added to the basis of the new building and amortized over a reasonable period (60 months) or at least depreciated over the life of the building.
Like demolition expenses, costs to clean up land purchased in a contaminated state must be capitalized and added to the basis of the non-depreciable land. The 1997 Taxpayer Relief Act provided immediate expensing of brownfield cleanup costs in empowerment zones and other high poverty targeted areas. This tax treatment should be made a permanent part of the tax code and should be extended in some fashion to non-targeted areas as well. If not immediate deductibility, then more rapid amortization periods, such as 60 months, would be appropriate. As with demolition expenses, requiring that environmental cleanup costs be capitalized is a disincentive to the acquisition and redevelopment of sites in some already urbanized areas.
To sum up, I would simply say that smarter growth and more open space conservation would not only bring environmental benefits but also economic ones. I note that the Democratic and Republican leadership of this committee are both senior members of the Finance Committee. We would encourage you to share some of these economic issues with your colleagues on that Committee as well. Our members stand ready to assist you in advancing these objectives with rational federal policies. I would be happy now to take any questions you may have.
Thank you.