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It is almost unthinkable that a tax on outstanding securities would be voted after the securities have been offered for sale as"tax-exempt" and purchased on that basis. Such action is clearly unfair and would tend to destroy confidence in government and break down the future willingness of the investing public to buy public securities.

A tax of this nature would be passed by the bond buyer directly back upon the public moneys of our State in the form of an increased interest rate.

It is clear, therefore, that the proposed tax, in addition to increasing the interest rate and cost of financing public projects, would deter a number of bond buyers from investing in securities of this nature. Thus it is quite probable that our State, in many instances, would be deprived of a means of financing worth-while projects due to the increased cost or refusal of the public to invest in the securities.

The amount of revenue that would be derived over a long period of years would be comparatively small and certainly would not justify the obvious disadvantages in taxing the securities, especially in view of the fact that it would tend to hamper the States and municipalities in the development of vitally essential public works projects, thus decreasing the estimated future source.

Therefore, in direct proportion to our present rapid growth which is a 46-percent increase in population, as shown in the recent census report, the development of the State of Florida would be greatly hampered.

The imposition of this tax by the Federal Government will give it power over the States and municipalities, which is not contemplated in our system of government, which makes divisions between the United States on one hand and the sovereign States on the other. In reality, this tax would be a tax by the Federal Government placed upon the funds of the State government and, in the opinion of our attorneys, is, therefore, unconstitutional.

In behalf of the State of Florida and all of its public entities, we respectfully request this honorable committee take positive action against this proposed method of taxation.

The CHAIRMAN. If there are no questions, we thank you for your appearance and the information you have given the committee.

Mr. KEYES. Thank you, Mr. Chairman.

The CHAIRMAN. Hon. Alexander A. La Fleur, attorney general of the State of Maine.

Will you give your name and address to the reporter, and the capacity in which you appear here?

STATEMENT OF ALEXANDER A. LaFLEUR, ATTORNEY GENERAL

OF THE STATE OF MAINE

Mr. LAFLEUR. My name is Alexander A. LaFleur. I am the attorney general of the State of Maine. I represent not only myself in that official capacity, but I represent the Governor, the legislature, and every citizen in the State of Maine in opposition to this proposal.

In behalf of the individuals whom I have said I represent, we oppose the suggestion made to this committee on February 1951 by the Secretary of the Treasury that the income from the bonds issued by the States and their political subdivisions be subjected to taxation by the Federal Government.

We had assumed that the issue now raised by the Secretary of the Treasury had been settled once and for all almost a decade ago. In the late thirties and early forties, the then Secretary of the Treasury urged the Congress to pass legislation taxing the interest received from State and municipal bonds and securities.

Despite this urging, the Ways and Means Committee consistently refused to report favorably on this proposal to the House of Representatives.

Furthermore, on September 19, 1940, the Senate defeated a proposal which sought to tax future issues of State and municipal obligations. On October 18, 1942, the Senate again rejected a similar proposal.

Now, at a time when national unity should be stressed, this disunifying issue, an issue which goes to the roots of our Federal systems, is once more submitted.

The Secretary of the Treasury has not presented any new reason why this proposal, a proposal which, incidentally, yields negligible revenues to the Federal Government, should now be enacted. The Secretary has not advanced any new arguments why he or his counsel fee that the Congress has the constitutional power to tax State and municipal bonds.

The State of Maine wants to emphasize before this committee today that it believes it would be a major breach of faith for the Federal Government to impose the tax that the Secretary of the Treasury advocates.

The Federal Government's power to impose a general income tax at all depends upon the sixteenth amendment. We want to show you that when the sixteenth amendment was ratified by the States it was only upon definite congressional assurances that there was not lurking in the proposal any authority to tax their obligations. Congress cannot today act on the assumption that it has constitutional power to tax our obligations without the grossest kind of bad faith repudiation of those assurances which alone made the amendment possible.

Prior to the adoption of that amendment a general Federal income tax was impossible because of the decision of the United States Supreme Court in Pollock v. Farmers Loan and Trust Company (157 U. S. 429; 158 U. S. 601).

The only solution lay in amending the Constitution, and President Taft asked the Congress to do so in 1909.

The day following the President's message, Senator Brown, of Nebraska, introduced a joint resolution, which provided:

The Congress shall have power to lay and collect direct taxes on income without apportionment among the several States according to population.

However, in the Senate Committee on Finance the phrase "from whatever source derived” was substituted for the word “direct." This substitution occurred without discussion or explanation except for one occasion when it was observed on the floor of Congress that the phrase would permit the taxation of individuals as well as corporations.

After the amendment had passed the Congress and was before the States for ratification, in January 1910 the Governor of New York expressed the fear that the then proposed sixteenth amendment might permit the taxation of the interest from State and municipal bonds. His statement immediately endangered the adoption of the whole income tax proposal because it was clear that the States would never sanction an amendment containing such a threat to their finances.

So at once the friends of the amendment felt compelled to answer the Governor or abandon hope for the amendment.

In February of that year Senator Borah, then the leading exponent of the proposed amendment and an able constitutional lawyer, rose in the Senate to allay the New York Governor's fears. Senator Borah's views received widespread attention and publicity. Senator Borah said:

To construe the proposed amendment so as to enable us to tax the instrumentalities of the State would do violence to the rules laid down by the Supreme Court for a hundred years, wrench the whole Constitution from its harmonious proportions and destroy the object and purpose for which the whole instrument was framed.

Later, in February of 1910, Senator Brown, the introducer of the amendment, substantiated Senator Borah's views when he said:

The amendment does not alter or modify the relation today existing between the States and the Federal Government. That relation will remain the same under the amendment as it is today without the amendment. It is conceded by all that the Government cannot under the present Constitution tax State securities or State instrumentalities,

Moreover, Senator Elihu Root, of New York, alleged by some to be the actual draftsman of the amendment and considered by many to be the ablest lawyer of the age, notified the New York State Legislature that in his opinion the amendment could not be so interpreted as to permit a Federal tax upon State securities.

Furthermore he said: There was no question in Congress or in the courts, or in the country about the taxation of State securities. No one claimed that the sinability of the General Government to tax them was an evil.

Only after these statements were made by the three Senators who had the most to do with the amendment was the amendment ratified by the States.

We urge upon this committee most strongly the fact that were the Congress now to attempt to tax the interest from State and municipal securities it would be an incredible breach of trust of the highest order, with all of the States of the Union that ratified the amendment only after these absolute congressional assurances that the amendment would not permit the Federal Government to tax the interest on State and municipal obligations.

The State legislatures ratified this amendment only in reliance upon assurances that they did not thereby give the Federal Government the power to tax their securities. We do not see how in good conscience, in the light of the above statements, the Treasury Department seeks to have this committee propose such legislation. If the Treasury Department thinks such legislation should be passed, then we submit that the only fair and equitable thing to do is to submit the issue to the people in the form of a proposed constitutional amendment. Only in this way will the Congress keep faith with the States that ratified the sixteenth amendment.

In conclusion, we can only transmit to this committee the grave concern of the State of Maine with this attack on its immunity from Federal interference. We ask this committee to repudiate any suggestion that the States, or the State of Maine, are not the constitutional equals of the Federal Government in the field of intergovernmental taxation.

We urge that the Congress not break faith with the States that ratified the sixteenth amendment.

And we further respectfully urge that any other course of action by the Congress inconsistent with the reasons herein before set forth would leave to the State of Maine no substance as a State, but only the historical title, “State of Maine."

The CHAIRMAN. If there are no questions, we thank you very much, Mr. Attorney General, for your appearance and the information given the committee.

Mr. LAFLEUR. Thank you, Mr. Chairman.

The CHAIRMAN. Mr. Donald Goldberg will appear in place of Miss Vashti Burr, deputy attorney general of Pennsylvania.

Mr. Goldberg, will you please give your name and address and the capacity in which you appear to the stenographer?

STATEMENT OF DEPUTY ATTORNEY GENERAL VASHTI BURR,

REPRESENTING GOV. JOHN S. FINE, PRESENTED BY DONALD
GOLDBERG

Mr. GOLDBERG. My name is Donald B. Goldberg. I am appearing in substitution for Deputy Attorney General M. Vashti Burr, of Pennsylvania.

To save the time of the committee, I propose in reading the statement to omit a few sentences which repeat previous testimony, but I should like to have the whole statement placed in the record intact, because of the importance of its message.

The CHAIRMAN. All right, without objection that may be done.

Mr. GOLDBERG. As the representative of Hon. John S. Fine, Governor, and of Hon. Charles J. Margiotti, attorney general, of Pennsylvania, I desire to make this statement on behalf of the Commonwealth of Pennsylvania to oppose "the removal of the exemption of State and municipal securities from Federal taxation," as recommended in the statement of the Secretary of the Treasury on February 5, 1951.

I would invite your attention to the fact that in the 1939 hearings before the House Ways and Means Committee there was submitted as part of a statement on behalf of the Commonwealth of Pennsylvania, the text of a memorial by the General Assembly of Pennsylvani: declaring: that Federal taxation of State and municipal bonds is inimical to the best interests of this State and its municipalities,

The proposal for Federal taxation of State and local securities has been presented to the Congress on many occasions and in many guises.

Now in 1951 apparently the principal arguments for removing the tax exemption, although only with respect to future obligations are

1. That wealthy persons should be prevented from escaping the high rate of surtaxes;

2. That State and municipal governments should not hare advantages over private borrowers in the loan markets arising from the fact that interest on public loans is tax exempt while interest on private loans is taxed; and

3. That a logical consistency should be attained in the definition of taxable income. There has been considerable comment by proponents of Federal taxation of State and local securities concerning a so-called inequity existing as between the tax treatment of wealthy persons who can afford to invest in tax-exempt securities and persons in the lower income brackets.

The idea that the proposed Federal taxation should result in a situation more equitable for low-income taxpayers is quite unrealistic. In the first place, the relative number of people in the high surtax groups who could benefit from the ownership of tax-exempt securities is small and, secondly, in purchasing tax-exempt securities they feel indirectly the effects of high surtaxes because they must accept a lower return on their investment in exchange for the privilege of taxexemption.

Moreover, in the end it is the mass of middle class and low-income taxpayers throughout the country who would pay for such a venture in Federal taxation. That conclusion can be reached by the application of a bit of simple logic.

To begin with, we submit that it is unrealistic to suppose that Federal taxation of State and municipal securities would result in any appreciable revenue advantage to the Federal Government.

Furthermore, such Federal taxation would cost the States and local subdivisions annually in increased interest costs an amount approximately equal to, or perhaps more than, the revenue which the Federal Government would be expected to receive.

In effect, therefore, most of the additional revenue gained by the Federal Government would be paid by the States, to the same extent as though the States had been required to pay in to the Federal Treasury an amount equal to the increased interest costs.

And how would the States and their municipalities and other instrumentalities, faced with the increased cost upon their borrowing capacity, pay these costs?

Clearly the only way they could do so in the final analysis is to tax their citizens. In many cases this would undoubtedly mean increased property taxes. In other words, millions of "little” taxpayers would, in the end, pay.

Of course, they would not know that the reason they are paying is related in any way to the Federal taxation of State and local securities.

The idea that Federal taxation of State and local securities would bring about a more equitable situation as among taxpayers in highand low-income groups is chimerical and illusory, as is also the idea that anyone, even the Federal Government, would gain any appreciable advantage from the economic or fiscal viewpoint.

There is another aspect to the question now under consideration that transcends in importance, in our view, the purely economic and fiscal aspects. It is the well-considered view of the Commonwealth of Pennsylvania that, to express it in general terms as did the general assembly in 1939, Federal taxation of State and municipal securities is inimical to the best interests of the Commonwealth, its local subdivisions, and its people.

It is our view that the sovereignty and very existence of State and local governments would be seriously threatened by the Federal tax

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