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 Pennsylvania 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 have 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

ation of such securities, first, by weakening materially their financial independence, and, second, by making it difficult, if not impossible, for some of the local subdivisions to obtain essential credit.

Over four-fifths of the obligations are those of the local subdivisions, including county, city, township, school district, and special district. It is absolutely essential that the borrowing power of these local subdivisions remain unhampered; otherwise essential local services will suffer.

If the Federal Government taxed the interest on their obligations, the borrowing power of all of them would be severely hampered and the borrowing power of some of them would be destroyed. This is not a threat to be taken lightly.

It is expected that, particularly in those States which impose no income tax, the local governments would have to raise their propertytax rates or tax other objects.

The situation, to say the least, would be critical.

Under the Pennsylvania constitution there are limitations of borrowing power of the Commonwealth and its political subdivisions. The legislature has established a number of State and municipal authorities which issue their own bonds for the construction and operation of public institutions and facilities. Pennsylvania participates also in various interstate commissions created by compacts such as the Delaware River Joint Commission and the Delaware River Joint Toll Bridge Commission, which issue their own bonds.

The tax-free character of the bonds issued by these governmental authorities and commissions is a vital and indispensable factor in the exercise of the borrowing power.

Plans are underway for the creation of another interstate commission to carry out some vitally important projects in the Delaware Basin.

It is conceivable that, if the interest on the bonds to be issued by such a State government instrumentality were to be taxed by the Federal Government, the States concerned would be seriously hampered, if not thwarted, in their efforts to create such an interstate instrumentality.

It is folly for anyone to say that Federal taxation of State and local securities would not impinge in a vital and disastrous way upon the exercise of governmental functions by the States and subdivisions and instrumentalities.

Why should the State and local governments be constantly called upon to defend themselves against the onslaughts of those who, with apparently little or no regard for time honored concepts underlying our constitutional Federal-State system, advocate measures which would definitely cripple and further discourage the State and local governments in their efforts to be financially independent in performing the governmental functions which are primarily and distinctly their responsibility?

Why make it more difficult, for example for the States to finance their civilian-defense programs; the responsibility for which, as declared by the Congress itself recently, is "vested primarily in the several States and their political subdivisions"?

The Federal Government could not possibly raise sufficient revenue by the taxing of State and municipal securities to warrant the disastrous consequences to our Federal-State system.

Throughout the history of this Republic, there was always a wellrecognized principle known as reciprocal government immunity from taxation. As stated in the dissenting opinion of Justice Douglas, in which Justice Black concurred, in the case of New York et al. v. United States (326 U. S. 572):

The immunity of the States from Federal taxation is no less clear because it is implied. * * * The Constitution is a compact between sovereigns. The power of one sovereignty against another is an innovation so startling as to require explicit authority if it is to be allowed. * * *

The proponents of the proposal now under consideration may have in mind only the possibilities of obtaining additional revenue for the Federal Government, however slight, and whatever the cost in other respects may be.

To the Commonwealth of Pennsylvania and, we are sure, to other States and their local subdivisions, the proposal is another symbol of the struggle between those who would bring about greater and greater centralization of power in the Federal Government, whatever the cost, and those who believe that the preservation of our free society depends upon the preservation of the balance of powers between Federal and State Governments, essential to the continuance of our Federal-State system.

Perhaps the majority of the people in this country are desirous of having our Federal-State system supplanted by another, patterned along the lines of some foreign society. We doubt it.

The United States Supreme Court, in its later pronouncements having a bearing on the subject before us, has taken the view that basically the question whether the Federal power extends to the levying of a tax on State and municipal securities is a political as well as a fiscal problem and one must look to Congress for the solution. It is for the Congress to make it clear to the world, in this critical hour of the Nation's history, that we shall withstand further encroachments upon our form of government.

Let us bear in mind Benjamin Franklin's admonition that "liberty is lost by a gradual process." Let us not sanction measures, under the guise of revenue raising, or otherwise, that would lessen the effectiveness of local government in fulfilling its responsibilities or that would merely lead to further centralization of authority.

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

(The prepared statement of Deputy Attorney General M. Vashti Burr is as follows:)

STATEMENT OF DEPUTY ATTORNEY GENERAL M. VASHTI BURR, REPRESENTING Gov. JOHN S. FINE AND ATTORNEY GENERAL CHARLES J. MARGIOTTI ON BEHALF OF THE COMMONWEALTH OF PENNSYLVANIA

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 Feburary 5, 1951. It would be pointless, and a waste of the committee's time, for me to undertake a comprehensive review of judicial decisions bearing on the subject or of all the cogent reasons why State and municipal securities, or the interest from such securities, should not be taxed by the Federal Government. Others who are scheduled to appear at these hearings are prepared to present detailed information

and statistics bearing on the subject. Moreover, copious material, pro and con, is recorded in the hearings of 1939 and 1942 before the House Ways and Means Committee and in the hearings of 1939 before the Senate Special Committee on Taxation of Governmental Securities and Salaries.

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 test of a memorial by the General Assembly of Pennsylvania 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. In 1918 it was proposed, under the stress of the emergency then existing, that such securities be taxed for the sake of additional Federal revenue, exempting only refunding bonds. That proposal was passed by the House. In 1924 the Treasury gave as an objective and a motivating reason for Federal taxation of such securities that it would tend to curb the extravagance of municipalities. In 1923 and 1924 the majority of the Members of the Congress were, according to the reports, of the opinion that the tax exemption could not be removed except by a constitutional amendment. In 1939, when the Federal revenue repects were emphasized, the House passed the bill. In 1942, when the proposal was intended to apply to both existing and future obligations of the States and municipalities, emphasis seems to have been placed on the need for preventing a comparatively few wealthy individuals or estates from taking refuge in tax-exempt securities.

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 have 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, like some other ideas expressed in support of the proposal, quite unrealistic. It has been shown in much of the testimony in previous hearings on the subject that, 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 investments in exchange for the privilege of tax-exemption. 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, although we have not had access to exact figures as applied to the present situation, it seems clear, according to the best available reports, that 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 into 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 interest costs upon their borrowing capacity, pay those 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.

It has been proposed that consent be given to having the income from Federal securities taxed by the States. To the extent that States did tax such income, this would have the effect of eliminating a part of the revenue gain which the Federal