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I congratulate your committee for holding these open hearings and extending to the mayors of various cities an opportunity to be heard before a tax of this kind is enacted. (The material referred to above follows:)

CITY OF GARY,

Gary, Ind., February 20, 1951. Hon. Ray J. MADDEN, Congressman, First District of Indiana,

House Office Building, Washington, D. C. DEAR Ray: The House Ways and Means Committee has a meeting scheduled for February 26, relative to a proposal to remove the tax-exemption on State and municipal bonds.

The cities are very much opposed to this move, since we will have to foot the the bill by paying higher interest rates, if the exemption is removed. In the end, this means greater taxation for the owners of property and the industries in our locality.

I would appreciate it very much if you would be able to lodge a protest on behalf of the cities in Lake County when this proposal comes up. Very truly yours,

EUGENE H. SWARTZ, Mayor.

The Housing AUTHORITY OF THE CITY OF GARY, IND.,

February 26, 1951. Hon. Ray J. MADDEN,

House of Representatives, Washington, D. C. DEAR RAY: I suppose you have already heard that the Secretary of the Treasury is planning to tax bonds issued by municipalities and States. Having been the treasurer of Lake County and the comptroller of the city of Gary, you can understand the implications of such a step. The increased cost of local government would be tremendous. There is little equity in such a measure and I hope Bob Doughton's committee will give it the cold-shoulder treatment it deserves. With best personal regards, I am, Sincerely yours,

KENNETH A. PARMELEE, Excecutive Director. The CHAIRMAN. Our next witness is Mr. Carl H. Chatters, executive director of the American Municipal Association.

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

STATEMENT OF CARL H. CHATTERS, EXECUTIVE DIRECTOR,

AMERICAN MUNICIPAL ASSOCIATION

Mr. CHATTERS. My name is Carl H. Chatters, and my address is 1313 East Sixtieth Street, Chicago, Ill. I appear on behalf of the American Municipal Association.

The CHAIRMAN. About how much time will you require for your main statement, Mr. Chatters?

Mr. CHATTERS. About 8 or 9 minutes. I will make a verbal statement and file a written statement for the record.

I appear on behalf of the American Municipal Association which is a federation of 42 State associations of cities and of which Mayor William H. Devan, of the city of Seattle, is president.

Among the associations we represent are the New York State Conference of Mayors, Louisiana Municipal Association, League of Texas Municipalities, Illinois Municipal League, League of California Cities, League of Third-Class Cities of Pennsylvania, Pennsylvania State Association of Boroughs, Georgia Municipal Association, Kentucky Municipal League, Arkansas Municipal League, Alabama Municipal League, Michigan Municipal League, Tennessee Municipal League,

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North Carolina League of Municipalities, New Jersey State League of Municipalities, League of Nebraska Municipalities, League of Iowa Municipalities, Association of Washington Cities, League of Wisconsin Municipalities, Utah Municipal League, League of Virginia Municipalities, and 22 other State and Territorial associations of municipalities.

In addition to that, we directly represent many of the large cities.

The first point I want to make is the fact that we are certain that the added interest costs to municipalities, if this proposal were adopted, would be a minimum of 1 percent and from 1 percent to 14 percent. That would be the added cost of borrowing to the municipalities.

The added burden to the municipalities from the increased interest cost is the principal reason why local officials are opposed to this proposal.

I have attended literally hundreds of meetings of public officials in the last 15 years, and this question has never failed to attract their attention and their entire antagonism, primarily because of the burden on their finances.

The second point I want to make is the fact that this proposal, if adopted would necessitate and perpetuate the needs for Federal aid because the costs would rise on those very things which the Federal Government proposes to subsidize or for which it is proposing grantsin-aid.

The Federal Government, for instance, in various departments and agencies, has proposed Federal aid for education, either for school construction or for operation. Yet this proposal, if adopted, would bear more heavily on school construction than any other entity. It would increase the cost of borrowing which has to be done for all school construction or most school construction.

The need for sewers, sewage disposal plants, and the elimination-ofstream-pollution programs, is the second greatest need of the largest number of local governments. There have been many proposals to subsidize them.

If it is necessary, that need would be greatly increased by the increased interest costs. Even now in many of our States the programs of stream pollution have been impossible because of the lack of money to carry them out.

I think the gentlemen from Pennsylvania on the committee, if they were to investigate in their own State, would find that that is the serious detriment in their State. The plans that have actually been ordered cannot be built, and that would even be more difficult under this proposal.

The largest cities are greatly in need of superhighways and relief of traffic congestion in the center of their cities. Those facilities are extremely expensive.

They are partly federally financed. This proposal, if enacted, would be a great detriment to them.

At the present time the Federal Government subsidizes hospitals very heavily; that is, hospital construction, most of which is done through borrowing.

This would again perpetuate the need for such Federal help.

It seems peculiar that at a time when Federal subsidies are being proposed for these things and when you want to cut Federal costs that we would entertain seriously à proposal which would most seriously burden those things for which there is the greatest need of help at the present time.

The next point I want to make is this: that the increased interest cost, if this proposal were adopted, would come at a time when you find it necessary to increase the levies, the taxes already used most heavily by the States and the cities.

You will probably consider seriously increased levies on tobacco, liquor, income, sales, beer, automobiles, and other things on which the States and localities already rely very heavily. You will undoubtedly have to increase some of those levies to find increased revenue.

You will be doing that, if this proposal is adopted, and it would be an added burden on the localities at a time when you are impinging on their present sources of revenue very heavily.

Now, perhaps the most important point of all is this: that municipal public works in this country are about 25 years behind time. During the period of the depression and extending into about 1937 or 1938, cities were unable to carry on a normal construction program.

So our public facilities were falling behind from about 1929 or 1930 clear to 1937 or 1938. Just about the time that a normal construction program could be started, the defense program started in 1939, and cities had to drop their construction programs. They were able to go ahead to some extent, but very mildly, during the entire period of the war; and it was about 1946 or 1947 before they were able to start again.

Now they have been able to carry on a construction program for about 2 years, and again they are going to be forced to stop. There have been only 6 or 8 years in the last 25 years when cities could carry on a normal construction program.

When again there is an opportunity to build the things they need, they would be very seriously hampered if they found their bonds taxed at a time when their needs are the greatest. The result would be that the accumulation of public works would become all the greater.

Now, there is one other point. I think we ought to look not only at the conditions as they are now when bond interest rates are favorable, but what they are in serious times. If this proposal had been in effect in the 1930's, it would have done several things. It would have prevented the cities whose credit was marginal from borrowing any money at all. It would have made it impossible for the small places to borrow.

It would have made it impossible for any cities except those with the very top credit rating to borrow. It would have prevented the refunding of the debt of the States which were in difficulty and the refunding of the debt of the cities which were in difficulty.

This proposal, if in effect, would have prevented recovery by making it impossible for many cities to go ahead with their public works program,

So I think we have to look at what would happen if bad times, as well as good times, were at hand if this proposal were in effect.

Another very important factor was mentioned yesterday several times. That is that if this proposal were in effect the small communities would find it virtually impossible to borrow. That is true because they are not known in the investment market. Their names are not known to the investing public. The bonds must be purchased locally now, and if the bonds were taxable, my contacts sith investment bankers and with the cities themselves indicates that it would be difficult, if not impossible, for hundreds and thousands of small communities to sell their bonds and to borrow the money they need.

Now, the next to the last point I want to make is this: that in addition to all the fiscal difficulties, the local officials honestly and sincerely feel the controls over their programs that would be involved if the Federal Government were allowed to tax their bonds.

They ask, if the Federal Government can tax their bonds for their water plants, their light plants, their parking facilities, and other things, why won't they also be inclined to tax the total income from those facilities?

Regardless of what you may think would be the result, they honestly fear in their own minds further invasion of their rights if this proposal should be adopted. They think that if you can tax their water bonds, you can tax their water plants, and they have an honest and sincere fear of that.

Now, in closing, I would say this: that, in our opinion, this furthers the trend toward centralization, first through control; second through making it necessary to rely more heavily on State grants-in-aid and Federal grants-in-aid, that it has little merit as a revenue producer at this time, or at any other time, and that there is so little to gain and so much to lose that public officials are unanimously and wholeheartedly against the proposal.

Thank you.

The CHAIRMAN. Mr. Chatters, I was very much interested in your statement. I have just one question.

In asking this question, I express no opinion whatever about the proposal of the Secretary of the Treasury to tax the income from State and municipal bonds.

You have emphasized, as many witnesses have, the fact that if this tax were imposed, as recommended by the Secretary of the Treasury, it would mean an additional burden on the taxpayers of municipalities and States.

Now, we are holding these hearings for the purpose of seeking some means of obtaining increased revenue, Federal revenue, primarily for the national defense.

Can you think of any present tax that we can increase that will not be an added burden to those who pay the tax?

Mr. CHATTERS. No; any tax is an added burden to anyone who has to pay it.

The CHAIRMAN. That is my thought.

Mr. CHATTERS, It is a relative matter as to who gets the burden and as to who the shift is from and to. In the case of this particular tax, the shift in burden would be from one group to the local real estate taxpayers.

The CHAIRMAN. It wouldn't be a shifting of the burden.

Mr. CHATTERS. It would be an added burden. It would be a lesser burden to others who may not then have to pay the revenue derived from that particular source.

The CHAIRMAN. These hearings have been going on for several days, and so far we have had no help or suggestions or recommendations as to sources of increased revenues. All of the testimony practically has consisted of a protest against any increase in present taxes or against the imposition of any new taxes.

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We have had little or no help in the other direction, and I am hoping that somebody will sympathize with us to the extent of coming forward to offer some practical, feasible suggestions whereby we can raise additional reveues.

Have you any suggestions along that line?

Mr. CHATTERS. I could suggest some, sir, but I am sure that the people that would be affected by them would be here to protest aginst those suggestions. Any suggestions I would make would be my personal suggestions, and not those of the association I represent.

The CHAIRMAN. Do you have any suggestions of that kind you can give us?

Mr. CHATTERS. My own feeling would be that some adjustment in the capital-gains tax might be desirable.

The CHAIRMAN. That, like this other proposal, would not bring us much immediate revenue.

Mr. CHATTERS. I would have to leave that up to your experts, that is, to determine the amount that it might bring in. Certainly it would bring in some revenue.

I have always felt that perhaps the present allowance of 10 percent deduction for various things, without itemization was bad, and that ought to be reduced to 5 percent.

The only reason I see for making it 10 percent was so that there would not have to be so many liars on the record. I should think that if people were forced to itemize and otherwise be allowed only 5 percent deduction, instead of 10 percent, it might be worth while.

Again I would say that the technical questions would have to be discussed with your staff. That might yield some revenue. I would think the capital-gains tax might well be adjusted somewhat.

Perhaps single-purpose corporations might be looked into rather fully to see what is done about them. Some of the single-purpose corporations for a single operation or enterprise probably provide one important means of tax evasion.

Îhose are things that occurred to me as an individual, and not speaking for the association, but only for myself.

The CHAIRMAN. We appreciate those suggestions.
Are there any questions?
Mr. GRANGER. Mr. Chairman.
The CHAIRMAN. Mr. Granger.

Mr. GRANGER. Mr. Chatters, following out what the chairman was saying, I think nearly every witness that has been before us on this matter has used the figure of 1 percent or more than 1 percent as the amount that would be added to their tax burden if these securities, if the income from these securities was taxed.

What evidence do you have that such would be the case?

Mr. CHATTERS. There is evidence, such as Mr. Tobin presented yesterday, which showed the immediate effect in a community where a proposal to sell bonds was received at the time a proposal to tax the bonds was made in 1942. I think we have to judge from our knowledge of the market and from our knowledge of who buys bonds, and how they buy bonds to determine what the result would be.

We know, of course, that some bonds are bought by people for tax purposes, and even though that may be only a small portion of the total, still that affects the whole price because the price at which a part of a commodity sells influences the sales price of the whole lot.

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