takings is the accelerated amortization applicable to those undertakings which can be related to national defense. To the extent that such accelerated amortization is available to private utilities they receive assistance in the financing of their undertakings through the reduction of income tax.

In the Pacific Northwest at this same time, because of the terrific burden of national defense on the public, congressional appropriation for further expansion of the Government-developed utility system is being retarded. Also, at this time there is no means by which a municipally owned utility can receive any such assistance from the Government in the form of accelerated amortization as is made available to the private utilities. The only assistance comparable to that now being given to the private utilities in accelerated amortization is that which has been available continually to the municipalities in the form of tax exemption. If then, the present tax exemption is to be removed from the field for utility development, construction will be restricted by present defense conditions so that none but private utilities may undertake any power developments, and both the Government and the municipalities will be eliminated from this field.

In the Pacific Northwest the municipal systems of Seattle and Tacoma together represent a generating capacity at the present time well in excess of 500,000 kilowatts. The operations of these two systems are integrated to obtain maximum mutual benefit in the use of natural resources. Their combined capability is larger than the generating capacity of any single private utility agency in the area. The city of Seattle is in the middle of a program which will add another 400,000 kilowatts to its capacity. Seattle's financing for power generation is a continuing operation which will involve issues subsequent to the present date. Tacoma, at present, is adding only a single 30,000-kilowatt unit.

Tacoma has under consideration the proposed Cowlitz development. A hearing has been held before the Federal Power Commission on an application, No. 2016, for the construction of 460,000 kilowatts of installed capacity on the Cowlitz River. This undertaking, which will involve financing in the neighborhood of $150,000,000, will be affected by any removal of tax exemption. The programs of the two cities when completed will represent a generating capacity on their systems of approximately $1,500,000 kilowatts. It approaches in size that of the Federal system on the Columbia River and exceeds that of any single private agency or any combination of two or more of the private utilities of the Northwest. If then the program which involves removal of tax exemption is carried out, and if it has the effect of retarding the cities' development of power for the use of their own people, it could well be that the general economic development of the Northwest would be seriously affected. The combination of circumstances will discourage appropriation for Federal development of the Columbia while Federal assistance is being given to private utility undertakings which cannot be com parable in size to the proposed undertakings of either Tacoma or Seattle.

Viewing the matter from the standpoint of tax income to the Federal Government, the historic policy of the city of Tacoma and the city of Seattle with regard to their rates was the incentive for the development of the large hydro undertakings of the Federal Government. Federal appropriations for power development have been justified on the basis of tax income derived from the tremendous investment in industrial plants which that development has encouraged. In the Tacoma metropolitan area there is similar evidence of large income-tax payments to the Federal Government resulting from the industrial operations of plants which are very heavy users of low-cost municipal electric power. Location of such plants in Tacoma has been due to power developments financed in part by Federal income-tax-exempt bond issues, and financed in part from income of the utility operations of the city which has the lowest power rates in the Nation for residential users. These same residential users are the people who own Tacoma City Light. Tacoma's present power development provides industrial, as well as commercial and residential power supply, for a community of approximately 200,000 persons, with 50,000 wage earners. The proposed Cowlitz development, which again is dependent on Federal exemption from tax, will provide all the electrical needs for 75,000 wage earners, whose annual wages will approximate $250,000,000 at present wage levels.

There is a distinction to be made between general fund obligation bonds of a municipality and revenue bonds of a municipality, and a further distinction must be made between municipal revenuesbonds based on utility revenues and any other bond issues. Certainly in Tacoma the evidence of 58 years' operation and the maintenance of the lowest rates in the Nation for power, confirms the fact that operation has been at cost and without profit, besides paying heavy gross earnings taxes to city and State general funds. Surplus has been reinvested in 79120-51-pt. 2—33

facilities owned by the public so that any analysis of the city's operations in generally accepted financial terms still results in all benefits in excess of costs going directly to the public.

In considering the application of Federal income tax to municipal revenue bond issues the impression appears to be that municipal utility operations pay no taxes. Tacoma City Light pays into the municipal general fund a gross revenue tax of 7%1⁄2 percent. It pays to the State of Washington an excise tax of 3 percent on its gross revenues. In addition, it provides services which are an additional tax on its gross revenues bringing the total to 13% percent of gross revenues. This compares favorably with the taxes paid by private utilities in the area except for Federal income tax, and represents a difference in taxation between Tacoma City Light and the Puget Sound Power & Light, which operates in the Puget Sound area, of approximately 8 percent of gross revenues. The revenue per kilowatt-hour which the city of Tacoma received was 6.255 mills for the calendar year 1948. For the calendar year 1949 it was 6.258 mills, whereas the average revenue per kilowatt-hour received by Puget Sound Power & Light for its sales of electric energy was reported to be 12.262 mills in 1948, and 12.240 mills in 1949. In 1948 Puget Sound Power & Light payments to Federal taxes, including Federal income tax amounted to 8.61 percent of its electric revenue gross. At the same time the difference in the kilowatt-hour revenue between Puget Sound Power & Light Co.'s rate and that of the city of Tacoma was 6.006 mills, or 48.99 percent less than Puget Sound Power & Light Co.'s revenue. In other words, the benefit which ultimate consumers received in purchasing from Tacoma City Light was almost six times the amount which would have been paid in Federal taxes, assuming that operation of the two utilities were equally efficient.

To summarize:

1. The application of Federal income tax to the revenue bond issues of the city of Tacoma light division and the city of Seattle will tend to discourage the development of power generation by these two cities, at a time when Federal undertaking cannot be encouraged because of defense needs, and at the same time that tax-exemption is being afforded to private utilities to encourage their construction of generating facilities.

2. The application of Federal income tax to Tacoma City Light revenue bond issues will tend to discourage the development of the Tacoma area industrially while encouraging areas which receive their power supply from tax-exempt Federal sources. The application of Federal income tax to municipal revenue bond issues of the cities constructing generating facilities in the Northwest will tend toward making the area totally dependent on Federal development with the resultant loss of local control of power generation.

3. Construction of power facilities by Tacoma City Light financed in part by tax-exempt revenue bond issues, to be paid off out of earnings, are subject to Federal income tax. This statement is not to be interpreted in any sense as opposing non-Federal power-generating projects in the area by private utilities. All feasible projects however sponsored must be given every encouragement if energy requirements for defense are to be met in the next 2 to 3 years.

In the present state of regional power supply deficiency in the Northwest, both for defense needs and normal economic growth, there is no competition between publicly owned and privately owned agencies as to who shall build new generating capacity.

The CHAIRMAN. Our colleague, Mr. Madden of Indiana, will be the next witness.

STATEMENT OF HON. RAY J. MADDEN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF INDIANA

Mr. MADDEN. Mr. Chairman, Mayor Eugene H. Swartz, of Gary, Ind., and Kenneth A. Parmelee, executive director of the Housing Authority of the City of Gary, hereby submit their opposition to a proposal removing tax-exemption on State and municipal bonds.

I agree with these two city officials that a taxing of municipal bonds would create havoc with the financial stability of our municipalities.

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:)

Hon. RAY J. MADDEN,

Congressman, First District of Indiana,

House Office Building, Washington, D. C.

CITY OF GARY,

Gary, Ind., February 20, 1951.

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, Executive 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,

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 1%1⁄2 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 a 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