They are making great progress out there as far as the development of the State of Washington is concerned, both in farming and in power development. A good bit of United States Government money has gone into that. Mr. LITTLE. That is right, sir. Mr. EBERHARTER. A tremendous amount. Mr. LITTLE. We are having to match it with our State money. Mr. EBERHARTER. That is one reason why we find it necessary to raise taxes, and that is another reason why we cannot cut down on the domestic spending, is it not? Mr. LITTLE. That is correct, sir. Mr. EBERHARTER. How many thousands of additional acres Mr. LITTLE. Eighty-seven thousand acres will be under water in 1952. That is the first block of land. Mr. EBERHARTER. For irrigation and agricultural purposes? Mr. EBERHARTER. That will increase the yield of agricultural products tremendously in this country. Mr. LITTLE. That is right, sir. Mr. EBERHARTER. Then that will force us perhaps in some respects to pay out more money for price supports, will it not, thus forcing us to raise more taxes? Is that right? Mr. LITTLE. We will face that problem when it comes, sir. of in a circle, are we not? Mr. LITTLE. We appreciate that position, certainly. So we are sort Mr. EBERHARTER. I don't know what the answer is going to be. We certainly want to improve all sections of the country, but it is costing money, and the people have to pay for it. We Pennsylvanians help to pay for that irrigation and that power development and everything else. We are kind of generous about it and good-hearted and do not complain about it too much. Mr. LITTLE. It is a fine place. We invite you to come out and live with us. The CHAIRMAN. We thank you, Mr. Little, for your appearance and the information you have given the committee. Mr. LITTLE. Thank you. (The following was submitted for the record:) Hon. ROBERT L. DOUGHTON, Chairman, Committee on Ways and Means, UNITED STATES SENATE, February 28, 1951. House of Representatives. DEAR MR. DOUGHTON: Attached is a telegram received by Mr. Alfred R. Rochester, city councilman from Seattle. You will note the communication was addressed to Mr. Rochester, care of my office. The wire was received by Mr. Rochester too late to arrange for a personal appearance before your committee. Yesterday Mr. Ted Little, chief assistant attorney general of Washington State, presented the views generally prevailing in our State with reference to the proposed taxation of municipal and State bonds. Would it be possible to insert this telegram in the record immediately following Mr. Little's remarks? Thank you and best regards. Sincerely, WARREN G. MAGNUSON, ALFRED R. ROCHESTER, Care of Hon. Warren G. Magnuson, SEATTLE, WASH., February 27, 1951. United States Senate Office Building, Washington, D. C.: General obligations, December 31, 1950, $21,524,000. Utilities, city light, December 31, 1950, $67,841,000. To be issued March 1, 1951, $25,850,000. Mr. Hoffman says they expect another bond issue early in 1952 but the amount is not yet known. He also says to remind you that in a growing municipality the number of bond issues is naturally going to increase. Water, December 31, 1950, $1,883,000. Presently authorized, $3,050,000 additional of which they expect to issue $2,000,000 soon. Local improvement districts December 31, 1950, $6,385,262.90. ROBERT H. HARLIN, The CHAIRMAN. Hall Hammond, attorney general of the State of Maryland. Mr. Hammond, will you give your name and address to the stenographer for the record? STATEMENT OF HALL HAMMOND, ATTORNEY GENERAL, STATE OF MARYLAND Mr. HAMMOND. Mr. Chairman and gentlemen of the committee: My name is Hall Hammond. I am attorney general of the State of Maryland. I appear as attorney general and also at the request of and as the representative of Governor McKeldin, of Maryland. With the permission of the committee I should like to read into the record a letter from Governor McKeldin to me. The CHAIRMAN. Without objection, you may do so. Mr. HAMMOND. Dated February 23, 1951, the letter is as follows: DEAR MR. HAMMOND: I am greatly concerned by the Federal Government's proposal to tax State and local securities. I am sure that you share this concern because of the serious effect it could have on State and municipal financing. The Ways and Means Committee of the House of Representatives will hold a hearing on the proposal on Monday, February 26. The presence of the legislature in Annapolis and the press of other State business which requires the attention of my office makes it impossible for me to attend the hearing and oppose the proposal, much as I would like to do so. I would appreciate it greatly if you will represent the State government and me personally at the hearing. With kindest regards, I am THEO. R. McKELDIN, Governor. I may say also that there has been introduced in the Legislature of the State of Maryland a joint senate resolution opposing this proposal, the passage of which is expected during the present week. If and when it is passed, it will be sent to each member of the committee. As I say, I am here to voice Maryland's protest and objections to the proposal of the Secretary of the Treasury that the income from bonds of States and their subdivisions be subjected to Federal income tax. I shall not deal with the legal question as to whether or not the Federal Government has the constitutional power to impose such a tax, although I am of the clear opinion that it has not. If the Congress should impose the tax, its constitutionality will be bitterly fought out in the courts. Many able and stable constitutional lawyers of the past and present are firm and united in their conviction that the Constitution bars such a tax. Yet in the final analysis, given a chance by the Congress, no more than five men, sitting not far from here, can conclusively say that I and the many distinguished publicists who have so spoken since the founding of the Republic are completely wrong. I submit they should not be given the chance in the absence of the gravest and most imperative necessity. Since this Nation came into being it has literally been taken for granted that the Federal Government lacked the constitutional power to tax the fiscal obligations of the sovereign States. The historical relationship between the Central Government and the States has been based and built upon this fundamental premise. Only the most drastic and compelling considerations should invite the possibility of change in this relationship. If such change is to come, it should come only after the people have so decided by amending the Constitution. It is earnestly urged, however, that there is no grave, imperative, drastic, or compelling necessity for such a basic change. The reasons suggested by the advocates of taxation of State and local bonds are essentially but two. (1) That the nonliability of the bonds of local government to Federal taxes is a loophole in the socially progressive Federal tax structure in that the nonliability to tax prevents the equitable distribution of the national tax burden by making it possible for the wealthy to avoid their just share of the universal contribution to government. (2) That the revenues which would accrue to the Central Government by virtue of the taxation of local bonds is needed in this present period of financial emergency. The fallacy of both these arguments is demonstrable, and those who have preceded me have shown from the Treasury's own statistics that some 60 percent of all State and municipal bonds are held by institutional investors, charitable institutions, pension systems and other entities not subject to the progressive income tax, rather than by individuals. The 1939 hearings on the taxation of governmental securities and salaries indicated that the then average investment of large estates was about 11 percent of tax-exempt bonds. So apparently tax exempts have not been too largely used for tax avoidance by the very wealthy. The second contention, the increase in tax revenues to the Federal Government, is admitted by the Government itself to be a weak reed. and the figures sustain this admission. It is estimated that the amount of new municipals issued each year would be $1 million par value. At an average return of 2%1⁄2 percent, this would mean an annual income of some $25 million, some $10 million of which might be subject to tax, and if all of that income became tax revenue to the Federal Government it would suffice to run the Government for a very short period of time-some 2 hours. The weakness of the affirmative arguments for the tax suggested, assuming its constitutionality for the purpose of the argument, inevitably brings to the fore the suspicion that the present emergency is being used as a pretext and opportunity to weaken the financial independence and integrity of local governments and insure the decline and eventual death of the Federal system of dual sovereignty. Whether or not this is its purpose, it surely would be its result. The effect of the taxation of local bonds would be plain. The financial independence and ability to function of any government is based on its ability to raise revenues, whether by taxation or by borrowing, and any interference by an outside agency having control of this power makes the one who has such control the ultimate ruler of the destiny of the local government. The immediate effect of the tax would be to greatly increase the cost to local governments. It has been said again and again that interest rates would rise from one to one and a half percent, and such is the information which I have been able to secure from those who I felt had the best knowledge of the subject. This extra cost would come at a time when building and other costs make projects of government cost two or three times as much as they did but a few years ago. Thus you would have, at a time of inflated costs, the pyramided effect of the extra cost of financing at such a time. This of course would mean extra local taxes, ad valorem or otherwise, for the support of the bonds which would be sold at these increased interest returns. Many counties and cities-in Maryland and other places-are near their practical or legal debt limit and are in dire necessity of issuing bonds for much needed services. This extra tax might keep many projects from going into effect. Also affected of course would be the revenue bond financing, such as that for bridges, roads, tunnels, sewer and water district, and other selfliquidating projects which utilize the community as an agency or politically created subdivision of government. In Maryland, for example, there is urgent need at the present time, the health department estimates, for sewerage and water for many localities which cannot afford to give it to the people by the selling of municipal bonds. Bankers tell us that this could be done by the creation of sewer and water districts and the sale of revenue bonds. If the bonds which would not be subject to tax for these projects, were made subject to tax, it might not be possible to bring about these improvements vital to the health of the State and its people. The long-range effect of such taxation as this proposed by the Treasury would be to weaken local government because it could not effectively function. Its independence would be lost as the drift toward powerful central government was fostered by the Government itself, and the idea and actuality of strong local government, which is the keystone of a free democratic nation, would be on the way out. The central government, by the power to tax and the power to exempt, for example, could pick and choose the direction of local activity and the ends to be achieved-as in grants-in-aid which were first given without strings or conditions, or very few, but which now have come to be given fully conditioned. Maryland objects to this proposed tax and the probable results if it became effective, and we urge that this committee consider on the one hand the danger of giving up local financial independence, the danger of burdening local financing and taxpayers, and the danger to our dual system of sovereignty, and balance those ill effects against, on the other hand, the alleged beneficial results, namely, the more equitable distribution of tax burdens, which the facts do not sustain, and the negligible results so far as revenue is concerned. We hope the proposal will be defeated. The CHAIRMAN. We thank you very much. Mr. CURTIS. Mr. Chairman, this next witness is one of our distinguished lawyers of Omaha, Nebr., a member of the Douglas County Board of Commissioners, and president of the Nebraska Association of County Officials, and he speaks for the National Association of County Officers of which he is a prominent and active member. I think Mr. Hruska is one of the outstanding public officials of our State. He comes to us well qualified to express an opinion on this legislation. The CHAIRMAN. Will you please give your name and address and the capacity in which you appear to the stenographer? STATEMENT OF ROMAN L. HRUSKA, CHAIRMAN, COUNTY COMMISSIONERS, DOUGLAS county, nEBR., OMAHA, NEBR., REPRESENTING NATIONAL ASSOCIATION OF COUNTY OFFICIALS Mr. HRUSKA. Thank you, Mr. Chairman. Although I don't deserve seven-eighths of what the introduction contained, I love it and I am glad he said it. My name is Roman Hruska, as already indicated. For the last 6 years I have been chairman of the county commissioners in Douglas County, Nebr., which is the metropolitan county of that State. I am currently president of the Nebraska Association of County Officials as Congressman Curtis has indicated, and also am now a member of the board of directors of our National Association of County Officials. The other aspects of this problem having been amply and ably covered by other witnesses, I propose to devote my time in presenting briefly the practical consequences of the proposal of the Treasury Department upon the counties of America. There are 3,050 counties in the United States, the combined territory of which covers every square mile of the 48 States. Historically and immediately they are the agency by and through which the State governments are able to administer State government. While there are many other political subdivisions undertaking specialized and limited fields of endeavor, it is the county which furnishes the basic, over-all coverage for State governmental functions. Their importance and the difficulty of their activities are emphasized by at least these two factors: (1) Whenever new functions of government arise which are not capable of other classification or which no other political subdivision wants, they are assigned to counties. (2) Increased demands for services are made because of shifts of population from urban areas to suburban areasthese latter areas being outside of incorporated villages or cities but being within territory necessarily served by the counties for so many of their needs. This population shift is unmistakably demonstrated in the 1950 census returns. So that there are new and heavy added burdens heaped upon county responsibility in the way of schools, paving, sewerage disposal, water, fire and police protection and many other services and utilities. Now then, the counties would be particularly hit by the Treasury Department proposal because of all the political subdivisions they are the most heavily and exclusively dependent upon property taxes for their revenues. So that if there is any weight at all to the argument that the proposal makes of the income tax a property tax in its result, it certainly falls with its fullest force upon the county and upon the taxpayers within its borders. The regressive nature of the property tax, its already heavy burden upon real estate and other of its vicious aspects have already been commented upon fully. But again, let me remind you that these vicious factors will be particularly felt on county levels. This is true for the added reason that in many of our |