similar proposal. The situation remains unchanged. In our opinion, this proposal should again be rejected.

The sixteenth amendment to the Constitution in 1913 did not intend to extend Federal authority to taxation of State and municipal bonds. A review of the proceedings when this amendment was before the Senate will reveal the cogent remarks by Senator Borah, who stated that to tax the States' instrumentalities would "wrench the whole Constitution from its harmonious proportions" and would "destroy the object and purpose for which the whole instrument was framed." Certainly there is nothing in the decisions of the Supreme Court which would support the Federal Government's right to tax State and municipal bonds. I am not here to argue the legal implications of this proposal. It is my purpose to indicate what this would mean to the taxpayers of Baltimore City. The securities sold by Baltimore City would have to bear a higher interest rate. Baltimore's principal source of revenue is its general taxing power. Therefore, the additional cost entailed by this proposal would mean an additional burden on the property owners of Baltimore, who are already heavily taxed.

It is generally believed that by taxing municipal securities, the interest cost would increase up to 1 percent. This is pretty well borne out by the fact that last week a corporation with an AA rating sold its bonds which, of course, were taxable, in the amount of $30,000,000 on a 2.80-percent basis. Baltimore's securities of a comparable maturity, which also have an AA rating, are currently selling on a 1.65-percent basis. If the city had to pay an additional 1-percent interest cost, this would be equivalent to a 60-percent increase in interest charges. Baltimore derives its borrowing power in the following manner: First, there must be secured from the legislature an enabling act; in turn the city council must, by ordinance, submit the matter to the voters. Now, I can only comment on what is immediately in sight. We have presently the approval of the voters for the issuance of bonds totaling approximately $84,000,000. In addition, we plan to submit to the voters in May of this year, for their approval, the issuance of bonds in the amount of $32,000,000. Therefore, if these bonds, totaling $116,000,000, are to be subjected to a Federal tax, the additional interest cost over the life of these bonds would probably be in the neighborhood of $17,000,000. Of course this would be increased by further issues.

I, therefore, respectfully request that your honorable committee recommend the continuance of the present exemption of municipal securities.

Might I also make the following statement: that there are a number of municipalities that are now ready to issue their securities. If the committee could arrive at an early conclusion on this matter it would help very materially in the marketing of these bonds.

I thank you.

The CHAIRMAN. Does that conclude your statement?

Mr. FALLIN. Yes, sir.

The CHAIRMAN. Thank you very much for your appearance and the information you have given the committee.

Mr. FALLIN. Thank you.

The CHAIRMAN. Julian Barnard, representing Pennsylvania Boroughs Association and League of Third-Class Cities. I didn't know we had any third-class cities in the United States.

STATEMENT OF JULIAN W. BARNARD, BOROUGH SOLICITOR, NORRISTOWN, PA., REPRESENTING PENNSYLVANIA BOROUGHS ASSOCIATION AND LEAGUE OF THIRD-CLASS CITIES

Mr. BARNARD. We have 46 of them in Pennsylvania, sir. They are graded according to size, not quality.

The name is Julian W. Barnard. I live at Norristown, Pa. I am borough solicitor of the town of Norristown, the largest borough in the United States. I am here as the representative of the Pennsyl vania State Association of Boroughs, representing 940 boroughs in Pennsylvania, total population of 3% million people, and also repre

senting 46 third-class cities in the State of Pennsylvania, a total population of over 2,000,000 people, or speaking on behalf of approximately 6,000,000 people who live in the small towns of America, gentlemen. I might say, if I may make a personal observation, Mr. Chairman, I think it has been about 12 years before I appeared before this committee on this same topic.

I recognize only two faces, your face, Mr. Chairman, and Mr. Cooper's face. I don't know whether I miss anybody else. Those of us who represent the workmen in the small towns of America thought this question was settled. We have been very much alarmed lately to have it built up again. I think we all have our problems. Some of you gentlemen have indicated that you have a problem to raise necessary money. We are all in government work, and we have our problems to raise necessary money for necessary and vital works. I am going to pass by the legality of this question. I recognize the fact that the Federal Government has the power, if perhaps not the right, to enforce this upon the people. Let's just assume that. I say the Congress ought not to do it even though it has the right and the power.

Local units of government furnish those necessary and vital services. without which the people cannot live from day to day. We furnish the public safety, police protection, fire protection, sanitation and public health, streets and highways and street lighting and education. We can only furnish those services by paying money for them and by having equipment and public works. We can only get the money out of direct taxation on real estate. That is where we get the money with which we furnish those services. Our power to tax real estate is limited constitutionally and by statute. There is a top limit on how many millions we may levy in any one year. There is a top limit on how much debt we can incur. We can only provide public works, sewage-disposal plants, sewage-treatment plants, streets, highways, street lighting, school buildings, by selling bonds and amortizing those bonds out of the tax revenues we raise from year to year.

It is conceded that if this proposal should become law, it will cost the public and the towns more money with which to finance their public works. We can't raise any more money out of direct taxation We are already up against our limits. We are seeking somehow to get increased limits because costs have gone up, as you gentlemen know.

on real estate.

The borough of Norristown is now building a secondary treatment plant for its sewage system at a cost of over a million and a half dollars. We could have built that same works 15 years ago for $600,000. That is what is happening to our costs. We are paying our policemen almost twice as much today as we did years ago.

Where are we going to get the money? We can't get it. The answer is we are reducing services, reducing these vital services which the people must have and need. Our towns need more and better services, not less.

So I say why can't we each do our work which is interdependent · and independent. We in the towns have our specific duties of government to do, the same as you people in Congress and the Federal Government have their specific duties to do. Why must we turn and do things to each other, gentlemen? Why do we have to put handicaps around each other's backs? I know 10 years ago when I was down

here privately talking to my friend, Senator Guffey, about this matter, Senator Guffey didn't see it this way. I said, "Look, Senator, why do you want to do this to us? The Federal Government has a great big beautiful post office building in Norristown. We furnish all the public services, we give you sewage, we give you police protection. When you ask for no parking, when the postmaster asked for it, we created a no-parking zone. We don't get any taxes out of the Federal Government. Why shouldn't we put a tax on the post office."

He said, "Go ahead, you can't collect it. You don't have the power."

If that is the attitude, gentlemen, "We in Congress have the power, and you people are helpless," I don't think you seriously mean that. It would be economically wrong, plain economically wrong. It has been demonstrated I know to your satisfaction, without my going into it, that the small and insignificant amount of increased revenue the Federal Government would get would be disproportionate to what it would cost us in the local towns. I don't care what you call it, you can call it a tax on the bond holders, but it results in a tax on the municipality, and I will tell you why that is true. The State of Pennsylvania has opposed a 4 mill personal-property tax which covers evidences of indebtedness, covering bonds. They did not exempt the bonds of municipalities. Four mills, but the immediate reflected cost in financing of the towns of Pennsylvania was so much that every single municipal bond that has been issued in Pennsylvania in recent years calls for a tax-free covenant. The municipality itself assumes and pays that tax and saves money. So I don't care what you call it, if this should become law it becomes a tax on the municipalities, indirectly, but directly in its result. So I say you ought not to do it. You ought not to impose this hardship. I thought about the old adage of burning down a barn to catch a single rat, and that is about the way it impresses me.

Gentlemen, there is one more thing that I would like to say. For 20 years I have been working actively in municipal government. I have become more and more persuaded that the keystone of American democracy is in our local units of government, where everybody in the town knows his councilman, knows where to find him, where o go if he has a complaint, and believe you me, they do it. Where everybody in the town knows that sewage plant is being build and drives by and watches it and knows what it is for. That is where people are conscious of daily democracy. They don't even sea Washington. Why, Washington is so far away it is something that is really not comprehended. But they come to the borough hall. They come to the men who constitute the borough council, and they know where to find those men, and they know where to express themselves and they do express themselves. When they go to election they know personally the men they are voting for and the men they are voting against. There is democracy alive and working, and I believe that if you maintain the integrity of what we call home rule in America, there never will be much real danger to our understanding of democracy.

Don't you see that everything that you do or everything that we have ever done that might tend to weaken that and take some of these local powers away and transfer them down to Washington tends to weaken that sense of democracy? I have often said to some of our

local meetings, "Look, instead of being governed by a' borough council that you know, men that you know, men that you know how to find, if we were governed by a gauleiter appointed from Washington and if he went haywire, you people couldn't make enough noise to be heard over in the next county, let alone in Washington," but they can make enough noise to be heard in their own borough hall. Let's above everything else maintain the integrity of home rule and don't put any handicaps upon it. Don't weaken the public, gentlemen. That is my point.

Thank you.

The CHAIRMAN. Are you through? We thank you for your appearance and the information you have given the committee.

Our colleague, Mr. Cotton, of New Hampshire, will be the next witness.

STATEMENT OF HON. NORRIS COTTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW HAMPSHIRE

Mr. COTTON. Mr. Chairman, I am grateful to the committee for the opportunity to appear in opposition to the proposal to tax income derived from State and municipal bonds.

I desire not only to express my own opposition to the proposal but also to oppose it on behalf of the Governor of the State of New Hampshire, the Honorable Sherman Adams, and the attorney general of the State of New Hampshire, the Honorable Gordon M. Tiffany.

The proposed tax, in our opinion, offends every accepted principle of comity between State and Federal Governments. It abrogates the long established principles of our constitutional form of dual government and causes the National Government to exceed its proper limits under our Federal system. It obstructs the States in the performance of their governmental functions and imposes a direct limitation upon their ability to borrow money at favorable rates of interest to perform said functions.

I hope that the committee will reject this form of taxation, and I ask permission at this point to file a short brief by the attorney general of the State of New Hampshire in opposition to this proposal. The CHAIRMAN. Without objection, the brief may be inserted. (The brief is as follows:)

BRIEF OF THE ATTORNEY GENERAL OF NEW HAMPSHIRE IN OPPOSITION TO PROPOSAL TO TAX OBLIGATIONS OF STATES AND THEIR GOVERNMENTAL SUBDIVISIONS

I. It is basic to our dual form of government that the States will respect the Federal Government and the Federal Government the State, as each carries out its assigned or inherent functions under the Constitution.

It was early held that a state is without the power to tax the Federal Government in respect to governmental functions undertaken by the latter. The principle leading to this conclusion is cogently stated by Marshall, J. in M'Culloch v. Maryland (4 Whet. 316, 4 L. ed. 579):

"That the power to tax involves the power to destroy tion not to be denied." (4 L. ed. at 607.)

*

*[is a] proposi

The reciprocal of the foregoing principle was stated in Pollock v. Farmers Loan & Trust Co. (157 U. S. 428, 39 L. ed. 759):

"The Constitution contemplates the independent exercise by the Nation and the State, severally, of their constitutional powers.

"As the States cannot tax the powers, the operations, or the property of the United States, nor the means which they employ to carry their powers into

execution, so it has been held that the United States have no power under the Constitution to tax either the instrumentalities or the property of a State.

"A municipal corporation is the representative of the State and one of the instrumentalities of the State government. It was long ago determined that the property and revenues of municipal corporations are not subjects of Federal taxation." (39 L. ed. at 820.)

The doctrines thus asserted have been assiduously followed. See, e. g., Indian Motorcycle Co. v. United States (283 U. S. 570, 75 L. ed. 1277), where the court declares

"It is an established principle of our constitutional system of dual government that the instrumentalities, means and operations whereby the United States exercises its governmental powers are exempt from taxation by the States, and that the instrumentalities, means and operations whereby the States exert the governmental powers belonging to them are equally exempt from taxation by the United States. This principle is implied from the independence of the national and state governments within their respective spheres and from the provisions of the Constitution which look to the maintenance of the dual system."

See, also, Ashton v. Camer County Water Improvement District No. One (298 U. S. 513, 528, 80 L. ed. 1309, 1313).

The recent language of Justice Douglas is directly in point and cannot be questioned as applied to State activity in its governmental sphere:

"The States on entering the Union surrendered some of their sovereignty. It was further curtailed as various amendments were adopted. But the tenth amendment provides that 'The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.' The Constitution is a compact between sovereigns. The power of one sovereign to tax another is an inovation so startling as to require explicit authority if it is to be allowed. If the power of the Federal Government to tax the States is conceded, the reserved power of the States guaranteed by the tenth amendment does not give them the independence wihch they have always been assumed to have. They are relegated to a more servile status. They become subject to interference and control both in the functions which they exercise and the methods which they employ. They must pay the Federal Government for the privilege of exercising the powers of sovereignty guaranteed them by the Constitution, whether, as here, they are disposing of their natural resources, or tomorrow they issue securities or perform any other acts within the scope of their police power." New York v. United States (326 U. S. 572, 90 L. ed. 326, 341.) The State of New Hampshire feels, consistently with the principles clearly enumerated in the cases noted above, that the proposed measure strikes at the very core of our constitutional system and should not, therefore, be countenanced. II. The State of New Hampshire for its part, has made no attempt to infringe upon the constitutional immunity from State taxation enjoyed by the Federal Government.

In recognition of the principles of constitutional law which are held to confer an immunity from taxation upon the Federal Government in respect to its governmental functions, and in reliance upon like treatment at the hands of the Federal Government in respect to its own, the State of New Hampshire has been alert to avoid the imposition of taxes in any form upon the United States either directly or upon income derived from its securities. Thus, chapter 78 of the Revised Laws, 1942 (taxation of incomes), and expressly avoids the assessment of income tax in violation of the Constitution of the United States and Federal constitutional law. And in chapter 85, Revised Laws, 1942 (taxation of banks), Federal Government obligations are expressly exempted from the tax imposed by that chapter. It is obvious that if the proposed Treasury measure be adopted, this State, along with many, if not all, of the others, will no longer be bound by what must have been a supposed constitutional principle and will no longer permit the Federal Government to enjoy an immunity of which it has been deprived.

III. Adoption of the Treasury proposal will seriously impede the State of New Hampshire and its subdivisions in the performance of their governmental functions. A large portion of the activities of government is financed by the borrowing, either upon short-term notes in anticipation of taxes to meet the cost of current operations, or on long-term instruments ranging from the construction of schools and installations for the abatement of disposal of sewage.