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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 jo 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 sez 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.

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.

Thank you.



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:)



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'Cuiloch v. Maryland (4 Whet. 316, 4 L. ed, 579): "That the power to tax involves the power to destroy

[is a) proposition not to be denied." (4 L. ed. at 607.)

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 main

tenance 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

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.

ÍII. 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. It is essential to the continued operation of State government that securities issued in connection with such borrowing continue in their tax-free status in order that they may be salable at a rate which the State and its subsidivisions can afford to pay. Taxation of income from such obligations will inevitably be reflected in a demand for a compensatory increase in discount or in interest rate on the part of investors. To meet this the State, already burdened by increased costs, and hampered by the drain of the Federal Government on sources of income otherwise open to it, would be required further to curtail its government activities to the detriment of its peor

The Chairman. Without objection the committee will adjourn until 10 o'clock tomorrow morning. (The following material was submitted for the record:)


Washington, D. C., March 23, 1951. Hon. Robert L. DOUGHTON, Chairman, House Ways and Means Committee,

New House Office Building, Washington 25, D. C. DEAR COLLEAGUE: Enclosed is a letter I have received from the Buffalo Municipal Housing Authority, Buffalo, N. Y., expressing its opposition to Secretary Snyder's proposal to tax the income from bonds and notes of States and local governments.

It will be greatly appreciated if you will bring this to the attention of your members when your committee meets in executive session after the Easter recess. Thanking you kindly, I am Sincerely yours,



Buffalo 2, N. Y., March 19, 1951. Hon. EDMUND P. RADWAN,

House Office Building, Washington, D. C. DEAR CONGRESSMAN RADWAN: It has come to the attention of the Buffalo Municipal Housing Authority that hearings are being held before the House Ways and Means Committee on a proposal to tax the income from the bonds and notes of States and local governments. As a local public agency, with power to issue bonds, the Buffalo Municipal Housing Authority wishes to record its opposition to any such taxing of local government issues.

In addition to the financial chaos such a tax would bring to States and municipalities generally, it would destroy the market for the obligations of public authorities and would especially be disastrous in the housing field. The level of debt service costs resulting from the taxing of local housing authority bonds would either make it impossible to administer the program for low-income families or would greatly increase the subsidy requirements, thus nullifying the Government's gains through the taxing vehicle.

In behalf of the varied interests of local communities, we should like to urge that you lend your efforts toward preventing any tax being placed on the income from local government issues. Very truly yours,

ROBERT D. SIPPRELL, Executive Director.


Washington, D. C., February 28, 1951. Hon. ROBERT L. DOUGHTON, Chairman, Committee on Ways and Means,

House Office Building, Washington, D. C. MY DEAR MR. CHAIRMAN: I enclose herewith statement submitted by Mr. Robert L. McCurdy, assistant city manager, city of Pasadena, Calif., voicing objection of the city to any taxation on income derived from municipal bonds, with which I concur.

Will you kindly incorporate this statement as part of your hearings on this subject. Sincerely yours,



Pasadena, Calif., February 21, 1951, Hon. ROBERT L. Doughton, Ways and Means Committee, House of Representatives,

House Office Building, Washington, D. C. MY DEAR MR. Doughton: The city of Pasadena wishes to voice its objection to any taxation on the income from municipal bonds. We are opposed to this proposed action for the following reasons:

(1) The exemption of municipal securities from taxation is an established principle and policy of the Federal Government for many years and any change in this tax structure would tend to disrupt harmonious tax relations and would be inequitable to the municipalities of the United States.

(2) In effect, the taxation of municipal bonds would increase the cost of these securities by approximately 50 percent. This is based on the assumption that the net cost to the cities on serial bonds running from 1 to 30 years would be from 1 to 144 percent. The interest on this type of bond issued in the sum of $1,000,000 would increase from approximately $310,000 to approximately $450,000.

(3) The additional cost of this increase would have to be borne, for the most part, by little business and the home owners of America.

(4) Many cities are faced with vital and important projects which would generally be accomplished through the issuance of revenue bonds. The proposed increase in interest rates would seriously jeopardize these projects and make many of them impractical and impossible.

(5) The proposal is extremely untimely. Many taxes already used by States are, we understand, to be sharply increased. To add this new cost to municipal finance would create many serious and new taxation problems.

(6) If not illegal, it is contrary to the purpose and intent of the sixteenth amendment to the Constitution. It certainly was never the understanding of the ratifying States that authority was being given to the Federal Government to tax the securities of State and municipal agencies.

(7) An action taxing municipal securities might lead to further taxation of municipal functions such as the income of municipal light and water companies.

(8) À tax on municipal bonds could only be interpreted as an attack by Government on the sovereignty and right of municipalities to control their own financing.

We respectfully request that any proposal for the taxation of municipal bonds be defeated by your committee. Respectfully submitted.


City Manager. Robert M. McČURDY,

Assistant City Manager.


Washington, D. C., March 1, 1951. COMMITTEE CLERK, Ways and Means Committee, House of Representatives,

Washington, D. C. Dear Sir: I am enclosing herewith two communications directed to me in reference to the recommendations by the Secretary of the Treasury that the Federal Government tax State and municipal bonds.

I would appreciate your having these two communications read into the record
of the hearings on this proposal which were held earlier this week.
With best wishes, I am
Cordially yours,

Karl E. MUNDT,
United States Senator.

PIERRE, S. Dak., March 1, 1951. Hon. Karl MUNDT,

United States Senator, Washington, D. C.: Urge your support against Secretary Snyder's proposal that the Federal Government tax State and municipal bonds. Proposal now being considered by Ways and Means Committee.


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