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 people. The CHAIRMAN. Without objection the committee will adjourn until 10 o'clock tomorrow morning. (The following material was submitted for the record:) Hon. ROBERT L. DOUGHTON, HOUSE OF REPRESENTATIVES, 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, Hon. EDMUND P. RADWAN, EDMUND P. RADWAN. BUFFALO MUNICIPAL HOUSING AUTHORITY, 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. Hon. ROBERT L. DOUGHTON, HOUSE OF REPRESENTATIVES, Washington, D. C., February 28, 1951. 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, CARL HINSHAW. CITY OF PASADENA, Hon. ROBERT L. DOUGHTON, Pasadena, Calif., February 21, 1951. Ways and Means Committee, House of Representatives, House Office Building, Washington, D. C. MY DEAR MRr. 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 14 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. are, we understand, to be sharply increased. Many taxes already used by States 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) A 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. 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, 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. SIGURD ANDERSON, Governor. Hon. KARL MUNDT, SOUTH DAKOTA MUNICIPAL LEAGUE, Senate Office Building, Washington, D. C. DEAR MR. MUNDT: It has come to our attention that Secretary of the Treasury Mr. Snyder, is again recommending the taxing of municipal bonds. We wish to call your attention to the fact that this would make financing in South Dakota very difficult, would increase our interest rate from 1 to 1% percent, and are informed that it would produce very little immediate revenue for the Federal Government. We wish that you would exert every effort to oppose this legislation and would appreciate your advising us if there is anything the municipalities of South Dakota can do to prevent passage. Thanking you for your earnest consideration, I am Very truly yours, Hon. ROBERT L. DOUGHTON, HOUSE OF REPRESENTATIVES, Chairman, House Committee on Ways and Means, MY DEAR CONGRESSMAN: I will appreciate the inclusion in your committee hearings on taxation of the attached statement and communications. With warmest personal regards, Sincerely yours, HUGH B. MITCHELL. STATEMENT OF HON. HUGH B. MITCHELL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WASHINGTON Mr. Chairman, I wish to register my opposition to the proposal now before your committee which would impose a tax on interest derived from State and municipal bonds. While it is imperative that new sources for taxation should be located, it is apparent that those sources should be derived from (1) increased taxes on higher incomes, (2) increasing the tax rate currently imposed on capital gains, (3) reducing the "depletion allowances" granted certain oil and gas producers and mineral products, (4) increasing estate- and gift-tax rates, and (5) increasing corporation taxes. The proposal to tax interest derived from State and municipal bonds would react unfavorably and unfairly on municipalities now struggling under severe odds. This is particularly the case for cities in areas experiencing a rapid growth such as those communities in Washington State, for it is in those areas that the obligation to construct utilities, housing, schools, and hospitals is most evident. Should this proposal be adopted, communities in Washington State would be forced not only to replan but delay programs to construct hospitals, build streets and highways, build and improve schools, extend sewage-disposal systems, and construct additional public housing units now so vitally needed. This new regressive tax would necessarily be passed on to the people in these communities, hindering greatly necessary public improvements. Attached are communications from Arthur B. Langlie, Governor of Washington State; Mr. E. R. Hoffman, superintendent of the Department of Lighting of the city of Seattle, and Mr. John McCauley, secretary of the Washington Public Utility Commissioners Association, setting forth their opposition to this proposal. I cannot urge too strenuously that this proposal be defeated. Hon. HUGH MITCHELL, OLYMPIA, WASH., February 14, 1951. House Office Building, Washington, D. C.: Proposed tax on State and municipal bonds seriously threatens effort of State and local governments this State to maintain solvency. Tax would seriously increase cost of State and local financing without yielding any appreciable Federal revenue for many years, and would undermine ability of local governments to finance needed improvements. Strongly urge your opposition this unconstitutional invasion of States' rights. Thursday, February 15 is deadline for applying for place on committee calendar. Hon. HUBH B. MITCHELL, ARTHUR B. LANGLIE, Governor. CITY OF SEATTLE, Wash., House of Representatives, Washington, D. C. DEAR HUGH: We are advised that there is again a plan on foot to levy a United States tax on the income from municipal and perhaps other bonds issued by the State and its subdivisions. The State and its subdivisions issue bonds for the most part for public improvements of one kind or another. The cost of money secured for these purposes is paid directly by the people. Now, the cost of public improvements has increased tremendously, and to increase the cost of money through a tax on income derived therefrom will further increase the cost of public improvements. We are attempting to increase the industry of the Northwest through low-cost power and our great supply of low-cost water. Jobs can be provided for thousands of the people coming to the Northwest if these basic resources can be kept "low cost." This we cannot do if the cost of money is increased. Therefore, we respectfully urge that you exert every effort to prevent the imposition of a tax on the income from public-improvement bonds. High-cost money for public-improvement bonds will stop development in this State. With kindest regards, I am Yours very truly, E. R. HOFFMAN, Superintendent of Lighting. FEBRUARY 14, 1951. R. L. DOUGHTON, Chairman of Ways and Means Committee, House of Representatives, Washington, D. C.: Secretary Snyder's proposal that interest on municipal bonds be taxed is unconstitutional and strikes at the heart of democracy. Municipal bodies must be in position to obtain ready finances or all our functions will have to be turned over to Federal Government or private monopoly. Such centralization would make democracy a tyranny. We would lose low-cost power so badly needed to develop this region. Have Federal officials completely forgotten Jefferson's check and balance and fact that absolute Federal power will corrupt. We will fight such a step as if it were attack on our lives. JOHN MCCAULEY, Secretary, Washington Public Utility Commissioners Association. HOUSE OF REPRESENTATIVES, Hon. ROBERT L. Doughton, Chairman, Committee on Ways and Means, House of Representatives, Washington, D. C. DEAR MR. DOUGHTON: Shortly after I filed my statement with your committee this morning concerning the proposed taxation of State and municipal securities, the enclosed letter from Mr. Ross Miller, city manager of Berkeley, Calif., was delivered to my office. I would very much appreciate it if this letter could be attached to my statement and made a part of the record of the hearings. Thank you. Cordially yours, JOHN J. ALLEN, Jr. Hon. JOHN J. ALLEN, CITY OF BERKELEY, CALIF., House of Representatives, Washington, D. C. DEAR MR. ALLEN: Your letter of March 8, concerning the proposed Federal taxation of municipal securities, stated that Members of Congress who desire to be heard on the subject will have an opportunity to appear sometime after the 15th of this month. The resolution of the Berkeley City Council opposing such taxation has been previously sent you. Among the reasons we are opposing this legislation are the following: 1. On the basis of previous study, this tax has been consistently rejected by Congress. This identical issue was before Congress in 1924 in the form of a joint resolution calling for submission of a constitutional amendment, and emphatically rejected. In 1939 and 1942 the House Ways and Means Committee did not even report to the floor the proposal advanced by Secretary Morgenthau. When this subject was before the Senate in 1940, 57 Senators were against the proposal. In 1942, 52 Senators opposed the mesaure. The proposal should again be soundly defeated. 2. Constitutional issue: Competent legal opinion has repeatedly held that the sixteenth amendment was not intended, either by Congress or by the States which ratified it, to extend Federal authority to taxation of State and municipal bonds. There is every reason to believe that the Supreme Court would reaffirm its traditional position and hold the proposed tax is unconstitutional. 3. The tax is destructive of the ability of States and cities to borrow. Austin J. Tobin points out in the July issue of Fortune that expert testimony before the Tax Court and congressional committees shows that imposition of income tax on municipal bonds would result in an increase of cost to cities of at least 1 percent in interest rate. (This would increase such cost by about 50 percent.) "With a 1-percent increase in servicing charges on the $20 billion debt now outstanding, the annual State and local tax burden would increase by $200 million.' He further points out that, "Since more than 80 percent of the tax exemptions are local obligations and since 90 percent of local tax revenues come from property taxes, about three-quarters of the burden of added interest would probably be met by increasing taxes on real estate and other property." 4. State and municipal bonds do not form a haven of refuge for wealthy investors. The Treasury Department's own statistics disprove the allegation that State and municipal bonds are held in any substantial degree by wealthy persons as a means of tax avoidance. Mr. Tobin presents proof in his article that, with the 1945 effective tax rates on a $50,000 net income, triple the amount they were in 1937, the percentage of State and municipal securities held by individuals in 1945 was actually somewhat less than in 1937. 5. Present increase of revenue to Federal Government insignificant: Federal tax revenues will be relatively nominal for a decade since only future issues are to be made taxable. Hence, a substantial amount will not be realized until future issues of bonds reach the volume of outstanding bonds. As testified by Under Secretary of the Treasury Hanes in 1939, before the House Ways and Means Committee, "the full effect" of the estimated Federal revenues from this tax "will not be felt for nearly 50 years." Added revenues would not accrue during the defense period. 6. Regressive effect of proposed tax: Since interest rates of new bond issues will inevitably increase the effect will be twofold. Buyers of bonds will get higher interest rates to pay Federal income taxes. City treasuries will require added revenues. Local revenues come mainly from property owners. Taxpayers of our cities will ultimately foot the bill. 7. Centralization of government: The real basic issue is the financial independence of local government. There is a well-grounded fear that the Federal urge for power which has been asserted during the years of this argument is by no means limited to income from municipal securities, but that it encompasses in its political philosophy the further extension of Federal control over local governments. As you know, California cities are fortunate in the degree of home rule we have been granted by the State of California, and we do not want this right and privilege taken away by Congress. I hope that this summary will be of some assistance to you, should you find it possible to make a presentation before the House Ways and Means Committee. Let me know if you desire anything further. Sincerely, Ross MILLER, City Manager. |