and chambers of commerce, representing nearly 2,000,000 businessmen, who have endorsed the principle of tax equality throughout the United States. Representatives of the National Tax Equality Association first appeared before your committee in November of 1947 and presented the results of exhaustive research on the competitive aspects of Federal income tax exemption. They pointed out the unfair position that businessmen found themselves in during the war when taxpaying businesses were required to pay up to 80 percent of their earnings in Federal income taxes while their tax-free competitors paid none. At that time, the revenue needs of the Nation were being met and the prospect of tax reduction was in sight. Now that Congress must raise revenues, our representatives have shown that you can raise nearly $1,000,000,000 in new revenue from income that by law, economics, or common logic should bear its fair share of the tax. They have also shown that taxation of this income would remove a competitive inequality in our tax laws.

Today, we are faced with another subject-finding revenues for the task of rearming for an indefinite number of years and the prospect of a third world war. Either event will require great expenditures of moneys-moneys that this committee must find to pay the bills. It must use utmost care and diligence in selecting additional sources of revenues. It must see that those who can best afford to pay are required to pay on a fair and reasonable basis. It must fully tax those profit-making corporations and associations that now escape payment of income tax, before it levies any additional taxes on anyone. Do these things, Mr. Congressman, and the taxpayers of the Nation will support you. Neglect them and you will be faced with their vigorous resentment.

President Truman has said that we must tax individuals and corporations "until it hurts." Many commercial corporations at the present time are not being taxed at all. Some of them have been specifically exempt by laws passed by Congress years ago. Others, through liberal rulings of the Treasury Department, escape all or nearly all income-tax payments.

In his tax message to you, President Truman urged that you review the tax status of organizations now exempt under present law. He went on to say, "I do not believe any of us, in good conscience, take action to increase taxes on the man, with a wife and two children, who earns $60 a week-an increase I am now recommending without at the same time taking action to reduce the glaring inequities in the present law."

In implementing the President's statement, Secretary Snyder referred to the structural revision relating to the treatment of business organizations now exempt from tax, including cooperatives and other mutual enterprises. In reviewing the tax status of these organizations, we urge that you make each dollar of their net income subject to double taxation in the same manner and on the same basis as the income of regular corporations. This is the time to remove the "glaring inequities" that in effect result in tax-subsidized competition for all businesses competing with these tax-exempts and prevents these tax-exempt corporations from being "hurt" by additional taxes as called for by the President.

In early 1950 we urged before this committee and before the Senate Finance Committee that the business income of all commercial corporations be subjected to income taxes. In the Revenue Act of 1950, you saw fit to tax the unrelated business income of charitable and educational institutions. This was a step in the right direction, but a step that cannot be justified unless the income of business institutions presently exempt is also taxed. If our present financial need requires us to take money destined to help the blind and the helpless and turn it over to the Federal Treasury, it is surely necessary to subject the profits of business corporations to Federal income taxes, even though those corporations are organized on a cooperative or a mutual basis.

The businessmen I represent believe the Congress should tax the income of all business corporations alike. They believe the principle of double taxation should apply to all alike. They are unalterably opposed to the inequities of the present tax structure which makes one corporation pay full income taxes and allows another corporation to escape all or nearly all of such payment. It is these inequities that I propose to discuss.

The business corporations that have these tax advantages are made up of mutual savings banks, Federal- and State-chartered savings and loan associations, cooperative banks and homestead association, Federal- or State-chartered credit unions, production credit associations, national farm loan associations, mutual fire and casualty insurance companies, various Government corporations that engage in commercial enterprises, and various types of cooperative corporations. I shall discuss these in the order I have just mentioned.

MUTUAL SAVING BANKS

Mutual savings banks are made exempt from the payment of Federal income taxes by section 101 (2) of the Internal Revenue Code. At the present time there are 531 of these banks located in the New England States, Indiana, New Jersey, New York, Ohio, Pennsylvania, Washington, Wisconsin, Delaware, Mary land, Minnesota, and Oregon. Many of these banks have resources worth hundreds of millions of dollars. For example, the Bowery Savings Bank of New York City has assets of $932,000,000, the Emigrant Industrial Savings Bank of New York City has assets of $644,000,000, and the Philadelphia Savings Funds Society has assets of $681,000,000.

At the close of 1949, the combined assets of all mutual savings banks amounted to more than $21,000,000,000 and were increasing at the rate of $1,000,000,000 a year. The deposits in these banks exceeded $19,000,000,000 and in 1949 they had $2,000,000,000 in tax-free accumulated income or surplus. The earnings on this capital amounted to $467,000,000, on which no Federal corporate income taxes were paid. If this income were not tax-exempt, the Federal Treasury would be receiving approximately $197,000,000 more revenue.

SAVINGS AND LOAN ASSOCIATIONS

Last Friday, Mr. Tark, representing private banking companies, told you about the early history and tremendous growth of savings and loan associations or building and loan associations as the State-chartered corporations are called. The State-chartered building and loan association is granted exemption from Federal income taxes by section 101 (4) of the Internal Revenue Code. Federal savings and loan associations receive their exemption under the Home Owners Loan Act of 1933, section 5 (h) of which provides "that such associations, including their franchises, capital, reserves, and surplus, their loans and income shall be exempt from all taxation imposed by the United States." There are approximately 6,000 savings and loan associations in the United States today. The average value of the resources of each of these associations at the close of 1949 was over $2,000,000.

Among the larger representatives of this type of enterprise are the First Federal Savings and Loan Association of Chicago with assets of $94,000,000, the Bell Savings and Loan Association of Chicago with assets of $75,000,000, and the Carteret Savings and Loan Association of Newark, N. J., with assets of $70,000,000.

At the present time, savings in these institutions are increasing at the rate of $1,000,000,000 a year. Their assets aggregate more than $13,000,000 and their savings accounts aggregate over $11,000,000,000.

Savings and loan associations had net earnings last year of approximately $451,000,000. If this corporate income were presently taxed, it would result in over $191,000,000 more revenue to the Treasury.

CREDIT UNIONS

Mr. Glander testified before you about the 10,000 tax-free credit unions in the United States that are competing with fully taxed credit institutions. Those that are chartered under State laws are exempt from Federal income tax by section 101 (4) of the Internal Revenue Code. Federal credit unions receive their exemption from section 18 of the Federal Credit Union Act which was passed by the Seventy-third Congress as Public Law 467. The assets of these tax-free credit unions have shown a tremendous growth, increasing from $192000,000 at the close of 1939 to $828,000,000 at the close of 1949. Among the suc cessful credit unions is the Municipal Credit Union of New York City with assets of $10,262,000, the Telephone Workers Credit Union of Boston with total assets of $2,793,000, and the Workers Credit Union of Fitchburg, Mass., with assets of $4,070,000. Last year their tax-free earnings were over 25.6 million dollars. If these were taxed it would mean $10,846,000 for the Federal Treasury.

PRODUCTION CREDIT ASSOCIATIONS

Some of our members who are small-town bankers tell us that their greatest competition comes from production credit associations. These credit associa tions are exempt from Federal income tax by section 63 of the Farm Credit Act of 1933 which grants them such exemption as long as the Federal Government owns any stock therein. When the Government capital is retired, the asso

ciation loses its tax exemption but will still be able to escape all or nearly all of its Federal income-tax liability by taking advantage of liberal Treasury rulings and making their profit distributions in the form of patronage dividends rather than dividends to the stockholders.

As of June 30, 1949, there were 503 production credit associations in the United States with combined assets of $660,000,000. Their total capital amounted to $102,000,000, of which $40,000,000 represented investments of the United States Government and $62,000,000 represented stock owned by former members. The associations, in addition to their capital, had $54,000,000 which they had accumulated out of tax-free earnings. In 1948 their earnings amounted to nearly $7,000,000. This sum would provide about $2,937,000 additional tax money for the Treasury.

NATIONAL FARM LOAN ASSOCIATIONS

Another source of tax-subsidized competition to the country banker is the national farm loan associations which numbered more than 1,200 at the close of last year. These associations are made exempt from Federal income taxes by section 26 of the Federal Farm Loan Act of 1916. Their combined assets amounted to $92,000,000. Their reserves and surplus approximated $32,000,000. In 1948 their earnings amounted to over $7,000,000 which at present corporation income-tax rates would provide an additional $2,972,000 for the Treasury.

MUTUAL FIRE AND CASUALTY INSURANCE COMPANIES

Another inequity which Congress should remedy at the present time relates to the taxation of mutual fire and casualty insurance companies about which Mr. Webb testified last week. Up until 1942 practically all mutual fire and casualty insurance companies escaped payment of Federal income taxes. The first step toward taxing them on a basis similar to that used for stock fire and casualty insurance companies was taken in that year. At that time your committee and the House passed a bill providing for the taxation of these mutual insurance companies on the same basis as that on which stock companies were taxed. Unfortunately, when the bill got to the Senate the provisions were changed, with the result that at the present time these mutual insurance companies pay smaller taxes per dollar of profit than do the stock companies. In effect, the Senate compromise bill taxed the mutuals upon either of two bases, whichever produced the greater tax. One of these bases is net investment income to which the regular corporation income-tax rates are applied. The other basis is the gross amount of income from interest dividends, rents, and net premiums less dividends to policyholders and tax-exempt interest. A rate of 1 percent, with a notch provision, is applied to this base. The notch provision is necessary because all mutual fire and casualty insurance companies whose gross receipts from interest dividends, rents, and premiums are under $75,000 are still exempt from the payment of all income tax.

There is no rational justification for the special treatment of these companies and the law should be amended so that mutual insurance companies and stock insurance companies should be taxed on their underwriting and investment income in the same way. As long as one segment of the insurance industry is taxed on a gross-income basis and its competition taxed on a net-income basis there can be no competitive tax equality. In 1949 the underwriting profit of 207 mutual fire companies totaled $117,485,000 and their investment income $26,183,000, or a total income of $143,668,000. The income tax they paid amounted to $4,267,000, or 3 percent of their total income. As opposed to this, the stock fire-insurance companies, on a total income of $645,826,000, paid $128,039,000 M Federal income taxes. This amount was 19.8 percent of their total income. In other words, at the 38 percent level for every dollar of net income the stock fire companies paid 500 percent more in income taxes than did their mutual competitors.

For the same year mutual casualty insurance companies numbering 155 had a total income of $162,688,000 on which they paid Federal income taxes of $8,547,000. This income-tax payment was 5.3 percent of their total net income. Figures for 246 stock casualty companies showed a total income of $302,905,000 and a Federal income-tax payment of $60,658,000. This payment was 20.1 percent of their total income at the 38-percent level, a payment of nearly 300 percent more for each dollar earned than was paid by their mutual competitors. At present rates, if the mutual fire and casualty insurance companies were to pay the same percentage of their net income dollar in Federal income taxes as will their stock insurance competitors, the Federal Treasury would be richer by $60,000,000.

GOVERNMENT IN BUSINESS

At the close of 1949 there were nearly 100 Federal Government corporations competing with private taxpaying business corporations engaged in transportation on land and water, generation and transmission of electrical energy, production of fertilizer and chemicals, rum distilleries, insurance, lumbering, and the extension of credit.

The 1947-48 report of the Secretary of Treasury showed that the assets of these corporations and other Government agencies engaged in business activities totaled more than $23,000,000,000, and that the Government's investment in these institutions exceeded $17,000,000,000. The combined net income of all corporations and agencies amounted to $57,692,000. The net income of the corporations and agencies which operated at a profit was $352,985,000. Had these institutions been taxed at the 38-percent rate like their taxpaying competitors, they would have paid the Federal Treasury $120,000,000. At the present rate of 47 percent they would have paid the Treasury $140,000,000. If they had paid such taxes and if they had been required to pay interest on money borrowed from the Federal Government, they would have been operating in a way similar to their fully taxed competitors and furnishing a valid yardstick as to the efficiency of their business operations.

The States are also in business competing against taxpaying corporations. Sixteen States operate alcoholic-beverage systems and some have entered the workmen's compensation insurance field. One State owns a steamship pier while another owns and leases the Western & Atlantic Railroad. Two States derive income from power generation and one operates a cement plant, and so it goes. Recent figures of the Department of Commerce show that State governments realize $170,806,000 from such operations. If the 38-percent_corporate rate were applied to this income it would produce a revenue of $57,000,000. The present 47-percent corporate rate would yield a revenue of $70,000,000.

Municipalities and local governments operate water, electricity, transit, gas, and port facilities; airports, ferries, railroads, toll bridges, radio stations, and many other facilities. An extensive survey made by the Department of Commerce in 1942 showed these governmental units receiving an indicated profit of $460,000,000. If corporate tax rates of 38 percent were applied to this income, they would have produced revenues of $153,000,000. The 47-percent corporate rate would yield $190,000,000.

COPERATIVE CORPORATIONS

The most important source of additional revenues that remain to be taxed by this committee are the tremendous earnings of cooperative corporations. These business corporations, as you know, are able to escape the payment of Federal income taxes by two separate routes. About half of the farmer marketing and purchasing cooperative corporations are granted exemption from the payment of all income taxes by section 101 (12) of the Internal Revenue Code. The other half of the farm cooperatives, the business, manufacturing, and wholesale cooperatives, the city consumer cooperatives, etc., are able to avoid all or nearly all of their Federal income taxes because of liberal Treasury rulings, not based on any statute, which permit them to deduct or exclude from gross income that part of their net earnings which is distributed as dividends on patronage. These nonexempt cooperatives are required to file income-tax returns just like any other corporation. By the use of the patronage dividend device, however, these corporations are able to transfer their profits to their owners without paying a corporation income tax on them.

The Consumers Cooperative Association of Kansas City, Mo., is an example of this type of cooperative. In 1948 it reported earnings of $8,320,206 but indicated that its total Federal and State income tax bill would amount to only $415,105. An ordinary corporation making the same profit would have been required to pay $2,000,000 more than the $415,000 that this big cooperative paid to both Federal and State Governments. The basis for this $2,000,000 tax advantage was the patronage dividend device referred to above. The oil business of this cooperative is operated through a wholly owned subsidiary which in turn owns the 4 petroleum refineries, a thousand miles of pipe line, 911 oil wells, 161,000 acres of undeveloped leases, and other similar assets.

Through its retail operations in 10 States it sells not only petroleum products but also tires, tubes, accessories, paint, twine, spray, feed, machinery, wire and steel, lumber, roofing, groceries, household appliances and farm supplies, many of which are produced in its own factories.

For example, its facilities include grease, paint, and printing plants, à soybean mill, a cannery, a bottling plant, a lumber mill, a feed mill, and several fertilizer plants.

Another example of this type of corporate organization is the cooperative Grange League Federation Exchange which in its 1949-50 fiscal year distributed over a million dollars in patronage dividends, nearly a million dollars in dividends to stockholders, paid an estimated income tax of $1,099,000, and added $847,000 to surplus. If it had been taxed on its full earnings it would have paid at the 38-percent rate an income tax of $1,534,000 to the Federal Government and so would still have had $412,000 to add to surplus. It seems clear that paying income taxes would not destroy this cooperative. The Grange League Federation Exchange at the close of its 1948-49 fiscal year sold supplies to its members through 282 GLF-owned service stores, 365 agency stores, 61 bulk petroleum plants, 14 egg stations, and 45 local cooperative associations. The Farmers Union Grain Terminal Association is a good example of a cooperative association that qualifies for full tax exemption under section 101 (12) of the Internal Revenue Code. This association markets grain in 39 States for more than 150,000 members, handling more than 100,000,000 bushels of country delivered grain a year. In 1946 it owned 150 country elevators. Through an affiliate, the Great Plains Supply Co., it operates 108 lumber yards throughout a six-State area. From 1946 to 1950 its net worth increased 87 percent, or $9,328,173, bringing its net worth to $18,878,745.

This expansion is almost entirely capitalized out of tax-exempt earnings, the corporation distributing patronage dividends in the form of stock and certificates of equity.

Net earnings in 1946 were $3,560,000. In 1950 they were $1,801,755 upon which an ordinary corporation would pay Federal income taxes of nearly $846,824 at present rates of taxation.

Another wholly tax-exempt cooperative is the Southern States Cooperative of Richmond, Va., which has 7 subsidiary corporations, 117 cooperative retail service stores, 10 cooperative freezer plants, and 26 cooperative service stations. It also sells supplies through 46 local cooperative associations and 550 retail stores acting as its agents.

Among the assets of this corporation are 30 wholesale purchasing, processing, manufacturing, distributing, and marketing facilities; it owns 7 seed and farm supply warehouses, 5 feed mills, 4 fertilizer plants, 4 egg-marketing terminals, a seed-processing plant and a river petroleum terminal, as well as 2 oil-blending plants, a paint factory, and an oil refinery in Texas.

The net worth of this cooperative rose from $646,391 in 1937 to $11,430,945 in 1946, to $18,061,000 in 1950. In 1950 the profits of this cooperative exclusive of the profits of affiliated corporations, amounted to $2,411,000. This income was, of course, tax-free. An ordinary corporation would have paid approximately $1,133,000 to the Government in Federal income taxes at present rates.

Cooperative protagonists have constantly attempted to minimize the growth of cooperative business. Before the Senate Finance Committee in 1950, Mr. Karl Loos said: "It is perfectly evident that the cooperatives are not doing any larger share of the farmers' business now than they have been in the past."

All cooperatives, however, have expanded at a greater rate than their competitors. For example, farm marketing cooperatives marketed farm produce valued at $1,638,000,000 in 1940. This had increased to $7,297,000,000 for the year 1949, an increase of 345 percent. Meanwhile, the total cash income of farmers, which represents the total value of all farm produce marketed by both cooperative and taxpaying businesses increased only 236 percent during the same period; namely, from $8,364,000,000 in 1940 to $28,127,000,000 in 1949.

Expansion of cooperative business also took place in the purchase of farm supplies. The Farm Credit Administration reports that this business increased from $448,000,000 in 1940 to $2,022,000,000 in 1949, an increase of 351 percent. On the other hand, the total value of farm supplies purchased as represented by feed, fertilizer, lime, cost of operation of motor vehicles, and expenditures for buildings and machinery, increased from $3,219,000,000 to $10,883,000,000 for the same period, an increase of 238 percent.

The Farm Credit Administration's latest calculation of farmer cooperative business volume for the year 1949 is $9,320,000,000. It is estimated by competent officials that this amount should be increased by 33% percent to account for wholesale and manufacturing business which is not now reckoned in FCA calculations. That makes a total of $12,400,000,000 for farm cooperatives.

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