duced the sixteenth amendment, and Senator Borah and Senator Root. Senator Root wrote a letter to a friend in the Legislature of New York at that time which, by the way, Mr. Chairman, was printed as an appendix to the 1929 report of this committee, in which he pointed out the sole and only purpose of the sixteenth amendment was to provide for the levy of this direct tax, Federal taxation, without apportionment among the several States. Now, Mr. Chairman, I realize what I am saying is highly repetitious. I know that there are at least six members of this committee who have heard this argument in great detail as presented here in 1941 and 1942 when then, as we hope now, the argument of the Treasury failed to receive favorable action. So I thank you, Mr. Chairman, for this opportunity to be heard and to present the views of my State of North Carolina. I think I present the views of every attorney general in the United States. I do not think that any governor of any State or any attorney general of any State would want to see this time-honored rule changed without the highest degree of misgiving. As pointed out by Mr. Tobin, for the present, and certainly for the next 15 or 20 years, the proposal does not involve any substantial revenues to the Federal Government. Here in this national emergency they are not opposing any tax which would in any measurable way help to solve the great problem which confronts this committee today. I thank you, Mr. Chairman. The CHAIRMAN. Do you wish to have your prepared statement inserted in the record? Mr. MCMULLAN. Yes, Mr. Chairman. The CHAIRMAN. Without objection, your statement will be inserted in the record at this point. (The prepared statement of Mr. McMullan is as follows:) STATEMENT OF HARRY MCMULLAN, ATTORNEY GENERAL OF THE STATE OF NORTH CAROLINA AND PRESIDENT OF THE NATIONAL ASSOCIATION OF ATTORNEYS GENERAL I desire to put before the committee my legal objections to the Secretary of the Treasury's proposal to tax the income from the bonds and securities issued by my State and its political subdivisions. In my opinion, the Federal Government lacks the constitutional power to impose such a tax. If such a vast change is necessary, the only proper approach should be by a constitutional amendment. The reasons for this opinion I shall here outline as briefly as I can. THE IMMUNITY RULE The constitutional doctrine which prevents the States and the Federal Government from taxing each other is the foundation on which our system of dual sovereignties is based. If the Federal system is to continue to function efficiently, the position of each of the partners demands the continued respect of the other. To preserve this balance, the rule of immunity has arisen. If this rule were overturned, the Federal system would be gravely jeopardized. This rule of immunity is as strong today as it ever was in our history. On the ground of precedent, there can be no question that the Federal Government lacks the constitutional power to tax the interest from State and municipal obligations. Pollock v. Farmers' Loan & Trust Co. (157 U. S. 429; 158 U. S. 601), is decisive of this issue. Though the Court in the Pollock case was divided on every other issue involved and employed nine opinions and two hearings on the other points, it unanimously denied the Federal power to tax State and local obligations. Later in Brushaber v. Union Pacific R. R. Co. (240 U. S. 1), and Evans v. Gore (253 U. S. 245), the Court ruled definitely that the sixteenth amendment did not grant to the Federal Government any additional power to tax nor detract from the necessarily reserved immunities of the States. When the Gore case was later overruled by O'Malley v. Woodrough (307 U. S. 277), the Court very deliberately chose not to disturb its former opinion that the sixteenth amendment did not grant any additional Federal power of taxation. In recent cases on governmental immunity, our most distinguished jurists have repeatedly confirmed the validity of this rule. In Hale v. Iowa State Board (302 U. S. 95), Mr. Justice Cardozo said (p. 197): "By the teaching of the same [Pollock] case an income tax, if made to cover the interest on Government bonds, is a clog upon the borrowing power such as was condemned in McCulloch v. Maryland." In James v. Dravo Contracting Co. (302 U. S. 134), Chief Justice Hughes said (p. 156): * * "The ruling in Pollock v. Farmers' Loan & Trust Co. related to net income. The uniform ruling in such a case has been that the interest upon Government securities cannot be included in gross income for the purpose of an income tax on that income." In Helvering v. Gerhardt (304 U. S. 405 (1938)), the question was treated by Mr. Justice Stone who distinguished it from the case of the taxable public employee. Graves v. New York ex rel. O'Keefe (306 U. S. 466), only serves to confirm the view taken by the Court in Helvering v. Gerhardt. The O'Keefe decision dealt only with the question of the immunity of governmental salaries and did not treat the question of bond immunity. Justice Jackson, then Solicitor General, upon the argument of the case, stressed the fact that there was a difference between taxing public securities and public employees. The recent so-called Saratoga Springs case (New York v. United States (326 U. S. 572)), does not question any of the above constitutional theories. The majority of the Court in this case concurred in Chief Justice Stone's opinionan opinion which goes along with existing precedent. The dissenting opinion of Justice Douglas concurred in by Justice Black even argued for the reversal of existing precedents which allowed the Federal Government to tax the income received from State-owned liquor distilleries. This case does not give any comfort to those who would desire to abolish the traditional immunity of the States in this field. The test laid down in the O'Keefe case is that a Federal tax upon the States is constitutional if it imposes an indirect and conjectural burden on the States but is unconstitutional if the burden is direct and inevitable. On the basis of this test-even if there had never been a Pollock case, the Court would be forced to conclude that the proposed tax on State bond income is unconstitutional since the one fact admitted by both the representatives of local government and the representatives of the Treasury is the inevitability that the proposed tax would directly increase the cost of government and directly burden the States and their political subdivisions in the exercise of their governmental functions. In the past the proponents of the tax claimed that while the Federal Government can tax the States, the rule is not reciprocal because the States have nothing to fear from the Federal Government's taxing power on the ground that the States are represented in the Congress, whereas the United States has no representation in the States. The fallacy of this argument is self-evident. It gravely threatens the basic rights of minorities which our Constitution so carefully guarantees and which is the distinguishing mark of a true democracy. The argument means that if a majority in some Congress should pass an act denying the right of free worship, of free speech, or of free assembly, the American citizens injured could not complain because they are represented in Congress. The argument mistakes the entire difference between a government operating under a constitution and a parliamentary government with no restriction upon the rights of the legislature. The argument misses the entire point of constitutional guaranties. Also it should be noted that if the States may not, because they are represented in Congress, challenge the constitutionality of any Federal invasion of their reserved rights, the tenth amendment will be nullified. The Supreme Court has recognized the equal supremacy of the States and the Federal Government each in their own sphere. In Educational Films Corp. v. Ward (282 U. S. 392), Mr. Justice Stone explained: "The necessity for marking those boundaries grows out of our constitutional system, under which both the Federal and the State governments exercise their authority over one people within the territorial limits of the same State. The purpose is the preservation to each government, within its own sphere, of the freedom to carry on those affairs committed to it by the Constitution, without undue interference by the other." Thus on the basis of both precedent and policy, it is my opinion that the Federal Government lacks the constitutional power to tax the interest from State and local obligations. THE SIXTEENTH AMENDMENT The sixteenth amendment does not give the Federal Government the right to impose this tax. The sixteenth amendment provides: "The Congress shall have power to lay and collect taxes on income, from whatever source derived, without apportionment among the several States and without regard to any census or enumeration." In the first place, it will be recalled that the sixteenth amendment was only made necessary by reason of the fact that the Supreme Court in Pollock v. Farmers' Loan & Trust Co. (157 U. S. 429 (1895)), had held that a tax upon the income from real estate and personal property was direct and therefore subject to the rule that it must be apportioned among the several States. This rule laid down by the Supreme Court, as we all know, made the taxation of income from real estate and personal property wholly impracticable. The only solution therefore was to amend the Constitution. On June 16, 1909, the then President of the United States sent a special message to the Congress in which he recommended that both the Houses propose an amendment conferring power upon the National Government to levy an income tax "without apportionment among the States in proportion to population." On the very next day a Senate joint resolution was introduced by Senator Brown providing that Congress shall have power to lay and collect direct taxes on income without apportionment among the several States according to population. Subsequently the Senate Committee on Finance substituted the word "direct" in the above resolution the phrase "from whatever source derived." The substitution was made without discussion or explanation and accordingly it must be obvious to all constitutional lawyers that it was intended only as a more precise and satisfactory substitute for the word "direct." Moreover, the phrase "from whatever source derived, without apportionment" was never discussed in the Senate or House except on one occasion when it was observed that the phrase would permit the taxation of individuals as well as corporations. After the Senate joint resolution had been adopted by the Congress and it was already before the States for ratification, the then Governor of New York showed some apprehension that the amendment might be interpreted to permit a tax upon State and municipal bonds. However, as I study the record these apprehensions were immediately set to rest by three outstanding Senators who were intimately identified with that amendment. Senator Borah, one of the most ardent proponents of the amendment, came out upon the floor of the Senate and explained at great length that the amendment was not intended to permit such a tax as the Governor of New York feared might result. Senator Brown, who introduced the amendment, also joined Senator Borah and he too said that it was not intended to extend the scope of the Federal Government's taxing power to subjects which were heretofore immune. And I might again state parenthetically that the income from State and municipal bonds had been held immune from Federal tax in the Pollock case, by every one of the Justices who sat in the case. Senator Elihu Root of New York, said by some to have been the actual draftsman of the amendment and perhaps the leading American lawyer of the age, notified the New York State Legislature that in his opinion the amendment could not be interpreted so as to permit a Federal tax upon the securities of the State of New York. The answer of Senator Root was immediately publicized by the papers. It was referred to as "an able presentation of his reasons for differing with Governor Hughes' views." Another paper characterized his letter as "unanswerable" and said "Mr. Root proves the amendment does not open a way for the taxation of State securities." In my opinion the States of the Union ratified the amendment only after the apprehension expressed by the then Governor of New York had been thoroughly allayed by Senators Borah, Root, and Brown. In the case of my own State, the message of the Governor indicated that he was not in thorough accord with the views expressed by Governor Hughes. Under these circumstances I fail to see how under any possibility the Department of Justice can have any reasonable hope of sustaining its interpretation of the amendment. The record fully proves that the resolution was never passed in the Congress, and the amendment was never ratified by the States, under any circumstances which would remotely support the proposition that the States were yielding their immunity from Federal taxes. The amendment, Senators Borah, Root, and Brown said at the time, was adopted solely to overcome the unworkable rule that certain direct taxes had to be apportioned among the States. The CHAIRMAN. I want to compliment you on your very splendid statement. If there are no questions, we thank you for your appearance and the splendid statement you have made. Mr. MCMULLAN. Mr. Chairman, I have here some telegrams and communications which I have received from various attorneys general. I have not had an opportunity to hear from them all. I would like to have them inserted into the record, if I may. The CHAIRMAN. Without objection, they may be included in the record. (The communications referred to appear beginning on p. 981.) Mr. REED. Mr. Chairman, I ask unanimous consent to insert in the record telegrams which I have received from my own district. The CHAIRMAN. Without objection, they may be inserted in the record. (The telegrams referred to are as follow:) Hon. DAN REED, BROCTON, N. Y., February 24, 1951. House of Representatives, Washington, D. C.: Strongly object to the removing of the tax exemption feature on future issues of Federal, State and municipal securities. C. M. FLEMINGS, Hon. DANIEL A. REED, WELLSVILLE, N. Y., February 24, 1951. House of Representatives, Washington, D. C.: This municipality strongly opposed to removal of tax exemption feature on future issues of State and municipal securities. A proposed bill removing exemption now before House Ways and Means Committee. If enacted into law, future costs of local government will be terrifically increased or future expansion of needed facilities drastically curtailed with little income benefit to Federal Government. Additional Federal aid will be necessitated. Please resist to utmost any such action. TOWN BOARD, Town of Wellsville, N. Y. Hon. DANIEL Reed, DELAVAN, N. Y., February 24, 1951. House of Representatives, Washington, D. C.: Please oppose proposal to remove tax exemption feature of future issues of Federal, State and municipal securities. Hon. DANIEL A. REED, MACHIAS DELAVAN BOARD OF EDUCATION, WESTFIELD, N. Y., February 26, 1951. House of Representatives, Washington, D. C.: Definitely opposed to removal of tax exemption feature on muncipal borrowings. HENRY FELTON, Supervisor. Hon. DANIEL A. REED, United States House of Representatives, GOWANDA, N. Y., February 24, 1951. State Capitol Building, Washington, D. C.: Believing that removal of tax-exemption features on future issues of Federal, State, and municipal securities would (1) adversely affect the interest rates required for school district bond issues and (2) therefore would increase largely the total cost of school buildings to be financed by such bond issues we urge that you do all in your power to retain the tax-exemption features on such securities. Dr. ALLEN W. COLE, President, Board Education, Gowanda, N. Y. Hon. DANIEL A. REED, House of Representatives: JAMESTOWN, N. Y., February 24, 1951. The city of Jamestown, N. Y., very much concerned over threat of legislation calling for taxation of municipal bonds. This precipitant action is to be deplored. Recent large bond issue by our utilities and contemplated bond issue for sewage-disposal plant and other improvements will be unjustly increased in cost. Comparatively small revenue derived from such action make it unwarranted. Please use your utmost effort in defeating such legislation. Mayor SAMUEL A. STROTH. Mr. KING. Mr. Chairman, I ask unanimous consent to have inserted in the record at this point, at the suggestion of Congressman Hugh B. Mitchell of the First District of the State of Washington, a communication by the mayor of the city of Seattle, Wash. The CHAIRMAN. Without objection, that may be inserted in the record. (The material referred to is as follows:) Hon. HUGH B. MITCHELL, House of Representatives, Washington D. C. MAYOR'S OFFICE, Seattle, February 9, 1951. DEAR HUGH: It has just come to my attention that again there is a threat to tax the income from municipal bonds. This serious threat seems to appear every year but fortunately without success. As you know, we have many municipal bonds including city light and water bonds. We are constantly increasing our electric output, thereby contributing to the prosperity of the entire region. These projects are all financed through city light bonds, and if we are compelled to pay higher rates of interest because they are taxed, it will seriously handicap our operations. It will inevitably mean that the more we have to pay in interest charges, the fewer projects we can complete or the more we will have to pay out of our general fund, either of which alternative is detrimental to the public good. It further opens the door to taxation of local municipal utilities. At present our utilities are operating so close to the margin that any additional tax would be disastrous. As you know, one of the great advantages that we in the Pacific Northwest have is our low-cost electric power and water. It would be most unwise to deprive this area of that asset. Our utilities are presently creating a great amount of employment for this area and provide reasonable rates which would be impossible if further taxes are imposed upon them. I sincerely hope that you will do all you can to see that this unwise measure is again defeated. I would appreciate it very much if you would let me know your thinking in this matter. Sincerely yours, WILLIAM F. DEVIN, Mayor. Mr. CURTIS. Mr. Chairman, I ask unanimous consent to insert at this point in the record a statement by our former colleague, now the Governor of Wyoming, Mr. Frank A. Barrett; and a telegram from |