EXHIBIT A.-Statement of total amounts of bonds authorized to be issued by political subdivisions

South Carolina opposes taxing State and municipal bonds by United States Government for the following reasons:

1. The State of South Carolina annually issues highway-construction bonds. Such bonds are necessary to continue the development of the State highway system. Taxing such bonds will materially retard the much-needed highway construction in this State as such construction depends upon bond issues.

2. The State of South Carolina hopes to begin an educational expansion program which will necessitate large sums of money for the construction of new educational buildings and facilities. This construction can only be carried out by issuing State bonds for such purpose. Legislation is pending authorizing a $75,000.000 bond issue for this purpose. For the Federal Government to tax the

income from such bonds will mean an increased cost to the schools of South Carolina and will retard this worth-while program.

3. The State of South Carolina is engaged in and encouraging the development of health centers and hospitals. The construction of many such units will require bond issues. The impediment caused by Federal taxation of such bonds should not be borne by the State of South Carolina.

4. Municipalities and other subdivisions of the State of South Carolina are also expanding their educational facilities, health centers, and hospitals. They are likewise engaged in construction and expansion of sewer lines and other public utilities requiring bond issues and can ill afford to continue these programs if taxes are levied by the Federal Government on the income from such bonds.

5. The State of South Carolina is interested in the development of port facilities which from time to time will have to be financed by bond issues.

6. Administrative buildings for the State government are under construction and from time to time thereafter will be constructed through bond issues.

7. The Federal Government can use the powers of the Federal Reserve Board to maintain the market price of its securities. A State cannot do so. Should the Federal Government now tax State securities it will depreciate the value of all State securities.

Considering the bona fide efforts of the State of South Carolina and its subdivisions to improve living conditions within the State, to educate all of its children, and to protect their health, it is our opinion that this program should not be retarded by an unjust tax upon the only method whereby the State and its subdivisions may obtain the long-hoped-for improvements above outlined. Respectfully submitted.

DEAR MR. TOBIN: Answering your wires of February 14 and 15, 1951. Complying with your request, I am writing the two Senators and the Congressman from Wyoming protesting the taxation of income from State and local

securities, and this letter will authorize your including me among those who are making this protest.

It seems quite unlikely at this time that I will be able to attend the hearing on Monday, February 26.

Yours truly,

HARRY S. HARNSBERGER,

Attorney General.

JOINT STATEMENT OF EDWARD F. ARN, GOVERNOR OF KANSAS, AND HAROLD R FATZER, ATTORNEY GENERAL OF KANSAS, TO THE WAYS AND MEANS COMMITTEE OF THE HOUSE OF REPRESENTATIVES IN OPPOSITION TO THE PROPOSAL OF THE SECRETARY OF THE TREASURY TO TAX THE INCOME OF STATE AND MUNICIPAL BONDS

Mr. Chairman and Members of the Committee on Ways and Means of the House of Representatives:

In view of the fact that we are unable to attend the hearing today, we thought best to submit a joint statement outlining our sentiments relating to the proposal of the Secretary of the Treasury to tax the income of State and municipal bonds. We feel that the proposal to tax State and municipal bonds is another attempt by the Federal Government to further encroach upon the power of State and local governments under the guise of an emergency need for taxes and spending. We believe the proposed tax would be in violation of firmly established constitutional principles which have been announced and followed by the Supreme Court of the United States almost since the inception of our Federal Government. The proposed tax would, without question, increase costs of operation to local units of government in Kansas and would undermine their ability to finance public improvements which will be needed in the future. At the present time, bonds of political subdivisions in Kansas are issued with an interest rate of between 1 and 2 percent per annum. They have an immediate market value at this rate of interest of par value and accrued interest. If the income from these bonds were taxable as proposed by the Secretary of the Treasury, the interest rate would be greatly increased. Moreover, the ad valorem tax levy for bonds and interest upon the tangible assessed valuation of a particular political subdivision would be increased. This will further increase the tax upon property owned by individuals in the political subdivisions. Likewise, if the interest rate of bonds of political subdivisions was greatly increased, it would in turn increase the income tax the owners or holders of such bonds would be required to pay to the Federal Government. We do not believe the additional revenue which might be received by the Federal Government, if the proposed tax be adopted, would in anywise justify the increase of ad valorem tax levies upon property owned in State and local governments.

Obviously, the increase in revenue to the Federal Government from such a tax upon the income of municipal bonds issued by Kansas political subdivisions is not the end sought by the proposal, since the total amount to be derived from this source would be relatively infinitesimal, and could be saved many times over by only slight economy in the operation of the Federal Government.

We submit that if the proposal of the Secretary of the Treasury is adopted by Congress, all power to issue bonds by State and local governments would be greatly curtailed, if not in fact ended, thus leaving the Federal Government without competition in seeking investors willing to loan money on public securities at a low rate of interest.

The vital and fundamental principle involved in the proposal of the Secretary of the Treasury to tax the income from municipal bonds is vastly more important than the immediate result of increasing the interest rate on municipal bonds issued by Kansas political subdivisions and other sister States. This vital principle is that the exercise of this taxing power by the Federal Government could arrest the power of the States and render their sovereign and independent action impotent and useless.

STATES CANNOT TAX FEDERAL SECURITIES

The Supreme Court of the United States in the past has consistently held that the States cluld not by any form of taxation impose a burden upon any part of the public national debt. The authorities cited herein are not exhaustive, but are selected because of their clear analysis of the reason of the prohibition against such taxation.

In Home Saving Bank v. De Moines (205 U. S. 503, 27 S. Ct. Rep. 571, 51 L. ed. 451) the court in its opinion said:

"The next question is whether such taxation violates any provision of the Federal law. The State cannot, by any form of taxation, impose any burden upon any part of the national public debt. The Constitution has conferred upon the Government power to borrow money on the credit of the United States, and that power cannot be burdened or impeded or in any way affected by the action of any State. This principle was announced in Weston v. Charleston (2 Pet. 449, 7 L. ed. 481) where it was held that taxes upon the stock of the United States, levied by one of the municipal corporations of South Carolina, were invalid. From that time no one has questioned the immunity of national securities from State taxation. It may well be doubted whether Congress has the power to confer upon the State the right to tax obligations of the United States. However this may be, Congress has never yet attempted to confer such a right. Until, the time of the Civil War it was not thought necessary to express the constitutional prohibition in an act of Congress. But, on the occasion of authorizing the issue of Treasury notes, it was enacted that 'all stocks, bonds, and other securities of the United States held by individuals, corporations, or associations within the United States shall be exempt from taxation by or under State authority"."

Quotations from other cases of the Supreme Court of the United States will not be set forth herein to lengthen this statement, but the following citations of a few select cases bear directly on this point: (McCullough v. The State of Maryland, 4 Wheat. 316; New York, ex rel. v. Commissioner of Taxation, et al., 2 Black 620, 17 L. ed. 451; McCallen Company v. Massachusetts, 279 U. S. 620, 49 S. Ct. Rep. 432, 73 L. ed. 874; National Life Insurance Company v. United States, 277 U. S. 508, 519, 48 S. Ct. Rep. 591, 72 L. ed. 968, 970, and Missouri, ex rel. v. Gehner, 281 U. S. 313, 50 Sup. Ct. Rep. 326, 74 L. ed. 870).

In each of the selected cases listed above the attempted power to tax was exercised by the State upon Federal securities.

FEDERAL GOVERNMENT CANNOT TAX STATE AND LOCAL SECURITIES

The following case was an attempt by the Federal Government to levy a tax upon income derived from State bonds and is the leading authority that it would be repugnant to the Constitution of the United States for the Congress to enact into law the proposal of the Secretary of the Treasury to tax the income from State and municipal bonds.

In the case of Pollock v. Farmers Loan and Trust Company (157 U. S. 429, 15 S. Ct. Rep. 673, 39 L. ed. 759, syl. 4 and 5 of the Court) reads:

"4. A tax upon the income derived from municipal bonds is a tax on the power of the States and their instrumentalities to borrow money and is consequently repugnant to the United States Constitution.

"5. The act of August 15, 1894, is invalid so far as imposing a tax upon the income received from municipal bonds."

In the opinion the Court said, and we quote at length herein, because it sets forth the constitutional principle which the proposal of the Secretary of the Treasury would violate:

"Another question is directly presented by the record as to the validity of the tax levied by the act upon the income derived from municipal bonds. The averment in the bill is that the defendant company owns two millions of the municipal bonds of the city of New York, from which it derives an annual income of $60,000, and that the directors of the company intend to return and pay the

taxes on the income so derived.

"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 (Buffington v. Day, 78 U. S. 11 Wall. 115 (20:122); United States v. Baltimore & O. R. Co., 84 Ü. S. 17 Wall. 322, 332 (21:597, 601)). In Buffington v. Day, supra, it was adjudged that Congress had no power, even by an act taxing all incomes, to levy a tax upon the salaries of judicial officers of a State, for reasons similar to those on which it had been held in Dobbins v. Erie County Commissioners (41 U. S. 16 Pet. 435 (10:1022)), that a State could not tax the salaries of officers of the United States, Mr. Justice Nelson, in delivering judgment, said: "The General Government, and the States, although both exist

within the same territorial limits, are separate and distinct sovereignties, acting separately and independently of each other, within their respective spheres. The former in its appropriate sphere is supreme; but the States, within the limits of their powers not granted, or, in the language of the tenth amendment "reserved," are as independent of the General Government as that Government within its sphere is independent of the States.'

"This is quoted in Van Brocklin v. Anderson (117 U. S. 151, 178 (29:845, 854)), and the opinion continues: 'Applying the same principles, this court, in United States v. Baltimore & O. R. Co. (84 U. S. 17 Wall. 322 (21: 597)), that a municipal corporation within a State could not be taxed by the United States on the dividends or interest of stock or bonds held by it in a railroad or canal company because the municipal corporation was a representative of the State, created by the State to exercise a limited portion of its powers of government, and therefore its revenues, like those of the State itself, were not taxable by the United States. The revenues thus adjudged to be exempt from Federal taxation were not themselves appropriated to any specific public use, nor derived from property held by the State or by the municipal corporation for any specific public use, but were part of the general income of that corporation, held for the public use in no other sense than all property and income, belonging to it in its municipal character, must be so held. The reasons for exempting all the property and income of a State or of a municipal corporation, which is a political division of the State, from Federal taxation, equally require the exemption of all the property and income of the National Government from State taxation.'

"In Mercantile Nat. Bank of New York v. New York (121 U. S. 138, 162 (30: 1 895, 904)), this court said: 'Bonds issued by the State of New York, or under its authority by its public municipal bodies, are means for carrying on the work of the Government, and are not taxable even by the United States, and it is not a part of the policy of the Government which issues them to subject them to taxation for its own purposes.'

"The question in Bonaparte v. Appeal Tax Court of Baltimore (104 U. S. 592 (26:845)), was whether the registered public debt of one State, exempt from taxation by that State or actually taxed there, was taxable by another State, when owned by a citizen of the latter, and it was held that there was no provision of the Constitution of the United States which prohibited such taxation. The States had not covenanted that this could not be done, whereas, under the fundamental law, as to the power to borrow money, neither the United States on the one hand, nor the States on the other, can interfere with that power as possessed by each and an essential element of the sovereignty of each.

"The law under consideration provides 'that nothing herein contained shall apply to States, counties, or municipalities.' It is contended that although the property or revenues of the States or their instrumentalities cannot be taxed nevertheless the income derived from State, county, and municipal securities can be taxed. But we think the same want of power to tax the property or revenues from the States or their instrumentalities exists in relation to a tax on the income from their securities, and for the same reason and that reason is given by Chief Justice Marshall in Weston v. Charleston (27 U. S. 2 Pet. 449, 468 (7:481, 488)), where he said: "The right to tax the contract to any extent, when made, must operate on the power to borrow before it is exercised, and have a sensible influence on the contract. The extent of this power depends on the will of a distinct government. To any extent, however inconsiderable, it is a burden on the operations of government. It may be carried to an extent which shall arrest them entirely * * * The tax on Government stock is thought by this Court to be a tax on the contract, a tax on the power to borrow money on the credit of the United States, and consequently to be repugnant to the Constitution.' Applying this language to these municipal securities, it is obvious that taxation on the interest therefrom would operate on the power to borrow before it is exercised, and would have a sensible influence on the contract, and that the tax in question is a tax on the power of the States and their instrumentalities to borrow money, and consequently repugnant to the Constitution."

The statement by the Supreme Court that the power to tax could be carried to an extent which would not only burden the operation of State and local governments, but could entirely arrest their operation, discloses the motive for the eurrent attempt to impose a Federal tax on bonds of the State and their political subdivisions.

We point out specifically, that the State of Kansas does not tax security issued by the Federal Government, and that it cannot constitutionally be done.

This

was the holding by the Supreme Court of Kansas, in case of Lantz v. Hanna (111 Kan., 462). The syllabus by the court in that case reads:

"Taxation. Provision of section 11163, General Statutes, 1915, relating to taxation of United States bonds unconstitutional. The portion of section 11163 of the General Statutes of 1915 which provides that, where bonds of the United States have been purchased during the year preceding March 1, a sum shall be listed for taxation as money on hand on March 1, computed by dividing the value of the bonds by 12, and multiplying the quotient by the number of months of the year remaining after deducting the time the bonds were owned, violates the constitutional principles of equality and uniformity in property taxation in this State, denies purchasers of Government bonds the equal protection of the laws guaranteed by the Federal Constitution, and violates the Federal statute exempting bonds of the Federal Government from State taxation."

We also point out that by statutory law in Kansas, State and municipal bonds are not taxable by either the State or by its political subdivisions. General Statutes of 1949, 79-1407, reads:

"That no person shall be required to list for taxation any State, county, city, school district, and municipal bonds of the State of Kansas, or other evidences of indebtedness issued by municipal corporations of this State.'

We submit that since the State of Kansas does not tax State and municipal bonds in any form, the present Federal law, section 22 (b) (4) title 26, United States Code Annotated, which provides generally that interest upon the obligations of a State or Territory or other political subdivision thereof, shall not be included in gross income and shall be exempt from taxation, should not be changed in any way by Congress.

CONCLUSION

The additional income which would be derived by the Federal Government from the taxation of income from State and municipal bonds would not justify the increase in the interest rate of State and municipal securities which, in turn, would increase the ad valorem tax levy upon the assessed tangible valuation of the State of Kansas and its political subdivisions. Real estate in Kansas is now carrying as great an ad valorem tax as should be imposed. If the people in the political subdivisions of Kansas desire public improvements and thereby vote an indebtedness therefor upon themselves, they should reasonably expect to borrow money on their own public debt at a reasonable rate of interest, and not have the interest rate increased at the behest of the Federal Government.

We believe that the proposed tax would be in violation of established constitutional principles and, therefore, would be repugnant to the Federal Constitution for this reason.

The power to tax is the power to destroy. A Federal tax, however small, upon State and municipal bonds, or interest derived therefrom interferes, or tends to interfere with the constitutional power of State and local governments to borrow money on their own credit and, if carried far enough, would prove destructive. This could destroy the sovereign and independent action of all State and local governments. We vigorously oppose any attempt to place a tax, however small, upon income from State and municipal bonds. The present Federal law (26 U. S. C. A. 22 (b) (4)) should never be changed in any particular which would remove the exemption of State and municipal bonds from taxation.

We strongly urge that the House Ways and Means Committee give no credence to the proposal to tax the income from State and municipal bonds as proposed by the Secretary of the Treasury, and it is assured that the officers and citizens of Kansas will jointly assist them to the fullest extent to that end. Respectfully submitted.

EDWARD F. ARN, Governor of the State of Kansas. HAROLD R. FATZER,

Attorney General of the State of Kansas.

The CHAIRMAN. Our next witness is the Honorable Vincent R. Impellitteri, mayor of the city of New York.

Mr. Mayor, will you please give the stenographer your name and the capacity in which you appear.

Mr. KEOGH. Mr. Chairman.

The CHAIRMAN. Mr. Keogh.