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arise if this language be construed to be an attempt of the Federal Government to deprive the States of power to levy taxes for this lawful State purpose.

But even if this bill effectively forbade, or could be amended to effectively forbid, the States to levy pay-roll taxes on railroads for the support of unemployment relief for general industry, certainly the bill does not even pretend to prevent States from collecting general revenue from railroads for nonrailroad unemployment relief.

The validity of the imposition of such a State tax for this public purpose would not be affected by the absence of benefits to the railroads or their employees, or by lack of responsibility on their part for the conditions which render the tax necessary. Mr. Justice Stone developed this at length in the Carmichael case, declaring flatly:

"Nothing is more familiar in taxation than the imposition of a tax upon a class or upon individuals who enjoy no direct benefit from its expenditure, and who are not responsible for the condition to be remedied.”

The Social Security Act does not prescribe the source of State funds, nor could it, under the Constitution, and the fact is that the States do not look to the same

Some lay a pay-roll tax on employers and an income tax on employees. Others lay only the pay-roll tax on employers. In the Steward Machine Company case, Mr. Justice Cardozo carefully pointed out that the States retain their freedom in this respect.

There is serious constitutional question whether Congress has power to forbid States to levy taxes for lawful State purposes even though such taxes may cripple those engaged in interstate commerce, so long as the taxation is not on interstate commerce itself but is merely incidental to it.

As late as February 28, 1938, the Supreme Court, speaking through Mr. Justice Stone, has called attention to this unmistakably, saying:

"It was not the purpose of the commerce clause to relieve those engaged in interstate commerce from their just share of State tax burden, even though it increases the cost of doing the business. ‘Even interstate business must pay its way,' Postal Telegraph Cable Co. v. Richmond 249 U. S. 252, 259; Ficklen v. Shelby County Taxing District, 145 U. S. 1, 24; Postal Telegraph Cable Co. v. Adams, 155 U. S. 688, 696; Galveston, H. & S. A. R. Co. v. Texas, 210 U. S. 217, 225, 227, and the bare fact that one is carrying on interstate commerce does not relieve him from many forms of State taxation which add to the cost of his business, He is subject to a property tax on the instruments employed in the commerce. (Western Union Telegraph Co. v. Massachusetts, 125 U. S. 530; Cleveland, C. C. & Št. L. R. Co. v. Backus, 154 U. S. 439; Adams Express Co. v. Ohio State Auditor, 165 U. S. 194; Adams Express Co. v. Kentucky, 166 U. S. 171; Western Union Tel. Co. v. Missouri ex rel. Gottlieb, 190 U. S. 412; Old Dominion Ś. S. Co. v. Virginia, 198 U. S. 299), and if property devoted to interstate transportation is used both within and without the State, a tax fairly apportioned to its use within the State will be sustained. (Pullman's Palace Car Co. v. Pennsylvania, 141 U. S. 18; Cudahy Packing Co. v. Minnesota, 246 U. S. 450.) Net earnings from interstate commerce are subject to income tax, (United States Glue Co. v. Oak Creek, 247 U. S. 321), and if the commerce is carried on by a corporation a franchise tax may be imposed, measured by the net income from business done within the State, including such portion of the income derived from interstate commerce as may be justly attributable to business done within the State by a fair method of apportionment (Underwood Typewriter Co. v. Chamberlain, 254 U. S. 113; cf. Bass, Ratcliff & Gretton, Ltd. v. State Tax Commission, 266'U. S. 271).

“All of these taxes in one way or another add to the expense of carrying on interstate commerce, and in that sense burden it; but they are not for that reason prohibited.

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“Recognizing that not every local law that affects commerce is a regulation of it in a constitutional sense, this Court has held that local taxes may be laid on property used in the commerce; that its value for taxation may include the augmentation attributable to the commerce in which it is employed; and, finally, that the equivalent of that value may be computed by a measure related to gross receipts when a tax of the latter is substituted for a tax of the former” (Western Live Stock v. Bureau of Revenue, 58 S. C. R. 546).

And on April 4, 1938, in Milton Coverdale, etc. v. Arkansas-Louisiana Pipe Line Company, the Supreme Court, speaking through Mr. Justice Reed, said, with reference to an excise tax created by the State of Louisiana, that

It obviously adds to the cost of interstate commerce. But increased cost alone is not sufficient to invalidate the tax as an interference with that commerce."

The distinction between the power to regulate commerce and the power of taxe ation was announced very early by the Supreme Court in the celebrated case of Gibbons v. Ogden:

“The grant of the power to lay and collect taxes is, like the power to regulate commerce, made in general terms, and has never been understood to interfere with the exercise of the same power by the States; and hence has been drawn an argument which has been applied to the question under consideration. But the two grants are not, it is conceived, similar in their terms or their nature. Although many of the powers formerly exercised by the States are transferred to the Government of the Union, yet the State governments remain, and constitute a most important part of our system. The power of taxation is indispensable to their existence, and is a power which, in its own nature, is capable of residing in, and being exercised by, different authorities at the same time. We are accustomed to see it placed, for different purposes, in different hands. Taxation is the simple operation of taking small portions from a perpetually accumulating mass, susceptible of almost infinite division; and a power in one to take what is necessary for certain purposes, is not, in its nature, incompatible with a power in another to take what is necessary for other purposes. Congress is authorized to lay and collect taxes, etc., to pay the debts and provide for the common defence and general welfare, of the United States. This does not interfere with the power of the States to tax for the support of their own government; nor is the exercise of that power by the States, an exercise of any portion of the power that is granted to the United States. In imposing taxes for State purposes, they are not doing what Congress is empowered to do. Congress is not empowered to tax for those purposes which are within the exclusive province of the States. When, then, each government exercises the power of taxation, neither is exercising the power of the other. But, when a State proceeds to regulate commerce with foreign nations, or among the several States, it is exercising the very power that is granged to Congress and is doing the very thing which Congress is authorized to do. There is no analogy, then, between the power of taxation and the power of regulating commerce" (Gibbons v. Ogden, 9 Wheat. 1, 198–200).

Since the creation of the Nation, Congress has never asserted the power to declare that a State tax which is for a lawful State purpose, and which is of a form within the broad power of the States to classify persons and subjects for taxation and which is free from other constitutional objection, nevertheless is void as an: interference with interstate commerce merely because it depletes railroad treasuries. Such a power would mean that by a like declaration Congress could exempt railroads from all or any part of any of the many State taxes which they now pay— ad valorem taxes upon their tracks, structures, and rolling stock; income taxes on: their net income, or even franchise taxes on their right to engage in intrastate business. The exercise of such a power by Congress might depend only upon its misapprehension as to railroad financial difficulties, which, incidentally, one would think to cause such concern need not greatly exceed those which notoriously perplex the railroads just now.

It is conceivable perhaps that in an extreme situation Congress might have such a power, but if it claims it and undertakes to exercise it Congress should assert it bluntly and unmistakably and not leave it to implication.

Discussing a dispute as to the creation of a tax exemption by a State itself the Supreme Court of the United States has said:

“A State cannot strip herself of this most essential power by doubtful words. It cannot by ambiguous language be deprived of this highest attribute of sovereignty(Memphis Gas Light Co. v. Taxing District, 109 U. S. 398, 401).

The principle underlying this rule, with even greater force, and for a higher reason, in the delicate field

of comity between the Federal and State sovereignties would exclude implication of attempted Federal interference with State taxation.

Even if Congress could prevent State taxes levied for an expressed purpose having specific relationship to the separation of the two types of unemployment, it does not follow that it has power to control State taxes for general revenue or to control the States in their expenditure of funds so derived.

Up to this point we have discussed the power of the State to lay a tax for the specific purpose, earmarked as it were, to provide funds with which to administer its unemployment insurance system for the protection of nonrailroad employees, If it be possible to come to the conclusion that the Federal Government, acting under the guise of the commerce power, may deprive the States of their right to tax railroads for this public purpose of the State, then consideration must yet be given to the legislative device of eliminating the earmark and divorcing the tax from the object for which the proceeds of the taxes are to be expended. However novel this device, whatever its lack of legislative frankness, and whatever its.

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implication of constitutional evasion, Congress has demonstrated its use, and it cannot be put aside as improbable. That it now has at least some measure of sanction from the Supreme Court of the United States is apparent from the following language of Mr. Justice Cardozo in his opinion in the Machine Company case holding the Social Security Act itself constitutional:

The proceeds, when collected, go into the Treasury of the United States like internal revenue collections generally. Section 905 (a). They are not earmarked in any way.

"The appropriations when made were not specifically out of the proceeds of the employment tax, but out of any moneys in the Treasury.

"The proceeds of the excise when collected are paid into the Treasury at Washington and therefore are subject to appropriation like public moneys generally.

No presumption can be indulged that they will be misapplied or wasted. Even if they were collected in the hope of expectation that some other and collateral good would be furthered as an incident, that without more would not make the act invalid.

This indeed is hardly questioned. The case for the petitioner is built on the contention that here an ulterior aim is wrought into the very structure of the act, and what is even more important that the aim is not only ulterior, but essentially unlawful. In particular, the 90 percent credit is relied upon as supporting that conclusion. But before the statute succumbs to an assault upon these lines, two propositions must be made out by the assailant.

There must be a showing in the first place that separated from the credit the revenue provisions are incapable of standing by themselves." (Chas. C. Steward Machine Co. v. Davis, 301 U. S. 548.)

It is perfectly obvious that a State may supplement unemployment funds with money taken from its general treasury; and it may supply its general treasury by taxes of a surprising number of kinds applicable to railroads. The various forms of taxes discussed by Mr. Justice Stone in the passage which we have quoted above from the Western Live Stock case are sufficiently illustrative, though the catalog so presented is by no means complete.

Against taxes of one or all of the sorts there mentioned, and against taxes of many additional sorts which the States have power to lay, and upon occasion to lay, this bill offers no pretense of protection, unless, indeed, it be claimed that protection is to be found in the provision of section 13 (g) which proposes to amend section 303 of the Social Security Act by providing that the Social Security Board shall not certify funds to any Štate “if it finds, after reasonable notice and opportunity for hearing to the State agency

(2) That such State is failing to afford reasonable cooperation with every agency of the United States charged with the administration of any employment insurance law.

This is a curious provision. It constitutes one Federal bureau a monitor over the States for the protection of another Federal bureau. The monitor bureau may summon a sovereign State to appear before it for trail of the issue of the reasonableness of acts of the State legislature-for failure of the State legislature to administer the State power of taxation in such a way as the bureau sitting in judgment shall decide is "reasonable cooperation” with the other Federal bureau. The decision apparently is to be final, there being no provision for review. The bill does not pretend to define “reasonable cooperation” being content that the bureau be limited only by its own notions.

To find protection here against taxes not earmarked for unemployment relief one must indulge the assumption that the bureau may inquire whether the State is concealing the real purpose of the tax, an inquiry ordinarily beyond the power of the Federal courts, and must assume that the opinion of the bureau is to prevail over the announcement of the legislative assembly of the State and perhaps over the decisions of its highest courts.

If this is to afford protection to the railroads the lawfulness of the tax must not be permitted to hamper the bureau in the exercise of its supervisory function. It must sit in judgment not upon the question whether the tax laid by a sovereign State is lawful, but upon the question whether, lawful or not, it coincides with the view of the bureau as to what is "reasonable cooperation”; and thus its powers go far beyond those entrusted to any court under our governmental plan.

Of course such absurdity will not be within the intent of Congress if it adopts this bill; but that is merely another way of saying that this provision affords the railroads no protection against a double burden.

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CONCLUSION

General unemployment relief is a lawful function of State government. It costs money now, and if the States succumb to demands for increased payments similar to the demand of railroad employees embodied in this bill, it will cost

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vastly more. The States have the power, and they will be compelled to exercise it, to get this money through taxation. Regardless of whether it is possible now to foresee the exact detail of future events or to demonstrate them by mathematical computation, at least the course of future events is obvious insofar as they relate to railroad participation in all public burdens, State or Federal.

It is clear from what has been shown above that there is only one way by which the railroads could be safeguarded against being compelled to contribute to the support of the separate State unemployment systems after their removal therefrom as proposed by this bill. That way would be for Congress, by valid enactment, in clear and unmistakable terms, to withdraw them entirely from the whole field of State taxation. Even if it be conceded that Congress, as an incident of its power to regulate interstate commerce, could prohibit all State taxation of interstate railroads (all of which are also intrastate railroads, exercising important rights and privileges granted by the various States), is thare any member of this committee who sincerely believes that such power will ever be thus fully exercised?

Promises breed demands for more generous promises, as illustrated by this very bill. Some day these demands may be hushed by the voice of reason, but that time is not yet. Common experience indicates increased cost for State unemployment systems, and despite the treacherous protection pretended by the equivocal language of this bill, despite any language which might conceivably be put in the bill, the railroads must share these burdens when the States assume them, just as the railroads have always been called upon and expect always to be called upon to bear any other burden incident to the operation of State governments.

The Nation is in the midst of a financial depression unprecedented in sudden approach and almost unprecedented in gravity. It has an unemployment roster for which the wisest have been unable to find a solution. The Senate Subcommittee on Relief and Unemployment on April 20 filed a preliminary report estimating that 12 million workers are totally unemployed and more than one-seventh of the population of the Nation are receiving public assistance. In the midst of these conditions the meager resources of industry are being depleted under the Social Security Act, not to combat the present depression or to temper present unemployment, but to provide against some other condition of unemployment which may arise at some indefinite time in the future. Of all industry, perhaps the railroads most conspicuously arouse public con

Certainly they are not in position to be selected for further experiment. This is no time for further experimentation. Let new experiment wait until the experiment now under way at least approaches completion; and let legislation which would add impetus to demands for further devotion of present resources to future needs wait until money is available to meet the needs of the present.

Mr. MARTIN. I might observe that the trend of tax legislation, for both railroads and their employees, under the Social Security Act, is to have them wholly support their retirement plan without any outside aid or contribution from the general taxpayers or anybody else. At the same time, they are paying their share of the general taxes to support the rest of the Social Security Act. I do not know that there is any way of curing that, but that condition does exist.

I have been reminded here this morning of a magazine article that I read 25 of 30 years ago, and I would give a thousand dollars to have it now. That was an article in which the writer predicted that eventually there would be substantially only two forms of government in this country, the Federal Government and the municipal governments, and that the State lines would practically amount to no more than county lines have heretofore amounted to. If we have not reached that time, it is coming. If this legislation is to go ahead, with the economic system we have in this country, that will be thé situation.

Our corner grocery store and corner drug store are national industries, owned by gigantic national agencies. We are just driven more and more to place the country under Federal regulation.

We thank you for your statement, Mr. Souby.

cern.

This concludes the hearings for the opponents, and we are now ready to proceed with the rebuttal testimony. Mr. Latimer, the Administrator of the Railroad Retirement Board is present, and I presume there will be no objection to Mr. Latimer proceeding first.

STATEMENT OF MURRAY W. LATIMER, CHAIRMAN, RAILROAD

RETIREMENT BOARD

Mr. Martin. Before you proceed, I might say that I have a few questions to ask, some of which were given to me, but if you desire you may proceed without interruption.

Mr. LATIMER. Mr. Chairman and gentlemen of the committee, I would like to deal this morning with the question of the cost of unemployment insurance for railroad employees as provided in H. R. 10127. I will deal with the question in two parts, the first part relating to the cost of the benefits themselves, and the second part to cost of administration.

Any estimates as to the cost of unemployment-insurance benefits applicable to conditions at the present time must necessarily be based on data taken from different sources and pieced together, in part at least, by a process of estimation. All estimates as to the rate of unemployment are like any other estimates dealing with the future, in that they are subject to a margin of error. Since unemployment is a variable risk, falling off in years of prosperity and increasing in years of depression, a reasonable estimate ought to be based on data covering a period of some years.

The most comprehensive study of unemployment in the railroad industry was that made by the Federal Coordinator of Transportation covering the years 1924 to 1933, inclusive. That study as I believe, has already been pointed out in the hearings, was made largely from personnel records; the individuals studied were those on the pay rolls of the railroads included in the sample for the first pay roll periods of July 1924 and July 1929, and the last pay roll in December 1933. Because of the fact that the time elapsing between the dates of direct pay roll checking was so large, a fairly substantial number of short service employees were omitted from the Coordinator's study. For the purpose of determining the costs of an unemployment insurance system providing benefits for all those becoming unemployed, irrespective of the length of their railroad service, the Coordinator's study would have been seriously inaccurate. Since no such system has every been proposed, and since, on the contrary, all the proposals thus far formulated require fairly substantial employment as a qualification, or relate the length of benefit payments to the length of employment, or both, some of the omissions from the Coordinator's study may have no material effect on the cost of unemployment insurance except insofar as they may have added to pay rolls without adding to benefits. Of the employees included in the Coordinator's study, the proportions affected by unemployment during the years 1924–33, ranged from a low of 13.01 in 1928 to a high of 30.47 in 1932. That represents the number of persons becoming unemployed 1 day or more before becoming reemployed.

The average annual percentage of employees affected by unemployment over a 10-year period was 18. That was shown by the Coordinator's study.

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