Pleate accept this written statement in lieu of my appearance before your Committee in opposition to the portion of the Tax Reform Act of 1969 which relates to the tax exempt status of state and local bonds. The Levy of a Federal income tax on the interest received from state and local bonde would unquestionably curtail the ability of state and local governments to finance necessary public facilities. Direct, open market tax exempt financing is essential to responsible and efficient local administration. The level of government that is given the responsibility of raising revenues will assume the privilege of determining priority of expenditures and the role of the local official will become ministerial only. I therefore reaffirm my position of long standing that Congress should take no action which would remove the tax exempt status of state and local bonds or in any manner unsettle or destroy the functioning of the tax exempt market as an independent source of capital for local improvements. Also, I elect to rely upon the presentations and briefs of others having a common interest that the proposed tax levy is unconstitutional. North Carolina and its counties and cities have historically followed the principle of pay-as-you-go, using borrowed funds only as and when absolutely needed. While I personally deplore abusing the tax-exempt privilege, I take pride in defending the policies and practices of our State's legislature in acting as guardian of public credit in North Carolina. I offer the assistance of my office in providing you with further procedural and statistical information upon request. KENNETH J. DAHLKA JOHN J. BASSO ALBERT B. GREGORY HARRY H. MEISNER JAMES R. FRIESEMA DETROIT-WAYNE COUNTY PORT COMMISSION P. CLIFTON LIND AREA CODE 313 224-5656 The Detroit-Wayne County Port Commission, the county agency vested by Michigan law with responsibility for the economic welfare of the Detroit-Wayne County Port District, wishes to file for the record of the Senate Finance Committee, in its current hearings on H. R. 13270, the following statement: This Commission is strongly opposed to any attempt, directly or indirectly, to tax state and municipal bonds. It is, therefore, unalterably against the passage of Sections 301, 302, 601 and 602 of H. R. 13270 for the following reasons: 1. The sections in question do not carry out the stated purposes of the bill. Sponsors of the bill have repeatedly indicated that it is intended to close tax loopholes which presently cause great inequities in tax burden among various classes of taxpayers. The Treasury Department claims that the tax exempt status of interest received by holders of state and Washington, D. C. 20005 - 2. municipal bonds constitutes such a loophole. In an However, in every one of the cited cases, the tax-free status was a result of interest, charitable contributions and other deductions, not through holdings in municipal bonds. Under today's economic conditions, the person who becomes free of tax liability as a result of placing all his funds in municipal bonds probably is a hypothetical fiction. An investor would have to be extremely naive to follow such a course, when he would be forced to accept approximately 30% less in interest from municipal bonds than good business judgment would require from comparably rated corporate obligations only to find that bonds which he acquired only a relatively short time ago at the then current interest yields, have suffered substantial declines in market value due to general interest rate increases in corporate bonds. These sections would fail to carry out stated purposes of the bill for yet another reason. The Report of Proceedings in the present hearings, September 4, 1969, P. 184 indicate that Treasury believes the application of Section 301 would net $45 million in annual tax revenue. The real effect would be to increase costs to state and municipal taxpayers by multiples of this amount each year. These increased costs would be required to be met by increases in local taxes. This would be neither equity nor tax reform. Furthermore, these increased local taxes would be fully deducted on Federal Income Tax returns, resulting in a net loss to the Treasury. 2. If adopted, these sections would raise serious constitutional questions. Most tax deductions are based on government policies which encourage philanthropy, stimulate needed investments, foster discovery of natural resources, and the like. Exemptions are the result of entirely different considerations. In the case of municipal bonds, the exemption on interest received stems from the established constitutional principle of intergovernmental immunity. This principle has been followed throughout the nation's history in order to preserve the continued functioning of States and their political subdivisions in the stable framework of our Federal system of government. If adopted, these sections would immediately raise constitutional questions as to the power of Congress to indirectly tax income from state and local obligations. They would inevitably produce litigation lasting anywhere from three to five years. Such litigation could be counted upon to thoroughly disrupt the municipal bond market which is already greatly hampered by the mere threat of passage of these provisions. 3. Adoption of the sections would have a crippling effect on the ability of state and local governments to fund capital projects. State and local government construction of vitally needed schools, hospitals, water and anti-pollution facilities, streets, sewers and other public improvements would be made even more difficult, and, in many significant instances, impossible. In a period when State and local governments are faced with tremendous problems of preserving and improving environmental conditions for an ever expanding population, the average taxpayer would bear a significantly increased burden if local governments are to continue to combat environmental problems. A great many of these taxpayers will find this burden unbearable, if they are employed in construction industries, because they will face unemployment as well. In conclusion, we oppose the above cited sections because they would increase local tax burdens; because their proposal has already disrupted the municipal bond market and their adoption would bring utter chaos; because their adoption would destroy the ability of local governments to provide for public needs. |