unthinkable for the State to levy a tax on the Federal highways running through it? (3) Is it not just as unthinkable for the Federal Government to levy a tax on a State or local government hospital as it is unthinkable for a State or local governmental unit to levy a tax on a Federal hospital for the health care of veterans or others? (4) Is it not just as unthinkable for the Federal Government to levy a tax on a State or local police building, a city hall or courts building as it is unthinkable for States and local governments to levy a tax on Federal government centers, post offices of courthouses? 16 Has the partnership between the Federal and State Governments, both joined together for the common good and for the benefit of the same people," proceeded to the point of desperation where one of the partners seeks to increase the cost to the other of doing the public's business? If so, is it not to be expected that the other partner will retaliate in kind and to the same degree? If it is Constitutionally permissible for the Congress of the United States to levy taxes (either directly or indirectly) on the interest paid on State and local bonds to the great and obvious detriment of those governments, is it not also true that State and local governments will be permitted Constitutionally to tax in the same manner the interest paid on the notes and bonds of the Federal Government, to its great 15 While this is not an earth-shattering observation, we all deserve an occasional reminder that the same people constitute the citizenry of both governments, and it is their interest which we all seek to protect. 16 "We are relieved, as we ought to be, from clashing sovereignty; from interfering powers; from a repugnancy between a right in one government to pull down what there is an acknowledged right in another to build up; from the incompatibility of a right in one government to destroy what there is a right in another to preserve." M'Culloch v. Maryland, supra. detriment and cost?"Is this not a classic case where neither government wins? Will it not, in the final analysis, lead ultimately to the dissolution of the partnership? Won't the public be surprised when they hear it said, "All we were trying to do was close a loophole." Respectfully submitted, McCall, Parkhurst & Horton, 1400 Mercantile Bank Building Calutelun Dated September 23, 1969 By E. Ray Hutchison 17 "It is admitted that there is no express provision in the Constitution that prohibits the General Government from taxing the means and instrumentalities of the States, nor is there any prohibiting the States from taxing the means and instrumentalities of that government. In both cases the exemption rests upon necessary implication, and is upheld by the great law of self-preservation; as any government, whose means employed in conducting its operations, if subject to the control of another and distinct government, can exist only at the mercy of that government. Of what avail are these means if another power may tax them at discretion?" Buffington v. Day, 78 U.S. 113 (1871) STATEMENT OF CAST IRON PIPE RESEARCH ASSOCIATION By: Edward D. Heffernan My name is Edward D. Heffernan. It is a distinct pleasure and privilege to have this opportunity to appear before your Committee. I represent the Cast Iron Pipe Research Association, a group of nine manufacturers of cast iron pressure pipe. A substantial proportion of the production of these companies goes into the many public waterworks around the country. As you are aware, I am sure, Mr Chairman, most of the waterworks, either new or those being updated, are financed by the issuance of local bonds, the proceeds of which pay for the system Historically, the interest on these bonds has been tax exempt, thereby allowing these lower yielding securities a competitive place in the bond market. I need not dwell on the damage caused by the efforts to tamper with the tax exemption. It is all too evident in recent bond market reactions to the proposal you have under consideration Not as apparent is the vast number of water projects (destined to provide much-needed life support water systems to both rural and urban areas) which may well be jeopardized by a decision to go ahead with exemption-limiting provisions of H. R. 13270. Our interest in opposing these provisions is both personally and civically motivated personal, from the standpoint that our industry stands to be greatly impacted by a probable cut back in water projects all around the country; civic-minded, in that we cannot ignore the long-range potential for havoc in communities faced with critical water shortages in the face of burgeoning populations. The bill proposes turning to the federal government as an alternative for help in financing the water systems. The supposed election of choosing either a tax exempt bond or federally subsidized bond may turn out to be no option at all. The higher tax exempt bond interest rates would drive bond issuers to use the subsidy if the cost to them were cheaper. The economics of this will soon press every community into seeking the subsidy. Neither is it at all clear, given a predictable change in the market for taxable municipal bonds as opposed to tax exempt bonds, that the federal government would collect more money in tax revenues than it paid out in interest subsidies; in fact, there is much evidence to suggest that it would lose considerable amounts of money. The Ways and Means Committee clearly indicated the concern of some members by stating in its report, "There is no review of the advisability of the local project or of the users' ability to repay. Despite this disclaimer, nothing was put in the language of the bill restricting the Treasury Department from setting up requirements, and, in truth, the bill gives the Secretary or his delegate broad discretionary power of regulation ("subject to such conditions as the Secretary or his delegate, by regulation, prescribes"). Annually, it will be necessary to go for appropriations, and thus changes are always a possibility. Obviously there was discussion of the specter of federal controls when a community accepts federal assistance. Our concern here is that when it comes to setting priorities for worthy projects to be funded, the local people most familiar and closest to the problems will be subordinated to the bureaucratic review. Water needs, not nearly as glamorous as many publicized national problems, will be pushed far down the list of priorities. We do not think it is wise, equitable or economically sound to put the business of providing clean water Our comments have been mainly about the election provision for state and municipal bonds; however, several other provisions of H. R. 13270 will have an objectionable effect on tax-free local bonds. The allocation of deductions provision includes the interest from new municipal bond issues in the list of tax preferences against which an individual would now have to charge a portion of his deductions. The limit on tax preferences requires that one pay taxes on at least half of all his earnings regardless of source (which includes interest from state and local bonds). The attraction of municipal bonds on the open market would certainly be impaired by these provisions. Another aspect that greatly concerns us is the constitutional issue inherent in this legislative provision, since the federal government would be taxing a portion of the interest from tax exempt municipal bonds through the limits on tax preferences mechanism. Undoubtedly, opponents will challenge the constitutionality in the courts, resulting in lengthy litigation. During this period of doubtful tax status, bond investors would be unlikely to invest until the issue is resolved. Thus, with the market for bonds totally disrupted, many or all water systems projects would have to be suspended. We urge you to remove these onerous provisions affecting local. tax-free bonding and let our cities and local governments get on with the job of renewal, unhampered by unwise legislation hastily drawn in the name of tax reform. Thank you for your consideration. |