said they could sympathize with a taxpayers revolt, 82% said "the big tax burden falls on the little man,” and 64% agreed that taxes have "reached the breaking point."

These fears are justified when we examine the numerous inequitable tax loopholes. Supposedly each of these tax favors has some rationale or is intended to support some worthy social objective. In fact, they either fail in their stated purpose altogether or achieve limited objectives at excessive cost to the general Treasury. Most loopholes disproportionately benefit the wealthiest members of our society. Experts say that some $50 billion in federal revenues are lost each year through existing loopholes. If this revenue were added to existing collections, we could finance all present federal programs, balance the budget, and have enough surplus to reduce general tax rates.

The federal income tax was first instituted by Constitutional amendment in 1913. It is based on the principle of tax progressivity, that those who can afford to pay more should do so. Today's marginal income tax rates reach 70% on individual incomes and 48% on corporate income. Despite these nominal rates, however, the highest average effective rates in 1972 were 34.2% on individual income and about 35% on corporate income.

Numerous tax preferences enacted by Congress over the years permit this discrepancy between nominal and effective tax rates. Some high income families may avoid paying any taxes at all. Two families with identical incomes may pay grossly different amounts. The inequity of the system has been growing. The share of total national income received by the richest 5% of American taxpayers has increased by 15% since 1968.

All too often, tax preferences amount to government subsidy of the rich, or, as Walter Reuther put it, "Socialism for Park Avenue and free enterprise for the ghetto."

One of the main offenders is the capital gains loophole. Only one-half of capital gains on assets held over six months is taxable, and even then the first $50,000 in capital gains in any one year cannot be taxed at a rate higher than 25%. Unrealized capital gains of appreciated property transferred at death or by gift are not taxed at all. Those who engage in capital gains transactions are mainly the wealthy. In a study done for your Committee in October, 1972, it was found that 53% of the estimated benefit from capital gains preferences fell to individuals with incomes of $100,000 and over ($2.9 billion).

In 1966 the cost of the average oil well was recovered 19 times over through the depletion allowance. Large oil companies pay very little income tax. The top 20 firms in 1966 earned profits of $4.75 billion and paid taxes at the rate of 82%. Only cutting percentage depletion from 22% to 15% would save the Treasury $800 million per year.

Exclusion from income of interest on state and local bonds saves those governments about $1 billion in interest each year, but costs the U.S. Treasury about $2 billion. 80% of the tax break goes to the richest 1% of the citizenry. The various tax subsidies serve to perpetuate and protect the wealth of the few. Meanwhile, the public cupboard is bare; long-standing federal programs are cut to the bone or eliminated outright for lack of funds. We, as a society, go on living with the great contradiction of poverty amid affluence-living with the dangers that inevitably flow from the contradiction.

When Congress passed the Tax Reform Act of 1969, publicity about loophole-closing far outweighed the actual results; the Act provided the illusion of reform without the substance of it. There were still 112 persons with incomes over $200,000 who paid no federal income tax in 1970. The 10% minimum tax only covered certain preference items and brought in no more than $116.9 million in additional revenue in 1970. Total revenue raised as a result of the 1969 changes amounted to only $3.3 billion a year.

The Revenue Act of 1971, far from providing tax reform, undid several reforms and opened a few new loopholes. The 1971 Act introduced new tax preferences of $370 million, not includng revenue lost from reinstatement of the investment tax credit and revision of rules for business equipment depreciation (the Asset Depreciation Range System-ADR).

At that time, Common Cause joined three other groups in filing a suit to prevent the Treasury Department from unilaterally initiating the ADR system without Congressional approaval, on the Constitutional ground that an admin

istrative revision exceeded Treasury authority. We held that the change could only be accomplished through legislation, and the Administration tacitly admitted we were correct by submitting the measure to Congress, which enacted it. Common Cause was again active on tax reform in 1972 when Chairman Wilbur Mills introduced what became the Mills-Mansfield bill (H.R. 15230). The bill sought to ensure systematic Congressional review over a three-year period of almost all of the tax preferences found in the IRS Code-17 or 18 per year, 52 in all. The bill provided that the preferences, unless justified and upheld after hearings and public debate, would be automatically repealed, placing the burden of justification where it should be. Common Cause endorsed the automatic review process as an "essential step in opening the door leading to tax justice." But H.R. 15230 died. We still support review by this Committee and believe these important hearings are a beginning.

In addition to the inequities created by loopholes in the income tax, an increasingly heavy burden is being placed on working people by the payroll taxes which are used to finance federal Social Security and Medicare programs. Just this year these regressive taxes were increased by about 10% for the average worker.

This tax is placing an increasingly onerous burden on working people and the surplus which it generated is being used to offset deficits in other budget items. The President claims there is only a $12 billion deficit when it is actually over $27 billion because $15 billion dollars committed to Social Security benefits are charged to the deficit. The hoax is furthered by the proposal to cut medicare benefits without a corresponding decrease in the payroll tax.

Americans now depend on a variety of programs to provide economic security in their retirement years-social security, private pension plans, federal, state and local employees and military pensions.

For most working families, social security is their sole source of support in their retirement years. Over half have no coverage under private pension programs and the overwhelming majority receive no benefits under military, federal or state employee pesion programs although they contribute to the cost of these benefits through the federal and state taxes they must pay.

Workers must also directly pay for one-half of the cost of the system to which they must look for their retirement benefits through the federal Social Security payroll tax. This tax is sharply regressive due to the $10,800 ceiling on any one person's annual wage income subject to this tax. Some economists have argued that workers also bear the burden of employer contributions to Social Security-in the form of lower wages.

Despite the magnitude of these costs and despite the improvements in Social Security benefits in recent years, the average working family is still unable to maintain its standard of living into retirement years. At the same time, the improvements necessary to provide adequate retirement security will be difficult to achieve as long as they must be fnanced out of further increases in the payroll tax.

Proposals for national health security legislation providing benefits as a matter of right currently incorporate dependence on a payroll tax. The already heavy tax burden imposed on workers for retirement security programs will probably serve, therefore, to limit the extent of health care benefits that can be provided by this kind of national program.

It seems essential to furnish some relief to the average and low-income worker from the burden of the heavy payroll taxes. This should be done without destroying the contributory principle which is at the core of the right to benefits from social insurance programs.

While relief from the payroll tax can take many forms, it is appropriate to urge that the revenues resulting from the closing of specifc tax loopholes be applied to the financing of our social security system.

Common Cause believes that the 93rd Congress must make a start towards plugging some of the tax loopholes. We think that $10 billion dollars in additional net revenue from modifying existing tax preferences is a reasonable goal in this session. This sum can be recovered by enacting some or parts of the many tax reform measures already introduced in the House of Representatives.

Common Cause supports tax legislation that will accomplish this objective. We urge the Committee to consider this proposal and report out a tax reform package gaining at least $10 billion and using these funds to relieve the

increasing payroll tax burden. We suggest that the following tax favors now costing the Treasury about $20 billion are appropriate for modification.

1. Preferential treatment of Capital Gains (including tax-free transfer of property at death by gift)

2. Exemption of State and Local Bond Interest (to be replaced by a direct subsidy)

3. Oil Depletion Allowance and Deduction of Intangible Drilling Costs

4. Asset Depreciation Range System (ADR)

5. Domestic International Sales Corp. (DISC)

6. $100 Dividend Exclusion

7. Deferred tax on Foreign Income of U.S. Companies

8. Low level and partial coverage of minimum tax on preference income. Common Cause further urges this Committee to use the revenues gained from tax reform to provide relief from the regressive payroll tax. This tax reflects an unfair and intolerable burden on low and middle income Americans. It taxes every dollar earned by the working poor, hindering their efforts to escape from poverty. It requires every middle-income worker who earns $10,800 a year to pay as much payroll tax as an executive in the $75,000 bracket. Relief from this unfair tax system is clearly in order.

STATEMENT OF THE EDISON ELECTRIC INSTITUTE, NEW YORK, N.Y.

SUMMARY

This statement urges tax equality for electric utilities and their customers. Under present tax laws government-owned and government-financed electric utility enterprises pay no federal income or equivalent federal tax and most of these government systems may finance their operations with tax-free bonds. Federal power agencies are exempt from state and local taxation in most states.

Taxes equivalent to those paid by investor-owned electric companies should be imposed on government-owned and government-financed electric suppliers because:

1. Equal tax treatment of all customers of electric energy will be assured; 2. Fair competition for all ownership segments of the electric utility industry will result;

3. Sound energy conservation policies will be aided;

4. Governmental subsidies will be e'iminated for those not needing them ; 5. Additional tax revenues will accrue to federal, state and local governments.

The above objectives may be accomplished by:

a. Placing a federal excise tax on government-owned and governmentfinanced electric utility systems equivalent to the federal tax on electric utility companies;

b. Eliminating the exemption from income taxation of interest on state and local government bonds issued to finance the business of supplying electric energy; and

c. Giving federal permission for state and local governments to tax federal power systems.

Finally, there is an inequity in application of the Investment Tax Credit among businesses which should be eliminated. The credit available to electric utility companies should be the same 7 percent available to business corporations generally.

This statement is submitted by the Edison Electric Institute, 90 Park Avenue, New York, New York 10016. The Institute is the principal national association of the investor-owned electric utility companies, whose operating company members directly serve over 77 percent of the customers for electric service in the United States.

The purpose of this statement is to urge tax equality for electric utility companies and their customers in two respects-first, equality as compared with government-owned and government-financed utilities, and, second, equality with other business corporations in respect to the Investment Tax Credit.

I. Equality of Taxation among All Segments of the Electric Utility Business

Under present tax laws government-owned and government-financed electric utility enterprises pay no federal income or equivalent federal tax. Also, under present tax laws most of these utility agencies may finance their operations, expansions, and acquisitions with tax-free bonds.1 And lastly, federal power agencies are exempt under federal law from state and local taxation, and only two federal agencies make token in lieu of tax payments.2

We respectfully submit that there is no justification for perpetuating these discriminatory tax exemptions, and that there are a number of affirmative reasons why Congress should end them. These reasons are discussed below, followed by an outline of legislative measures that would accomplish these reforms.

A. REASONS FOR EQUALITY OF TAXATION

1. Fair Tax Treatment of All Customers of Electric Energy

Electric utility companies are permitted under federal and state regulatory laws to earn a fair return (and no more) on rate base after allowance for necessary and proper expenses, including taxes. Accordingly, while economists may differ as to whether, in respect to most business corporations, the corporate tax burden falls ultimately on customers, or stockholders, or both, there can be no doubt as to where the tax burden on electric utility companies falls. The full economic burden of taxes on utility companies is passed on to their customers by the regulatory rate-making process. It is manifestly unfair to the 78 percent of the nation's electric consumers bearing this tax burden that they continue to pay more than their proportionate share of the cost of government while the remaining 22 percent of the nation's electric consumers pay less than their proportionate share.

2. Fair Competition for Electric Utility Companies

Most business concerns compete against others in the same field of business, but not against the government. Electric utility companies are regulated as territorial monopolies and hence do not compete against each other. But they are subject to actual or potential competition from government-owned and government-financed power agencies. This sort of competition would not pose a serious problem if it were fair competition. But the cost and price advantages these power agencies derive from tax exemptions make the competition grossly unfair. The unfairness of the competition is aggravated by the fact that state and local governments have the power to take over by condemnation the properties of their competitors-the no-government electric utility systems. Until such time as the tax structure is amended to bring about tax equality among all segments of the electric utility industry, the tax-paying investor-owned electric utilities will be up against very formidable and very unfair competition. 3. Tax Exemptions Leading to Under-Priced Electric Service Are Incompatible with Sound Energy Conservation Policies

The primary energy resources which are now being converted to electric energy are limited (hydropower and geothermal power) or exhaustible (fossil and nuclear fuel). This nation, and the rest of the world, is faced with decreasing supplies and increasing costs of primary energy resources. Much attention is being given to the formulation of energy conservation policies. One such policy for which there seems to be strong support is that consumers of energy should pay the full economic costs, including proper tax burdens, of the production and marketing of each form of energy.

The laws which permit certain consumers of electric service to avoid their fair share of necessary tax burdens, are, in effect, subsidizing the consumption of electricity by these consumers, and are clearly incompatible with this energy conservation policy.

1 The principal exceptions are the Tennessee Valley Authority, which shifted in 1959 from U.S. Treasury financing to publicly marketed bonds, and electric cooperatives to the extent that they may use publicly marketed bonds in lieu of government loans.

2 The Tennessee Valley Authority and the Bureau of Reclamation in only 8 states.

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4. Governmental Subsidies in respect to Electric Service Should be Confined to Individual Consumers Who Need Welfare-Type Assistance

There are millions of people in this nation who need, and are receiving, taxprovided subsidies to maintain a government-prescribed minimum standard of living, which includes, among the necessities of life, electric utility service. These people reside in the urban and rural areas of every one of the 50 states, and are furnished electric service by whatever type of utility system serves their area. This type of governmental subsidy, borne by taxpayers as a whole for the benefit of those individuals who cannot pay their own utility bills, makes sense.

However, it does not make sense for taxpayers as a whole to provide tax exemptions for the benefit of electric utility customers who do not need them. Merely because a person happens to live in a city served by a municipal utility system or in an area served by a public utility district or electric cooperative does not justify his receiving, as he now does, tax-free power rates. Those who can afford to carry a fair share of our total tax burden should do so. Their taxes are needed to help support the truly needy.

5. Additional Tax Revenues

Several hundred million dollars of additional federal tax revenues would be generated by a tax on government-owned and government-financed power systems that would be equal in tax burden to the federal income tax on electric utility companies, and by the elimination of the exemption from the federal income tax of interest on bonds sold to finance electric power systems. (The additional federal tax revenues that these two tax reforms would generate during the year 1974 is estimated at about $400 million.)

Several hundred million dollars of potential additional tax revenues would be mad available to state and local govenments by authorizing such governments to tax federal power system properties and operations in a non-discriminatory manner. (The property tax potential that this tax reform would make available to local governments and taxing districts is estimated for the year 1974 at $250 million.)

B. PROPOSED CHANGES IN THE FEDERAL TAX LAWS TO PROMOTE EQUALITY OF TAXATION AMONG ALL SEGMENTS OF THE ELECTRIC UTILITY INDUSTRY

1. A Proposed Federal Excise Tax on Government-Owned and GovernmentFinanced Electric Utility Systems Equivalent in Tax Burden to the Federal Income Tax on Electric Utility Companies

There is no constitutional barrier to federal taxation of state and local government-owned electric utility systems.

Ohio vs Helvering (1934) 292 US 360

"Whenever a state engages in a business of a private nature it exercises non-governmental functions, and the business, though conducted by the state, is not immune from the exercise of the power of taxation which the Constitution vests in Congress."

New York vs United States (1946) 326 US 572

66

so long as Congress generally taps a source of revenue by whomsoever earned and not uniquely capable of being earned only by a State, the Constitution of the United States does not forbid it merely because its incidence falls also on a State."

A federal tax on net income would not be an efficacious type of tax to apply to federal, state or local government-owned electric utility systems or to electric cooperatives, all of which can operate without earning a “taxable income" as defined in the federal income tax law. However, there would be no constitutional objection to classifying such electric utility systems separately for the purpose of federal taxation and applying to them a different type of tax, as long as it would not produce a discriminatory result. The constitution permits reasonable classifications necessary or appropriate to the accomplishment of proper legislative objectives. Flint vs Stone Tracy Co (1911) 220 US 107, Billings vs United States (1914) 232 US 261, Brushaber vs. Union Pacific RR (1916) 240 US 1, Puget Sound Power & Light Co vs Seattle (1934) 291 US 619, Steward Machine Co vs Davis (1937) 301 US 548. Equalization of tax burdens would be a proper legislative objective.