of the tax-exempt character of municipal bonds, these factors are secondary to the preservation of the sovereignty of our states and the integrity of our local governments. Those who purchase municipal securities do so with the full understanding that the interest received from such securities is exempt under existing Federal income tax laws. To levy an income tax retroactively would seriously damage investors' confidence in the integrity and good faith of the Federal government. Furthermore, unless there is an early and decisive conclusion to the threat of Congressional action neither present investors in municipal bonds, prospective investors, nor banks and other institutions that purchase municipal obligations for their portfolios would have sufficient confidence in the tax exempt status of municipal bonds to take a chance on future investment in such securities. Once this principle is breached, there is theoretically no limit to the extent to which the interest could then be taxed by succeeding Congresses. This would, of course, result in a total collapse in the market which would unquestionably force the states and municipalities to seek financial relief from Washington. If the tax exemption on interest from municipal and state bonds were eliminated, the cost of public works to the taxpayer would increase. Investors would continue to buy the bonds. They are the most secure of investments, but they would demand a higher interest rate to compensate in part at least for the taxes levied on the interest. The local property taxpayers would foot the bill. There can be no doubt that financial relief is sorely needed by the states and their subdivisions, but the proposals presently before the Congress would appear to create more problems than they solve. The economists today are saying that in the years to come local governments will be one of the major "growth industries". Through the years the objective of the State of North Carolina has been to encourage local units to assume full initiative and responsibility allowing the role of the State to be mainly that of advisor and counselor. Stability goes to the heart of character and the legislatures of the State of North Carolina have given our peopjle and our bondholders a stable fiscal policy. Sincerely yours, HARLAN E. BOYLES, Deputy State Treasurer and Secretary of Local Government Commission. STATEMENT OF E. B. DAVIS, STATE AUDITOR, DEPARTMENT OF AUDITS, ATLANTA, GA. The Senate Finance Committee is at this time holding hearings in consideration of House Bill 13270, the "Tax Reform Act of 1969." I wish in this statement to stand in complete opposition to a portion of this Bill which provides for the taxation of interest paid on state and local government obligations. The National Association of State Auditors, Comptrollers and Treasurers adopted unanimously on September 3, 1969, a resolution voicing their full opposition to this proposed taxing by the Federal government of state and municipal bond interest. I approve and support fully this resolution which is attached hereto. The arguments supporting the removal of the tax exempt status for state and municipal obligations seem to be made principally around the cliche "Tax the rich." It certainly isn't going to result in any savings for the Federal budget and in my opinion it isn't going to do much damage to the rich. The fact is that it will do untold damage to state and municipal financing and capital outlay programs and will actually result in higher taxes on the small local taxpayer. The supporting evidence for this argument is clear and has been presented time and time again to the Committee along with many other strong and well documented arguments. The mere prospect that the Bill may become law has proven the point and already cost local taxpayers millions which can never be recovered. There is one point, however, that has not been clearly brought to the Committee's attention and in many ways concerns me more than anything else about this Bill. Along with the provision to tax state and municipal bond interest is a proposal to provide state and local governments with a subsidy to someher make up for the increased financing costs that will result from this legislation We are told that this "plum" will make up for all the bad things that will happe to us. All we have to do is ask for it. It seems so easy. Gentlemen, what you are really providing is a means by which a Federal agency or agencies will be abi in time to control and dictate all state and local financing programs. One-past applications will turn into a hundred-page legal document. Duplicates will pe on top of duplicates; whole states and cities will be at the mercy of minor cler and approvals will become an instrument of Federal policy. This may sou extreme, but history tells us it will follow and there will be nothing Congress or anyone else can do about it, once put into effect. For the sake of a cliche, w may very well be wrecking our Federal system of sovereign states within a sof ereign nation. If you want complete central control of government, you have it this Bill the means of providing it. I just can't believe you really want this, s please consider the real cost, very carefully before you act on this proposal. RESOLUTION 3.-TAXATION OF STATE AND MUNICIPAL BOND INTEREST Whereas, proposals in H.R. 13270 (a bill to enact a so-called "Tax Reform Ad of 1969") would impair the exemption of state and local government obligations: and Whereas, these proposals have already precipitated a dramatic increase in interest rates which state and local governments must pay to finance schools, hospitals, highways and all other necessary public improvements: and Whereas, such increased interest costs must be passed on to the general citi zen and taxpayer in the form of higher property taxes, sales taxes and other local taxes or in reduced Local services: and Whereas, therefore, the said proposals to impair the exemption of state and local government bonds, do not constitute true reforms in that their burden ultimately fall on the average citizens across the nation, including practically every person of modest means, and Whereas, the Congress has received no evidence that millionaires have gen erally invested so heavily in state and local government bonds as to escape federal income taxes, and, in fact the statistics as to the much publicized 154 millionaires who paid no tax in 1966 contain no showing that they held state or local government bonds; and Whereas, any purchaser of state and local government bonds in prior years has accepted a lower interest rate in reliance on his expectation that the interest would not be taxed, and the amount he has thus paid for his exemption is 30 to 35% of the interest he could have received on an equally secure private taxable obligation; and Whereas, this thirty to thirty-five per cent payment is exactly equal to the highest tax rates proposed by H.R. 13270 on other forms of income labeled as "tax preferences" by the bill; and Whereas, therefore, there is absolutely no argument in tax equity for subjecting state and local government bond interest to the "tax preference" treat ment proposed for sheltered income which has not thus made a contribution to the cost of government; and Whereas, as members of the present Supreme Court have said, taxation of the states by the Federal Government constitutes a powerful regulatory instrument, and should therefore be rejected as an unconstitutional subversion of our federal system; Now Therefore: Be it Resolved by the National Association of State Auditors, Comptrollers and Treasurers this 3rd day of September, 1969 that this Association urges upon the Congress of the United States the defeat of all proposals to impair the exemption of the interest on state and local government bonds, including the following provisions of H.R. 13270: (a) the inclusion of such interest in the base of the limit on tax preferences as proposed by Section 301 : (b) the inclusion of such interest in the base for the allocation of deductions as proposed by Section 302; 32 STAT (c) the taxation of interest on "arbitrage bonds" without a statutory definiion as proposed by Section 601 (b) and (d) the taxation of the interest on all otherwise exempt obligations in exhange for a preferred Federal "subsidy" as proposed by Title VI. STATE OF NORTH CAROLINA, Raleigh, September 16, 1969. Subject: H.R. 13270, Tax Reform Act of 1969 Hon. RUSSELL B. LONG, Chairman Committee on Finance, New Senate Office Building, Washington, D.C. DEAR SENATOR LONGS Please accept this written statement in lieu of my appearance before your Committee in opposition to that portion of the Tax Reform Act of 1969 which relates to the tax exempt status of State and local bonds As Treasurer of North Carolina and ex officio Director of Local Government, I wish to state my opposition to any effort on the part of the Congress to directly or indirectly tax interest on State and municipal bonds. The mere fact that Congress is considering taking such action has literally brought chaos to the market for our securities. It has taken many years to build up the confidence of the investing public in our bonds, and it would be tragic if this confidence were undermined and even destroyed by the well-intentioned action of Congress taken in the name of tax reform. Actually the removal of this exemption, in whole or in part, will mean ultimately a heavier tax burden upon the people of our State, our counties, our cities and our towns. In fact, it is estimated that, exclusive of the increased cost to the State, there would be approximately $25 million annual additional interest cost to our local governments, which would be the equivalent of an ad valorem tax levy of between 15-20¢ per $100 valuation. Recently much has been said about the New Federalism, which, as I understand it, would offer a true partnership between the national government and the fifty States. In my judgment, to take from the State and local governments this very precious privilege of tax exemption, would strike a blow at local pride and initiative, and would really violate the proposed spirit of such New Federalism. I believe that Congress should preserve the exempt status of our State and municipal bonds as a great traditional privilege which has been a part of our inheritance as declared in the landmark case of McCulloch vs. Maryland, which preserved the fiscal independence of the States and municipalities. Due to the very high interest rates that we are now experiencing, in part because of this threat to our exempt status, I hope for an early resolution of this matter by Congress. In my opinion, prolonged debate serves to strengthen the fears of potential investors. Incidentally, the retroactive effect of this proposed legislation is, in my judgment, morally and constitutionally indefensible. I wish to endorse the briefs that are being filed in behalf of the States and local governments by the National Association of State Auditors, Comptrollers and Treasurers, the National Association of Counties, the League of CitiesConference of Mayors, Inc., and other organizations concerned with FederalState relationships, including, of course, the National Governors' Conference. Respectfully submitted, EDWIN GILL, Treasurer, State of North Carolina and THE STATE TREASURER, STATE OF NORTH CAROLINA—SUMMARY OF POWERS AND The State Treasurer is a Constitutional officer of North Carolina elected by the people for a term of four years running concurrently with the term of the Governor. The State Treasurer is actually the State's banker, serving as the chief fina cial officer of the State. He receives and disburses the funds of the State, ministers the bonded indebtedness program and serves as investment officer all State funds. In addition, he has certain supervisory functions over lo government finances. The State Treasurer also advises with the General Asse bly and the Governor at all times concerning the financial condition of the Sta and its fiscal problems. The State Treasurer is, under the Constitution, a member of the Council State and of the State Board of Education. By statute, he is ex officio Chairm of the Local Government Commission, the Banking Commission, the Tax & view Board, the Retirement Systems for Teachers and State Employees a Local Governmental Employees. He is also an ex officio member of the La Enforcement Officers Benefit and Retirement System. The present incumbent, Edwin Gill, has served in this capacity since 19 Mr. Gill began his service in State government in 1929 as a member of the General Assembly and has served in many capacities since that time, includi seven years as Commissioner of Revenue of North Carolina. TREASURY DEPARTMENT, STATE OF TEXAS. Austin, September 19, 1969. Mr. TOM VAIL, Chief Counsel, Committee on Finance, New Senate Office Building, Washington, D.C. DEAR SIR: I want to express my strong opposition to the proposals in the T Reform Act of 1969 which, if enacted, will remove or modify income tax exe tion on municipal bond interest. The main beneficiaries of the present system of tax exemption on municip bond interest are those people who comprise the direct taxpayers or contributers of the issuing municipality. To eliminate the tax exemption would now sorely distress, if not halt, pr tically all proposed issues, and would eventually result in much higher loca taxes on all tax issues and much greater patronage charges on all revenue issue The confusion inherent to such proposals would hamper the orderly progres of programs of municipalities, schools, water districts, states and other gover mental entities. On all those programs partially completed it would be like chang ing rules in the middle of the game. Again, I strongly urge all concerned not to enact legislation that will change the tax exempt status on income to municipal securities. Sincerely yours, JESSE JAMES, STATE OF MICHIGAN, DEPARTMENT OF TREASURY Lansing, Mich., September 18, 1969. DEAR MR. VAIL: In accordance with the recommendations set forth in your telegram of September 7 Governor Milliken and I are agreeable to your sugges tion permitting a six man panel of the Governor's Conference to make the oral presentation before the Senate Committee on Finance. We are in full agreement with the position taken by the Governors' Confer ence in opposition to the taxing by the Federal Government of state and local government bond interest. In addition we are submitting the following observations for the Committee's consideration. 1. The proposals in H.R. 13270 have already precipitated a dramatic increase interest rates which state and local governments must pay to finance schools, the fospitals, highways, drains, and all other necessary public improvements. On zeptember 8, 1969, Michigan borrowed 42 million dollars on one year general obligation notes at an average annual rate of 6.234 percent. In our judgement, his rate would have been from 1⁄2 of one percent to a full percentage point lower if the municipal bond market were not faced with the uncertainty created y the passage of H.R. 13270 by the House of Representatives. meme 2. Increased interest cost, such as this, must be passed on to the general citizen beatand taxpayer in the form of higher property taxes, sales taxes, income taxes, and Other local levies or the level of services must be reduced. We therefore believe hat these proposals to impair the tax exempt status to state and local governnent bonds, do not constitute tax reform in that the burden ultimately falls on he average citizen across the nation. We therefore urge upon the Senate Comnittee on Finance and the Congress of the United States the defeat of all proposals to impair the exemption from taxation the interest on state and local the government bonds. In our judgement, failure to take this action could very well cost Michigan and its municipalities additional interest running into the hunireds of millions of dollars on the presently authorized bond issues totaling nearly one billion dollars. We appreciate this opportunity to set forth our position on this question and are prepared to furnish additional data if desired. Sincerely, ALLISON GREEN, STATEMENT OF FRANCIS GEOGHEGAN, DIRECTOR, STATE OF MISSISSIPPI COMMISSION OF BUDGET AND ACCOUNTING The proposed actions contained in Sections 301 and 302 of the above bill would break a long established principle that state and municipal bonds are not subject to Federal taxation. If these sections are enacted it would, no doubt, cause long periods of litigation and would seriously interrupt the states and local governments abilities to obtain capital funds for purely local projects. In my opinion, the taxing of one group of bond holders and not taxing another group is of doubtful merit. The proposal in Section 601 of House Bill 13270 to provide a tax subsidy plan for local and municipal tax exempt bonds appears utterly without merit. If approved this would put the Federal Government in the position of controlling purely local and state projects and would, no doubt, result in greater cost to the U.S. tax payer. In addition, the delays in obtaining Federal Government's ap proval would seriously slow down the obtaining of capital funds for immediate urgently needed local and state projects. For the above reasons, I respectfully request that the Senate Finance Committee delete the above sections from the Tax Referendum Bill now under consideration. STATEMENT OF ARTHUR LEVITT, COMPTROLLER, STATE OF NEW YORK I am Arthur Levitt, Comptroller of the State of New York. My office is elective, for a four-year term, and I am currently serving my fourth consecutive term. As Comptroller of the State of New York my duties include management of the State's financing, both temporary and capital. I am also required to supervise the financing of the State's agencies; and I audit and advise most of the municipalities, school districts, and other special districts within the State. Thus, the general supervision of State and local financing procedures and programs is a primary concern of my office. My purpose today is to oppose any taxation, direct or indirect, of state and local obligations by the Federal Government. Specifically, I would urge this |