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not pledge the full faith and credit of the issuing authority for the payment of interest and principal. The term “manufacturing articles" is used in a broad sense and includes processing and related activities, such as canning, tanning, etc., the result of which is to make available for sale an article or product. A public utility producing electricity or gas would not be "manufacturing articles.” Obligations issued for the acquisition or improvement of real property used principally for recognized governmental purposes shall not be considered industrial development revenue bonds even though a minor portion of the property may be availed of for manufacturing purposes incidental to the primary activity for which the entire property is used. The prohibition of the section will apply whether such bonds are issued before or after the acquisition or improvement of the property with respect to which rental payments are made.

"The section applies only to rental payments paid or accrued on property acquired or improved with the proceeds of any bonds issued after February 8, 1954.”

Initially, the House Committee on Ways and Means had proposed to remove the tax exemption from “Interest received from so-called industrial development bonds of State and local government units.” 1

Following a wave of protests from State and local officials this proposal was discarded but in its place now stands the above proposed section 274 which in effect would disallow as a deductible business expense, rentals paid by an industrial lessee to a municipality which issues revenue bonds.?

There appears no doubt that this provision was and is aimed directly at the very prevalent practice of a number of southern communities in issuing revenue bonds to finance the construction or acquisition of properties upon which are then erected industrial plants. The public ports, which use revenue bond financing in accomplishing public purposes for which they were created, appear to be caught in the middle.

Section 274 of H. R. 8300 would of course effectively prohibit such arrangements by the simple expedient of disallowing as a business expense the rental payments to be paid by the lessee.

The principal direct concern of the organizations which I represent, all of whom are public agencies, is directed at the definition of "manufacturing articles." It would, however, be timely to point out that there is a strong feeling that the proposed section 274 is but the first step in an effort to tax the interest from all municipal obligations. The fact that section 274 is directed only at revenue bonds is small comfort to municipal corporations, first, because in many instances it is far easier and more practical to issue revenue bonds for public financing, if there is a market for them, than to issue general obligation bonds; and second, because there is no assurance whatsoever that Congress would not in the future disallow rental payments paid under general obligation bond issues as well.

The practical effect of section 274 cannot be ignored. A private concern proposing to lease facilities of any particular nature from a municipality would certainly be hesitant to enter into such an arrangement and would undoubtedly abandon the project altogether if there appeared any possibility that its rental payments would not be deductible as business expenses. In any event the private concern would certainly insist upon lower rentals to offset this possibility. This would result in lowering the rent income of the municipality so that the net income of the municipality from that particular operation would be reduced or completely wiped out.

Obviously, then, with respect to any revenue bond issue the problem reduces itself to ascertaining when the real property is to be used by the private concern for “manufacturing articles.” Unfortunately, this term is as broad as it is long and so has resulted in great alarm among public ports. The report of the House Committee on Ways and Means in which it was stated, “The term ‘manufacturing articles' is used in a broad sense and includes processing and related activities, such as canning, tanning, etc., the result of which is to make available for sale an article or product,” has served to intensify this alarm.

Even with this indication of the interpretation of the term “manufacturing articles,” it would be next to impossible to predict the ruling of a court as to

1 Committee announcement, January 20, 1954. 2 Press release issued by Representative Daniel A. Reed, chairman, House Ways and Means Committee, on February 9, 1954.

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whether or not any particular program of a municipality would be affected by section 274, on the grounds that the private lessee was engaged in "manufacturing articles.”

A short, concise statement of the law on this point would be illustrative. Although the term involved here has probably never been used in any statute of similar context, "article of manufacture” is a term often used in patent statutes and the term “manufacture” has been used in safety regulations, personal property tax statutes, and Interstate Commerce Commission regulations, and the decisions of the courts in this respect would probably be persuasive to say the least.

For example, the courts have ruled that none of the following constitutes "manufacturing": :

Taking ice from a river and storing the same for sale; blending and packaging tea; and roasting, blending, and packaging coffee; cleaning and bagging wheat; treating oranges to avoid blue mold; and sorting, processing, and treating redried tobacco.

On the other hand, the courts have ruled that the following do constitute "manufacturing":

Storing, sorting, and packing apples; finishing rough lumber and shelling and sorting peanuts.

Unfortunately, when the courts themselves are not in agreement, it could not be expected that a private lessee would be willing to risk a long-term lease involving tax considerations of such magnitude.

The organizations which I represent here are all public bodies and fall under the broad category of “municipal corporations.” Almost without exception, substantial portions of their activities consist of the erection of wharf, terminal, and various specialized harbor facilities, many of which are either leased to or used by private concerns.

This is particularly true on the west coast or a harbor facility such as a grain elevator, which this new proposed legislation has already affected. Notwithstanding ambitious expansion programs on the part of many of these ports, the tremendous wheat harvests of recent years have precipitated a drastic shortage of storage and terminal space. In this connection, it should be recognized that municipalities simply cannot operate the grain elevators which are so necessary to their economy, as the grain business is international in scope and requires worldwide commercial connections and extensive credit quite beyond the capability or legal power of most municipal corporations. So the elevators owned by the municipalities are leased to private grain concerns under long-term leasing arrangements that afford a reasonable return to the port and permit the private operators to make a profit. (This is true of all of the many public grain elevators owned by the ports of the Pacific coast.) Grain is not only stored in the tidewater elevators but is sorted by grade, blended, washed, purified, and in some instances sacked. The question immediately arises as to whether or not an operation such as this results in “manufacturing articles."

This concern is not merely theoretical or speculative. The effect of this proposed legislation has now effectively halted an important maritime facility on the Pacific coast. The city of Portland, Oreg., has owned a tidewater grain elevator to serve the farmers of its hinterland for over 30 years. Desiring to modernize and enlarge the same, an agreement to enter into a new lease with the present tenant was made, the rentals therefrom designed to provide the basis for the issuance and retirement of revenue bonds. After public hearings and with widespread public approval, this project (which would result in the largest tidewater grain facility on the Pacific coast), was publicly announced. Today, because of the threat implicit in this legislation, the entire project is being held up.

This problem is not limited solely to grain elevators. Ports carry on many other endeavors which would or could be affected by this legislation, such as the operation by private concerns of publicly owned bulk handling facilities and wharf properties, where such activities as sorting, grading, storing, bagging, strapping, coopering, and assembly are carried on every day. It is quite conceivable that the proposed legislation could be interpreted to directly affect these and other similar activities.

3 People v. Knickerbocker Ice Co. (99 N. Y. 181, 1 N. E. 669 (1895)); People ex rel. Union Pacific Tea Co. v. Roberts (145 N. Y. 375, 40 N. E. 7 (1895)); Frazee v. Moffitt (18 Fed. 584 (1872)): Fruit Growers, Inc., v. Brodgex Co. (283 U. S. 1, 51 Sup. Ct. 328, 75 L. Ed. 801 (1931)); and Interstate Commerce Commission v. Yeary Transfer Co., Inc. (104 F. Supp. 245, affirmed 202 F. (2d) 151 (1953)).

4 Red Hook Cold Storage Co. v. Department of Labor of New York (295 N. Y. 1, 64 N. E. (20) 265, 163 A. L. R. 439 (1945)) ; Stearns Coal & Lumber Co. v. Thomas (295 Ky. 808, 175 S. W. (20) 505) ; and Interstate Commerce Commission v. Weldon (90 F. Supp. 873, affirmed, 188 F. (20) 367, certiorari denied, 342 U. S. 827, 96 L. Ed. 625, 7 Sup. Ct. 50 (1950)).

The end result of section 274, if it is allowed to stand or without appropriate amendment, would be to effectively prohibit a substantial part of all revenue bond financing by public ports, simply because private concerns would be afraid to enter into long-term leases if section 274 could possibly be applied to them.

It is respectfully urged that this committee give the matter serious consideration to the end that section 274 be stricken from H. R. 8300, or as an alternative that the committee give due consideration to amending the section to exempt public port bodies from its provisions when carrying out the purposes for which they were created.


Attorney at Law. PORTLAND, OREG.



I appear in opposition to section 274 of H. R. 8300 which would prevent the States and municipalities from using their revenue bonds, without a pledge of their full faith and credit, to acquire or improve property to be leased to private persons for manufacturing purposes.

I am the executive director of the Port of New York Authority, a bistate governmental agency of New York and New Jersey, concerned with the construction and operation of bridges, tunnels, airports, bus, truck, marine and other terminal and transportation facilities, and the development of the commerce of the port of New York. I appear on behalf of the Port of New York Authority and on behalf of the Airport Operators Council which includes the major State and municipal airport operators of the country, and also on behalf of the American Association of Port Authorities which includes all major public port operators. I also appear as an individual who is deeply concerned that the balance between our State and Federal Governments should be preserved and that the States be not destroyed as independent units of Government by Federal control of their finances.

I should say at once that the Port of New York Authority is not directly affected by this proposal although it condemns the section's purpose, philosophy, and effect. The Port of New York Authority does not issue bonds without a pledge of its full faith and credit. However, many States and municipalities are compelled by law or decisions of policy to use revenue financing for the development of their airports, seaports, and other improvements which are capable of supporting themselves through revenues.

Technically, section 274 does not prohibit the States and cities from using revenue financing for industrial development purposes. But that is both the announced purpose and the inevitable effect of this provision. By its terms the section would disallow deduction from gross income of rental payments made by private lessees to States or their political subdivisions for the use of public property acquired or improved by the State or its agencies with the proceeds of revenue bonds.

According to the press releases of the Ways and Means Committee of the House, the provision was aimed at discouraging the relocation of established industry attracted to new locations by the opportunity to rent plants financed by State and municipal credit.

It so happens that I am personally opposed, as are the proponents of section 274, to the use of public credit as a means of raiding industries from section to section. But I feel about this as I feel about free speech. Devotion to the principle of free speech is proven only by defending the right to speak on policies in which you do not believe. So here, a deep belief in the independence of State government as a vital part of our system of dual State and Federal sovereignties requires me to support the right of any State, within limits of the Federal Constitution, to adopt local policies I oppose, and to deny the right of Congress to sit in review upon those local policies and thwart them by ostensible use of a taxing provision which can yield no taxes.

With the committee's permission, I will return to this fundamental objection of policy. But first I would like to indicate how far section 274 goes even beyond its announced purpose. What it has actually done is to make it impossible to go forward with important public improvements throughout the country which are wholly unrelated to the purposes of its proponents. The evil it would do far outweighs any possible transitory gain of anchoring a few factories to their present sites.

Thus, while the announced aim of the provision is to discourage the raiding of industry, nothing in its language limits its effect to relocation of established industry. It applies just as much to a new industry which a State or municipality wishes to attract in the first place, for perfectly proper reason in the development of the prosperity of its people, as it does to the relocation of an existing plant from any other part of the country. A wholly new industry may be involved like a plastics factory or an aircraft parts manufacturing plant. Or in cases of existing industries which are expanding, a wholly new factory may be established. Reclamation of lands or new power developments in the West or in New York may naturally invite the location of industry nearby. And sections of the country with great new population increases which serve as markets as well as sources of labor supply, may require as well as attract wholly new industrial developments.

If there is anything morally wrong with the attraction of plants which are already established, that condemnation cannot apply to wholly new plants which never had a situs anywhere. Yet States and municipalities wishing to finance such plants by revenue bonds would be prevented from doing so by section 274.

I should say, categorically, that any use which the public-airport operators and port authorities of this country have made of revenue financing of industrial developments has been for the establishment of new developments and not the raiding of industries from existing locations.

Furthermore, the provision restricts its operation to manufacturing plants, but there is no definition of the word “manufacturing." Fear that manufacturing will receive a very broad definition has already destroyed an opportunity for a Pacific coast public-airport operator to secure the location of a new and important aviation base at that airport. The airline proposing to rent base facilities to be constructed by the public agency pointed out that certain of its operations in preparing aircraft for flight might be considered manufacturing, and that it was completely uneconomocal for the airline to establish a base under those circumstances so long as the rental paid to the public agency would not be allowed as an ordinary business deduction on its income-tax return.

The State of North Carolina, with no purpose of industry raiding at all, has established grain storage and processing plants by the issuance of revenue bonds and has leased those facilities for operation by a private lessee, with the objective, and I believe the result, of protecting the price of grain produced by the farmers in North Carolina. If the cleaning, drying, sorting, and bagging of grain is manufacturing under section 274, that policy of that State may be completely frustrated.

In Oregon, the mere pendency of section 274 in the present bill has brought to a dead stop negotiations for the establishment of a similar grain terminal facility to be built through revenue financing but operated by a private lessee.

The doubt and fear arising over the undefined use of the term “manufacturing" is not unfounded. It is compounded by language of the House Ways and Means Committee report that

“The term 'manufacturing articles' is used in a broad sense, and includes processing and related activities, such as canning, tanning, etc., the result of which is to make available for sale an article or product.”

Another serious objection is demonstrated by the experience of public airport operators and marine port authorities. Section 274 makes no distinction between property acquired or improved solely to attract new or relocated industry, and situations where the property is already held and must continue to be held for some other public purpose, where it becomes advisable in the public interest to devote a portion of the area to incidental uses which are consistent with the primary governmental purpose for which the property as a whole is held.

It is well known that airports cannot be made self-supporting solely out of the revenues from aircraft operators. It is also obvious that airports must occupy tremendous areas of land for the accommodation of their runways and to assure sufficient distance from ends of their runways for aircraft to attain an altitude from which aircraft noise will not unreasonably interfere with the owners of land below. In other words, airports require much more land than can be occupied by runways, hangars, and administration buildings. These two factors, inadequacy of takeoff and landing fees to cover costs and the necessity of having to own more land than is occupied by direct air-terminal structures, have led to the development of incidental revenues from airport properties, as a means of easing their burden on the local taxpayer. State and municipal airports have built and rented out structures on their peripheral areas, usually for purposes related to the aviation industry although not directly concerned with the immediate process of the landing and taking off of aircraft. For example, we have heard of an instance where a surplus airport hangar was converted by the municipal owner to the manufacturing of light aircraft parts. And we have heard of negotiations for the establishment of an aviation instrument plant at another airport.

Far from there being anything wrong in such incidental uses of property already held for a public purpose, we suggest rather that the public officials administering such public properties would be derelict in their duty if they did not seek to devote such property to this type of incidental use. Yet, financing such improvements through revenue bonds would be stopped by section 274 just as if it were open to the objections which have been expressed against State financing for plant relocation.

I should note also that section 274 encourages States and municipalities to issue general obligations rather than revenue bonds, because the penalty it imposes does not apply if full faith and credit bonds are used, even for the very type of factory relocation which the proponents of the measure disapprove. I submit that this discrimination against revenue financing is wrong for two reasons. In the first place the type of financing used for lawful local purposes seems to be the business of the States and not of the Federal Government. Secondly, the financial stability of State and municipal credit is in some cimcumstances more severely affected by the use of general obligations than of revenue bonds, so that it may often be economically unsound to encourage the use of general obligations and discourage the use of revenue bonds for the same purpose.

Oddly enough, the use of municipal revenue bonds to finance industrial development is extremely rare. I have studied the figures and find 8 such instances involving an aggregate of only about $3 million in revenue bonds. So that even if the process is evil, it has not assumed any proportions which remotely justify congressional intervention.

Finally, I should like to return to the most serious objection of all—that of governmental philosophy. We are dealing with State and municipal financing which is admittedly lawful in the States within which it is accomplished both as a matter of State law and Federal law. Under such circumstances there is no warrant for Congress to set itself up in judgment as to the wisdom of the State legislatures in authorizing such State and municipal fiscal policy. It is wrong from the point of view of the Congress as well as of the States. Congress is overloaded as it is with obligations to pass upon purely Federal policy without assuming the impossible burden of reviewing the policies of 48 State legislatures on matters of purely local concern.

But more important, it is stultifying to the States and to the dual system of State and Federal Governments which assures to the States exclusive jurisdiction in matters of purely State concern. It cannot be the proper business of Congress to review the numerous purposes for which State and municipal borrowing is undertaken and to work out penalties and rewards to discourage some sovereign State purposes and encourage others.

Section 274 of this bill makes it impossible for the States and their political subdivisions to issue revenue bonds for manufacturing purposes. The next bill could penalize the use of full faith and credit bonds for the same purpose. A further bill could enlarge the purposes Congress would penalize a process often urged by special interests. Last year, for example, representatives of private electric companies proposed to penalize by special taxation the issuance of bonds for the acquisition and improvement of public electric plants. I submit, respectfully, that the Congress should not wish to enter upon this stony and unending path of reviewing State fiscal policy.

If the States are to survive as sound and healthy units of local government, their policies should not be subject to control by direct or indirect use of the taxing power of the Federal Government, with the objective of making the internal policy of our State legislatures into carbon copies of those of Congress,

I respectfully urge that this honorable committee recommend the deletion of section 274 from the present revenue bill.

The CHAIRMAN. Dr. Momsen.

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