[S. J. Res. 154, 75th Cong., 1st sess.] JOINT RESOLUTION Proposing an amendment to the Constitution of the United States relative to taxes on certain securities and the income derived therefrom and on the compensation of officers and employees of the States and their political subdivisions Resolved by the Senate and House of Representatives of the United States of America in Congress assembled (two-thirds of each House concurring therein), That the following article is proposed as an amendment to the Constitution of the United States, which shall be valid to all intents and purposes as a part of the Constitution when ratified by the legislatures of three-fourths of the several States: "ARTICLE "SECTION 1. The United States shall have power to lay and collect taxes on securities, and the income derived therefrom, issued after the ratification of this article by or under the authority of any State but without discrimination against such securities or income and in favor of securities, or the income derived therefrom, issued after the ratification of this article by or under the authority of the United States or any other State. "SEC. 2. The United States shall have power to lay and collect taxes on compensation paid, after the ratification of this article, by any State or any political subdivision thereof to its officers and employees but without discrimination against such officers or employees in favor of officers or employees of the United States or any other State." SENATE JOINT RESOLUTION No. 5 STATEMENT OF HON. AUGUSTINE LONERGAN, A SENATOR IN CONGRESS FROM THE STATE OF CONNECTICUT Senator VAN Nuys. You may proceed, Senator Lonergan, with such statement as you care to make. Senator LONERGAN. Senate Joint Resolution No. 5, now under consideration proposes an amendment to the Constitution of the United States to enable the United States Government to lay and collect taxes on income derived from securities issued by any State, and to enable each State to lay and collect taxes on income derived by residents from securities issued under authority of the United States. I will explain for clarity of procedure that it is not necessary to submit a constitutional amendment to enable the Federal Government to tax the income from future issues of its own securities. I have another bill, S. 16, now pending in the Senate Finance Committee, to provide for a tax by the Federal Government on the income from its own securities, but the Treasury is opposed to the passage of that measure until this constitutional amendment is ratified, so that there will be no decrease in demand for Federal issues in preference for State issues. It is for this reason that I am pressing for action on the constitutional amendment first. For your attention, however, I insert in the record a copy of S. 16. [S. 16, 75th Cong., 1st sess.] A BILL Making income from United States securities subject to the income-tax laws of the United States Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That notwithstanding any other provisions of law, all income derived from secutities issued after the date of enactment of this Act by or under the authority of the United States shall be included in gross income within the meaning of section 22 (a) of the Revenue Act of 1932 for the purposes of taxation under title I of such Act, and shall also be subject to taxation under all income-tax laws of the United States hereafter enacted. I shall not take the time of the committee with a lengthy discussion of the wisdom of a tax on securities now exempt. As the committee members know, this subject has been discussed and studied for many I believe the time is now ripe for action, in connection with efforts by Congress to prevent tax avoidance generally. With this in view I recently contacted the Secretary of the Treasury as follows: WASHINGTON, D. C., June 4, 1937. Hon. HENRY MORGENTHAU, Jr., Secretary of the Treasury, Treasury Department, Washington, D. C. MY DEAR SECRETARY: I will appreciate a report from you within a few days stating whether the Treasury is in favor of immediate action by Congress on legislation to provide for a tax on the income of future issues of United States Government securities which are now exempt, and on future issues of securities by States and subdivisions thereof. In view of the current program to avoid tax evasion and otherwise to provide for an adequate national revenue, I suggest that a definite position by the Treasury on this important question should be taken immediately. For several years the Congress has had bills and resolutions before it which would provide for such a tax. I personally introduced such measures in the Seventy-third, Seventy-fourth, and Seventy-fifth Congresses, and in the Congressional Record of January 16, 1934, Senator Robinson, the Democratic Senate leader, inserted a comprehensive study which I prepared on this subject, with recommendations that income from future issues of all Federal securities should be taxed by passage of a private bill, but that a constitutional amendment would be necessary to enable the Federal Government to tax future issues of securities issued by the States, and likewise to enable the States to tax income from Federal securities. In principle the Treasury has been favorable to a tax on securities now exempt since September 23, 1921, when former Secretary Mellon in a report to the Committee on Ways and Means in the House stated that "The ever-increasing volume of tax-exempt securities (issued in the most part by States and municipalities) represent a grave economic evil, not only by reason of the loss of revenue which it entails in the Federal Government but also of its tendency to encourage the growth of public indebtedness and to divert capital from productive enterprises.' Mr. Mellon was also on record on numerous other occasions in support of such a tax. On December 6, 1923, the late President Coolidge, in his annual message to Congress, Sixty-eighth Congress, first session, said: "Another reform which is urgent in our fiscal system is the abolition of the right to issue tax-exempt securities. Also on record in 1923 is former President Hoover, who was then Secretary of Commerce, who, in a communication to the Senate, said, among other things: "It is an extraordinary thing for a commercial Nation like ours to have developed a form of taxation which puts a premium on nonproductivity and a blight on productivity iteslf." This was in connection with general recommendations for a tax on income from both Federal and State securities generally exempted. Former Secretary Mellon is again on record on the subject in his annual report to the Sixty-ninth Congress, for the fiscal year ending June 30, 1925, with the following statement: "Looking at the proposition logically there is no reason for the existence of tax-exempt securities. There ought to be no refuge to which the wealthy man can go and avoid income taxes at times when the Federal Government needs the money. A constitutional amendment to make these securitie s taxable should be passed. The Treasury has consistently been the advocate of such reform." Again, in 1928, in his annual report, Mr. Mellon was on record favoring such a tax, and in 1930 he took a very vigorous position in his support. The present administration has made reports to Congressional committees, by the Secretary of the Treasury, as follows: On March 16, 1934, you notified the chairman of the Senate Finance Committee that "Although as a matter of principle the Treasury is favorable to the elimination of all tax-exempt securities, it would be opposed to the enactment of S. 1892, which would eliminate the tax-exempt features of future issues of Federal obligations only. "To require that future Federal obligations be issued on a fully taxable basis in competition with tax-exempt securities originating elsewhere would be likely to react unfavorably on the market for Federal securities, increasing the cost of the Government's borrowing and complicating the heavy financing operations which must be effected in the near future." On March 19, 1935, you notified the chairman of the Senate Committee on Finance that "The Treasury has already stated that it favors the adoption of a constitutional amendment permitting the taxation by the United States of the interest on future issues of State and municipal securities; and by the State on future issues of Federal securities. In the absence of such a constitutional amendment the Treasury is opposed to enactment of S. 201, a bill to provide for a tax on income from Federal securities only." The latest report from your Department to Senator Harrison, on legislation pending in this Congress, dated February 5, 1937, summarizes the Department's previous recommendations and adds: "The Treasury has already stated that it favors the adoption of a constitutional amendment permitting the taxation by the United States of the interest on future issues of State and municipal securities; and by the States on future issues of Federal securities. In the absence of such a constitutional amendment the Treasury is opposed to the enactment of S. 16, a bill to provide for a tax on income from Federal securities only." I desire to point out that my resolution, Senate Joint Resolution 5, for a constitutional amendment as referred to is now pending in the Senate Judiciary Committee. It was introduced in conjunction with S. 16, referred to above, to provide for a tax on Federal securities. Very truly yours, AUGUSTINE LONERGAN. On June 10, I received the following reply from Mr. Roswell Magill, Acting Secretary of the Treasury: (Copy of letter from Treasury Department) JUNE 10, 1937. MY DEAR SENATOR LONERGAN: Receipt is acknowledged of your letter of June 4, 1937, in which you request a report within a few days stating whether the Treasury is in favor of immediate action by Congress on legislation to provide for a tax on the income of future issues of United States Government securities which are now exempt, and on future issues of securities by States and subdivisions thereof. As your letter recognizes, the Treasury Department has on numerous occasions, during the present and former administrations, gone on record unequivocally as favoring the adoption of a constitutional amendment, which would permit the taxation by the United States of the interest on future issues of State and municipal securities. The Department continues to adhere to its previous position upon this question. If this result could be achieved by legislation alone, the solution of the problem of the tax-exempt security would be relatively simple. Unfortunately it seems perfectly clear under the decisions of the courts that the desired result cannot be attained in the case of State and municipal issues by any action short of the submission and ratification by the States of a constitutional amendment. For the reasons stated in my letter of March 6, 1934, to the chairman of the Senate Finance Committee, from which you quote, the Department is compelled to oppose the enactment of legislation which would eliminate the tax-exempt feature of future issues of Federal obligations, while State and local issues would continue to enjoy their constitutional immunity from Federal taxation. It is further believed that submission of a constitutional amendment should precede legislative action with respect to the tax-exempt status of future issues of Federal securities in view of the uncertainty as to the ratification of such an amendment by the States. Both of the above communications may be found in the Congressional Record of Monday, June 14, 1937, at page 7361. It is clear that the Treasury has consistently been in favor of a tax on income from exempt securities, although opposing any measure that would tax income from Federal securities until a similar tax could be imposed upon State securities. Doubt has also been expressed by the Treasury as to the actual amount of revenue that might be collected by such a tax. This would depend upon who holds the securities. If many are held by colleges and institutions exempt from taxation the revenue would be materially reduced. Likewise, the rate applicable to income from such securities held by corporations would be different than the rate charged to individuals holding such securities. It is therefore impossible, without a general survey of the holders of such securities, to estimate the revenue, unless it is contemplated that no exemptions whatever shall be granted and that a uniform rate be applied. To give the committee some idea of the possible revenue from this source, I shall read a letter from Prof. Edwin R. Seligman, economist, who was invited to appear at the hearings, but who will be unable to attend: Senator A. LONERGAN. JUNE 18, 1937. ; MY DEAR SENATOR: I received your kind letter just as I am leaving for my summer home, and regret that at my time of life it will be impracticable for me to accept your kind invitation. The argument in favor of your proposition as set forth in my Essays on Finance becomes stronger from year to year. For entirely apart from the question of justice in taxation, the separate States, in view of the great Federal debt, stand to gain far more than they will possibly lose from an rise of interest on their own issues. Now that virtually all the States have or will soon have an income tax the situation is vitally different from the old conditions. I think that if the matter is well presented, the former opposition of the States can be fairly easily overcome. With a total Federal and State debt of about 56 billion dollars, the annual income is around two billion, and the total tax ought ultimately, when the present issues are refunded by new issues, to be considerably over one-half billion dollars— a fact, which, other things being equal, will permit of a considerable reduction in the rate of taxation. If I can be of any use to you in your fight, pray command me. EDWIN R. SELIGMAN, As a further basis for estimates of income, on any taxing program the committee may consider for the purpose of such estimate, I submit the following tabulation of tax-exempt securities outstanding as of 1936, showing more than 37 billion dollars in securities wholly exempt, and 26 billion dollars in securities partially exempt, or a total of nearly 64 billion dollars in outstanding exempt securities-both Federal and State issues combined. Tabulation of tax-exempt securities outstanding as of 1936 Wholly or partially exempt, net outstanding Partial break-down: Federal.. States and subdivisions. Reconstruction Finance Corporation_. Home Owners' Loan Corporation. Wholly exempt, net outstanding Partial break-down: Federal. States and subdivisions.. Federal farm loan___ Territories and insular possessions_ Partially exempt, net outstanding (amount outstanding which was examined for normal but not the surtax). Partial break-down: Federal. Reconstruction Finance Corporation_. $53, 613, 000. 000 30, 880, 000, 000 16, 882, 000, 000 252, 000, 000 2, 624, 000, 000 2, 856, 000, 000 37, 611, 000, 000 15, 272, 000, 000 19, 876, 000, 000 2, 318, 000, 000 145, 000, 000 26, 232, 000, 000 17, 484, 000, 000 4, 282, 000, 000 3, 044, 000, 000 1, 422, 000, 000 Tabulation of tax-exempt securities outstanding as of 1936—Continued Wholly exempt. Partially exempt. Grand total $37, 611, 000, 000 23, 232, 000, 000 63, 843, 000, 000 NOTE. The grand total does not agree with the total in first table because the difference of $10,230,000,000 represents amounts held in sinking funds, etc., by Treasury. On January 16, 1934, I submitted for the Congressional Record, a report on tax-exempt securities, covering all the advantages and disadvantages of levying a tax on income derived from them; reviewing the Treasury recommendations for many years; presenting excerpts from the Congressional Record over a period of many years to show the views of numerous Senators and Representatives; presenting recommendations of a subcommittee of the House Ways and Means Committee in 1933 on this subject; and recommendations of joint Congressional Committee on Internal Revenue Taxation. The report also includes legal opinions concerning the necessity for a constitutional amendment, there being some belief, though not a generally accepted one, that the United States Supreme Court would now reverse itself and uphold a tax on the income of State instrumentalities, and a State tax on income from Federal securities. I desire to point out that the Constitution nowhere expressly declares that Congress has no power to tax the bonds of the States or of their subdivisions, or the income derived from such bonds. It is, however, equally silent regarding the power of the States to tax the bonds of the United States and the income derived from those bonds. limitations upon the powers of Congress and of the State legislatures with respect to such limitations, and the intention to impose such limitations must be determined from a study of the entire Constitution and its historical background. The In view of the information contained in the report referred to, I will insert it in the record here. Copies of the Congressional Record containing this information have been very difficult to obtain. Included in the preceding study are numerous recommendations by Mr. L. H. Parker, Chief of Staff of the Joint Congressional Committee on Internal Revenue Taxation, as well as legal opinion by his staff regarding such a tax. Suggestion is made that most of the income from tax-exempt securities could be reached by an excise tax upon the carrying on of business by corporations, measured by the net income from all sources, including interest from the tax-exempt securities, and a similar tax on individuals engaged in any trade, avocation, or employment. This method is constitutional under the decision of the Supreme Court in the case of Stone-Tracy Co. v. Flint (220 U. S. 107). Furthermore, it appears that some of the States have used this method for taxing income from Federal securities, and this method has been upheld by the Supreme Court (Pacific Co. v. Johnson, 285 U. S. 480; Educational Film Co. v. Ward, 282 U. S. 379). For further discussion on this subject I insert herewith a brief statement from the Record of June 10, 1937, by Representative McFarlane, of Texas, during a discussion of tax evasion in the House of Representatives. |