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in computing taxable income. The exemption of the trust is permitted because it encourages the establishment of nondiscriminatory employee benefit plans. In my testimony, I simply pointed out that these rationales could not be invoked to justify comparable treatment in the case of a GSOP.

I also indicated that direct acquisition of interests in energy ventures by the State of Alaska would not be quite as radical a departure from traditional tax policy. This observation is based on the time-tested perception, codified in Section 115 of the Internal Revenue Code, that certain ventures in the nature of public utilities are appropriate for state involvement and may be carried on by state or local governments free of tax. Such truly "public" utilities include, for example, local electrical generating facilities and the provision of local sewerage and water service. Because at least some of the ventures for which I understand the GSOP proposal was intended-ventures such as oil or gas pipelines in Alaska-can be likened to public utilities, I pointed out that it would be less of a departure from the policy embodied in Section 115 to permit Alaska to acquire directly some interest in these ventures.

My statement, of course, was no more intended to reflect a general predisposition for state ownership of productive assets than is reflected in current Section 115. I trust that you regard that section as an appropriate provision of the Internal Revenue Code, and that this letter will adequately respond to your concern. Please let me know if you desire any additional information. Best regards. Sincerely,


Assistant Secretary (Tax Policy). The CHAIRMAN. Next we will call a panel of the Honorable Stanley Lundine from New York; the Honorable Peter Kostmayer from Pennsylvania; and the Honorable Matthew F. McHugh of New York, Members of the House of Representatives.

We are pleased to have you gentlemen.



Representative KOSTMAYER. Mr. Chairman, thank you very much for the opportunity to testify before vour committee this morning. As Members of the House, we appreciate it. We are glad to be on this side of the Capitol.

I will be very brief, just about 5 minutes. I want to explain the basic provisions of our bill, say something in conclusion and then yield to my colleagues from New York.

This legislation was introduced by myself and by Mr. Lundine and Mr. McHugh last March 1. It has over 60 cosponsors to date.

Simply and fundamentally, it establishes a fund of $100 million which would be used as loans to employee and employee community groups to purchase firms and to purchase businesses where a shutdown is imminent. It is important to point out that we need to determine whether or not these plants which are about to close can continue to be operated as viable businesses.

The loan is contingent upon this, and would be determined by the Department of Commerce after the Economic Development Administration has conducted a feasibility study. If the EDA determines that a plant can continue to operate, then the workers who would be laid off and the community which would be so hard hit, would have the opportunity to borrow money from the Federal Government. Funds would be paid back. These are loans, not grants, to be paid back at a rate of interest no higher than that of the prevailing rate within a period of 70 years. Technical assistance would be provided


and these people would have the opportunity to purchase these plants and continue to run them, continue to keep them in their community and continue to work.

Those are, in a very simple and elementary fashion, the basic provisions of this legislation.

Let me say that I think there is a philosophical concept here too, not only an economic notion that we need to keep these plants functioning, particularly in small cities and small towns and rural areas as well as in large cities. This philosophical concept is more controversial. I speak for myself and not for my colleagues. They can address this individually, if they choose to do so.

I think we can improve the quality of life and the quality of working life especially if we provide employees with an opportunity to have some measure of control in the workplace. Our bill would accomplish this by providing employees with funds to purchase stock in their companies, in these plants, which they would buy.

Many studies have been made which have found that there is a rather dramatic increase in productivity and in profits in plants where there is employee participation. We will insert in the record with the committee's consent data showing that this is not an idle notion, or just a romantic notion. We have found that there really is a correlation and a real increase in productivity and in profits as workers have more of a say in their plants and in their workplaces.

I think this legislation would help to do that. With that, Senator, I will stop and yield to my colleague. I think Congressman McHugh is going to go next.

Representative McHUGH. Mr. Chairman, I think Representative Lundine would be next, appropriately.



Representative LUNDINE. Mr. Chairman, before starting I would like to say that it is a pleasure to be here. You have, no doubt, been America's foremost spokesman for the idea that employees should have the opportunity to own some stock in the corporations they work for. The proposal we are advancing, we believe, is entirely consistent with that.

I know that these hearings are primarily directed at further inducements which you and Senator Gravel and others have proposed and I think they, likewise, are entirely consistent with the specific approach we are advancing.

I understand that this committee has had testimony yesterday by South Bend Lathe and other companies indicating that firms that are in peril of closing and might otherwise have to cease operations have, on occasion, experienced the opportunity to revitalize those companies with an employee-owned enterprise.

I have had personal experience with cases where firms were revitalized and kept in business, improved, and made profitable after employees were given the opportunity for ownership. As the mayor of Jamestown, N.Y., I formed a labor-management committee and dealt with several troubled companies, the most_dramatic being Jamestown Metal Products, a very small company. Eighty-seven out

of 120 of that company's employees-production workers as well as managers--took it over in 1973.

Since that time, in spite of some difficulty, Jamestown Metal Products has expanded sales by 65 percent. It has had no layoffs and in fact has increased employment, and the book value of the stock since 1973 is approximately four times what it was when the firm became an employee-owned enterprise.

In another case, in Dunkirk, N.Y., Allegheny-Ludlum was going to close down a specialty steel division, and a new employee-community-owned enterprise called Al Tech Specialty Steel Corp., was formed. Despite the general troubles of the specialty steel industry, Al Tech increased employment to 2,200 full-time workers and made a profit in its very first fiscal year.

I think these are examples which demonstrate not only that there is a potential for saving jobs and improving the enterprise with the participation of the employees but that, as my colleague from Pennsylvania has indicated, productivity is often improved because of the motivation and the interest in the firm. And from my own observations, increased worker participation leads to greater job satisfaction and improves the quality of working life.

The examples, to us, lead all the evidence that is needed to the case for improving the opportunity for employee ownership of troubled firms.

Now I would like to yield to my colleague from New York who will explain how this legislation goes beyond existing authority to meet this particular need. STATEMENT OF HON. MATTHEW F. McHUGH, A REPRESENTATIVE


Representative McHugh. Mr. Chairman, first I would like to join my colleagues in thanking you for giving us this opportunity to testify, and to congratulate you and the other members of this committee for your great leadership in employee stock ownership plans, something which we are clearly very interested in as well.

It is no accident that we are from the Northeast. We have expe-rienced, in our own areas, the devastation to individuals and their families, and to the tax base of some of our communities, by plants closing or being transferred; and so we have tried, in cooperation with people outside of Congress, to develop some new ideas which can address that very serious problem.

Mr. Lundine has given you some examples where there have been success stories with employees taking over the firm. One may well ask, then, is new legislation really necessary?

I think it is necessary because, in our exploration of this problem, we have found that there are many failures as well. And those failures result not just because the plant could not be continued profitably but because at the critical time, when employees or communities are anxious to purchase, technical assistance and capital was not available.

And so we feel that it would be entirely appropriate for the Federal Government to provide some modest encouragement, information and assistance to those employees or those employee-community groups that are interested in taking over a plant which would otherwise close. The Economic Development Administration, as I think Mr. Lundino has pointed out, has been of help in certain cases but on an ad hoc basis. It has not had the mandate from Congress to deal with these kinds of situations in a continuing and constructive manner.

At the same time, we have been told by officials in EDA that they have received hundreds of calls from people all across the country who need help and who are anxious to get involved in employee ownership, but to whom EDA has not been able to respond.

We think that this particular legislation would address at least two of the critical problems which we have seen as obstacles to employee ownership. It would provide the information and technical assistance that is necessary at the critical time, and the loans which are necessary in order for them to take over the operation of the plant. I might also


Mr. Chairman, that I do not think our bill necessarily addresses every single problem that might be relevant to this situation. For example, I think if there is going to be an adequate transition, the cooperation of the existing ownership is necessary, especially in terms of providing early warning that a plant is going to close.

I also think that disclosure of pertinent business information and financial data would also be important for the transition to take place effectively.

Our bill does not address those problems directly and this committee might want to consider additional legislation to provide incentives to existing ownership to provide early warning to employees, or to provide necessary business information.

But we think our bill, Mr. Chairman, addresses two of the most critical problems, the technical advice and the capital that is necessary to make these kinds of transitions effective, and we certainly hope that your committee will seriously consider our proposal. It may not be perfect in all respects, but we think it is a very important and innovative start.

The CHAIRMAN. Thank you very much, gentlemen.

Of course, as you know, the Finance Committee does not really have the jurisdiction to create any kind of a bank, an employee stockownership bank, or any kind. Now, we can cooperate by voting for the tax aspects of it, the revenue parts. It may be that if we are going to do what you would like to do, you will have to go before the Banking Committee over here and also the Banking Committee on the House side.

When you get ready to go before the Banking Committee on this side, I would be inclined to go along with you and do what I can to importune the members on that committee to consider it.

I think that this area of employee stockownership is something that more than just the Finance Committee ought to be involved in and so far as this Senator is concerned, I would try to get all of the committees involved. I would involve the Commerce Committee. That committee has already passed an amendment to that Con Rail bill to make ConRail an employee-owned railroad and I have no doubt that if we can make the emplovees aware of the fact that they have a vested interest in making that railroad succeed, they will do so.

In the last analysis, we need to involve the whole Congress.

I certainly appreciate your imaginative suggestions, gentlemen. Senator Gravel? Senator GRAVEL. I, too, am encouraged. It seems we have natural allies for our legislation, from what I can see. I have not had a chance to read your bill, but I can assure you that I will have our staff meet with your staff to work out something. I think that we are philosophically on the same wavelength.

As the chairman said, there are certain of your suggestions such as the loan and banking part of it that deal with another committee.

I would also suggest that if you do begin to lobby, these loan restrictions are quite tight. If we are able to discount these loans with the Federal Reserve System, we could open up a whole new area of being able to finance productive capacity at a very low interest rate of 4 percent without having to go through the budgetary process of the Congress. You would be dealing directly with the money supply to do that.

I would recommend that, since we will be working very closely as to this legislation. In the past, this has always been tacked on to other legislation, but I have recommended to the chairman that with this kind of support over in the House, we can go directly at it.

We have wisdom here and beginnings have been made, and now we can make some giant steps.

Right now we have about 10 million Americans under ESOP's. With the changes that the chairman's bill offers with respect to ESOP's, we will probably put 20, 30, or 40 million very quickly under this program.

Any community can go into this. We had an example yesterday with the South Bend 'Lathe Co. similar to the example you are talking about. Well, that is wholly-owned ESOP, and they got a loan from the community.

If the community took an equity interest, then the community owns the stock and it is socialistic in character. But there is no reason why the community could not take an equity interest through the individnal citizens, which is what we are trying to do in Alaska. It has nothing to do with the State government. The citizens own it directly in addition to the employees.

I think that one of the things we are going to, in theory, is a mix between ESOP's and GSOP's. But we do not have any legislation on the books that can bring this about.

I hope that yon gentlemen, as we incorporate your views through this legislation, will give us a hand because it is going to come to your side and we are going to rely upon you to see that it gets passed through the House. You have got to carry the water over on your side.

Again, I just want to join in complimenting you gentlemen for having come to this level of sensitivity regarding the fundamental economic problems of the free enterprise system.

Mr. McHugh. We commend the committee for its good sense, Mr. Chairman. Thank you.

The CHAIRMAN. Senator Packwood ?
Senator PACKWOOD. No questions.
The CHAIRMAX. Thank you very much, gentlemen.

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