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I wonder if either of you have given-I know you have given a great deal of thought to the problem. I wonder if you have given much thought to some of the proposed solutions.

For example, there has been a great deal of interest here in Washington, some sort of revenue sharing or tax sharing or bloc grants, nonspecific grants, to the municipalities, counties and States on a flat percentage basis, in order to make the income tax available as a tax resource to your cities.

Have you addressed yourself to this, and if so, with what result? Mayor BEHREL. Well, I can say that we have not in our city, and that it is an interesting concept that I would like to see and hear more about in the future.

We are at the top of our constitutional limit for sales tax in the State of Illinois, and obviously our real estate taxes are getting just almost out of sight. In our last legislature, there was an income tax bill presented and defeated. I am sure it is going to come up again. The implication of the income tax bill would be that it would relieve some of the real estate tax burden. But thus far it has not had the appeal of the voters-no question about that.

But this Federal grant, that you are discussing, may have some interesting ramifications. I have not heard of it before. But it would be interesting to look into, I would think.

Chairman PATMAN. Congressman Brock, wouldn't it seem a little unusual for the Federal Government to give part of the income taxes that the Federal Government collects to a State where they have expressed opposition to income taxes and prohibited them?

Representative BROCK. I think it would be I think the reason the people in my State have consistently opposed an income tax-and it is prohibited constitutionally in Tennessee-is because the Federal Government has preempted such a large share of personal income today, that they do not feel they can take the additional burden.

The logic of the case-and I am an advocate, as you may gather, of tax sharing is that both sales taxes and property taxes, by their nature tend to be somewhat regressive. They tend to penalize the low-income person primarily-they take a higher percentage of his income. Therefore, a State which constitutionally prohibits an income tax is in a position of being required to impose the most regressive form of taxation available. It is self-defeating in a number of ways. And I mentioned, in my own city, if it raised property taxes to the extent necessary to provide the services we really need-and there are great needs in our community-then we would lose our competitive advantage with Raleigh, Charlotte, Jacksonville, Atlanta, Birmingham, to the effect that sooner or later our industrial growth would phase off, or smooth out, and we would be hurting our tax base for the future.

So a property tax which is excessive is self-defeating.

The logic of tax sharing, Mr. Chairman, is that the income tax by its nature is probably the most equitable tax we have-it is certainly the most efficient. By allowing revenue sharing or tax sharing or bloc grants, we make that resource available to the cities, so that they can allocate it to their primary area of priority-their primary problem area—rather than being told by us what their problems are. And I think this is the reason I am very interested in it.

Mayor TOMLINSON. If I may comment on this, in North Carolina we do have an income tax on a State level. The cities are preempted as well as the counties in this area. We are vitally concerned about the increasing ad valorem costs and the burdens placed on the property owner. We are looking for all the possible areas of revenue, and we are very much interested in a tax sharing concept. And the National League of Cities has a policy on this, and revenue sharing has first priority for consideration of the revenue and financing committee in this year's study and activity. We also look to working with the Governors of the respective States, and with Members of the Congress. We feel that there is going to have to be a sharing program in order to support the needs that are very evident in the municpalities. Representative BROCK. As you recall, the Governors unanimously, in the Governors' conference, endorsed the concept of tax sharing. I did not know that the Municipal League had taken a specific stand in the area, other than to express an interest.

Chairman PATMAN. That should not be a difficult vote for Governors, should it?

Representative BROCK. No, I do not think it would be very difficult. I do not think it should be very difficult for Members of this body, either.

Chairman PATMAN. I just wonder if it would lead to the eventual conclusion that since we are furnishing 5 percent to the States and later 10, 25, or 50, there should not be one tax authority of the Federal Government to collect all the taxes from the 50 States, and then just share the part necessary for the support of the Government.

Representative BROCK. If we could let the cities respond to the needs of their constituents in their own fashion, I think that might be something well off into the future.

Chairman PATMAN. The paramount question, I believe, is that some of us believe money should be spent for certain purposes, and some believe it should not be spent for those purposes at all. Have you finished, Mr. Brock?

Representative BROCK. Yes.

Chairman PATMAN. And thank you, gentlemen, very much, for your appearance. You have been very helpful to us and your testimony will be valued by us.

Mayor TOMLINSON. One last point, if I may. Mr. Harkins reminded me, the municipalities and the Governors have been working together on this program and will continue to do so. I wanted to inject this in the record. It has been a pleasure for us to be here.

Chairman PATMAN. Of course, if it ever gets to the point where the Members of Congress will vote for all this money to be spent and the tax bills to pay it, it puts them in a position of taking the heat from the people, and the local people get the benefit of it, and they have no heat at all. They have not voted to provide this money, nor for the appropriations. That should be considered, too, from a practical standpoint in politics.

Representative BROCK. A very great President, a member of your own party, said, "If you cannot stand the heat, get out of the kitchen." Chairman PATMAN. Thank you, gentlemen, very much.

Mayor BEHREL. Thank you. It has been a privilege to be here. (Whereupon, at 11:40 a.m., the subcommittee was recessed, to reconvene at 10 a.m., Thursday, Dec. 7, 1967.)

FINANCING MUNICIPAL FACILITIES

THURSDAY, DECEMBER 7, 1967

CONGRESS OF THE UNITED STATES,
SUBCOMMITTEE ON ECONOMIC PROGRESS

OF THE JOINT ECONOMIC COMMITTEE,

Washington, D.C. The subcommittee met at 10 a.m., pursuant to recess, in room S-407, the Capitol, Hon. Wright Patman (chairman of the subcommittee) presiding.

Present: Representative Patman and Senator Proxmire.

Also present: John R. Stark, executive director, and Arnold H. Diamond, consulting economist.

Chairman PATMAN. The committee will please come to order.

Today we have a distinguished group of witnesses who are here to give us the benefit of their experience. Our first witness is my very able colleague from Dayton, Ohio, Representative Charles Whalen. We invited Mr. Whalen here because he is most knowledgeable and helpful and particularly in the area of finance.

We also have the mayor of Ohio, Mr. David Hall, accompanied by Mr. Graham Watt, the city manager, and Mr. Winton Parent, the finance director.

Later the committee will hear from Mayor Vern Miller, mayor of Salem, Oreg., accompanied by Douglas Ayres, city manager, and Duane Scott, executive director of the Ohio Municipal Advisory Council, Cleveland.

Gentlemen, I would ask you to keep your initial statements short, to give us more time for questions and answers. In addition to that, you may extend your remarks in the record if you desire to do so, and include any relevant, pertinent matter that you believe is important in the hearings.

We would be glad to have you do that.

Mr. Whalen, you may go ahead first.

STATEMENT OF HON. CHARLES W. WHALEN, JR., A REPRESENTATIVE IN CONGRESS FROM THE THIRD CONGRESSIONAL DISTRICT OF THE STATE OF OHIO

Representative WHALEN. Chairman Patman, members of the Subcommittee on Economic Progress of the Joint Economic Committee, it is an honor to be asked to appear before your subcommittee today in connection with your hearings on municipal finance. I have never served as an elected or appointed city official. Therefore, I have not been directly involved in the processes attendant to the securing of community funds. Nevertheless, as an economist and a 12-year member of the Ohio General Assembly, I am aware of many of the financial problems confronting our cities.

121

I. SCOPE

This morning, I shall address my remarks specifically to the issue delineated by the chairman in his statement of December 5; namely, "the difficulties experienced by small municipalities in marketing their bonds." 1 II. BOND MARKETING PROBLEMS

Finance officers of our Nation's smaller cities, in my opinion, face three distinct problems in their bond-placement efforts.

First, they frequently are hampered by unrealistic legal restrictions.

Second, they are at the mercy of a highly competitive money

market.

Third, their communities' tax bases often bear no relationship to financial needs.

Let me analyze each of these situations briefly.

A. UNREALISTIC LEGAL RESTRICTIONS

During the depression of the 1930's 10 percent of municipal bonds outstanding-approximately $1.5 billion out of $15 billionwere in default. As a result of this experience, many States imposed constitutional or statutory restrictions upon debt financing. Ohio residents, for example, adopted a constitutional amendment in the early thirties which limits to 10 mills the total taxes which can be levied against real property (assessed valuation). Any additional millage can be secured only through the vote of the electorate of a political subdivision. Additional taxes once approved, then are subjected to periodic renewals.

This simply means that finance officers must spend a great deal of their time campaigning for passage of bonds issues. Thus, in Ohio, as in other States, a city finance director, in addition to his fiscal capabilities, must possess the skill of a seasoned votegetter. Many States, including Ohio, have established arbitrary debt ceilings (usually expressed as a percentage of total assessed property valuation). When this limitation is reached, even the most politically consummate finance director is prohibited from exercising his powers of persuasion.

It is paradoxical that local officials those who are closest to the people are burdened with fiscal sanctions which are not imposed upon Federal functionaries operating in Washington literally hundreds, or thousands, of miles away.

B. HIGHLY COMPETITIVE MONEY MARKET

Robert E. Weintraub, in his recent publication "Options for Meeting the Revenue Needs of City Governments," estimates "a revenue gap of $262 billion" during the next 10 years.3 Projected expenditures

1 Statement of Chairman Wright Patman, Joint Economic Committee, Subcommittee on Economic Progress, hearings on "Financing Municipal Facilities," Dec. 5, 6, and 7, 1967. P. 1 of proceedings, Dec. 5.

2 James A. Maxwell, "Financing State and Local Governments." The Brookings Institution, 1965. P. 181.

Robert E. Weintraub, "Options for Meeting the Revenue Needs of City Governments." Prepared for National League of Cities, TEMPO, General Electric Co. January 1967. P. 6.

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