authorities have been and are being deprived of personal property tax revenues on inventories of such properties as a result of provisions in procurement contracts under which title to such inventories passes to the Federal Government prior to completion. Further adding to the problems of local taxing authorities is the fact that when the Federal Government takes over a facility which was formerly subject to taxes, and uses it for defense production purposes, it often brings into the community large numbers of workingmen to man the machines and they, in turn, bring their families with them. Thus, the burden on the community increases as the result of the need for more schools, police and fire protection, and other services of this nature, at a time when property formerly subject to taxation is taken off the tax rolls. This bill reflects a general presumption that, since defense production facilities are of national, rather than local, interest and benefit, the property-tax costs associated with such properties should be borne largely by Federal taxpayers rather than by local taxpayers. The bill thus provides that the Federal Government pay, in connection with such facilities, an appropriate share of those State and local government costs which are financed through the general property tax. ACTION DURING THE 83D CONGRESS S. 2473. During the 83d Congress, the committee had before it an identical bill, S. 2473, introduced by Senator Knowland, for himself and others, on July 24, 1953. Brief hearings were held on the bill prior to the close of the first session, at the urgent request of the then majority leader. In view of the fact, however, that the Bureau of the Budget, the Department of Defense and other Federal agencies concerned with this legislation had not had an opportunity to analyze the effect of the measure upon property within their respective jurisdictions, and there was no specific information available concerning the cost of the proposed program, the committee postponed action until the 2d session of the 83d Congress. A further consideration underlying this decision was the desire on the part of the committee and the administration to have the benefit of the studies, findings, and recommendations of the Commission on Intergovernmental Relations which had been recently established and charged specifically with making a study of the entire field. In September 1953, the chairman of the committee addressed a letter to the Chairman of the Commission on Intergovernmental Relations requesting the Commission's views with respect to this bill. A copy of that letter was also sent to every member of the Commission, together with copies of the hearings. on S. 2473. In January 1954, and prior thereto, members of the staff of this committeehad several conferences with members of the staff of the Bureau of the Budget and the Commission on Intergovernmental Relations concerning the pending legislation, and it was agreed that the committee would defer action until after February 17, 1954, the date on which the Commission was expected to submit its findings and recommendations. Furthermore, the Bureau of the Budget had not yet defined the administration's policy with respect to the bill, since it was also awaiting the report of the Commission. Subsequently, and in response to requests from the chairman of this committee for comments on S. 2473 and a related bill, S. 788, the committee received replies from various agencies and departments of the executive branch. Some proposed major amendments to the bill; others proposed minor amendments; and still others indicated they had no interest. However, virtually all of the affected agencies advised the committee that pending a review of the forthcoming report and recommendations of the Commission on Intergovernmental Relations, no determination had been made with respect to the relationship of the bill to the President's program. Finally, on May 19, 1954, Senator Knowland received a letter from the Chair-man of the Commission on Intergovernmental Relations advising that the Commission did not deem it proper to comment on the legislation, but that it had no desire to hold up action on any legislation desired by the President or the Congress, prior to the submission of the Commission's report. At about the same time, the staff of the committee ascertained that the Intergovernmental Relations Commission would not have its report and recommendations completed prior to the close of the second session of the 83d Congress, and the committee was informed that the President would formulate no policy with respect to the pending legislation until he had had an opportunity to review the findings and recommendations of the Commission. 69937-56-pt. 1-4 Hearings on S. 2473 (and H. R. 5605, a much narrower bill) were held by the Subcommittee on the Legislative Program of this Committee on Government Operations, on June 2 and 3, 1954. Appearing in support of S. 2473 (and, in some instances, in support of H. R. 5605) were Senators William F. Knowland, Prescott Bush, Allen J. Ellender, and Homer Ferguson, for himself and Senator Charles E. Potter; Mr. Thomas N. Biddison, city solicitor, Baltimore, Md., and former president, National Institute of Municipal Law Officers; Mr. John H. Witherspoon, assistant mayor and controller, Detroit, Mich.; Mr. Homer Marson, president, board of assessors, Detroit, Mich.; Mr. Claude E. Porter, mayor, Adrian, Mich.; Mr. Paul Walters, Cleveland, Ohio; Mr. Arthur C. Eddy, county assessor, San Diego, Calif.; Mr. G. L. Guetzkow, director, priorities and allocations, central board of purchase, Milwaukee, Wis. ; Mr. Randy Hamilton, Washington director, American Municipal Association; Mr. Keith L. Seegmiller, secretarytreasurer, National Association of County Officials; and Mrs. Shirley Ludlow, clerk, village of Arden Hills, St. Paul, Minn. Statements in support of the bill were submitted by Senators Thomas H. Kuchel and Russell Long, and numerous statements and telegrams from interested officials who sought some legislative action designed to afford relief to various local taxing authorities, were inserted in the record. The Director of the Bureau of the Budget, represented by Mr. I. M. Labovitz, Assistant to the Division Chief, Labor and Welfare Division, stated that the Bureau was basically opposed to any legislation on this subject at that time, pending the report and recommendations of the Commission on Intergovernmental Relations. He stated the Bureau's objections as follows: "As you know, S. 2473 is a major legislative proposal, involving a basic modification of present policy with respect to Federal immunity from local taxation. If enacted, it will provide for annual payments to hundreds, or possibly thousands, of local taxing jurisdictions throughout the country on account of Government-owned property, both real and personal, classified as 'defense production facilities.' *** The bill would require extensive administrative arrangements and it would entail large additional Federal expenditures. "These bills, as you know, deal with a single aspect of the general subject of intergovernmental tax immunities, and this, in turn, is only a segment of the broad and complex subject of Federal-State-local relationships. This is a primary reason why the administration, like the Congress, has proceeded cautiously and with deliberation in formulating a position on proposals for legislation in this field." The President, in a message to the Congress in connection with the veto of a bill (H. R. 2570, 83d Cong.) to pay a special assessment levied for local improvements at an Air Force base in Colorado, commented as follows: "The present Congress recently approved my recommendation that a Commission on Intergovernmental Relations be established to study the means of achieving a sounder relationship between Federal, State, and local governments. I believe that the exercise of taxing powers is within the scope of the Commission's assignment, and I shall request that its report include recommendations as to how to solve the many difficult problems which arise in the field of intergovernmental tax immunities. "The basic question underlying the enrolled bill, H. R. 2570, is whether the Federal Government should adhere to its constitutional immunity or should forego it in this particular instance and possibly in other cases. Since this involves the question of modifying a long-established policy, I believe it should be decided broadly and deliberately, rather than through a succession of piecemeal decisions on individual requests. Moreover, I believe such a decision can best be reached in the light of the general suggestions which will be derived from the work of the Commission on Intergovernmental Relations." The Department of Defense, represented by its General Counsel, Mr. Wilbur M. Brucker, accompanied by representatives of the three services. testified that the Department was unalterably opposed to the enactment of S. 2473 on grounds (1) that it would represent a complete surrender by the Federal Government of its sovereign immunity from local taxation which is unwise and undesirable: (2) that it would result in a serious dissipation of the defense dollar; (3) that its administration would be extremely complex; (4) that it represents, at best, only a piecemeal approach to the overall problem; (5) that it would provide many local taxing authorities with windfall benefits; and (6) that further action should await the report and recommendations of the Commission on Intergovernmental Relations. Mr. Brucker suggested that, rather than subject the Federal Government to the determinations of local assessors, the proper approach would be to provide special relief by way of direct payment in lieu of taxes in a proper case. He suggested further that there might be transitional payments on a diminishing scale where there is a readjustment to be made, coupled with increased Federal aid under statutes designed to meet particular needs. He then suggested certain amendments in the event of favorable action by the committee. The General Services Administration, while interposing no objection to the enactment of S. 2473, pointed out that it favored comprehensive legislation on the subject, rather than the piecemeal approach represented by this bill. It stated further, however, that, "This Administration is unalterably opposed to any proposed legislation which would divest the Federal Government of its immunity from taxation." It thereupon recommended that the pending bill be amended so as to provide only for payments in lieu of taxes rather than for direct taxation. Certain other amendments were also recommended by the General Services Administration. According to the best estimates which the Bureau of the Budget was able to compile, the provisions of S. 2473 would have covered an aggregate of approximately $11.5 billion worth of real and personal property. Of this amount, some $9.1 billion represented personal property and $2.4 billion real estate. Of the $11.5 billion, about $5.9 billion worth of property would have been subject to direct taxation under section 4, and approximately $5.6 billion would have been subject to administratively determined payments under section 5 of the bill. After pointing out that it was extremely difficult to translate these estimates of property costs into dependable estimates of the payments that would be made to local taxing authorities under this legislation, the Bureau estimated that the total cost to the Federal Government, if the bill became effective as of June 30, 1953, would amount to between 115 and 127 million dollars for the fiscal year 1954. In addition, administrative expenses, amounting to approximately $4.6 million, would have raised the total cost for fiscal year 1954 to somewhere between 120 and 132 million dollars. These figures assumed an average tax rate of between 1 and 1.5 percent with respect to real estate, and about 1 percent with respect to the personal property. According to estimates of the cost of S. 2473 submitted by the Department of Defense, the aggregate cost of the property involved amounted to approximately $11.3 billion, or about $228 million less than the Bureau of the Budget estimates. However, the Department of Defense used an overall tax rate of 2 percent for all property, rather than an average of 1 to 1.5 percent used by the Bureau of the Budget. Thus, according to the Department of Defense estimates, the total cost of S. 2473 to the Federal Government for fiscal year 1954 would have amounted to approximately $225,500,000, exclusive of administrative expenses, which were estimated at $4,402,000, making a total of $229,902,000. The Department stated that the 2-percent rate was, in its opinion, a conservative estimate. The Bureau of the Budget, on the other hand, held that the 1- to 1.5-percent tax rate was more realistic. These estimates reflected a variance of over $100 million in the estimated cost of the enactment of the measure for fiscal year 1954; the Bureau of the Budget estimated the cost at approximately $130 million, whereas the Department of Defense estimated it at approximately $230 million. After extended consideration of this bill, the committee concluded that favorable action could not be justified in the absence of considerable additional analysis, research, and information, and some reconciliation of the variance in cost estimates between the Bureau of the Budget and the Department of Defense. Furthermore, an analysis of the bill by the legislative counsel of the Senate, with respect to its draftsmanship, revealed that its application to specific instances and properties appeared to involve numerous difficulties, requiring substantial redrafting to conform to policy determinations. Finally, the committee felt that since the area covered by S. 2473 was receiving special attention from the Commission on Intergovernmental Relations, and the President would formulate no policy with respect to legislation in this field prior to his receipt and review of the Commission's report, no further action was warranted by the committee pending receipt and evaluation of the Commission's findings and recommendations. Related bills During the 83d Congress, the committee considered 2 related measures, H. R. 5605 and S. 788, dealing with Federal payments to State and local taxing authorities in lieu of taxes. A full discussion of H. R. 5605 (identical to S. 888, 84th Cong.), which was approved by the committee but failed of passage in the Senate, and a summary of S. 788, are contained in staff memorandum No. 84-1-5, dated February 21, 1955. CONCLUSIONS To date, the committee has received no indication as to when the Commission on Intergovernmental Relations will submit its findings and recommendations on the subject of Federal payments to State and local taxing authorities in lieu of taxes. In view of that fact, it is suggested that further action by the committee on S. 826, and related bills, be deferred until the Commission has completed its studies and the committee has had an opportunity to evaluate its report and recommendations. Following the usual practice, copies of the subject bill were sent to those executive branch agencies and departments having a primary interest in the measure, with a request for their comments. A summary of their views will be submitted to members as soon as they are received. Approved: WALTER L. REYNOLDS, Staff Director. ELI E. NOBLEMAN, Professional Staff Member. APPENDIX A TO STAFF MEMORANDUM NO. 84-1-4 S. 826 consists of 9 sections, of which the first 3 provide for a short title, declare the general policy and establish special definitions for the purpose of the bill. Section 4 identifies the categories of properties which are to be subject to ordinary ad valorem taxation. Section 5 establishes a system of administratively determined payments covering those defense production facilities which are not subject to taxation under section 4. Section 6 assigns responsibiliities for the administration of the act, provides for appeals by State or local governments from decisions of property-owning Federal agencies, requires specific periodic reports, and otherwise provides for the general administration of the policies established. The three final decisions specify the relationship to other laws, the separability of provisions of the bill and the effective date. Since the operative provisions of the bill are contained in sections 4 and 5, analysis at this point will be limited to those sections. Section 4 grants consent to State and local governments to impose property taxes on defense production facilities which fall within three categories defined in the section. Subsection (a) refers to property acquired since June 30, 1950, in order to protect the financial interest of the Federal Government in connection with loans or contracts of insurance or guaranty or contracts for procurement for national defense. Subsection 4 (b) refers to property leased or sold by conditional sale to taxable persons. In this case, the Federal interest may be taxed if the defense production facility is not otherwise subject to State or local taxation. Subsection (c) comprises defense production facilities which have been taxable since June 30, 1950, or may become taxable hereafter but which would not continue subject to taxation if this consent were not given. These are properties which have been taxable, or may become taxable, because of their ownership by a taxable Government corporation, such as the Reconstruction Finance Corporation, but which are taken off the tax rolls by transfer of title, administration, or use to a nontaxable Government agency. They would remain taxable as long as they continue to be used for defense purposes. It should be noted that the Federal property covered by section 4 may be taxed to the same extent and in the same manner as if it were privately owned, and the assessed valuation on which the tax is based is to represent no greater percentage of true value than is used by assessing authorities in valuing property generally for tax purposes within the taxing jurisdiction. Any special tax treatment accorded to other similar property is to be applied to this Federal property. Section 5 provides for the making of payments with respect to all defense production facilities which are made subject to taxation under section 4. Expressly exempted by subsection (a), however, is any defense production facility acquired or constructed by the Federal Government prior to July 1, 1950. Also exempted is any defense-production facility which, if in private ownership, would be tax exempt under the constitution or laws of the State of its location. In general, the State or local governments would be eligible for annual payments on property subject to the provisions of this section. Subsection (b) provides, however, that a State or local government is not eligible if it discriminates against the defense-production facility or its residents or workers or their families in the way in which it provides or withholds the usual governmental services. The amount of each payment under section 5 is to be determined by the Federalowning agency in accordance with general rules and regulations to be issued by the Director of the Office of Defense Mobilization under section 6. The rules and regulations must be based on consideration of certain enumerated factors, to the extent that each is pertinent to any particular claim for payment. Also, the general rules are to specify or recommend weights to be given to these factors. The items to be considered may be characterized as representng mainly (1) the amount of taxes which would be paid if the property were taxable; (2) addiditional expenditures by the local government for providing services to the defense-production facility, and its workers or residents and their families; and (3) certain types of aid rendered by the Federal Government. Finally, section 5 provides rovides that during the first 6 months after its effective date, applications shall be accepted relating to the first tax year which begins after June 30, 1953. SENATE COMMITTEE ON GOVERNMENT OPERATIONS Staff Memorandum No. 84-1-36. NOVEMBER 28, 1955. Subject: Federal payments of taxes or in lieu of taxes to State and local taxing authorities-S. 1566, S. 1657, S. 2390, and S. 2754. INTRODUCTION Five bills dealing with Federal payments of taxes or in lieu of taxes to State and local taxing authorities are pending before the committee. In addition, the report and recommendations of the Commission on Intergovernmental Relations and its Study Committee on Payments in Lieu of Taxes and Shared Revenues which deal in part with the subject matter of the pending bills, are also before the committee. Three of these bills, S. 1566 (Humphrey, Goldwater, and Kuchel), S. 1657 (Bush), and S. 2390 (Knowland) would establish broad permanent programs and policies with respect to payments of taxes or in lieu thereof by the Federal Government to State and local taxing authorities; and S. 2754 (Malone) would provide only for direct taxation of Federal real property, subject to certain stated limitations. The fifth bill, S. 826 (Bender), which would establish a limited program of payments with respect to Federal real and personal property acquired subsequent to the Korean war, was the subject of staff memorandum No. 84-1-4, dated February 19, 1955, and will not be dealt with further herein. It is the purpose of this memorandum to present a brief summary of (1) the major pertinent recommendations of the Commission on Intergovernmental Relations and of its Study Committee on Payments in Lieu of Taxes; and (2) the major provisions of the first four of the pending bills. A comparative analysis of the major provisions of these bills and their relationship to the recommendations of the Commission will be submitted to members of the committee as soon as it is completed, in the form of a comparative print. The comments of Federal agencies and departments on the Commission's recommendation and the pending bills will also be summarized and made available as soon as they are received and analyzed. General BACKGROUND State and local taxing authorities have been seriously concerned, particularly since 1939, over the increasing acquisition by the Federal Government of various types of property which has operated to remove such property from local tax rolls. From time to time, the Congress has acknowledged responsibility for reducing, to some extent, the adverse effects of these acquisitions government revenues and fiscal structures by enacting numerous visions which authorize payments by certain Federal agencies and or upon certain types of properties. However, the great majority of upon local statutory prodepartments Federal agencies have no general authority to make payments on their properties. |