rated in all of the pending bills except S. 2754), Federal property would be adequately protected.

6. Should the Federal Government make transition payments on a category of properties which normally and traditionally would not be subject to any payments whatever?

The Commission recommended only that transition payments be made in certain cases. The Study Committee, S. 1566, S. 1657, and S. 2390 all provide for transition payments by the Federal Government on a category of property with respect to which no payments of any kind would ordinarily be made. Federal payments-in-lieu in diminishing amounts over a period of not more than 10 years would be required on properties in this category which were acquired either during the 10-year period immediately preceding enactment of this proposal or are acquired subsequent thereto. All properties acquired by the Federal Government more than 10 years prior to enactment would retain their exemption. Under the formula recommended by the Study Committee and incorporated in the three bills mentioned above, property acquired after enactment of this proposal would be subject to annual payments based upon the formula; property owned by the Federal Government at the time of enactment would be subject to annual payments based upon the same formula, but no payments would be made for any fiscal year prior to enactment, and for the purpose of determining payments thereafter the amount would be computed as if payments had been made in the years preceding enactment.

In support of this provision it is contended that new Federal acquisitions which remove properties from the tax rolls impose a hardship upon local taxing authorities, and transitional payments would provide them with a necessary cushion. The issue here raised relates to whether or not there is justification for transitional payments on property owned by the Federal Government at the time of enactment for a period of less than 10 years. The Study Committee appears to have taken the view that payments in this category would serve as an additional cushion against the shock of depletion resulting from new Federal acquisitions. 7. Should the initial computation or determination of Federal liability for payments-in-lieu be placed in the hands of local taxing authorities or should it be given to the Federal owning agency or to a Federal administrative commission?

The Study Committee, S. 1657, and S. 2390 would place the initial computation in the local taxing authorities. S. 1566 would place it in the Federal owning agency.

In support of placing the initial determination in the local taxing authorities, it is contended that this would eliminate difficult administrative operations connected with the determination of tax equivalents; that local taxing authorities would apply local assessment practices and current tax rates to determine Federal payments in exactly the same manner as is done with private-property owners; that the Federal Government would have the same administrative and judicial review and appellate procedures open to it as have private owners; and that additional safeguards are provided by authorizing the Federal administering commission to review the tax equivalent amount and make adjustments where justified.

In opposition, it is argued that to vest in local taxing authorities the initial computation would be placing the Federal Government at the mercy of such local authorities, and that the Federal Government's representatives would be unable to negotiate differences with local taxing authorities as freely or in the same manner as private taxpayers.

8. Should the Federal Government consent to making payments of taxes or in lieu thereof on tangible personal property which is incidental to commercial or industrial activities or operations?

The Study Committee, S. 1566, S. 1657, and S. 2390 all provide for payments on Federal tangible personal property which is incidental to commercial or industrial operations. S. 1566, however, limits the personal property covered to that which has a fixed location by reason of attachment to real property.

In support of payments with respect to this category of property, it is contended that if equity requires the Federal Government to make payments to local tax authorities for losses resulting from the tax-immune status of Federal real property, the rule should be the same with respect to Federal tangible personal property. It is further contended that unless such property is subjected to payments, private contractors performing services for the Federal Government are given an avenue of escape from taxation since their personal property is often comingled with that of the Federal Government.

In opposition, it is argued that tangible personal property fluctuates in volume as inventories changes, resulting in numerous administrative difficulties in connection with determining taxes or tax equivalents.

ELI E. NOBLEMAN, Professional Staff Member.

Approved:

WALTER L. REYNOLDS, Staff Director.

APPENDIX A TO STAFF MEMORANDUM NO. 84-1-36

SUMMARY OF FINDINGS AND RECOMMENDATIONS OF THE COMMISSION ON INTERGOVERNMENTAL RELATIONS WITH RESPECT TO PAYMENTS IN LIEU OF TAXES

The findings and recommendations of the Commission on Intergovernmental Relations relating to payments of taxes or in lieu thereof by the Federal Government to State and local governments are contained in chapter 4 of its report, entitled, "Financial Aspects of the American Federal System."

In this chapter, the Commission reviewed and examined various aspects of the problem and made a number of general observations and recommendations with respect to the overall situation as well as to the specific problem of payments in lieu of taxes. For specific detailed recommendations in this area, the Commission referred to the report of its Study Committee on Payments in Lieu of Taxes and Shared Revenues (the only supporting volume pertinent to the subject under consideration).

GENERAL OBSERVATIONS

In discussing the general subject, the Commission observed that "the strength of our Federal system is no greater than the strength and vitality of the many governments which compose it" and "fiscal capacity is an essential ingredient of this strength and one measure of it.”

The Commission observed further that "if State and local governments are to absorb additional functions or to take on an increasing share of emerging governmental responsibilities, the question arises whether they are financially able to carry the load. States, and more particularly local governments, are said to lack resources adequate for the discharge of the duties and responsibilities required of them. If it is impossible for them to satisfy the demands of their citizens for governmental services, traditional local self-reliance may be weakened and pressures may increase for Federal participation in services hitherto regarded as primarily State and local responsibilities. The Commission believes the fiscal imbalances among levels of government must be reduced if our Federal form of government is to endure and if government as a whole is to be responsive to the will of the governed."

Noting that there are many obstacles in the way of expanding State and local revenues to enable these governmental levels to assume their proper responsibilities, the Commission observed that it did not believe there was any single solution to the problem.

In a subsequent section of the chapter dealing with measures needed to strengthen State and local finances, the Commission observed that a combination of measures "must be used to enable States to assume and finance added activities" and that such measures "must be varied, some gradual and others immediate in their application."

OBSERVATIONS RELATIVE TO PAYMENTS IN LIEU OF TAXES

In a subsection, entitled "Intergovernmental Tax Immunities," the Commission observed that one aspect of tax relations among governments requiring urgent attention is the immunity of the National Government from State and local taxation, and that in this area, the problem of greatest concern to local governments is the tax status of Federal property.

In this connection, the Commission found that the immunity of federally owned property from State and local ad valorem taxation has reduced the tax base of many communities which rely on property taxes as their chief source of revenue; that the impact of this immunity is uneven; and that it is particularly severe in areas where the value of Federal property is a large part of total property values. The Commission found further that this problem has increased in importance with the acceleration of property acquisitions associated with the war and defense efforts and with diverse other Federal programs, including urban housing, power production, resources conservation, and regional development and conservation.

Finally, the Commission found that the Congress has not considered constitutional immunity as freeing the National Government from all responsibility for paying State and local taxes or their equivalents; that over the years, it has developed a variety of financial arrangements between the National and Statelocal governments; and that at present, the National Government's payments to local governments on its extensive property holdings vary widely. Thus, it pays taxes on some, like any other property owner; on others, it makes payments in lieu of taxes; and on still others, a percentage of revenue from Federal operation of the property is paid to State and local units. However, in many cases, there is no payment at all.

GENERAL RECOMMENDATIONS RELATIVE TO PAYMENTS IN LIEU OF TAXES

The Commission's general recommendations and the rationale therefor follows: 1. That the Federal Government inaugurate a broad system of payments in lieu of property taxes to State and local governments;

2. That the most important class of properties on which such payments should be made is commercial or industrial properties; and

3. That special assessment payments and transitional payments in lieu of taxes should be made in certain cases.

In support of these three recommendations, the Commission stated that it believes these payments are necessary to help preserve financially healthy local governments; that present tax immunities of Federal property have weakened many local governments; that the States and the National Government share in the responsibility for avoiding actions which impair the financial ability of local governments; and that equity as between Federal and local taxpayers requires the National Government to make appropriate payments.

The Commission continues with the following additional recommendations and supporting material;

4. That payments in lieu of taxes should be based largely on the property tax system which is the main source of local revenue;

5. That no in-lieu payments should be made on any properties acquired prior to a specified cut-off date, either September 8, 1939, the earliest, or July 1, 1950, the latest; and

6. That in addition to a cut-off date, some type of arbitrary limitation on Federal payments is necessary to prevent excessive payments or windfalls to some local governments.

In support of the fifth recommendation, the Commission states that it does not believe that equity requires the initiation of payments in lieu of taxes on properties held by the National Government where their noncontributory status has already become integrated into the economic and fiscal patterns of the community; and that the dates suggested marked the begining of periods of largescale acquisition of properties for defense purposes, which properties have been largely responsible for the problem now faced by State and local governments. The Commission adds, however, that recognizing that any selection of dates must be arbitrary, it is not prepared to recommend a specific cut-off date.

With respect to specific recommendations, the Commission stated: "In the Commission's opinion, the exhaustive report of its Study Committee on Payments in Lieu of Taxes and Shared Revenues will provide the Congress with a solid foundation upon which to build a sound program of payments in lieu or taxes on Federal properties * * *"

Report of the Study Committee on Payments in Lieu of Taxes and Shared Revenues

The report submitted by the Study Committee is divided into 4 parts, comprising 14 chapters and 8 appendices. Part I (two chapters) contains the Committee's summary and recommendations. Part II (three chapters) presents a general introduction to the subject, including a brief analysis of the nature and extent of its studies, the manner in which they were conducted, the types of testimony received, and the limitations upon the scope of its work (ch. 3); a brief discussion of the background of the problem, emphasizing such matters as the dependence of local governments on property taxes, the nature of Federal properties, the lack of inventory, the area and value of Federal property, distribution of Federal holdings, fiscal impact of tax-immune Federal properties upon individual communities, potential revenue from tax on Federal property, growth of Federal properties and local dissatisfaction, the present Federal contributions, and past studies of the problem (ch. 4); and a brief statement of the Committee's guiding considerations (ch.5).

Part III (four chapters) deals entirely with properties not associated with shared revenues, and is the heart of the report, so far as the pending legislation is concerned. Considered here are the general approaches to the solution of the problem, of which the following five are emphasized: (1) Tax approach; (2) payments in lieu; (3) payments on excess Federal properties; (4) payments for specific services; and (5) payments of a sum for each person connected by residence or employment with Federal property (ch. 6). This is followed by a brief chapter on the Committee's conclusion (ch. 7); a chapter devoted to its recommendations with an explanation of the reasons for each recommendation (ch. 8); and a brief analysis of the costs of these recommendations to the Federal Government, which emphasizes the numerous difficulties involved in attempting to estimate costs (ch.9).

THE NATURE OF THE PROBLEM

Under the intergovernmental tax immunities doctrine, all Federal property is immune from ad valorem taxation by States and local governments. This immunity is a source of widespread complaints from local governments which generally rely on the property tax as their chief source of revenue. These complaints have multiplied with the expansion of Federal property holdings and especially of those properties devoted to uses comparable to those made of privately owned properties, such as commercial and industrial uses.

The Study Committee found that the Federal Government makes no contribution to the support of local governments for most Federal properties, although under existing statutes, it does make payments for some of its properties, either in the form of (a) tax payments; (b) administratively determined payments in lieu of taxes; or (c) a sharing of income receipts from operations on Federal properties.

OBJECT OF STUDY

The Study Committee undertook to review problems of State and local governments arising from the Federal immunity to property taxation and to recommend a policy to be adopted by the Federal Government for best meeting these problems. Its mission was to find a solution to the financial difficulties experienced by local governments arising out of the tax immune character of Federal properties which would be both appropriate to all the diverse situations in existence and compatible with basic concepts which have been part of our constitutional fabric for a century and a half.

The Committee was unable to find any universal principle or set of principles capable of resolving the extent to which the Federal Government as the owner of property should contribute to the support of State and local governments. It concluded that generally accepted principles which would authoritatively indicate an answer as well as provide an appropriate frame for its philosophical justification simply do not exist. The only definitely accepted principle which exists is that Federal property is immune from State and local taxation and this principle, in turn, creates the problem.

The Committee was not concerned with either the general desirability of intergovernmental tax immunities or the propriety of the continued application of the immunity doctrine so as to exclude Federal property from State and local ad valorem taxation in the absence of congressional consent. The only question before it was whether the Congress should consent to make a contribution of some type to the costs of State and local government because of the presence of Federal property. Having found no authoritative general principles to shape harmonious rules defining the extent to which the Federal property owner should share in the support of local government, the Committee concluded that the problem must be approached primarily from considerations of practicality and substantial fairness. Thus, its basic objective has been to secure substantial equity between Federal and local taxpayers.

GENERAL GUIDING CONSIDERATIONS

After weighing the conflicting considerations which inhere in the problem, the Committee listed 10 considerations which it believed were the best guides to a reasonable and fair solution of the problem, pointing out, however, that they were neither immutable nor dogmatic and that they should be considered in their general context and relationship to each other.

These guiding considerations are:

1. The diverse characteristics and contrasting uses of Federal properties and their varying burdens on local governments preclude a single uniform rule for determining the extent to which Federal property should contribute to the support of local government. It appears that for some types of properties payment is desirable; for others payment is inappropriate.

2. The principal basis for distinguishing between Federal properties which should contribute to the costs of local government and those which should not is the use made of the property.

3. It is generally fair that the costs of local government allocable under the property tax system to an item of federally owned property should be borne by the Federal taxpayer if the property serves primarily a national or broad regional purpose and conversely by the local taxpayer if the property serves primarily a local purpose.

4. Federal properties devoted to purposes which are of a type customarily the subject of private activity or.concern should pay their fair share of local government costs without reference to whether they serve a national, regional, or local purpose.

5. Practical considerations suggest that property long in Federal ownership and immune from payment should not now be required to contribute to the costs of local government. Some general cutoff date is appropriate.

6. Practical considerations suggest also that existing arrangements for Federal payments which have been operating to general satisfaction should not be disturbed.

7. Property used or held primarily for purposes for which property is generally exempt from taxation under the laws applicable in the taxing jurisdiction should likewise be exempt from any payment obligation in Federal ownership.

8. With respect to special assessments to finance improvements for the benefit of adjoining Federal and private property, Federal property should be treated on the same basis as private property and accorded the same safeguards and exemptions.

9. Generally, the foregoing considerations contemplate no distinction between real and tangible personal property.

10. Federal property and persons either living or working thereon should receive local public services on the same basis as those generally provided to other properties and persons in the community.

GENERAL APPROACHES OF STUDY COMMITTEE TO SOLUTION OF PROBLEM

To find a policy concerning payments for Federal property holdings which would most appropriately balance the equities between Federal and local taxpayers, the Committee explored the following alternative approaches:

1. Payment of taxes on Federal property as determined by local tax officials according to local tax laws;

2. Payments in lieu of taxes based upon tax equivalents with or without offsets or other payments limiting factors;

3. Payment of taxes or tax equivalents on that portion of Federal properties in a community exceeding a specified percentage of all property in the community; 4. Service payments, or payments for local public services received by the Federal property or persons living or employed on it;

5. Per capita payments or payments of a fixed or calculable sum for each person living or working on the Federal property within the area of the local government.

GENERAL CONCLUSION OF STUDY COMMITTEE

The Committee concluded that the solution to the problem could be found only within the framework of considerations germane to the property tax and all of its recommendations rest upon that conclusion. This conclusion was based upon the fact that since the problem is one created by the immunity of Federal properties to State and local taxation, its solution should be one bearing a