I might say in that connection, gentlemen, in the last 40 days we have had to negotiate new contracts with labor at a rise in cost of approximately 17 percent. In addition to that, we endeavored to pass some of that on to the public. Since that time, however, the Government has stepped in, and in Sacramento, has established a price ceiling on rentals, putting us back to March.

In addition to that, due to the rubber curtailment and lack of the traveling public, our revenue is very seriously curtailed.

In that connection, I would like to say that we are keenly aware of the momentous problem that is facing you gentlemen as to the astronomical figures that are required to be spent for the war effort in order to preserve our liberty and I am satisfied there is not one of us that would not make whatever sacrifices that are possible in order to preserve our liberty and win this war. On the other hand, taxes should not be increased to the point of diminishing returns. From an analysis of the present tax bill, I believe that a 45 percent normal income tax and surtax coupled with a 90-percent excess-profits tax would seriously jeopardize the existence of many small corporations. I am firmly convinced that the ceiling for both the normal and surtax rate on corporations should be 40 percent and the excess-profits tax rate should not exceed 80 percent. When the corporations are faced with any higher tax rates than the last-mentioned figures, the profit motive is disrupted if not almost practically destroyed, with a consequent rise in the cost of operation to the detriment of both the Treasury Department, the corporation, its employees, and stockholders.

There is another item I would like to touch on very briefly and that is a general sales tax. I fully appreciate that some other method of securing income must be devised in addition to our present source of obtaining revenue if the revenue requested by the administration is to be obtained. I believe that a general sales tax of not exceeding 5 percent would very materially aid and should be passed. Senator TAFT. Would that cover hotel-room sales?

Mr. TRIPP. That would cover, I believe, every form of service; professional services, also.

In order to meet, however, the obligations of the wage earners and small-salaried classes, I would exempt from such tax necessary food commodities, clothing in the lower price brackets, and, of course, commodities or supplies used in the war effort. Such a tax thus framed would be practically painless as it is pay as you go and also such a tax would not meet the resistance from the people in the lower earning brackets. On the other hand, the person with larger income that has more expensive tastes would be taxed in direct proportion to his or her spending. California has had such a sales tax amounting to 3 percent in force for the last past several years. As a result of such a tax, the State's financial condition has been changed from the huge deficit to a surplus even though during such periods of time the amount spent on relief per capita was one of the largest in the United States. I thank you very much for the privilege of appearing before you. The CHAIRMAN. Thank you, sir, for your appearance.

Mr. Gadsby.

76093-42 -vol. 1- 76

STATEMENT OF G. M. GADSBY, SALT LAKE CITY, UTAH, PRESIDENT AND GENERAL MANAGER, UTAH POWER & LIGHT CO.

The CHAIRMAN. Mr. Gadsby, upon what subject are you appearing? Mr. GADSBY. I appear on behalf of the Utah Power & Light Co., presenting two phases of the effect of the proposed tax bill which are common to the industry at large, and probably to a good many other companies which, as is mine, are facing immediate refinancing. The CHAIRMAN. I see.

Mr. GADSBY. The two features which I would have brought out, and would like to present to the committee, have to do with the effect of the excess-profits tax on an industry whose income is entirely regulated, with suggestions as to some modification of the effect of the tax on this type of company.

If I may, I will simply skip through the five-and-one-half-page statement which I have presented.

The company that I represent, as is noted in the statement, serves an area in Idaho, Utah, and Colorado, and the southwestern part of Wyoming. We are an electric utility, a holding company and a subsidiary of a holding company, all as defined by the Holding Company Act. And that is important because it makes us subject to the jurisdiction both of the Securities and Exchange Commission and the Federal Power Commission, we being also a licensee company.

The size of the company is indicated by the fact that during the last 12 months we have sold about a billion kilowatt-hours, about 700,000,000 of which have gone directly into war work

We have about $45,000,000 of bonds outstanding, in addition to the stock issues as noted. The securities of the company are held by about 25,000 separate owners, about 11,000 holders of the bonds and 14,000 holders of the stock.

We were able to maintain the dividend rate until the depression curtailed mining activities, which affected a large part of our industrial sales, and then we were not able to keep up our dividends. We entirely suspended them for a year and then picked them up at a later date.

We now have a large amount of accrued undeclared dividends.

All of our mortgage bonds expire in 1944, and we have to refinance about $45,000,000. The effect of the tax, of course, has a very serious effect on our ability to handle that refinancing. If we are able to follow the trend that has been established by recent refinancing operations we should be able to handle the new securities on a basis which would save us about $700,000. However, the proposed tax would take 72 percent of that and leave us with an interest coverage quite low and quite unable to pay our preferred dividends.

Senator BROWN. I do not see how you get the 72 percent.

Mr. GADSBY. It appears a little later in the prepared statement, Senator Brown, on page 4.

Based upon present refinancing trends we hope to evolve and have approved a plan which will reduce interest charges and amortization of debt expense some $700,000 a year. On the basis of this refunding and then applying the 1942 revenue bill, the 1942 Federal tax re

quirements would be $2,477,000, an increase of $513,000 over the proposed taxes based upon the present funded debt. That is 72 percent of the total saving.

In addition to the taxes, all other prices entering into our operations have increased, as is common, of course, to every other line of activity.

The calculation of the application of the tax is shown in detail in my statement, and I will not go into it, but I want you to note that based on 1942 operations it is $1,963,000. It would leave a deficiency for the payment of preferred stock dividends amounting to $481.000.

Then follows the discussion already covered on the subject of refinancing. It shows while we may refinance on a favorable basis we lose a large measure of the gain accomplished by reason of the fact that as we decrease bond interest, the savings drop down into an equity position which is 100 percent subject to the operation of the excess-profits tax. Although, as a regulated industry, we really have no profits, and under no circumstances excess profits, but the calculation determined by the empirical formula as provided in the law does put our earnings into that position.

We respectfully suggest, sir, these difficulties may be overcome in two or three ways:

First, that a deduction be permitted to regulated companies, companies subject to entire price control, such as the utilities are, by deduction from income subject to the excess-profits tax, of debt reduction during the taxable year.

Second, that the excess-profits tax be made payable after rather than before normal and surtax deductions. That has merit, so far as regulated utilities are concerned, because the courts have held that all taxes are a part of the deduction before the calculation of return on the fair value of the company. Therefore, the normal and surtaxes, if deducted, would go in as an allowable deduction, but any profits remaining after the deduction of those normal and surtax amounts would then become subject to the excess-profits tax.

The third point is that preferred-stock dividends, plus a reasonable rate of return on the common stock, if earned, be allowed as a deduction from income subject to the excess-profits tax. That again gives recognition to the fact that it is a regulated industry with a rate of return determined by the regulatory commissions and would permit us to follow, in our financing, the principles laid down by the Securities and Exchange Commission, which insists upon a decreasing ratio of mortgage debt and a corresponding increase in equity financing.

Then I show the calculation on 1942 operations if any of these allowances be made. The reduction as suggested will not result in an entire loss to the United States Treasury but, as noted, here again there would be a return flow to the Federal Treasury, because the dividends paid would, of course, increase the income of the payee, either individual or corporation.

Finally, kilowatt-hours are becoming more and more a vehicle for conveying funds from the pocket of the rate payer to the Federal Treasury. I submit if they are to be used as such a vehicle,

all kilowatt-hours entering into commercial transactions should. carry the same load, as far as expenditures and taxes levied for war expenditures are concerned. By that I mean there should be provision made whereby kilowatt-hours for war purposes should carry the same burden, whether flowing from publicly owned sources or privately owned sources. After all, as I say, they are simply a vehicle, simply a means of taking from the rate payer and conveying to the Treasury certain funds. In this respect I should like to submit that this burden be distributed evenly, regardless of the source of the generation.

That, with the statement before, completes what I have to say. Again I want to say, as my predecessors, that I appreciate the opportunity of coming before you.

The CHAIRMAN. Any questions?

Thank you very much for your appearance.

(The brief submitted by Mr. Gadsby is as follows:)

BRIEF ON BEHALF OF THE UTAH POWER & LIGHT CO., SUBMITTED BY G. M. GADSBY, PRESIDENT AND GENERAL MANAGER, SALT LAKE CITY, UTAH

Utah Power & Light Co. is an electric service utility company supplying an extensive area in eastern Idaho, northern Utah, and southwestern Wyoming. It owns all of the securities of the Western Colorado Power Co., and all the stock of Utah Light & Traction Co. excepting directors' qualifying shares. Utah Light & Traction Co. supplies transportation service in Salt Lake City, and The Western Colorado Power Co. supplies electric service in southwestern Colorado.

Utah Power & Light Co. is an operating electric utility, a holding company, and a subsidiary of a holding company, all as defined in the Holding Company Act of 1935. It is subject to the jurisdiction of the Federal Power Commission and the Securities and Exchange Commission. Its rates are regulated by State and Federal regulatory commissions.

For 12 months ended June 30 electric energy sales to approximately 124,000 customers amounted to 1,049,000,000 kilowatt-hours, of which almost 70 percent were used directly in war production work, and in copper and other critical metal mines, smelters, and industrial enterprises contributing directly to war production.

On June 30, 1942, there were outstanding 4% and 5-percent bonds of Utah Power & Light Co. and Utah Light & Traction Co. amounting to $45,277,000; Power Co. 6-percent debentures-$5,000,000; Power Co. $7 preferred stock207,605 shares, $6 preferred stock-41.921 shares; and Power Co. common stock-3,000,000 shares (all owned by Electric Power & Light Corporation). The publicly held securities are widely distributed. The bonds are owned by some 11,000 holders; the preferred stocks by approximately 14,000 stockholders— averaging 18 shares each.

After 20 years of unbroken record in payment of preferred dividends the severe effect of the depression on mining activities made it necessary to suspend payments during 1933, and thereafter to pay partial rates until October 1, 1940, since when the full rate again has been paid. No payments have been made on the large amount of undeclared accumulated dividends.

All of the mortgage bonds of the combined companies in the hands of the public mature in 1944, necessitating refinancing approximately $45,000,000.

The impact of the Revenue Act of 1942, as it has passed the House of Repre sentatives, will have a serious effect upon the company's ability to meet its financial obligations to the public represented by the holders of its bonds and preferred stocks, also its ability to refinance its maturing debt. The company has no excess profits. In fact, it has no true profits of any kind, nor has it had for over 10 years as is evidenced by the fact that it has been unable, after paying its interest, to pay in full its preferred dividends. Because of tax increases the amount left for the company after paying operating costs and fixed charges is declining month by month. This is true despite increasing operating revenues.

In 1941 the combined companies' Federal income taxes were $811,000, an increase over 1940 of $380,000. Applying the 1942 revenue bill to 1941 operations would produce Federal income and excess-profits taxes of $1,421,000; an increase of $610,000 or over 75 percent. This would have left 1941 net income available for preferred stock dividends $350.000 less than the dividend requirement.

In addition to taxes, all costs of operation and maintenance are increasing; for instance, Utah Power & Light Co. use of coal in 1942 at September 1 prices will cost approximately $860,000 f. o. b. cars at generating plants. This same coal at prices as of September 1 of each year would have cost: 1938, $785,000; 1935, $734,000. Coal prices have thus increased 17 percent in 7 years. The June 1942 monthly operating pay roll for the company was $245,000. The corresponding monthly pay roll for the same employees during the same work would have been $222,000 in 1938 and $190,000 in 1935, an increase in 7 years of 29 percent. Poles, cross arms, hardware, and other items have substantially increased in price.

A contrawise trend is found in prices received for electric service, the average price per kilowatt-hour sold by the company for 12 months ended June 1942 being 13 cents, a decrease of 30 percent since 1935. The average residential rate is now 34 cents, again 30 percent under the 1935 price.

The following is a calculation of Utah Power & Light Co. and subsidiaries estimated 1942 consolidated normal and surtax and excess-profits tax based on the revenue bill of 1942 (6 months actual operations and 6 months estimated):

Estimated net taxable income, year 1942___.
Plus 50 percent of interest on borrowed capital.

$3, 198, 872 1,271, 250

4, 470, 122

Normal and surtax on above at 47 percent (consolidated).

1,000, 269

Total tax.

1,963, 845

dividends leave

These taxes deducted from 1942 income available for $1.223.000 to meet preferred-stock dividend requirements of $1,704,000, an indicated deficiency of $481,000.

Plans are being made for refinancing the $45,000,000 of bonded debt maturing in 1944, and in due course declaration will be filed with the Securities and Exchange Commission. Based upon present refinancing trends, we hope to evolve and have approved a plan which will reduce interest charges and amortization of debt expense some $700,000 a year. On the basis of this refunding, and then applying the 1942 revenue bill, the 1942 Federal tax requirement would be $2,477,000, an increase of $13.000 over the proposed taxes based upon present funded debt. Over 72 percent of the saving resulting from refinancing is lost in additional taxes. Interest after payment of all taxes and provision for depreciation and retirements on the new issues would be earned 1.74 times, and annual preferred dividend requirement would be short $290.000. Under these conditions it is extremely doubtful if a market can be found for such bonds. The cost of refinancing and debt servicing will be grievously increased and the future of the company be placed in jeopardy.