general treasury increases voted by Congress for public assistance (70) percent of California's adult caseload are also recipients of OASDI benefits) compels me to earnestly request that this provision be made mandatory instead of permissive by inserting "shall" instead of "may." This small amount, estimated by me at an average of $35 per recipient, would mean a real windfall to them.

The public assistance increase put in last year's bill through the efforts of an esteemed member of your committee, Senator Russell Long, would have been effective October 1964. These needy people cannot understand why they are being penalized in H.R. 6675 by having this small payment delayed to January 1966. We hopefully pray that the Senate will make this increase effective for the needy in October 1965.

It is becoming extremely difficult to obtain additional much-needed increases in public assistance in the high per capita income States. We regret to note that H.R. 6675, while providing for a greater share of Federal matching of funds, continues to penalize those

States whose per capita income is above the national average, shall receive correspondingly lower percentage but not less than 50 percent.

We recommend these States also be permitted to receive 55 percent Federal matching, and we believe the time has come when the unrealistic ceiling imposed upon Federal matching be eliminated entirely. Certainly these 30 years the Social Security Act has been in effect has proven that the States will not be overly generous to their needy on public assistance. Yet this ceiling penalizes the States who desire to be considerate of their poor.

It is noted that H.R. 6675 contains a number of provisions to bring about a little more uniformity among States. Unfortunately, these new provisions are limited to the medical assistance program. We urgently request that the same provisions be provided through the money payments. For instance, the requirement that

States may not include in their plans provisions for requiring contributions from relatives other than a spouse or the parent of a minor child, or children over 21 who are blind or permanently or totally disabled.

And that the

States may not impose a lien against the property of any individual prior to his death on account of (medical) assistance payments, except pursuant to a court judgment concerning incorrect payments, and prohibits adjustment or recovery for amounts correctly paid except from the estate of an aged person after his death, and that of his surviving spouse *** Such an adjustment or recovery would be made only at a time when there is no surviving child who is under the age of 21 or who is blind or permanently and totally disabled.

There are a number of long sought provisions contained in H.R. 6675 which, unfortunately, are limited to the medical assistance program and should be extended to that section dealing with the money payments for those on public assistance. H.R. 6675 provides for judicial review of the denial of approval by the Secretary of Health, Education, and Welfare of State public assistance plans, and of his action under such programs or noncompliance with State plan conditions in the Federal law.

I view this provision with a great deal of alarm, as the district attorneys of California's 58 counties have sought such a provision for many years in their attempts to block, in the courts, humane public

assistance amendments adopted from time to time by Congress and the State legislature. I am afraid that this provision will bring about much delay and deprive the needy of congressional benefits. I can recall sitting in the audience several years ago when a representative of the California County Supervisors Association urged the adoption of a similar judicial review provision and was severely reprimanded by the late Senator Robert Kerr of Oklahoma, who was acting as chairman pro tem of this committee. I trust you gentlemen will reconsider this provision.

It has been found where a recipient of old-age assistance with a wife too young to qualify and unable to get relief of any kind is penalized because they both share one household and his aid is reduced. If he left his wife and lived alone his full amount of aid would be restored. In order to correct such a situation, which I have found to be quite common, I wish to recommend the following:

Assistance furnished to an individual under this title is to assist him in meeting his individual needs, and is not for the benefit of any other person; and such assistance shall not be regarded as income of any person other than such individual.

In 1935 Congress recognized the wisdom of providing for money instead of vendor payments in the public assistance section. However, now that Congress has provided housing for the elderly, it has been found that the owners of such housing are reluctant to rent to those on public assistance because of the undependency of their income. The California League of Senior Citizens is the sponsor of one of the largest quality, low-rent housing for the elderly projects in Fresno, Calif. We cater to the low income group, especially those on public assistance. Unfortunately, we have found some of these people failing to pay their rent, even though it was allowed them by the welfare department. In our 3 years of operation the village has lost $2,600 on nonpayment of rent by public assistance recipients. This is difficult for a nonprofit corporation to absorb, and represents a considerable loss. In order to avert future losses and encourage similar nonprofit owners to take in public assistance recipients, we recommend the following amendment to H.R. 6675:

To the extent provided by the State agency, direct rent payments to the landlord or landlords involved on behalf of individuals who are otherwise eligible for assistance under the State plan approved under this title, if the dwelling accommodation with respect to which such rent payments are applicable (or the structure in which such accommodations is located) was purchased, constructed, or rehabilitated, or is otherwise being financed, by means of a loan, mortgage insurance, guarantee, or other form of assistance by an agency of the Federal Government which is still outstanding at the time such payments are made; and any such payments shall be considered money payments made to such individuals.

I trust the recommendations I have made from my 25 years of experience with those on the receiving end of social security and public assistance will receive consideration from the members of this committee, and I wish to thank you for giving me this opportunity to express my views.

Senator RIBICOFF. Thank you very much, Mr. McLain.
Mr. Arthur J. Packard.

STATEMENT OF ARTHUR J. PACKARD, PRESIDENT, PACKARD HOTEL CO., CHAIRMAN, GOVERNMENTAL AFFAIRS COMMITTEE, AMERICAN HOTEL & MOTEL ASSOCIATION

Mr. PACKARD. Good morning, Senator.

For the record I am Arthur J. Packard, president of the Packard Hotel Co., with headquarters in Mount Vernon, Ohio. I am chairman of the Governmental Affairs Committee of the American Hotel & Motel Association. I am also president of a chain of small hotels and motels in Ohio.

We appreciate the opportunity to discuss with this committee section 313 of H.R. 6675. This section in the bill has created nationwide concern in the innkeeping business.

We have never objected to paying our share of the social security tax on payroll. The point is, however, that tips received directly by an employee are not and should not be considered payroll for tax purposes.

Neither in theory nor in practice can we justify an arrangement between two separate parties who have nothing to do with an employer's payroll, but which imposes a Federal tax on an entirely separate party, namely, the employer.

In our opinion, tips are a hybrid or in the twilight source of income and should be considered as being closest to self-employment earnings. We must also recognize that tips cannot be considered purely a wage because after all the employer does not exactly determine the actual amount that the employee received.

We must object to a proposed law which would require an employer to accept an employee's statement as to the amount of tips he received. This is tantamount to asking an employer to incur a responsibility which he cannot budget and to pay taxes on a base of which he has no accurate knowledge and over which he has no control. The employer cannot rely on a tip declaration given him in 1 month to aid him for the purposes of tax in the next month.

A hotel-motel employer has no more knowledge of what his employee receives in total tip income than you or I know as to how much a minister of the gospel gets in "gratuities" over a year's period; than a shoeshine boy receives "in tips" in a day; than a barber receives "in gratuities" in a week's time; or that a taxicab driver receives "in tips" in a period of an hour. It just doesn't seem right under these circumstances to place an employer in a position of accepting a statement of tips received from an employee and at the same time require the employer to accept such a declaration as gospel. Actually, the employer has no way of knowing whether or not the employee's report is authentic.

Under the terms of H.R. 6675 a hotel employer or manager may be put in the untenable position of filing a tax return which contains information which he knows to be incorect and which is in effect implementing a fraud perpetrated on the Government by an employee.

For example, in most hotels there are occasions when the management has exact information as to certain tips being received by the employees. It has become a common practice for patrons having charge accounts at hotels to indicate on the food or beverage check the amount of a tip to be advanced to the employee by the hotel. When

this is done by individual patrons, the employer is not required to withhold income tax or social security on the amount of such tips. However, the management thus knows that the employee is receiving at least this amount of tip income. The employer might know that a particular employee received exactly $42 in tips during a specific month under this system. At the end of the month the employee declares that his tip income for reporting purposes was only $30 and, under this bill, the hotel employer or manager has no choice but to accept the employee's report and base the employer's social security and income tax withholding returns upon the report although he knows that the employee is defrauding the Government to that

extent.

Another similar situation arises where a banquet is held by an organization which arranges with the hotel to add 15 percent to the bill, which is then distributed to the employees as gratuities. Under the present Treasury regulations, the hotel is required to withhold income tax and social security on such tips. To this extent the hotel knows exactly how much each employee received in tips. If the amount subsequently reported for the month under the provisions of H.R. 6675 is less than the amount so distributed, the hotel is in a quandary. It has already withheld income tax and social security on these tips but under the present bill it is required to withhold only the amount reported which might be substantially less.

If the provisions of the bill supersede the present withholding requirements, the hotel may again become a party to a fraudulent report by the employee. These two examples illustrate the impossibility of writing a law and imposing a tax based upon a voluntary statement by an employe to an employer.

Regardless of the consequence, even if the employee is convicted of a willful fraud on the U.S. Government and the manager is held immune from prosecution, we in all honesty do not think such a requirement in the law is fair to the reputation of a hotel employer or manager, to his family, or to his standing in the community.

The language in section 313 of the bill actually does violence to commonsense. There is no question that tips are clearly "income" for tax purposes. They are a gratuity, however, paid by a patron, not by an employer. The language of the bill is unjust and unfair when it states on page 222 that—

such tips shall be deemed to be paid to the employee by the employer and shall be deemed to be so paid at the time a written statement including such tips is furnished to the employer.

Can an assumption contrary to fact be made the basis of a tax? The bill will require that separate records be maintained for each tip employee, even those who are maintained on a temporary basis such as extra waiters. These extras or "casual employees" are oftentimes here today and gone tomorrow. It appears from the bill that if extra waiters are engaged in a given month and the total tips that they receive while working for several employers exceed $20 in each case the waiters would have to furnish each employer with a declaration of tips for that month. Just think of the records an employee must keep. He must keep a daily record of every place he works, and when during a given month has has received $20 in tips, he must make a report of such tips to the employer involved. We, frankly, do not

know how the social security tax would be worked out for an extra waiter working for several employers during a month. It certainly would be improper, small as the amount might be, to impose a social security tax on an employer (disliked by an employee) for tips earned during the course of any employment by another and yet, this is entirely possible.

The numerous casual or extra employees in our industry create an additional inequity.

For example, two or more employers may each pay the social security tax on the present base of $4,800 or on $5,600 under the terms of the bill for the same employee. Each employer would also deduct that employee's tax from his wages. The employee, however, through his income tax return can recover any excess that has been deducted from his wages over and beyond the ceiling of $4,800 now, $5,600 in the proposed law. Not so for the unfortunate employer. There is no recovery provisions for any employer. Each one of the two or more employers will be forced to pay a tax up to the $5,600 ceiling on that one employee.

Whether a waiter is a permanent or extra employee, it is likely that in many cases the withholding tax on tips would exceed the amount of cash wages due. The untenable nature of the employer's position is apparent. The employee would receive a tax recepit instead of a cash wage. The detriment to the employer-employee relation is clear on its very face. You can imagine what will happen when an employee who obtains substantial income from tips finds out that he is no longer entitled to his regular wage for a certain payroll period because his share of the social security tax plus withholding has reduced it to zero.

The problem will be even more difficult if the employee does not have sufficient wages or other funds made available to the employer to cover his tax on his declaration. Take the employee who has little or no regular wages but relies solely on tips. As he files one or more monthly written statements of tipped income, as he could do under the bill, and fails either by design or accident to provide sufficient funds to cover withholding or the social security tax, the employer is placed in an awkward and extremely difficult position.

We firmly believe that section 313, if enacted, will create tremendous discord in employee-employer relations.

Our contention that an employer will be faced with paying a tax at the whim and fancy of an employee finds support in the fact that a young worker or a female contemplating early marriage and retirement from the labor force will be inclined to report little if any tip income. However, those employees approaching retirement will be inclined to declare substantial tip income so as to obtain maximum benefits under the social security system.

Moreover, an employee who in one month has suffered a serious illness in his family or has added expense in his household, or a bad day at the races, could very easily declare a minimum tip income. The next month with reduced household expenditures or a good day at the races, he could double or triple the amount of tip income to his employer.