pay taxes, others make payments in lieu of taxes and still others make no payments at all.

The seriousness of the general problem was magnified by the outbreak of the Korean war in 1950, when the large-scale acquisition by the Federal Government of defense production facilities throughout the country resulted in the removal of substantial parcels of real property from local tax rolls. In addition, local taxing 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. Furthermore, certain properties owned by Government corporations and specifically made subject to local taxation, have been taken out of taxation by the transfer of such properties to other Government agencies which have no authority to make such payments. Finally, more than 30 States are being deprived of sales and use taxes on items of personal property which are being used in connection with the construction of Federal installations under contracts providing that the private contractor is an agent of the Federal Government for the purpose of these purchases, and the items are, therefore, immune from State taxation.

During the past three Congresses, this committee has had pending before it numerous bills dealing with various aspects of the problem. Some of these were designed as temporary measures; others proposed the establishment of permanent, long-range policies and procedures: and still others were aimed at meeting specific phases of the overall problem. In general, they covered (1) direct taxation of certain Federal property; (2) payments by Federal agencies of sums in lieu of taxes; (3) restoration to local tax rolls of real estate held by Government corporations and subject to local taxation which was taken out of taxation following the transfer of such property to other Government agencies; and (4) elimination of certain types of Federal tax immunity with respect to State sales taxes on personal property.

During the last Congress, this committee devoted considerable time and effort in an attempt to bring about the enactment of legislation which would, at the very least, provide some measure of temporary relief for hard-pressed local taxing authorities. However, due to the fact that the Intergovernmental Relations Commission, of which it was my privilege to be a member, was making a comprehensive study of the entire field of Federal-State relations, the excutive branch agencies most affected were reluctant to make specific recommendations until all the basic facts were available.

It was therefore necessary for the committee to defer further action until the reports of the Commission became available. The Commission's reports were submitted to the Congress on June 27, too late to permit full evaluation and action at the present session of the Congress.

Nevertheless, it was felt that a preliminary hearing should be held at this time with a view to initiating committee work on the subject. May I pause to say that Senator Kuchel, Senator Goldwater, and Senator Potter, as well as others, have been most insistent and persistent in getting this hearing underway, and it is because of their cooperation that we are able at least to initiate this study.

Full-scale hearings and detailed study of the recommendations of the Commission on Intergovernmental Relations and the various pending bills have been scheduled for the next session of the Congress. Pending before the committee this morning are seven bills which represent various approaches to the solution of the problem. I digress to say that if you have 7 bills on one subject, there is apparently some genuine interest in it. Most of the sponsors of the bills are either here or have submitted statements.

For the most part, the pending bills appear to fall into four major categories:

(1) The establishment of permanent and overall policies and procedures with respect to payments by the Federal Government of taxes or in lieu of taxes, represented by S. 1566, which I introduced, together with Senators Kuchel and Goldwater, and which is virtually identical to bills I introduced in the 82d and 83d Congresses; S. 1657, introduced by Senator Bush; and S. 2390, introduced by the distinguished minority leader, Senator Knowland, for the purpose of carrying out the recommendations of the Intergovernmental Relations Commission;

(2) The establishment of a limited program of payments by the Federal Government in lieu of taxes with respect to Federal real and personal property acquired during and subsequent to the Korean war, respresented by S. 826, introduced by Senator Bender and identical to S. 2473, introduced in the 83d Congress by Senators Taft, Knowland, Ferguson, Bush, and Potter;

(3) The provision for temporary, short-term relief for local taxing authorities, designed to alleviate their present fiscal plight until longrange legislation can be worked out, represented by S. 888, introduced by Senator Martin of Pennsylvania and identical to H. R. 5605, as reported favorably by this committee during the 83d Congress, and S. 2377,1 a similar measure, introduced by Senator Potter; and

(4) The prohibition of certain provisions contained in contracts of some Federal agencies which, under a recent decision of the United States Supreme Court, prevent States from levying sales and use taxes on personal property acquired by private contractors in connection with the performance of such contracts, represented by S. 2100, introduced by Senator Thurmond.

At this point, the Chair desires to place in the record that portion of the report of the Commission on Intergovernmental Relations which deals with intergovernmental tax immunities and payments in lieu of taxes, and the 7 bills pending before the committee S. 826, S. 888,2 S. 1566, S. 1657, S. 2100, S. 2377,3 and S. 2390.

(NOTE. S. 2754 is included as a related bill. It was introduced by Senator Malone on August 2, 1955, and was, therefore, not before the committee when this hearing was held.)

(The report and bills referred to are as follows:)

1 A companion bill, H. R. 6182, which was substantially similar to S. 888 and S. 2377, became Public Law 388, 84th Cong., on August 12, 1955, and appears on p. 144, of this hearing.

2 See supra, note 1.

3 See supra, note 1.

[Extracts from ch. 4 of the Report of the Commission on Intergovernmental Relations (pp. 107-109, H. Doc. No. 198, 84th Cong.)]

THE COMMISSION ON INTERGOVERNMENTAL RELATIONS

*

INTERGOVERNMENTAL TAX IMMUNITIES

One aspect of the tax relations among governments requiring urgent attention is the immunity of the National Government from State and local taxation and the immunity of State and local governments from Federal taxation. In this area the problem of greatest concern to local governments is the tax status of Federal property. 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. The impact of this immunity is uneven; it is particularly severe in areas where the value of Federal property is a large part of total property values.

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 reclamation.

The Congress has not considered constitutional immunity as freeing the National Government from all responsibility for paying State and local taxes or their equivalents. Over the years, it has developed a variety of financial arrangements between the National and State-local governments. At present, the National Government's payments to local governments on its extensive property holdings vary widely. 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 revenues from Federal operation of the property is paid to State and local units. In many cases there is no payment at all.

Payments in lieu of taxes

The Commission recommends that the National Government inaugurate a broad system of payments in lieu of property taxes to State and local governments. The most important class of properties on which such payments should be made is commercial or industrial properties. Special assessment payments and transitional payments in lieu of taxes should be made in certain cases.

The Commission believes that these payments are necessary to help preserve financially healthy local governments. Present tax immunities of Federal property have weakened many local governments. The States and the National Government share in the responsibility for avoiding actions which impair the financial ability of local governments. Equity as between Federal and local taxpayers requires the National Government to make appropriate payments. These should be based largely on the property tax system, which is the main source of local revenue.

The Commission does not believe that equity requires 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. Therefore, no in-lieu payments should be made on any properties acquired prior to a specified cutoff date. Perhaps September 8, 1939, would be the earliest date and July 1, 1950, the latest date. These dates marked the beginning of periods of large-scale acquisition of properties for defense purposes-the properties which have been largely responsible for this problem. The Commission, recognizing that any selection must be arbitrary, is not prepared to recommend a specific cutoff date. In addition to a cutoff date, some type of arbitrary limitation on Federal payments is necessary to prevent excessive payments or windfalls to some local governments.

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 of taxes on Federal properties and make such adjustments in shared revenue arrangements as may be needed.

The States sometimes contribute to the financial difficulties of their subdivisions by exempting their own properties from taxation. They may therefore want to consider the use of broad payment-in-lieu arrangements at the State level.

[S. 826, 84th Cong., 1st sess.]

A BILL To provide for payments by the Federal Government to States or local taxing units adversely affected by Federal acquisition, ownership, or use of defense production facilities, to provide for the taxation of certain Federal properties, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the "Act for Payments to Local Taxing Authorities."

DECLARATION OF POLICY

SEC. 2. (a) Although the Federal Government is under no constitutional obligation to pay taxes or to contribute to the States or local governments any sums in lieu of taxes on account of property owned by the Federal Government, the Congress declares that it is the policy of the United States in carrying out the national program of military security and defense to avoid insofar as feasible the impairment of the finances of State and local governments through the acquisition, ownership, or use of any defense production facility by the Federal Government or through requirements for State or local governmental services arising directly from Federal ownership or use of any such facility. Officials and employees of the Federal Government, in administering this Act, shall be guided by the general objective of avoiding insofar as feasible, inequities between the taxpayers of particular States and local governments on the one hand and the taxpayers of the Federal Government on the other hand in the distribution of tax burdens and governmental costs associated with the ownership or use of any defense production facility.

(b) The Congress declares further that, in consideration of the system of payments herein provided, State and local governments will be expected, when requested, to make available public services for any Federal Government defense production facility and any residents thereof or workers employed therein and their families, upon the same terms as are accorded to other properties, residents, or persons.

DEFINITIONS

SEC. 3. As used in this Act the following terms shall have the meaning respectively ascribed to them below, and, unless the context clearly indicates otherwise, shall include the plural as well as the singular number:

(a) "Federal" or "Federal Government" means the United States of America and the Government thereof, including all its departments, agencies, boards, and commissions and all corporations subject now or hereafter to the provisions of title I of the Government Corporation Control Act, as amended (31 U. S. C. 846-852).

(b) "Federal agency," "owning agency," or "Federal owning agency" means any part of the Federal Government which has jurisdiction over or administers a defense production facility.

(c) "Defense production facility" means property (i) the title to which is in the Federal Government or which by reason of its use by the Federal Government is not subject to taxes of general application levied by local taxing units, and (ii) which is acquired, owned, or used for industrial or commercial purposes connected with national defense: Provided, however, That the term "defense production facility," as used in this Act, shall not include property owned or used by the Atomic Energy Commission for purposes of the Atomic Energy Act of 1946, as amended, and materials acquired, owned, or used by the Federal Government for the strategic and critical stockpile: And provided further, That a defense production facility declared excess or surplus or held for disposition shall remain within this category for purposes of this Act until it is either disposed of by the Federal Government or is used otherwise than for industrial or commercial purposes connected with national defense.

(d) "National defense" means the operations or activities of the Armed Forces or any other Government department or agency directly or indirectly and substantially concerned with the national defense, or operations or activities in connection with the Mutual Defense Assistance Act of 1949, as amended.

(e) "Property" shall include land; structures and other improvements to land, whether affixed or movable; machinery, raw materials, goods in process, articles, commodities, inventories, products, supplies, and components; and leaseholds or other substantial rights to the use or disposition of any of these.

(f) "Industrial or commercial" refer to activities involving primarily, or to properties the ownership or use of which involves primarily, the processes of mining, manufacture, fabrication, repair, generation of electrical energy, transportation, or any similar process, including storage within or on such property, or the sale or resale, rent, or lease of commodities or the sale of services, including storage within or on such property.

(g) "Acquire" means to vest title in the Federal Government by purchase, exchange, condemnation, donation, devise, revestment, or bequest.

(h) "State" and "States" means the several States of the United States of America.

(i) "Local government" or "local taxing unit" means any county, city, municipality, or other political subdivision or public entity of any State having authority under State laws to levy and collect taxes upon real or tangible personal property. (j) Unless the context indicates otherwise, "tax" means a levy of general application upon property according to value, and "taxation" means the imposition of such a tax.

(k) "Tax year" means the year beginning with the tax assessment date or tax lien date, whichever establishes tax liability in the jurisdiction concerned. In the event an assessment period is used by the taxing jurisdiction and no single assessment date or lien date fixing tax liability is determinable with respect to the property, then the first day of the assessment period shall be the beginning of the tax year.

(1) "Average effective tax rate" means the average nominal tax rate adjusted to reflect the current average relationship of assessed value to fair value of property.

CONSENT TO STATE AND LOCAL TAXATION

SEC. 4. (a) Consent is hereby granted to State and local governments to tax any defense production facility 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, while held pending disposition or until put to permanent use by the Federal Government. If such property is put to permanent use as a defense production facility by the Federal Government, the classification of the property as specified in this Act shall thenceforth be controlling as to any payments with respect to such property.

(b) Consent is hereby granted to State and local governments to tax to the Federal Government the Federal interest in any defense production facility which has been or herafter is leased or sold by conditional sale to taxable persons and is not otherwise subject to State or local taxation.

(c) Consent is hereby granted to State and local governments to tax—

(1) any defense production facility which in any tax year which began after June 30, 1950, was subject to State or local taxation under the provisions of any other Federal statute and is not subject to taxation under subsection (a) or (b) hereof; and

(2) any defense production facility which is subject to State or local taxation subsequent to the effective date of this Act but which, though still a defense production facility, would, in the absence of this consent, be withdrawn from such taxation by reason of a transfer of its ownership, use, or administration from one Federal agency to another.

(d) Property under this section may be taxed to the same extent and in the same manner according to its value as if it were privately owned, and any such tax shall be based upon an assessed valuation which does not represent a larger 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 shall be applied to property of the Federal Government. The Federal Government shall not be subject to penalties or penalty interest nor shall its property be subject to any lien, foreclosure, or other proceedings because of nonpayment or failure to make timely payment of taxes; nor shall subsequent owners be liable therefor: Provided, however, That this shall not preclude the payment of penalties or penalty interest when the Federal owning agency determines that such payment is in the interest of the Federal Government.