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

SUMMARY OF MAJOR PROVISIONS OF S. 826

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 responsibilities 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 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 upon local government revenues and fiscal structures by enacting numerous statutory provisions which authorize payments by certain Federal agencies and departments or upon certain types of properties. However, the great majority of Federal agencies have no general authority to make payments on their properties.

Furthermore, existing provisions of law are quite diverse and result in different treatment for similar properties of various agencies. Thus, those provisions of law which do exist fail to present any clear-cut uniform policy. On some classes of property, some agencies pay taxes; others make payments in lieu of taxes; and still others make no payments at all.

The seriousness of the general problem appears to have been magnified by the outbreak of the Korean war in 1950, when large-scale Federal acquisitions 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.

Prior action

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 types of 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.1

During the 83d Congress, this committee devoted considerable time and effort in an attempt to bring about the enactment of legislation which would have, at the very least, provided some measure of temporary relief for hard-pressed local taxing authorities. The bills before the committee at the time were S. 2473 (identical to S. 826, 84th Cong.) and H. R. 5605 (identical to S. 888, 84th Cong., and similar in essential respects to S. 2377, 84th Cong.). However, due to the fact that the Commission on Intergovernmental Relations was engaged in a comprehensive study of the entire field of Federal-State relations, the executive branch agencies affected were reluctant to make specific recommendations until all of the basic facts were available. It was therefore necessary for the committee to defer further action until the reports and recommendations of the Commission became available.

During the 84th Congress, the committee considered and approved S. 2377 (similar in essential respects to H. R. 5605, 83d Cong., as reported by this committee), introduced by Senator Potter. This bill was reported favorably on July 29, 1955, with an amendment in the nature of a substitute containing language identical to a companion measure, H. R. 6182, previously approved by the House. After agreeing to the committee amendment, the Senate, on July 30, 1955, passed the companion measure, H. R. 6182, which became Public Law 388 on August 12, 1955. This act provided relief for a period of 4 years for local taxing authorities by restoring to the tax rolls certain real property which had been held by Government corporations and was subject to local taxation, but which was taken out of taxation by the transfer of such property to other Government agencies. Although this legislation will provide temporary relief to a very small number of hard-pressed communities, it does not provide a permanent, long-range solution to the general problem, as proposed by the pending bills.

MAJOR OBSERVATIONS AND RECOMMENDATIONS OF THE COMMISSION ON INTERGOVERNMENTAL RELATIONS AND ITS STUDY COMMITTEE ON PAYMENTS IN LIEU OF TAXES AND SHARED REVENUES

For the convenience of the committee, the major pertinent recommendations of the Commission on Intergovernmental Relations and its Study Committee on Payments in Lieu of Taxes and Shared Revenues are briefly summarized in this staff memorandum. A detailed summary and analysis of the findings,

1 The subject matter of (4) is dealt with in a related bill, S. 2100, introduced by Senator Thurmond, which would prohibit agencies of the United States from entering into contracts under which private contractors are constituted agents of the United States to purchase property necessary to carry out such contracts, and would nullify, so far as the application of State sales tax laws is concerned, such provisions in any contract entered into after the date of enactment of the act. A separate staff memorandum will be prepared on S. 2100.

observations, and conclusions of the Commission and its Study Committee, with respect to payments in lieu of taxes, is annexed hereto as appendix A. (Pertinent excerpts from the Commission's report will be found in pt. I of the hearings on these bills and those of the Study Committee in an appendix to the hearings.) Commission's recommendations

In a preliminary discussion of the general subject of financial aspects of the of the American federal system, the Commission observed that 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 but 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.

In a subsection entitled "Intergovernmental Tax Immunities," the Commission noted 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 tax status of Federal property is the problem of greatest concern to local governments. 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 the chief source of revenue; that the impact of this immunity is uneven; that it is particularly severe in areas where the value of Federal property is a large part of total property values; and 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.

The Commission found further 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 a variety of financial arrangements have been developed between the national and State-local governments through the years; and that at present a wide variance exists with the Federal Government paying taxes on some property, making payments in lieu of taxes on other properties, and making no payment of any kind on still other properties.

The Commission made the following six general recommendations:

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.

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

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 cutoff date, either September 8, 1939 (outbreak of World War II), at the earliest, or, July 1, 1950 (outbreak of the Korean war), at the latest.

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.

Concluding that portion of the report, the Commission stated that in its 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 ***”

2

The Study Committee's findings, observations, conclusions, and recommendations General.-The Study Committee undertook to review the problems of State and local government arising out of Federal immunity to property taxation, and to recommend a policy to be adopted by the Federal Government which would best

2 A summary and detailed description of the Study Committee's objectives, approach, guiding considerations, and general and specific conclusions and recommendations are found in appendix A, annexed hereto.