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m E g > vuxxaxm OF B&OSB FROM STATS m m A Special Senate Comnitte* under the chairmanship of Senator Brown held extensive hearings in 1939 on the Taxation of Government Bondholders and I&ployeee. Shere \srere presented before this comlttee* moons other things* a £19 page legal *study* wide by the Department of Tustlee and a 480 page "answer"feythe Attorneys General of several States* The former favored federal power to tax the Income fro& State beads* the latter favored exemption* Leaving aside considerations of policy end detailed discussions of various eases* there are sumarlsed below the Constitutional arguments for end against Federal power to tecs the income from State bonds* Argument for Reciprocal fimmttg* ~ The argument for the exemption is gen* erally stated in terns of reciprocal State«Fed*reltaaunltieaiState tax* ation ssay not Interfere with appropriate functions of the Federal Govern** ment and* reciprocally* Federal taxation say not interfere with appropriate functions of the States* The doctrine is not expressly stated in the Constitution but is claimed to follow f m the general purposes and organisation of our Con* stltutional systesu It Is argued that a Federal tax on the incests from State bonds mould increase the State*a cost of borrowing* and that this Increased cost would burden the State In violation of the principle of reciprocal imsunity* Argments for Taxability. There are several different arguments for the taxability of such income* Each argument is, in effect* a reply In one way or another to the argument for the exemption* These arguments for taxability gay be considered separately as, l\ Argument that lEsmunlty is not fully reciprocals 2* Arggg* nent that the proposed tax would not burden the, States* and 3* Argument that sixteenth mtraa&enfr specifically provides for taxability. 1* Ipgmnity Sot Fully Beelproeel* ~ It is argued that the reasons for Federal imu&ity from State action do not apply with equal force to State i&sunlty from Federal action* Federal imaaaity is the only practice able way to protoct the whole against one of Its parts* But all the States ere represented in the Federal Government stud e$& adequately protect the®* selves against oppresive Federal action* McCullock v* Maryland* the original tax exemption case* dealt State tax* It denied the power of the State of Maryland to tax a branch of the Bank of the United States* a Federal instrame&tallty* In his fc&ous opinion in that case Chief Justice Marshall recognized this difference between State and Federal Imtnitles* the recent case of Befererinff w* Oerhardt again referred to this difference* a History also gives sosse support for the reasonableness of this view, «hen the courts have denied the States power to tax Federal instra* mentalities Cong**** tea usually granted permission for the States to levy ncm^isorlttinatory t&xes* An oxe&pla Is the provision for States to tax national brides* Those who favor taxing income fron State bonds under this theory also favor having the Federal Government grant poz&iaaion for the States to tax tneoft* for Federal bonds* 3* gt&te Kqt Burdened by Tay* <* Another argument for taxability adatts the doctrine of reciprocal immunity* but s*$rs that it applies only when there Is a burden* and that $ State would not be burdened by a non^iscri&ina* tory tax on the incoae froaa its bonds* Zt is to bo noted that the tax involved in HeCullooh v* Maryland not only m levied by a State rather than the federal <k>veramsnt, but also was clearly discriminatory and clearly a burden* The present Supre&e Court shows a strong tendency to examine the facts of Constitutional questions rather than pressed merely on the basis of legal analogy or precedent* It might, therefore* be inclined to exsnins the factual operations of a nondiscriminatory income tax* Zt la by no means clear that a State would In f«et be burdened by a nondiscriminatory tax on the lncosse frost its bonds* The exemption probably is a bounty (and one that interferes eorioudy with the Federal tax structure) Instead of taxability being a button* This can be seen by examining the effects of a similar tax* Suppose a tax of 10 per sent was placed on a given article that had a relatively fixed deo&nd* The 10 per cent tax would be borne by the pur* chasers* If Mr* Jones* production of the article was exempted from th* tax it would be worth Just as ouch to purchasers as that manufactured by others* Kr* Jones* therefore* could get 10 per cent r»ore for his products than If thera was no tax at all* Jfc* Jones* Interest in keeping the exeaptlon for his product would be no greater than his Interest in keeping the tg£ on his competitor's product* ths exemption of State bonds fros the Federal ineono tax la not far different* A nondiscriminatory tax on Income is borne by the purchaser of the income, !»*•* the purchaser of the bond* The price of exempt incme (1*0*t a Stats bond paying tex^exsmpt interest) rises* The exempt State bonds therefore sell at a higher price (lower yield) than comparable noa» exempt iuvosiaentsj, and the State1 s borrowing cost is reduced* This difference In borrowing cost is a bounty to the State* Its removal would merely place the State on a parity with other borrowers* Far from istpos* ing a burden* the elimination of the exemption would merely remove a bounty* • 3 « Any such analysis of the probable results of a tax necessarily cannot bo exact* However, this la clearly the moat likely effect* If the tax placed ray burden at ell on the State It would clearly be problematical and highly speculative <** hardly the type of "burden* to justify a rigid Constitutional exemption that seriously interfere* with the Federal tax structure* $he Supresae Court recently indicated a aimilar view of the situation when it permitted Federal taxation of the ealariee of State era* ployeee in llelverity; v* Qerhardt and State taxation of the ealariee of Federal employees in Graves v* O^Bgefe* Xn the latter caee the court et&ted: *S?he theory* v&ieh once won a qualified approvalf that a tax on income ie legally or economically a tax on ite source^ ie no longer tenable * * ** Sixteenth ^endmont* *> The sixteenth amendment authorizes the Federal Government to tax * incomes, from whatever source derived$ i&thout apportionment among the several States** Proponents of taxability claim that the words "frost whatever source derived" specifically cover the aueation and auperaede any argu&onte baaed on earlier general language of the Conatitutlon* Zbey point alee to events contemporaneous tdth the adoption of the amendment* At about that tlise the Supreme Court held that similar language in a statute included income from State bonds* Chief Justice Efcghee* then Governor of How 'iork, opposed ratification of the amendment on prociaely the ground that it ^ould permit federal taxation of income from State bonds* Thoae *ho favor this interpretation also favor having the Federal Government grunt permission for the Statee to tax income fro® Federal bonds* She opponents of this interpretation essphaeisse the wordei "without apportionment srnong the several Statea"* They claim that the amend* sent merely eliminated the previoue Constitutional requirement that an income tax, ae a direct tax* be apportioned among the Statee In accordance sdth population* They also cite various event* connected with the adoption of the amendment ae tending to ehow that It m e not intended to perait Federal taxation of income from State bonds* 12/16/4®
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