As many of you may know, I hays been particularly interested during my first year in the Senate in exploring those conditions within the jurisdiction of the federal government which have contributed to the impairment of economic stability within New England or particular communities in this area. One may argue as to whether the New England economy is now fully recovered from the short term crisis of 1949 and the long term decline which has characterized its primary manufacturing industries far the past 30 years. But there surely can be no argument as to the fact that no matter how many new industries move in, some attention should be paid to our old industries; and that new industries will not move in and old industries will continue to move out as long as other regions in the country employ what I consider to be unfair methods of competition.
It is my opinion that such unfair methods include the exploitation of loopholes or privileges contained in our federal tax laws; and I think this is an area of particular interest to you in the accounting field. Certainly no critic of my New England Program could deny that correction of inequitable federal tax legislation is one example of where federal policies and action are related to New England's economic status.
But because you are no doubt more familiar with the complexities of such tax laws than I, I am going to reverse the usual role of the political speaker who supplies all the answers. I am instead going to supply questions - questions directed in part to you, but to a greater extent directed to our Secretary of the Treasury, Commissioner of Internal Revenue, Defense Mobilizer and other officials. Some of these are questions of policy, some of administrative procedures, and some of fact.
PART 2
Tax Loopholes Influencing Industrial Dislocation:
The first group of questions which I wish to raise are those concerned with those loopholes or privileges in our Federal tax laws which have directly influenced industrial migration or dislocation to the disadvantage of New England and other older areas. My first question is:
1. Why are municipal securities which are used for the financing of private commercial facilities declared to be exempt from Federal income taxes? There appears to be a growing tendency of states, counties, and municipalities to issue tax exempt bonds for the acquisition or construction of plants or sites which are subsequently leased, loaned or given to private profit-making enterprises. As municipal property, these buildings escape local property taxes and the interest from these municipal bonds is exempt from Federal income taxes. This, of course, permits the financing of such facilities at a lower cost, and induces bargain-seeking manufacturers in other areas to abandon their plants and workers to accept the gains of such a tax dodge, This constitutes, in my opinion, unfair competition to the private company which would have to pay higher interest rates to finance taxable bonds for a new plant. One tax expert concluded that a municipally-financed cotton mill needed only a 2.4% profit on sales to stay in business, compared to a 4.36% return needed by a privately-financed cotton mill.
Last year the Stylon Corporation, makers of ceramic tile, decided to move from Milford, Massachusetts, to Florence, Alabama. The city of Florence issued municipal bonds to build a new $1.3 million plant for Stylon. I am told that these bonds did not pledge the credit of the city, but provided for interest and repayment only from the so called rent Stylon was to pay on its new factory. The bonds themselves, in fact, were convertible into Stylon common stock. Nevertheless, these Florence, Alabama, bonds wars exempt from all Federal income taxes and were gobbled up by investors at a low interest rate. Thus the taxpayers of Massachusetts and every other state in the union were handing a subsidy to Stylon to help it move from Massachusetts to Alabama. This year, the American Bosch Company, a rather important factor in the employment and industrial life of Springfield, Massachusetts, is leaving its location in that city for a free plant, free taxes for 10 years and low wage labor in Columbus, Mississippi.
I could cite dozens of other examples to you in Kentucky, Mississippi, Tennessee, Arkansas, Louisiana and Oklahoma as well as Alabama. These are tactics which have been particularly harmful to the textile industry. Apparel, machine, leather, abrasive, paper, and other important industries have been lured to these states through the use of industrial development revenue bonds.
But to return to my question, why are such securities exempt from Federal income taxes? Are not these bonds issued for a proprietary rather than for a public purpose? Are not these purely commercial bonds being used for purposes of unfair competition which, by hiding under the sheep's clothing of municipal securities, are able to cause a loss of revenues to the federal government? The Investment Bankers Association, the Municipal Finance Officers Association, the American Bar Association's Section on municipal law and others have all condemned these practices within the past few years. If the Bureau of Internal Revenue is convinced that such bonds cannot be taxed under our present statutes, then it is the duty of Congress to provide such an amendment. Putting an end to this tax dodge would benefit not only our older industrial areas whose plants are lured by such practices, among others, but also in the long run those communities now mistakenly offering such inducements. The Southeastern States Tax Officials Association has pointed out that this practice is "inequitable and unfair to industry in the states and detrimental to the taxpayers of the state because what is given away must be paid for by other businesses and individuals ... thereby creating an unhealthy social and economic condition." Virginia a few years ago repealed its authorization for such bond issues, its officials pointing out that "someone has to pay in the end." Moreover, no community which attracts migrant industries obviously not devoted to community responsibility or high ethical standards can ever be sure at what time such enterprises, having accepted these benefits and a few years of heavy profits, will again move for new bargains elsewhere leaving the community with empty buildings and a heavy bond issue.
I raise the question as to whether such municipal bonds are, or properly should be, tax exempt.
My second question is:
2. Should it be possible for Puerto Rico, under her Commonwealth relationship to the United States, to offer tax exemptions and municipally financed plants to firms moving their operations to Puerto Rico from the mainland in order to take advantage of such subsidies?
This question is closely associated with the first, but offers a special case because of the economic relationship between Puerto Rico and the United States. At the present time, certain new industries in Puerto Rico are granted complete exemption from income taxes, insular and municipal property taxes, and certain license fees, excise taxes and other levies imposed by the insular and municipal governments of Puerto Rico for the period from July 1, 1947, to June 30, 1959; a 75 percent exemption from such taxes for the fiscal year 1959-60; a 50 percent exemption for the fiscal year 1960-61; and a 25 percent exemption for the fiscal year 1961-62. Recently, the Governor has requested a still, more far reaching program of tax exemption. United States corporations in Puerto Rico and Puerto Rican corporations, as well as citizens of Puerto Rico, do not, except under special circumstances, pay Federal income taxes to the United States.
I fully sympathize with the need of Puerto Rico for further industrializing its economy; and I am opposed to undue interference by the Congress in Puerto Rico's affairs since the granting of its constitution. But, I cannot believe that Congress is powerless to act upon the type of unfair competition and industry dislocation which such tax exemptions create.
Recently, I obtained assurances from Governor Munoz Marin that the Puerto Rican tax exemption program "will not be used to encourage any industry to move to Puerto Rico if that involves closing industrial plants in any part of the United States." However, since the release of this correspondence, several other examples of the abuse of the Puerto Rican tax exemption program have been called to my attention; and I am hopeful that in the near future I can travel to Puerto Rico to inspect this situation firsthand. But I raise the question for consideration by you and our tax officials as to whether either the people of Puerto Rico or the people of the United States profit from the exploitation of such tax privileges by manufacturers transferring their operations out of this country.
My third question is:
3. Is that loophole completely closed which permits avoidance of taxes through the operation of a private business by a tax exempt, charitable or educational trust?
I am sure that all of you remember the wide publicity given to the closing of the Nashua, New Hampshire, mills of the Textron Company as a part of its manipulation of mill property through the use of charitable trusts and other tax avoidance devices. Title III of the Revenue Act of 1950 was intended to close this loophole. However, the original proposals to close up this loophole completely were somewhat modified, such modifications being made by the Congress in good faith. I raise the question again tonight because since enactment of the 1950 Act, Textron has sold a mill to a southern university, who could pay a relatively high price because of its tax exempt status and then "permit" Textron to "manage" the mill for a fixed sum each year. A review of this provision of the Internal Revenue Code would seem to be in order to ascertain whether its provisions need to be tightened.
Fourth, I wish to ask:
4. Can steps be taken to prevent the preferred capital gains treatment from being used as an incentive to liquidate going concerns?
It has been called to my attention that the preferential treatment of capital gains under our tax laws has been increasingly used by financial speculators who purchase going concerns for purposes of manipulation and liquidation rather that operation. In this way, profitable and established businesses are exploited or destroyed for personal gain regardless of economic dislocations and human waste. This has apparently been a factor in liquidations in textile, leather, tobacco and retail establishments. In one example which has been cited to me, a single group of speculators, through a series of financial manipulations over a period of eight years involving about a dozen allegedly different corporations, has been able to list most of the taxable income from the textile mills involved as capital gains, thereby paying a maximum tax of 25 percent - now 26 percent - instead of the higher rates intended by the tax laws. As a part of these maneuvers, the capital assets of one textile mill in New Bedford, Massachusetts, were so impaired that it was liquidated in 1949, destroying 1,000 jobs; other mills met a similar fate.
I realize that any limitation on the preferential treatment of capital gains is difficult to draft and administer, but I ask whether such repeated abuses could not be restricted.
PART II
Tax Amortization and Industrial Dislocation:
My next set of questions all relate to the same provision in our tax law Section 124A of the Internal Revenue Code providing for accelerated tax amortization as an inducement to expansion of emergency defense facilities. Although Defense Mobilizer Flemming has recently said that a sharp cut in such inducements is now planned, the operations of this program are worthy of review, not only in view of their past and present scope - certificates having been awarded for some 515.7 billion worth of capital investment - but also because such a program appears certainly to be a part of any future defense expansion policies.
My first question with respect to this program is:
1. Are tax amortization certificates being issued in a manner contributing to industrial dislocation?
It is my observation that tax amortization certificates have been awarded without regard to available sites or facilities in labor surplus areas; and frequently in cases contributing to the dislocation and unemployment in such areas. A few days before J. P. Stevens Company announced the liquidation of its Haverhill mills throwing over 400 employees out of work, the same company had applied for a tax amortization certificate as an inducement for new textile facilities in Stanley, North Carolina. The awarding of tax amortization privileges for a new $25 million transformer plant for General Electric Company in Rome, Georgia, was made at the very time that General Electric's activities in Pittsfield, Massachusetts, were threatened with curtailment and that community already had serious unemployment and available plant facilities. Several other examples which I quoted to the Senate convinced me that this is a question which must be seriously considered and answered by the appropriate officials. At present, the Department of Labor comments on many such proposals which might create a problem of labor shortage; but not where it might create a problem of labor surplus. At present, regulations deny certificates which would be used in lieu of existing facilities; but a Congressional investigation two years ago indicated that such regulations were not being strictly enforced, particularly on a nationwide basis. If, therefore, we are to have a prosperous and growing economy in every section of the country, consideration should be given to the effect of tax amortization certificates on industrial dislocation.
My second question closely related to the first:
2. Are tax amortization certificates being issued in a manner damaging the competitive status of any part of the country?
New England's participation in the accelerated amortization for expansion program has been disproportionately small in terms of its population, income, manufacturing employment, defense contributions, value added by manufacture, and willingness to expand. On the other hand, the four West South Central States, with far less defense participation, have received thus far certificates of necessity for projects worth five times the amount awarded all six New England states. Similar comparisons may be made with the South Atlantic and East South Central states. Particularly in the textile, chemical and metal industry has New England received an amazingly small portion of such certificates as might be expected on the basis of its employment in those industries.
If some equilibrium is not maintained, we shall end the emergency period with some sections of the country having most of the new plants and equipment while others, including New England, will have most of the old plants. In part this inequity is an indication of less aggressive representation on the part of New England businessmen and Congressmen; but our willingness to cooperate must be met by Federal policies concerned with an equitable distribution of new productive facilities, The competitive status of New England and other parts of the country who are an the short end of the present tax amortization program will be further weakened at the close of the emergency should an excess of productive capacity cause further liquidation of outmoded plants in higher cost areas.
Third, I would like to ask this question concerning the tax amortization program;
3. ARE TAX AMORTIZATION CERTIFICATES BEING ISSUED FOR OBJECTIVES EITHER UNNECESSARY OR SUBSEQUENTLY NOT ADOPTED?
This question has its roots in the first two questions raised, particularly with respect to the textile industry. A considerable number of new textile, and particularly synthetic textile, plants have been built largely in the South under the inducement of accelerated tax amortization. But at the same time the textile industry showed every sign of excess capacity with empty plants and unemployment in many important textile towns in New England. For building and operating these new plants, critical materials had to be allocated and new workers trained, at the same time that the workers and plants of Lawrence and Lowell stood idle. There are, of course, many reasons why the manufacturers chose to build these new plants in the South and elsewhere; but it highly questionable whether the inducement of accelerated amortization was a necessary incentive for such construction,
Moreover, of the 233 expansion programs for which rapid tax amortization certificates have been provided, a majority have been in the indirect defense category including petroleum, railroad freight equipment and electric power, many of which facilities would undoubtedly have been built regardless of the special privileges offered by the government, Finally, several other cases have been called to my attention where the new facilities, built with the critical materials allocated under the certificate of necessity and operated originally under the accelerated amortization provisions, have been deemed by their owners to be unnecessary for the defense purposes for which they were originally built; and instead private commercial operations are transferred thereto from older plants in older parts of the country. I was astonished to learn that practically no check or review for possible revocation is provided under the present program, regardless of the use to which such facilities may be put once the tax privileges have been given. The Congress and the people are entitled to know whether these certificates are being issued for unnecessary objectives or objectives not subsequently adopted.
Fourth, I ask:
4. ARE TAX AMORTIZATION CERTIFICATES BEING ISSUED IN A MANNER DAMAGING T0 THE COMPETITIVE STATUS OF SMALL BUSINESS?
This is a question of no small significance to New England, which has a higher proportion of independent business enterprises employing less than 500 persons than any other region in the United States. The economic growth of our region is particularly dependent upon the industrial expansion of our small business enterprises. Present regulations state that expansions will not be certified where such expansions may tend to eliminate competition, create or strengthen monopolies, injure small business, or otherwise promote undue concentration of economic power. But let us look at the result. In the basic industries concerned with this program, small firms normally provide roughly 35% of the employment. In ten out of the 20 major industry groupings in manufacturing small business firms filed enough applications so that they could have received 35% of the certificates awarded. But in 18 out of the 20, small business received substantially less than its fair share.
On the whole, although over 43% of all certificates were issued to small business, they received only 10% of the value of certificates granted; and they represented 23% of the applications denied. In textiles, small business has 22% of the employment, but received only 5% of the value of certificates issue. Thus, we must seriously raise the question as to whether the effect of this program has been to damage the competitive status of small business whose need for productive expansion and tax relief is already critical.
Finally, in concluding my remarks with respect to this tremendous program of accelerated tax amortization, I wish to ask this question:
5. ARE TAX AMORTIZATION CERTIFICATES BEING ISSUED IN A MANNER RESULTING IN UNJUSTIFIABLE SUBSIDIZATION AT PUBLIC EXPENSE?
Actually, this question breaks down into a number of sub-questions. Because of the billions of dollars of tax funds involved, we must ask ourselves whether this program has permitted abuses and undue advantages at the expense of the general taxpayer. If we accept the premise that tax amortization incentives are a necessary and desirable inducement for defense expansion, then of course we must accept the legitimate gains to manufacturers from their participation in the program. But it is not always easy to distinguish the legitimate gains from the unfair advantages. The conclusion of the Hardy Committee Investigation of the last Congress was that " the certificate of necessity program is the biggest bonanza that ever came down the Government Pike." The Committee stated that the program had cost the government millions in tax revenues, had been turned into one of direct and hidden subsidies and resulted in discrimination between competitors and against small business and had on the whole been excessive. Interestingly enough the Brewster Committee following World War II called that tax amortization program "legal profiteering"; and the Nye and Couzen Investigations following World War I were similarly highly critical of the abuses permitted by the special tax amortization programs in existence during the war. One may wonder how much we learned from our experience and whether future programs will permit similar abuses.
Many questions need to be raised. In how many cases is the amortization percentage based upon original cost, instead of original cost less salvage value, as is the normal tax accounting procedure? In how many cases, has land, which no other taxpayer can depreciate, been included as well as buildings in the investment for which amortization can be allowed? In how many cases have defense contracts operating on a cost plus basis included in their costs of depreciation paid by the government the excessive charge for amortization permitted under this program? In how many cases will the productive facilities amortized in five years - or in the case of atomic facilities in the unbelievably short period of one year - be extremely profitable to their owner for 20 years thereafter? In how many cases will the owner be able to sell his facilities at a profit and pay on the long-term capital gains tax rate, after he has derived the full tax benefit from special amortization under the income or excess profits tax rates?
Certainly it is legitimate to offer manufacturers a decrease in the risk involved in such plant expansion. The tax advantage secured through high deductions during a time of high taxes, or the income resulting from tax savings made possible by the acceleration of amortization deductions, are also gains necessarily connected with any such program.
But at a time when the tax burden borne by all of us is exceedingly high and when the administration talks in terms of imposing even more discriminatory taxes upon the general public, these questions relating to those tax loopholes and privileges which permit the few to profit at the expense of the many must be seriously raised - and I hope seriously answered.
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