Evening star., 1937-06-27
SENATOR'S MOVE TO TAX
ON STATE BONDS, SALARIES
Court Rulings Leave Constitutional
Amendment as Lone Mode of Ending
Local Immunities.

ton Of power plants. street railways
and general hospitals
That the line of demarcation is
difficult to determine and far from
matter Of unanimous feeling is seen
in the circumstance that the Board
of Tax Appeals last year overruled
the Bureau of Internal Revenue in
connection with tax liability Of SAL
aries of employees of port authority.
an activity which had been classified
as proprietary by the bureau, but as
governmental by the board.
The bureau made a similar finding
In connection with the New York
City Bureau Of Water Supply. but
was reversed In 7-to-2 decision Of
the Supreme Court last March.
While the barriers to taxing each
others employees thus were being
built up. the Federal Government
also found itself stymied temporarily
from levying taxes on two classified.
| tions Of its own employees namely tho
presidency and the Federal judge
ships. In this instance the prohibi-
ton is constitutional one to the
! effect that the compensation for
these Offices could neither be increased
nor decreased during the incumbency
of an individual. the contention then
| being that taxation would have the
effect of diminution of compen-
/ sation.
The validity Of this contention was
/ nnho1H in 1QO0 isio
of the Sunpreme Court.
! Congress got around this situation
! in the revenue act Of 1882 by provid-
/ ing that for President and Federal
! judges taking Office after passage of
the act their compensation should be
| included in gross income. adding that
all acts fixing the compensa ton Of
such Presidents and judges are here
by amended accordingly" The effect
of this last provision, in other words.
was to reduce automatically the salary
for the positions involved by the
amount Of the tax liability
Tax on Interest voided.
The question Of Federal or State
taxation of income from State or Fed
eral securities. as noted before. rests
upon the same legal foundation as
that built up for the salary tax i'm
munity
In 1929. following the Mccullough
VS.. Maryland decision, the court in
validated a municipal tax on Federal
securities. A clear statement of rea-
soning on the issue came in 1895, when
the court in the case of Pollock VS..
Farmers Loan & Trust Co. ruled that
State and municipal bonds could not
be taxed.
1T is contended," the court said.
that, although the property or rev.
enues of the States or their instru-
mentalities cannot be taxed, never
theless the income derived from State.
county and municipal securities can
be taxed. But We think the same
want Of power to tax the property or
revenues of the States or their in
strumentalities exists In relation to a
tax on the income from their securi-
ties, and for the same reason. 1t is
obvious that taxation on the interest
therefrom would operate on the power
to borrow before it is exercised. and
would have a sensible influence on
the contract, and that the tax in
question Is a tax on the power Of the
States and their instrumentalities 10
borrow money. and consequently re-
pugnant to the Constitution.
Although numerous devices for
getting at the potential revenue have
been suggested, and an excise tax
actually has been found valid IN ap-
plication to corporate income from
tax exempts, constitutional amend
ment obviously Is the only step which
would clear the way to complete
taxation Of such income.
Recognition Of the material loss OF
revenue was given q public airing by
Secretary of Treasury as long age
, as 1919 when Carter Glass, then a
. member of President Wilson's cabinet
expressed his hostility to the condi-
, ton. His feeling was echoed IN 1926
by Secretary Of Treasury Houston.
Andrew Mellon proposed abolition
OF such exemptions in 1921 and PreSi.
dent Harding proposed constitutions
amendment for that purpose In hi
first annual message to Congress. Tht
House approved such an amendment
In January. 1928, but the Senate tool
no action that session and when th'
proposal came before the next Hous'
, in December, 1928. 1t was defeated.
,, The attitude OF the Treasury De
partment in the Hoover administra
-
question, but the present Secretar.
Morgenthau was smoked out" on tn
issue In March, 1884, when he In
formed the House Judiciary Commit
tee that the department favored "elim
> ination OF the exemptions from Fed
/, eral income tax now accorded to tn
4 interest on Federal. State and mu
= ,(Ccntinued on Page D-3)