Evening star., 1941-03-15
Treasury Seeks Test
On Taxing State, City
And Local Securities
Move Planned After
Unpromising Effort Of
Congressional Action

The Treasury. securing the coun-
try for revenue sources at time
when public expenditures are mount
ing. was on the way today to finding
out whether the Constitution permits
the Federal Government to tax
State, municipal and local securities.
This is an old question which is
pressing now that Congress has
passed a law permitting full taxation
of Federal securities.
The Treasury's Bureau of Internal
Revenue is going about the test first
by finding out whether it can tax
the issues of a quasi-public inStitu-
ton, the Port of New York Author
ity. Treasury attorneys said that if
the courts agree the Authority's
bonds are taxable, they will be asked
to decide the broader question of
whether State and municipal securi-
ties are immune from Federal taxa
ton.
This approach to the problem has
been taken after an unpromiSing ef-
fort on the part of Secretary of the
6Nllbiluh w oOullA Oub
Congress on whether the House and
Senate would pass bill granting the
Treasury statutory authority to tax
the local issues. Congressional lead
ers have indicated the Treasury
would not find enough hackers at the
Capitol for such move.
The Treasury is ready to push the
Port of New York Authority matter
right up to the Supreme Court in
order to find out exactly where it
stands. The first step in the test
action was to send tax deficiency
notices to seven Port of New York
Authority bondholders:
Howard S. Cullman, vice chair
man of the Authority; Alexander
j. Shamberg, a commissioner of the
Authority; Dennistoun M. Bell,
Maurice Bouvier. Henrietta J. Bou-
vier, Willis S. Kilmer and Martin
S. Paine.
1t is assumed that the Port Au-
thority will undertake the legal de-
fense of these bondholders, espe-
cially since it defended Port Au-
thority employees in previous tax
litigation with the Federal Govern
ment.
Wants Tax on Future Issues.
Technically, the TreasuryS action
was an effort to collect back taxes,
but the Treasury reiterated its pol
icy against taxing existing State
and local securities and said it
wanted only to tax the income from
future issues. If the action insti-
tuted succeeds, the Treasury prom
ised to renew its recommendation
to Congress to abate the payment
of back taxes, to exempt outStand-
ing issues from taxation and to be-
gin the taxation of future issues"
Existing State and local govern
mental securities total $4,000, ,000,-
900. Under the Treasury plan, these
would remain exempt from Federal
| taxation, but all new securities in
cluding any refunding securities is
sued to replace the existing ones
would be subject TO Federal taxes
The Port of New York Authority
was selected for the test case for
historical reasons. BY a similar
test action a few years ago, the
Treasury won from the Supreme
Court and Congress the right tc
tax the salaries of persons employed
by State and local governments.
S400, ,000, 900 Revenue.
When the volume of newly issued
securities equals the size of the
existing tax free securities of the
State and local governments. the
additional revenue may reach S400,-
100000 per year according to some
Treasury estimates. if this suit is
successful.
1t is the Treasury's intention. if
it wins the case, to make the privi-
lege reciprocal Then, in the case
of new securities, Federal bonds
would be subject to State income
taxes. and State and local bonds
would be subject to Federal income
taxes. Apparently, in neither case
would there be any taxation of the
bond itself. only the interest on it.
Secretary Morgenthau announced
yesterday plans for s1,000,0 200, 900 of
Treasury financing next week which
will boost the Federal debt to a new
record high of $4,000, 100000.
He said it was planned to borrow
$500, ,000, 900 of new money" through
the sale of securities, and to issue
additional securities to refund S504, =
600 600 of Ia Der cent Treasury
notes coming due for payment
June Is.