STATEMENT OF SENATOR CHARLES MCC. MATHIAS, JR. SUBMITTED TO THE Mr. Chairman, it has been said that a real opportunity for tax reform comes only once to each generation. If this is true, this is our opportunity and we must use it well. H.R. 13270 is undoubtedly the most far-ranging bill we shall consider this year. As the mail pouring into our offices testifies, there is great public concern over the growing weight of taxation -- Federal, state and local -- on the nation's wage-earners. As the mail also indicates, each section of this bill will have a lasting impact on some segment of our economy and society. Thus our task is the difficult one of halancing general concepts and specific complaints, and producing an equitable and durable bill. I claim no special expertise across the whole spectrum of taxation, and I would therefore like to confine my remarks today to four areas which are of deep concern to me and to many Marylanders: philanthropy, state and local bonds, pension plans, and livestock. I choose these subjects not out of any limitation of interest and concern, but out of a limitation of your time. I. CHARITABLE CONTRIBUTIONS AND FOUNDATIONS The House-passed bill constitutes a severe challenge to the philanthropic activities which have been a uniquely American asset throughout our history. As far back as the 1830's, Alexis de Tocqueville noted the tendency of Americans to form voluntary associations to meet public needs. This week the launching of annual United Givers Fund campaigns across the nation reminds us again of the tremendous contributions which the voluntary sector has made to our social health and national welfare. The spirit of philanthropy has built and sustained many of our greatest educational and medical institutions. It has founded and supported many of our finest libraries, museums and orchestras. It has enriched our cultural life and underwritten many valuable community services, such as scouting and the Red Cross, which otherwise would have to be provided by government or not at all. Private foundations have been a vital expression of this philanthropic spirit. As HEW Secretary Robert Finch wrote recently: In every area of thought and action -- in all benchmarks in the progress of recent civilization. It is true that a few individuals have used charitable contributions or created foundations to reduce their tax burdens excessively. Also, a few foundations have abused their tax-exempt status. Such excesses do justify improvements in the laws and far more extensive oversight and auditing of taxexempt activities. But they do not justify, in my judgment, a wholesale assault on the voluntary sector -- especially at a time when government's social burdens are already vast, or when diversity and innovation should be promoted rather than squelched. A. In regard to charitable contributions, therefore, I support the House provision which would increase the limit on charitable deductions from 30 percent to 50 percent of adjusted gross income. I am concerned, however, about other provisions of the House bill which could discourage very large contributions, the creation of charitable trusts, and gifts of appreciated property, including works of art and literature. The Administration's recommendations to this Committee represent a substantial improvement over the House bill, but further modifications should be considered. In particular, I cannot understand any justification for placing in a separate and prejudicial category gifts of appreciated property to private foundations as opposed to similar gifts to other types of tax-exempt entities. P. In regard to foundations, I am especially troubled four aspects of H.R. 13270: by 1. The proposed tax of 7 percent on the investment income of foundations is to me excessive and unwarranted. I therefore support, as a compromise, the Administration's recommendation to reduce this to 2 percent. To maintain the traditional tax-exempt status of foundations and other philanthropic institutions, moreover, I believe that such a levy should be clearly and explicitly imposed as a user charge or fee, earmarked to defray the administrative expenses of auditing and 2. The "income equivalent" provisions requiring a minimum 5 percent yield for foundations is unrealistic and could be mischievous. Foundation managers are obliged to maintain a prudent investment portfolio which would, presumably, include a mixture of growth and income-producing investments. The House bill would upset this management concept and could lead foundation managers to chase the vagaries of the stock market in pursuit of a 5-percent return, rather than concentrating on their philanthropic Far more flexibility should be permitted. responsibilities. 3. The stock ownership limitations of section 101 of H.R. 13270 would impose special hardships on private foundations whose assets consist wholly or primarily of stock in closely-held family corporations, and whose major contributors are members of that family. Even where these holdings are of non-voting stock, the extremely broad attribution rules of the House bill would require such a foundation to dispose of all its securities in the family corporation, because of the stock held by family members. Presumably the funds received in return would then be reinvested by the foundation in other securities not subject to the 20-percent limitation. I am not convinced of the necessity for such complete divestiture where the stock involved is non-voting stock. However, I am more concerned by the fact that in such cases, compliance with these provisions would be extremely difficult since no ready market would exist for the non-voting stock other than the family or the issuing corporation. Realistically, only redemption by the issuing company would provide the foundation with a reasonable value for the securities held. While the House bill does not forbid such redemption by the issuing company, the Internal Revenue Service has sometimes taken the position that where a corporation redeems shares which have been received by a foundation as a gift, the redemption amounts to a dividend taxable to the persons who made the gift. As far as the redeeming corporation is concerned, there is a possibility that the IRS would assert the penalty tax for unreasonable accumulations of income. The uncertainty of this situation is extremely dangerous and could effectively prohibit redemption as a practical matter. At the very least, therefore, an explicit legislative mechanism should be provided to allow redemption by the issuing company in such cases over the 10-year period with no adverse tax effects to the foundation, the redeeming corporation, its stockholders or the original donor of the stock involved. In related areas, too, I would encourage this Committee to provide the required assurances to permit such foundations to comply in good faith with the concept of divestiture without incurring penalties for their compliance. - 4. Finally, I urge this Committee to clarify the highly confusing and ambiguous language of the House bill restricting the permissible activities of foundations in public policy fields. The line between lobbying and educational activities is a delicate and elusive one, but as Secretary Finch has stated a rational definition must be found. It would be a real mistake, I feel, to discourage foundations from sponsoring innovative efforts in education or medical research, or to deny legislators and public administrators the benefits of the experience and knowledge of many eminent Americans simply because those individuals are connected with foundations. For example, under some interpretations of the House bill, public officials could discuss the Heller-Pechman revenue-sharing proposals with Dr. Heller, who is at a university, but not with Mr. Pechman, who is associated with a foundation. Such inane situations should be precluded by clarification of these provisions. II. STATE AND MUNICIPAL BONDS A second area of special concern to me is the proposed change in the treatment of interest on previously tax-exempt state and local bonds. In 1968, $16 billion in such bonds was issued to finance a portion of the vast capital needs of our nation. The tax bases on which state and local governments depend are already overburdened. In this context, I believe we should be extremely cautious in considering measures which could make it even more difficult for states and localities to finance much-needed improvements such as schools, hospitals, streets, libraries, and water systems. The mere discussion in Congress of removing the traditional exemption from these bonds and of including such income in the LTP and allocation of deductions provisions has engendered chaos in the market. In the period from February to August 1969, the Bond Buyers' Index of 20 representative municipals rose from 5.04 percent to 6.02 percent, a considerably larger jump than occurred in federal and corporate debt financing. As our colleague from New York pointed out before this Committee, the market rate of return on state and local bonds has been steadily rising. It would appear that the revenue effect of the proposed changes may not be great, but that the market effect could be catastrophic. If we are to design a true tax-reform measure, we must not force local governments to abandon bonds and turn to increases in regressive sales, property and utility taxes. Protracted litigation to test the limits of the doctrine of "intergovernmental immunity," regardless of the eventual outcome, promises to keep the municipal market in confusion for years if changes similar to those in H.R. 13270 are ultimately enacted. Federal grants-in-aid for capital purposes in F.Y. 1970 will total some $6.5 billion. The bulk of the required matching funds will be raised through bond issues. As the Federal government holds out promises of revenue sharing, a mass transit fund, and welfare reform on the one hand, it must not seriously erode a significant source of state and local government financing on the other. III. PENSION PLANS Since 1942 lump-sum distributions from qualified pension plans and similar sources have been accorded capital gains treatment. The House bill would prospectively limit such treatment to the amount in excess of employer contributions. The fact that these distributions involve receipt in one year of funds accrued over a number of years suggests that the entire amount should continue to be taxed at special rates. I am confident that this Committee will carefully examine the relevant portions of H.R. 13270 to insure that the reasonable expectations of the numerous employees participating in such plans are not thwarted. I am concerned that other changes in pension treatment called for in H.R. 13270 may have broader ramifications than initially appear. Future growth in the private sector of our economy is dependent upon the availability of a large pool of capital which will enable older businesses to expand and new ventures to be created. Any narrowing of this pool of capital should be regarded with concern if we are to keep what will soon be a trillion-dollar economy growing in a healthy manner. Profit-sharing and pension |