State Of New York et al v. Mnuchin et al

Filing 47

DECLARATION of Owen T. Conroy in Support re: 44 CROSS MOTION for Summary Judgment .. Document filed by State Of Connecticut, State Of New York, State of Maryland, State of New Jersey. (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3, # 4 Exhibit 4, # 5 Exhibit 5, # 6 Exhibit 6, # 7 Exhibit 7, # 8 Exhibit 8, # 9 Exhibit 9, # 10 Exhibit 10, # 11 Exhibit 11, # 12 Exhibit 12, # 13 Exhibit 13, # 14 Exhibit 14, # 15 Exhibit 15, # 16 Exhibit 16, # 17 Exhibit 17, # 18 Exhibit 18, # 19 Exhibit 19, # 20 Exhibit 20, # 21 Exhibit 21, # 22 Exhibit 22, # 23 Exhibit 23, # 24 Exhibit 24, # 25 Exhibit 25, # 26 Exhibit 26, # 27 Exhibit 27, # 28 Exhibit 28, # 29 Exhibit 29, # 30 Exhibit 30, # 31 Exhibit 31, # 32 Exhibit 32, # 33 Exhibit 33, # 34 Exhibit 34, # 35 Exhibit 35, # 36 Exhibit 36, # 37 Exhibit 37, # 38 Exhibit 38, # 39 Exhibit 39, # 40 Exhibit 40, # 41 Exhibit 41, # 42 Exhibit 42, # 43 Exhibit 43, # 44 Exhibit 44, # 45 Exhibit 45, # 46 Exhibit 46, # 47 Exhibit 47, # 48 Exhibit 48, # 49 Exhibit 49, # 50 Exhibit 50, # 51 Exhibit 51, # 52 Exhibit 52, # 53 Exhibit 53, # 54 Exhibit 54, # 55 Exhibit 55, # 56 Exhibit 56, # 57 Exhibit 57, # 58 Exhibit 58, # 59 Exhibit 59, # 60 Exhibit 60, # 61 Exhibit 61, # 62 Exhibit 62, # 63 Exhibit 63, # 64 Exhibit 64, # 65 Exhibit 65, # 66 Exhibit 66, # 67 Exhibit 67, # 68 Exhibit 68, # 69 Exhibit 69, # 70 Exhibit 70, # 71 Exhibit 71, # 72 Exhibit 72, # 73 Exhibit 73, # 74 Exhibit 74, # 75 Exhibit 75, # 76 Exhibit 76, # 77 Exhibit 77, # 78 Exhibit 78, # 79 Exhibit 79, # 80 Exhibit 80, # 81 Exhibit 81, # 82 Exhibit 82, # 83 Exhibit 83, # 84 Exhibit 84, # 85 Exhibit 85, # 86 Exhibit 86, # 87 Exhibit 87, # 88 Exhibit 88, # 89 Exhibit 89, # 90 Exhibit 90, # 91 Exhibit 91, # 92 Exhibit 92, # 93 Exhibit 93, # 94 Exhibit 94, # 95 Exhibit 95, # 96 Exhibit 96, # 97 Exhibit 97, # 98 Exhibit 98, # 99 Exhibit 99, # 100 Exhibit 100, # 101 Exhibit 101, # 102 Exhibit 102, # 103 Exhibit 103, # 104 Exhibit 104, # 105 Exhibit 105, # 106 Exhibit 106)(Conroy, Owen)

Exhibit 26

S.

HRG. 99-246, PT. XIX

TAX REFORM PROPOSALS-XIX

HEARING
BEFORE THE

COMMITTEE ON FINANCE
UNITED STATES SENATE
NINETY-NINTH CONGRESS
FIRST SESSION
JULY 25, 1985
INCOME TAX DEDUCTIONS OF STATE AND LOCAL GOVERNMENTS

Printed for the use of the Committee on Finance

52-9110

U.B. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1980

&32

/-

lr

COMMITTEE ON FINANCE
BOB PACKWOOD,
ROBERT J. DOLE, Kansas
WILLIAM V. ROTH, JR., Delaware
JOHN C. DANFORTH, Missouri
JOHN H. CHAFEE, Rhode Island
JOHN HEINZ, Pennsylvania
MALCOLM WALLOP, Wyoming
DAVID DURENBERGER, Minnesota
WILLIAM L. ARMSTRONG, Colorado
STEVEN D. SYMMS, Idaho
CHARLES E. GRASSLEY, Iowa

Oregon, Chairman
RUSSELL B. LONG, Louisiana
LLOYD BENTSEN, Texas
SPARK M. MATSUNAGA, Hawaii
DANIEL PATRICK MOYNIHAN, New York
MAX BAUCUS, Montana
DAVID L. BOREN, Oklahoma
BILL BRADLEY, New Jersey
GEORGE J. MITCHELL, Maine
DAVID PRYOR, Arkansas

WILLIAM DIsKrNDI)KRIER, Chief of Staff
MICHAEL STERN, Staff Director
(1!)

CONTENTS
ADMINISTRATION WITNESS

Pearlman, Hon. Ronald A., Assistant Secretary for Tax Policy, Department of
th e T reasu ry ..................................................................................................................

Page

81

PUBLIC WITNESSES

Javite, Hon. Jacob K a former Senator from New York ..................
Carlin, Hon. John, governor of Kansas and the chairman of the National
Governors' Association ......................................
Lamm, Hon. Richard D., Governor of Colorado .......................
Thornburgh, Hon. Dick, Governor of the Commonwealth of Pennsylvania .........
Moral, Hon. Ernest, mayor of New Orleans ..............................................................
Voinovich Hon. George, mayor of Cleveland ............................................................
Marchi, Ron. John J., chairman, senate finance committee, New York State
Senate on behalf of National Conference of State Legislatures ..........................
Klinger Ann member, board of supervisors, Merced County, CA ........................
Howe, Jonathan T., second vice president, National School Boards Asociation ..................................................................................................................................

13

82
32..................
58
59
108
126
149
162
178

ADDITIONAL INFORMATION

Prepared statement of Senator Dave Durenberger ...................................................
2
Prepared statement of Senator Jacob K. Javits .........................................................
16
Prepared statement of Gov. Ed Herschler of Wyoming ...........................................
3
Prepared statements of Governor Carlin and Governor Lamm .............
42
Prepared statement of Gov. Dick Thornburgh ..........................................................
63
Prepared statement of Hon. Ronald Pearlman ..........................................................
85
Prepared statement of Mayor Ernest Morial .............................................................
111
Prepared statement of Hon. George V. Voinovich ....................................................
128
Prepared statement of Hon. John Marchi ..................................................................
151
Prepared statement of the National Conference of State Legislatures .................
164
Prepared statement of Jonathan T. Howe ..................................................................
180
A working paper from the National League of Cities entitled "Federal Housing Assistance: Who Needs It? Who Get It?" ........................
208
COMMUNICATIONS

American Association of State Colleges and Universities .......................................
Am erican Jewish Congress ..........................................................................................
Am erican Library Association .......................................................................................
Am erican Planning Association ....................................................................................
Association of American Publishers, Inc .....................................................................
Council of State Housing Agencies ...............................................................................
Delaware School Boards Association ............................................................................
Free The Eagle .................................................................................................................
Bordallo, Hon. Ricardo J., Governor of Guam ..........................................................

Dixon, Richard B., treasurer and tax collector, Los Angeles County ....................
Minnesota School Boards Association ..........................................................................
Missouri School Boards Association .............................................................................
New York School Boards Association .........................................................................
New York City Partnership................
...................................
Van Brocklin, Robert D., director of government affairs, city of Portland, OR..
Taft, Stettinius & Hollister......................................5.
(li)

251
258
268

274
279
281
298
8 00
301

884
847
352
856
367
870
89

IMPACT OF THE TAX REFORM PROPOSAL ON
STATE AND LOCAL GOVERNMENTS
THURSDAY, JULY 25, 1985

U.S. SENATE,
COMMrIrEE ON FINANCE,

Wateington, DC.
The committee met, pursuant to notice, at 9:80 a.m. in room SD215, Dirksen Senate Office Building, Hon. Robert Packwood (chairman) presiding.
Present: Senators Packwood, Heinz, Durenberger, Symms, Grassley, Bentsen, Moynihan, and Bradley.
[The prepared statement of Senator Durenberger follows:]
(1)

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1985

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8
Dear Mr. Chairman:

I appreciate this opportunity to address the Committee on
this important issue--the federal income tax deduction for state
and local taxes.

This deduction has been a provision of the

Internal Revenue Code since the creation of the federal income
tax in 1913.

The President's tax reform plan would eliminate

thih deduction.
The Administration considers this deduction to be an unfair
subsidy to the rich in high-tax states with a penchant for big
government.

This rhetoric ignores the fact that the state and

,local tax deduction is part of a much larger system, called
fiscal federalism.
In reality, national, state, and local taxes are combined in
a Federal Tax System.

And it is the federal tax system--not just

national taxes--that is the engine for a successful domestic
economy.

So, if we are going to tinker with that engine, we had

better know how its parts fit together or we may not get it
started again.
I speak to you today as the Chairman of the Senate
Subcommittee on Intergovernmental Relations.

As Chairman,

participated in the New Federalism debates in 1982.

I

At that

time, it was clear to those of us in the trenches that state and
local tax deductibility is one of a number of ways in which the
national government helps states and local governments to handle
their own responsibilities.
The New Federalism initiative may have died, but de facto New
Federalism is alive and well.

Over the past four years, we have

4
thrust upon state and local governments more and more
responsibilities with fewer and fewer national dollars to go with
them.

And, undoubtedly, we shall continue to do so.

It is only in this Federalism context that we are able to see
state and local tax deductibility clearly.
states to raise and keep their own revenues.

Deductibility allows
And it rewards them

for handling their own responsibilities.
My subcommittee examined this issue at a hearing in June, and
we received testimony from many groups and individuals--some of
whom are here today.

I'd like to read a few comments from theme

"Federal budget cuts, and the elimination or reduction
of certain federal programs have put additional burdens on
state and local governments throughout the country.

Removal

of the federal deduction for state and local taxes would have
a serious impact on the ability of thea. governments to raise
the funds needed to meet their increasing obligations."
"The proposed elimination of deductibility threatens to
weaken our federation of states, which is the foundation of
our nation.

Factors such as state sovereignty, fiscal

federalism, equity, and national security do not easily lend
themselves to economic modeling and standardized indices.

In

today's uncertain time, it would be foolhardy to abandon
these principles in pursuit of new goals. which are framed
more by rhetoric than careful and considered analysis.
These are strong words

.

.

.

expressing powerful sentiments.

You're probably thinking they were spoken by Governor Mario Cuomo
or Senator D'Amato or Senator Moynihan.

After all, they are all

5
from New York, the highest tax state in the country, and citizens
of New York have the most to lose if the deduction is eliminated.
But it wasn't Governor Cuomo nor Alfonse D'Amato nor Pat Moynihan
nor anyone from a high-tax state.

These are the concerns and

protestations of the Governors of Alaska and Wyoming--the two
states that would be the biggest winners if the deduction were
eliminated.

They know that the issue of deductibility is more

than an issue of winners and losers, and it must be viewed in the
broader context of our federal system.
Our national, state, and local governments are joined in a
single system of government, sharing responsibilities and
resources.

And while some states might not benefit as much from

deductibility, they receive the benefits of our intergovernmental
system through grants to. state and local governments, defense
contracts and procurement, and direct payments to individuals.
Por example, Governor Sheffield of Alaska knows that hit state
received the fourth highest per capita federal expenditure for
defense contracts in 1983, a whopping $1,783 compared to the
national average of $778 and a lowly $445 in Minnesota.
The Governor of Mississippi also wrote to me in support of
the deduction, even though his is a low-tax state.

His citizens

might not receive much benefit from the deduction; but for every
$1 that Mississippi pays in federal taxes, Mississippians receive
$1.67 back in federal spending.
receive less than they put in:
ranking of 42 for Minnesota.

On the other hand, Minnesotans
only 87 cents, resulting in a

6
Now, I'm not suggesting that each state should receive the
What I am saying is that states

same level of federal spending.

which levy high tax rates so they can take care of many of their
problems without federal aid--states like Minnesota--should not
be penalized.

I think the Governors of Mississippi and Wyoming

realize that while they might be low on thO' totem pole for some
things, they are high for others.

And for them to point the

finger at high-tax states would be like the pot calling the
kettle black.
By repealing the deduction, the Treasury Department is
treating state and local tax deductions as though they were
identical with tax subsidies for three-martini business lunches.
In fact, under the Administration's proposal, those lunches farebetters

That deduction is reduced but not eliminated.

The Administration says its plan is simple and fair.

Well,

repealing the deduction for state and local taxes is certainly a
simple way to keep the plan revenue neutral.

But that doesn't

make it fair.
I believe the tax reform plan is grossly unfair to state and
local governments.

Consider these statistics:

The estimated

federal government revenue loss for tax expenditures which
benefit individuals is $293 billion for Fiscal Year 1986.
Deductibility of state and local taxes represents $33.2 billion-about 11 percent of the total.

Yet , deductibility represents 67

percent of the Administration's proposed modifications of tax
expenditures that would lower tax rates.

I don't call this fair.

I
I will just mention briefly the reasons I believe the
deduction of state and local taxes is critical for our
intergovernmental system.

First, the deduction prevents the

national government from capturing all of the tax base and helps
to preserve some portion of the base for state and local revenue
Without the deduction, state and local governments will

sharing.

face increased voter resistance to raising taxes to finance
needed expenditures.

The Congressional Research Service

estimates that revenues from state and local taxes paid by
itemizers could decrease by up to 13 percent if deductibility is
repealed.

And this decrease would mean a decline in state and

local spending, during a time when we are already asking states
and local governments to assume more responsibilities.
The deduction also helps to cushion the harmful tax
competition among states by reducing the effect of fiscal
disparities among them.

There are several factors, other than a

preference for big government, which can cause differences in tax
rates.

For instance, large urban areas that have a higher than

average percentage of the poor must impose a heavier burden on
the non-poor so that ordinary public services--education,
roads--are provided at adequate levels.

police,

Without the deduction,

high-income taxpayers face an incentive to move to lower tax
jurisdictions, leaving behind a depleted tax base which cannot
support the low-income population.
Conversely, low-tax states don't necessarily have a
preference for loes

government but might be able to generate

revenue from other sources, such as natural resources, tourism,

70
The CHAIRMAN. Senator Moynihan.
Senator MOYNIHAN. Thank you, Mr. Chairman.
Excellency, we are very honored to have you with us today. I
have just a couple Qf questions I would like to ask and one general
statement I would like to make. I think that this committee-at
least some of us here-is concerned that in the course of undertaking to reform the Tax Code, which in all truth we do every other
year, we are going to alter the Constitution. I mean by this we are
going to change the constitutional balance in some fundamental
way. Senator Javits has described so well of the increasing efforts
of the Federal Government in the last quarter century to reduce
inequities in the American Federal system. As a result of this
effort, there arose some concern that the Federal Government was
getting too large.
In response to this concern, President Kennedy initiated-and
President Nixon finally adopted-revenue sharing. This was a very
specific proposal- to turn revenue back to State governments and
local governments and to permit decisions to be made there.
Now we have lost revenue sharing. And if we lose State and local
tax deductibility, there is going to be one ineluctable process-that
is, more and more decisions will be made in Washington.
I would like to ask all of you one question. I was surprised to
learn that the Treasury Department describes this provision, which
has been in the Tax Code from the beginning, as a Federal subsidy.
There is something perverse about this proposition-any money
the Federal Government doesn't take from you, it has somehow allowed you to keep, as if it was theirs to begin with. A Federal subsidy, it would appear, is the amount of money that the Treasury
does not collect as taxes.
And just this very word, subsidy, changes the whole political
debate. It is a most arrogant assertion that the government owns
your income-what it does not take from you is something it has
given to you.
The CHAIRMAN. Let me interrupt and recall to memory. You
weren't here at the time, Pat, but in 1974-75 Ed Levy who became
our Attorney General but was then the dean of the Law School at
Chicago testified-we were on tax reform then as we are now-and
he took exactly this theory that you were talking about. About it
belongs to us, but we will let you keep some of it. And he said I
don'ttheory. where these taxbeen aroundget this idea that that's to
new know He said that's reformers for centuries. We used a
call it feudalism. [Laughter.]
Senator MOYNIHAN. Well, welcome to the court.
But there is another subsidy that I would like to ask you about:
the Federal tax exemption for the interest on State and local government bonds. Would you consider it? For a number of years the
Office of Management and Budget would put out special anayss
of different aspects of public finance, up until 1982 when they
stopped it. There was a table, 89 which listed the present value
-of the subsidies for new issues of State and local government bonds.
In the year 1982, it was estimated that the tax loss to the Federal Government for new bond issues was $28 billion and the borrower benefit was $16.5 million, which meant to say that there was a
difference of $8 billion that went solely to the people who owned'