July 10, 1968
Page 20469
Mr. PROXMIRE. Mr. President, will the Senator from Maine yield?
Mr. MUSKIE. I am very happy to yield to the Senator from Wisconsin.
Mr. PROXMIRE. I hesitate, and, believe me, I do hesitate before I would question the distinguished Senator from Maine in an area in which he is the outstanding authority in the Senate, and because he has done a magnificent job for my State in this area as well as for all other States of the Union, but what concerns me is the financing method proposed to be used here. It has been brought to my attention that the financing features of the bill represent a sharp departure from that contained in the original administration request.
The problem is this: By providing for contracts regarding future payments of grants to localities which would be used as backing for tax-exempt securities issued by the localities, the bill in its present form would, in effect, seem to lead to Federal guarantees of tax-exempt securities.
The Treasury has always maintained that to do this is regarded as highly unsound, uneconomical, and contrary to the basic administration position as expressed in the report of the President's Committee on Federal Credit programs.
This morning, the Joint Economic Committee held hearings at which it heard the banking regulatory administrators testify that emphatically they thought any kind of Federal guarantee of tax-exempt securities was very bad. It seems to me what it does lead to is a further broadening of the loophole which all of us recognize as unfortunate; namely, the fact that people can invest enormous sums in municipal obligations and pay no taxes whatsoever. We recognize that we have to pay a price for helping the municipalities, but I am wondering, under these circumstances, why we could not have followed the administration which would have provided for taxable securities, as contained in the committee report which says by the administration route that communities enter into contracts with the Secretary to issue taxable securities. Why can we not follow that procedure instead of the procedure which the Treasury -- and it seems to me with good reason -- has opposed?
Mr. MUSKIE. Let me say that the bill does not provide for any Federal guarantees whatsoever for either taxable or tax-exempt municipal bonds. All this does is to provide a backing for a commitment the Federal Government has already made to States and municipalities in the 1966 act. In that act, it provided that if the States or municipalities wanted to move ahead with construction of approved waste treatment plants at a faster pace than that authorized by the 1966 act, they could do so and the Federal Government would reimburse them for the Federal share of the cost of such projects.
That commitment is already in the law. Now, whether Congress and the appropriations committees would meet that commitment is something the States and municipalities will have to gamble on. But some 20 States have decided to take that gamble, including my State, New York State, and others.
What we propose to do here is to substitute, within certain limitations which I described earlier, for that open-ended reimbursement commitment, a contract authority, a backing, limited to the difference between the amount actually appropriated for grants and the total authorization set in the 1966 act.
Now, how the States and municipalities provide or finance the Federal share of the cost of such projects is for them to decide. The pending bill has nothing to say on that subject. We do not say they must issue bonds, taxable or tax-exempt.
So far as we are concerned, they can finance the Federal share of the cost out of current revenues.
That is their decision to make. Thus, we do not undertake in this bill in any way to guarantee the issuance of any kind of Federal, State, or local bonds.
Mr. PROXMIRE. The Senator is absolutely correct when he says he does not undertake to guarantee. But there is, apparently, a strong feeling that by providing for contracts regarding future payment of Federal grants to localities the contracts would be used as indirect Federal backing for tax-exempt securities issued by the localities. Of course, they do not issue taxable securities. If they issue them tax exempt, the bill in its present form would lead to partial Federal guarantees, at least, on tax-exempt securities.
Mr. MUSKIE. Let me say to the Senator from Wisconsin on that point that it is my understanding the reimbursement feature of the 1966 act is now being relied upon as backing for municipal and State bonds issued, to take advantage of it.
Mr. PROXMIRE. I am not saying that the principle which the Treasury espouses has not been violated. I want to establish whether we are not widening it here. If we are, then whether we have a record on it. Has your committee discovered a record on this matter?
Mr. MUSKIE. Let me say on that point that, if anything, S. 3206 narrows the obligation we assumed in the 1966 act, in at least these respects: One, there is a dollar limit on the total. The reimbursement feature of the 1966 act had no such limit.
The limitation here is the difference between the amounts actually appropriated for grants and the total authorization figures in the 1966 act. The reimbursement feature of the 1966 act had no such limitation.
Mr. PROXMIRE. What about the dollar limit?
Mr. MUSKIE. The dollar limit for 1969 is $700 million.
Mr. PROXMIRE. Through 1971 it goes up to more than $2 billion altogether in the aggregate; is that not correct?
Mr. MUSKIE. Fiscal 1970 is $1 billion. Fiscal 1971 is $1,250 million. So that is a total of $2,750 million for the 3 fiscal years. It was $400 million for the last fiscal year.
This bill would limit contract authority to the difference between the amount appropriated for grants and this authorization figure. In this year, it would be, if the budget request for grants were approved by Congress, $475 million. There is no such limitation upon the 1966 reimbursement feature.
Mr. PROXMIRE. Nevertheless, if the administration, in its proposal for financing its taxable securities, were followed, there would be $475 million in the coming fiscal year from taxable securities. Instead of that, we have $475 million of nontaxable securities, with what some people interpret as partial Federal guarantee. Is that correct?
Mr. MUSKIE. If the administration bill were adopted, there would be full Federal guarantee plus a subsidization of interest cost. The communities and States would be relieved of any interest charges on bond issues to finance the Federal share of the project cost.
Mr. PROXMIRE. So it would be less expensive for the localities if the administration proposal had been followed, rather than the committee's proposal?
Mr. MUSKIE. That is correct.
The Senator asked me what there is in the record with respect to the administration's position. I questioned Mr. Phillip S. Hughes, Deputy Director of the Bureau of the Budget, who was testifying for the Budget Bureau and for the administration on this point, carefully on whether or not the administration's proposal was intended as a first step toward the elimination of tax-exempt municipal and State and general revenue bonds. He said it was not; that the administration had no such designs for the future and that this proposal was offered simply as a means of financing the Federal share of the project costs. On that point, it was offered by the administration as a means of relieving communities of the burden of financing the Federal share of project costs under the reimbursement provision of the 1966 act.
What we have done here is to offer municipalities and States a trade -- a more limited Federal reimbursement proposition, but a more binding commitment for the future. That is what the trade is. The whole question of tax-exempt municipal and State bonds is no different than it was with respect to the reimbursement feature of the 1966 act.
Mr. PROXMIRE. The Senator may be correct. I am not familiar with the reimbursement feature of the 1966 act. I would certainly agree with the observation of the budget representative that this is not the first step toward elimination of tax-exempt securities; but Treasury has taken the position that they do not want to have tax exempts of any kind with even partial Federal guarantees, and there seems to be a definite Federal guarantee here. Even though there has been a precedent in the past, isn't this perhaps another precedent for the future.
Mr. MUSKIE. While we are on the administration's position, let me say the administration bill was in pretty good shape on the basis of the record, and especially on the basis of the testimony by Mr. Hughes, to which I have just referred; but, unfortunately, Treasury representatives off the record created the very definite impression that they hoped eventually to eliminate all tax-exempt municipal bonds. The moment that specter was raised, the prospect of passing the original administration bill evaporated. That is why we were forced to this expedient, which is very sound, very limited, very moderate. The Treasury position off the record on the question of tax exempt municipal bonds was different from the administration position on the record.
Mr. PROXMIRE. So the opposition in the financial community was–
Mr. MUSKIE. No, among the municipalities and States.
Mr. PROXMIRE. Among the municipalities and States, was the specter that this might lead to the first step toward the elimination of tax exempts, and they just flatly opposed the administration proposal and favored an alternative.
Mr. MUSKIE. That is correct. They did not propose this alternative. We felt as a committee that the Congress had made a commitment to the States and municipalities and that we had to try to find a way to meet it. This was the only proposal that we could develop which seemed to meet the objections which had been raised and which were an insuperable block to the administration bill.
Mr. PROXMIRE. May I say to the Senator that I had not intended to offer an amendment or ask for a roll call, or anything of that kind, but I would like to ask his comment on one further observation. That is that this proposed financing procedure adopted by the committee would be far more costly to local communities than the procedure contained in the original administration proposal, since it would call for full payment of interest by such communities. Indeed, it would seem to me that it represents a more costly procedure than virtually any of the alternatives which have been proposed in the past. In view of the heavy financial demands being made on all governments to meet pressing social problems, it is certainly desirable to seek fiscally efficient methods of financing so that our resources are adequately husbanded.
Mr. MUSKIE. This is more costly than the administration proposal, I think it is fair to say, although it is not that black and white; but it is no more costly than the reimbursement feature of the 1966 act, which has been taken advantage of by 20 States at the present time. This alternative is not all they might have, but it is something that the States and municipalities find more acceptable than the original administration proposal.
Mr. PROXMIRE. Did or did not the Treasury Department testify on this measure, in view of the strong feeling in this area? And if not, should not they have been called to testify?
Mr. MUSKIE. The Treasury did not testify. Let me say that before the administration proposal was sent up to the Hill I discussed this with them and with the Budget Bureau, and I thought I had a clear understanding as to what the proposal was -- that it was not a precedent, that it was not a foot in the door approach. It was on that basis that I offered to go along with it. Then when
it became something different, off the record and in private conversations, we were in a new ball game.
I am delighted that the Senator has raised these questions this afternoon. I think this colloquy is an important part of the record. I think at some point this Congress is going to have to come to grips with what some of us feel is a very real intention by many in the Treasury to eliminate tax-exempt municipal bonds. By raising that specter, the original administration bill S. 3206 was set aside. Whether that represents the official position of the Treasury, the official position of the administration, with respect to the ultimate attack upon tax-exempt bonds, I have no way of knowing; but somebody, whether authoritatively or not, whether wisely or not, has created for the municipalities and the States the specter that what was involved in S. 3206 was a first step toward eliminating tax-exempt bonds. It created terrible problems for us in our committee, and it was only with the cooperation of the distinguished Senator from Delaware and other minority Senators that we were able to work out what I think is a sound, minimal substitute.
Mr. PROXMIRE. I am sure the Senator would not oppose either this Senator or any other Senator or the Federal Treasury or any President who urged an optional approach which could be made voluntarily available to municipalities to follow a taxable route which could result, perhaps through interest subsidization payments in a lower cost to them.
Mr. MUSKIE. I tried that one, may I say to the Senator.
Mr. PROXMIRE. And through other means to recover for the Treasury some of the enormous amounts of funds the Treasury is losing now through tax exempts, while at the same time giving the municipalities the option to follow the taxable route if they wish. It seems to me it can be worked out. We have had many hearings on it. Thereby the Treasury would gain and the municipalities would be better off when we consider there are some who pay and some who escape their taxes.
Mr. MUSKIE. I tried to write an option on the State and municipal share of project costs. I was not able to arrive at one in view of what Treasury officials said off the record. We did not object to testimony by the Treasury Department. We assumed the Bureau of the Budget would testify to the administration's position on all issues involved. Otherwise we would have called Treasury witnesses before us to testify. If they had come before us and given us their full position, we might have had something we could have worked with.
But it was difficult enough, without that off-the-record specter, to sell the original administration bill in the light of the fears of municipalities relative to tax-exempt bonds.
Incidentally, there is a considerable record in the hearings on the debate as to whether or not the administration proposal would or would not be the cheaper route for the Treasury to follow.
Mr. PROXMIRE. Once again, I congratulate the Senator from Maine on his usual very competent handling of the bill.
I take it from his remarks that he does see substantial merit in following a taxable approach, and he feels there is merit for that reason, perhaps, to that aspect of the administration proposal, but that there is such opposition on the part of municipalities and localities to something they feel might possibly deprive them of their tax-exempt status that it would not be practicable to follow what might be a better policy in financing this bill; is that correct?
Mr. MUSKIE. I was sympathetic to the idea of taxable municipal bonds to finance the Federal share of the cost. I was never sympathetic to the idea of requiring the issuance of taxable bonds to cover the municipal or State share.
Mr. PROXMIRE. I quite agree with that.
Mr. MUSKIE. As a matter of fact, Federal bonds issued now are taxable, so that when we finance the Federal share out of general appropriations which are financed by Federal bonds, the proceeds of those bonds are taxable, as I understand.
So if municipal bonds were issued in lieu of the Federal bonds, I would see no reason to object to making them taxable.
Mr. PROXMIRE. And the Senator can see merit in that, I take it, and he would not be opposed personally to an amendment to provide accordingly; but he does feel it would be very difficult to get enacted in either the Senate or the House of Representatives?
Mr. MUSKIE. That is right. I would be opposed to it for that reason.
Mr. PROXMIRE. I thank the Senator.