EXHIBIT C Estimated increase in annual interest costs on the bonded debt of State and local governments on the basis of the estimated maturity of the June 30, 1937 debt, assuming that the taxation of future issues of State and local securities will result in a 1⁄4 of 1 percent increase in interest rates 1 [Amount of maturities and interest costs in millions, percentages in units of 1 percent, per capitas in units of 1 dollar] 1 It is assumed that all securities will remain outstanding until their final maturity dates. Source: Treasury Department, division of tax research. EXHIBIT D Amount and percent of the present bonded debt of selected State governments that will be retired by Jan. 1 of selected future years, assuming that all securities will remain outstanding until their final maturity dates Source: Treasury Department, division of tax research. Now, exhibit C, you will observe, shows the estimated increase in annual interest costs on the bonded debt of State and local governments on the basis of the estimated maturities as of June 30, 1937, assuming that the taxation of future issues of State and local securities will result in one-fourth of 1 percent increase in the interest rate. We have calculated there the maturities, according to maturity schedules of State and local debts, and show how much interest costs will increase during each of the years up to 1987. The second column shows the percent that has matured up to that point, and you will see by 1950, 48.57 percent had matured. By 1951, 51.67 percent had matured, and it is not until 1969 that there is 90 percent to be exact, 90.49-that had matured. Then the increased interest cost. On the basis of one-fourth of 1 percent, by 1987, it is estimated that the increased interest costs would be $45,700,000, while in 1945 it would be only $15,400,000. The next column shows the percent of that increase to the 1937 interest costs, and finally, the per-capita figure. This, I think, may be useful to you in calculating the date at which this cost becomes effective. Exhibit D takes a few States that we happen to have on hand at the moment, and shows from that how much of the State debt in those States matures in various years, and what is the year of final maturity in each case, and there is shown the rate of the percent of present bonded indebtedness, and the date of maturity. This may be helpful to the committee. Professor Lutz and others appearing before your committee have placed considerable stress upon the increased local property tax rates which will follow the discontinuance of the issue of tax-exempt securities. For purposes of illustration, Professor Lutz submitted estimates for the 13 cities having a population of over 500,000. His computations indicated that under conditions prevailing in 1936 the taxation. of local issues would have resulted in an increased tax rate ranging from 42 cents per thousand dollars of assessed valuation in Milwaukee to $2.10 in Detroit. It is our contention that these figures greatly overstate the probable results. This overstatement is caused in part by the assumption of an excessively high interest differential but primarily by the assumption that all debt constitutes a burden on general property. Professor Lutz's computations overlooked the fact that a substantial portion of the debt of these cities is paid directly from public utility receipts and special assessments, and, moreover, that only a portion of that payable from general revenues falls on real estate. Varying proportions of general revenues in different cities are, of course, derived from nonproperty-tax sources. Moreover, Professor Lutz's estimates present. the increased cost which will appear only after all the present indebtedness has been retired. This, as I have already noted, will not occur for 50 years. Estimated increase in the property tax rates of 13 cities having a population above 500,000 resulting from the taxation of future issues of municipal securities ESTIMATED INCREASE IN TAX RATE, PER $1,000 OF ASSESSED VALUATION 1 Harley L. Lutz, The Fiscal and Economic Aspects of the Taxation of Public Securities, p. 87. Assumes an increase in the interest rate of 14 of 1 percent. For other specifications see exhibit E. 4 Less than 1 cent. Source: Treasury Department, Division of Tax Research. The CHAIRMAN. You have a little table inserted at this point. What does that represent? Mr. BLOUGH. So that you will understand what we are getting at. We are getting our basis. In the first place, you will see that we are using the one-quarter percent, and any higher figure can be used by multiplying the onequarter percent. In the second place, we are trying to find out how much is raised on property, and not by utilities. For instance, take the city of Detroit figure that has been submitted to the committee. As a matter of fact, a great percent of the debt in Detroit today is from the street railways and water works, which are not served from taxes, at all, and this table indicates just such increase in taxes, and it shows about a 16-cent increase in the tax rate in the year of final maturity? The CHAIRMAN. That is cents, and not percentages? Mr. BLOUGH. Yes, sir. The CHAIRMAN. In other words, taking Detroit, you have 27.90, and, according to Professor Lutz, that would be 30, and, according to the Treasury, it would mean that in 1950 it would be 27.95. Mr. BLOUGH. That is right. The CHAIRMAN. And you arrive at the figure at the year of final maturity of 28.10? Mr. BLOUGH. That is right. The largest part of the difference between Professor Lutz's statement and ours is that he assumes that all of the debt of Detroit is a burden on real property, and any increase in interest would be a general burden on property, whereas a large part of Detroit's debt today is public service enterprise debt. To illustrate the degree of overstatement of Professor Lutz's point, we have made detailed computations of the probable effects of increased interest costs on local property tax rates. These computations indicate that, if tax exemption had been discontinued last year, the increased cost of borrowing would have resulted, by 1950, in an additional tax rate ranging from 3 cents per thousand dollars of assessed valuation in New York City to 15 cents in Buffalo. Even in the year of final maturity, the increased tax rate would in no case amount to more than 35 cents per thousand dollars of assessed valuation. With respect to the data here presented, it should be emphasized that full allowance has been made not only for the city debt but for the city's share of all overlapping local debt and that the computations are based on the assumption that the taxation of future issues of municipal securities would result in a fourth of 1 percent increase in interest rates. The CHAIRMAN. Are you assuming in this discussion that the entire addition in the interest rate is being paid by the city? Mr. BLOUGH. We are assuming the entire addition is being paid from the same source that the interest rate is now being paid from, and we are thinking about the tax on the area, and not simply on the city separately. We are assuming that all of the local governments are consolidated into one body, so that there is no debt on the side, or something like that. It is all in here, and we are assuming that the future increase in interest would be paid from the same source that the present interest is paid from, for we are trying to get at the amount of those apportionments that would fall on the real property. Should the resulting increase in interest rates be as high as one-half of 1 percent, the effects on the property tax rate would, of course, be double those indicated. In any case, they are only a fraction of those suggested by Professor Lutz. The basis of these computations, together with the results, are presented in full detail in exhibit E, which I should like to have inserted in the record. EXHIBIT E TABLE 1.-Present bonded debt of cities having a population of over 500,000 and their overlapping units, showing overlapping debt allocated to cities and distribution of total debt by (1) debt payable from utilities and special assessments, (2) debt payable from general revenues, and (3) debt payable from property taxes 1 Allocation of bonded debt to city on the basis of assessed valuation excepting where specified otherwise by statute. Includes utility bonds currently payable from general revenue. The special assessments of Cleveland are payable from general revenue and those of Detroit have been refunded into general obligations. Proportion of general revenue debt based on the ratio of property tax revenue to total general revenue in 1936 of the city and overlapping units, as reported by the Bureau of the Census, Financial Statistics of Cities, 1936. Exclusive of relief bonds payable from State revenue and special assessments on property outside of city Source: Treasury Department, division of tax research. |