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Admiral MAHER. I think as an offhand answer, we would prefer the latitude of the present bill, but I think also that I would prefer to have the Air Force answer that since they have monitored this bill for the National Military Establishment.
Senator CAIN. What does that mean, sir?
Admiral MAHER. The Air Force has coordinated the action. They have been the one nominated by the Secretary of Defense to monitor this for the NME.
Senator CAIN. But you, Admiral, know what is better for naval housing than the Secretary of the Air Force.
Admiral MAHER. For myself I would prefer the latitude in the bill, because there are a number of reasons why I think that is the better provision.
Senator CAIN. I would appreciate it if at your convenience-no hurry-you would submit a small memorandum on why you think such a proposed amendment would not be of benefit to the bill.
(The following was later submitted for the record in response to the above:)
Question: State why the bill should not restrict the construction of housing to the property within the boundaries of military installations.
Answer: It is considered that the bill should provide for the construction of family housing units either on or off military installations for the following
(a) Many military installations do not have large land areas within their boundaries for the construction of large housing projects.
(b) In some locations it will be cheaper to buy land and tie in to municipal utilities and related services than it would be to run utility lines over long distances to military sources of supply.
(c) On some military installations the nonavailability of sufficient schools and other community facilities may make it inadvisable to construct large housing projects within the boundaries.
(d) Some military installations which have urgent need for additional housing do not have sufficient facilities to supply utilities and related services to large housing developments.
(e) The provision authorizing construction either on or off military reservations should be retained in the bill in order that every possible opportunity to obtain more housing for military personnel can be explored.
The CHAIRMAN. Have you finished?
Admiral MAHER. I have one brief paragraph.
The CHAIRMAN. Go ahead.
Admiral MAHER. The Department of the Navy considers that every effort should be made to provide comfortable and livable houses and that the standard of adequacy should not be reduced. The housing situation is a national problem and concerted action by the military, private interests, and the Congress is urgently needed. I want to assure you that the Navy appreciates the committee's interest in our problem.
The CHAIRMAN. Admiral, would you, just for the record, make a statement on the 90 or 95 percent you think is essential, in your case to have the 95 percent, insurance guaranty?
Admiral MAHER. I think as far as a personal opinion is concerned it would not be valuable. The Navy's stand would be that we will rely on the advice and experience of the FHA in that matter and go along with their recommendation, if it is not below 90 percent-we think 90 percent should be the minimum. We will certainly go along with the 95 percent in the bill. I do not really feel that it is a critical
point. That is my personal opinion. But the Navy will go along with the 90 or 95 percent, either way.
I think probably you get more housing with the 95 percent, and I think with the 90 percent you will probably get better contractors, get a larger equity in the project, and he has got to put up more money. I think it will probably keep out of construction-that is just my personal opinion-certain contractors who will not want to put that much money into the project. But we will go along with either
The CHAIRMAN. But they would still have to come up to the FHA standards, whether it was 90 or 95 percent, because the contracts come through FHA.
Admiral MAHER. Yes, sir; that is right. They will have to meet the specifications.
The CHAIRMAN. Are there any questions of the admiral?
The CHAIRMAN. We want to thank you for coming down here, Admiral.
I want to express my regret that because of the quorum call in the Senate we will be unable to hear Colonel Lapsley now. We will hear him with the other military witnesses tomorrow, and they will be followed by Mr. Foley. If they will arrange to be here at 10 o'clock we will appreciate it.
A report from the Treasury Department, on S. 1184, will be inserted in the record at this point.
(The report referred to follows:)
Hon. BURNET R. MAYBANK,
TREASURY DEPARTMENT, Washington 25, D. C., April 19, 1949.
Chairman, Committee on Banking and Currency,
United States Senate, Washington, D. C.
MY DEAR MR. CHAIRMAN: Further reference is made to your request for the views of this Department on S. 1184, to encourage construction of rental housing at or in areas adjacent to military and naval installations.
The Department has the following comments to offer with respect to the bill in the event your committee should give it favorable consideration.
(1) Section 803 (b) (3) of the proposed new title VIII of the National Housing Act would provide insurance at 100 percent of the estimated current cost of the completed project. This would remove completely any risk to the owner of the project and is considered undesirable. With the Government assuming the entire risk under such insurance, the owner would have little incentive for careful and prudent management of the housing project. In the circumstances, it is recommended that the percentage of insurance be reduced to 90 percent of the value of the completed project.
(2) Section 803 (h) of the proposed new title VIII would provide for the payment of profits to the mortgagor realized from any property conveyed to the Commissioner under default under insurance contracts. There would appear to be no sound reason for returning such profits to the mortgagor and it is recommended that they be returned to the insurance fund as is the case under the existing provisions of section 608 of the National Housing Act.
(3) Section 803 (f) of the proposed new title VIII would provide that debentures issued to mortgagors under insurance contracts shall be exempt both as to principal and interest from all taxation (except surtaxes, estate, inheritance, and gift taxes) now or hereafter imposed by the United States, by any Territory, dependency, or possession thereof, or by any State or local government. Section 803 (f) would also provide that the debentures shall be obligations of the proposed military housing insurance fund and shall also be fully and unconditionally guaranteed as to interest and principal by the United States.
The Public Debt Act of 1941 established the policy that interest on all securities of the United States issued on or after March 1, 1941, should be subject to the Federal income tax. The principle established by this enactment has re
mained unviolated, and numerous bills proposing to exempt interest on particular bond issues have failed of enactment. The Treasury Department has repeatedly recommended that interest on future security issues should not be exempt from income taxation on the grounds that tax exemption for specified sources of income is incompatible with equitable taxation and opens avenues for tax avoidance. For example, those persons who receive income from investments are highly favored by such exemptions over those who receive earned income. This Department therefore recommends against the enactment of the provisions for the exemption of interest on such debentures from Federal tax since it would be in direct conflict with the principle established by the Public Debt Act of 1941.
(4) Section 3 of the bill would add a new section 110 to the Internal Revenue Code. The new section would authorize 50 percent of certain investments in rental housing in or near military installations to be written off in 5 years, at not more than 10 percent per year, through an accelerated amortization deduction. This would be in lieu of the normal depreciation deduction. Rental housing eligible for the proposed amortization would be such rental housing as is certified by the Secretary of the Army to be necessary.
It is the belief of this Department that the proposed amortization deduction would have adverse revenue implications without producing sufficient corresponding public benefits. One of the primary purposes of accelerated investment write-off is to reduce the risk of investment loss due to failure to obtain tax free recovery of capital. However, in the case of the proposed military rental housing facilities no substantial private investment risks exist since the mortgagee prior to the repayment of the mortgage would be the real investor and is insured against loss through operation of the insurance provisions. Hence, the proposed amortization deduction would appear to grant an unnecessary and unwarranted preferential tax treatment.
Under existing income-tax regulations, investors in rental-housing properties already have the privilege of using a declining-balance method of depreciation which permits them to write off a substantial portion of their capital outlay during the early years of the useful life of the property. Moreover, since the proposed amortization deduction under S. 1184 would exceed the normal earnings of the proposed rental-housing projects, the optional increased deduction would be effectively available only to taxpayers with income from other sources. Tax savings through such a method, particularly in the case of unincorporated taxpayers, would increase percentagewise with the size of the income from other sources, with no assurance of a corresponding beneficial increase in the construction of military rental housing. Moreover, there appears to be no assurance that such tax savings would be applied in reduction of the insured mortgage indebtedness in order to reduce the Government's contingent insurance liability. The proposal for amortization of rental-housing facilities represents one of a broad class of proposals currently being urged in many quarters designed to permit write-off of depreciable property for tax purposes over a period of less than normal useful life or otherwise to modify existing concepts of depreciation allowances so as to postpone the realization of taxable net income. Thus, the type of tax subsidy proposed under the bill is no different from numerous other legislative proposals for accelerated depreciation for particular types of enterprise, and the adoption of such a proposal for rental-housing facilities would serve as a powerful precedent for its adoption for other segments of the economy, which might well urge that their needs were no less important from the standpoint of the national economy. In adidtion to their implication for the Federal revenues, such proposals raise difficult and complex issues relating to their effects on the economy and the competitive structure, as well as the equitable distribution of income-tax burdens. The Treasury recommends therefore that section 3 of the bill be deleted.
In view of the request for the expedition of this report, it has not been possible to obtain the customary Bureau of the Budget clearance prior to its submission. Very truly yours,
JOHN W. SNYDER, Secretary of the Treasury.
(Thereupon, at 12:15 p. m., the committee recessed to reconvene at 10 a. m., April 28, 1949.)
HOUSING IN MILITARY AREAS
THURSDAY, APRIL 28, 1949
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY, Washington, D. C. The committee met, pursuant to adjournment, at 10:15 a. m. in room 301, Senate Office Building, Senator Burnet R. Maybank, chairman of the committee, presiding.
Present: Senators Maybank, Sparkman, Frear, Tobey, Cain, and Bricker.
Also present: Senator Wherry.
The CHAIRMAN. General Fairchild, will you come up, sir, have a seat and proceed in your own way?
STATEMENT OF GEN. MUIR S. FAIRCHILD, VICE CHIEF OF
General FAIRCHILD. Mr. Chairman and gentlemen, I am especially glad to be here today to present the Air Force position on this legislation, because it is a matter that I consider to be of primary importance to our national defense situation, and particularly so to the United States Air Force. The finest weapons and equipment are useless without qualified personnel to maintain and use them. We have a very grave personnel problem in the Air Force. The enactment of this bill would go a long way toward solving that problem.
The CHAIRMAN. General, for the record, could you furnish the figures of the present number of enlisted men and officers in the Air Force as of today and as of, say, 1920-21 after the last war?
General FAIRCHILD. I would have to get those figures, sir.
The CHAIRMAN. I understand the greatest problem is in the Air Force because your expansion has been greater since the last war than that of either the Army or the Navy.
General FAIRCHILD. That is correct, Mr. Chairman.
The CHAIRMAN. I would like to have those figures for the record because there have been new bases planned for the Air Force where there have not been as many for the Navy and the Army.
General FAIRCHILD. That is right, sir.
The CHAIRMAN. Circumstances have just caused that.
General FAIRCHILD. That is right, sir.
The CHAIRMAN. Your problem would probably be a little worse than that of the Army and Navy, in view of your expansion. While they have had a great expansion too, I would believe that proportionately yours would be greater.