130 



2. The guarantee of tax-exempts disproportionately benefits investors in the 

 higher Federal income tax bracliets. That is, an investor in the 30 percent tax 

 bracket receives roughly the same income after taxes on a 7 percent taxable 

 bond and a 5 percent tax-exempt bond with the same Federal guarantee; but 

 an investor in the 70 percent tax bracket who holds a 5 percent tax-exempt 

 bond is receiving as much interest after taxes as he would only a 17 percent 

 taxable bond. 



3. Such guaranteed obligations heighten the competition for the limited amount 

 of funds available to State and local borrowers from high tax bracket investors 

 and raise the cost of financing other local projects for which direct Federal credit 

 aid is not provided. For instance, a local public body might be required to pay a 

 higher interest rate on its school bond issues if potential investors were attracted 

 instead to the added supply of tax-exempt bonds with Federal guarantees. 



4. Such guarantees conflict with Federal debt management policy by creating 

 a class of securities (tax-exempt) which the Federal Government itself is pro- 

 hibited from issuing by the Public Debt Act of 1941. 



In addition to our concern with the problems resulting from Federal guaran- 

 tees of tax-exempt obligations, we are also concerned with the growing tendency 

 to rely on direct Government support of borrowings in the private market. 



There have been several studies in recent years by the Administration, the Con- 

 gress, and others of the various methods of providing Federal credit assistance 

 to States and local public bodies as well as to private borrowers. The general con- 

 clusion from these studies has been that the provision of credit in our economy 

 is properly a function of private lending institutions and that direct Fwleral 

 credit assistance should generally not be provided except in cases where bor- 

 rowers are unable to obtain credit on reasonable terms iu the private market for 

 programs of high national priority. 



In this regard, section 307 would permit full Federal guarantees of tax-exempt 

 bonds for any borrowings for the purposes set forth iu that section. Thus, all 

 ■eligible borrowers might be encouraged to seek this Federal credit aid regardless 

 of the borrower's ability to obtain funds from normal private market sources. 

 The guarantee would effectively shift to the Federal Government the investment 

 risk normally entailed in these obligations so that they would sell on the market 

 at rock bottom interest rates along with other top rated securities. It is easy to 

 see how widespread availability of Federal guarantees would quickly lead to Fed- 

 eral intervention in credit activities throughout the economy. 



The Treasury Department is not itself aware of the specific problems which 

 coastal States might have in borrowing for the purposes stated in S. 582 in the 

 private market without Federal guarantees of their obligations or, indeed, 

 whether the States desire to borrow for these purposes. 



We are especially concerned with the need to husband Federal credit resources, 

 just as we do Federal budget resources, in view of the current large increases in 

 iFederal credit programs which are financed outside of the Federal budget. In 

 the Budget for the fiscal year 1972 it is estimated that the amount of such Fed- 

 erally-assisted loans outstanding will increase by $30 billion compared to an 

 income in fiscal 1970 of $13 billion. 



In his Budget Message to the Congress on January 29, 1971 the President 

 stated : 



Furthermore, Federal credit programs which the Congress has placed outside 

 the budget — guaranteed and insured loans, or loans by federally sponsored enter- 

 prises — escape regular review by either the executive or the legislative branch. 

 The evaluation of these extrabudgetary programs has not been fully consistent 

 with budget items. Their effects on fiscal policy have not been rigorously included 

 in the overall budget process. And their effects on overall debt management are 

 not coordinated well with the overall public debt policy. For these reasons, I will 

 propose legislation to enable these credit programs to be reviewed and coordinated 

 along with other Federal programs. 



The Treasury Department is currently working with other agencies in prepar- 

 ing the legislation referred to by the President and we hope to be in a position 

 soon to submit a proposal to the Congress. 



I understand that your Committee wishes to consider the feasibility of alter- 

 native methods of providing credit assistance under S. -582 and that you would 

 also like to discuss the collateral issues raised by the various alternatives. 



