The Honorable Dan Burton

Chairman

Committee on Government Reform and Oversight

U.S. House of Representatives

Washington, D.C. 20515

Dear Mr. Chairman:

The Department of the Treasury would like to take this opportunity to express its views on

H.R. 2245, the "Federalism Act of 1999," as reported on July 29 by the Subcommittee on National Economic Growth, Natural Resources, and Regulatory Affairs. The Department of the Treasury strongly opposes this bill for the reasons set forth below.

Section 7 of H.R. 2245 provides that before issuing any proposed, interim, or final rule, the head of the agency "shall consult" with the seven identified organizations representing the interests of State and local governments "for the purpose of identifying any preemption of State or local government authority or any other impact on State or local governments that may result from issuance of the rule." The agency then must prepare a detailed federalism impact assessment unless it certifies, after having consulted with the seven identified organizations, that the rule does not preempt State or local government authority and does not have any other impact on State or local governments.

For purposes of these requirements, section 7 applies the definition of "rule" contained in 5 U.S.C. 551(4), which provides, in part, that a rule is "the whole or a part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency." This sweeping definition encompasses far more than rules published in the Federal Register under the rulemaking procedures of the Administrative Procedure Act (5 U.S.C. 553) because it includes rules of particular applicability such as IRS revenue rulings and private letter rulings, Customs Service rulings, and potentially every answer to every inquiry from the public asking for guidance on how a law or a regulation applies to a particular set of facts and circumstances.

In addition to rules of general applicability published in the Federal Register, agencies annually issue thousands of rules of particular applicability in response to inquiries from the public to agency offices in Washington and to field offices throughout the country. There is simply no way that agencies can consult with the identified organizations before issuing each of these rules. Moreover, there is no way that the seven identified organizations have the time or resources to consult with agencies on each of these rules. As written, H.R. 2245 will bring the government to a halt -- and the public will not get the information and guidance that it wants and needs.

Under the bill, any rule that has any impact on any State or local government, no matter how remote or unrelated to federalism considerations, cannot be issued until consultations occur; it makes no difference whether the impact is positive or negative. Even if a rule has no impact whatsoever on a State or local government, the issuing agency nevertheless is required to consult with the seven identified organizations because the agency cannot certify the rule unless consultations occur. With respect to notice and comment rulemaking under 5 U.S.C. 553, the consultation and assessment requirements apply to each stage of rulemaking even if the rule has no effect on State or local governments or is unchanged from the prior rulemaking stage.

The following are a few examples that illustrate the sweeping nature of the consultation and assessment requirements in section 7 of the bill:

• •The IRS would be precluded from making statutorily required inflation adjustments for withholding rates on employee wages because States and local governments would be affected as employers subject to withholding rules. Even after consultations, the IRS would still be required to prepare a federalism impact assessment.



• •The IRS would be precluded from issuing any revenue ruling or private letter ruling that has the effect of increasing or decreasing the taxable income of taxpayers because it would change the taxable income of taxpayers in States that use federal income computations as the basis to compute State taxes. A federalism impact assessment would be required for each revenue ruling and private letter ruling.



• •The Customs Service would be precluded from issuing any ruling that changes the rate of duty on any article of imported merchandise that may potentially be purchased by a State or local government the ruling affects the price of the imported article. A federalism impact assessment would be required.

We are also very concerned that section 7 applies to interim and non-notice final rulemakings under 5 U.S.C. 553. This is inconsistent with the authority of agencies under section 553 to issue rules without notice and comment under narrow and well established circumstances. For example, Treasury's Office of Foreign Assets Control would not be able to issue rules implementing a presidential determination to impose trade or economic sanctions on a terrorist government or group until it consulted with each of the seven identified organizations notwithstanding that such rules are exempt from notice and comment rulemaking under the foreign affairs exemption contained in section 553.

Section 9 of the bill would establish new rules for determining the effects of federal statutes and rules on the authority of State and local governments. The bill would establish a new rule of construction, authorizing preemption by statutes (and rules promulgated thereunder) only where the statute explicitly expresses preemptive intent or contains a direct conflict with a State or local law, ordinance, or regulation. In the event of any ambiguity, the bill would create a presumption against preemption. Section 9 affects any subject matter in which a State or local government might have some degree of concurrent jurisdiction with a federal agency.

Although section 9 is intended to apply only with respect to statutes enacted after the effective date of the legislation and to rules issued under those statutes, we expect that many of the existing statutes under the jurisdiction of the Department will become subject to section 9 because they are frequently amended. We are also concerned that needless litigation will be required to address the application of section 9 to regulations that involve statutory provisions that were enacted both before and after the effective date of the legislation. The following are a few examples of how these rules of construction could affect critical missions of the Department of the Treasury:

• •The federal banking agencies, including the Treasury's Office of the Comptroller of the Currency and Office of Thrift Supervision, are charged with administering federal laws that ensure the safety and soundness of the nation's federally insured depository institutions. It is critical that the federal banking agencies have the authority to respond quickly to changing circumstances that threaten the safety and soundness of these institutions.

For example, by the early 1980s many thrifts were in financial difficulty because interest rates were rapidly rising and their assets were long-term fixed-rate first mortgage loans. To address this problem, the federal banking agencies approved the use of the adjustable rate mortgage (ARM), which could help institutions operate more safely and at the same time provide consumers with an alternative to fixed-rate mortgages. At that time, some States prohibited ARMs or imposed restrictions on their use. If H.R. 2245 had then been in effect, the use of federally-approved ARMs would not have been permitted in the States that prohibited ARMs, resulting in more failed thrifts and more costs to the taxpayer.

Similarly, during the 1980s some States permitted federally-insured institutions to engage in risky real estate development ventures. Many of these institutions failed at great cost to the U.S. taxpayer. Congress responded by enacting the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which provided federal regulators with the final authority to determine what activities could be undertaken by these institutions. If H.R. 2245 had been in effect at that time, it would have resulted increased costs to the U.S. taxpayer as more institutions failed while the new federal restrictions were debated and litigated.

The Congress is moving closer to enacting financial modernization legislation that will enable financial institutions to compete in the global financial services market by removing obsolete restrictions and regulatory burdens. H.R. 2245 is inconsistent with this objective because it will foster a patchwork of statutory and regulatory requirements under the laws of the 50 States and countless local governments. The resulting increase in compliance costs will impede the ability of the institutions to compete in the global market internationally and increase costs to consumers.

• •Regulations that set the terms and conditions of Treasury securities and savings bonds are issued under statutes that are silent with respect to preemption of State law. The Department has relied for over 30 years on the case of Free v. Bland, 369 U.S. 663 (1962), which sustained the authority of the Secretary of the Treasury to prescribe regulations for savings bonds that preempt State law. Because these statutes support rules for marketable Treasury securities held in the commercial book-entry system through intermediaries, marketable Treasury securities maintained directly in TreasuryDirect, and all series of savings bonds, any suggestion that the rules could not preempt State law in the future will inject uncertainty into Treasury securities transactions and ultimately impair the liquidity of the Treasury securities market and result in higher borrowing costs to the U.S. Government.

The Office of Management and Budget has advised that there is no objection from the standpoint of the Administration's program to the submission of this report.

Sincerely,

/s/

Linda L. Robertson

Assistant Secretary

(Legislative Affairs and Public Liaison)

[Identical Letter to the Honorable Henry A. Waxman]