Now, as you all are aware, inflation is a factor that is hitting everyone, but especially the farmers and ranchers. Costs have escalatedthe fuel cost for tractors have gone up as much as five times. An example, 6 years ago diesel fuel could be bought for probably 10 cents per gallon. Today it is nearly $1 a gallon. Cotton prices 5 years ago were more than they are today. A new tractor that would have cost $15,000 5 years ago would cost $40,000 today. So these are just some of the problems.

Because of the decline in production, our royalty checks have been cut and, now, right at this critical time, when we can use the income to survive, the windfall profit tax has come along.

In most cases, at least the ones that I have seen and in our own case, the tax takes about a third. So we are being penalized again.

I would like to mention these things: I have talked to representatives in Washington about this problem before, actually, before the windfall profit tax was passed. I have talked to members of the Senate Finance Committee. Some of those members on the committee and other Representatives did not even know who royalty owners were. I think most Senators and Representatives need to be educated. [Applause.]

So, I would like to ask this: I would like to ask for a hearing in Washington by the Senate Finance Committee and the House Ways and Means Committee so that those Senators and Representatives in Washington can be educated as to who the royalty owners are and the plight that they are in right now. Thank you. [Applause.]

Senator BENTSEN. Let me say to you that there will be hearings in both Houses of Congress. The Ways and Means Committee of the House and the Finance Committee of the Senate will conduct those hearings.

Our next witness will be Mr. R. Ray Bell of Dallas, Tex.

STATEMENT OF R. RAY BELL

Mr. BELL. Senator Bentsen, Senator Boren, Representative Pickle, I want to present some facts regarding the effect of the Crude Oil Windfall Profit Tax Act of 1980 on a specific group of royalty owners. The term "royalty owner" brings to our mind a farmer or a rancher. But, there are royalty owners that acquire their interest from the leasehold, not from the mineral rights. This type of royalty is usually acquired for cash or services which are then used in exploration programs.

The royalty owners that I introduce to you today are the 1,639 unit holders of Marine Petroleum Trust and the 1,127 unit holders of Tidelands Royalty Trust. A list of these people by the State they live in includes every State in the Union except Idaho. These folks could in no way be classified as "big oil" even though they own a royalty interest in leases on the Outer Continental Shelf.

Their royalty was established back in 1951 when a small group of independent scientists pioneered the development of a seismic recording technique to explore the oceans for oil and gas. They contributed their invention to an oil company in exchange for a royalty. Most of the present unit holders acquired their interest by laying out hard cash.

They did this for a number of reasons, including a hedge against inflation. Their investments were made long before the windfall profit tax was conceived.

It was evident in the early 1970's that oil was scarce, much in demand, and likely to increase in value. Inflation averaged 9 percent a year in the early 1970's and was later to increase to 10 percent. Where could you find a place to put funds for retirement and college for the kids? You certainly couldn't lend it and get a 10-percent return after taxes. Oil in the ground looked like a good investment.

Of course, we knew that there were price controls on oil, but Congress had told us that they were to be removed on October 1, 1981. So, we felt pretty safe. Then the rules were changed on us.

Along came the windfall profit tax taking 70 percent of any increase in the selling price of our royalty oil. This 70 percent tax is bad enough, but there is an indirect cost also. The tax has the potential of reducing our return on investment since it may cause early abandonment of a lease. In other words, some of the oil we bought may be left in the ground because of the tax.

Among our unit holders is a widow living in California. The royalty check we send her makes up a significant portion of her income. If it were not for the windfall profit tax, she would receive oil royalties of $152 per month, but the tax reduces that amount to $82. She could sure use the $70 that goes to the U.S. Treasury to pay her bills.

One of our unit holders plans to use his oil royalty check to send his kids to college. He was hoping that the royalty check would increase as fast as the cost of a college education. It probably would have except for the 70 percent that now goes to the U.S. Treasury.

One of our unit holders decided 2 years ago to start putting his royalty check back into oil exploration. He is now an independent operator. The windfall profit tax on his royalty income is going to take $365,000 out of his drilling funds every year.

Several proposals are before the committee. The various proposals will have different effects on our people. An exemption of 1,000 barrels a day will remove the tax on all of our unit holders, 10 barrels a day will eliminate the tax for 98 percent and a tax credit of $1,000 per year will eliminate the tax for 82 percent.

The industry is going to need a lot of money to keep 2,911 rigs running. Some of it may very well come from investors like the unit holders in Marine and Tidelands. We have seen a trend lately toward the use of the royalty trust to finance exploration programs. It attracts a type of investor that would not normally invest in a limited partnership. The royalty trust investment vehicle is a good source of exploration funds for the 1980's.

An exemption from the windfall profit tax will make this a very attractive fundraiser.

We need to help our retired people, investors, and our energy situation by eliminating or reducing the windfall profit tax on crude oil. Gentlemen, this concludes my statement and I thank you, [Applause.]

Senator BENTSEN. Thank you.

Our next witness will be Mr. Edgar W. Monteith.

STATEMENT OF EDGAR W. MONTEITH

Mr. MONTEITH. Senators Bentsen, Boren, and Representative Pickle, I represent the Brown Foundation.

We wish, like other royalty owners, to appear before the committee. The Brown Foundation is itself a royalty owner but advocates and seeks modification of the windfall profit tax not only on the grounds entitling the usual royalty owner to relief but on additional grounds incident to its being a charitable foundation, thus making its position somewhat more compelling than that of the usual royalty owner.

In this regard, we raise for your consideration the following: This would entail charitable nonprofit organizations to relief. Under the act, educational institutions and medical facilities are exempt from the windfall profit tax.

On the other hand, in contrast to that, charitable foundations not dedicated exclusively to educational or medical causes are not accorded the exemption, even though they are in the same category. They are not accorded this exemption, notwithstanding that contributions made by them may be predominately for educational and medical purposes— educational and medical-which are otherwise accorded exemptions but they are not given the exemptions simply because they are a foundation and they are not devoted exclusively to that purpose. Case in point is the Brown Foundation, where, since its establishment in 1951, its total authorized grants has exceeded $150 million.

Of this some 73 percent in excess of $110 million have been devoted to educational and medical endeavors. At least to the degree of a foundation's giving to educational and medical entities that would otherwise be exempt from the tax, why should not the charitable foundation be accorded the same exemption?

In the same vein as the educational and the medical establishments argument for another example the Windfall Profit Tax Act provides that oil produced by a church from property held on January 21, 1980, is exempt if at that time the income had been committed to support of educational or medical endeavors.

In contrast to this, in the case of our Brown Foundation, on that basis, it held oil and gas royalty interests together with other interests from the income of which it had a committed $32,568,000 to charitable educational and medical institutions.

To the degree that such commitments will be funded from oil and gas royalties, why should not the Brown Foundation be accorded the same exemption as a church under identical circumstances? It is clear that charitable foundations are the victims of discrimination in this regard.

Historically, we have known the concept of exemption from income taxes of the charitable foundation. We have likewise known the deduction for charitable contributions. With advent of the windfall profit tax we see for the first time violations of these concepts. The question arises: In enactment of the tax, did the Congress proceed on the ground that it knew best regarding expenditure of funds belonging to charitable foundations and that, accordingly, the decisionmaking power be taken from them and put into the Congress?

Is this not a governmental intrusion novel to our taxing system?

In the case of the Brown Foundation, the windfall profit tax will divert from meritorious charitable purposes 30 percent of its royalty income.

Senators Bentsen, Boren, and Representative Pickle, we sincerely appreciate the opportunity to appear before you and we strongly urge your favorable consideration of legislation to cure. [Applause.]

Senator BOREN. Thank you for your testimony, very much.

The testimony we took in Oklahoma which has been made part of the record, we took the example of a children's home which received a substantial number of contributions each year from foundations. These funds were primarily tied up in royalty income. I have been told by the superintendent of the children's home there that they are going to lose a very substantial part of their income each year just from the very effects of what you are talking about. This is another thing that has been so frustrating to us.

I mentioned a while ago, that a person who had a retirement plan, stocks and bonds, they have not been taxed. Certainly no charitable institution in any part of this country are having income taxed like this, children's homes, and it is an absolute outrage and I want to tell you that your testimony has been very, very helpful and we will be entering additional information like it in the record. We want to make an effort to get this corrected. We thank you very much for your testimony.

Senator BENTSEN. Senator Boren and I worked for an exemption that would cover children's homes during the debate of this tax. We thought we had that situation taken care of. However, we ran into opposition in the conference committee from a northern Congressman and Senators from the Midwest, who said that we were giving an advantage to charitable institutions in producing States.

Congressman PICKLE. The amendment was originally for charitable institutions and educational institutions to be exempt. We were able to hold it in conference. You've got a good case here. It ought to be extended.

The problem is there are only about 10 or 12 producing States. There are about 35 or 40 nonproducing States. That is difficulty. I thought we did good to get that much. We ought to go further and I hope we can later.

Senator BENTSEN. Let me make a point. The lady who testified earlier, said that this fight is not going far enough. She's absolutely right. What we are talking about is a fight between producing States and nonproducing States.

Frankly, there are a lot more nonproducing States than there are producing States. It is a tough fight to make them understand what this means to the overall energy concerns of this country.

But I think this kind of hearing and this kind of response will be very helpful. The information that we are getting here, the personal cases and how it affects those individuals will be terribly important for

us.

Senator BOREN. Let me add something to what Senator Bentsen said and let me give you an example of how the testimony has been so helpful.

We did have testimony earlier in Oklahoma City, and particularly. Kansas. This is the third of the hearings being held.

During the discussions, for example, the $1,000 refund of this year, we had some pretty insensitive things said. I don't know which of the committee members said them. I said something about the small royalty owners. I said something about the farmers and ranchers that are already broke and now here we are hitting them again against something that is enabling them to stay in agriculture. [Applause.]

One of the members of the committee said, "Oh, now we are hearing the story of the poor little royalty owner," as if he didn't believe any such person existed.

I pulled out a statement that was entered in the record in Oklahoma City, from a widow who is 81 years old. She set out the fact that her social security, I believe it was less than $160 per month and her only other source of income was an $80 royalty check that had been cut down to $44.

I just looked across the table at him and I said, "Now, do you really think that you can justify," and I said, "This is not a fictitious person. Here's her name, address, here's her letter, I'm going to enter it into the record for this committee. Can you really justify that kind of a tax that has been levied on that kind of individual?" And the Senator did not make any objection. Then after that one we passed the amendment.

I think these hearings are helpful and I think each and every one. of you want to know that not only the testimony is reviewed, but the statement that you are entering into the record helps us explain that the royalty does not refer to the income that some of our colleagues think it is.

I do want you to leave here today knowing that your presence is important and it does help make an impression. Direct testimony was taken orally and is entered into the record and it really does help give us an idea and we appreciate it very much.

Senator BENTSEN. Our next witness will be Mr. James Powell. Texas and Southwestern Cattle Raisers Association.

TESTIMONY OF JAMES POWELL

Mr. POWELL. Senator Bentsen, Senator Boren, Congressman Pickle, I am a concerned rancher and a royalty owner and I speak on behalf of the Texas and Southwestern Cattle Raisers Association and its many members.

Our organizations are opposed to the philosophy of the so-called windfall profit tax and strongly support the proposed amendments that provide relief for royalty owners from this tax.

The recent transition of our modern free enterprise system to mass government by continuous plebiscite, with its overwhelming emphasis on income and wealth redistribution and special programs to serve the interest of particular groups, has led to a sharp erosion, if not a breakdown, of liberal democracy.

A democracy which emphasizes the freedom and responsibility of the individual, a necessary condition for the survival of a productive and competitive capitalism. [Applause.]

Each new social program suggested is generally a flagrant appeal to the desires of the masses for instant gratification regardless of the