THE TAX-SHARING FALLACY

...Furthermore, by providing a greater than proportional refund to the poorer states, the plan promises to help smooth out the distressing differences in standards of education and social services that now prevail among the states...

...in many respects, because of their intimate and necessary services, they are and must remain closer to the people...

...At one sweep the plan provides support for both the "states-rights" bias of many conservatives and the help-the-poor propensity of liberals...

...Some day, the sooner the better, the Vietnam war will end...

...Part of this bounty could be absorbed by reducing Federal taxes, if Congress and the White House so decide...

...The answer is that the tax-sharing plan seems to have something for everyone...

...In some states rural and suburban legislators can and do form an effective majority in opposition to urban needs...

...Senators, Congressmen, and state legislators have gone beyond this point in their reasoning...

...The intriguing, almost magical answer, in the estimation of so many in Washington and in the state capitals, is the so-called Heller - Pechman tax - sharing plan, whereby part of the personal income tax receipts of the Federal Government would be systematically siphoned off to the states...

...A leveling off in the need for expansion of educational facilities is therefore a certainty—a fact not fully reflected in the most popular projections...

...For by easing the financial pressure on the states, it would eliminate or obscure the motivation for tax reform in the many states that need it...

...An expanding population requires more highways, schools, teachers, welfare payments, parks, and hospitals on top of the familiar problems of seething big city ghettos, crime, and urban sprawl...

...It is in reaction to this uncertainty of use that a group of mayors, led by John F. Collins of Boston and Harold Tollefson of Tacoma, Washington, recently told a Senate subcommittee on intergovernmental relations that they were unalterably opposed to the tax-sharing plan...

...It is as though an invisible hand (nudged only slightly by Heller and Pechman) had providentially arranged to solve some of our most urgent social and economic problems simultaneously...

...For example, it is simply not true that the fifty states have exhausted the sources of tax revenue available to them...

...How can we account for this bandwagon popularity that succeeds even in cutting across party lines...

...Indeed, a growing number of authorities believe that the financial crisis of the states forecast for the next decade is largely a myth created by erroneous extrapolations...

...In addition to its initially persuasive logic, the plan enjoys distinguished authorship as well as the prestige that often accrues to ideas generated under the John F. Kennedy Administration...

...The states, it is alleged, cannot raise the taxes necessary to meet their mounting financial obligations...

...Thus, approximately one out of every three of our fifty states levies no income tax at all upon its citizens...

...Thirteen states do not tax corporation incomes at all, and among those that do, the rates range from highs of six or seven per cent down to lows of less than one per cent...

...Fortunately, there are better ways than tax-sharing for channeling funds or other aid to poor localities and persons...

...this is true of Alabama, Arkansas, Florida, Georgia, and Washington...

...Let us hope that they do—for a little further thought reveals that the basic assumptions of the proposal as well as its technique are seriously questionable...

...But all too obviously, this plan would give to many of the richer states more funds than they would legitimately require, while providing only a trickle to some others where the need is great...

...Among states that have neither corporation nor personal income taxes are Maine, New Hampshire, Florida, Ohio, Michigan, Illinois, Texas, Nebraska, Wyoming, Nevada, and Washington...

...Moreover, hardly any voices have been raised in vigorous dissent, suggesting a fairly widespread, if passive, acquiescence...

...by the method of grants-in-aid, some assurance can also be provided that funds will be spent intelligently, honestly, and efficiently...

...California spends almost twice as much on education, per person, as does Missouri...

...Although legislative safeguards may be proposed, as they are in a few of the tax-sharing bills recently introduced, there is no practical way of preventing the state and local governments from using their new Federal funds to reduce their own taxes...

...In Massachusetts the property tax rate is four times as great as in Alabama, Arkansas, Dele-ware, and New Mexico...

...If support came exclusively from such conservative sources, the ultimate defeat of tax-sharing would be more probable...

...Some place chief reliance on regressive sales taxes, even imposing substantial levies on food and medicine...

...It is neither possible nor desirable to put a Federal commission in control of the fifty state budgets, not to mention the budgets of the many thousands of local governments that would receive Federal funds indirectly...

...To help meet these needs at the state and local level, there is little doubt that for many particular programs and in numerous trouble spots, the Federal Government will have to provide more funds...

...The uncertainty concerning the ultimate use of the proposed tax-sharing funds is also an ineradicable part of tax-sharing...

...Finally, there is the fact that when the Vietnam war ends, the Federal Government will enjoy a very substantial budgetary surplus—unless its taxes are reduced, its outlays for nonmili-tary purposes are increased, or both...

...However well-intended, therefore, a Federal review commission could be little more than window dressing...

...Instead, the mayors called for expanded funds for the model cities program, in which the Federal Government provides aid for urban mass transportation, housing, open land conservation, water and sanitation, and other specific projects...

...The enormous differences in income tax rates among the states range from a low of zero at all income brackets in seventeen states to a high of nearly fifteen per cent reached in the upper income brackets in Alaska...

...In fact, so long as a lump sum is to be divided by formula among the states, as tax-sharing provides, it is almost certain that the allocation of funds would be inequitable and that its uses would be uneconomic...

...Why not turn over the surplus funds from the Federal Government that doesn't need them to the states that definitely do...

...But coordination in a growing number of these services is essential, and history leaves no question about where the nation's leadership must reside...

...Here, of course, Federal authorities can direct resources toward the most urgent requirements...

...But tax-sharing would take funds from some states and give them to others, with no strings attached...

...Then the states, and the local governments, too, will be free to take up the slack with higher rates of their own, as voters in each area may decide...

...Each day the idea seems to win new support among both Republicans and Democrats...

...The taxpayer, it is usually conceded, ought to have some say over the use of the funds he provides, at least through his elected representatives...

...Some forty-eight of the fifty-seven are Republicans, operating with the warm approval of their leaders, Everett McKinley Dirksen in the Senate and Gerald R. Ford in the House...

...But some of the tax-sharers have other plans...

...But the birth rate reached its peak in 1957 and has been declining since...

...The competition to sponsor legislation is keen...

...Unfortunately, such reviews would almost inevitably be pointless in tax-sharing...

...Together with its glamor and its impressive support, any critic must also concede that the tax-sharing plan is directed toward a real and important problem...

...In some respects, indeed, tax-sharing may defeat the very aims it ostensibly seeks...

...As they view it, the present tax-sharing bills are only a beginning, in that they allocate to the states a "modest" four or five per cent of Federal income tax receipts...

...This is not to underestimate the key role of state and local governments...

...Some states tax neither incomes nor sales...

...Perhaps part of the support for tax-sharing stems from the fact that few U.S...

...One-third of the states do not impose a general sales tax, which, whatever its limitations, is nevertheless available to relieve the pinch of financial need...

...Concerning the former, some plan must be devised for inducing the states as a group to utilize the income tax for a larger share of their revenue...

...For then, as the huge surplus appears, the states' share in Federal income tax receipts can be elevated from four or five to perhaps twenty per cent or higher...

...For under this plan, and under the bills now introduced in Congress, the states would be free to use their share of Federal taxes as they wish...

...The disparities between North and South in outlays for health, education, and welfare are perhaps obvious...

...It would tend to reduce the activities of our sprawling and expanding Federal Government in favor of the state and local governments which are presumably "closer to the people...

...Some type of financial aid, supporters contend, is therefore urgently needed...

...Underlying the idea of tax-sharing is the basic assumption that the fifty states, in general, have more or less exhausted the sources of tax revenue now available to them...

...It is important to realize that the faults just described are inherent in the tax-sharing concept, and hence are not avoided in any of the bills proposed...

...The postwar baby boom did mushroom requirements for educational facilities—the largest item in state and local budgets considered together...

...New York spends more than twice as much on health and hospitals, per person, as does Ohio...

...Until some of the lagging states are induced to employ the fiscal powers they already possess, it would seem premature to talk of tax-sharing...

...For example, the only way to make tax-sharing non-discriminatory would be to return to each state the same fixed proportion of the Federal revenue collected from that state...

...The states-rights lure, however, is almost certainly the more powerful...

...He is the author of a widely used college textbook, "Economics: Theory and Practice," and of numerous technical and popular articles...

...The tax-sharing plan is an immediate danger...

...Once enacted by law it would worsen the problems of equity, efficiency, and social requirements that are involved in present Federal-state-local fiscal relations...

...Part could be used for meeting the many pres-ing public needs that today are only partly, tantalizingly, satisfied—in education at all age levels, in the anti-poverty program, retraining of workers, health, urban planning, conservation of natural resources, and so on...

...It likewise ignores the fact that some residents of New York's Harlem have smaller incomes than the oil tycoons of (poorer-on-the-average) Texas...

...In an effort to confront this weakness, some bills provide for a Federal commission to review the budgets of the fifty states...

...For a few others, such as Idaho, Minnesota, and Montana, sales taxes are a relatively minor source...

...Their doubts are reinforced by the observation that even in the newly-reapportioned state legislatures, the cities tend to be neglected...

...THE TAX-SHARING FALLACY by MELVILLE J. ULMER T ike a lovely damsel in distress, state government has been beckoning to Washington and numerous would-be heroes are not only ready, but astonishingly eager, to rush to her rescue...

...Its authors are Walter Heller, former chairman of President Kennedy's Council of Economic Advisers, and Joseph A. Pechman, chief economist of the famed Brookings Institution...

...Even aside from this, the need for more and better public services of all kinds should be apparent to any objective observer of the way in which our rich nation has allocated its resources...

...Nevertheless, the aspirations of the underprivileged in our society have been fully awakened and must be satisfied...

...session of Congress...

...When the war ends, the real opportunity will arise for a drastic change in the relative positions of the Federal Government vis-a-vis the states...

...He writes here in a private, unofficial capacity...

...Meanwhile, the expected growth of our labor force and the steady rise in productivity (both of which swell the gross flow of income) promise a considerable increase in the revenue yields for state and local governments, even at existing tax rates...

...Instead of encouraging uniformity, which would be justifiable morally and economically, a tax-sharing system would do just the opposite...

...Besides being discriminatory (by, in effect, taxing people in the same income bracket differently), this decision violates a fundamental principle of good democratic government...

...The Heller-Pechman plan would provide more revenue, proportionately, to those states whose residents are, on the average, poorer, a feature that has attraction for its liberal supporters...

...To an increasing extent, the states would spend it, and very likely with no greater degree of wisdom and social enlightenment than we have come to expect from many of them in the past...

...specifically their voting records have won ratings of zero from Americans for Democratic Action...

...Comparable to these huge variations in the sources of funds are those relating to expenditure...

...Economists such as Professor John Kenneth Galbraith of Harvard have documented the case with care and eloquence...

...Fiscal reform, as reflected in part in a more uniform use of the income tax, would go a long way toward solving the widely-publicized financial problem of many states...

...A considerable body of opinion believes that with a real effort at tax reform the states would be fully capable of solving their own financial problems...

...He has served as an economic adviser to the General Services Administration and the Departments of State, Labor, and Commerce under the Truman, Kennedy, and Johnson Administrations...

...It would divide among the fifty states anywhere from one to six per cent of the total personal income tax payments collected by the Federal Government —a percentage that varies from bill to bill and could, in any case, easily be increased later...

...One important reason is that large suburban populations swing increasing weight, and the suburbs and their political leaders evidence inadequate concern for the problems of the very cities which keep the suburbs alive...

...It is the crowning failure, on the other hand, of the Heller-Pechman plan that it provides no guarantee, or even assurance, that its avowed objectives would be accomplished...

...But even within the North there are large discrepancies...

...Some rich states like California are troubled with substantial deficits while others, like medium-income Indiana, are enjoying ample budgetary surpluses...

...It is even more of a prospective danger...

...At least one outstanding research organization, the Committee for Economic Development, thinks that it would do so for all states...

...To bring some balance, order, and equity into the confusion of state and local financing requires creative Federal leadership, not merely money...

...With some justification, the mayors claimed that deterioration of central cities was "the leading domestic problem of our times," and doubted that this would receive adequate recognition from state governments in the disposition of Federal funds under a tax-sharing plan...

...Both tools are readily available and can be used as vigorously and purposefully as we, as a nation, may desire...

...No fewer than fifty-seven bills, incorporating one version or another of the original tax-sharing plan, were introduced within the first two months of the present MELVILLE J. ULMER is a professor of economics at the University of Maryland and an economic consultant to the Bureau of the Budget...

...That is why all varieties of the plan, despite some differences in formula, allocate relatively more funds to the poorer states...

...As society grows more crowded, complex, and interdependent, this need for Federal leadership and coordination increases, notwithstanding the protestations of those who support states rights...

...There is much to be said, also, for the desirability of inducing a greater degree of uniformity in the tax burden imposed on families in the same income bracket around the country...

...At the same time the costs of meeting such needs at the state and local level are threatening to exhaust the ingenuity of some legislators as well as the patience of some taxpayers...

...The Federal Government would retain the right to levy and collect taxes, with all the plaudits and acclaim associated with these activities...

...The problem of the states posed in this particular drama is financial...

...Of the fifty-seven legislators who sponsored tax-sharing bills, all but six or seven have the untarnished profiles of extreme conservatives...

...no economist, to my knowledge, disputes this...

...When it does, the Federal Government will be blessed with a huge budgetary surplus—perhaps considerably more than $20 billion...

...Furthermore, as matters now stand, families in the same income bracket are taxed at considerably different rates in the various states...

...Where income taxes are levied, the rates vary enormously...

...Based on crude geographical lines, tax-sharing creates the illusion of equitable redistribution of income, without any of its substance...

...Again, the problem must be considered separately in terms of taxation and expenditures...

...The most equitable tool for redistributing income is the progressive income tax...

...Unquestionably, social needs for education, slum clearance, welfare services, crime control, preservation of our natural resources, and the like are growing...

...The most effective tool for aiding backward states in improving educational and social services is the familiar one of grants-in-aid by the Federal Government...

...No formula or plan of this kind can do justice to the great diversity among the states, not only in the crude "tax effort" made, but in the structure of their taxes, the magnitude of their financial needs, their present regard for social obligations, and in other ways...

...Above all, it can insure that jobs that need to get done, do in fact get done...

...As already indicated, this tax is not used at all by one-third of the states and in many others the rates are extremely low...

...They could devote these funds to meeting ordinary expenses of government, to building roads, monuments, golf courses, or even, as so often happens in underdeveloped areas, for raising the living standards of state and local politicians...

...Yet this discriminates against the individual taxpayer in the richer states by giving him less tax relief than a person with the same income in a poorer state...

...It would systematically give a larger proportionate share of these refunds to poorer states than to the richer ones...

...To the contention that the states need funds, and that the Federal Government has already preempted the major revenue producer, the income tax, the mayors respond: "If it is found that the Federal Government can spare some of its receipts, beyond those that can be appropriately earmarked for specific state or local projects, let it reduce its tax rates, instead of tax-sharing...

...Yet, unless it had this control, and also a superhuman capacity for gathering and evaluating data, there would be no way of directing the ends to which the Federal tax payments would be put...

...This method, by which the Federal Government supplies funds for specific purposes, where matching funds are offered by the state or local government, is widely and successfully used now...

...But because, on its face, the plan promises much more than merely an increase in the power of the states at the expense of the Federal Government there is at least a sprinkling of liberals among its supporters, such as Representative Henry Reuss of Wisconsin and Senator Jacob Javits of New York...

...There are now more than 100 such measures before the House Ways and Means Committee...

...Yet the income tax is generally considered the fairest of all possible levies, and the one that does the least harm to the allocation of the nation's resources...

...No one can deny that such differences do exist, and that they are distressing...