not been continued, systematic attention to the problem either from the congressional or executive side." The Commission recommended periodic congressional review of Federal grants to State and local governments. Legislation to implement this recommendation was introduced in the preceding three Congresses, and presently it constitutes Title V of the proposed Intergovernmental Cooperation Act of 1967. In the same report, the Commission also recommended that: existing grant-in-aid programs be assessed periodically In its later report on equalization in grants-in-aid, the Commission made the further recommendation that Federal grant administering agencies be required by the President to review periodically (a) the adequacy of the need indexes employed in their respective grant programs and (b) the appropriateness of their equalization provisions and that this review be coordinated by the Bureau of the Budget and with the periodic congressional review procedure recommended earlier. These previous Commission recommendations together with the one at hand would establish both legislative and executive machinery that could bring under constant surveillance the varying matching and apportionment provisions as well as other aspects of grants-in-aid with likely rationalization and simplification. Where grant programs are consolidated either through affirmative legislative enactment or through Presidential initiative subject to congressional veto, the disparity in allotment and matching ratios obviously becomes resolved in the process of merging. The Commission recognizes that however much logic may cry for the combination of grants, the political barriers in some cases will just be too high. Therefore, the Commission urges that the Bureau of the Budget proceed immediately to erect a "second line of defense"--namely, the initiation of legislative proposals to modify matching and allotment ratios of "unmergeable" grants so as to minimize the destructive effect that such disparities now exercise. STRENGTHENING STATE AND LOCAL FISCAL SYSTEMS The best guarantee of fiscal flexibility for State and local governments is a highly productive and equitable revenue system. Most States, however, have not yet availed themselves of the opportunities open to them. We hold this to be true although State and local policymakers have demonstrated remarkable courage on the tax front in assuming the political hazards implicit in tax increases that produced about half of the $30 billion growth in tax collections registered during the last decade. The other half can be attributed to economic growth. If States in particular are to remain effective partners in our federal system, they dare not abdicate their responsibility for: Protecting the local property taxpayers from being forced Reforming the State-local revenue system so as to shield Tackling the tough fiscal equity issues created by the Minimizing the proliferation of local nonproperty taxes-- Broad-Based Tax System- The Commission concludes that the development of a more equi- There is untapped revenue potential remaining in the State-local tax system. At the present time six States are without a sales tax: Alaska, Delaware, Montana, New Hampshire, Oregon and Vermont. Fifteen are without an income tax: Connecticut, Florida, Illinois, Maine, Nevada, New Hampshire, New Jersey, Ohio, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Washington and Wyoming. Additionally, many local governments, particularly in the South and While the champions of the graduated personal income tax and the sales tax advocates still engage in political sniping, this contest has lost much of the bitterness that in former times had transformed the State tax arena into a dark and bloody political battleground. The importance of the change cannot be overemphasized because bitter clashes between sales and income tax advocates for years hamstrung efforts to construct a more diversified and productive State tax system. The perennial sales-versus-income-tax debate is now a luxury few States can afford. During the last seven years Kentucky, Wisconsin, Idaho, Massachusetts, New York, Virginia, Minnesota, Michigan, West Virginia and Indiana have adopted the "second" tax, while Nebraska adopted an integrated revenue package--both a general sales and a personal income tax. Except for Indiana, Michigan and West Virginia, all of the "second" tax enactments took place on the sales tax side of the ledger. Thus, in these last few years, the growing fiscal pressures raised the number of sales-plus-personal income tax States to 30. A broad-based sales-personal income tax combination enables a State toì create a diversified and productive revenue system while holding tax rates to moderate levels. To put the issue more sharply, it enables a State to maximize its revenue potential while minimizing vulnerability to interstate tax competition. Food Tax Credit or Exemption Recommendation No. 7 In order to strengthen the productivity of the sales tax, the come families from undue tax burdens on food and drugs under general sales taxes. States have demonstrated that the sales tax need not be severely regressive--that either the exemption of food or a system of income tax credits and cash refunds can rid this tax of its worst feature for the great mass of taxpayers. At the present time 14 States exempt food outright while 6 States (Indiana, Colorado, Hawaii, Iowa, Massachusetts and Nebraska) permit State income taxpayers to take a credit for sales tax payments on food against their personal income tax liabilities. These recent and pioneering tax credit and refund devices enable the coordination of income and consumption taxation. Hawaii and Iowa are experimenting with a diminishing income tax credit for sales tax payments--one that declines as income rises. This ingenious device removes the regressive impact of the sales tax thereby creating a climate of public opinion more favorably disposed to intensive use of the levy. The Commission noted in its report Federal-State Coordination of Personal Income Taxes that pioneering State efforts with the personal income tax credit illustrate the benefits that can flow from State and local experimentation with new ideas. Because the personal income tax credit system can considerably lighten the relatively heavy State and local tax load now borne by the poor, it can contribute to the effectiveness of the general sales tax and perhaps the property tax as sources of State and local revenue. Or to put the issue more affirmatively, a better reconciliation of consumption and property taxes with the ability to pay principle by means of income tax credits can help State and local tax policymakers cut the Gordian knot tied by two opposing pressures--the demand for tax relief for the poor and the need for additional revenue. Property Tax Overburden Recommendation No. 8 In order to strengthen the productivity of the local property tax, the Commission recommends action by the States to help the localities finance the cost of relieving any undue local If by some stroke of magic the local assessor could equalize all property tax assessments at full value, or at some uniform percentage thereof, the collection of this tax would still create special hardships for property owners with low incomes. Although the value of the family residence serves as a fairly good proxy of ability to pay taxes in a rural society, and still does in suburbia, total household income stands out as a far more precise measure of taxable capacity in our modern urban society. This point can be grasped quickly from examples of the hardship that the payment of residential property taxes imposes on low income households. With retirement, the flow of income drops sharply and a $300 a year property tax bill that once could be taken in stride becomes a disproportionate claim on the income of an elderly couple living on a pension of $1,500. By the same token, if the flow of income falls sharply as a result of the death or physical disability of the breadwinner, or due to unemployment, then again payment of the residential property tax can become an extraordinary tax burden. The most notable attempt to cope with the regressive impact of the property tax upon low income people can be found in Wisconsin's 1964 tax credit plan that provides substantial property tax relief to low income elderly persons--both homeowners and renters meeting specified income criteria. This tax relief program is financed from State funds and administered by the State Tax Department. The Wisconsin legislature (and more recently the Minnesota legislature) took the position that if an elderly householder in the below $3,000 income class had to turn over more than 5 percent of total income to the residential property tax collector he was confronted with an extraordinary burden and that amount in excess of 5 percent is either refunded by the State to the property owner, or applied as a direct credit against his State income tax, if the taxpayer falls in that category. The renter is also entitled to relief and 25 percent of his rent is considered as imputed property tax payment. Of special significance is the fact that the State and not local government finances this tax relief program. The reduction of tax disparities between high and low income communities within metropolitan areas can be cited as a beneficial side effect of the Wisconsin plan. Because the poor tend to cluster together, the mailman will deliver most of the property tax refund checks to households in the low income communities. Thus, the granting of tax relief to the low income elderly moves in the "right" equalization direction from both the interjurisdictional and interpersonal standpoints. Moreover, the tax credit can be viewed as the most efficient tax relief mechanism because it can be so designed to maximize the amount of aid extended to low income homeowners and renters while minimizing loss of revenue. In a number of States, homestead exemption, a durable by-product of the 1930's depression, offers some protection from undue property tax burdens on lowincome occupants of dwellings and farms. This method bestows property tax relief to all homeowners, however, not just those with low incomes, and misses completely the low-income families in rented properties. Moreover, as this Commission reported in its 1963 study on The Role of the States in Strengthening the Property Tax, the policy of homestead exemption involves a substantial amount of injustice among individual taxpayers and taxing jurisdictions at a large and usually unwarranted sacrifice of local property tax revenue. Flexibility in Long-Range State Financing Recommendation No. 9 The Commission recommends that the States which have not done so, give serious consideration to providing more flexibility in their constitutions for long-range State financing programs. In its 1961 report, State Constitutional and Statutory Restrictions on Local Government Debt, this Commission recommended that local governments be given greater flexibility in borrowing so that they can exercise maximum initiative in meeting their own needs. The Commission believes that the States' power to borrow should also be liberalized and for essentially similar reasons. Expanded State legislative authority to borrow becomes increasingly important as States are asked to participate in numerous Federal grants-in-aid for capital improvement projects, such as airports, hospitals, and university buildings. Such power can also help States to take a more positive role in assisting their local governments by increasing their fiscal capacity to contribute to the non-Federal share of Federal programs administered locally. Most State constitutions restrict the borrowing freedom of State governments (legislatures). In the main the restrictions were imposed as a consequence of overextension of State credit to finance internal improvements in the nineteenth century and the ensuing defaults in periods of economic depression. Often they have not restricted the amount of borrowing, but shifted it instead to "nonguaranteed debt," incurred through such devices as revenue bonds, public corporations, and lease-purchase agreements. Debt in this form rather than as a general obligation of the States has meant higher costs and sometimes the creation of additional administrative machinery. The Commission also notes that a basic cause of earlier debt defaulting has disappeared as countercyclical devices have been built into the American way of life and the Federal Government has developed tools for controlling boom-to-bust fluctuations in the economy, thus reducing the |