TABLE 11 (CONCL 'D).--STATE AND LOCAL TAX BURDEN, FOR SELECTED TAXES, BY STATE

Index

(State Amounts Related to U.S. Average)
State Personal State General

Local General
Property Tax

100

1/ State personal income tax collections in 1966 as a percent of Federal adjusted gross income in 1965.
2/ Estimated average State general sales tax liability for a family of four with AGI between $7,500 and $8,000,
January 1, 1967.

3/ Average effective rate of local general property tax on locally assessed real property, 1962.
4/ Weighted mean of the 33 States, and the District of Columbia imposing a personal income tax as of 1/1/67.

Excluded from this tabulation are the New Hampshire and Tennessee flat rate taxes on interest and dividends,
and the New Jersey "commuters tax," which applies only to income earned in New Jersey by residents of New
York. Michigan and Nebraska became personal income tax States during 1967.

5/ Arithmetic mean of the 42 States and the District of Columbia imposing a general sales tax as of 1/1/67.
Minnesota and Nebraska became sales tax States during 1967.

6/ In addition but not reflected in these data, local sales taxes are authorized and imposed by numerous local

governments at rates ranging between 1/2 percent and 3 percent. For additional detail see, Advisory Commis-
sion on Intergovernmental Relations, Tax Overlapping in the United States, Selected Tables Updated--A Supple-
ment to Report M-23, December 1966 and subsequent annual Supplements.

1/ Local sales taxes are levied by a number of municipalities.

Source:

U.S. Bureau of the Census, State Tax Collections in 1966, and Property Taxation in 1962 (State and Local
Government Special Studies, No. 47), November 1964; U.S. Treasury Department, Internal Revenue Service,
Statistics of Income Individual Income Tax Returns 1965, and 1966 State Sales Tax Tables, Document
No. 5622.

While no State scored 100%, based on 1966 tax collections, Hawaii, Arizona, Utah, California, Colorado, Wyoming, New York and Wisconsin came closest-over 80% out of a possible 100% (Table D-2). As a result of recent State tax enactments that will be reflected in collection data within a year or two, a number of States have materially increased their utilization rates already (Table D-3). On the other hand, Delaware, Virginia and West Virginia stood out as the States with the greatest amount of untapped tax potential. When compared to the average of the 10 top States in each of these three major categories, their score indicated they had used up only 43 percent of their sales, income and property tax potential.

It should be noted that property, sales and income taxes, being general in character, tend to be the "last resort" type of taxes--levies that States and localities will use only after they have fairly well mined those revenue sources that are less hazardous to exploit from a political standpoint. For example, a State can be expected to maximize the amount of taxes that it can "export" to other States via severance taxes on minerals or petroleum--a fact that partially explains Louisiana's, Texas' and Oklahoma's, low rank on a "last resort" type of tax utilization index. Relatively speaking, taxes on alcoholic beverages and cigarettes also rate as revenue raising "easy marks"--particularly cigarette taxes since the health issue has become prominent.

However, with all of these qualifications, the fact remains that most States and many local governments have not exhausted their tax potential by any means--a fact which when considered in conjunction with the fluctuating fiscal fortunes of the National Government and the deepening big city fiscal crisis described in Volume 2 of this report, complicates any effort to chart an efficient policy for strengthening the intergovernmental system.

COMPENSATORY ACTION ON THE EXPENDITURE FRONT

The accommodation of diverse local, State and National political objectives to fiscal capabilities is most evident in the intergovernmental "joining" of financial responsibility as revealed in the expenditure aspects of fiscal federalism.

Upward Drift of Responsibility for
Financing Functions

Slowly, but steadily, the jurisdictions with superior fiscal capabilities--first the States and then the National Government--have assumed a larger responsibility for financing the Nation's domestic programs.

This fact takes on special significance in view of the rather remarkable absolute increase in State and local government general expenditures from $9 billion in 1942 to $83 billion in 1966. Between 1942 and 1957, there was a small shift from local to State financing of general government services: the Federal Government's share remained fairly constant, just below 10 percent. Since 1957, however, Federal outlays have increased sharply and the Federal share rose from 9.5 percent to 15.8 percent causing both the State and local contributions to slip relatively (Fig. 6, Table A-5).

Growth in Federal Aid

During the past decade, Federal aid has become an increasingly important factor in the financing of services provided by State and local governments. The $3 billion total in fiscal 1956 represented about 10 percent of State and local general revenue. By 1966 it had climbed to $13 billion and comprised about 16 percent of State and local general revenue. For fiscal 1967 the U.S. Bureau of the Budget estimates Federal aid at $15.4 billion or 16 to 17 percent of State and local general revenue, and with an estimated $17.4 billion of Federal aid in fiscal 1968, the percentage will probably go higher.8/

The interstate variation in the relationship of Federal aid to State and local general revenue is considerable. It ranges from 8.6 percent of general revenue in New York to 44.4 percent in Alaska (Table 12). Alaska's State-local general revenue was only $127 million compared to New York's $8.8 billion; the aid amounted to $101 million for Alaska and $832 million for New York.*

The low income States, particularly in the South, also tally higher-thanaverage proportions of Federal aid revenue. To some extent, this reflects the equalization provisions in Federal grant programs, as well as the fact that such States generally do not spend more on federally-aided programs than the absolute minimum needed to meet matching requirements.

The equalizing effect of Federal grants.--A critical issue in structuring a system of Federal financial aid to State and local governments is the extent to which recognition is given to the wide variations in both fiscal needs and fiscal resources among the States and among the respective local governments. We have on previous occasions dealt with several aspects of this difficult problem. We dealt with it at some length in the Commission's earlier report on The Role of Equalization in Federal Grants.2/ We concluded on the basis of that examination that the role of equalization in the system should be enhanced. Some of the grant-in-aid programs enacted during the last two or three years, particularly those that focus on education and poverty, move in this direction.

In a recent study by the Bureau of the Budget, Federal grants were found to have a definite equalizing effect provided the atypical jurisdictions, Alaska, Hawaii and the District of Columbia, are excluded.** This equalization finding can be attributed in part at least to several new grant-in-aid programs in which caseload rather than an explicit fiscal capacity equalization factor (per capita income) is used as the method of allocating funds. For example, the Elementary and Secondary Education Act has a natural or "automatic" equalization effect because it distributes school funds to States on the basis of the number of children from families below $2,000 income and number of children from families receiving welfare benefits under the category of aid to families with dependent children.

*

The especially large amount of highway aid needed to meet the high cost of road construction and the large amount of shared Federal mineral leasing revenue account for Alaska's high percentage. Shared revenue from the leasing of mineral, grazing and forest lands stands out as an important Federal aid factor for most of the Western States. In Wyoming and Nevada, for example, Federal aid comprised 37.8 and 25.5 percent of the general revenue, respectively.

**

Excluding these atypical jurisdictions the Bureau study found that for the year 1966 Federal grants had an equalization power (correlation coefficient) of -.301.10/