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p While a description and analysis of the state and local expenditures basically revolves around the question of establishing the relationship between current and long-term needs on a satisfactory basis, a study of the composition and scale of revenue largely makes it possible to pinpoint the factors determining this relationship.

p Efforts of state and local governments to increase pressure through their own sources, chiefly through taxes, invariably affect the material condition of the people who are themselves compelled to pay for public services, including those they do not directly use.

p This applies in the first place to metropolitan districts, the public services of which are enjoyed by the inhabitants of suburbs and other cities.

p The revenue of state and local governments can be listed in three main groups, according to their sources: a) revenue from own sources; b) federal or state grants and c) loans.

p These groups of revenue can, in turn, be broken down into smaller subgroups, the examination of which will make it possible to analyse in detail the system of state and local budget revenues.

p Revenue from their own sources comprises the main part of budget receipts of states, counties, municipalities, townships, school and special districts. In 1968 they exceeded 85 per cent of all receipts.

p Tax receipts make up the overwhelming part of revenue 168 Table VI-9 Distribution of State and Local Revenue by Sources in 1969  [168•1  (million dollars) Total state-local State Local Total revenue From own sources Intergovernmental revenue 132,153 113,001 19,153 77,584 59,809 17,775 79,274 53,192 26,082 from their own sources. In 1968 they amounted to more than 80 per cent of the general revenue of state and local governments. Table VI-10 Distribution of State and Local Budget Revenue by Sources in 1969  [168•2  (million dollars) Total State Local All revenue 132,153 77,584 79,274 Total revenue from own sources 113,001 59,809 53,192 General revenue from own sources 95,397 49,537 47,861 Taxes 76,712 41,931 34,781 Charges and miscellaneous general re- venue 18,689 7,606 11,080 Utility revenue 5,931 — 5,931 Liquor stores revenue 1,909 1,663 245 Insurance trust revenue 9,764 8,609 1,155 Intergovernmental revenue 19,153 17,775 26,082

p Total revenue from own sources consists of taxes and charges and miscellaneous revenue, and revenue from utility, liquor stores, and insurance trusts. General revenue from own sources is limited to taxes and charges and miscellaneous revenue.

p Pressed by circumstances demanding an increase in expenditures, state and local governments are trying to find additional financial sources. They resort both to improved 169 administration and to legislative action affecting the size of the tax base and the rates of the operating taxes.

p In some cases new taxes are introduced if this does not lead to obvious adverse consequences. At times such measures prevent further economic growth and undermine the base for a further increase in revenue.

p State and local governments utilise more than 15 types of taxes, of which the most widespread are the following: sales and gross receipts; motor fuel; individual income; corporation income; automobile licences; tobacco; alcoholic beverages; property tax; insurance company gross premium tax; the use of natural resources; corporation licences; public utilities; and estate and gifts tax.  [169•1 

p The role played by specific taxes varies from state to state and in administrative districts under their jurisdiction. But a number of major taxes are practically applied in all states. These taxes are: property, individual income, general sales, corporation income and indirect taxes added to the prices of goods and services.

p Together with states, the general sales tax has been widely utilised by many local bodies since 1934 when it was inaugurated in New York and then, in 1938, in New Orleans. In 1968, about 3,000 local governments had general sales taxes, introducing them directly or administratively through the financial agencies of states.

p Taxation of goods at the level of production is not practised for fear of lowering the competitive position of companies within the state and for fear of losing them to other states.

p The distribution of revenue from interstate commerce remains an intricate problem. Many industrial companies which send their goods to other districts are located on the territory of several states. As a result direct taxation on retail sales and the siphoning off of revenue by the taxing state could have a distorting effect on the distribution of incomes to the detriment of states which produce the commodities.

p The interstate distribution of revenue from general sales 170 taxes was the subject of long discussions, and thus far a single distributive formula with unified criteria has not been devised. Since more than 120,000 firms have commercial relations beyond the borders of a single state, this remains an extremely important issue.

p The general sales tax, affecting most consumer goods including prime necessities, remains regressive because it absorbs a higher share of the incomes of the poor than of the rich whose proportional expenditures on the taxed goods are lower.

p The most important social aspect in the taxing of prime necessities is ultimately their higher cost and a corresponding reduction in effective demand and consumption.

The tax on corporation incomes introduced for the first time in Wisconsin in 1911, is now applied in 40 states and the District of Columbia.  [170•1  Most states utilise rates within a range of from 2 to 11.33 per cent. Moreover, in 25 states the net income is taxed; nine utilise excises and a tax for the privilege of doing business in the state, and six employ both types. In 1968 these taxes yielded $2,518 million or about 7 per cent of all the tax revenue of states.

Table VI-11 Revenue of State and Local Governments from the Corporation Income Tax  [170•2  State and local Sum (million dollars) Per cent of all taxes 1942 272 3.2 1950 593 3.7 1960 1,180 3.3 1968 2,518 3.7 1969 3,180 4.1

p In view of the different tax rates employed by states, the uneven level of concentration of industry and trade, there 171 are big differences in the share of the corporation income tax in individual states.

p In New York, California, Connecticut, Michigan, Massachusetts, Pennsylvania and some other states this revenue is essential (from 11 to 16 per cent of all tax receipts), while in states like New Mexico, North Dakota, South Dakota, West Virginia, Indiana and Nebraska they practically play no part at all, amounting to from 1 to 3 per cent of all tax receipts (according to data for 1969).

p The tax rate scale is a wide one, ranging from 8 per cent in South Dakota to 15.4 per cent in Connecticut.  [171•1 

p But there is a definite tendency to equalise the tax rates in proportion to federal income tax rates. At the same time the differences in the proportions of specific kinds of taxes in state budget revenues make it impossible to effectively equalise rates.

p A more or less proper distribution of revenue demands consideration of a big number of interconnected factors such as property, productive assets, size of sales, expenditures of firms, security holdings, the size of sales within the state, and so on. These factors are evaluated in various forms; moreover, the method of calculating the quantitative values of specific factors differs in many states.

p Individual income taxes occupy third place in state-local taxes and second in state taxes. The share of this tax in budgets of state and local governments amounted to 10.8 per cent in 1969 and reached $7,308 million. Paralleling the Federal Government’s taxation on personal incomes, begun in 1913, states also started to gradually introduce these taxes. By 1938, already 32 states and the Hawaii had made this tax a permanent source of revenue. By 1968, their number had reached 35.  [171•2  About one-third of the population living in other states is not subject to this tax. However, they levy other types of direct and indirect taxes which are sufficiently high.

p The introduction of individual income taxes very likely will arouse a sharply negative reaction from taxpayers. Total taxes per capita in states which do not utilise 172 Table VI-12 Revenue of State and Local Governments from Individual Income Taxes  [172•1  State and local, million dollars Per cent of all taxes State, million dollars Per cent of all state and local taxes Local, million dollars Per cent of all state and local taxes 1942 276 3.2 249 2.9 27 0.3 1950 788 4.9 724 4.5 64 0.4 1960 2,463 • 6.8 2,209 6.1 252* 0.7 1968 7,308 11.1 6,231 9.2 1,077* 1.6 1969 8,008 11.6 7,527 9.8 1,381* 1.8 * Corporation tax included with individual Income tax collections. individual income taxes are approximately the same as in states which do. Thus, in 1968 taxes in Connecticut, Illinois, Ohio and Pennsylvania were respectively $357, $330, $277 and $298, with this figure fluctuating in all states from $200 to $503, and averaging $338.  [172•2 

p The role played by this tax in all tax receipts of states is steadily rising: in 1950 they collected $724 million out of $7,930 million received from all taxes, or about 9 per cent; in 1960, $2,209 million out of $18,036 million, or approximately 12 per cent, in 1968, $6,231 million or 17 per cent, and in 1969, $7,527 million or 18 per cent of all tax revenue.  [172•3 

p In some states receipts from the individual income tax comprise more than one-third of all tax receipts while in Oregon they exceeded 50 per cent in 1969.

p The most important characteristic of this tax is the level of rates and criteria for tax-exemption employed in individual states.

p In 1970, the minimum rate fluctuated between 0,75 (Iowa) and 4 per cent (Oregon and Utah); the maximum rate ranged from 4 per cent (Missouri and Mississippi) up to 14 per cent 173 Table VI-13 Receipts from the Individual Income Tax in Selected States in 1969  [173•1  All tax Individual receipts, income tax Per cent of million receipts, mil- all tax revenue dollars lion dollars Oregon 405.8 204.3 50.3 Wisconsin 1,090.8 461.9 42.3 New York 5,329.0 2,151.6 40.3 Minnesota 914.6 304.2 33.2 Massachusetts 1,232.0 452.6 36.7 Maryland 917.2 365.8 39.9 Connecticut 157.0 61.4 39.1 (New York and New Jersey). Moreover, the rate of progression of taxes on incomes above $15,000 slows down. Some states use a steady rate—Michigan 2.6 per cent, Indiana 2 per cent, Illinois 2.5 per cent and Massachusetts 4 per cent.  [173•2 

p Many states apply a maximum tax rate to comparatively small incomes of $3,000—$7,000 (Maryland, Mississippi, Oregon and Utah). It is clear that such regressivity of taxes, with small differences between minimum and maximum rates as, for example, from 3 to 4 per cent in Mississippi, benefits persons with high incomes.

p States which apply high rates, as a rule, have also a larger percentage of receipts per capita, such as Delaware, Wisconsin, Oregon and New York.

p The minimum level of tax-exempt incomes in 1968 also ranged widely from $370 per person to $5,000 and from $740 to $7,000 for a family of two. Moreover, the most widespread tax-exempt incomes were $600 and $1,200 respectively (14 states), i.e., at the same level as exemption from the federal income tax.

p Twenty-eight states apply tax exemptions depending on age and also other types of exemption as, for example, for blind persons, disabled, and so on.

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p Some states provide tax exemptions through tax credits (Arkansas, California, Iowa, Kentucky, Louisiana, Minnesota and Wisconsin) , as a result of which the tax-exempt minimum is raised.

p Higher tax rates, together with the extension of the tax base, have ensured a very strong reaction on the part of taxes to the rise or drop in the GNP in a ratio of approximately 1:1.7. While such a situation is exceptionally favourable during the rise in the GNP, it has a very negative effect in periods of recession, especially when the predicted dynamics of the GNP were optimistic in comparison with the actual situation. State governments are unable to issue loans on an unlimited scale and, since they lose a considerable part of the revenue, may find themselves in difficult positions.

p Sharp fluctuations of tax rates in individual states are likewise an adverse feature of the existing system. This creates definite conditions affecting individual groups of the population and persons engaged in certain vocations who in order to evade a loss of an essential part of their incomes migrate to states with more favourable taxation terms.

p The property tax is now the chief source of tax revenue of local governments. In 1969 it totalled $30,673 million, of which $29,692 million or 96.8 per cent were receipts of local governments.

But notwithstanding the exceptionally high share of the

Table VI-14 Revenue of State and Local Governments from the Property Tax  [174•1  State and local, million dollars Per cent of all tax revenue State, million dollars Per cent of all state and local tax Local, million dollars Per cent of all local tax revenue revenue 1942 4,537 53.2 264 3.0 4,273 91.6 1950 7,349 46.2 307 1.9 7,042 88.2 1960 16,405 45.4 607 1.7 15,798 87.4 1968 27,747 41.1 912 1.3 26,835 86.1 1969 30,673 40.0 981 1.3 29,692 85.4 175 property tax in revenue of local governments, its role is gradually declining.

p While the role of the property tax in all federal and state tax receipts is declining quite rapidly as a result of the introduction and spread of other taxes, it remains dominant in local budget receipts. State governments are orienting themselves on more effective taxes, responsive to economic growth, population increase and a rise in incomes.

p The main reason for the almost complete dependence of local governments on the property tax is the absence of other large revenue sources, including taxes, which could provide sufficient budget resources, without detriment to the tax base. At the same time, the property tax, chiefly on real property, within certain limits (when its rates are not too high), does not stimulate population migrations to other areas, and local governments can utilise it as a permanent financial source.

p Existing regulations for applying the property tax in most states provide for the inclusion of practically all types of property, both real as well as personal movable property, including automobiles, furniture, jewellery, and so on.

p At present more than 85 per cent of the taxable property consists of real property. Non-material property is almost not taxed because of the difficulty of evaluating such property. Local governments use various forms of exempting personal property from taxation, such as household property, whose value it is extremely difficult to assess. The importance of the property tax for various types of local administrative units is not everywhere identical, because, with the exception of municipalities with substantial nontax revenue sources, all the others, especially school districts, depend almost entirely on this tax.

p The role of the direct property tax in the budgets of cities is noticeably declining, however. In 1968, of the $11,291 million in tax receipts collected by cities, $7,769 million came from the property taxes, i.e., 68.8 per cent.  [175•1  In that year, all local governments received $26,835 million from property taxes out of the $31,171 million collected from all tax receipts, i.e., 86.1 per cent.

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p A characteristic feature of property taxation in the United States is the great diversity in methods of valuation, the list of taxable property and the terms of exemption. On the one hand, this is a consequence of big differences in the financial position of individual state and local units as regards the need for solving urgent problems, which, in turn, tells on the degree of pressure exerted on the taxpayer. On the other, we have the structure of the financial base which is capable of reacting differently to the introduction of some or other taxes. This, of course, does not rule out the subjective initiative of financial agencies and respective government bodies in finding new or tapping more intensively the existing revenue sources. Thus, personal household property is exempted from the property tax in 30 states and personal automobiles in 21 states.

p Personal material property which yields a commercial income is taxed by 46 states. Ownership of a car formally is not subject to the property tax in some states but practically is subjected to other additional duties. Partial exemption from the personal property tax is applied in most states.

p Various types of property which bring commercial benefits such as cars, equipment and implements, are difficult to valuate because of the unequal purchase prices, the degree of wear and tear, the type of production, and so on. This applies especially to the valuation of implements, which is practically impossible.

p The absence of a single system for determining the tax base, the methods of valuation and the unequal distribution of the mass of property in individual states and local administrative units, have resulted in big differences in respect of the burden borne by individual states.

p Thus, the per capita receipts from the property tax in state-local budgets fluctuated in 1969 from $36 (Alabama) to $246 (California).

p The chief difficulty in applying the property tax lies in valuating property. This depends not only on the regulations and procedures established through legislation but on a number of subjective factors in respect to the owners and the estimators.

p Notwithstanding the existence in many states of quite 177 Table VI-15 Per Capita Property Tax Revenue  [177•1  (dollars) States with the highest per States with the owest per capita incomes capita incomes California 249 Alabama 36 Connecticut 210 Arkansas 58 New Jersey 227 Louisiana 60 Massachusetts 225 Mississippi 60 definite criteria for valuating property, actually there is an underassessment almost everywhere. A comparison of the estimated values with the market prices shows that on the average, the estimated tax value of property was about 33 per cent of the market price. Moreover, in some states, these fluctuations are even more striking. Although the laws of 17 states provide for a specific ratio of the assessed and market values, it is clear that this relationship cannot be maintained because of the above-mentioned reasons. The assessed value calculated by the tax officials ranges from 5 per cent of the market price (South Carolina) to 84 per cent (Kentucky).  [177•2 

p Divergences in the level of underassessment of property during valuation are inevitable in the absence of a strictly unified system of taxation and results in an unjust distribution of the tax burden borne by individuals and groups of the population. Moreover, property owners try to get a maximum lowering of the estimated value because they know that there is no firmly fixed practice of valuation.

p Another serious shortcoming in the system of valuating property lies in the terms of financial allocations between state and local governments. The latter have to collect taxes for the states but in accordance with their own evaluations.

p The interest of the local authorities in reducing the tax base in such cases is obvious. This circumstance has had 178 much to do with the refusal of a number of states to collect the property tax in their favour.

p In part, estimated value also plays a role in the distribution of state aid when the per capita property value is employed as a criterion for estimating the financial potentialities of a local administrative unit.

p Such an approach is utilised particularly in determining grants for education.

p Analysing the system of valuating taxed property, Maxwell says that “a locality is tempted to set a low valuation in order to reduce its share of county tax assessment and to set a high valuation in order to secure larger shares of state grants or of state distributions of taxes".  [178•1 

p The desire of states to unify, to some degree, the system of local tax valuations thus far does not go beyond efforts at comprehensively assessing property in specific localities for the purpose of establishing a more just intrastate reallocation of resources. But there still exist various valuations of individual property in each administrative unit and this naturally tends to deepen the differences in their financial situation in the allocation of state aid.

p The process of establishing comprehensive and equitable valuations by states is very inaccurate and is based on subjective decisions by state tax agencies.

p State re-evaluations of property, as a rule, encounter the energetic resistance of local financial agencies which at times succeed in getting a second re-evaluation in their favour.

p Yet the question of valuating taxable property goes beyond purely tax relations when the size of the utmost limit of the debt on local loans is based on the ability of a corresponding administrative unit to collect the property tax. Thus, the evaluators, within certain limits, can influence the size of local loans to which they, in respect to their purposes, have no relation whatsoever.

p Another adverse aspect of the imperfect system of valuation is the application of privileges for exempting property from taxation when it depends upon the estimated value of property whether the local government unit will receive some tax from the owner or not.

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p The glaring shortcomings in property taxation are constantly criticised and various reforms are proposed. But at the local level no sufficiently effective substitute for this tax has been found which could ensure similar budget revenue and would not suffer from still greater shortcomings.

p The widening gap between the value of property owned and the income which this property brings, makes it increasingly difficult to find an efficient and justified application of the tax, and very often its size exceeds permissible limits.

p Moreover, the property tax is regressive and does not conform to the incomes of the owners. It prevents commercial enterprise from withdrawing taxable property. This is most strikingly revealed in metropolitan areas where businesses move from the central urban districts to suburbs, increasing the financial difficulties of central districts. To a certain extent private investments in housing construction are being decreased and unemployment is rising. This, in turn, places new demands on the budget expenditure of municipalities.

p Commercial firms try to compensate for their tax payments by raising prices for the goods they sell. This, in turn, leads to a rise in the cost of municipal services.

p The taxes on estates and gifts supplement each other and in a number of cases are ineffective, although an opinion is current that they prevent huge accumulations of wealth and promote equal opportunities.

p Summing up this brief review of sources and methods of financing state and local budgets, one can conclude that the general financial resources at their disposal are no longer sufficient to ensure meeting growing needs.

p Yet the taxation system itself proved inflexible and as a result of this was not sufficiently adapted to rising expenditures without resorting to assistance from higher government bodies. On the other hand, the system cannot ensure a fair distribution of the tax burden on individual sections of the population and, on the contrary, promotes the deepening of social disunity vividly revealed in metropolitan areas. Comparing the efficacy of the taxation system of states and local governments with that of the federal government, 180 Cantor noted: “Their tax revenues have not grown in line with public-service needs and their methods of taxation seldom result in a fair sharing of the tax burden."  [180•1 

He, however, does not explain this as the result of complex and contradictory socio-economic processes in US society, in which the concentration of state-monopoly power which determines national priorities runs counter to the interests of the overwhelming majority of the population. In this sense the budgets of state and local governments reflect the wide gap that exists between the federal government’s priorities and the needs of society as a whole. For the latter a solution of urgent domestic problems is immeasurably more necessary than the purposes for which federal resources are largely used.