As would be expected, this shift has not been the same for each major type of spending. In table I-1, 1927 is the most recent year that was relatively unmarked by severe unemployment or the effects of hot and cold wars. Since 1927 education, highway, and public welfare expenditures have been shifted mainly from local to State governments, while spending for health and natural resources has been moved from the local to the Federal level. Table I-2 shows the nature of these changes. It should be stressed that these patterns are based on the expenditures actually made by each level of government whether they were financed by it or by some other level. The next step, therefore, is to consider what has happened to the intergovernmental sharing of program costs during the present century. TABLE I-2.-General civil expenditures by the 3 levels of government, 1927 and 1964, 1 Federal expenditures for veterans have been allocated to the relevant categories. Local parks and recreation are included in natural resources. Figures are rounded and may not add to totals. Source: Mosher and Poland, op. cit., pp. 46-47, and Governmental Finances in 1963-64, p. 25, Intergovernmental Aid Since 1902 both Federal and State expenditures representing payments to other levels of government have grown more rapidly than GNP, though not in any regular fashion (table I-3). Both expanded rapidly during the "Great Depression," receded during World War II, and then remained stable over much of the postwar period. Federal aid, for example, remained close to 1 percent of GNP between 1948 and 1958, rose to 1.4 percent between 1959 and 1963, and increased again in 1964 to 1.7 percent. Since 1950 State payments to local governments have remained within a range of 1.7 to 2.1 percent of GNP, though they have tended to remain near the top of that range more consistently in recent years than earlier. TABLE I-3.- Federal and State intergovernmental expenditures as a percentage of gross national product, selected years, 1902-64 Source: Mosher and Poland, op. cit., p. 162, and "Governmental Finances in 1963-64," pp. 19, 23. When the budgetary significance of intergovernmental aid is considered, the proportions are also stable. Local governments have received funds for 25 to 27 percent of their total expenditures from higher levels of government since the mid-1930's; State governments received 15 to 16 percent between 1948 and 1957 and then 21 to 23 percent in the early 1960's (table I-4). Looked at from the point of view of the giver, State aid has shown the greater stability. While Federal payments to State and local governments, as a percentage of Federal expenditures, have receded during wartime and expanded thereafter. State aid has remained close to 35 percent of State general expenditures throughout the postwar period (table III-9). TABLE I-4.-Intergovernmental revenue as a percentage of the recipient's expenditures,1 selected years, 1902-64 Source: Mosher and Poland, op. cit., p. 162, and "Governmental Finances in 1963-64," pp. 22, 23, and 53. Since the Great Depression, State governments have functioned as grant intermediaries. In 1922 and 1932 only 8 percent of their spending was financed by the Federal Government and 23 to 29 percent represented aid to local governments. By 1934, 27.5 percent of their spending was Federal money, and nearly 40 percent of their budgets was for State aid. Though neither of these levels was reached again, States in the early 1960's were receiving aid equal to 22 percent of their expenditures and granting aid to local governments constituting 35 percent of their total spending. State and Local Tax Systems While the flow of financial aid from Washington has been increasing. State and local governments have not been idle in expanding old taxes or in enacting new ones. As a result, State-local tax revenues have more than kept pace with the growth of the economy, rising from 4 percent of GNP in 1902, to 5 percent in 1942 and 1948, and to nearly & percent in 1964. As table I-5 shows, however, the increase has not been a steady one, nor did it match the Federal increase up to the end of World War II. Since then Federal tax receipts have little more than kept pace with GNP (except during the Korean war), but State-local taxes have increased their ratio by over one-half. Also worth noting in table I-5 is the approximate equality of State and local tax collections as a ratio of GNP during the postwar period (in contrast to the one-third to two-thirds share of the two level of government in direct general expenditures shown in table I-1). In addition, the stability of total tax revenues since 1946, near a level of 22 percent of GNP in 4 of the 5 years listed, merits attention. TABLE I-5.-General tax revenues1 as a percentage of GNP by level of government, selected years, 1902-64 1 As defined by the Census Bureau. Excludes revenues of the insurance trust funds. It is clear from table I-6 that State governments have been energetic in enacting new taxes. By 1964 these changes, along with numerous rate increases, had produced the highly diversified tax structure shown in table I-7, and they had created many of the tax coordination problems discussed in chapter II. Varied though the State tax systems are, they have been dominated for some time by three main kinds of taxes: motor vehicle fuel and registration taxes, general sales levies, and individual and corporate income taxes. TABLE I-6.-Number of States adopting new taxes, by major type-Frequency distributions by decade, 1901–64 1 Includes the partial income taxes of New Hampshire, New Jersey, and Tennessee. 2 Excludes South Dakota's tax on financial institutions. Excludes the 17 States that either operate or supervise government liquor stores. Sources: Advisory Commission on Intergovernmental Relations (ACIR), "Tax Overlapping in the United States, 1964" (July 1964), p. 25, and the Tax Foundation, "Tax Review" (October 1964), p. 38. TABLE 1-7. The structure of State tax collections,1 selected years, 1902-64 Sources: Tax Overlapping in the United States, 1964, p. 20, and Governmental Finances in 1963-64, p. 22. In 1963-64, each of the first two produced one-fourth of State tax collections; the income tax produced one-fifth. Excise taxes on tobacco and alcoholic beverages and property taxes yielded 10 percent. A long list of relatively unimportant levies produced the remaining 20 percent. Local tax systems, in contrast, are much less diversified. Property taxes still dominate, though not nearly to the extent that they did before the Great Depression (table I-8). Reacting to many problems (see ch. V), some of the largest cities have been especially active in the search for new revenue sources. While some utilized taxes similar to those existing at higher levels of government to their great advantage, others have gone their own independent ways, frequently adding to both their own and their taxpayers' costs. TABLE 1-8.-The structure of local tax collections, selected years, 1927-64 Sources: "1927-58: Tax Overlapping in the United States, 1964," p. 43; "1964: Governmental Finances In 1983-44," p. 5. FEDERAL-STATE-LOCAL FINANCIAL RELATIONS* BY C. LOWELL HARRISS Every session of a State legislature or of Congress, and many meetings of city councils and other local government bodies, deal with problems involving financial relations with other governments. Federal, State, and local officials in their day-to-day activities deal with each other in many ways, most of which have financial significance. Numerous and persuasive changes are taking place in the relations among governments-city and suburb, neighboring towns, State welfare agencies with their Federal and local counterparts-and soon. The change may be large and well publicized; more often it is small and undramatic. The problems are so complex and their elements so interrelated, the developments are so numerous and widely varied, that no brief account can possibly do the subject justice. The space available here will be used to identify some of the problems and then to discuss what is perhaps the most important financial development, the growth of grants-in-aid. ISSUES BEARING ON THE STUDY OF INTERGOVERNMENTAL RELATIONS The analysis of intergovernmental financial relations can draw on a huge literature which deals with a variety of points, not always closely related to each other. The following brief statements summarize material useful for understanding the discussion which follows. 1. The American public believes that some functions can be performed best at the local level rather than the State (or by the State in preference to the National Government). The assignment of responsibilities for performing governmental functions, however, has not always been matched by the grant of effective ability to raise revenue. For decades localities have faced increasing pressure to spend more, but their own effective power to raise the necessary revenue has lagged. Local governments have depended heavily upon the property tax. Though its yield has grown rapidly, especially since World War II, objections to the increasingly intensive use have been strong. Earlier, during the Great Depression, property owners often found themselves unable to pay the tax due, and various protective limits were imposed in many States. More recently, one objection to the heavier use of this tax is a conviction that to do so would lead some taxpayers to flee from, not enter, or not expand in, the community. When businesses are discouraged in this way, it is argued, the source of jobs and income will suffer. * Reprinted from: Handbook of State and Local Government Finance, Tax Foundation, Inc., New York, 1966. |