net financial burdens, measured in relation to local ability to shoulder those burdens, to the detriment of the more urbanized areas. But shared taxes do in large measure correct that distortion by giving to the more urbanized areas some at least of the financial assistance which they need because of their high cost urban functions. It can only be for this reason that local government expenditures (by county areas) in Wisconsin are equalized to an appreciably higher degree than in the six States neighboring to it.

The limitations of the county area approach adopted in this article should not be overlooked. In particular, two further factors have to be taken into account before a final judgment can be made on the Wisconsin system. These are

(1) The extent to which State payments received by local communities are financed by those same communities through tax payments made by their residents.

(2) The particular application of the State payments to individual municipalities within each county area. În view of the frequently arbitrary nature of municipal boundaries, it is highly probable that the broad pattern of expenditures and State payments will be broken up into a highly variegated pattern characterized by considerable differences between individual municipalities.

But the county area approach is at least a first step to the final evaluation of the State payments system. It does not prove that a proper and comprehensive method of calculating grants-in-aid by reference to overall local needs and fiscal ability might not be preferable to the present system in Wisconsin. But no such method has yet been proposed and, prima facie at least, there appears to be an unanswerable case for retaining the present system, with its high proportion of shared taxes, until a demonstrably better system can be devised.

For an attempt to evaluate both these factors in relation to Milwaukee County, see the writer's report on Financial Relationships Between Municipalities in Milwaukee County (Center for Business Services, Marquette University, Milwaukee, 1961). Tables LIII-LV of this report estimate the net financial contribution by each municipality (taxes paid less shared taxes and aids received) toward the costs of State government and table LVI estimates the net contribution made by local governments in each county area, demonstrating that the less densely populated county areas receive payments from the State far higher than other areas, both in relation to the net taxes which they pay and in relation to their fiscal ability.

INNOVATION IN TAX SHARING: THE WISCONSIN

EXPERIENCE

BY HAROLD M. GROVES*

INTRODUCTION

The purpose of this paper is to relate the problem of Federal tax sharing to the Wisconsin experience of State sharing with municipalities. This experience is relevant because all versions of the HellerPechman proposal comtemplate some redistribution of grants to municipalities and some of these provide for this explicitly. None of them to the author's knowledge specify a formula for the redistribution, but this could be added without seriously violating the free-grantmotif of the proposal. It is not our purpose here to argue the merits and demerits of Federal sharing as such. We here assume that some program of this kind will be adopted at least eventually and we focus our attention on its content.

The Plight of the Cities. It can be said without much fear of dissent that a major concern behind the Heller-Pechman movement is that for the plight of the cities. We need not belabor the well-known facts that most of our people live in cities and most of these in metropolitan areas; that the laudable objectives of improving the American environment is thus in large degree identified with the urban problems; that the urban problem embraces a formidable package of more specific problems including antipollution, housing, transportation, recreational facilities, and education.

A critical aspect that pervades several of these problems is minority group discontent. The ghettos of our large cities have become (con-tinued to be) trash heaps of human and physical materials waiting a spark for explosion. While a comprehensive and adequate attack on urban problems might have to wait for better times in terms of inter-national affairs, the urgency of the urban situation is immediate.. The Vietnam war is unique in many respects; let us hope that it will not be accompanied by civil disorders approaching civil war.

We consider it highly doubtful that the forces which have brought cities into the foreground as an urgent problem will level off or reverse themselves in the years ahead. It is true that some studies are more optimistic: Selma Mushkin and Gabriel Lupo in their Project "70 study, find little or no gap in future revenues under optimistic assumptions including a doubling of Federal aid in the course of 5 years. But a more realistic view, we think, could be gained by talking with your mayor or alderman; most often, we are sure, you would hear a story of great financial duress with no prospect of respite. In New York City, for instance, administrations do change and new sources of

*University of Wisconsin.

revenue are pressed into use to meet this emergency or that; but the high pressure continues faithfully even between recurring crises. "This is no time to think small about the money our cities will need. It will cost not billions but trillions of dollars to correct what is wrong with our central cities today.

The intergovernmental relations aspect of the urban problem includes an elaborate system of aids. Many of them go directly to cities, numbering in the thousands and greatly complicating the administration at both ends of the stick. Nevertheless many would prefer to continue and extend this system on the ground that it insures expenditure where it is most needed. Certainly in this author's view there is a place for such specific grants that a block grant should not aim to replace. But it is also true that the municipalities on their own could and would solve many of their problems if they were not so hard pressed for financial resources. They too might blossom with new ideas and fresh programs if they but had a bit more fiscal elbow room. Even so, it is commonplace to note that many of the Federal Government's best programs sprouted in the laboratories of State and Municipal practice. If the Federal Government has the advantage of a larger perspective, the municipalities have the opposite advantage of close proximity to the needs. It could be that a judicious combination of the two types of grants is the happy answer. It is here contended that the municipalities' share of a block grant should take the form of a federally directed redistribution of a block grant to the States.

We should not leave the impression that all the critical municipal problems are confined to the large urban centers. Many of the smaller and more rural municipalities (and some townships and suburbs) also find themselves in a financial bind. To be sure, their needs are simpler and their tax base is less often unbalanced by commuting. But their tax base is also much leaner and their bill for first-rate education comes very high. In its financial aspect, the problem in these cases is more properly described as "municipal" rather than "urban” or "metropolitan."

In conclusion, no program on the Heller-Pechman model is likely to be acceptable unless it provides some reasonable assurance that it will make a major contribution to the solution of the municipal and particularly the urban problem.

Metropolitan Fragmentation

Much of the problem of the urban centers is due to the dismemberment of the metropolitan community and the migration of the better part of what might have been its tax base to independently incorporated suburbs. Many factors have contributed to this trend: great improvements in transportation facilities; virtual laissez-faire in the determination of municipal boundaries, zoning and others.

We start our study of public finance with the proposition that people should be obliged to contribute to the community according to some principle such as benefits received or ability to pay. Most of the discussion then centers on the proper principle and how it can be ap

"What Kind of City Do We Want?" A Special Report. Nation's Cities, April 1967, p. 20.

plied. But this ignores what in some cases is the major problem and that is the definition of "community". Presumably the term implies a group of people in some area that are tied by common economic, social and political interests and intercourse.

Differences in economic capacity among cities are as common and inevitable perhaps as those among people. We bear with these differences in large degree because we regard them as a necessary feature of a free society. But when what is in some sense an organic unity is artificially divided to create rich and poor units of government, the legitimacy of the product invites skepticism.

Most communities have in terms of their budgets what might be called plus and minus areas. The mercantile and industrial and the best residential sections fall into the first category and the poor residential districts (slums) into the second. The poor areas require more by way of city services than they contribute by way of tax base. In an unfragmentized city, the pluses and minuses neutralize each other. But when these areas segregate themselves with separate incorporation, the balance of the atom is upset. It is likely to leave the core city and some poor suburbs desperately short of tax base in relation to need.

The peripheral migration may involve businesses as well as people. A firm with a high capital-labor ratio is especially vulnerable to the property tax, but by the same token it especially enriches the tax base. When enough of such firms get together under separate municipal incorporation (industrial enclave) they can all but wipe out the property tax burden. The advantage is enhanced if the firms' labor force resides for the most part in the central city or other independent units.

These inequities in metropolitan finance are not likely to be corrected by local action. The vested interests created by fragmentation are formidable and the inertia of boundary lines once established is notorious. Some joint action to plan and manage certain functions through counties and/or councils has occurred and is likely to develop further. But they make only a small dent on the fundamental inequities. Differential State and especially Federal aids offer greatest promise. Unhappily some State grants and shared taxes aggrevate rather than relieve the problem. The Federal aid system if only in the selection of functions for assistance does have a considerable measure of built-in equalization among cities. If a block grant is to compete with them in this respect it too must make some contribution to the mitigation of metropolitan inequities. There are formidable political and implementation problems that impede such an achievement. It is here argued (later) that they are not insurmountable. Property Taxation

Municipalities generally have quite limited taxing powers; some of them as in Wisconsin are confined to the general property tax. Their power to use the property tax is circumscribed by the fact that they have no wall to keep their industries and rich taxpayers within their boundaries. Central cities are expected to compete with rich suburbs both in the quality of the services they render and in tax rates. If high tax rates are not as potent a factor in the location of industries

and wealthy taxpayers as is sometimes alleged, there is no doubt about the potency of threats as a restraining constriction.

The property tax when well administered and applied moderately is a tolerable source of local revenue. At best it constitutes a considerable load upon the poor-the very group that the poverty program aims to relieve. At best it constitutes a differential burden on housing-a "merit want" that Federal programs seek to promote. At best the local levy on industry on the one hand provides a built-in device for exporting burdens to outsiders and on the other carries the constant threat of firms to migrate. But all of the faults of the property tax are more than proportionately aggravated by its use to excess. Gerald Sazama attempted a sophisticated study of market value tax rates on real estate in 22 of the large central cities in the United States (1962). He found a variation from 58.88 mills in Boston and 48.30 in Newark to 11.64 in Seattle. These variations were accounted for in some degree by different policies with regard to the taxation of personal property and supplemental levies on income and sales. The median rate of 23 mills seems tolerable. But surely some of these rates are unconscionably high. No one has prescribed a top limit for the property tax. Presumably it becomes self-defeating when it so promotes migration and discourages building that more would be collected at lower rates.

Mordecaai S. Feinberg in a study of core-city decline noted that of the 10 largest core-cities, eight experienced an absolute population decline from 1950 to 1960. Assessed value in constant dollars declined in seven of the 10 cities. In almost every case property tax rates increased substantially. Several of these cities already tax income and/or sales. In others the use of these levies is circumscribed by constitutional or statutory limitations. Tax critics are generally less than enthusiastic about these innovations. Anyway, and as in the case of high property tax rates, a point is reached before long where such taxes are self-defeating.

Look at the situation in Milwaukee. Here is a well-governed city that has won numerous prizes for excellence in this service or that. Its alert electorate is not satisfied with anything but the best in government and it gives top-rating to the amenities which government must supply. Its locally-raised tax revenue is confined to the property tax. It is now hemmed by suburbs that fill Milwaukee County and spill over into several adjoining counties. In the early 1960's, the periphery of Milwaukee County (outside the City) embraced 28 percent of the County's population and enjoyed 40 percent of the County's taxable wealth; 37 percent of its shared taxes, and 49 percent of its utility wealth.1

Milwaukee's full-value tax rate in the late 1920's stood at about 23 mills. It had risen to some 30 mills at the close of World War II, but property was then equalized by the State substantially below sales value. A study at that time indicated that market value rates were

2 Gerald Sazama, "Equalization of Property Taxes for the Nation's Largest Central Cities." National Tar Journal. June 1965, pp. 151-161.

Mordecaai S. Feinberg. "The Implications of Core-City Decline for the Fscal Structure of the Core-City." National Tax Journal, September 1964, pp. 213-231.

Harold M. Groves and John Riew. Financing Metropolitan Municipalities in Wisconsin, Land Economics, February 1964, pp. 29-40.

5

Report of the Commission on the Economic Study of Milwaukee, 1948, p. 119.