If two identical jurisdictions collect identical amounts of taxes from their taxable resources, they have exerted equal effort. Despite our inability to measure relative taxable resources (ability) precisely, we know that they vary widely among taxing jurisictions. Those low in ability cannot adequately meet their responsibilities in the absence of above average effort, or in the absence of high taxes. Those high in ability can meet their responsibilities with below average effort.

Studies of ability and effort-usually relative State measureshave been and are being conducted. They include studies by the Advisory Commission on Intergovernmental Relations, Brookings Institution, the U.S. Department of Health, Education and Welfare, and the Southern Regional Education Board.

In many respects the methodologies are similar. Results differ because of the choice of different assumptions on what constitutes jurisdictional ability to pay taxes.

The methodologies can be distinguished, however, in that one compares a representative set of tax bases and the other the potential taxes from a representative tax system. In the first case, economic factors that either are the tax bases or are closely correlated with tax bases are gathered and compared. In the second case, taxes are computed from a representative tax base, using a uniform set of tax rates, and results compared.

A continuing effort has been made by the Southern Regional Education Board in Atlanta since the late 1950s to measure State and local ability and effort, using a methodology developed by Dr. James W. Martin at the University of Kentucky. The methodology has been applied annually since 1967 and is slightly modified from time to time.

A summary report in 1976 described the trends in State tax collections or tax effort, tax potential (ability) and underutilization by State and by tax from 1961 to 1974. The data were updated to 1975 for this report. State and Local Revenue Potentials, 1976, will be published in December 1977 or January 1978.

The SREB employs a simplified representative tax system in computing ability and effort and then in comparing relative Statelocal tax performance. The methodology can be described as taking place in six steps:

First, tax collections are designated by major source-that is, general sales and use, personal income, general property, et cetera, into 14 major sources and an "other" category.

Second, an average rate is computed for each tax for States using each particular tax.

Third, the average rate is applied in each State against a proxy base attributed to the State.

Fourth, this potential collection (ability) is compared with actual collections.

Fifth, a tax is underutilized or overutilized depending on whether potential collections exceed or are less than actual collections. Sixth, a State-local tax system is underutilized or overutilized depending on whether potential collections exceed or are less than actual collections.

By using the summary report covering 1961-1974 data and the subsequent report for 1975, the trends in ability, effort, and underutilization or overutlization of ability can be traced.

For the 50 States and the District of Columbia, State and local tax collections increased from $39.1 billion to $143.0 billion from 1961 to 1975, 266 percent. The most rapid growth was in the SREB region and the Pacific region, in that order. Collections in the SREB region were up 310 percent, well above the national average. Along the eastern seaboard and in the North Central region, growth lagged the 50-State average.

Percentage growth by region was: SREB, 310 percent; Pacific region, 276 percent; Mountain region, 264 percent; New England region, 260 percent; Middle Atlantic region, 255 percent, and North Central region, 232 percent. Southern region and Pacific region showed the greatest growth in tax collections or effort.

The ability to collect State and local taxes increased by 246 percent from 1961 to 1975 in the 50 States and the District of Columbia. Most rapid growth was in the SREB region, the Mountain region, and the Pacific region, in that order. Growth in the two eastern and North Central regions was less than the 50-State average.

Potential growth or ability by region was: SREB region, 303 percent; Mountain region, 271 percent; Pacific region, 221 percent; North Central region, 228 percent; New England region, 221 percent, and Middle Atlantic region, 201 percent.

In general, growth in both ability and effort corresponded to growth in personal income and population in the States and regions. Of course, this is to be expected because tax liabilities are generated by economic activities, and we are all aware that the Southeast and the West are the fastest-growing economic regions in the United States today.

Now, looking at the underutilized potential or the effort or the lack of effort to use their ability, the statistics indicate that some regions and States have rather consistently over- or underutilized their potential to collect taxes at average rates.

Overutilization is rather consistently found in the Middle Atlantic region and the Pacific region, but it is attributable to New York and California, respectively. Since 1972, Massachusetts has swung the New England region in the overutilizaton column. Other Statse overutilizing their capacity in 1975 were Vermont, Minnesota, Wisconsin, Arizona and Hawaii. Underutilization occurred in every State in the SREB region, the Southeast.

It is interesting to note that actual collections in every region increased at a faster pace than potential collections. Thus, pressure on the available tax bases increased from 1961 to 1975. The importance of the changes is especially significant in the New England and the Middle Atlantic regions, and relatively insignificant in the North Central, SREB, Mountain, and Pacific regions. That is, the increased effort relative to ability did not increase greatly except in the New England and Middle Atlantic regions.

If all 509 States employ a particular tax, overutilization and underutilization cancel out because an average rate is applied in every State. However, individual State above and below-average utlizations are recognized. If less than 50 States employ a particular tax, the underutilization is represented by the potential collections in the nonuser States. Major taxes not used by all States, and where

the bulk of underutilizations are found, are the general sales taxes and the corporation and personal income taxes.

Ability-effort studies are extremely valuable in tax and grant policy decisions. The SREB reports are perhaps among the most valuable because they are produced annually on a fully comparable basis. They serve as the basis for intrastate as well as interstate analyses. The statistics are also relatively simple and economical to produce.

In another sense, all the current ability-effort studies need to become more sophisticated in order to become fully adequate as tax and grant policy tools. This becomes evident when we realize precisely what ability and effort really mean.

As currently envisioned, tax ability is essentially a jurisdictional concept. It represents availability of taxable resources in a jurisdiction. Tax effort represents not only the extent to which these resources are levied upon, but also the extent to which nonjurisdictional resources are subject to be taxed. This adds to tax ability

Moreover, some of the potential taxable resources are effectively removed from the jurisdictional tax base by the same processinterjurisdictional economic activities. This reduces tax ability. It is not likely that the pluses and minuses will exactly cancel out.

We have commuting between tax districts. Tax ability is not then fully a measure of the capacity of the families and individuals in a jurisdiction to pay taxes. Tax effort is not fully a measure of the tax burden placed on the personal taxpayers in a jurisdiction.

Because all taxes are ultimately shifted to consumers, it would be more specific to measure both burden and capacity in terms of personal taxpayer units. We find rich taxpayers in poor districts and we find rich taxpayers in rich districts, and poor taxpayers in poor districts and poor taxpayers in rich districts. So that if we equate tax effort among jurisdictions, we do not equate tax effort among the people, the personal taxpayer. So capacity could be related to personal taxpayer income, with income defined in rather broad terms. Burden would recognize both the level and distribution of tax levies attributed to the family and individual taxpayer units. Quite simply, all State and local taxes should (a) be allocated to the jurisdictions in which the tax incident is located, and (b) be distributed among families and individuals according to the level of income, by income class. Once incidence is settled at the personal level, the best measure of capacity is total family and individual income.

If every tax is finally settled on the personal taxpayer units by income class we then have a tax distribution that may be regressive, proportional, or progressive. Tax burden distributions as well as tax levels can be compared and evaluated. Comparative 'tax levels and burden distributions are the two basic factors upon which tax and grant policy should be conditioned. Whether one accepts regressivity, proportionality, or progressivity as a measure of equity, or whether one accepts the discovered differences in levels and distributions in taxes as tolerable, a comprehensive 50State tax study is needed in order to establish both the jurisdiction and the distribution of the tax State-local incidence.

Finally, because Federal taxes also have important distributional aspects with interjurisdictional implications, Federal taxes should be included in a comprehensive study. Such a study has been proposed by the University of Tennessee and some other organizations working with the university in which we propose to make just this study.

It had been made to the Economic Development Administration, it has passed their technical review and is now up for final decision, whether it will be financed or not. Hopefully we then would have a basis to provide you with excellent data on the individual tax problems in every State in the Union.

Not very much has been done as yet on intrastate work. We would hope that this could be extended then to intrastate tax burdens.

That is all I have, thank you.

[Prepared statement of Dr. Quindry follows:]

PART I

BACKGROUND

Introduction

The United States is a federal system of government operating under a Constitution which divides public functions between the national government and the states. The federal Constitution gives Congress the power to collect revenues sufficient to provide for national defense and the general welfare of the United States--to provide uniformly for certain public services of benefit to all the people of the nation.

Basic to a federal system is the view that administration of certain public functions should be centralized and others, decentralized. One of the primary values of a federal system is that it permits a variety of public choices, creating greater freedom to develop different packages of public services for functions in which regional nonuniformity can be tolerated without compromising the national interest. Regional differences in characteristics, desires and needs are the basic justification for a federal system. Variations in demographic, economic, political and social characteristics bear directly on the relative capacities and efforts of the subnational governments to function adequately and effectively in both the local and the national interests.

federalism.

Public service diversity within tolerable limits is compatible with Beyond tolerable limits, diversity limits the viability of states and their subdivisions in meeting national objectives. Services provided by states and local units vary in both quality and quantity either from choice or lack of capacity. A few generations ago, such