TABLE 15 THE DISTRIBUTION OF STATE AND LOCAL TAX COLLECTIONS, 38 SOURCE: Quindry, Perry and Perry, op. cit., Table 1; and Kenneth E. Quindry, op. cit., Tables 1-11. PART III CONCLUDING REMARKS ON MEASURING TAX CAPACITY, Introduction In the U.S. federal system, it is generally acknowledged that most domestic functions should be performed by the states. States, in turn, assign a large part of their administrative responsibilities to their subdivisions. In recent decades, federal involvement with administra8 tive efficiency and financing of domestic functions has increased. As the federal involvement increases, the federal government acquires additional responsibility for equalizing both interstate and intrastate public service benefits and costs within tolerable limits. Because the states retain significant administrative and taxing responsibilities, they are no less interested in equalizing benefits and costs. Equalizing costs of government involves the revision both of the federal, state and local tax systems and of the system of government grants. As long as local jurisdictions retain substantial taxing authority, tax systems are likely to remain inequitable--that is, income regres 8. The impetus for the increased federal interest comes from two sources. First is the constitutional provision of "equal protection." Second is the growing concern that the constitutional provisions are not being honored, either on the demand or supply sides. The rationale for some movement toward centralization of taxing authority and continued decentralization of administration is explained as follows: The central government, followed by state governments are superior to local units in the efficiency and equity of tax collections. The federal government must assume the responsibility to advance equitably the performance of several public programs that are increasingly becoming national in scope. However, nonuniformity in purely local matters, as well as tolerable allowances for variations in some functions of growing state and nationwide interest, must be retained if the federal system is to remain viable. 40 sive--and expenditure requirements fail to meet state and federal require ments. The federal and many state and most local tax systems need revision. They must then be supplemented with a revised system of equalizing grants. A revised system of grants requires a change in the basic information employed in allocating and distributing grants. The purpose of this section is to explain why the current capacity-effort data which serve as the foundation for many federal and state grants is inadequate. In order to provide the information for preparing tax systems and grants that will equalize costs, a comprehensive 50-state study of federalstate-local tax shifting and incidence is critical. A proposal for such a study has been prepared. One of its primary goals is to measure the variations in tax burdens in the 50 states upon which to base tax reforms and grant systems. Taxes would be assigned fully at the personal level, on the basis of state averages--at the point of incidence rather than to a state. Additional work would be necessary to distinguish tax inequities within the states. Tax Efforts and Tax Burdens In much of the literature on the subject of cost equalization, tax effort is confused with tax burden. Confusing the two concepts tends to limit the usefulness of tax reform and grant programs. In current terminology, tax effort usually relates to tax impact. Tax burdens would relate to tax incidence. Efforts are a jurisdictional concept; burdens, an individual concept. 9 Individual equalization is superior to 9. Tax efforts and burdens may differ in a jurisdiction depending on the ability of a jurisdiction to export its tax levies. If a jurisdiction is a net importer of taxes, tax burdens exceed tax efforts. If it is a net exporter, tax efforts exceed burdens. It is the burden (and its distribution) that should be significant in tax and grant reform proposals. 41 jurisdictional equalization in equalizing government costs. Public services are equitable only when every citizen has an equal opportunity to develop his individual potential regardless of his individual economic and social circumstances. Public services should be equalized on both the demand and the supply sides. 10 Tax effort studies are usually attempts to compare tax collections using inadequate capacity measures. Tax effort measures should be refined to measures of tax burdens and related to a broad measure of family and individual income attributed to the jurisdiction's residents. Tax burdens should be measured at the jurisdiction of incidence and then the jurisdictional burdens assigned to an array of income classes. The distribution of the jurisdictions' tax loads are of equal significance to the total tax load related to capacity in measuring tax burdens. Given a regressive tax system and a progressive tax system of equal magnitude other things equal, the regressive system is surely more burdensome than the progressive system. Tax Equity This introduces the concept of tax equity. Tax equity is usually defined in terms of the distribution of a tax. It has many aspects, but it is usually defined as treating all taxpayers in equal circumstances equally and taxpayers in unequal circumstances unequally in proporton to their inequalities. If all taxpayers were in identical circumstances and all taxes were direct personal taxes there would be no problem. 10. The federal and the state governments have and are taking significant steps to equalize service levels (especially in public education) and to equalize costs at the jurisdictional level. Some notice is taken of cost inequities at the individual or family level, but corrective actions have lagged, especially in state-local tax reform. |