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up calls for a mandatory 'pass-through' from the States to counties and localities. If a State government does not pay any local government its fair share as stipulated by the act, the law requires the Secretary of the Treasury to cease making revenue-sharing payments to that State." If funds can be withheld under this circumstance, what is to stop other controls from being attached to future revenue-sharing distributions?

The distribution of Federal funds to the States, whether out of surplus or during a deficit period, has deeply affected our system of Government by upsetting the balance of power and responsibility intended by the Constitution. Based on the lessons of the past, there is no question that as Federal grants expand, the States become more and more and more dependent on the central Government and become more vulnerable to coercion. The threat to withhold funds is usually sufficient to assure complete compliance with the Federal will.

Mr. Chairman, we agree completely with your remarks before the Tennessee Legislature less than a month ago in which you said:

What is there to prevent a future Congress or an administration-either Democratic or Republican-somewhere down the road, when the Federal part of the total expenditures of the States grows to represent a sizable amount of their total spending, telling the States that they are rather backward? There are certain things that we would like for you to do-with respect to your judiciary, with respect to your legislature, with respect to your local governments, with respect to any State program you want to name-in order for us to justify continuing giving you this largesse out of the Federal Treasury. In fact, there is already one revenue-sharing proposal which would tie revenue sharing to increased efficiency in local government-efficiency determined not by you but by someone else.

** It may give the illusion of temporary vitality to the State governments, but, in the long run, it makes them dependent entirely on the Federal Treasury and on whatever controls Congress or the President subsequently wants to impose.1

Creeping Government control is not a new issue. It was discussed in 1906 by the then Secretary of State Elihu Root. In a speech before the Pennsylvania Society in New York he said:

It is useless for the advocates of State's rights to inveigh against the supremacy of the constitutional laws of the United States or against the extension of national authority in the fields of necessary control where the States themselves fail in the performance of their duty. The instinct for self-government among the people of the United States is too strong to permit them long to respect any one's right to exercise a power which he fails to exercise. . . . The true and only way to preserve State authority is to be found in the awakened conscience of the States, their broadened views and higher standard of responsibility to the general public; in effective legislation by the States, in conformity to the general moral sense of the country; and in the vigorous exercise for the general public good of that State authority which is to be preserved.

State governments will have to play an ascending role in the future if we are to retain our present form of Government. As Gov. John A. Love of Colorado stated in 1963:

The charge is well founded that, at least over the past two decades, the States have, to a certain extent, failed to live up to their obligations and responsibilities. There has been a trend toward the central government taking over. Many things that are happening show a clear and present danger to our Federal form of Government.

1 Congressional Record, CXVII, No. 69 (May 12, 1971), E4269.

I don't think the trend should be allowed to continue. When Government becomes removed from the people it becomes subject to the danger of becoming more arbitrary and less responsive.1

The Federal Government has widened its control of State and local government through the use of categorical grants-in-aid. State and local governments have contributed to this broadening of Federal control through their constant quest for money from the Federal level. This in turn has made State and local government officials less, rather than more, responsive to their constituents.

There are those who are not very optimistic that the money coming from the Federal Government will be spent as wisely as it would be were it to be raised locally. They point out that too often government officials look upon funds passed on from another level of government not as money raised frm local taxpayers, but as a gift to be spent lavishly and without responsibility to the voters. Business Week reflected this lack of optimism with this comment in an editorial on revenue sharing:

Perhaps the shakiest part of the President's proposal is its assumption that the local governments would use their Federal appropriation to solve their most urgent problems. Some of them probably would. But any student of local politics would give you odds that others would shoot the money on the handiest political project, leaving the priority problems-the schools, the slums, the collapsing urban transit systems-right where they were before."

INFLATION CONTRIBUTES TO THE FISCAL PROBLEMS OF LOCAL GOVERNMENTS

Inflation is a major contributor to the problems of State and local governments. Rising salaries and rising prices are causing State and local governments increased difficulties. With 10 million people employed by State and local government in the United States at an annual cost of $6 billion, any increase in salaries and wages results in a major increase in the cost of government. The Federal Government can make a meaningful contribution toward solving the problems of State and local governments by helping to solve the continuing problem of inflation.

MUST STATE AND LOCAL GOVERNMENTS RELY ON THE FEDERAL GOVERNMENT FOR REVENUES?

A few years ago Mayor Herman W. Goldner of St. Petersburg, Fla., said:

Too many of our ailing cities today are calling for massive doses of Federal aid as a cure-all, complaining bitterly that they do not have the resources to heal their own maladies. They are wrong. They have potential cures at hand if they will honestly seek them out."

Too often we accept the assertion that State and local governments must have Federal revenue sharing because they have exhausted all of their own revenue sources. But is this really true?

Actually, the State and local governments have access to the same resources that are available to the Federal Government. For instance, if the States wish to use the Federal income tax base-and many of the States are already using it-they need only to place a surcharge on the Federal income tax and require that their resident taxpayers

1 "Why Local Government Serves Best: A Nations Business Interview with Gov. John A. Love of Colorado," Nation's Business (September 1963), p. 39.

2 "Can Revenue Sharing Work?" Business Week (August 23, 1969), p. 108.

3 "A Mayor Tells How to Modernize America's Cities," Nation's Business (April 1966), p. 109.

pay it to the State through the use of a State income tax return. Through an exchange of information with the Federal Government, audits of such State tax returns can be made by the States themselves. It is true that some of the largest cities in the Nation are failing to collect enough revenues to meet the projected costs of their programs. Many affluent taxpayers and large taxpaying businesses have moved out of metropolitan areas and continue to do so, contributing to the fiscal problems of the cities. Better cooperation by city officials with local chambers of commerce could assist in reversing this trend. We need to hear more of efforts by city governments to woo back affluent taxpayers.

We hear much about the financial plight of the cities, but little about actual improvements in the efficiency and administration of government or taxation-particularly property taxation.

Earlier this year the Wall Street Journal, in an editorial, commented:

That brings us to one of the biggest troubles in the use of the property tax, the fact that the levy has often been not so much used as misued.

Around the Nation assessments are levied by thousands of local jurisdictions, often by political hacks with no qualifications for the job.1

Although the property tax provides 85 percent of the taxes of local government, and 40 percent of tax revenues of States and local government combined, it is very poorly administered.

Participants in the Claremont Round Table at Claremont Men's College in California about 6 years ago stated that the real property tax yields only about 1.7 percent of market value and called loudly for local property tax reform. A report on the round table said:

So except for a few big cities, it is just plain nonsense to say that our local governments' right to collect real-property taxes gives them an inadequate tax base *. It may be an unpopular tax and a tax that makes voters unhappily conscious of what local government costs. But is is not inadequate as a source and it is very far from exhausted.'

The suggestion that State and local governments have exhausted their taxing sources is not supported by the facts. Five States do not have a sales tax, 11 States have no personal income tax, and seven States have no corporate income or franchise tax. In an article in the New Republic earlier his year, Melville Ulmer said:

Even larger amounts, were they actually needed, perhaps another $15 or $20 billion, could be added to their revenues if all the States were to duplicate the sales and property taxes that prevail in the five States in which such levies are now the highest."

Concern has been voiced regarding the impact on state and local tax revenues resulting from the amount of property that is exempt from the property tax rolls. Harold B. Meyers in an article in Fortune magazine 2 years ago said that:

In 1968, according to one solidly based estimate, almost a third of all potentially taxable real estate in the U.S. was entitled to some kind of exemption (and this does not include the huge land areas-e.g., nearly 97 percent of Alaska-that remain in the public domain). At the rate at which property is going off the tax rolls, half of all real estate could be exempt before long."

1 "In Defense of the Property Tax," The Wall Street Journal (February 3, 1971), Col. 1, p. 10, "The Great Urban Tax Tangle." Fortune, (March 1965), p. 107.

Melville J. Ulmer, "Better Than Revenue Sharing," the New Republic (February 13, 1971), p. 17.

Harold B. Meyers, "Tax-Exempt Property: Another Crushing Burden for the Cities," Fortune (May 1, 1969), p. 76.

1

To further illustrate this point, Alfred Balk indicates in his book, "The Free List: Property Without Taxes," that in Boston 47.2 percent of the property is exempt from taxation, in New York 33.6 percent, in Pittsburgh 32.4 percent, and in Buffalo 33.6 percent, just to name a few.

NEED TO MODERNIZE STATE AND LOCAL GOVERNMENT

Part of the problem lies in the reluctance of the States and cities to modernize their governments. In our view every effort, but not at Federal direction, should be made to modernize State and local governments. State constitutional amendments and State legislation. should be adopted to strengthen local government's taxing and borrowing powers and its authority to change its structure and to undertake new functions.

State and local tax problems are a part of the broader question of creating adequate governmental structures and administrative methods at State and local levels. In our own activities at the national chamber we have long recognized that most of the problems that confront our citizens where they live are not solvable without significant. improvements in the way we govern our localities. For over a decade the national chamber has been engaged in a cooperative program with State and local chambers of commerce and a number of national organizations that is designed to encourage the modernization of State and local government. While we can point to some successes in this area, we feel there is much that can and should be done.

CONCLUSION

What I have attempted to illustrate here, in addition to the shortcomings of the general revenue sharing proposal of the administration, is that this Nation does not have to depend on such devices to correct the financial problems of our cities. There are a number of alternatives, several of which I have mentioned. The block grantspecial revenue sharing-approach to which I have referred is supported as a preferable mechanism for increasing the effectiveness of Federal assistance to States and localities.

I do not want my testimony to be read as endorsing, on a permanent basis, the present level of Federal income tax rates. As conditions permit, Federal tax rates should be reduced further to enable the States to provide the services they feel are necessary and that they are willing to pay for out of revenues collected at the State and local level.

In conclusion I would like to reiterate the national chamber's opposition to general revenue sharing. We hope that this committee and the Congress will reject this proposal, which, in our opinion, wouldResult in increased Federal taxes,

Destroy fiscal responsibility within our State and local governments,

Not solve the problems of our cities, and,

1 Alfred Balk, "The Free List: Property Without Taxes," Russell Sage Foundation, (1971), p. 19.

Make State and local government more rather than less dependent on the Federal Government,

General revenue sharing, if adopted, would be the most basic change in our form of public finance since the adoption of the Federal income tax in 1913. We hope you will not take the American taxpayer down this road that can lead only to the further centralization of govern

ment.

Mr. Chairman, with your permission, I would like to include one page of statistical appendix...

Mr. BURKE. Without objection, the appendix will appear in the record at this point.

Mr. WINTER. Thank you, Mr. Chairman.

(The appendix referred to follows:)

COMPARISON OF CONTRIBUTIONS AND RECEIPTS OF $5,000,000,000 OF GENERAL REVENUE SHARING BY STATE UNDER THE ADMINISTRATION'S PROPOSAL