of Commerce that State and local governments have in effect ample capacity to meet the financial problems of education.

I have already addressed myself to the intensification of the State's financial problems because of the recession. However, we should also look to the whole postwar period for an explanation of the financial fix the States confront this year.

1. They have been under relentless pressures in the postwar period, pressures which have multiplied State-local spending and gross debt almost fourfold and State-local revenues approximately threefold from 1946 to 1958.

2. State-local spending, taxes, and debt have risen relatively much faster than Federal during this period in spite of Korea and the cold war. Federal expenditures and taxes roughly doubled, while Federal debt rose only 7 percent in the period ending 1958.

3. Unabated upward pressure of spending during the recent recession, combined with flattening out or actual decreases of revenue, have put many State and local governments in severe financial straits: a recent survey by Newsweek magazine indicated that 36 of the 49 States would have to ask their 1959 legislatures to increase tax rates. (Table 3 follows:)

TABLE 3.-Postwar growth of State-local and Federal Expenditures, revenues, and debt (selected fiscal years 1946 to current)

[Dollars in billions]

6283.0

105.0

107.0

109.6

i Federal aids are included in both Federal and State local expenditures.

2 Excludes expenditures of publicly owned utilities and liquor stores.

3 These figures are more than the conventional or administrative budget figures in that they include social security, highway, and other trust fund receipts, and payments to the public.

Excludes Federal aids; includes taxes, charges, and miscellaneous, insurance trust revenue, and excess of receipts over expenditures of publicly owned utilities and liquor stores.

The 1947 State local figures are not available while 1946 Federal figures are not representative because of the impact of World War II.

6 Estimated.

Sources: State local data for 1946-52 from: U.S. Department of Commerce, Bureau of the Census, "Historical Statistics on State and Local Government Finances, 1902-53", table 1, pp. 17, 18, and for 1954-57 from "Summary of Governmental Finances." Series G-GF 1956 and G-GF 1957. Federal data from U.S. Department of Commerce, Bureau of the Census, "Statistical Abstract of the United States: 1958," table 458, p. 368; and Bureau of the Budget, "1959 Federal Budget, Mid year Review," pp. 19 and 42.

Table 3 lays side by side the amounts and indexes of growth in expenditures, revenue and debt, for the 100,000 State-local governments and the Federal Government. For example, column 2 on expenditures shows that State-local expenditures rose from $12 billion to $47 billion from 1946 to 1958. Thus, by 1958, the index of postwar growth stood at 382, a rise of 282 percent from 1946. In a corresponding period, Federal expenditures rose from $36 billion to $94 billion-160 percent.

The figures for revenues are similar. They go from $13 billion to $41 billion in this period for State and local governments, a rise of 204 percent. For the Federal Government, revenues rose $44 billion to $80 billion, or roughly 85 percent.

The most striking difference occurs in gross debt. In 1946 State and local governments had a gross debt of $16 billion; today, it is close to $60 billion. In other words, State and local debt has increased almost fourfold in this period, while Federal debt was rising by 9 percent. This underscores the point that the State and local governments are under tremendous pressure.

The explosive postwar resurgence of State-local government is primarily a response to the fourfold pressures of population, prosperity, public works backlogs, and price inflation.

First, the sheer force of numbers the growth of total population by 40 percent from 1946 to 1965 (projected) has immensely increased the demand for local government services. Population imbalance intensifies the problem. The "expensive" age groups are expanding much faster than the productive age groups. From 1946 to 1965, school-age population (ages 5 to 17) is rising by 78 percent, and the 65-and-over age group is rising by 63 percent. But the most productive group in between is rising only by 21 percent. In other words, the school-age population is increasing almost twice as fast as the total population and four times as fast as the 18-64 age group.

This means that the people who require State and local expenditures are increasing by leaps and bounds compared to the basic taxpaying group, the 18 to 64 age group.

Second, prosperity generates more demands for new and improved State-local services than revenues to pay for them. As the average family's disposable income (after taxes) rises from $5,300 in 1956 to $7,100 in 1975 (as estimated by the Committee for Economic Development), people are demanding new services and higher levels of existing services from government. In the 1930's and 1940's when we were fighting first for economic and then for military survival, only one government-the National Government-could cope with these national crises. But currently and in the foreseeable future, both the pressure of numbers and the pressure of quality will focus primarily on new and improved State and local services: schools, roads, health, parks, sewer systems, smoke abatement, urban redevelopment, and the like.

Third, these pressures are further compounded by the huge backlog of public construction born of depression and war, combined with vast

new demands arising from the "flight to the suburbs" and deterioration of the core of our metropolitan centers. Various estimates have placed average annual State-local public construction outlays in the second postwar decade at a level nearly double that of the first. Compilations and estimates made by financial analyst Harry L. Severson, based on the pivot year 1956, dramatically established this point, as follows:

Note that in relation to the 1956 rate of spending, the average annual rate of construction expenditures in general would rise by nearly three-quarters, and the school construction rate by three-fifths.

Fourth, inflation has hit State-local government disproportionately hard. Such governments are heavy buyers in markets for services and products whose prices have risen especially fast. The so-called price deflators roughly equivalent to price indexes-for various segments of the economy reflect this pressure. Taking 1947 as 100, the preliminary 1958 deflator for gross national product as a whole was 133; for Federal purchases of goods and services, 146; for new construction, 150; and for State-local purchases, the highest figure of all, 162.

What does this mean? This means that State and local price levels have risen 62 percent under the impact of inflation as against a national rise of GNP as a whole of 33 percent, almost double that of the general price level increase. Even between 1954 and 1958, when the Consumer Price Index increased only 8 percent, the price per unit of goods and services purchased by State-local governments rose 16 percent.

Superimposed on rising prices for goods and personal services is the sharply rising cost of money. Interest rates on the huge volume of State and local bonds have risen not only absolutely, but relative to other interest rates. As table 4 shows, the yield on high-grade municipal bonds has risen from 2 percent in 1951 to 3.84 percent in December 1958. In other words, the cost of money that is borrowed to finance schools and local construction has almost doubled from 1951 to 1958. Further data are given on that point.

(Table 4 follows:)

TABLE 4.-Percent that interest rates on high grade municipal bonds are of U.S. Government taxable bonds and on Aaa corporate bonds

Source: U.S. 86th Cong., 1st sess. "Bond Yields and Interest Rates." Economic Indicators, January 1959, p. 29.

Even more revealing is the ratio of municipal to U.S. Government bond yields; in 1951 it was 78 percent; by December 1958 it was 101 percent. In spite of the exemption of State and local bond interest from Federal income taxes, State and local governments now have to pay higher rates on long-term money than the U.S. Treasury. In other words, the market for "municipals" has become so "heavy" that the tax exemption privilege has lost much of its effectiveness in holding down State-local interest rates. This implicit Federal subsidy is going more and more to the bondholder and less and less to the hardpressed school districts and other State-local units.

The impact of these multiple pressures has been cushioned to a considerable extent, first by substantial balances built up in State and local treasuries during the war, and then by revenues flowing from rapid economic growth during the period 1948 to 1957. But the 1958 recession drove home how razor thin the State fiscal margin has been. State-local expenditures continued their uninterrupted rise from an annual rate of $38.6 billion in the first half of 1958 (as shown in the national income account), to $43.4 billion in the second half of 1958, a 12-percent increase. But tax revenues rose much less rapidly from $33.4 billion to $36.3 billion, a rise of only 9 percent.

The foregoing is not to say that State and local units should relax for a moment their efforts to adjust their administrative structures and revenue systems to provide more adequate support for governmental services. In fact, the problem cannot be solved by action at one level of government alone-it must be a concerted attack at all levels of government.

I introduce this because it seems to me that a responsible approach to the question of school financing must take into account not only what the Federal Government should do as its rightful share of the problem, but what the State and local governments are doing, and

whether they are doing all they can do. In noting the financial crisis of State and local governments this year, as I did a moment ago, I don't mean to say there is no fiscal capacity left there to contribute to the further solution of financial problems. In the interest of this balanced look at the overall problem I spend a few minutes here on where the State and local governments might find more money. If this is worth the committee's time, I will go through this part. If not, I could move on to the final section.

Senator MURRAY. You may include that if you wish.

Dr. HELLER. I will take just a moment, then.

What, then, can be done at the State-local level? First, every effort must be made to collect taxes already on the books, both fully and equitably. For example, only one-third of the 31 income tax States have adopted withholding this, in spite of the fact that in the States which have adopted it, withholding has increased collections materially (in several States, from 5 to 10 percent, and in some States 20 percent), without any increase in tax rates.

It is worth noting that the Governors of New York, Minnesota, Massachusetts, and a number of other States are proposing to withhold income taxes this year.

In the property tax field, it is high time that efforts were mobilized to raise average levels of assessment from 15, 20 and 25 percent to the levels well above 50 percent which leading States have achieved, at the same time removing the inequities in valuation which serve as a barrier to full use of the property tax. We are all painfully aware from our own property tax bills that this source is already doing yeoman service in the interest of school financing (producing 99 percent of all local school district taxes), and that the main task should now fall to other sources of revenue at the State and national levels. But efforts for greater equity and higher assessed valuations should be unremitting.

Apart from improved administration, every source of State revenue must be closely examined for possible additional contributions to schools and other governmental functions. One can readily find States that have done a courageous fiscal job in this respect. Several States of widely differing characteristics draw nearly half of their State tax revenues from the income tax, although the 49 States as a whole draw only about one-sixth of their taxes from this source. Similar comparisons can be made for the sales tax. When speaking of possible additional State and local tax potential, we should consider (without any necessary policy implications) that only 31 States have a personal income tax, only 35 have a sales tax, and only 19 have both. Also we may note that State cigarette taxes range from 2 cents to 8 cents a pack, and beer taxes from 50 cents to $13 a barrel.

Moving from such specific avenues of inquiry to the more general question of whether State-local efforts to support public education are adequate, taxpayers and legislators in each State should ask themselves several questions in the course of deciding how much additional financing should be provided at the State-local level, and how much of the job logically falls within the Federal Government's province. First, is a large enough percentage of the State's personal income being devoted to schools? Second, is the deficiency, if there is one, due to too little overall tax effort? Third, is the State making a suffi