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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.

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 hard-pressed school districts and other State-local units.

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

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

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 1957 (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.

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) without any increase in tax rates. 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 sufficient allocation of its total tax dollar to schools, or are its schools getting less than their "fair" proportion of the total tax dollar? Fourth, is school financing in any given State too heavily dependent on local tax sources, particularly on the property tax or too heavily dependent on State tax sources. Fifth, where one finds an adequate total taxing effort (in terms of school expenditures as a percent of the State's personal income) and yet finds teachers' salaries far below average, can this be attributed to poor organization, in particular, to an excessive number of administrative units?

The foregoing process of self-appraisal will surely bring to light many State and local jurisdictions whose fiscal effort on behalf of schools is below par and should be stepped up. Yet, as noted earlier, the States and localities labor under substantial fiscal handicaps. Limited tax jurisdiction, fear of interstate migration and competition, and sharply focused interest-group pressures characterize all States. By and large, State and local governments rely chiefly on property and consumption taxes which are more regressive and repressive than Federal taxes. In addition, the level of per capita income in our poorest States is only one-third to one-half that of the richest States. Under these circumstances, some States already find themselves near the end of their fiscal rope, and many if not most others, will be hard-pressed to raise the revenues needed to close the gap between expanding State-local services and the natural growth in State-local revenues.

The demonstrated pressures on, and limitations of, State-local tax sources intensify the need for Federal support. Exclusive reliance on State and local taxation to do the job simply means that it will not be done. Unless a program of Federal support is adopted, the National Government will, in effect, be asking the States and localities to assume educational costs which (a) they should not be asked to assume because they are spent in furtherance of the Federal Government's programs and responsibilities, and (b) they cannot be asked to assume in full because of limitations on their taxable capacity.

VI. THE ISSUE OF FEDERAL CONTROL

Advocates of Federal aid for public schools must overcome two major arguments: (a) that such aid will lead to Federal control and undermining of States' rights; (b) that the Federal Government cannot afford such an additional financial burden in the face of its huge current deficit, its growing debt, and the danger of inflation.

When we separate the true issues from the false, the charge that Federal support means Federal control simply falls to the ground. Opponents of Federal school support have no monopoly on the conviction that strong responsible Government at the State-local level is the broad base on which the Federal system in this country is built. Most advocates of Federal aid for schools would be the first to reject it if they felt it threatened to undermine this base. But viewed

in the light of logic, Federal support for schools of the type embodied in the Murray-Metcalf bill will strengthen the financial base of the States and localities without in any way encroaching on their sphere of self-governing responsibility. The vitality of State and local governments rests on (a) their capacity to provide the services legitimately demanded by their voters; (b) the efficiency and economy with which they conduct their affairs; (c) the right of self-determination-and its vigorous pursuit-without fear of Federal domination.

If State and local governments are to retain the confidence of their citizens, they must meet the basic test of ability to serve. But their fiscal ability will not be equal to their fiscal need in the absence of Federal support to undergird their efforts. To continue to force the States to rely entirely on their own tax resources for school financing under these circumstances is to invite local weakness and to court eventual direct Federal intervention. Seen in this light, Federal school aid becomes a positive and affirmative contribution to the strength and vitality of the local government. As the second section of the MurrayMetcalf bill incisively states, if local units have insufficient financial resources at their disposal, "the control of our Nation's schools is not directed by State and local school boards but is dictated by the harsh demands of privation. Without the means to pay for alternatives, school boards have no freedom of choice. In order to provide State and local school boards with actual, as well as nominal, control of schools, the Congress has the responsibility for appropriately sharing in their financial support." This statement puts Federal support in precisely its proper perspective as a source of strength, not a threat, to self-governing local units.

A second fear often expressed is that Federal aid will lead to loose and wasteful spending. But waste and inefficiency are generally associated with open-ended financial arrangements where the total funds exceed reasonable needs or where the spender knows that "there's always more where that came from." But the Murray-Metcalf bill provides funds that are limited in amount and modest relative to needs. This fact, plus the evidence available from other Federal aid programs, gives every confidence in the belief that State and local officials will spend these funds just as wisely, efficiently, and responsibly as they spend funds from their own sources.

At the same time, there would be no restriction of the sphere of local selfgovernment and responsibility. State-local initiative in improving elementary and secondary schools and State-local determination of educational policies and standards would be explicitly protected within the type of Federal program projected in the Murray-Metcalf bill. This kind of support is designed to accomplish the national objective in education through the instruments of decentralized administrative responsibility and control at the State and local levels: If the Federal Government does its fair share of the financing job, one can rely on the State-local decisionmaking process to meet America's critical needs for a higher quality and greater quantity of public education.

The Murray-Metcalf bill is an expression of the genius of our federalism in its ability to achieve national objectives in a tightly interdependent economy through constructive cooperation among different levels of government. Under this approach, the Federal Government does what it can do best, namely, mobilize financial resources through taxation, and State and local governments do what they can do best, namely, make grassroots decisions and carry out functions under the direct control and close scrutiny of the local electorate.

VIII. FEDERAL FISCAL CAPACITY

But, it may be averred, how can the Federal Government provide this support in the light of the $13 billion deficit it faces this year, and a possible continuation of this deficit into the year 1960? Do we dare risk a further addition to the Federal debt, with possible inflationary consequences?

Three points can be cited to lay these fears to rest. First, given a continuation of brisk and sustained economic recovery, the deficit will disappear or at least shrink to insignificance, within the coming fiscal year. By the end of 1959 or early 1960, the rate of Federal revenue collections will very likely overtake the rate of Federal expenditures. The President's budget, indeed, forecasts a small surplus for the coming year, chiefly on the basis of a $9 billion rebound in Federal revenues. Even if this forecast is a bit overoptimistic, especially in its assumptions on the level of spending, the day of Federal surpluses is not too far off. Investment of those surpluses in the education of our children seems a far wiser disposition of the funds than releasing them for lower priority uses through tax cuts.

As to the impact of the deficit on the Federal debt, one cannot look at a 1-year increase in the Federal debt of $13 billion without some qualms. Yet, as a proportion of national income, our national debt dropped from 150 percent just after the war to 75 percent in 1957. In short, the real burden of the debt has been cut in half. If the current Federal budget deficit is held to 1 or 2 years and economic growth is resumed, the trend of a declining real burden of our national debt will also be resumed. Again, the case for Federal support need not be hobbled, even temporarily, by fears concerning the national debt.

Finally, one encounters the fear of inflation. For both the short run and the long run, this fear seems misplaced when dealing with proposals for stronger financial support for education. On one hand, our economy is still operating well below its full potential. Latest figures show seasonally adjusted unemployment still standing at 6.1 percent of the labor force, over half again as high as the level which characterizes full employment. The average workweek, at 40.2 hours, is considerably below its recent peaks. Investment in plant and equipment is at the rate of $30 billion, against a peak rate of $38 billion last year. Most impressive of all, the Federal Reserve Board's unofficial indexes of capacity and output in 17 basic materials industries (including steel, copper, textiles, cement, and industrial chemicals), show output at a level of only 76.5 percent of capacity. To deny ourselves additional classrooms and higher teachers' salaries in the face of these figures would be economically illogical.

For the longer run, education is, indeed, one of our best bulwarks against inflation. A rapid growth in productivity is our best ultimate safeguard against rising prices. Our goal should be to satisfy the rising income claims of the participants in the productive process by sharing an expanding product rather than by pushing up prices and eroding the value of the dollar.

Here, education stands head and shoulders above most competing programs. As we have shown earlier in this statement, education as an investment in human beings pays rich dividends in greater productive capacity. It develops not only the skills and understanding needed on the production line, but also the brainpower needed to break through technological barriers and reach new heights of human accomplishment. Given the creativity of educated minds, the returns on our educational investments are more than worth while-they may be infinite. We can erect no better advance defense against creeping or grinding inflation than to expand, through education, the productive and creative power of our children. Mr. HELLER. I think I can run through the rest of this very quickly. Proceeding with these pressures on State-local government in terms of the "four P's," the second one is prosperity, the point being made that prosperity really generates more new demands than it does additional revenues, and prosperity creates problems in terms of the schools, roads, hospitals, parks, sewer systems, smoke abatement, urban redevelopment, and so forth, that it calls for upon State and local governments to provide.

In the thirties and forties we were concerned first with economic survival and then military survival, and this the National Government had to do. But as we go on to use our affluence for improving the quality of life, the burdens fall and focus particularly on State and local governments.

The third pressure is that of the tremendous public works backlogs. Estimates seem to show that public works requirements in the next decade will be about 75 percent higher per year on the average than they were in the past decade. The fourth pressure is that of prices. I cite figures showing that the remarkable fact is that for State-local purchases of goods and services, the prices since 1947 have risen by 62 percent as against an overall rise of 33 percent for the gross national product as a whole. In other words, the particular things that State and local governments buy have risen so much faster in price than the average prices in the economy. This has put additional pressure on them again.

You will note by way of contrast that the Federal Government's rise has been 46 percent in the prices of the goods and services it buys, while the State and local governments have had a 62-percent increase. Superimposed on this is the sharply rising cost of money. The yield on high-grade municipal bonds has almost doubled from 1951 to 1958. It is very interesting, there is a new research study that was undertaken by the National Bureau of Economic Research that shows that the tax exemption of State and local securities has become so weak relatively as a factor in reducing the cost of State and local borrowing under the impact of this rise from $16 to $60 billions of outstanding State and local securities, that only one-fifth of the benefit of the tax exemption accrues to the State and local governments in the form of reduced borrowing costs, and about four-fifths of the benefits now goes to the private holder of the bonds in the form of tax reduction.

This and this, frankly is a section that I am sorry Mr. Frelinghuysen missed, because on pages 19 and 20 in particular, and on 21, I take up the question of what the State and local governments can do to make sure that they are doing their utmost from their own sources to contribute to the financing of schools, to contribute to the financing of all of their functions.

On page 21 I suggest a whole series of tests, a whole series of questions that the policymakers at the State level should ask themselves, should apply to themselves, in determining whether they are doing their fair part of the job.

I think any of us would be derelict in suggesting that the whole job should simply be turned over to the Federal Government. By no means. The State and local governments should do their utmost to make their fair contribution to the total financial effort.

But then on page 22, I suggest that the demonstrated pressures and limitations of State-local tax sources intensify the need for Federal support, and exclusive reliance on State and local taxes to do the job simply means that it will not be done unless a program of Federal support is adopted.

The National Government will be, in effect, asking the States and localities to assume educational costs which they should not be asked to assume, because they are spent in furtherance of the Federal Government's programs and responsibilities, and they cannot be asked to assume them in full, because of limitations on their taxable capacity.

Mr. THOMPSON. In this connection, the Murray-Metcalf legislation has a level-of-effort index which certainly should provide some incentives; although it does not set forth a needs formula, and things of that nature, it certainly should provide inducement, because they simply will not get any more if they do not spend any more of their money.

Mr. HELLER. Yes. As I understand it, in the testimony that will be offered by the NEA when these hearings are resumed, the question of the effort index will be discussed with the committee, and there will be an opportunity to examine it at that time.

I take up next the issue of Federal control, and I believe we covered most of that in our discussion, so that we can move rather rapidly over that.

I do try to point out that the whole question of vitality of State and local governments depends not only on some empty concept of States rights, but on the ability of State and local governments to provide

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