Sharing of Tax Revenues

Report Outline
Recent Readjustments in Tax Structure
Extent of Intergovernmental Tax Sharing
Growth of Tax Sharing in the States
Tax Sharing by Federal Government
Special Focus

Recent Readjustments in Tax Structure

Centralization of Tax Administration in Larger Units

Fiscal relationships between federal, state, and local governments in the United States have undergone a marked readjustment in the last decade. Breakdown of the property tax system at the time local governments were being called upon to assume new burdens incident to the depression has led to the centralization of tax administration in larger governmental units, which are better able than the localities to levy new non-property taxes. In some cases, these larger units (i. e., state and federal governments) have taken over both the administration and the financing of public services previously carried on by local governments, but for the most part, local administration has been retained, partial or complete financial support being provided by the central governments either indirectly through grants-in-aid or directly through locally-shared taxes. With a continued extension of governmental functions, intergovernmental tax sharing by these methods promises to become an increasingly important feature of the American fiscal system.

So far, centrally-collected locally-shared taxes, as such, have been imposed only by the states. The federal government has taken over both the administration and the support of certain services, such as work relief, formerly carried on by local governments, but it has shared tax revenues with the states and localities only through the indirect method of grants-in-aid. During recent years, however, federally-collected locally-shared taxes have been proposed as a means of employing the superior tax-raising capacity of the federal government for the benefit of the states and of promoting uniformity and efficiency in the nation's tax system.

Establishment of a system of federally-collected locally-shared taxes was advocated by Mayor La Guardia of New York last December at a forum on tax problems held in Chicago under the auspices of the Illinois Tax Commission. Using the income tax as an example. La Guardia suggested that the federal government impose and collect a levy at a rate high enough to permit distribution of a part of the proceeds to the states. “Under such a plan, all citizens would bear the same rate and this would eliminate competition between the states,” he said. Declaring that real estate could no longer carry the tax burden in cities, La Guardia declared: