CONGRESSIONAL. RECORD -- SENATE

August 19, 1965

Page 21173

PROPERTY TAX REFORMS

Mr. MUSKIE. Mr. President, two well-written and penetrating articles have come to my attention in the last few weeks. Both appeared in the Wall Street Journal and both discuss State and local taxes.

The first analysis, by Joseph Mathewson, probes the dimensions of the continuing debate over property taxes. It demonstrates that more State and local governments must institute far-reaching reforms if taxes are to continue to yield increased revenue without being oppressive. As the author points out:

Given such improvements, the property tax could yield much greater revenue without becoming unduly burdensome. . . . According to the Advisory Commission on Intergovernmental Relations, if all States taxed at the average effective rate in New England, property tax yields would be increased about 50 percent.

Many States, however, view property tax levels as already reaching a dangerously high level and have moved to reduce State reliance on them.

The second article highlights an unexpected byproduct of the Johnson administration's successful effort to keep our economy moving. In State after State, the continued prosperity has produced budgetary surpluses. Some States, however, have used this as an excuse for further delaying the much needed overhauling of their tax structures.

I strongly recommend to my colleagues these two well-documented reports and ask unanimous consent that they be printed in the RECORD.

There being no objection, the articles were ordered to be printed in the RECORD, as follows:

[From the Wall Street Journal, Aug. 17.1965]

SURPRISE SURPLUSES: STATE TAX COLLECTIONS SOAR ABOVE ESTIMATES, EASING FISCAL SQUEEZE -- SHARP REVENUE RISE, CREDITED TO BUSINESS BOOM, HELPS SOME AVOID TAX INCREASES -- BUT CRISIS WARNINGS REMAIN

That traditional fiscal weakling, the State treasury, is looking surprisingly robust these days --thanks in no small measure to the curative effects of a 4-year business boom.

So high have State tax collections been running this year that State after State reports it is in the best fiscal shape in a long time. Indeed, the projected deficits are being converted into unaccustomed surpluses so rapidly as to make persistent past warnings of impending State fiscal crises seem at best considerably exaggerated -- and in some cases, perhaps, like a case of crying wolf.

The warnings haven't faded away entirely. Most States regard their current prosperity as a momentary thing, and expect rising costs and citizen demands for more and more services to land them back in the financial soup again before long -- or at least to make future tax boosts inevitable. But that doesn't make their current budgetary turnaround any the less impressive.

MICHIGAN'S COMEBACK

Michigan is a striking example. From the edge of fiscal collapse only a few years ago, the Wolverine State now finds itself with an accumulated surplus of more than $122 million. State officials attribute it almost entirely to a booming State economy, fueled by a record pace of auto production.

In Pennsylvania much the same story is unfolding. Without even one new tax or tax increase the Keystone State wound up its fiscal year June 30 with a record surplus of $105 million. The big surplus, built up despite a $91 million rise in State spending during the year, is credited to an economic pace which far exceeded the fondest hopes of Pennsylvania's budgetary officials.

The surge in tax payments, in some States, is helping to head off, or at least delay, tax increases that once seemed inevitable. In Connecticut, spending rose from $710 million in fiscal 1961-63 to $874 million in the 2-year fiscal period just ended, and is scheduled to rise even more sharply to $990 million in the current biennium. Yet since 1963 State legislators found it unnecessary

to raise any taxes except for two 1-cent-a-pack increases in the cigarette levy.

"We certainly assumed 2 or 3 years ago the (other) tax increases were unavoidable," says Leo V. Donohue, deputy commissioner of finance and control. "But, the general growth of the State's economy has been so swift that they have proved unnecessary."

AN UNFAMILIAR PROBLEM

Such good fortune, however, is not without its problems -- at least for State fiscal officers and legislators. Long accustomed to an unending and often unequal struggle to make ends meet, they are now being forced, however temporarily, to grapple in many States with a problem for which few guideposts can be found in recent experience: What to do with the money that is now piling up?

In some States, the solution comes easily. Florida, which finished the latest biennium with the highest gross surplus in a decade ($44 million), figured the time was ripe to build up its retirement trust fund, so $6.5 million was transferred there. State legislators also approved an "emergency" appropriation of $1.5 million to help prop the sagging financial structure of its giant pavilion at the New York World's Fair. The rest, $36 million, is being carried into the current year's account.

In industrial Illinois, where tax revenues are far exceeding original projections, State officials also are planning to carry a $100 million surplus into this biennium's account. Gov. Otto Kerner in a proposed budget hasn't earmarked the surplus for any special project but has chosen to use it to help finance general spending in the next 2 years.

TAX RELIEF IN WISCONSIN?

In neighboring Wisconsin, however, taxpayers have some hope of benefiting directly from a treasury surplus built up in the past 2 years. For the biennium ended June 30, the State wound up with $35.9 million in excess funds. No plans have been announced officially on how the surplus will be spent, but there's growing speculation that it may bring cancellation of an income tax increase which State legislators voted this spring.

In working out Wisconsin's budget for the current biennium ending in 1967, State authorities originally projected a deficit of more than $70 million. To raise the needed money, the legislature passed bills increasing income tax rates, boosting the cigarette level, and instituting a new franchise tax which mainly affected banks. But the high rate of tax collections may convince the lawmakers, when they meet again this fall, that the income tax increase, at least, isn't needed; though the higher rates were made retroactive to January 1, they could be rescinded easily.

Most often, though, State officials are giving almost no thought to a tax cut. They contend the money is needed by the State -- somewhere. Just where is another question Which has touched off controversies in several States.

In Texas, a $108 million surplus -- the largest in nearly 20 years -- led to a major political battle last spring. Many legislators wanted to appropriate the excess funds for pet pork-barrel programs, or to raise welfare payments, but Gov. John Connally strongly fought such moves. He feared such spending would boost State costs on a permanent basis -- and he was horrified at the thought of having to come to the legislature 2 years from now and ask for a major tax increase because the State's surplus had been consumed.

Governor Connally instead urged lawmakers to spend the money on projects of a one-shot nature, such as capital improvements for schools. The battle raged for several weeks and finally was settled only by compromise. Some $20 million was earmarked for programs of a permanent nature and the rest went into capital expenditures.

Some statehouse executives are still critical of the compromise. "If something should go sour with our sources of revenue, we could be faced with a politically explosive situation when the time for the next budget rolls around," says the Governor's budget director, William Cobb.

A similar struggle ended in Ohio last week only after a threat of a bitter Governor-vs.-legislature showdown. Ohio emerged from its biennium June 30 with a $17.4 million surplus, well above the original estimate of $3.6 million. So the legislature boosted appropriations for public education in the new biennium $9 million above Republican Gov. James A. Rhodes' budget recommendation and drew an immediate threat of a veto. The Governor insisted such an increase in school spending would force a tax boost; he pointed out that his budget had already provided for a $100 million boost in State education outlays over the next 2 years, and said this figure took the bigger-than-expected treasury surplus into account.

CUTS BALANCE INCREASES

Though many politicians doubted the Governor actually would veto an education bill, the battle ended last week in a compromise: School spending in the current biennium win be raised $6 million above Governor Rhodes' recommendation, but this will be balanced by cuts of $6 million in other State outlays. Among other things, the State's emergency fund is being clipped $2.5 million below the Governor's recommendation.

Interestingly, Governor Rhodes is relying heavily on continued economic expansion to sustain State spending, even at his budget figures, without a tax increase over the next 2 years. His budget counts on continued booming business to lift collections a sharp 14 percent during the current biennium under the State's current tax structure.

Ohio is hardly alone in this counting on a continuation of the business boom to help balance its budget. With an election this fall, New Jersey State legislators have passed a budget calling for increased spending but no tax boosts. In preparing the fiscal 1966 budget, State officials estimated tax revenues would climb to $623 million from last year's estimated $574 million. All but $11 million of the rise is expected to come from growth of the State's economy; the rest would come from acceleration in collections of insurance taxes.

LOW SPENDING

New Jersey's tax structure, however, is still the focal point of the current Governor's race. While the State faces no financial crisis in the form of huge deficits, there's a major debate over its lagging spending. The Garden State ranks last in the Nation in per-capita tax revenues but also ranks low in spending -- it's 49th in per-capita aid to education, 49th in per-capita highway spending and 48th in per-capita welfare spending.

The low ranking could soon end. Both candidates for Governor, Democratic incumbent Richard Hughes and GOP challenger Wayne Dumont, have lined up for higher taxes in the future.

Governor Hughes is plugging for an income tax and Mr. Dumont is supporting a sales tax. New Jersey is one of the few States without a general income tax or a sales tax.

In Michigan, too, new future taxes are considered necessary by both parties. Despite the State's huge current surplus, State authorities warn soaring costs, particularly for education, probably will bring a $37 million deficit in State operations in the current year. That deficit, they think will go much higher next year -- enough so, quite likely, to wipe out the $122 million surplus by the end of 1967.

But the size of the current surplus is hindering efforts to get taxes raised in time to head off trouble; neither the Republican State administration, headed by Gov. George Romney, nor the Democratic-controlled legislature, is eager to take the political consequences of raising taxes while the State appears so prosperous. The Democrats last fall won control of the legislature for the first time in 30 years, and "if we pass an income tax while there's a big surplus we may take another 30 years to get (back) control," says one party leader. Michigan now has no income tax, its general fund is wholly dependent on revenues from a sales tax and a patchwork of nuisance taxes.

[From the Wall Street Journal, Aug. 9, 1965]

PROPERTY TAX DEBATE-PROTESTS MOUNT THAT SUCH LEVIES ARE INEQUITABLE, TOO HIGH

(By Joseph Mathewson)

Chicago. -- Are property taxes too high?

Around the country protests by homeowners, farmers, and businessmen are giving new impetus to an old debate over whether the age-old property tax is still a fair and adequate means of raising public revenues. The discussion is more than academic now, for many States are easing the ever-upward pressure on these levies and turning more to other revenue sources.

Property taxes cover mainly real estate, and also business inventories and machinery, livestock, and such personal goods as autos and furniture. They are levied primarily by local governments, but by some States, too, the money going mostly to public schools. Last year property taxes reaped a hefty $22 billion, and no one expects such productive levies to be swept away, but there are many who argue that they're not fully geared to an industrial society where much income and wealth aren't derived from property. "At the turn of the century," says Gov. William H. Avery, of Kansas, "75 percent of Kansas income was from the land or improvement in land. Now it's only 25 percent, yet our ad valorem (property) tax is continuing to carry approximately 75 percent of the load of education."

Critics point out that much modern property, such as securities and bank accounts, escapes property taxation and so the burden falls inequitably on tangible property. Also, according to economics professor Reuben A. Zubrow, of the University of Colorado, "the property tax base does not grow with the growth in need for public income and development. We need a more flexible source."

In some places property taxes are believed to have reached their practical limit, or gone beyond. Gov. Edmund 0. Brown, of California, feels real estate taxes are unnecessarily excessive in most areas of California. Gov. Carl E. Sanders, of Georgia, declares, "The property tax rate has just about reached the saturation point. We're going to have to open up additional revenues for local government."

A BRAKE ON BUILDING

In the business realm, the lack of new building in downtown Boston in recent years is generally attributed to unusually high property taxes. Gov. Calvin L. Rampton, of Utah, says the State's tax on business property "is getting to the point where it's discouraging new industry from locating in Utah." He feels a business income tax is better because a new venture doesn't have to remit such a levy "until the business starts to pay." Iowa's inventory tax, according to Gov. Harold E. Hughes, is "certainly unfair to businesses that need large inventories and can't turn them fast," such as lumber and hardware firms. "and it makes liars out of 90 percent of them."

On the other hand, many tax experts contend property taxation is not excessive. They point out that property levies still produce nearly half of local government revenue and this amount can't readily be raised from other sources. "You'd need a 20-percent sales tax to replace the property tax," says John Shannon of the Advisory Commission on Intergovernmental Relations in Washington, D.C.

These experts concede the property tax has shortcomings, but they insist it can be improved and equitably increased to meet rising revenue needs.

The principal improvement sought is the assessment of all property at the same percentage of true value. This could be almost any percentage; 75 percent is considered a good level, while many States now stipulate100 percent (but don't enforce it). "If the law says 50 or 100 percent of market value, all property should be assessed that way," says Lynn F. Anderson, assistant director of the Institute of Public Affairs at the university of Texas. Though some property tax changes, such as one proposed by Gov. Otto Kerner, of Illinois, would permit taxation of homes at a lower rate than income producing business property, Professor Anderson feels the business and residential rates should be equal. "You have to remember," he says, "that the owner of a home also has income and taxpaying capacity." Defenders of the property tax also favor eliminating taxes on securities and other assets which are difficult to subject to assessment and they strongly urge putting assessment work in the hands of professionals rather than untrained elected officials or political appointees.

Given such improvements, the property tax could yield much greater revenue without becoming unduly burdensome, the authorities contend. According to the Advisory Commission on Intergovernmental Relations, in 1960 property tax rates in individual States ranged from about 0.5 percent to about 2.4 percent of actual property value, and this wide variation indicates an "untapped property tax potential." The Commission figured that "if all States taxed at the average effective rate in New England, property tax yields would be increased about 50 percent."

Efforts to improve property tax administration are being made in many States, but progress is slow. One problem, asserts L. Laszlo Ecker-Racz, assistant director of the Advisory Commission, is that "local communities compete in property tax exemptions," giving special relief to old people, farmers, or other groups and thus increasing the burden of other taxpayers. The only way to prevent this, he feels, "is for the State to see that property is fairly assessed." However, Mr. Ecker-Racz adds, State governments receive little of their own revenue from property taxes (though State laws generally govern property taxation by local governments) "and if the States have no revenue stake in the property tax, it's hard to get them interested in policing."

LEGISLATIVE ACTION

As the arguments go on, property taxes continue to rise, by about $1.5 billion a year, and political pressure against them also is mounting. This year several States took steps to curtail property levies and provide instead revenue from sales, income, or other taxes, usually collected by the State and passed on to local governments,

The Utah Legislature increased corporation and personal income taxes by $12 million partly to permit a reduction in the State-level property tax rate equivalent to $1.7 million in revenue. Illinois and North Dakota lawmakers voted to drop personal property taxes, instead establishing an income tax in Illinois and increasing various taxes in North Dakota. These plans will be submitted to the voters in each State. The Idaho Legislature approved a sales tax which would require ending the State-level personal and real property taxes; the plan has gone into effect but voters will make the final decisions next year. Similarly, an income tax approved by the Nebraska Legislature would eliminate State-level property taxes, and petitions are now circulating to put this on the ballot next year.

In Wisconsin, Kansas, Indiana, Wyoming, Iowa, and Idaho the legislatures reduced property taxes on livestock, household goods, business inventories and machinery, moneys and credit, and warehoused goods. Gov. Robert E. Smylie of Idaho says that as a result of new exemption for goods in transit through the State (a free port law), "some cold-storage people -- handling fruits and vegetables already have announced plans for expansion of their capacity."

STATE AID TO COMMUNITIES

Furthermore, Georgia, Colorado, Idaho, and Oregon began new programs of State payments to local governments in hopes of alleviating the need for property tax increases. A similar program already existing in New York was doubled to a whopping $197.6 million in grants this year. Gov. John A. Volpe of Massachusetts has proposed a 3-percent sales tax which would be distributed to local governments and, according to the Governor, "definitely" would pave the way for actual reductions in local property taxes.

Looking ahead, more potshots will be fired at property taxes. Unsuccessful reduction proposals made this year by the Governors of Wisconsin, Minnesota, California, and Texas will be revived in future legislative sessions. "I want to eliminate personal property taxes if we can," says Gov. Warren P. Knowles of Wisconsin. Special property tax studies are underway in Arizona and Iowa, and they're likely to produce recommendations for change.

New revenue devices undoubtedly will assist these efforts. In one State-tax innovation, per capita annual credits of $6 in Indiana and $7 in Colorado have been introduced to help offset the State sales tax, thus blunting the frequent charge that such levies bear too heavily on low-income families. Professor Zubrow of Colorado believes "this is a technique by which local governmental units can move into the sales tax field."

But as some cuts will be made, so also, at least for the foreseeable future, will total property taxes continue to rise. And the debate over "how high is up?" will go on in the State capitol, in the university, and most certainly in the assessor's office.