Muskie Congressional Record: IGR Revenue intro

CONGRESSIONAL RECORD -- SENATE

June 25, 1969

Page 17192

S. 2483 -- INTRODUCTION OF THE INTERGOVERNMENTAL REVENUE ACT

Mr. MUSKIE. Mr. President, I introduce, for appropriate reference, the Intergovernmental Revenue Act, on behalf of myself and Senator GOODELL. I ask unanimous consent that the text, a section-by-section analysis of the bill and exhibits be printed in the RECORD following these remarks. The bill and the exhibits were prepared by the Advisory Commission on Intergovernmental Relations, of which I am privileged to be a member. I am introducing the bill at the request of the Advisory Commission for purposes of discussion and further study.

Senator GOODELL has long been a strong advocate of Federal revenue sharing with the State and local governments, and has sponsored major bills on this subject in 1967 (H.R. 4070) and in this session (S. 50). The first title of the proposed Intergovernmental Revenue Act would create a system of revenue sharing that is closely analogous to that proposed by him in his S. 50 bill introduced earlier this year.

The central objective of the Intergovernmental Revenue Act is to help redress the fiscal balance of our federal system. It would do this by:

First, supplementing the tax base of States and localities, through a system of Federal general support payments; and

Second, encouraging States and localities to adopt stronger tax systems of their own, by establishing Federal tax credits for State and local income and estate taxes.

It is designed to put new life into our federal system by strengthening the fiscal base of States and local governments.

Urgently needed steps must be taken toward redressing the growing fiscal imbalance among the levels of our Government. This imbalance poses a grave threat to the integrity of our federal system of shared power.

While the Federal income tax has given the central Government of this Nation a strong fiscal base, capable of growing as the economy expands, the fiscal base of our State and local governments, however, has not had the same strength and growth potential. Consequently, many State and local governments face a financial squeeze today, and have become increasingly dependent on Federal grant-in-aid programs in order to meet rising demands for public services.

The fiscal crisis that has followed is a product of rising State and local expenditures, outdated State and local tax systems and increasingly, inter-area competition for a limited amount of tax dollars.

The current revenue-producing abilities of State and local governments cannot keep pace with rising public expenditures. Many of our State and local governments still have outdated tax structures. Only a minority have a built-in capacity to provide for revenue growth as the economy grows. Those States and municipalities with modern tax structures have suffered from interstate and inter-area competition, losing affluent taxpayers to neighboring lower tax areas.

In sum, this is the problem of fiscal imbalance. It has been carefully documented by the Advisory Commission on Intergovernmental Relations in its landmark 1967 report, "Fiscal Balance in the American Federal System." That report made a number of major recommendations for reform many of which have been developed in detail in this proposed legislation.

One proposed remedy for this crisis concerns revenue sharing. Under that proposal, the Federal Government would distribute a portion of its tax revenues to States and localities without specifying a particular use of the funds. The States and local governments receiving these payments would be free to determine for themselves how to use the grants. The Federal Government does not now provide this type of general support payments to States and localities, and instead makes grants-in-aid for specifically defined purposes, often with extensive controls.

The objective of distributing, from Federal revenues, percentage of personal income to States and local governments without Federal controls would be to provide greater vigor to State and urban governments. It would supplement these governments' local tax base, thus enabling them to strengthen their administrative apparatus, supply better public services, and meet pressing social needs more effectively.

General support grants to State and local governments date back 130 years, when the Federal Government on a one shot basis, distributed the surplus accumulated in the National Treasury to the States. Today, many States have their own systems of revenue sharing with local governments analogous to proposals made for its adoption at the Federal level.

As a concept, revenue sharing has been endorsed by the National Governors' Conference, the National League of Cities, the U.S. Conference of Mayors, the National Conference of State Legislative Leaders, and the National Association of Counties. In the 90th Congress alone, over 110 Members of Congress sponsored or cosponsored over 90 revenue-sharing payments to States and local governments for fiscal year 1970. Under the distribution formula of the bill, it is estimated that on a nationwide basis about 49 percent of these payments would be allocated to States, 22 percent to major cities, 12.5 percent to urban counties, and 16 percent to the support of local schools.

A unique feature of this bill is that it combines revenue sharing with tax credits to reinforce the fiscal independence of State and local governments. Revenue-sharing supplements the tax base of States and localities. Tax credits help strengthen the tax base of States and localities, by creating an effective incentive for improving their tax systems.

To assist States in adopting or strengthening their own income tax systems, the bill authorizes the Treasury to collect State personal income taxes under terms mutually agreeable to the Secretary of the Treasury and the appropriate State officials.

The proposed income tax credit would result in an estimated Federal revenue loss of $2.6 billion in the first year of its operation. The offsetting State revenue gain is difficult to estimate, as it depends on how many States adopt the income tax or upgrade their existing income tax, but in the long run the State gains should exceed the Federal loss because the States will be collecting $1 for each 40 cents of Federal credit.

By combining revenue sharing with tax credits, the bill will help achieve the complementary objectives of supplementing and modernizing State and local tax systems. It will assist in assuring that States and localities keep up their own tax efforts after they begin receiving general support payments from the Federal Government. It will constitute an important step toward eliminating the serious interstate and inter-area taxing disparities that have placed the most progressive taxing jurisdictions at a competitive disadvantage.

Mr. President, I hope that the bill can be given early consideration in the Senate. The fiscal crisis confronting our State and local governments is deserving of prompt resolution and this alternative is one well worth exploring.

The PRESIDING OFFICER. The bill will be received and appropriately referred; and, without abjection, the bill, section-by-section analysis, and exhibits will be printed in the RECORD.

The bill (S. 2483), to establish a system of general support grants to State and local governments to allow partial Federal income tax credit for State and local income tax payments; to authorize Federal collection of State income taxes; to enlarge the Federal estate tax credit for State death tax payments; and to permit States or local taxing authorities to tax property located in Federal areas, introduced by Mr. MUSKIE (for himself and Mr. GOODELL), was received, read twice by its title, referred to the Committee on Government Operations, and ordered to be printed in the RECORD, as follows:

[Bill text omitted]

The material presented by Mr. MUSKIE follows:

SECTION-BY-SECTION ANALYSIS OF THE INTERGOVERNMENTAL REVENUE ACT

Section 1 provides that this legislation may be cited as the "Intergovernmental Revenue Act."

Declaration of policy

Section 2 affirms the "federal" character of the governmental system of the United States and contains the declaration of Congressional policy to federalize the Federal personal income tax, reduce Federal tax impediments to more intensive use of State personal income taxes, facilitate the exercise of adequate powers of taxation by States and localities and establish a system of general support (revenue-sharing) payments to the States and major units of local government.

Confronted with the diversity of objectives in fashioning a program to aid State and local governments, this legislation proposes that a variety of techniques including revenue sharing and income and death tax credits be combined into a remedial measure that will:

Redress the unequal distribution of taxable resources and thereby help create a fiscal environment that will enable States and localities to exercise wider latitude in determining their budgetary priorities.

Strengthen the financial base of State and local governments with revenue sources that grow as the national economy expands.

Reward States and major local units that go the extra mile on tax effort to respond to their own expenditure requirements.

Arm States with the revenue source that enables them to enlarge their fiscal flexibility, diversify their tax systems, and adjust the distribution of tax burdens for family size as well as other equity considerations.

Reduce State vulnerability to and political leaders concern with tax competition from other States based solely on their making intensive use of the personal income tax.

TITLE I-GENERAL SUPPORT PAYMENTS TO STATES AND THEIR POLITICAL SUBDIVISIONS

Section 101 defines several terms used in this title of the Act.

General Support Trust Fund Section 102 establishes the General Support Trust Fund in the Treasury of the United States and provides for annual appropriations to the trust fund. The section directs the Secretary of the Treasury to determine the annual appropriation to the trust fund as an amount equal to either (a) the result obtained by adding (1) 1 percent of Federal individual taxable income and (11) 25 percent of State personal income tax collections and dividing the sum by 2 or (b) the amount appropriated to the trust fund for the preceding year, whichever is greater. The last sentence of subsection (b) protects States and localities from a cutback resulting from a recession. The section also requires the Secretary to transfer from the general fund to the trust fund quarterly on the basis of estimates and subsequently adjust the trust fund transfers to reflect the precise formula determination.

In fiscal 1970 the appropriations to the trust fund under this act would approximate $2.8 billion determined as follows:

[In billions of dollars]

(A) 1% of Federal Individual Taxable Income -------------------------3.8

(B) 25% of State Personal Income Tax Collections -------------------1.8

Sum of (A) and (B) ----------- 5.6

Result of dividing sum by 2---------- 2.8

Initially, growth in the State income tax collections factor will outrun growth in the Federal individual taxable income factor because of State tax rate increases and new State income tax enactments. Thus, in the near term, the general support fund will rise faster than the growth of the Federal individual income tax base. The trust fund appropriation will continue to grow at a fairly rapid pace even after all the States have entered the personal income tax fold because of the responsiveness of this tax to growth in the national economy.

This section further provides a percentage set aside, far the first three years following enactment, to be used by the Secretary of the Treasury to fulfill his administrative and data gathering responsibilities under this title.

Basic payments

Section 103 requires the Secretary of the Treasury to make quarterly payments from the trust fund to the qualifying States and adjust subsequent payments to reflect any previous over or under payments.

State area entitlement

Section 104 directs the Secretary of the Treasury to determine by formula, the amount of the entitlement to the trust fund for each State. The formula specified in this section allocates to each State area an amount that depends on the population and relative tax effort in each State. It recognizes that responsibilities are divided in different ways as between State and local governments in each State. Each State thus shares in the fund in proportion to its population and State-local tax effort-the respective indicators of a State's revenue needs and the response made to these needs.

The Secretary would obtain for each State its:

(A) resident population;

(B) tax effort, i.e., the result of dividing the annual total of State and local taxes plus profits of State-owned liquor stores by the total personal income of individuals in the State; and

After multiplying each of the factors (A, B, and C) for each State, the products are added to determine the sum for the 50 States and the District of Columbia. This total becomes the denominator for calculating a ratio between each State's population-tax effort product and the total population-tax effort product for all States. The amount of the trust fund multiplied by this ratio for any State yields the amount of that State's entitlement.

The use of two tax effort factors in the formula provides a bonus to States which maintain and increase their tax effort. The factors also protect the National Government against attempts by States to replace Statelocal tax effort with funds from revenue sharing.

Qualifying agreements with the Secretary Section 105 (a) requires the Governor of a State with the approval of the State legislature to enter an agreement with the Secretary in order to qualify to receive revenue sharing payments. States would pledge to adhere to these conditions:

(1) Financial control and accountability over payments to the State of the same type the State gives to State funds;

(2) Preparation and submission to the Secretary of a five-year projection of State government expenditures along with a report on the disposition of revenue sharing payments in order to subject the spending of the funds to the usual budgetary processes. The Secretary has no power either to approve or disapprove the plan or the expenditures.

(3) Maintenance of the unrestricted character of the funds distributed to cities and counties, except that a State could prohibit cities and counties from spending the money for a purpose that conflicts in whole or in part with a State's plan dealing with the utilization and development of its human or physical resources.

(4) Confirmation by report to the Secretary that in each of the first three years after the effective date of the act that the State did not reduce its grants out of its own funds to eligible cities and counties because of the Federal aid assured to these governments under this act. It is thus the intent of the act that the States not reduce their grants out of their own funds to eligible cities and counties.

(5) Adherence to all Federal laws in connection with any activity or program supported by funds provided in this Act so that these funds do not perpetuate practices that conflict with national policy.

(6) Submission of reports as necessary to the Secretary, the Congress, and the Comptroller General to help them carry out their responsibilities under this act;

(7) Distribution of the funds within the State required under other provisions of Section 105, described below.

Distribution of State entitlement Section 105 (b) requires each State to pay over to cities and counties of 50.000 population a portion of the State entitlement in accordance with a formula that varies the payment to each city and county on the basis of its local revenue ratio, i.e., the ratio between its tax receipts and the total tax receipts of the State and its localities plus State liquor store profits. The amount of local tax receipts is assumed to implicitly reflect variations in local tax effort.

Specifically, the pass-through requirement in this act provides that (a) cities and counties of 100,000-plus population receive an amount equal to the product of multiplying the State entitlement by two times the local revenue ratio, and (b) cities and counties of 50,000-plus population receive an amount equal to the product of multiplying the State entitlement by two times the local revenue ratio multiplied further by the percentage by which the city or county population exceeds 50,000. This population modification for the cities and counties in the 50.000 to 100,000 size class avoids the possibility of drastically different treatment for cities and counties just below and just above the minimum population of 50,000.

The 50,000 population cutoff figure is designed to reconcile the competing demands of "federalism" and "urbanism." By drawing the line at 50,000, Congress still leaves each State with considerable discretion in the allocation of revenue sharing payments to its units of local government, a policy that accords with the tenets of federalism.

By specifying payments to the 872 counties and cities above the 50,000 mark which account for approximately 75 percent of the nation's population, Congress includes virtually all of the local jurisdictions experiencing the most severe fiscal tensions. The use of the multiplier of two times the local revenue ratio is designed to reflect the national urgency of the urban fiscal crisis.

It is estimated that on a nationwide basis, this formula allocates 22 percent of the trust fund to cities and 13 percent to counties.

To encourage States to take the initiative in strengthening the fiscal position of cities and counties and to maximize flexibility in the use of general support payments for

meeting the particular needs of differing State-local fiscal systems, this section requires the Secretary to accept an alternative State plan that meets either of two conditions:

(1) Each city and county will receive more under the State alternative plan than it is entitled to under the statutory formula; or

(2) An alternative State plan is accepted by formal resolution of the city and county legislative bodies representing, at one and the same time, half of those entitled to receive payments under the statutory formula, and those entitled to receive at least 50% of the amount designated by the statutory formula for cities and counties.

Under the second of these conditions, a State with the concurrence of cities and counties, may carry out a plan that would shift financial responsibility for a major function such as support for public schools or public assistance from the local governments to the State.

In recognition of the contribution that locally imposed school taxes make to aggregate State and local tax effort, Section 105(e) further designates part of the State entitlement for support of local schools. The amount spent for this purpose is determined by multiplying the payment to the State (after subtracting the amount allocated to cities and counties) by the ratio of separate school taxes to State and separate school taxes. It is estimated that on a nationwide basis this requirement allocates 16 percent of the trust fund to school support.

Powers of the Secretary

Section 106 directs the Secretary to obtain the requisite statistical data, reports and other materials he needs to discharge his responsibilities under this title. This section also gives the Secretary authority to reimburse Federal agencies for the cost of providing any data necessary to the administration of this act from the funds allocated for the Secretary by a percentage set aside in the first three years following the enactment of the act. It further authorizes appropriations after the first three years to support the continuing information requirements of the Secretary under this act.

This section also empowers the Secretary, after giving notice and conducting a hearing, to stop payments to a State that fails to comply with the agreements required under the act until such time as corrective action is taken.

Judicial review

Section 107 permits a State to file a petition for review of the. Secretary's action in the appropriate United States Court of Appeals. The scope of the judicial review authority is spelled out and includes final appeal to the Supreme Court.

Report by the Secretary

Section 108 requires the Secretary to report to the Congress on the operation of the trust fund for the preceding and current fiscal years. He must file a statement of the actual and estimated appropriations and disbursements from the trust fund and may recommend changes in its operation.

Congressional study

Section 109 charges the respective Appropriations and Legislative committees of both the House and the Senate to conduct a full and complete study with respect to the operation of the trust fund at least once during each session of Congress. This section explicitly provides that the Congress retains the same rule-making authority with respect to these rules as it does with other rules.

TITLE II:-PARTIAL FEDERAL INCOME TAX CREDIT FOR STATE AND LOCAL INCOME TAX PAYMENTS

Section 201 amends the Internal Revenue Code by renumbering Section 40 as 41 and

inserting a new Section 40 that permits individuals to elect, in lieu of deductions, to take full credit against their Federal income tax liability an amount equal to 40 percent of their State and local income tax payments. The section defines State and local income taxes so as to include only those that apply to net income (after personal exemptions and dependent allowances). It pins down the period in which the taxpayer changes his election of the Section 40 credit or deductions. It spells out the methods to be used in accounting for adjustments on payments of accrued taxes claimed as Section 40 credits. It also incorporates cross references and the necessary technical and conforming amendments to other sections of the Internal Revenue Code.

The effect of the partial Federal tax credit on State use of the income tax cannot be predicted with certainty. Nonetheless, the thrust of the credit will be to encourage greater State use of this revenue source. Assuming the credit stimulates State income tax effort to a moderate degree, the Federal revenue forgone during the second year of the operation of the credit may be more than offset by the increasing State income tax receipts. Once State income tax receipts pass this threshold, State gains should overshadow Federal revenue loss because the States will be collecting one dollar for each forty cents of Federal credit.

Section 202 contains technical amendments.

Section 203 makes the amendments to the Internal Revenue Code contained in this title effective with taxable years beginning after the date of the enactment of this act.

TITLE III-FEDERAL COLLECTION OF STATE INCOME TAXES

Section 301 adds a new section to Chapter 77 of the Internal Revenue Code to allow the proper officials of any State and the Secretary of the Treasury to enter into an agreement for Federal administration and enforcement of that State's income tax. It requires that the State pay to the Treasury Department the cost of any work or services performed as a result of the agreement.

If the States, on their part, evidence a willingness to enter into the agreements authorized under this section, the day may come when taxpayers of a State can discharge both Federal and State tax liabilities with a single set of tax officials. States have tended increasingly to conform their income tax laws to the Federal Internal Revenue Code. The prospects of working out a mutually accepted agreement have thereby been enhanced. Currently, several States are considering the enactment of a personal income tax for the first time. If the Secretary of the Treasury had this authority, one or more of these States might immediately take steps to enter into an agreement in order to avoid the cost of establishing its own income tax administrative machinery.

TITLE IV-LARGER FEDERAL CREDIT FOR STATE DEATH TAX PAYMENTS

Section 401 amends the Internal Revenue Code by adding a new subsection at the end of section 2011 to restructure and liberalize the Federal credit for State death tax payments in return for State enactment of: (a) an estate tax in States now using an Inheritance tax in order to ease taxpayer compliance and tax administration burdens; and (b) revised estate tax rates to pick up the increases in the Federal credits so that their effect is to raise State revenue rather than to reduce State taxes.

Taxpayer compliance and tax administration are frequently difficult under the present system of Federal estate and gift taxes and State estate, inheritance, and gift taxes. Jurisdictional conflicts frequently arise. State revenue from death taxes fluctuates from year to year. This section replaces the present Federal estate tax credit for State death tax payments with a two-bracket credit. This two-step credit gives the States a larger part of the revenue produced by the lower tax brackets-taxable estates up to $50,000-and reserves for the Federal government the portion of the revenue produced by the larger estates. This section would make the liberalized credit applicable to decedents dying after December 31, 1972 to give States time to make appropriate adjustments in their tax laws to obtain the revenues involved. The budgetary impact of this section would build up gradually after the first few years.

Section 402 contains technical amendments.

TITLE V-PROPERTY TAXES IN FEDERAL ENCLAVES

Section 501 adds a new section 105A to Title 4 of the United States Code. This new section permits the imposition and collection of property taxes on privately owned real and personal property within Federal areas, such congressional consent to take effect (or terminate) State-by-State upon certification (made or withdrawn) by an agency designated by the President that persons living and working in areas under the exclusive Federal legislative jurisdiction within the State are afforded substantially the same rights and privileges and tax supported services as those available to other residents of the State.

Under the provisions of Title V the National Government would permit States and their localities to tax the personal property of private individuals located in areas under exclusive Federal jurisdiction. This privilege would be accorded only if the State could demonstrate to the satisfaction of the Department of Justice that all persons residing in such Federal enclaves enjoy the same rights and privileges accorded to residents of the State. Adoption of this provision would not result in a direct revenue loss to the National Government--it would, however, result in some personal property tax gain to those local governments that have Federal enclaves located within their jurisdictions.

In view of recent economic trends, the rise in local tax rates and an estimate that States and localities in 1961 would have gained about $10 million a year, it seems reasonable to estimate the current revenue gain would be on the order of $20 million annually.

Sections 502 and 503 contain technical amendments, and Section 504 establishes a legal remedy to prevent collection of unauthorized taxes.