Empty Pockets on a Trillion Dollars a Year
CAN a nation with a trillion-dollar economy be running out of money? That startling question is forcing itself upon every government official who must shape a budget, from President Nixon down to the head of the smallest local mosquito-abatement district. By most measures of private wealth, the U.S. is the world's richest country. But in terms of its ability to pay for the public services--health care, education, welfare, garbage pickup, pollution control, police and fire protection--that make the life of its citizens pleasant, or at least tolerable, or in some cases even possible, the country seems almost to be going broke.
This anomaly has come as a bitter shock. Americans have long thought that they had the resources to accomplish practically any goal that they set for themselves. Political liberals have argued for years that economic growth could pay for a vast improvement in housing, health care and education programs, and leave an ample margin for tax cuts besides. Only a few years ago, liberals and conservatives alike thought that the major question of public finance was how best to use the "peace dividend" of $30 billion a year that they expected the U.S. to collect once the Viet Nam War ended.
Doubled Burden. Today, that hubris has been drowned in a rising sea of red ink. In 1970, federal, state and local governments spent $60 billion more than they took in, and the deficit certainly yawned even wider last year. Meanwhile, taxes keep going up and up. Though federal taxes have been reduced since 1960, the cuts have been offset by severe increases in state and city income taxes, sales taxes, property taxes, Social Security taxes and "sin" taxes on liquor and cigarettes. Between 1960 and 1970, the tax burden on each American man, woman and child almost doubled, from $711 to $1,348. Many Americans, worried about just what will be taxed next, could echo the Beatles' song, Taxman:
If you drive a car, I'll tax the street, If you try to sit, I'll tax your seat, If you get too cold, I'll tax the heat, If you take a walk, I'll tax your feet.
The higher taxes and higher spending have brought little if any improvement in public services. In many cases, the nation's streets are dirtier, its mass transit more decrepit, its public hospitals more understaffed, its streets more crime-ridden today than in decades. The knowledge that they are paying more and more for less and less service has bred in many citizens a suspicion that they are being cheated, and has fanned a mood of rebellion.
In Connecticut, an outburst of voter anger frightened the state legislature last August into repealing an income tax that had been passed just six weeks before; that was a hollow victory for the rebellious citizens because the lawmakers were quickly forced to impose some of the nation's highest taxes on sales (61%), on gasoline (100 per gal.) and on cigarettes (210 per pack). In Kansas City, voters last December defeated a property tax increase that civic leaders of both parties had campaigned hard for on the. grounds that it was urgently needed to improve the city's schools. Across the country, citizens last year voted down 65% of all bond issues proposed to build new schools, hospitals, sewage plants and other facilities v. an average of a 30% turndown rate during the 1960s and a mere 8% in 1947.
The voter rebellion has considerable justification. The U.S. urgently needs radical reforms in the way that it collects, apportions and spends tax money. But for the moment, the taxpayer revolt is only tightening an already merciless squeeze on the budgets of most of the nation's 81,299 governmental units. At a time when public officials should be planning to finance the pollution-control, mass-transit and slum-rebuilding programs of the future, they are having to struggle to stretch present revenues to cover immediate spending needs. Increasingly, they are failing.
Pray for Cash. The failure has been most conspicuous in Washington. Richard Nixon, who in the past has zealously denounced federal deficits, now admits that he is likely to run up the biggest three-year red-ink totals that the U.S. has ever experienced outside of the World War II period: an estimated $87 billion for fiscal years 1971 through 1973. The President argues persuasively that the deficits are necessary to spur a lagging economy. Even so, he has felt obliged to limit some programs that his Administration earlier had labeled top priority. For instance, the Labor Department has kept the number of people in its manpower-training programs below 1.3 million, although the persistence of a nearly 6% unemployment rate cries out for a greater effort to help provide the jobless with marketable skills.
Still, the Federal Government is in much better budgetary shape than many states and cities. For the most part, Washington has only been delaying or underfinancing desirable programs, rather than cutting back on absolutely essential spending. No such statement can be made about many states and cities. Some examples:
. Ohio last year closed all state parks for two months beginning in mid-August, cut average state payments for care of the aged in nursing homes from $11 to $10 per day per patient, and furloughed 3,000 state employees. Having thus dramatized a shortage of funds, Democratic Governor James Gilligan persuaded the Republican-controlled legislature to pass a one-half of 1% to 3% income tax and was able to increase budget appropriations by 27%, to $7.7 billion, for the two-year period ending in mid-1973. Even that leaves only a piddling $7,000,000 for a new program to open treatment centers for drug addicts, and the legislature turned down a Gilligan request to extend Medicaid to the working poor. Ohio limits these federal-state payments, for which states set the standards, to people on welfare, despite warnings from Ohio hospitals that they will have to stop taking some low-income patients unless the state pays for them.
. New York State, after taxpayers had defeated a transportation bond issue in November, awoke to the fattest projected nonfederal deficit in U.S. history: $750 million for the fiscal year ending in June. To shrink it, Republican Governor Nelson Rockefeller ordered payment of more than $350 million in state aid to local school districts delayed from March until July, so that it would count against the fiscal 1973 budget rather than the present one. The state this fiscal year has also closed two tuberculosis hospitals, a school for retarded children and a prison, and instituted a statewide freeze on hiring.
. New York City last week unveiled a tentative $10 billion budget for fiscal 1973 that is "balanced" only by counting in nearly $800 million of new state and federal aid that it is highly questionable the city will get. The budget gap would be even larger without "economies" that have grievously hurt the quality of life. A prohibition on hiring shrank the city's police force by 800 cops last year, despite a level of street crime that makes many New Yorkers barricade themselves in their apartments after sundown. At the overcrowded Morrisania City Hospital in The Bronx, a new obstetrics wing is kept locked because there is no money to hire anyone to operate it. Slashes in city support of the New York Public Library have forced it to reduce its operating hours from 78 to 40 per week, and to close many of its special research facilities to the public.
. Detroit has enacted income and property taxes as high as Michigan law allows, and slapped a 5% tax on residents' telephone, gas and electric bills. Still, the city faces a $30 million deficit this fiscal year. "Every morning we gather in the mayor's office to pray for money," quips a mayoral assistant, "and we face Washington." Since the prayers have gone unanswered, Mayor Roman Gribbs has requested cuts of 5% to 45% in all city departmental budgets. All Detroit skating rinks are closed this month, parks and playgrounds will not be cleaned up for the spring, and recreation programs in city schools have been dropped. One result: Martin Cramatie, a 15-year-old former car thief and alumnus of a detention home, who for a while had switched his energies to playing basketball in the gym of Butzel Junior High, has been forced back on to the streets for his fun. "It's bogue [a bad trip], man," grumbles Cramatie. "Everybody will be getting into trouble."
. East St. Louis, Ill., like many urban centers, has seen its tax base steadily eroded by a flight of relatively well-off whites and an influx of low-income blacks, who now constitute 70% of its 68,000 population. The city is desperately short of policemen, firemen, sanitation workers, teachers and public housing. "We are even begging for paint to fix up our high school," says Mayor James E. Williams. In order to pay its bills, the city began selling as many bonds as Illinois law permits. When that proved insufficient, it resorted to an annual charade. The city would borrow from banks to meet its payroll, then, by prearrangement, would fail to pay when the loan came due. The banks would sue and win a judgment demanding repayment. That would enable the city legally to sell bonds beyond the normal debt limit. Today, 35% of East St. Louis' tax revenue must be used to pay off old borrowings, causing the city to fall ever further short of covering its bills.
Deeper in Debt. These are only some of the worst examples. Though the squeeze is most intense in the old and crowded states and cities east of the Mississippi River and north of the Mason-Dixon line, it is nationwide. New Orleans cannot afford to add the 300 sanitation workers and some 350 police that city officials figure it needs; authorities are afraid to raise the 6% sales tax for fear of driving more businesses to neighboring areas where taxes are lower. At the University of Kan, sas in Lawrence, students have only limited access to 80,000 recently acquired books in the university library; officials cannot afford to hire people to catalogue the volumes because the state legislature has frozen all the university's appropriations at last year's levels. In Mora, Minn., children go to school twelve months a year; the town had to put the school on a year-round schedule to save money after voters defeated a bond issue.
The budget squeeze will probably become even worse later in the 1970s. Lawrence S. Ritter, professor of finance at New York University, calculates that during the rest of the decade, public spending will have to average $46 billion a year above 1970 levels for just four purposes: rebuilding mass-transit systems, cleaning up pollution, upgrading law enforcement and improving education. Spending needs would rise even more if the U.S. decided to rebuild its cities or start a nationwide system of low-cost health care, as it should. There is no excuse for the world's richest nation to rank 13th in infant mortality and 17th in life expectancy for men.
If the country's governmental units follow their present course, they will respond partly by further raising some taxes, partly by rejecting some badly needed programs, and largely by plunging deeper into debt. That is a self-defeating course. Keynesian economists have oversold the idea that public debt does not hurt because "we owe it to ourselves." Interest on the debt--currently $12 billion a year for the Federal Government --devours tax dollars that are urgently needed for other purposes.
Debt service is now the third highest public expense, exceeded only by spending for defense and education; most of the money goes to banks, which are the major buyers of bonds that governments at all levels sell to cover their deficits. Moreover, debt functions as a wrong-way income redistribution device, channeling tax money that is paid in large part by the poor and the middle class into the pockets of wealthy holders of trust accounts or stock in banks.
How did the U.S. get into such a mess? One reason is poor federal management of the economy. Inflation has raised government costs for construction, supplies and utility bills more than tax planners had foreseen. Recession has caused tax collections to fall below expectations, while joblessness has jacked up government expenditures for unemployment compensation and welfare. Although it has become an intellectual fad to question the need for vigorous economic growth, no Governor, mayor or federal budget director can have any doubt about the meaning of a halt or even a slowdown: fiscal disaster.
Changes in demography and society have also put the U.S. through a budgetary wringer. Population growth has brought a more than proportional increase in the need for public services. A more crowded society multiplies demands for housing, parks, garbage collection and police protection. A skewed demographic pattern also has pressed a relatively small working and taxpaying population into paying for the medical, educational and welfare requirements of rapidly rising numbers of the very young and the very old. During the 1960s, the number of people aged five to 24 rose 28%, and the number aged 65 or over increased 21%; meanwhile, the group aged 25 to 44 expanded less than 3%.
The U.S., no less than the underdeveloped world, has also been going through a revolution of rising expectations. Higher education once was looked on as a privilege reserved for the brighter sons of the affluent. Now it is coming to be assumed that every boy or girl who can get through high school has a right to four years of college, with public assistance if need be. Last week the Senate passed a bill that would give every college student the right to a grant of $1,400 a year, minus what his family could contribute. Untended illness used to be regarded as the unavoidable fate of the poor and aged. Today it is considered an intolerable, if still far too frequent outrage. Such demands, though fiscally troublesome, are just claims on a technological society that also wants to call itself equitable and humane.
Private Bias. A more complex issue is the rising expectations of government employees. Teachers, government clerks and other civil servants in the past struck a tacit bargain under which they accepted relatively low pay in return for easy work, short hours, job security and relatively high pensions. Now they are demanding --and increasingly winning--wages just about equal to those in private industry. The effect on budgets has been catastrophic. In New York City, the number of public-school pupils rose 16% during the past decade, but school spending zoomed 207%, largely because of higher teacher salaries.
Even these factors do not wholly explain the poverty of American public services. The most important cause is a set of national attitudes. From the earliest days of the republic, Americans have shown a pernicious bias in favor of private consumption and against public outlays. Business expenditures for new factories and machinery are looked upon as productive investments. Public spending for new schools, fire engines, libraries and playgrounds is regarded as an expense that may be unavoidable but should be held to a minimum.
This bias has led to a massive failure to perform what might be termed preventive maintenance, of people as well as things. Bigger investments in public transportation during the 1950s might have avoided the worsening commuter crisis of today. In the period when low-income blacks (and whites) were flooding into the cities from the countryside, higher spending for manpower training, public housing and remedial reading could have alleviated many currently explosive social and racial tensions. Society is now being presented with the bill for such errors --at inflated prices. To cite just one example, Federal Reserve Board Governor Andrew Brimmer predicts that the nation will have to spend more than $16 billion annually in the next four or five years to keep pollution within tolerable limits. Part of that might come from corporate treasuries, but much surely would have to be tax money. The cost certainly would be lower if the building of efficient sewage-treatment plants, low-polluting city incinerators and the like had begun a decade ago.
Another result of the bias in favor of the private economy has been a persistent refusal by Americans to tax themselves heavily enough to pay for public services. Though almost every American feels oppressed by taxes, the U.S. is in fact one of the most lightly taxed of all the industrial nations. Total U.S. tax collections equal only 31% of the country's gross national product v. 33% in Germany, 37% in Canada, 41% in Sweden and 43% in Britain. By no coincidence, most of these nations enjoy higher-quality health care, recreational facilities, mass transit and many other services than the U.S. does. Japan is the only major industrial nation where taxes account for a smaller share of G.N.P. (16%) than they do in the U.S., at least partly because Japan's tax system was designed by American occupation authorities after World War II.
In some areas of the U.S., political opposition still keeps taxes low despite inescapable needs. New Hampshire, for example, can afford to keep only four state troopers on duty in the early hours of the morning, and has been unable to pay the telephone and postage bills of its own planning office. Nevertheless, the state has neither an income nor a general sales tax, and the legislature last week defeated for the second time an income tax proposed by Governor Walter Peterson.
Flat Failure. The bias against public spending has led the Federal Government to distribute the gains of economic growth in the form of income tax cuts rather than improved services. Since 1964, federal income taxes have been cut four times, from a range of 20% to 91%, to the present 14% to 50%. If rates, exemptions and deductions had been held steady for the past decade, Washington today would be collecting at least an additional $40 billion a year--more than enough to wipe out the $38.8 billion deficit foreseen in this fiscal year. Alternatively, if a large deficit were considered necessary to stimulate the economy, Washington could now be distributing enough additional aid to states and cities to meet nearly all the social spending needs expected for the 1970s.
The tax cuts have been aimed at shrinking the role of Government in U.S. life. In his January budget message, President Nixon boasted about his
Administration's tax cuts and declared that individuals "can use that money more productively for their own needs than Government can use it for them." This policy has been a flat failure. The role of Government has not declined because total tax collections, while still smaller than in other countries, have risen as a percentage of G.N.P. The reason, of course, has been the fast rise in state, local and Social Security taxes. The main achievement of the federal income tax cuts has been to distort the tax system by restricting the role of a levy that is effective and generally fair, and throwing a greater burden on taxes that are neither.
When the economy grows, the yield of the income tax grows even faster, because taxpayers hand over a rising percentage of their incomes as they move into higher salary brackets. By contrast, local sales tax collections increase only about as fast as the economy does, and the yield from property taxes does not necessarily rise at all even during a boom. Unlike the income tax, these local taxes are also regressive: their burden falls most heavily on those least able to pay.
The property tax in recent months has become the flash point of the taxpayer rebellion. More than half the $36 billion collected by property taxes annually is earmarked specifically to pay local communities' share of education costs. But in many cities, towns and villages, property taxes also raise most of the revenues for the whole range of local government services.
Fiscal Suicide. Theoretically, the property tax burden should be shared equitably, since the rich own more taxable real estate than the poor. Actually, property tax rates tend to be higher on modest homes than on mansions. A 2% tax on a house assessed at $50,000 will yield $1,000. A 10% tax would be needed on a house assessed at $10,000 in order to raise that same $1,000--and a town filled with $10,000 homes may need more revenue for such services as sewers and fire protection than a suburb of stately homes. Favoritism in assessments, overly generous exemptions for business, and other abuses magnify both the inequity of the tax and its inefficiency as a revenue raiser.
Boston offers a striking example. Its revenue, comes mostly from property tax. Yet fully 54% of property in the city is exempt, the result of unwise concessions to colleges, airlines and businesses putting up new buildings. A surge of commercial construction has increased office space in Boston by 40% in the past ten years, but the city has received little revenue from it. Property taxes on those who do pay have been raised to a mind-bending $174.70 per $1,000 of assessed value, and are likely to go up again shortly to $190 or more; that is equal to $2,660 a year on a house assessed at $14,000 (which probably would be worth $40,000 on the market). The city is still so broke that it cannot replace some century-old wooden sewers, or even plow its streets properly after snowstorms; two days after a heavy snow last month, many streets still had only one lane cleared. Says Mayor Kevin White: "We are on a course of fiscal suicide."
The inequities of the property tax in financing education are so glaring that four state and federal courts in the past year have ruled these disparities unconstitutional. The reason: poor districts cannot raise as much money for schools as rich districts, and the quality of a child's education should not depend on the wealth of his neighborhood. The likely result of these court decisions is that Washington will have to greatly enlarge its subsidies for local schooling in order to eliminate or at least reduce the role of the property tax. The Nixon Administration estimates that the Federal Government will have to come up with $12 billion to $13 billion more a year to help states and cities equalize school financing. Unfortunately, it is thinking of doing so by proposing a value-added tax--a kind of national sales tax (TIME, Feb. 28) that, like all sales taxes, would be regressive.
How can the nation raise the revenue it needs to improve public services? One way to begin is by slashing, or preferably abolishing, some Government programs that continue to soak up tax dollars long after they have lost their justification--if they ever had one. The U.S. is in trouble not only because tax revenues are inadequate, but also because too much of them has been spent for the wrong purposes.
The Pentagon is usually singled out as an overbloated tax eater, but there are many others. The federal highway system, by the time it is finished in the late 1970s, will have consumed $76.3 billion. That is only direct cost; indirect costs include increased air pollution resulting from more driving, as well as the destruction of much housing for the urban poor in Baltimore, Detroit and other cities to make room for new freeways. Meanwhile, mass-transportation systems that could move people more efficiently have been starved for funds. In the Washington, D.C., area, the National Association of Railroad Passengers has been unable to interest any governmental unit in a proposal to scrape up $17.4 million to improve passenger service to the city's suburbs. Yet the Federal Government is spending $53.5 million to build slightly more than a mile of road just south of the city. The Government recently laid out $110 million to open a new six-lane segment of Interstate 95, which parallels an existing four-lane highway between Washington and Baltimore.
Former Budget Director Charles Schultze lists some other unproductive expenditures: the building of giant dams that yield little economic return, even in terms of lower power costs, but harm the environment by flooding areas of great scenic beauty; irrigation projects that subsidize the growing in Western deserts of crops for which the Agriculture Department is trying to cut acreage elsewhere; farm price supports that benefit mostly higher-income farmers; subsidies to general aviation that aggravate airport congestion by encouraging private flying. The nation can no longer afford such extravagances, but they continue because they are promoted by powerful self-interest lobbies that encounter little opposition. They should be opposed by public-interest counterlobbies, which could press competing demands for cash for other programs. That is a cause to which Ralph Nader and his army of followers could profitably turn their attention.
How to Cut. The nation also needs a thorough overhaul of its tax system. The aim should be to make a reformed federal income tax a major revenue raiser for states and cities as well as for the Federal Government, reducing the necessity for endless sharp increases in unfair and ineffective sales and property taxes.
Although the income tax is fair enough in principle--rates rise with ability to pay--the way in which it actually operates is not. Because of elaborate deductions and exemptions, hardly anyone pays the rate that theoretically applies to his salary bracket. The deductions and exemptions excessively favor married couples over single people, homeowners over renters, large families over small, receivers of dividends and stock market profits over people who live by wages alone. Congress narrowed some of the loopholes in 1969, with the result that the number of people who paid no tax whatever on incomes of $200,000 or more declined from 300 in 1969 to 112 in 1970 (before final audit). Simultaneously, though. Congress has piled on new tax breaks. The latest, enacted last year in a bow to Women's Lib, is a child-care deduction for working mothers in families with incomes up to $27,000 a year.
Some tax favors reward actions that once seemed socially desirable, like the bearing of many children and the buying of single-family houses. It is questionable whether such goals should still be encouraged. If so, they should be promoted by direct subsidy. Indirect subsidies handed out through the tax system are extremely expensive and lead to ludicrous distortions. For example, the Federal Government last year in effect paid 70% of the mortgage interest and property taxes on the home of a couple who had a $200,000 annual income, but it paid only 19% of the interest and taxes on the house of a couple who earned $10,000 a year, and nothing at all on the house of a family too poor to pay any income tax.
Joseph Pechman, one of the nation's leading tax experts and a member of TIME'S Board of Economists, proposes a drastic reform. He reckons that by eliminating almost all deductions and exemptions--except for payment of state income taxes, unusual medical expenses and high charitable contributions--the Federal Government could reduce income tax rates by 40% and still raise as much revenue as it now does. A somewhat smaller but still major rate cut would yield new revenue to meet social and environmental needs. Pechman's wholesale removal of deductions would be far better than attempts to close loopholes one by one. Such efforts arouse furious opposition while still leaving many inequities.
No Bail-Out. Unless federal tax reform is coupled with a revenue-sharing plan to funnel cash to hard-up cities and states, it would benefit only Washington, while leaving local governments the choice of either shortchanging their citizens or boosting sales and property taxes. President Nixon has proposed a plan, now heading toward a vote in the House Ways and Means Committee, that would return $5 billion to states and cities in fiscal 1973. That is inadequate. Walter Heller, who with Pechman originated the revenue-sharing idea in the 1960s, proposes that the amount be set at 2% of the "tax base"--that is, all individual income subject to federal tax. That would yield about $10 billion annually under the present tax structure, and much more if most exemptions and deductions were knocked out.
Two further improvements would increase the effectiveness of revenue sharing. Heller suggests that the Federal Government calculate a national average of state and local taxes, then distribute more revenue to areas whose citizens are taxed more heavily than average and less to areas where taxes have been held down. Heavily taxed states and cities would get significant relief, while areas that had refused to tax enough to meet their needs would be prodded to do so because they could not count on Washington to" bail them out.
Democratic Congressman Henry Reuss also proposes that in order to qualify for revenue sharing, states should be required to submit plans for consolidating the crazy-quilt pattern of local government units. That step could go far toward bringing order out of the chaos of overlapping villages, towns, school districts, fire districts, water districts and other jurisdictions. As one fairly typical example, residents of Fridley, Minn. (pop. 9,233), pay taxes to nine government units: the city of Fridley, the Metropolitan Council Sewer Board, the North Suburban Hospital District, Anoka County, the Minneapolis-St. Paul Metropolitan Airports Commission, the Metropolitan Mosquito Control District, the state of Minnesota, the U.S. Government and an independent school district. A tenth unit, a watershed district, is now being formed. Such Balkanization wastes public funds, because tax revenue is divided among competing jurisdictions that operate with no area-wide plan or coordinated set of priorities.
Other administrative reforms are needed for the nation to get the most out of its tax money. The states should take over a larger role in the collection and distribution of money for education, under a federal mandate to work toward equalizing per-pupil expenditures among school districts. The Federal Government should assume the burden of financing welfare and make payments uniform across the country. That would relieve states and cities of a demand that they can no longer meet without starving other programs for funds. It also would end the scandalous situation under which citizens of states such as New York and Illinois in effect subsidize low tax and welfare levels in other areas, predominantly the South, whose poor still flock to the high-welfare states in order to collect more money.
In the end, though, no amount of administrative reform is likely to save Americans from the necessity of paying higher taxes. The nation is not running out of money so much as it has misallocated its resources so badly that it now faces a staggering bill for the public services that citizens have a right to expect. Tax and governmental reforms can and must apportion that bill more fairly; to the extent that the taxpayers' revolt is a protest against inequity, it is only too justified. Americans, however, will have to get uised to the idea that a greater portion of the country's wealth must be devoted to the public sector if they are to enjoy clean air, safe streets and better health and education. Paying the bill cannot be made pleasant. By reflecting on the observation of Justice Oliver Wendell Holmes that taxes are the price of civilization, it can perhaps be made at least tolerable.
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