INTERGOVERNMENTAL FISCAL FACTORS 39

$36.1 million, or less than 10 percent of those systems' operating receipts excluding amounts received from state and Federal governments. 12

The State of Ohio uses a unique method to finance public libraries. That portion of the state special property tax on intangibles which is collected by county treasurers (known as the tax on local situs intangibles-mainly stocks and bonds) is retained in the county where it is collected and is earmarked in large part for library systems within the county.

According to a recent study, this financing technique has resulted in the development of "some of the finest local library systems in the nation.' " 13 Because the intangibles tax revenue accrues mainly to the large urban areas which have the lion's share of intangible wealth, however, the high quality libraries are concentrated in a small number of large cities. According to the Stocker study, there were (in 1970) still many areas in Ohio with little or no library service.

Intangibles taxes collected in a county are allocated among the local governments by a County Budget Commission, which by law must allow the first claim on the revenue to library boards. In 1969, 81.5 percent ($43 million) of the local intangibles taxes collected was distributed to libraries. 14 The inherent inequity of a situation where a state tax is returned to the place where the collections originated is quite apparent when looking at per capita county collections of the Ohio local situs intangibles tax. The ratio between the highest per capita collections and the lowest was 16 to 1.15 This is a classic case of "the rich getting richer."

Professor Stocker points up an interesting political effect of Ohio's system of financing library services.

the preferred position of libraries in access to revenue from the intangibles has shielded them from the necessity of keeping the taxpaying public constantly aware of the community benefits that flow from the public library, and of the necessity for tax support to provide these benefits. Unlike other governmental functions, where support must be sought from the reluctant taxpayer in constant competition with all other public sector claims, libraries had led a comparatively sheltered existence. Not having had to scramble for money, many libraries in Ohio may have neglected to carry their case to the general public. Ohio has not developed a tradition or custom of voting tax support for libraries. Indeed very few Ohioans have any idea how libraries are supported. These facts take on an ominous tone if one considers the possibility of changes in financing that would place libraries in direct competition with other governmental services for the taxpayer's dollar. 16

40. ALTERNATIVES FOR FINANCING THE PUBLIC LIBRARY

Inpact of General Revenue Sharing

on Local Library Support

The Office of Revenue Sharing in the U.S. Treasury has already (by December 1973) distributed almost $10 billion to state and local governments. About two-thirds of this goes to cities, counties and townships and the remainder, to states. Revenue sharing funds are distributed to the states and to some 38,000 local units of general government on the basis of formulas that take into account population, income and tax effort. Because neither school districts nor special districts are eligible for the funds allocated to local governments, some library systemsparticularly in Indiana and Ohio-do not receive revenue sharing funds directly. It is possible, however, for municipalities and counties to share some of their own revenue sharing funds with such systems. It is still too soon to assess the impact of revenue sharing on local government finances. Yet, considering that the $4 billion a year that will go to local governments is almost 10 percent of their non-educational own-source revenue, unquestionably revenue sharing funds will help them cope with their fiscal problems.

Early indications are that very little of the revenue sharing funds distributed thus far are going into library services. The Treasury Department's first "planned use" report* notes that only 0.7 percent of some $3 billion distributed to states and localities for the third entitlement period would go for library services. 17 Next to economic development, this is the smallest amount expected to be used for any function. The lion's share of the funds was intended to be devoted to public safety and education (the latter almost entirely by state governments). Counties indicated that they planned to spend about $11 million of their revenue sharing money for libraries (about 4 percent of the amount expected to be spent for operation and maintenance, and only about 1.5 percent of their total spending, including capital outlay). The cities' intentions were even more parsimonious, so far as libraries were concerned; they intended to spend only $8.6 million for that purposeonly 1.5 percent of their intended operating expenditures from revenue sharing funds and less than 1 percent of their total, including capital outlay.

Thus, although the provision of library services is among the eight revenue sharing priority functions, local policymakers have thus far placed the libraries low on the revenue sharing totem pole. This, of course, is consistent with the position library services appear to hold generally in the local government order of spending priorities.

*A later "actual use" report issued in March 1974 and covering the first three entitlement payments, indicates that local governments spent $18 million for libraries. This total represents only one percent of the $1.8 billion of revenue sharing funds actually expended by local governments during the first half of 1973.

INTERGOVERNMENTAL FISCAL FACTORS 41

Issues in the

State Financing of Public Libraries

In recent years the state governments have been moving toward a more progressive tax structure and one that is more sensitive to economic growth. The need to cope with the economic depression of the 1930's resulted in a rash of state general sales tax enactments-half of the states levied such taxes between 1932 and 1937. A few states, like Wisconsin, Massachusetts and New York already had strong personal income taxes, but although there were a considerable number of such state taxes by the beginning of World War II-including a dozen that were enacted during the thirties—most were of the anemic variety. Immediately following World War II, accelerating fiscal pressures caused more states to seek new tax revenue, but, again, most of the major tax action occurred in the sales tax field. In its 1965 study of personal income taxes, the Advisory Commission on Intergovernmental Relations urged the states to move more aggressively into the taxation of personal income in order to improve their tax structures. 18 The Commission found, however, that heavy use of personal income taxation by the Federal government was "the single most important deterrent to its expanded use by the States."19 It recommended, therefore, that the Federal government take steps to encourage more extensive state use of personal income taxes--primarily by allowing taxpayers a credit against their Federal tax liability for part of their state personal income taxes.

Although the ACIR Federal tax credit proposal has not been implemented, continued pressure on state finances since the early 1960's has caused a considerable number of states to consider and to adopt personal income taxes-almost all having already adopted retail sales taxes. There are now 46 states with general sales taxes, 40 with personal income taxes, and 36 with both. Increasingly, state policymakers are recognizing the potential of using a dual state sales-income structure as a means of relieving the regressiveness of the total state-local tax structure. This they are accomplishing through credits against their income taxes for excessive sales and property tax burdens, particularly on low-income families. In the process, the states are making their tax systems more productive as well by tying them more closely to general economic growth. The states are gradually moving toward a highquality state-local tax system. 20

Shift of Financing

From Local to State Level

Recent aggressive state actions have reflected persistent pressures on the states to take on more of the responsibility to finance the non

42 ALTERNATIVES FOR FINANCING THE PUBLIC LIBRARY

Federal share of domestic public services. And, as Table 6 indicates, there has indeed, been a perceptible shift of financing responsibility from the local to the state level. In the past 30 years, the state proportion of total state-local general expenditure from own sources has grown from 44.3 percent to 52.7 percent. Local schools, by far the major function in terms of state-local expenditure, were largely responsible for the overall shift; the state share grew from 34.9 to 43.3 percent between 1942 and 1971, largely as a result of steadily growing state education aid.21 The highway and public welfare functions displayed similar patterns, both as a result of growing state aid, and in some instances, the shift of operating responsibility from the local to the state level.

Comparable historical data are not available for the library function. It is clear, however, that, by and large, the states are providing only a small proportion of resources for library support compared to the levels provided for schools, highways, welfare and health services, as shown in the data presented in Table 6. As noted earlier, the overall state percentage for library services was only 12.6 percent in 1971-72. Still, this modest level is considerably higher than it was in the early days of the Federal aid program for libraries. A rough calculation indicates that the states were supplying only about 8 percent of the non-Federal library revenue in 1962. By 1967, the percentage had risen to about 11 percent.

Strong State Fiscal Position

The fact that state tax structures have been quite responsive to general economic conditions was illustrated dramatically early in 1972 when the effects of increased and new taxes enacted in 1970 and 1971 began to push state tax revenues to such high levels that many governors were predicting substantial general fund surpluses for the fiscal year ending June 30, 1973.22 The state fiscal position was, of course, also enhanced by the infusion of a substantial dose of revenue sharing funds in late 1972 and early 1973.

A word of caution is in order at this point. For one thing, state TABLE 6-PERCENTAGE OF STATE AND LOCAL GENERAL EXPENDITURE FROM OWN REVENUE SOURCES FINANCED BY STATE GOVERNMENTS, SELECTED YEARS 1942-1971

Source ACIR, Fiscal Balance in the American Federal System (Washington October, 1967), Report A-31, Vol. I, Tables A-7. A-9. A-11, A-13 and A-15, and State-Local Finances: Significant Features and Suggested Legislation (1974 Edition-in Press).

INTERGOVERNMENTAL FISCAL FACTORS · 43

surpluses are ephemeral—it does not take long for them to evaporate. Even as the governors were reporting state surpluses for the close of fiscal 1973, they were also presenting plans for using them up in fiscal 1974. Income tax and sales tax rates would be held steady, if not reduced. Property tax relief plans galore were being proposed, and the usual spate of proposals to increase expenditures were being put forth. Furthermore, the surplus expectations were propounded before the present dismal economic outlook (the energy crunch) loomed on the horizon. Thus, it is the very sensitivity of state tax structures to the economy that could produce decreased revenues-to the dismay of state budgeteers. Should unemployment again push to 6 percent and more next year (some economists see it moving to 8 and 10 percent) the income tax base will deteriorate rapidly and state tax collections will decrease significantly.

State Fiscal Capacity and Effort

To gauge the ability of the states to finance educational costs, the Advisory Commission on Intergovernmental Relations has devised an index of "total tax capacity," based on state personal income estimates modified by a relative tax capacity factor for each state. 23 On the grounds that state policymakers compare their own tax efforts with those of (a) their neighbors, and (b) all states in the nation, the Commission developed three tests of potential tax capacity:

1. Most stringent capacity test-the amount of potential revenue a state could raise if it made the same tax effort as New York-the highest tax effort state in the Nation;

2. Least stringent capacity test-the amount of potential revenue a state could raise if it made the same effort as the highest tax effort state in its region; and

3. Intermediate capacity test-the amount of potential revenue a state could raise if it made a tax effort midway between the highest tax effort state in the Nation (New York) and the highest tax effort state in its region.

Relating each state's actual tax collections for 1970-71 to its potential capacity provides a measure of its "untapped capacity." The Commission found that, under the intermediate capacity test, for example, on average the states had untapped capacity of a little over a quarter of their actual tax collections-more than $25 billion. The untapped capacity ranged from zero for New York (by definition) to less than 5 percent for such high-effort states like Vermont and Wisconsin to over 75 percent for Oklahoma.24 By this measure, ACIR found that "there are 36 states in a relatively strong fiscal position-with untapped relative tax potential in excess of 20 percent of actual collections."25