Our representative system of government has responded amazingly to the crisis of war. The dictators have said that the democracies were decadent. They had proclaimed to the world that a free people could not be welded together into a strong, united and determined nation. American ingenuity has belied their accusations.
We have built, almost overnight, the mightiest Army and Navy in the world. American industry and agriculture, in spite of burdensome restrictions, have worked a miracle of war production. The American people are actuated by a single-minded determination to win this war. There is every evidence that we are now ready to strike decisive blows both in Europe and in the Pacific.
We cannot safely predict the length of the war. But I think it is the part of wisdom, in developing our post-war plans, to assume that the Axis powers may see at any time that they have nothing to gain by further resistance.
We may suddenly be confronted by problems of converting our economy to peacetime production and providing jobs for our returning soldiers. There is much to do. Nothing would be more encouraging to the American people than some substantial progress in the solution of our fiscal and taxation problems. These problems have confused enterprise and dampened the spirit of our people for more than a decade.
For six years, I have attended these conferences. At every meeting we have been considering the encroachment of the national government on state and local authority. We have had to fight our own government to keep our own rights. At this time of crisis there should be complete unity of purpose in all segments of our governmental authority. On the federal plan, we have built and produced mightily. We are serving America’s best interests when we battle to maintain it. This issue of centralized bureaucratic power as against a larger degree of local autonomy cuts across our fiscal and tax policies.
In considering our fiscal policies I am guided by two basic objectives. The first is the preservation of our federal system of government. The truth is that the states are threatened by an ever-growing centralization of power in Washington. The threat is so serious that today we face the question whether the states will remain active, cooperative and equally sovereign members of our governmental system, or whether they will be reduced to provincial administrative units with little or no self-government.
Indeed, the issue reaches to the very heart of the American form of government. Shall government be kept close to the hands of the American people and ever responsive to their guiding will, or shall it be completely usurped by an already highly centralized national authority which is ever growing more powerful? Shall the people preserve home rule or shall they sit passively by while it is being strangled to death? This is the issue to which the people must be constantly alert. To settle it, there must be a sweeping change in many current philosophies of government.
My second objective is that we must devise a system of taxation and adopt a scale of rates that will revitalize our entire economic machinery. To that end we must provide the necessary incentives for investment in industry and for production by management and labor. Before the war, our economic machinery was virtually on dead center because of unbalanced budgets, severe taxation and the overwhelming threats of higher taxation and restrictive legislation.
If government is to encourage, rather than hinder, full production and high employment, it must devise a system of taxation for the long run, not for the short pull. It must understand that frequent changes in fiscal policy throw our economic machinery out of gear and cause confidence to give way to misgiving and uncertainty. Government also must understand that if risks are to be taken, there must be a fair balance between opportunity for reward and hazard of loss.
In order to grasp fully the immediate and far-reaching significance of state and local fiscal policies, it is necessary to bear in mind certain trends which have been changing our public fiscal policies.
From the founding of our nation until the early 20th century, ours was essentially an agrarian economy. Most individuals felt far removed from the federal government – even from state government. Their governmental relations were primarily with the township or town and the county.
The federal government was concerned mainly with foreign relations, especially foreign commerce. At home it had the job of maintaining a small army and navy and improving internal waterways. Its financial requirements were easily met by indirect taxes, largely customs, and a few internal revenue duties of a sumptuary nature.
With the closing of the geographical frontier and the rapid growth of cities, the Machine Age was upon us. Soon a wider view was taken of interstate commerce. More businesses were held by the courts to be carrying on interstate commerce and hence came within the purview of Congress.
Thus began the more minute federal regulation of business which involved the organization of new federal agencies and the expansion of old ones. This led to the search for new sources of revenue. The income tax amendment was ratified in 1913 and immediately a new federal tax was imposed. World War I brought death taxes to the federal system. The Depression of the ‘30s saw the introduction of many more new taxes, such as those on payrolls, and the extension of old ones.
These developments had an adverse effect upon state and local governments. Confronted with their own increased financial responsibilities resulting from the Depression, they found their tax resources being cut into very severely by the revenue demands of the federal government. Nevertheless, they have continued, without forethought, to go along with a trend which, if continued, will lead to the loss of their financial independence. Our federal system is founded upon the necessity of maintaining strong, independent state and local governments. They cannot be destroyed without also destroying freedom. As Dean Pound said:
All experience shows that a domain in continental extent as always been ruled as an autocracy or as a federal government.
Or as Woodrow Wilson was moved to say:
The history of liberty is the history of the limitation of governmental power, not the increase of it. When we resist… concentration of power, we are resisting the processes of death, because concentration of power is what always precedes the destruction of human liberties.
It is true that now the states and local governments generally are in a relatively good financial position. Many states have accumulated surpluses. This present condition has resulted from more efficient and economical operation of state and local governments. It also resulted from the rise in the national income which started in 1939 and which was accelerated by the war in Europe, the defense program and, finally, our war production. Notwithstanding this condition, however, we should not be oblivious of the underlying currents which are inevitably washing away the very foundation of our state and local governments – their traditional financial independence. The time has come for the adoption of fiscal policies which will preserve that financial independence.
Attention should first be directed to the mainstay of local governments – the property tax. This has been severely reduced by the purchase of more and more land by the federal government, thus withdrawing it from the state and local tax rolls. As of June 30, 1937, it was estimated that total federal real estate holdings, including the public domain, were 395,000,000 acres. This was more than 20 percent of the total area of the country. If taxed at local rates, this federally owned property would have yielded some $91,000,000. That amount exceeds all collections from property taxes in 1939 in 34 of our 48 states.
Since Pearl Harbor, there has been, of course, further substantial acquisition of land by the federal government and its instrumentalities. The Defense Plant Corporation, for example, by December 1943, had acquired more than 10,000,000 acres and 20,000 city lots.
To make up the loss in revenue, instead of permitting the states and local governments even a limited exercise of their own taxing power, the federal government devised the scheme of “payments in lieu of taxes.” Adherence to this policy will help to destroy the financial independence of local governments.
Appropriate authorization for the local taxation of federally owned property, with proper restrictions, would help to maintain their financial independence. Even more important, all this property acquired for the conduct of the war, not needed for our permanent post-war military needs, should be returned to private ownership as soon as practicable after victory, thus restoring it to the local tax rolls.
The next threat to state and local governments to which we should direct our attention is the recent expansion of what might be termed the subsidy theory. This means that more and more functions of government heretofore locally administered and financed are becoming centralized. Changes in economic and social conditions obviously require, from time to time, a reallocation of governmental functions. But this should be done only when such a change results in greater benefit to the public at large with no loss in democratic control of the revenue raising and spending activities of the government assuming such function.
In 1932, federal subsidies to the states amounted to $217,000,000. By 1937, the figure had more than doubled. In 1941, it was more than triple, reaching $744,000,000. But this is not all. In 1941, in addition to the $744,000,000 granted to the states, over $95,000,000 went to local governments. Of all taxes collected in the United States in 1932, the federal government’s portion was 22 percent, leaving state and local governments 78 percent. In 1939, before World War II started, the share of state and local governments had dropped to 62 percent of all taxes, the federal government’s share having jumped to 38 percent.
Make no mistake about it, the most effective way to abolish the independence of state and local governments, and with it home rule in America, is by taking away their financial independence.
Coincident with the centralization of more and more of the taxing power in the federal government and the increase of federal subsidies to state and local governments, a similar trend has been going on within the states. There has been a steady expansion of the state taxing power with increased subsidies from the states to local governments.
It is perfectly natural that extension of the subsidy program should have some support from state and local officeholders. It is always more agreeable to a local official to have money to spend for the benefit of his constituents which he gets from the state capital or from Washington than it is to have to raise it by taxing his constituents who elect him. The same may be said of state officials with respect to federal grants. But we must realize the implications and results of this trend. State and local governments become a sham and a pretense if they cannot support themselves and must go to another government for handouts.
An excellent illustration of extending the subsidy theory info more and more fields has been the recent proposal of the federal government to subsidize the public schools of the nation. By dangling federal money before the eyes of the public schools, a very attractive lure is presented. But the difficulty is aside from the loss of financial independence, that there results a proportionate surrender of the states control over their educational systems. When an effort is made to change the government of a country, one of the first steps is to take over the education and training of the youth of that country. This is what Hitler did in Germany. I am opposed to the dictation of our educational policies from Washington.
The question then is: What is to be done in the face of these trends? I offer three recommendations.
First, it is essential that the strictest economy in government be practiced. This applies particularly to the federal government. Unless federal expenditures are limited to absolutely essential items, it is inevitable that the federal government must ultimately preempt the entire field of taxation, leaving nothing for state and local governments, have repeatedly pointed out that we may expect no substantial curtailment of federal expenditures until we abolish our present bureaucracy and return to a responsible cabinet government. There is a limit to the tax burden which our economy can bear.
Second, the states working together, the local governments working together and the two groups working with the Congress should take immediate steps toward appropriate segregation of tax bases, preserving appropriate fields of revenue for the national, state and local governments. One of the most serious problems confronting not only national, state and local governments, but especially the taxpayers, lies in overlapping tax bases. Our tax structure now is only a planless patchwork held together by nothing more substantial than political expediency.
Third, whenever state governments reach the point where their revenues may reasonably be anticipated to exceed necessary demands for any material period of time, instead of increasing local government subsidies, they should repeal such taxes as will best open fields of revenue for local governments. During recent years, the present administration in Ohio, after paying off its inherited deficits, has been confronted with the constant demand from local governments that the state’s surplus be distributed to them. It was my position last year that had we not been confronted with the uncertainties of war and the necessity of providing for a much-needed post-war building program, we should have launched upon a state tax repeal program, rather than one of increasing subsidies to local governments.
Of equal importance to the establishment of fiscal policies to maintain financial independence of state and local governments is the shaping of those policies so as to aid and encourage rather than stifle and suppress American private enterprise. Sound governmental fiscal policies, national, state and local, are the foundation stones of a stable economy and American prosperity.
There is need for further cooperation between the states in extension of reciprocity provisions in tax statutes. In view of recent decisions of the Supreme Court, two or more states may now tax the same income, the same inheritance or the same property. The necessity for appropriate reciprocal legislation has become more pressing in order to avoid this form of double taxation. While in a sense multiple taxation has existed for many years, it is my position that there is no justification for the imposition of such inequitable double taxation as I have mentioned. Appropriate reciprocal legislation will also relieve not only business, but individual citizens from double taxation arising from questions of domicile.
I am convinced that constructive work along these and other similar fines will aid rather than hamper business, to which we must look for high employment. But if this program is to be effective, the federal government also must do its part. This means that recent fiscal and tax policies of the federal government must be completely overhauled.
The federal government should balance its budget at the earliest possible date. That would give more jobs than all the made-work the Government could possibly plan. Simplification and stability of tax laws are desperately needed. We are given little encouragement along this line now. Adherence to the principle that the taxing power exists primarily for the purpose of raising necessary revenue and should not be used as an undercover method of effecting social changes is also necessary.
Moreover, there is a vital need for a sane and constructive federal tax policy that will stimulate incentive and encourage venture capital. Federal taxes should be reduced as soon as possible after victory. Such action would enable business to map out constant fear of changes, and to provide jobs for all who wish to work.
The recent Baruch-Hancock report went even farther. It said: “Until it is definitely known that post-war taxes are to be reduced, the launching of new enterprises and the expansion of existing ones will be deterred.” Accordingly, it recommended “that a post-war tax law be drafted now, during the war, and put on the shelf to go into effect at the end of the war.”
This proposal points the way toward the kind of federal tax policy that will be needed for reconstruction and rehabilitation after the war. In my judgment, the pre-war federal policy of spend, waste, borrow and tax will wreck American economy if continued in the post-war period. A nation which builds its financial house upon shifting sands of deficit financing in peace times cannot survive as a nation.
Nor can such a nation be a powerful influence in world affairs. The United States must help solve such problems as currencies, credits, air rights, markets and international trade. So long as the world is inflicted with discriminatory trade agreements, quotas, cartels, exchange wars, barter systems and the like, there can be little assurance of an enduring peace. Collaboration between nations in solving world economic and monetary problems is just as necessary as collaboration in solving world diplomatic and political problems.
But for all these purposes America must be strong. To be strong, to be influential, to be helpful in the world, we must, above everything else, build our own house upon the solid rock of financial solvency, equity and justice. Our power to help others will be dependent upon the degree in which we strengthen private enterprise and preserve individual opportunity.
Let us then remember, as the guiding principle of domestic policy, that our state and local governments, as well as the national government, are essential to our federal system. The strength of America stems from the practice of representative government in the towns, the cities, the counties and the states of this nation. When state and local governments become paralyzed, the door is open to every form of absolutism and every form of demagogy. When local responsibility is destroyed, citizenship atrophies and dies. But when state and local governments flourish, when men and women practice representative home rule, the foundations of the Republic are secure. The more the history of the Republic is written at the crossroads and the less at the Capitol, the freer we shall be.
