MONEY: Empty Pockets on a Trillion Dollars a Year

(9 of 10)

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