1939: Taxation

Federal Taxation.

Federal expenditures for the fiscal year 1939 amounted to $9,268,000,000. This is the highest level of expenditures the nation has seen, with the exception of the World War period when more than thirty billions were spent during the two years 1918-19. Compared with the previous fiscal year, 1939 expenditures represented a rise of approximately $1,500,000,000, or more than a 20 per cent increase. On the other hand, total revenues were only $5,668,000,000 — a drop of over $500,000,000 from the previous year. This amounted to an excess of expenditures of approximately $3,600,000,000 — the ninth successive deficit since 1930. As a result, the public debt rose to the unprecedented level of more than $40,000,000,000.

Chiefly responsible for the increased costs of the Federal Government were the larger appropriations for recovery and relief projects, for agricultural adjustment and farm tenancy programs, and for national defense. Total disbursements for recovery and relief were $3,105,000,000, or more than one-third of the national budget. Of this sum, $2,500,000,000 were allocated to the Works Progress Administration, the National Youth Administration, and the Public Works Administration. The balance was distributed for the construction of other public works, for credit aids to farmers and home owners, and for miscellaneous relief measures. The agricultural adjustment and farm tenancy programs cost $815,000,000, the Civilian Conservation Corps, $290,000,000, and an additional $500,000,000 were spent for rivers and harbors, public buildings, highways, flood control, reclamation, and rural electrification work. Direct appropriations for the national defense were approximately $1,000,000,000, while $552,000,000 more were allotted to the Veterans Administration. Another billion went for debt service (including payments for interest and a slight reduction in the public debt). General departmental expenditures were $645,000,000. Social Security and Railroad Retirement Act expenses amounted to 345 millions, plus an additional $610,000,000 which were added to old-age reserve and retirement accounts. The balance of federal disbursements was for postal deficiencies, loans and grants to states, the Panama Canal, the Tennessee Valley Authority, and miscellaneous charges.

The leading sources of revenue to meet these expenditures were income taxes of $2,182,300,000 and miscellaneous internal revenue taxes of $2,231,983,000. Income taxes were collected from individuals and corporations, each group contributing approximately one-half of the receipts. Internal revenue taxes consisted primarily of excises on liquor and tobacco which yielded about half the total. The balance came from estate and gift taxes, capital stock taxes, and a long list of excises on miscellaneous manufactured products and services. Social security taxes returned gross revenues of $631,000,000 and railroad retirement taxes, $109,000,000. Customs receipts amounted to $319,000,000. Additional revenues of $187,000,000 were obtained from Panama Canal tolls, government seignorage charges, proceeds from government-owned securities, and miscellaneous fees and charges.

State and Local Taxations.

Expenditures.

State and local government expenditures continued to be greatest for education, highways, welfare, relief and unemployment insurance, conservation of public health, police and fire protection, sanitation, and the maintenance of institutions of charity and correction. Increased activity was seen in some jurisdictions in the clearance of slums and in the construction of public housing projects. Total disbursements by the states exceeded $4,000,000,000, while aggregate local expenditures were estimated at $6,000,000,000.

State and Local Revenues.

Gasoline taxes, estimated at roughly $800,000,000, headed the list of state revenues. Payroll taxes earmarked for unemployment insurance yielded between $700,000,000 and $800,000,000. Next in rank came various types of general sales or gross receipts taxes aggregating $500,000,000. Income taxes upon individuals and corporations yielded $400,000,000; motor vehicle taxes, another $400,000,000; liquor taxes or profits from liquor stores, $300,000,000; and general property taxes, $200,000,000. The balance of state revenues was derived from estate and inheritance taxes, franchise and license taxes, miscellaneous selective sales taxes on tobacco, soft drinks and amusements, stock transfer taxes, and a long list of fines, fees, rents, interest and earnings of general departments. Substantial Federal loans and grants supplemented these receipts. This list of revenues reveals a strong reliance among the states upon indirect consumption taxes as a source of public income. Considerably more than half of state tax receipts are of this description. The trend has been increasing in this direction within recent years.

Among the local governments, the chief source of revenue, as in the past, was the property tax, mainly upon real estate. However, aggregate receipts from supplementary sources such as sales taxes, fees, fines, tolls, license charges, and from state-shared taxes and grants-in-aid, continued to mount.

Revenue Act of 1939.

The Revenue Act of 1939 introduced several modifications in the national tax system. Undistributed profits taxes on corporations earning more than $25,000 were eliminated, thus ending a lengthy controversy over this question between business and government. A flat tax of 18 per cent on the entire net income of these corporations was substituted for former rate structures. More liberal provisions were also introduced for the deduction of losses of bad years from profits of good years in computing gross income. A rather significant change in the taxable status of public employees was effected through the Public Salary Tax Act of 1939 which provided that salaries for 1939 and thereafter paid by the state and local governments would be subject to the Federal income tax. It also opened the way for state and local governments to tax the salaries of Federal employees. Amendments to the Social Security Act limited the application of the unemployment insurance tax to the first $3,000 paid to each employee, instead of making the total payroll the basis of the tax as heretofore. The 1 per cent tax rate on employers and employees for old age pensions was retained for the years 1940-42 instead of being allowed to rise to 1½ per cent as the law originally provided. (See also SOCIAL SECURITY.)

New State Tax Laws.

Among the states several hundred laws were passed introducing new taxes, and modifying, extending or abolishing old ones. Most significant as a trend were the actions by seventeen states to amend their income tax laws to tax Federal salaries. New taxes on cigarettes were introduced in several states. Two states raised the gasoline taxes, and five states increased their taxes on liquor. Real estate taxes were abolished as a state levy in New Hampshire, and Delaware abandoned all taxes upon personal property. Several states relaxed their penalties against delinquent property taxpayers.

National and State Indebtedness.

As the nation crossed the half-way mark of the 1940 fiscal year it faced the problem of an ever-widening gulf between revenues and expenditures. Federal indebtedness at roughly $42,000,000,000 came dangerously close to the maximum debt limit of $45,000,000,000 previously set by Congress. State and local indebtedness stood at $20,000,000,000.

Although present taxes are expected to yield somewhat higher revenues, there is little chance that the Federal budget can be balanced, unless expenditures are drastically cut, or new revenue measures are introduced. The continuation by the 76th Congress of heavy allocations for relief and for agricultural aids, coupled with a doubling of the national defense budget, has resulted in appropriations which will send total national expenditures to still higher levels. Meanwhile, state and local governments, constantly on the lookout for new tax measures in order to keep their budgets in balance, are drifting further away from the all-important goal of simplification and coordination of fiscal systems. See also BUDGET; BUSINESS; FINANCIAL REVIEW, UNITED STATES; LAW AND LEGISLATION; NATIONAL DEBT; SALES TAX; UNITED STATES: Supreme Court Decisions.