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A 'Shared Tax' for a New Federalism


Economist Alice Rivlin, former head of the Congressional Budget Office, has a thoughtful formula aimed at taming the federal budget deficit, reinvigorating federalism and restoring Americans' belief in government that works.

Her ideas do involve some new taxes, and thus would likely be anathema to President Bush. And they conflict with the thrust of Bill Clinton's national investment strategy that says Washington should expand its aid to states and cities for education, infrastructure building, housing and transportation.

Ms. Rivlin isn't against the programs Mr. Clinton names; in fact she talks of a very ambitious "productivity agenda" for the nation, including education and skills training, child care, housing, infra- structure and economic development. But it's the state governments, not Washington, that ought to fund and run that agenda, she says.

What she has created and spelled out in a new book ("Reviving the American Dream," Brookings Institution, Washington), is a case for federal system reform so ambitious that the "New Federalism" agendas of former Presidents Richard Nixon and Ronald Reagan pale in comparison.

This is also the first federal sorting-out proposal I've ever seen that's tied into a program for economic growth. It's also original in assigning responsibilities based not on ideology but on pragmatic judgments of which governments can perform which functions best.

Ms. Rivlin, an "inside-the-beltway" operator who ought to know, likens the federal government to a giant conglomerate that's acquired too many different kinds of businesses and can't manage them effectively from headquarters.

A few program divestitures and getting back to basics are timely, she says. The yawning federal budget deficit is the "biggest single impediment to revitalizing the American economy" and requires Washington's priority attention.

Presidential candidates just aren't thinking realistically, she says, when they suggest that the federal government can plunge into new housing, education and transportation programs and then say they'll balance the budget without a general-purpose tax increase.

Ms. Rivlin does believe Americans would accept a new tax earmarked to finance a universal health-care insurance program and tied to aggressive moves to control health costs.

She'd have the proceeds deposited into a health-insurance tax fund that would cover, among other things, poor people's medical costs now covered by the Medicaid program that is causing so much red ink in state budgets.

And she suggests Americans might be more open to some new form of levy for domestic programs -- a "productivity agenda" -- if they saw the revenues flowing exclusively to the states instead of an overworked and distant federal government.

Her solution: create a new "shared tax" -- a uniform value-added tax, or a tax on all mail-order catalog sales or perhaps a shared gasoline tax -- that would be collected by the federal government, but distributed entirely and directly to the states. There'd be an equity feature: With shared tax revenues distributed on a population basis, poor states that otherwise couldn't afford basic services get a big hand up.

One possibility would be a shared tax on services, ranging from advertising to lawyers' fees to stock brokerage. Services are the economy's most vibrant, growing sector and should be contributing back more. A service tax got torpedoed in Florida under pressure from advertisers, another in Massachusetts under pressure from financial services. In each case, the argument was that the business would flee to other states. Nationally imposed, there'd be no escaping the tax.

Well known in Germany and other federal nations, shared taxes are a brand new idea for Americans. Getting one passed might be tough -- virtually all the states would presumably have to line up in favor for Congress to approve. Any new taxes are unpopular these days.

But shared taxes, says Ms. Rivlin, would offset the states' extreme shyness to adopt any new tax, for fear of losing out to competitor states. And with the fresh revenues that shared taxes would bring them, states would have fresh incentives to think through strategic agendas for economic and human development -- to compete for businesses and residents, as Ms. Rivlin puts it, "with good schools, parks and transportation, rather than with tax breaks."

Shared taxes, tried first on a pilot basis and then growing, would also be easier for corporations to pay than the separate schedules and levies they now owe to as many as 50 states. Along with reduced tariffs, nations of the European Community are now trying to encourage economic activity with more standardized tax systems. Our states, despite being part of a common market for 200 years, have never tried to harmonize their taxes.

Finally, assigning the entire "productivity agenda" to the states, the entire health agenda to Washington, could be a giant step to pinpointing accountability and perhaps reducing voter confusion and resentment.

Could any of this come to pass? There's a possible scenario if Governor Clinton, who talks frequently of "reinventing government," were to win. A group of governors could ask their old colleague and former chairman to sit down with them, early next year, and start fashioning major federal system reforms. Suddenly faced with Washington's bleak budget realities yet with the state experience fresh behind him, a President Clinton might be surprisingly open to some big trade-offs.

Neal R. Peirce writes a column on state and urban affairs.

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