This section is from the "The Subvention In The State Finances Of Pennsylvania" book, by Frederic B. Garver.
The problem is how to attain the proper amount of central supervision to insure adequate performance of services that seem best administered by local governments. In England this problem has been solved to a considerable extent by means of grants in aid. The central authorities have succeeded in obtaining the right to prescribe, and to a great extent to enforce the observance of proper standards of performance in local affairs by offering substantial financial aid to those municipalities that live up to the requirements, and by refusing it to those that do not. *4 In the United States, the attempt has been made to accomplish the same result in the case of the common schools. In many states the central government pays a liberal amount toward the support of local schools only when the schools are in operation a certain number of months in each year, and when competent teachers are employed. *5 One of the powerful reasons, then, for the existence of a grant of money from a superior to an inferior authority is the opportunity such grant affords for central supervision.
4 Webb, Grants In Aid, pp. 5-6.
5 Fairlie, Local Government, p. 220.
A second reason for the establishment of a grant from the central treasury is suggested by the relative revenue resources of the state and of local governments. If the state is well provided with revenue while the local governments are not, and if the services that demand expansion are those that seem likely to remain under local control, one of the easiest solutions of the difficulty is a subvention from the central government for the support of these services.
Thus, in England, in 1874, the conservatives on returning to power advocated the use of a part of the surplus national revenues for the relief of local taxation. *6 The Chancellor of the Exchequer argued at this time that property subject to local direct taxation was greatly in need of relief. A grant from the national government would not only afford this relief but would also place local taxation on a more equitable footing. *7 One of the purposes, therefore, of the English system of grants in id has been from the very beginning the relief of local tax payers. *8 In brief, the grants in aid have been used in England, since their inception to equalize the burden of supporting the various governmental services, and to secure central control.
6 Grice, National and Local Finance, p. 56.
7 Idem, pp. 56-57.
8 Grice, p. 11.
Two other methods of solving the problem of equalization were possible in England at the date mentioned. Either certain of the duties of local authorities might have been transferred to the national government or certain revenues might have been transferred from the national to the local governments. The former alternative was at once rejected by the ministry in 1874. *9 The latter was accepted in the main by Mr. Goschen in the reforms which he introduced while Chancellor of the Exchequer in 1889. *10 Because of the great inequality that existed in the distribution of the grants, and because of the continual grasping of the local rate payers for additional grants, assigned revenues were substituted for subventions. Certain grants, mainly in aid of elementary education and of industrial and reformatory schools, were retained. *11 In lieu of the grants the local governments were given the greater part of the revenues from excise licenses and one-half the probate duties. *12
9 Idem, p. 56.
10 Idem, p. 81.
11 Idem, p. 90.
12 Idem, p. 82.
Similarly in the United States, it is not uncommon for the state to return to the local governments the revenues of certain taxes which are either assessed, or both assessed and collected by the state. An example of such practice is found in the Massachusetts corporation taxes and in the Iowa railroad taxes. The question may be raised at this point why either a grant in aid from the central treasury or the distribution of centrally collected revenues should be adopted. Why should the central government not relinquish certain taxes to the localities, allowing them both to administer these taxes and to receive the revenue from them? Several conditions may prevent such an arrangement. The localities may not be able successfully to administer the taxes which yield most abundantly under state control. This is true for taxes upon nearly all transportation companies, and in a less degree for corporation taxes in general. Or the tax may be like the inheritance tax, uncertain in yield in any given year for a small unit, but relatively steady when collected over a wider area. If the policy of distributing the proceeds of certain taxes is adopted, the question of the proper basis for such distribution is immediately raised and no satisfactory solution for this problem has as yet been discovered.