Before Budgeting
How cities and states once managed their finances.
The movement to establish budgeting began in cities in the first decade of the 1900s. States followed suit and adopted budgeting in the 1910s, while the federal government was the last adopter in 1921. The rise of budgeting is a worthwhile topic. But it also raises a different question: if budgeting wasn’t adopted until after 1900, what exactly did states and cities do before this?
First, start with what they didn’t do. States and cities didn’t compare estimated spending to estimated revenue. They didn’t impose stable and predetermined tax rates. Their legislators didn’t even know how much money they were spending.
Their system was surprisingly simple: once the legislature’s session ended, the government figured out how much spending they had voted for and divided this burden pro rata among the taxpayers.
This local property tax – called the General Property Tax – turns assumptions about taxation on their head, as it lacked almost every feature of modern government finance.
Property Valuation
The first step1 in imposing the General Property Tax was the annual tax valuation. For sake of illustration, suppose that the tax is imposed by a city.
First, a tax assessor would value all the property that each individual owned. There were often provisions for various sorts of disputes and appeals. Eventually, the city ended up with a valuation roll that had the name of every taxpayer and the value of their property.
You would expect the city to then apply some predetermined property tax rate, but instead they did something quite different. They added up the value of every person’s property in order to get the total value of all property in the city. Using this figure, officials took each taxpayer’s records and calculated what percentage of this total he owned.
An example: suppose that you live in Chicago, where you might own $20,000 of property. The city officials might calculate that, in total, Chicago residents own $1 million worth of property. Since you own $20,000 of this $1 million, the city marks down that you own 2% of Chicago’s assessable property. This percentage is the basis for ultimately levying your taxes.
A Running Tally
Cities and states didn’t bother to relate their spending to any estimate of revenues. In fact, they only had a vague idea of how much money they were spending.
Legislators would pass appropriation bills – usually several dozen of them, often more than 50 in a legislative session. These appropriations were passed rather quickly, almost always right before the end of the session. After the session ended, the legislators would tally these appropriations up to find out how much money they had voted to spend in total. The government would then take this total and apportion it to each tax payer according to the property tax percentage mentioned above.
Or to illustrate: Suppose once more that you own 2% of Chicago’s total assessable property. Suppose also that Chicago spent $10,000 total this year. Since you own 2% of the property in Chicago, you must pay for 2% of Chicago’s annual spending; in this case, $200 in tax.
The Gory Details
This discussion was simplified in a few respects.
First, states and cities had other sorts of taxes that did have fixed tax rates, usually excises on alcohol and so forth. The General Property Tax was used to raise whatever other revenue was needed, which was generally the majority of revenue.
Second, the tax system for states was more complicated than for cities: states typically farmed out tax collection to localities, generally counties. States often applied the General Property Tax in two steps:
As usual, the state began with the total money they needed to raise. However, it would often then apportion this total per county, usually based on population. In other words, a county with ten percent of the state’s population had to pay ten percent of the total state tax.
Then each county would impose the General Property Tax on its residents in order to raise its share of the state tax. The state level tax was first apportioned to the counties, and the counties now apportioned it to their residents.
States tended to avoid using property value to apportion tax, because county assessors would systematically undervalue their county’s property (so that the state would demand less money from their county). Population, by contrast, was a basis for apportionment that could not be rigged.
However, some states did apportion based on property value and had boards of equalization to get around this problem. These boards could raise the assessed value of all property in a county by some percentage, in order to combat local under-assessment. If a county systematically valued property at half its market value, the state board of equalization could double all the property tax assessments in that county.
An Unlamented System
This bygone era of the General Property Tax shaped American political economy in under-appreciated ways.
Under this system, taxes varied unpredictably every year depending on how much local government spent. That is, higher government spending led directly and immediately to higher taxation. American opposition to expanding the welfare state was likely colored by this experience. And the popularity of the Georgist single tax was due more to unhappiness with local taxation, rather than the inherent merits of Georgism.
In the end, it was a shambolic system that was extraordinarily unpopular even in its day. Replacing it was one of the the very first crusades of Progressive Era reformers. And within two decades, the Progressive proposals to adopt budgeting had triumphed at every level of government. At long last, governments had a firm grasp on how much money they spent, and citizens could predict their taxes in advance. Progressives hoped it could usher in a new era of trust in government and public support for taxation and spending.
These determined reformers proved that they could change even the most long-established systems. But their success was, inevitably, limited. Even after a century of budgeting, property tax is still not very popular.
The source for this material is mainly The Budget in the American Commonwealths by Eugene Agger.
Thank for putting together this interesting and valuable substack.