Source: Advisory Commission on Intergovernmental Relations, Fiscal Balance in the American Federal System, Vol. 1; and Library of Congress, Legislative Reference service. The respected Advisory Commission on Intergovernmental Relations notes: "Progressive loss of freedom of choice, therefore, is an additional price that must be paid by all state and local jurisdictions for categorical aid dollars... The illusion of Congressional 'control' has in reality disappeared into the dark jungles of bureaucratic red tape." "3 In sum, past Federal efforts to redress the fiscal imbalances within our governmental system have ignored the need for restoring an equivalent balance in the distribution of political power. We have not shared power as we have shared revenues. The resulting frustration and confusion have seriously eroded basic nublic confidence in the ability of government to function effectively. This is a significant point to weigh in examing alternative courses of action. Clearly, the problem to be addressed is more than just a financial issue. We must additionally examine alternatives in terms of their ability to enhance the responsiveness of government, and to strengthen the role of individual citizens in their relationships with government. A Listing of Alternative Federal Responses The problem of imbalance in our Federal system of government has been defined and recognized by many concerned public figures. As a result of that recognition, several optional Federal actions have emerged as possible program responses to the problem we have defined. These optional activities may be summarized as follows: (1) Direct Federal Assistance a. general revenue sharing, b. expanded categorical aids, c. assumption the of the public welfare cost burden. (2) Indirect Federal Assistance a. tax credits for state and local taxes paid, b. tax reduction. This list of alternative response will be analyzed in subsequent sections of the paper. Criteria for Evaluation of the Alternatives Before discussing the alternatives, it is appropriate to specify the bases for valuating their relative merits. We suggest two fundamental criteria: (1) Effectiveness-this includes such factors as distributing benefits coincident with need, the certainty of impact on the problem, and the extent to which the complete problem is addressed. (2) Equity-this includes equity in the distribution of Federal assistance, as well as equity in the overall tax system which remains after institution of the Federal program. These are widely accepted criteria for the evaluation of Federal programs, and would appear to be appropriate for the analysis at hand. DIRECT FEDERAL ASSISTANCE GENERAL REVENUE SHARING The concept of general revenue sharing has been widely discussed and analyzed. It calls for general support grants, free of any program or project restrictions, available to each state and its localities. The Administration's proposal would appropriate automatically, each year, 1.3 percent of personal taxable incomethe base upon which Federal individual taxes are levied. Thus, a small percentage of our progressive and broadly-based income tax would be Federalized to provide a solid financial base for our entire Federal system. Revenue sharing funds would be allocated among the states on the basis of population, with a "revenue effort" adjustment which recognizes those states making a greater effort to meet their needs from their own resources. Within each state, local governments would receive a guaranteed share of the fundseither based on a formula which allocates about one-half of the total amount to cities, counties, and towns; or based on a ratification process whereby each state works together with its local governments to formulate a distribution arrangement most suitable to their needs. Each state and local government receiving revenue sharing funds would be free to allocate the monies according to its own, locally determined, priorities. Ac p. 9. Revenue Sharing—An Idea Whose Time Has Come, Information Report, December 1970, countability and responsibility for efficient and effective use of the funds would rest with publicly elected officials, rather than with Federal Government employees. Local citizens would have more voice in public decisions, and local governments would have less red tape and inflexibility to constrain them in responding to pressing domestic needs. In terms of effectiveness, revenue sharing ranks high. Funds go to both states and localities on a roughly 50-50 basis-with certainty. Revenue sharing amounts grow with economic growth, and become automatically available each year. Localities and states are granted the freedom and flexibility to responding directly to their priority demands. They are not restricted to using funds for programs which may or may not accord with someone else's view of their priorities. On equity grounds, this approach also ranks high. Every state and locality shares on an equivalent basis. Large and small communities are included, and there is no necessity for making expensive application to receive the funds from Washington. Objective statistics are employed to allocate funds on a formula basis, with population-rather than taxable income-being the primary determinant of a state's share. Overall, by harnessing the progressive Federal income tax as a portion of the state and local tax system, our total tax structure becomes relatively more progressive in impact. EXPANDED CATEGORICAL AIDS One direct expenditure alternative to general revenue sharing is a further increase in Federal categorical grants. These narowly focused programs play a desirable and strong role in pursuing some national goals. They are most appropriate where-economies of scale, or the need for national standards, or the desire to provoke innovative practices are of paramount concern. But exclusive reliance on this tool has already blunted its effectiveness. The Ash Council noted the existence of more than 1,000 catalogued activities administered by 57 Federal departments and agencies. During the past decade, the astounding growth in dollar outlays for categorical assistance from $7.1 billion in FY 1961 to an estimated $30.3 billion in FY 1971-has been exceeded only by the growth in numbers of grant categories. There are many problems with this form of Federal assistance which hinder its effectiveness. Some of the more apparent difficulties include the following: Categorical grants mean a variety of fragmented programs which are difficult to coordinate in attacking complex problems; These grants mean excessive Federal control over projects which can best be solved by local action; Many grant programs overlap and duplicate one another while others compete with one another or strive for inconsistent ends; Categorical grants often require a cumbersome Federal approval process which rewards recipients who learn to manipulate the Federal bureaucracy rather than those who must need the money; Thus, they mean a great deal of red tape and long delays before projects are implemented; Categorical grants result in uniform Federal approaches which often do not fit the wide variety of local needs; Under categorical grants, state and local priorities can easily be distorted, especially by the provision which required them to use their own money to match Federal grants; Finally, categorical grants make it difficult for the electorate to hold specific officials accountable for the success or failure of a given project. What we need most, now, is a better "mix" of Federal grant assistance so that local flexibility and accountability can be encouraged. During FY 1971, virtually all of the $30.3 billion in Federal aids are of the narrow, categorical variety. With the President's proposals, FY 1972 outlays for Federal aid ($38.3 billion) would acquire a substantially different mixture: Percent of total outlays for Federal aid 10 26 64 100 General revenue sharing (maximum flexibility). Total Continued exclusive use of categorical assistance is neither an effective nor an equitable approach to the problems we face. The selective, subjective, fragmented, and over-controlled nature of this approach is clearly not responsive to the need for more generalized and flexible assistance. ASSUMPTION OF THE PUBLIC WELFARE COST BURDEN Another alternative to revenue sharing is for the Federal Government to undertake a significant portion-some say all-of state and local welfare obligations. Some advocates believe the Federal Government should assume all of the costs without making any changes in the present system. Others want to revise the welfare system and have the Federal Government pay the costs only for approved programs. Still others want both structural reform and total fiscal support by the Federal Government. The Nixon Administration believes, in the first place, that the present welfare system must be structurally reformed regardless of which level of government bears the cost. The President has on numerous occasions delineated the major deficiencies of our present efforts, and he has proposed the most complete welfare reform in history. The Administration does not find the Federal assumption of existing welfare obligations to be an appropriate alternative to revenue sharing. This is true for several reasons: 1. Federal assumption of welfare costs would provide an uneven distribution of benefits. State and local governments in the United States estimate that their share of the existing cash assistance programs for welfare will amount to $4.5 billion in the fiscal year 1972. However, most of these welfare costs are incurred by only a few relatively wealthy states. If fiscal relief were provided only by the Federal assumption of present welfare costs, these wealthy states would get far more money than they would get under revenue sharing, while most of the other states would get far less. The table at the end of this paper compares, on a state-by-state basis, the distribution of funds under revenue sharing with the distribution which would occur if the Federal Government assumes the state and local costs of welfare. The table shows that if such a proposal is adopted, the following consequences would result: 41 states would receive proportionately less money than under revenue sharing; 22 states would suffer a reduction of 50 percent or more from what revenue sharing would give them; 58 percent of the money would go to the 10 richest states (with 33 percent of the population) and only 6 percent of the money would go to the 10 poorest states (with 15 percent of the population); New York and California alone would receive 40 percent of the assistance if the Federal Government assumes the full cost of the welfare systemyet they have only about 19 percent of all the people in the country. On the other hand, revenue sharing would distribute money on a much fairer basis. It would give the 10 richest states 35 percent of the money and the 10 poorest states 14 percent of the money-a share which is approximately equal to their share of the national population. 2. Federal assumption of welfare costs would deny needed funds to most cities. If the Federal Government were to assume all welfare costs-or even all costs above a certain ceiling-most cities would receive no direct benefits at all. Only one-tenth of state and local welfare costs are actually paid by county and city governments, and most of this one-tenth is accounted for by cities and counties in just two states and the District of Columbia. Few cities would be eligible for aid under this proposal. Only six of the Nation's 43 largest cities would receive any direct benefits. Thus, Federal assumption of existing welfare cost burdens does not meet any reasonable standard of effectiveness or equity. Benefits do not reach most of our cities. The equity of state-by-state benefits distributions is questionable. State and local tax structures would remain unfortified by the addition of a broadly based and equitable income tax. Still, we believe that welfare reform is highly desirable-to humanize the welfare system, to improve work incentives, and to simplify administration. But, as a means of providing equitable fiscal relief, it is not nearly as effective as revenue sharing. We need welfare reform to reform the welfare system and revenue sharing to bring broadly based fiscal relief to hard pressed states and localities in a manner which strengthens their capacity to design their own solutions to problems. INDIRECT FEDERAL ASSISTANCE-TAX CREDITS FOR STATE AND LOCAL TAXES PAID Another alternative to revenue sharing is the proposal that taxpayers be allowed to credit some portion of their state and local income taxes against their Federal income tax liability. A number of significant points can be made regarding both the effectiveness and equity of this approach to responding to state and local needs. 1. Contrary to the stated intention, the initial impact of such a tax credit would not be to augment state and local treasuries, but merely to provide tax relief for the payment of existing state and local income taxes. Moreover, the distribution of such tax relief would be arbitrary and inequitable. 2. The intended increase in state and local revenues would only occur to the extent that states and localities would be encouraged to increase or enact income taxes more rapidly than they otherwise would. Hence, tax credits would tend to be an expensive way of making Federal assistance available to state and local governments. 3. High-income states would be permanently advantaged due to their relatively larger concentration of high-income individuals. As shown in Table 1, if all states enacted uniform income taxes, over 42 percent of the fiscal relief from a tax credit plan would go to the 10 richest states and only about 9 percent to the 10 poorest states. In contrast, under general revenue sharing 35 percent of the funds would be allocated to the 10 richest and 14 percent to the 10 poorest states. 4. The tax credit approach, with existing tax structures, would channel 91 percent of the aid to states, as contrasted to local governments. Yet cities and counties are an integral part of our Federal system, and very much in need of fiscal relief and program flexibility. Under tax credits it would be difficult for localities to ever receive much assistance, because of their dependence on the property tax. 5. A tax credit plan would be inappropriately coercive. The tax structures of our states often reflect years of debate and struggle. Under the tax credit plan, eleven states which do not now have a broadly based income tax would not obtain any significant Federal aid. These states would be forced to change their tax structures substantially in order to take advantage of the program. In at least three states, there is some doubt about the constitutionality of income taxes. FEDERAL TAX REDUCTION A reduction in Federal taxes would presumably make more of the Nation's tax base available for state and local governments to tap. This proposal, of course, is subject to most of the same criticisms which apply to the tax credit. For example-in contrast to revenue sharing—a program of Federal tax reductions would have the following results: 1. It would not ensure relief for state and local governments, since the immediate beneficiaries are taxpayers themselves. State and local units would have to raise their own taxes in order to translate relief for taxpayers into relief for governments. But such tax increases are often difficult to obtain at the state and local level-largely because of the intense competition between these jurisdictions for industry, commerce, and residents. 2. The distribution of benefits would go disproportionately to the higher-income states. This is made clear in Table 1, which contrasts the state-by-state distribution of Federal income tax payments with revenue sharing and welfare cost assumption. 3. The overall equity and progressiveness of our tax system would be reduced as property and sales taxes were substituted for the Federal income tax. States and communities which lacked the capacity to support adequate public services would receive relatively little assistance from this indirect approach, since none of their citizens would benefit significantly. |