- CONCLUSION

This paper has considered five widely discussed alternative Federal responses to the need for revitalizing the fiscal and political health of American Federalism. Table 1 summarizes the state-by-state implications of four of these approaches. Concentrating on factors relating to either the effectiveness or the equity of the action being evaluated, several significant observations can be offered:

Only the revenue sharing approach ensures that the tax resources given up by the Federal Government will get to our state and local governments; Only the revenue sharing approach brings an equitable distribution of the Federal aid to our states and local governments;

Only the revenue sharing approach combines fiscal relief with administrative reform and political decentralization, thereby enhancing the capacity of the whole system of government to respond flexibly to particular local and regional needs;

Only the revenue sharing approach attempts to improve the responsiveness and effectiveness of government at all levels.

Revenue sharing represents the most straightforward and sensible response to the pressing problems now facing our Federal system. It surpasses the other approaches both on grounds of effectiveness and equity. It recognizes the acute need for restoring balance to our Federal system of government-a balance that goes beyond purely financial dimensions of need. It represents a departure from the traditional narrow, programmatic response to problems. It is directed toward preserving and enhancing our unique governmental system of shared powers and shared responsibilities. In all these-and more-ways, revenue sharing is a uniquely superior approach, one whose merits emerge clearly from any detailed analysis.

TABLE 1.-FISCAL RELIEF BY STATE FOR EACH $5,000,000,000 IN ALTERNATIVE PROPOSALS

TABLE 1.-FISCAL RELIEF BY STATE FOR EACH $5,000,000,000 IN ALTERNATIVE PROPOSALS-Continued

1 Based on Personal Income Tax Payments in 1968, "Statistics of Income," IRS, 1968. 2 Department of Health, Education, and Welfare estimates. Based on estimated calendar year 1971 non-Federal expenditures of welfare payments to the aged, blind, disabled, and families with dependent children. These expenditures are estimated to total $4,000,000,000 but are normalized to $5,000,000,000 here for the purpose of comparing the State distribution of fiscal relief with that for revenue sharing.

Secretary CONNALLY. We conclude that revenue sharing is a substantially better approach to strengthening our Federal form of government than any other mechanism available.

In conclusion, Mr. Chairman and members of this distinguished committee, mine has been a plea for change. Why should we be afraid of change? The present system of Federal aid to States and localities clearly is not meeting our needs. It is not likely to do so in the future, in its present form.

Revenue sharing is a new approach that will enable the Government to respond more effectively to the needs of the people. I urge you to take that positive nonpartisan action that can make revenue sharing a reality.

Thank you very much, Mr. Chairman.

The Chairman. Mr. Secretary, we thank you for your statement. I want to congratulate you on making a very fine statement in behalf of a very weak cause.

Secretary CONNALLY. I understood, Mr. Chairman, that it was not your favorite subject.

The CHAIRMAN. No, sir; it is not.

Let me remind the members of the committee that we operate under a new rule of the House providing for questioning by members of the committee for not longer than 5 minutes at a time.

Mr. Ullman, do you want to try it for 5 minutes?

Mr. ULLMAN. Mr. Chairman.

I want to say, Mr. Secretary, that good as your argument was, I am not completely convinced at this point.

Let me ask you this. You say on page 2 of your statement:

I do not need to explain to you the basic idea of sharing Federal revenues with State and local governments. The Federal Government has been doing that for a very long time and all the States have revenue-sharing systems of their

own.

63-829 0-71-pt. 1-5

You say, "The Federal Government has been doing that for a very long time," and I would like to ask you: Do you not see a major difference between the Federal Government assisting the States in paying for State-operated programs, and what you are proposing here, a direct revenue sharing with the States in the form of passing Federal reveunes out to the States to spend as they see fit?

Secretary CONNALLY. Well, obviously, there is a difference, Mr. Ullman, between the categorical grant type of revenue sharing to which you refer and the general revenue sharing that we are addressing ourselves to this morning. But the thrust of that statement simply was that in a real sense I do not need to take the time of the committee to try to explain what revenue sharing is, that I thought it was obvious to everyone on the committee what it is.

Mr. ULLMAN. Except that I think you would agree that the Federal Government has not done this kind of thing before. This is something new and something different.

Secretary CONNALLY. Yes; that is true.

The principal difference, Mr. Ullman, is simply that under general revenue sharing, as we propose it, much of the decisions will be left to the States as to which programs they initiate, and which programs they support, and under what conditions, as opposed to the programs which are now operated by the States under categorical grants.

Mr. ULLMAN. That is the essence of the major departure from existing policy that you are advocating here today.

Secretary CONNALLY. Right.

Mr. ULLMAN. Second, what do you see in the way of a Federal deficit in this year's Federal funding budget this year?

Secretary CONNALLY. I think beyond any question we will have a substantial deficit this year. We anticipate a substantial deficit next year. Again, I tried to address myself to that, and I assume that this goes to the thrust of the fact that you have no income to share with the States.

I am anticipating, perhaps, your next question, but my analysis of it, which I tried to cover in my statement, was simply that we are not talking about economic policy, and we ought not to confuse economic policy with spending priorities.

In my judgment, the general revenue-sharing program carries with it so many benefits, so many desirable objectives, that it ought to have one of the highest priorities of spending in the Congress, and ought not to be viewed as a program that would be possible only in the event of a budget surplus.

Mr. ULLMAN. Mr. Secretary, we do a lot of talking about new priorities, but as I look around, I can see a very great need for major Federal programs in many fields, in mass transit, poverty, the environmental field, where everybody is concerned, and on and on.

Would you not agree?

Secretary CONNALLY. Yes; there are a great many problems that are crying out for solution, and part of the thrust of this whole approach in general revenue sharing, Mr. Ullman, is to make available moneys that would permit planning over a long period of time by State and local governments, looking toward experimenting with solutions to these various problems.

This is one of the things that we really want to try to accomplish. We want to try to restore some of the ability to experiment in the solution of problems in the various localities and States throughout this Nation.

We do not believe that all of the solutions inevitably have to come from Washington through a Federal program.

Mr. ULLMAN. But is it not going to be true, just because of the way things work, that these moneys will go for general expenditures of a great variety of day-to-day operating expenditures, rather than to the new, innovative social programs which are so desperately needed today?

Secretary CONNALLY. I would not necessarily concede that. I would have to concede that State and local governments faced with problems such as mass transportation, environmental problems, water pollution, sewage treatment facilities, and so forth are more under the gun and would be more compelled to initiate new programs, experiment with new solutions, than, frankly, is the Federal Government, because they are their problems. These are their problems, and they live with them day by day. They are under the gun every day. The mayor and the city council, the Governor and legislature, cannot go anywhere in the State without hearing about it every single day.

Those who are concerned about water pollution, control of drugs, whatever the local problem might be, those people are going to know precisely how much money their city, township, or county, or State will get under general revenue sharing, and will immediately undertake to put great pressure, in my judgment, on their governing boards to put some of that money into new ideas to try to find new solutions to their problems.

Mr. ULLMAN. Thank you, Mr. Chairman.

The CHAIRMAN. Mr. Byrnes.

Mr. BYRNES. Mr. Secretary, I do want to compliment you on your statement.

I am somewhat reminded of the story about the salesman selling refrigerators to the Eskimos, and if we have to have a salesman, I think you are a very good one.

Secretary CONNALLY. Thank you, sir.

Mr. BYRNES. As you know, I must express some reservations.

Let me ask is the Director of Budget and Management going to testify?

Secretary CONNALLY. I do not think so.

Mr. BYRNES. I would like to get some kind of a picture of the current fiscal situation of the Federal Government.

When you appeared on the debt ceiling, Mr. Secretary, you estimated a deficit in the Federal funds this year and the next year of some $48.6 billion.

Secretary CONNALLY. On a Federal funds basis.

Mr. BYRNES. Yes. I would like to know what the picture is today. I have had some visits with Director Shultz which indicated he was very concerned that the Congress was ballooning the budget, going beyond the budget of the President. The deficit estimate I have just mentioned which you gave us earlier in the year, was based on the

President's budget, and if we exceed that budget, this will necessarily increase the deficit that will be created.

It does seem to me that when one talks in terms of a program involving $5 billion we ought to have some picture of our fiscal situation. And we are talking about $5 billion just for today. We are talking about a permanent commitment, too.

You will agree that part of this is permanent?
Secretary CONNALLY. Yes, sir; part of it is.

Mr. BYRNES It is not permanent as far as the $5 billion is concerned, but there is an automatic escalator clause here, is there not?

Secretary CONNALLY. That is correct. It is 1.3 percent of the taxable income base.

Mr. BYRNES. Personal income, individual income; that is.

Secretary CONNALLY. But I might also point out at that there will be an outlay of only about $3.75 billion in fiscal 1972, because it was not anticipated that this act will go into effect until October, which leaves roughly three-fourths of the fiscal year.

Mr. BYRNES. It would be proportionate?

Secretary CONNALLY. Yes.

Mr. BYRNES. You are talking about fiscal 1972 ?
Secretary CONNALLY. Right.

Mr. BYRNES. But we are making a commitment and preempting revenues for this purpose into the future, and that can be more than $5 billion, because what you are doing is using a percentage of net individual income to determine what is going to be distributed.

Secretary CONNALLY. That is correct, and we actually anticipate that it will go above $5 billion in the years ahead.

Mr. BYRNES. Later I want to get into how we make determinations of our net individual income, how we make these estimates on which we are going to pass out this money. I have been having a very difficult time obtaining recent estimates on such things. Some figures that we use today, and the tables, I think, even of the administration, are based on 1968 data rather than 1970 data.

Secretary CONNALLY. That is correct.

Mr. BYRNES. When we talk about passing out money, people get pretty concerned over how much is passed out, and who gets it, and what the formula is, and whether it is based on full facts or estimates. That is another matter I would be glad to get into.

Secretary CONNALLY. I would be glad to comment on that, if I may, sir.

Mr. BYRNES. All right.

Secretary CONNALLY. They will not be estimates. The figures in each portion of the formula will be the latest available figures in whatever the category is.

Mr. BYRNES. But those are estimates, are they not?

Secretary CONNALLY. To some extent, they are estimates.

Mr. BYRNES. They are educated guesses.

Secretary CONNALLY. There will be a time lag of approximately two to two and half years on behalf of many of the figures. Yes, there will be a time lag, but the figures will be basically very certain.

Mr. BYRNES. But yet, your formula does not recognize a time lag.