FEBRUARY 4, 1971.-Referred to the Committee on Ways and Means and ordered to be printed To the Congress of the United States: One of the best things about the American Constitution, George Washington suggested shortly after it was written, was that it left so much room for change. For this meant that future generations would have a chance to continue the work which began in Philadelphia. Future generations took full advantage of that opportunity. For nearly two turbulent centuries, they continually reshaped their government to meet changing public needs. As a result, our political institutions have grown and developed with a changing, growing nation. Today, the winds of change are blowing more vigorously than ever across our country and the responsiveness of government is being tested once again. Whether our institutions will rise again to this challenge now depends on the readiness of our generation to "think anew and act anew," on our ability to find better ways of governing. BETTER WAYS OF GOVERNING Across America today, growing numbers of men and women are fed up with government as usual. For government as usual too often means government which has failed to keep pace with the times. Government talks more and taxes more, but too often it fails to deliver. It grows bigger and costlier, but our problems only seem to get A gap has opened in this country between the worlds of promise worse. and performance-and the gap is becoming a gulf that separates hope from accomplishment. The result has been a rising frustration in America, and a mounting fear that our institutions will never again be equal to our needs. We must fight that fear by attacking its causes. We must restore the confidence of the people in the capacities of their government. I believe the way to begin this work is by taking bold measures to strengthen State and local governments by providing them with new sources of revenue and a new sense of responsibility. THE POTENTIAL OF STATE AND LOCAL GOVERNMENT Parts of the genius of our American system is that we have not just one unit of government but many, not just one Chief Executive and Congress in Washington, but many chief executives and legislators in statehouses and courthouses and city halls across our land. I know these men and women well. I know that they enter office with high hopes and with sweeping aspirations. I know they have the potential to be full and effective partners in our quest for public progress. But once they have taken office, leaders at the State and local level often encounter bitter disappointment. For then they discover that while the need for leadership is pressing, and their potential for leadership is great, the power to provide effective leadership is often inadequate to their responsibilities. Their dollars are not sufficient to fulfill either their dreams or their most immediate and pressing needs. And the situation is getting worse. A GROWING FISCAL CRISIS Consider how State and local expenditures have been growing. In the last quarter century, State and local expenses have increased twelvefold, from a mere $11 billion in 1946 to an estimated $132 billion in 1970. In that same time, our Gross National Product, our personal spending, and even spending by the Federal government have not climbed at even one third that rate. How have the States and localities met these growing demands? They have not met them. State and local revenues have not kept pace with rising expenditures, and today they are falling even further behind. Some authorities estimate that normal revenue growth will fall $10 billion short of outlays in the next year alone. THE HEAVY BURDEN OF STATE AND LOCAL TAXES The failure of State and local revenues to keep pace with demands is the inherent result of the way in which our tax system has developed. Ever since the 16th Amendment in 1913 made it possible for the Federal government to tax personal income, this source of revenue has been largely pre-empted and monopolized by Washington. Nine out of every ten personal income tax dollars are collected at the Federal level. Income tax revenues are quick to reflect economic growth. Often, in fact, they grow much faster than the economy. As a result, budget increases at the Federal level can more readily be financed out of the "natural growth" in revenues, without raising tax rates and without levying new taxes. H. Doc. 92-44 State and local governments are not so fortunate. Nearly threefourths of their tax revenues come from property and sales taxes, which are slow to reflect economic expansion. It is estimated, in fact, that the natural growth in revenues from these sources lags some 40 to 50 percent behind the growth rate for State and local expenditures. This means that budget expansion at these levels must be financed primarily through new taxes and through frequent increases in existing tax rates. As a result, the weight of State and local taxes has constantly been getting heavier. On a per capita basis, they have climbed almost 50 percent in the last fourteen years. Property tax receipts are six times as great as they were a quarter century ago. In the past dozen years alone, States have been forced to institute new taxes or raise old ones on 450 separate occasions. Consumer and service taxes have sprung up in bewildering variety in many cities. These rising State and local levies are becoming an almost intolerable burden to many of our taxpayers. Moreover, they often fall hardest on those least able to pay. Poor and middle income consumers, for example, must pay the same sales taxes as the wealthy. The elderly-who often own their own homes-must pay the same property taxes as younger people who are earning a regular income. As further pressures are placed on State and local taxes, the impact is felt in every part of our society. The hard-pressed taxpayer-quite understandably-is calling for relief. The result is a bitter dilemma for State and local leaders. On the one hand, they must cut services or raise taxes to avoid bankruptcy. On the other hand, the problems they face and the public they serve demand expanded programs and lower costs. Competition between taxing jurisdictions for industry and for residents adds further pressure to keep services up and taxes down. While political pressures push State and local leaders in one direction, financial pressures drive them in another. The result has been a rapid and demoralizing turnover in State and local officeholders. The voters keep searching for men and women who will make more effective leaders. What the State and localities really need are the resources to make leaders more effective. THE BEST OF BOTH WORLDS The growing fiscal crisis in our States and communities is the result in large measure of a fiscal mismatch; needs grow fastest at one level while revenues grow fastest at another. This fiscal mismatch is accompanied, in turn, by an "efficiency mismatch"; taxes are collected most efficiently by the highly centralized Federal tax system while public funds are often spent most efficiently when decisions are made by State and local authorities. What is needed, then, is a program under which we can enjoy the best of both worlds, a program which will apply fast growing Federal revenues to fast growing State and local requirements, a program that will combine the efficiencies of a centralized tax system with the efficiencies of decentralized expenditure. What is needed, in short, is a program for sharing Federal tax revenues with State and local governments. H. Doc. 92-44 A WORD ABOUT PRESENT GRANTS-IN-AID There is a sense in which the Federal Government already shares its revenues with governments at the lower levels. In fact, Federal aid to the States and localities has grown from less than one billion dollars in 1946 to over 30 billion dollars this year. Unfortunately, most of this assistance comes in the form of highly restricted programs of categorical grants-in-aid. These programs have not provided an effective answer to State and local problems; to the contrary, they provide strong additional evidence that a new program of unrestricted aid is badly needed. The major difficulty is that States and localities are not free to spend these funds on their own needs as they see them. The money is spent instead for the things Washington wants and in the way Washington orders. Because the categories for which the money is given are often extremely narrow, it is difficult to adjust spending to local requirements. And because these categories are extremely resistant to change, large sums are often spent on outdated projects. Pressing needs often go unmet, therefore, while countless dollars are wasted on low priority expenditures. This system of categorical grants has grown up over the years in a piecemeal fashion, with little concern for how each new program would fit in with existing old ones. The result has been a great deal of overlap and very little coordination. A dozen or more manpower programs, for example, may exist side by side in the same urban neighborhoodeach one separately funded and separately managed. All of these problems are compounded by the frequent requirement that Federal dollars must be matched by State and local money. This requirement often has a major distorting effect on State and local budgets. It guarantees that many Federal errors will be reproduced at the State and local level. And it leaves hard pressed governments at the lower levels with even less money to finance their own priorities. The administrative burdens associated with Federal grants can also be prohibitive. The application process alone can involve volumes of paperwork and delays of many months. There are so many of these programs that they have to be listed in large catalogs and there are so many catalogs that a special catalog of catalogs had to be published. The guidelines which are attached to these grants are so complicated that the government has had to issue special guidelines on how the guidelines should be interpreted. The result of all this has been described by the Advisory Commission on Intergovernmental Relations as "managerial apoplexy" on the State and local level. Meanwhile, the individual human being, that single person who ultimately is what government is all about, has gotten lost in the shuffle. State and local governments need Federal help, but what they need most is not more help of the sort they have often been receiving. They need more money to spend, but they also need greater freedom in spending it. A NEW APPROACH In the dark days just after the Battle of Britain, Winston Churchill said to the American people: "Give us the tools and we will finish the job." H. Doc. 92-44 I now propose that we give our States and our cities, our towns and our counties the tools-so that they can get on with the job. I propose that the Federal Government make a $16 billion investment in State and local government through two far-reaching revenue sharing programs: a $5 billion program of General Revenue Sharing which I am describing in detail in this message to the Congress, and an $11 billion program of Special Revenue Sharing grants which will be spelled out in a series of subsequent messages. GENERAL REVENUE SHARING: HOW IT WORKS The General Revenue Sharing program I offer is similar in many respects to the program I sent to the Congress almost eighteen months ago. But there are also some major differences. For one thing, this year's program is much bigger. Expenditures during the first full year of operation would be ten times larger than under the old plan. Secondly, a greater proportion-roughly halfof the shared funds would go to local governments under the new proposal. In addition, the 1971 legislation contains a new feature designed to encourage States and localities to work out their own tailor-made formulas for distributing revenues at the State and local level. The specific details of this program have been worked out in close consultation with city, county and State officials from all parts of the country and in discussions with members of the Congress. Its major provisions are as follows: 1. Determining the Size of the Overall Program The Congress would provide a permanent appropriation for General Revenue Sharing. The size of this appropriation each year would be a designated percentage of the nation's taxable personal income-the base on which individual Federal income taxes are levied. This arrangement would relieve the States and localities of the uncertainty which comes when a new level of support must be debated every year. Since the fund would grow in a steady and predictable manner with our growing tax base, this arrangement would make it easier for State and local governments to plan intelligently for the future. The specific appropriation level I am recommending is 1.3 percent of taxable personal income; this would mean a General Revenue Sharing program of approximately $5 billion during the first full year of operation, a sum which would rise automatically to almost $10 billion by 1980. All of this would be "new" money-taken from the increases in our revenues which result from a growing economy. It would not require new taxes nor would it be transferred from existing programs. 2. Dividing Total Revenues Among the States Two factors would be used in determining how much money should go to each State: the size of its population and the degree to which it has already mobilized its own tax resources. By using a distribution formula which takes their tax effort into account, this program would encourage the States to bear a fair share of responsibility. A State which makes a stronger effort to meet its own needs would receive more help from the Federal Government. H. Doc. 92-44 |