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.

A WORD ABOUT PRESENT GRANTS-IN-AID

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There is a sense in which the Federal Government already shares its revenues with governments at the lower levels. 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 And because these categories are extremely resistant to change, large sums are often spent on outdated projects.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 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 neighborhood separately funded and separately managed.

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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."

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 half -- of the shared funds would go to local governments under the new proposal. 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.

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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.

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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.

One other incentive has also been built into the new legislation: those States which negotiate with their local governments a mutually acceptable formula for passing money on to the local level, would receive more money than those States that rely on the Federal formula. This provision would encourage a State and its localities to work out a distribution plan which fits their particular requirements. States which develop such plans would receive a full 100 percent of the money allocated to them under the formula described above. Other States would receive only 90 percent of their allocation, with the remaining ten percent being carried over and added to the following year's overall allocation.

3. Distributing Revenues Within the States.

Those States which do not adopt their own plan for subdividing shared revenues would follow a formula prescribed in the Federal legislation. This formula would assign to the State government and to all units of local government combined a share of the new money equal to that portion of State and local revenues currently raised at each level. On the average, this "pass through" requirement would mean that about one-half of the revenue sharing funds would go to the States and half would go to the localities. Governmental units of all sizes would be eligible for aid --- but only if they were set up for general purposes. This would exclude special purpose units such as sewer districts, school districts, and transit authorities. Each general purpose unit would then receive its proportionate share of revenues based on how much money it raises locally.

General Revenue Sharing monies would come without program or project restrictions. The funds would be paid out at least quarterly through the Treasury Department; no massive new Federal agencies would be established. Each State would be required to pass on to local units their proper share of the Federal funds and to observe appropriate reporting and accounting procedures.

In my State of the Union message I emphasized that these revenue-sharing proposals would "include the safeguards against discrimination that accompany all other Federal funds allocated to the States." The legislation I am recommending provides these safeguards. It stipulates that: "No person in the United States shall on the ground of race, color or national origin be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any program or activity funded in whole or in part with general revenue sharing funds."