Table 4.-FEDERAL GRANTS-IN-AID OUTLAYS BY FUNCTION III. Objectives of Federal Assistance Along with the complex pattern of Federal-State-local fiscal and administrative relations goes a complex set of Federal policy objectives and a complex set of arguments for and against different Federal assistance goals and mechanisms. This section considers arguments and counterarguments for (1) general support of State-local government with little or no Federal control over the use of funds, (2) categorical support for particular State-local activities, and (3) block grant support for broad functional areas of spending. GENERAL SUPPORT General support can take the form of continuing support, with funds steadily available year after year, or periodic support in times of general economic downturn-for example, the current recessionor specific fiscal crisis-for example, New York City. The basic arguments for continuing support are administrative ease and equity. There are economies to be realized from operating a single, large-scale tax system and sharing its proceeds, as opposed to carrying on a multitude of smaller, competing systems.1 Furthermore, the sharing rule can promote nationwide equality in public services by giving to poorer areas more than their proportional share of the revenuesthat is, more than the proportion contributed by their citizens. Moreover, since the Federal tax mechanism, aside from social security taxes, is more progressive than the alternative State and local mechanisms, the tax burden can also be distributed more equitably nationwide based on ability to pay. This nationally supported equity helps poor areas achieve an adequate level of public services without increasing their own tax rates so high that they drive significant parts of their already meager tax base out to better-off, lower tax areas. The chief mechanisms of continuing general support are (1) general revenue sharing, and (2) tax expenditures such as Federal income tax deductions for non-business State and local taxes and exclusion of interest on State and local bonds. Periodic support of two kinds has received attention recentlyantirecession grants and assistance to jurisdictions in fiscal crisis. The arguments for periodic support are the need for a nationally coordinated stabilization policy and the greater fiscal capacity of the Federal Government. With regard to stabilization, only the Federal Government has the ability to mitigate successfully swings in economic activity which affect the country as a whole. The greater fiscal capacity of the Federal Government assists it in meeting this stabilization responsibility, and also allows it to assist smaller jurisdictions which experience extreme fiscal strains. Failure to help State and local governments weather individual crises or nationwide recessions will often necessitate fiscal responses by them which undermine general financial stability and work against national economic recovery. Mechanisms for periodic general support include countercyclical revenue sharing and non-recurring grants, loans or loan guarantees to jurisdictions in crises. Arguments against general support center principally on accountability. State-local governments which spend the money have it given to them rather than having to impose the necessary taxation on their own jurisidictions-they may not be as careful spenders as they would be if they had to raise the funds themselves. Citizens will be opposed to unresponsive or inefficient spending, but not as aware or as opposed as they would be if they were asked to increase their own individual taxes to pay for it. An extreme form of this accountability argument holds that availability of bailout aid to fiscally threatened jurisdictions will reward and encourage mismanagement. The companion argument to accountability says that State and local governments can reform their tax laws and support themselves. Any lack of equitable and growth responsive taxes, notably significant progressive income taxation, results from decisions by those jurisdictions themselves, and is not a sufficient reason for Federal aid. Indeed, State and local governments have in recent years been turning increasingly to reliance on income taxation and their overall revenues 1 These economies have sometimes been overstated. They cannot be fully realized unless individual State and local taxes are eliminated entirely, which seldom occurs. Also, they can be obtained partially by piggybacking State and local income taxes on the Federal tax system, as some jurisdictions now do. as a proportion of GNP have grown steadily since the 1950's while the Federal Government's share remained about constant. Through Federal tax expenditures in the form of income tax deductions for State and local taxes paid, the Federal Government currently makes it easier for State and local governments to raise taxes, since part of their rise is automatically offset by lower Federal taxes. Further sweeteners or sticks are available to the Federal Government to induce further reliance by State and localities on their own tax revenues. CATEGORICAL SUPPORT Categorical support-that is Federal aid earmarked for specific purposes-is generally defended on the grounds of spillovers or national purposes. Spillovers occur when a jurisdiction which makes expenditures is unable to capture the full economic benefits of those expenditures. It is therefore likely to underinvest in those activities. Examples are interstate highways and water pollution controls, public education in a mobile society, and experimental programs which may identify successful innovative approaches which are then free for others to adopt (although Federal support in the last case is also defensible on grounds that the larger Federal Government is better able to invest in risky new experimental approaches). The nation as a whole can capture the full benefits of such expenditures, and therefore the National Government is an appropriate source of funds for them. The national purposes argument recognizes different spending priorities between Federal and State and local governments. These differences most often occur with respect to programs directed at particular population subgroups, especially those subgroups which are relatively small, widely dispersed and not-well-off economically. State and local governments may prefer not to tax their constituents heavily to provide services for the poor or for generally low-productivity people, since that may tend to attract those people, who are a drain on resources, and drive out others who are healthy contributors to the tax base. The recipient groups will, in general, be so sparsely represented and economically and politically weak that they may have difficulty capturing much of a share of expenditures for themselves. If the Federal Government gave general support to states and localities, those jurisdictions might not choose to spend the money on such recipient groups, but providing the money with requirements for its use can succeed in getting the desired services provided. Traditional mechanisms for categorical support are categorical grants, with or without matching requirements. Open-ended grantwith matching requirements reduce the cost to State and local governments of providing specified services, and leave it to those governments to decide whether and to what extent to provide the reduced cost services. This is a pure price subsidy which encourages but does not compel State-local spending along specified lines. However, other requirements regarding the level of services may also be attached, as is the case with matching grants for entitlement programs where everyone who is eligible must be served, and usually at some minimum service standard. In practice, decisions to participate in Federal matching grant programs often take on the characteristics of an allor-nothing choice. Categorical grants without matching resemble more a contracting arrangement, with the Federal Government retaining States and localities to carry out federally defined programs. Arguments against categorical grants concern the distortions and inefficiencies of earmarked funds and the attendant erosion of citizen control over and support for government. Distortions occur when State and local officials allocate their own revenues so as to maximize Federal grant money rather than to meet the priority needs of their constituents. They may do this through failure to think through their own priorities, or through political pressure to capture every available Federal dollar. Inefficiencies occur because the people who make the policies and write the administrative rules are not the people who carry them out. The Federal Government must work through 50 States to get its programs implemented the way it wants, and must monitor State performance. State governments face lengthy redtape to meet complex Federal standards and administrative rules and must often hire special staffs to go after Federal funds and to meet Federal reporting requirements. They lose flexibility to tailor levels and types of service to their particular needs and to reprogram fundsboth Federal and their own-as changes in needs occur. The split between policy makers and program operators leads to buck passingthe former blame the latter for mismanagement and the latter the former for poor policy design, overregulation, and underfunding. No one takes full responsibility, and citizens, finding no place to successfully lodge complaints or participate in reform, develop apathy and distaste for government. Responses to the problems of categorical grants have tended to go in two directions-proposals for federalization of programs and proposals for block grants. Federalization is suggested where the objective is to distribute resources to individuals nationwide and to relieve State and local governments of the burden of contributing to and administering the redistributed funds. Examples are welfare reform and national health insurance. Block grants are proposed when some loosening of Federal strings is desired to enable States and localities to pursue their own spending priorities with more flexibility. BLOCK GRANT SUPPORT Block grants provide a pool of money, to States or directly to local governments, for spending within relatively broad functional areasfor example, community development or job-related education and training. These grants are intended to provide flexibility to recipient governments in establishing spending priorities for individual programs, while retaining broad influence over the level and mix of public services and promoting a minimum level of key services nationwide. Block grants which do not change pattern of spending from what it would otherwise be are identical in effect to additional general revenue sharing. This will be the case if the receiving governments can be expected to spend more on the activities supported by block grants than the amount of the block grants themselves. Then, for example, if the Federal Government cuts back the law enforcement block grant and puts more into a child nutrition block grant, the State can simply reallocate its own funds out of child nutrition and into law enforcement so as to achieve the service mix it wants. This would appear to be the case in those present and proposed block grants where the Federal grant money is only a small portion of State spending in the block grant area-for example, law enforcement, education, and child nutrition. It is less likely to be true in areas such as commun 72-678-76- -6 ity development and employment and training where the Federal Government provides a substantial share of the dollars spent. Given the complex and at the moment largely unknown-pattern of State block grant pass-throughs to localities, it may be true that even limited Federal dollars are indeed the marginal dollars in some local jurisdictions and are in fact helping to raise service levels in some places. Also, it is often the case that some strings and performance standards are applied to block grants-for example, Presidential proposals that all child nutrition moneys go to poor children. These requirements may be effective in influencing State-local spending patterns, but they do so, of course, to the extent that they partake of the characteristics, and the rigidities, of categorical grants. While the effect on State and local spending patterns of moving to block grants is uncertain-and no doubt very different for different States and different functional areas-the basic premise of block grants is clear. It is that less Federal control over the use of Federal grant funds is desirable and that States are expected and intended to use their new discretion to change their spending patterns. Why should the Federal Government favor this change? Federal spending in areas that are principally State and local functions began in large part because of concern that certain important services, especially services to poor and handicapped people, were not being equitably or adequately provided. Moving back from this categorical spending must mean either that Federal priorities have changed, or that they have not changed but (1) States are now expected to support them voluntarily, or (2) categorical grants have proved to be inefficient means to achieve them. It is important to distinguish these possibilities. If it is true that Federal, State and local priorities now essentially coincide, either because Federal objectives have changed or because State and local orientations have changed, then block grants may be a good method of funding State and locally provided services, although another answer would be to get the Federal Government out of the grant business. However, if the problem is that Federal grants have gotten out of hand in number and complexity as tools for achieving distinctive Federal goals, then the responsible answer is to weed out and improve the categorical programs rather than to give the money to someone else and let them decide what to do with it. IV. Fiscal Year 1977 Budget Issues and Options A. GENERAL REVENUE SHARING PROGRAM SUMMARY General revenue sharing was first enacted in 1972. Under current law the program expires on December 31, 1976. Outlays in 1975 were $6.1 billion; current policy levels for 1977 would be $6.6 billion. This amounts to roughly 21⁄2 percent of projected State-local revenues from all sources. Funds are distributed to all 50 States and some 39,000 local governments, according to a formula which takes into account population, tax effort, and per capita income. Local governments receive about two-thirds of the funds. The President has proposed renewal through 1982, with funding of $6.5 billion in 1977 and annual increases of $150 million thereafter, consistent with present law. |