By Dennis Polhill
Federalism is a Constitutional Division of Authority and Functions between National and State Governments. Traditionally government policies particularly with respect to Federal Aid have attempt ed to conform with the rigid Constitutional Division of responsibilities. Until recent years, what Federal Aid existed, was applied primarily for educational purposes’. At various periods in History, it can be observed how attitudes of the time influenced the development of Federal Aid as _ contrasted with Traditional Federalism. The term “New Federalism” implies a dynamic, ever-changing relationship between the various levels of government. The existence of a “New Federalism” is a matter-of- ‘ fact which is evidenced by the enormous increase in Federal Aid in recent years. The question which remains is not whether or not it will be, but rather what form will it take. Revenue Sharing is just one of the “New Federalism” alternatives.
HISTORY OF FEDERAL AID
The History of Federal Aid goes back to pre-Constitutional Times. Under the Northwest Ordinance unconditional land grants were provided to the States for educational and internal improvements. In 1837 (Andrew Jackson) distributed, again unconditionally, a Federal Budget Surplus of five million dollars to the States proportioned to the states Congressional representation. This was the only program in American History that even begins to approximate what is known as Revenue Sharing today.
In 1862 Congress passed the Morrill Act which provided for land grants to the States to be used specifically for land-grant colleges. This Act is historic in that it defined the objectives to be met and outlined conditions for participation and supervisory procedures. The second Morrill Act, passed in 1890, provided cash payments annually to the States for the same purpose.
Until World War I most of the new programs were for Agriculture: 1887, Agriculture Experiment Stations; 1911, Forest Fire Protection; 1914, Agriculture Extension Work. The Forest Fire Protection Program required Federal approval of a State submitted plan and continued Federal inspection. These features have remained as key features of virtually all Federal Aids.
The World War I period was important in that new Federal Grants-in-Aid were initiated for Public Health, for Vocational Education, and for Highways. Following the war no new programs were enacted even though existing programs were continued and in some cases expanded.
Emphasis was placed on initiative at the State level, the Traditional Federalism. Several States adopted Social Legislation that was later used as a basis for new federal programs.
The Depression brought an explosion of new Federal Aids involving,
1) Precise definition of aided areas
2) The requirement of State plans in conformance with Federal Standards
3) State matching of Federal funds
4) The review and audit of aided programs by the relevant Federal Agency.
Some of the major new programs were: 1933, School Lunch Program; 1935, Old-age Assistance; 1935, Aid to Dependent Children; 1935, Aid to the Blind; 1935, Services for Crippled Children; 1935, General Health; and 1937, Low-Rent Housing. Many of these programs were interrupted during World War II but reinitiated in the post war period in 1953 the Eisenhower. Administration took office with a goal to make basic changes in the scope and character of Federal Aid Programs. The Commission on Intergovernmental Relations (Kestnbaum Commission) issued its report in 1955.
“The grants widest use has been in stimulating the States to launch or expand services for which State and Local Governments are generally regarded as primarily responsible. National Funds and Leader ship have stimulated State and Local activity in Agricultural Education and Research, Welfare Services, Public Health Services and Vocational Education, to site some prominent examples. In some of these fields the States or Localities had already made a start before the grant was made. Generally, though not always, the grants have produced notable spurts in State and Local Action, and the proportion of State and Local expenditures to Federal Aid-has shown a steady and substantial overall increase”.
In 1957 and 1958 the Eisenhower Administration’s Joint Federal-State Action Committee attempted unsuccessfully to eliminate certain Federal grants-in-aid in exchange for steps to turn over a compensating amount of Federal Revenues to the States. Despite Eisenhower’s efforts, Federal Aid Expenditures tripled to $7.3 billion over his Administration 1953 – 1961.
Under Kennedy and Johnson major new Federal Aid Programs have been established in Education, Antipoverty, Manpower Training, Mass Transportation, Mental Health, Air and Water Pollution Control and Aid to the Arts. Federal Aid has risen to $17 billion in 1968.
FEDERAL AID ALTERNATIVES
According to Richard Nathan who prepared the report “The
Policy Setting: Analysis of Post-Vietnam Federal Aid Policy Alternatives” for the U. S. Congress Joint Economic Committee, there are five major Federal Aid Alternatives:
A) Continued reliance on existing types of Federal Aid Programs
B) Revenue Sharing
C) Federal Tax Credit
D) Model Cities
E) Regional Aid Approach
A brief explanation of the five alternatives follows:
A) Continued reliance on existing types of Federal Aid Programs
As can be seen by the trends indicated under “History of Federal Aid”, Federal Aid traditionally has been restricted to categorical type programs. These can be subdivided into four types.
1) Narrowly Defined Formula-type Grants. These include formula-type grants for very specific purposes within major expenditure areas.
2) Highways and Public Assistance. These are formula-type grants for broad areas.
3) Broadly Defined Formula-type Grants. Aid is given to major functional areas with relatively few strings attached. This type of Traditional Aid most closely approximates the Revenue Sharing ideas. The Pre-Civil War grants and the Elementary and Secondary Education Act of 1965 fall into this class.
4) Project Aid. The use of project grants has in-creased in recent years. Project grants are used more at the local level while the various Formula type grants are primarily aids to the State level.
B) Revenue Sharing (Tax Sharing)
Revenue Sharing is the redistribution of Federal Tax Revenues back to various State and Local Governments with a minimum of restrictions.
C) Federal Tax Credit
This is intended to accomplish the same purpose as Revenue Sharing, shift power through money from the Federal Government to the State and Local Governments. The mechanism is to allow a tax credit rather than a deduction to the taxpayer. In other words, a percentage of Federal Income Tax would be credited against an individuals State Income Tax. This approach is favored by the U. S. Advisory Commission on Intergovernmental Relations and the Committee for Economic Development. If implemented tax credit would stimulate states to rely more heavily on income taxation. Much could be discussed on the question of tax credit but it is beyond the scope of this paper to deal with the subject in more detail.
D) Model Cities
On January 16, 1966, President Johnson in a message to Congress recommended a $2.3 billion, 6-year “Demonstration Cities Program that will offer qualifying cities of a11 sizes the promise of a new life for their people”. The Federal Government would provide financial assistance under existing Urban Aid Programs, plus 90% of the cost of planning and development; special supple-mental grants of 80% of the total non-federal contributions required from projects under existing grant-in-aid programs; federal grants for relocation of families and businesses; and technical assistance to help carry out the program. On March 2, 1966, Mayor Jerome P. Cavanagh of Detroit, testified before the Housing Subcommittee of the House on behalf of the National League of Cities and the U. S. Conference of Mayors, “we should recognize that $2.3 billion is a start and nothing more.” The National Housing Conference and the National Association of Housing and Redevelopment Officials also questioned the adequacy of $400 million per year. In November of 1967 the program was enacted. In the June 11, 1975 Cumberland Evening Times, the Associated Press reported that of the only fourteen model cities nearly all were in serious financial difficulty.
E) Regional Aid Approach
Funds would go to regions on a basis patterned after the Appalachia Regional Economic Development Program enacted in 1965.
REVENUE SHARING – BACKGROUND
On October 20, 1972, President Nixon signed into law the “State and Local Fiscal Assistance Act of 1972″. Passage of this measure is the result of conservative efforts, in the light of the “New Federalism”, to attempt to redistribute power to State and Local Governments. Federal Aid prior to the Civil War resembled Revenue Sharing but was not enacted with this purpose in mind. This end was first eluded to by President Eisenhower’s Commission on Intergovernmental Relations (the Kestnbaum Commission) in 1955. The subsequently appointed Joint Federal-State Action Committee was unsuccessful at attempts to enact Legislation in 1957 and 1958. In Congress even Conservatives were reluctant to separate the taxing responsibility from the spending “FUN”.
In the Spring of 1964 Walter Heller, Chairman of the President’s Council of Economic Advisors introduced the Heller Plan to President Johnson. The Heller Plan recommended supplemental General Aid to the States with no conditions attached. In a speech on May 22, 1964, Johnson called for “New Concepts of Cooperation, a ‘Creative Federalism’.” In the early Fall of 1964 the Pechman Task Force reported to the President. Recommendations conformed with those of Heller with the exception of a few broad conditions to be placed on Aid. Pechman also suggested the use of tax effort and per capita income factors along with population in the distribution formula. President Johnson was very much in favor of the Heller-Pechman Proposals. During the end of the Presidential Campaign, October 28, 1964, the White House issued a Presidential Statement, “Intensive Study is Now Being Given to Methods of Channeling Federal Revenues to States and Localities”. The same day an outline of the Pechman Task Force Report appeared on page one of the New York Times; strong opposition arose from labor groups and federal officials. In mid December 1964, the President called a halt to speculation about the plan. In the 89th Congress twenty-five Representatives introduced various forms of Tax Sharing Legislation. In the 90th Congress fifty-nine House Bills and twenty-nine Senate Bills were introduced. A December 1966 Gallup Poll indicated that 70% of the American People favored a 3% distribution of Federal Revenues to States and Local Governments.
In 1969 Nixon took office. His position was one very favorable to Revenue Sharing. By February of 1972 discussion of the Mills Plan vs. the Nixon Plan was in progress. Compromise prevailed. The House passed a Revenue Sharing Bill on June 22, 1972 by a 274 – 122 vote. Senate was not satisfied with the plan and amended the House Bill. The Senate Finance Committee approved the bill on August 16, 1972. Nixon signed the Legislation into Law on October 20, 1972,
REVENUE SHARING – DESCRIPTION
The “State and Local Fiscal Assistance Act of 1972″ (P.L. 92-512) provides for the distribution of $30.2 billion over five years to 38,750 State and Local Governments with relatively few restrictions. In 1972 $5.3 billion was to be distributed ($25.47/capita nation-wide). The distribution formula is based on population, per capita income and Adjusted Tax Effort (ATE). State distributions are:
One-third State Government and
Two-thirds Local Governments as per formula
The act is administered by the Office of Revenue Sharing (Graham W. Watt, Director) under the Department of the Treasury. The function of the office is to maintain accurate formula data, calculate and disburse payments and audit usage of funds for applicable compliance.
REVENUE SHARING – ALLOCATION PROCEDURE
State allotments are calculated by the Senate th’ree-factor formula and the House five-factor formula for each State. The higher figure is used and a11 States are scaled down proportionately to meet the allocation amount. Alaska and Hawaii are allowed an adjustment factor, 25% and 15% respectively. Within each State the State Government gets one-third. Counties (geographic, not political) receive a pro-portion of the remaining two-thirds based on population, A.T.E., and P.C.I. up to 145% but not less than 20% of the statewide per capita . entitlement. From the county portion, Indians and Alaskan natives receive a share on the basis of population; all townships receive a proportion equal to the proportion of township A.T.E. As compared to the total A. T.E. within the county; similarly for county governments; the remaining portion is for other units of local government. The division of funds among townships is done on the basis. of population, A.T.E. and P.C.I. up to 1451 but not less than 207. of the applicable per capita rate. Similarly for other units of local government. Only three of the five categories of local government are eligible: Counties, Townships and Municipalities, Special Districts and School Districts do not receive General Revenue Sharing Funds. ‘
REVENUE SHARING – USE OF FUNDS
Revenue Sharing may be used to pay operating and maintenance costs in any “Priority Expenditure Categories”: Public Safety (Police, Courts, Corrections, Crime Prevention, Fire Protection, Civil Defense, Inspection of Buildings, Plumbing, Electrical Facilities, Gas Lines, Boilers and Elevators); Environmental Protection (Smoke Regulations, Inspection of Water Supply, Sanitary Engineering, Collection, Refuse Disposal or Waste Recycling); Public Transportation (Highways, Bridges, Streets, Grade Crossings, Snow and Ice Removal, Transit Systems); Health, Recreation, Libraries, Social _.Services (Food, Clothing, Shelter, Daycare, Job Training); Financial Administration (Accounting, Auditing, Budgeting, Investing, Tax Collection, Fiscal Affairs). General . administrative costs such as the Chief Executive’s salary is not permissible. The act specifies that any ordinary and necessary capital expenditure authorized by State and Local Law is an appropriate use of General Revenue Sharing Funds. Budgeting, appropriation and use must meet State and Local Law requirements regarding use of a recipient’s own revenue. Revenue Sharing dollars may not be used to obtain federal matching funds. Recipients must observe nondiscrimination and labor standards. Money must be used, obligated or appropriated within twenty-four months of the end of the entitlement period. Funds transferred to private agencies or other units of government are still subject to a11 restrictions of the act.
A planned use report must be filed in the Office of Revenue Sharing prior to the beginning of each entitlement period. An actual use report must be filed by September 1, of each year. Both reports must be published.
REVENUE SHARING – IN ACTION
Prior to the release of the first entitlement – following is a list of anticipated Revenue Sharing Applications.
|JURISDICTION||EXPECTED HIGH PRIORITY USE|
|California||Cut Income Tax|
|San Francisco||Equipment for Municipal Railway|
|Los Angeles||Eliminate Budget Deficit|
|Ontario, California||Eliminate Budget Deficit|
|Oregon||Reduce Property Tax|
|Portland||Public Works, Fire Stations, Recreation|
|Multnomah County||Restore Previously Cut Services|
|New Mexico||Education, Law Enforcement, Environmental Improvement and Economic Development|
|Detroit||Forestall Additional Cuts in Services|
|Illinois||Freeze Property Tax, Education|
|Wisconsin||Reduce Property Tax|
|Milwaukee||Prevent Additional Tax Increases|
|North Carolina||General Fund|
|New York||Balance Budget|
|New York City||General Support of the City Budget|
|White Plains, New York||Forestall Tax Increase|
|Mobile, Alabama||Fire and Police Equipment|
|Atlanta, Georgia||Salary Increases, More Police & Fire|
|Houston, Texas||Public Works: Streets, Water, Sewe|
|Pine Bluff, Arkansas||Public Works|
|Phoenix, Arizona||Public Works: Streets and Sewers|
|Waterloo, Iowa||Reduce Proposed Tax Increase|
|Lima, Ohio||Capital Projects|
During entitlement period 4 (July 1, 1973 – June 30, 1974) actual use as a percentage of all Revenue Sharing Funds distributed was as follows:
Public Safety 23%
Public Transportation 15%
Multi-purpose General Government 10%
Environmental Protection 7%
Social Services for Poor and Aged 4%
Other Uses 4%
Financial Administration 2%
Housing/Community Development 1%
Corrections Under 1%
Economic Development Under 1%
Social Development Under 1%
The actual use reports for entitlement periods 1, 2 and 3 and the planned used reports for entitlement period 5 indicate the same general distribution. The State level spending is: 52% on primary and secondary education, 8% on public transportation, 7% on health, 7% on multi-purpose general government and 6% on social services for the poor or aged. Local governments spend 36% on public safety, 19% on public transportation, 11% on general government, 11% on environmental protection, 7% on health and 7% on recreation. On a regional basis there are no significant variations in the above distributions. Of both State and Local Governments, 84% reported that Revenue Sharing had enabled them to avoid incurring new indebtedness, or reduced the level of new indebtedness.
Revenue Sharing was a God-Send to Local Government. Even though it amounts to little more than 3% of State and Local Government Expenditures, it has at least temporarily forestalled an impending financial crisis. For some, like New York City, Revenue Sharing came too late with too little. New York City has a debt of over $14 billion today. The development of the crisis situation could only result in the inevitable termination of Local government as an autonomous governing body. That is to say, Local government would either be drawn gradually (as the trend has been in the past) or be forced catastrophically be-coming some type of subsidiary of the federal bureaucracy. Improved transportation, communication and mechanized warfare have necessitated a trend toward more centralized government. Centralized government also allows more efficient administration of certain public services such as Social Security. Therefore, I personally feel that a trend back to Traditional Federalism is not realistic and not in the best interest of the Nation. But, I also feel that Local government should be a part of our government. Categorical type Federal Aid serves the interests of the federal bureaucracy and, therefore, is not an answer to preserving the system. Revenue Sharing seems to be the right idea but changes will be necessary. The problem with changes at this time is that all indications are that potential changes will not be improvements. The ink was barely dry on the Act in 1972 when the Chairman of the House Appropriations Committee was calling for amending legislation to impose supervisory controls.
His point has been proven to be well taken. A 12-member committee of the National Academy of Sciences and the National Academy of Engineers recently concluded, “Local Governments and Agencies lack the planning and management personnel and capabilities necessary to meet decision-making responsibilities imposed by Revenue Sharing”. It cannot be denied that this problem exists. The mistake, however, is that every-one seems to be jumping to the conclusion that it is in everyone’s best interest to impose restrictions. If Revenue Sharing becomes categorical or “big brother” provides necessary management services, the program becomes just another extension of the federal bureaucracy and local government will never be able to develop self-reliance.
1. Readings on State and Local Government Edited by Irwin N. Gertzog 1970 — Prentice-Hall, Inc.
2. The Politics and Economics of State-Local Finance by L. L. Ecker-Racz Prentice-Hall, Inc. — 1970
3. Financing State and Local Governments by James A. Maxwell 1966 — Brookings Institution
4. The New Federalism by Michael D. Reagan 1972 — Oxford University Press
5. General Revenue Sharing – Reported Uses 1973-74 Office of Revenue Sharing 1975
6. What is General Revenue Sharing Office of Revenue Sharing 1973
7. A Fiscal Program for a Balanced Federalism Committee for Economic Development 1967
8. Federal Revenue Sharing A New Appraisal The Tax Foundation 1969
9. One Year of Letter Rulings on General Revenue Sharing: A Digest Office of Revenue Sharing 1973
10. Legislative Analysis, Federal Revenue Sharing American Enterprise Institute 1967
11. Revenues, March 1975 Office of Revenue Sharing
12. Getting Involved, Your Guide to General Revenue Sharing Office of Revenue Sharing March 1974
13. General Revenue Sharing, Data Definitions for Allocations to to Local Governments Office of Revenue Sharing 1975
14. Regulations Governing the Payment of Entitlements Under Title I of the State and Local Fiscal Assistance Act of 1972 Office of Revenue Sharing 1973
15. State and Local Government by Russell W. Maddox and Robert F. Foquay 1975 — D. Van Nostrand Company
16. – The American City, June 1975 Unions Want National Urban Policy, Too P. 50
17. A.P.W.A. Reporter, February 1974 Revenue Sharing and Public Works P. 14
18. The American City, September 1974 Local Governments Can’t Handle Revenue Sharing, Report Concludes P. 108
19. Professional Engineer, February 1975 Innovative Technology and the Cities: A Marriage as Yet Unconsummated P. 16
20. The American City, May 1975 Cities Face Huge Fiscal Gaps P. 26
21. Politics in States and Communities by Thomas R. Dye 1973 — Prentice-Hall, Inc. P. 59 – 60 –P. 536 – 538
22. The American City, January 1973 Revenue Sharing Funds – How Do Cities Plan to Use Them? P. 12
23. Municipal Maryland, December 1972 Uses of Revenue Sharing
24. Nation’s Cities, October 1972 The Future of Revenue Sharing P. 4
25. Nation’s Cities, October 1972 Revenue Sharing Becoming Law P. 5
26. Nation’s Cities, October 1972 Provisions of the State and Local Fiscal Assistance Act of 1972 P. 8
27. Nation’s Cities, October 1972 Revenue Sharings New Data Needs P. 11
28. Municipal Finance Officers Association Newsletter, March 1, 1973 Revenue Sharing Regulations Released
29. Department of Treasury’s Interim Revenue Sharing Guidelines
30. Washington Report for State Legislators, September 21, 1972 Outline of General Revenue Sharing Bill (H.R. 14370)
31. Washington Analysis (National League of Cities) September 1972 General Revenue Sharing as Agreed to by Conferees
32. M.F.O.A. Newsletter, April 1, 1971 Special Federal Revenue Sharing
33. The American City, November 1974 Free Bus Service Increases Retail Sales P. 19
34. T.A.C., November 1974 Bill Would Extend Revenue Sharing P. 32
35. T.A.C., March 1974 Act Now to Preserve Tax-Exempt Municipal Bonds P. 108
36. T. A.C., January 1975 Revenue Sharing Reenactment is Top Priority for I.C.M.A. P. 61
37. T.A.C., March 1973 Revenue Sharing Could Shrink Bond Market P. 28
38. T.A.C., May 1972 Look Before You Leap to New Tax Source P. 37
39. T.A.C., October 1973 How California Cities Will Use Revenue Sharing P. 110
40. T.A.C., November 1971 Doubts Expressed About Revenue Sharing P. 16
41. The Policy Setting: Analysis of Post-Vietnam Federal Aid Policy Alternatives by Richard P. Nathan Brookings Institute for the U. S. Congress Joint Economic Committee
42. Public Works, February 1974 Revenue Sharing Uses Take Form P. 7
43. Letter Appointing Federal Members of the Joint Federal-State Action Committee, July 20, 1957 by Dwight D. Eisenhower From Public Papers of the Presidents P. 562
44. T.A.C., August 1974 Revenue Sharing to be Pushed P. 6
45. Lyndon B. Johnson: The Exercise of Power by Rowland Evans and Robert Novak The New American Library — 1966 P. 501
46. U.S. News & World Report, February 21, 1972 Tax Sharing: Mills Plan vs. Nixon’s P.151
47. U. S. News & World Report, October 9, 1972 It Is Official: Who Gets What From Revenue Sharing P. 94
48. U.S. News & World Report, July 3, 1972 Revenue Sharing: Who’d Get What P. 46
49. U.S. News & World Report, August 28, 1972 Revenue Sharing’s Chance P. 68
50. U.S. News & World Report, October 2, 1972 Revenue Sharing – Where the Billions Will Go P. 20
51. T.A.C., December 1972 House Appropriations Chairman Seeks More Control Over Revenue Sharing P. 10
52. Many other Newspaper and Magazine articles and Letters too numerous to list
NOTE: T.A.C. – abbreviated for (The American City)