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National Needs Statement:

• Support the federal system by sharing Federal revenues with State and local jurisdictions and providing other forms of financial assistance.

• Reduce the impact of economic fluctuations on States and localities.

To meet our national needs in general purpose fiscal assistance in 1979, the Federal Government will spend an estimated $9.6 billion in support of the following major missions: • General revenue sharing: $6.9 billion. • Other general purpose fiscal assistance: $2.8 billion. The budget proposes to meet these national needs by continuing programs of general purpose fiscal assistance and providing a larger and more efficient direct subsidy for State and local interest payments. To carry out these missions, the following legislative proposals are included in this budget: • An extension of the current program of countercyclical revenue sharing (antirecession financial assistance). • Direct interest subsidy payments to encourage the issuance of taxable municipal bonds. The major missions are supported by the programs shown in the table on the following page.

General revenue sharing.—General revenue sharing has become a key element of the Federal Government's mission to assist State and local governments. Under legislation enacted in 1976, this program has been authorized through September 30, 1980. Full funding of the authorization for fiscal year 1979–$6.85 billion—is requested. As the law requires, one-third will be paid to State governments and the remaining two-thirds will go to local units of general government.

General revenue sharing is the only program of fiscal assistance that provides some funds to virtually every unit of general government below the Federal level. Nearly 39,000 units of government receive money four times a year. They may spend the money for any purpose permissible under State and local law, subject to minimal Federal controls. The principal Federal requirements of this program seek to assure nondiscrimination and public participation in spending decisions. In addition, governments that receive $25,000 or more in any one year must have their funds audited at least once every 3 years.


[Functional code 850; in millions of dollars]


mended Major missions and programs

budget 1977 1978 1979 1980 authority actual estimate estimate for 1979


[blocks in formation]






receipts ---Payments to States and counties from

Federal land management activities ----Other ---

434 483

247 424

395 461

434 483

463 483

Subtotal, other general purpose fiscal


9, 770



2, 776

2, 508


16, 632

9, 499

9, 860



Although the ease with which revenue sharing funds can be substituted for other resources makes it impossible to ascertain precisely how these funds are being used, voluntary reports from recipient governments indicate that the purposes for which revenue sharing funds have been used are as varied as are the needs of people in different regions of the country. One major city in the southwest used substantial amounts of the money to institute an emergency medical rescue system. A small town in New England has funded programs for the elderly. Reports also indicate that since the inception of the program in 1972, State governments have used most of their shared revenues to provide support for public education. Local governments have tended to spend most of their money for police and fire protection and transportation. The reports have also highlighted a trend toward spending increasing portions of revenue sharing money to operate and maintain programs rather than to undertake major capital projects.

Other general purpose fiscal assistance.—These programs also provide funds with minimal restrictions to States and localities. Total outlays are estimated to rise from $2.7 billion in 1977 to $3.0 billion in 1978 and then decline to $2.8 billion in 1979. The decrease results primarily from the anticipated decline in unemployment rates, which are part of the formula for computing payments under the antirecession fiscal assistance program.

Antirecession fiscal assistance to States and localities.—This program was established by the Public Works Employment Act of 1976. At that time, $1.25 billion was authorized to be distributed to States and local governments between July 1, 1976, and September 30, 1977. The program was intended to help local governments in areas of high unemployment maintain ongoing basic services.

In 1977, the program was extended through September 30, 1978, by the Intergovernmental Antirecession Assistance Act and an additional authorization of $2.25 billion was provided. Funds are distributed on the basis of a formula that takes into account unemployment rates and the relative size of general revenue sharing payments. As in the general revenue sharing program, one-third of each quarterly allocation of funds is paid to State governments and the remainder is distributed to local units of general government within the United States. The four American territories of Puerto Rico, the American Virgin Islands, Guam, and American Samoa are also eligible to receive funds under this program.

It is estimated that most of the funds available under current law will be spent before the end of 1978. While the budget anticipates an extension of this program, the administration expects to review its impact and make a specific recommendation concerning its future later this year. (The administration's urban proposals are discussed in the community and regional development function.)

Federal payments and loans to the District of Columbia.-The District of Columbia's operating budget is financed by annual payments from the Federal Government in recognition of the costs to the local government of the Federal establishment, and by local taxes. For 1979 a Federal payment of $317 million and water and sewer reimbursement charges of $10 million are requested. Additional authorizing legislation is proposed to increase the authorized Federal payment from $300 million to $317 million.

The District of Columbia Self-Government and Governmental Reorganization Act of 1973 (the “Home Rule Act”) authorized the city to issue short-term notes on its own behalf. Accordingly, interestfree cash advances from the U.S. Treasury to the District will no longer be made after 1978. The 1979 estimate provides for repayment of all outstanding Treasury advances and anticipates that the city will exercise its authority to borrow in the private market for short-term, cash management purposes. While the administration continues to support the District's efforts to obtain long-term bonding capability, the District will not be able to develop its capability to support capital improvements in 1979. In the interim, the District is authorized to borrow from the U.S. Treasury. The 1979 estimates provide for Federal loans of $120 million to fund capital improvements in the District.

Mineral impact loan assistance.—The administration has proposed legislation to amend existing authority for loans to States and local governments for the provision of public facilities made necessary by the development of minerals on Federal lands. Loans would be made against each State's future mineral leasing receipts. Such mineral development may sometimes result in substantial population increases in small communities and thus require construction of schools, fire houses and other public facilities. The proposed legislation would correct certain deficiencies in existing legislation and change the highly subsidized interest rate (3%) to the current Treasury borrowing rate.

New York City seasonal financing fund.—This fund authorizes short-term loans to New York City through June 30, 1978. These loans may not exceed $2.3 billion at any time, bear interest at a rate 1 percentage point above current Treasury borrowing rates, and must be repaid at the end of the city's fiscal year. These loans by the Treasury are purchased by the Federal Financing Bank and do not appear in the Federal budget totals. The administrative costs of servicing these loans are shown in the budget. The direct loan transactions are reflected in the budget schedules of the Federal Financing Bank in the Budget Appendix. Various proposals to extend and modify this program are under review.

Taxable municipal bond option.—Legislation is again proposed to provide States and localities with flexibility and an incentive to issue taxable, rather than tax-exempt, State and local bonds. There is no intent to eliminate the right of States and localities to issue tax-exempt bonds. Currently, interest income from most municipal securities is not subject to Federal income tax, allowing municipalities to borrow at lower interest rates. The loss of Federal tax receipts, however, exceeds the interest savings by State and local governments. Under the taxable bond option, subsidies would be provided directly to those State and local jurisdictions opting to borrow money at the higher interest costs of the taxable bond market. By providing a direct, rather than an indirect, tax subsidy, the Federal Government will ensure that State and local governments receive all the benefits of this subsidy. Currently, part of the subsidy goes to taxpayers in high tax brackets. For calendar years 1979 and 1980, the Treasury would subsidize States and localities for 35% of interest paid on newly issued taxable securities; in subsequent years the subsidy would be 40%. Associated outlays of $99 million in fiscal year 1979 would be offset partially by additional tax receipts.

Other payments.--Some jurisdictions also receive payments from the Federal Government based on the percentages of receipts generated in their jurisdictions from the sale of timber, mineral leases, grazing permits and other activities on Federal property and lands. Under a new law, Public Law 94–565, payments are provided to local governments in lieu of taxes for certain Federal lands contained within their jurisdictions. The Departments of Interior and Agriculture will return an estimated $621 million in 1978 and $676 million in 1979 to State and local jurisdictions. In addition, Federal taxes and other revenues generated or collected in the Virgin Islands and Puerto Rico by various Federal agencies are returned to those territories for their fiscal support.

Tax expenditures.—Major tax expenditures also provide fiscal assistance to States and localities. The exclusion from taxable income of interest paid on State and local obligations is discussed above in connection with the administration's proposal for the taxable municipal bond option. Under current law the related tax expenditure is $6.0 billion in 1979. In addition, the deductibility of State and local taxes from gross income allows individuals who itemize deductions to offset partially their State and local taxes through reduced Federal taxes; the revenue loss under current law is estimated to be $13.7 billion in 1979. The President's tax reform proposals include repealing the deductibility of State and local gasoline excise taxes, sales taxes, and certain miscellaneous taxes. These proposals, along with proposed lower tax rates, would reduce the tax expenditures associated with the deductibility of State and local taxes to $9.0 billion in 1979.

Related programs.-In addition to general purpose fiscal assistance, the Federal Government supports States and localities through a large variety of Federal grants-in-aid programs. These grants, which

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