of raising local revenues. Thus, the relatively good Federal taxation. flow back to local government will be supplanted by the generally regressive tax on home and personal property to make up the difference. This means more inequity heaped upon moderate income taxpayers. But in many places that will not be possible. In many States and cities, the cuts will simply translate into sweeping reductions in the quality of health care provided, in fewer police in the community, in fewer people monitoring water quality, sewer treatment and building and fire codes. It will mean an even lower quality of public institutional care in State after State. God knows, it is a national scandal now how few resources are being allocated to care for the sick, the aging and the helpless among us.

It is popular to deal with general revenue sharing allocations for the States separately from local government assistance. The conventional wisdom, after all, is that while many American cities are legitimately in need of Federal funds, the States have surpluses.

It is a fact, unfortunately, that some Governors like to play games with their budgets-understating revenue forecasts in order to look prudent at the end of the fiscal year. This kind of game-playing by Governor Brown in California involved building up a huge State surplus at a time when taxpayers were feeling real pain. That helped create the climate for the passage of the Jarvis-Gann proposition 13 referendum in California.

But California is not America. Federal Government figures show, in fact, that very few States are carrying surpluses. Most States need these funds. The States most in need are the States least able to impose new taxes at the State and local level.

In New York State, the State's share of general revenue sharing for fiscal year 1981 would amount to about $248 million. That is more than one-third of the total increase in State spending proposed by Governor Carey in a State budget that calls for drastic cutbacks in existing programs and the reduction of the State work force by more than 9,000 workers. Such a cut in a State like New York will surely result in reduced public services and layoffs that will only translate into Federal payments for unemployment insurance and other support programs. In Massachusetts, the State's share of general revenue sharing accounts for one-fourth of the total new State moneys for 1981.

The $110 million that is allocated for Pennsylvania each year amounts to 16 percent of the total increase in State spending budgeted there in fiscal year 1981.

The Governors of New Jersey and Connecticut have proposed tax increases to balance their budgets. But Connecticut assumes a continuation of State revenue sharing in its fiscal year 1981 budget and, without State GRS, New Jersey will certainly have fiscal difficulties.

I deeply regret the House Budget Committee's decision-evidently with administration compliance-to eliminate the $1.4 billion needed in the fiscal year 1981 budget to fund the State share. If that decision is not overturned, I foresee a fiscal disaster for many of our States.

It would also be a disaster for many local governments. A substantial portion of the revenue sharing money which goes to State governments is funneled on to the counties and cities. According to the National Governors' Association, about $922 million, or 40.1 percent of the State

share of GRS allocations in fiscal year 1980 was passed through to local governments. This is most common in those States that have hardpressed, older urban areas, but it is not limited to those States.

New York Governor Carey has said that if general revenue sharing payments to the State are cut off, then the State of New York should cut its own revenue-sharing program to urban areas. That could cost New York City alone over $37 million.

Virtually all of the $91 million in State GRS funds for Ohio in fiscal year 1980 were earmarked for local aid, mainly public school assistance. That State has no budget surplus, which means the cuts could not be absorbed by the State.

In Pennsylvania, again, nearly all of the State GRS money is allocated to local governments, mostly to school programs-$70 million. But Pennsylvania also passed on $14 million for local sewage treatment, $3 million for local public health programs and $24 million for county government programs. Pennsylvania has no budget surplus. Wisconsin gave its entire $50 million in State GRS funds to school programs, the biggest share to the troubled school system in Milwaukee. The State faces a deficit for fiscal year 1981. If GRS State funds are cut out, the schools will lose those funds.

In Maine, $13 million in State GRS was used to help fund the teachers retirement program, essentially a local problem. Those liabilities will continue even if the funds are wiped out, so the State, which has no budget surplus, will have to cut elsewhere.

In Chairman Fountain's home State of North Carolina, the State has no budget surplus. They have used much of their $55 million in State GRS for textbooks, schoolbus purchases and maintenance, improving local sewage treatment capabilities and other local government functions.

These cuts would work a hardship on local and State governments in the best of economic times. But now the administration seems likely, at last, to get its long-sought recession, the States and cities will face considerably greater costs for unemployment compensation, social services, and welfare aid.

That seems certain to be accomplished by higher unemployment, a fall-off in local income and sales tax revenues and higher costs for everything government buys because of inflation. I cannot think of a worse time to revoke the commitment made by the Federal Government to provide a steady and stable flow of Federal dollars to assist State and local government in meeting their obligations.

The administration has proposed $500 million as a substitute for the State share of general revenue sharing. It is no substitute at all. It is only in the arithmetic of the new thrift that $500 million equals $2.3 billion. It should be noted in addition that the $500 million would have to substitute for all cuts to aid to State and local governments included in the proposed budget of the congressional Budget Committees and the administration. The real cut in aid to State and local governments included in the President's and the Budget Committees' plans is $7 billion.

Finally, the targeting in that proposed $500 million program is turning out to be less than we originally supposed. If the moneys are allocated on the basis of the administration's revenue sharing formula,

the money will be spread far too thin to make up for the massive cuts in hard-pressed urban areas which are scheduled to occur in the President's and the Congress current budget plan for 1981.

As I mentioned earlier, general revenue sharing represents a progressive form of local government taxation not available in many States. In some respects it has served as a lever to encourage the reform of regressive State and local tax structures.

In our testimony supporting the original general revenue-sharing program in 1972, we proposed establishing a formula to reward States with a better-than-average reliance on progressive income taxes, and a less-than-average reliance on regressive sales and property taxes. While there have been some improvements in some areas, State and local tax systems remain, on the whole, extremely regressive. We support further attempts to prod States and localities into promoting progressive taxation methods.

We believe there is a need for tighter oversight of the use of revenue-sharing moneys, to make certain that the funds are not being misused or wasted. We support the establishment of State oversight commissions to recommend alternatives where problems develop around the financing of services or financial management.

With regard to the allocation formula used under general revenue sharing, we favor raising the ceiling on the maximum allowable revenue-sharing payment from 145 percent of the average statewide per capita allocation to 175 percent. Cities such as Baltimore, Philadelphia, and Detroit, currently in desperate need of more State and Federal aid, would see their revenue-sharing payments increase with enactment of this provision.

We wholeheartedly endorse a countercyclical aid program within the scope of general revenue sharing to increase aid to States and localities most affected by economic slowdowns. It may be wise to build in some sort of formula to allocate the State share, or some portion of it, to those States who are most in need-although I know the difficulty of getting the full Congress to agree on such a formula.

Since the financial strain of a slowed economy varies from State to State and locality to locality, a countercyclical program could effectively target funds to the most distressed jurisdictions. A countercyclical title within the General Revenue Sharing Act, more importantly, would make permanent the Federal Government's commitment to aid financially troubled States and localities.

I would like to emphasize the importance of upholding the multiyear entitlement features of the general revenue-sharing program. Nothing could more effectively undermine the program's usefulness than could subjecting funding levels to yearly appropriations. Yearly appropriations would prevent State and local governments from including general revenue-sharing funds in their proposed spending plans until funds were actually appropriated. With funding levels subject to yearly fluctuations, general revenue-sharing allocations would be treated as windfall gains and might be spent inefficiently. If the entitlement features of the program are to be dropped, they ought, at a minimum, be replaced by forward funding of the program to allow the States some time to plan for the most effective use of their Federal dollars in combination with their own revenues.

We thank you for this opportunity to express our views to the subcommittee about this vital piece of legislation. Our intimate involvement with the workings of States and localities, and the link between the program and the livelihood of many of our members, make our commitment to the passage of a comprehensive and equitable general revenue-sharing program a steadfast one.

Mr. FOUNTAIN. Thank you very much for your statement.

Our next witness is Arnold Cantor, assistant director of the department of economic research, American Federation of Labor and Congress of Industrial Organizations. He is accompanied by Robert McGlotten, associate director, department of legislation.

Both of these gentlemen are representing the AFL-CIO. We are delighted to have them with us this morning.

STATEMENT OF ARNOLD CANTOR, ASSISTANT DIRECTOR, DEPARTMENT OF ECONOMIC RESEARCH, AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS; ACCOMPANIED BY ROBERT MCGLOTTEN, ASSOCIATE DIRECTOR, DEPARTMENT OF LEGISLATION

Mr. CANTOR. Thank you very much, Mr. Chairman. Mr. McGlotten had a meeting, but hopefully he will be back before I complete our testimony.

My name is Arnold Cantor. I am the assistant director of the department of economic research of the AFL-CIO.

We are pleased to appear in support of a reauthorization of the general revenue sharing program for 5 more years at the present $6.85 billion annual level.

Recession, unemployment, rampant inflation and taxpayer resistance at all levels of government have resulted in an enlarging of the Nation's public investment gaps over the past decade. The prospects for the next few years point to even greater strains on the fiscal capacities of State and local governments, and there is a clear need to at least maintain, if not expand, those programs that are preventing a worsening of the situation.

As an example of this need, we should like to call attention to the data from the U.S. Department of Commerce-attached to my statement-showing the dismal record of State and local public construction over the past decade.

Mr. FOUNTAIN. Without objection, the data referred to will be entered in the record at this point.

[The material follows:]

Note: Outlay figures include grant-in-aid funds from the Federal Government

e Estimate

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis,

Government Division