grants to State and metropolitan educational agencies for D. Improved Statistics for Metropolitan Areas 11. The Commission recommends the establishment of a national system for the collection, analysis, and dissemination of social statistics, with full participation by Federal, State, and local governments, with special emphasis upon the development of such data for sub-State geographic areas (major cities, counties, and SMSA's) as well as State and national aggregates. 12. 13. The Commission recommends that the Internal Revenue Service expand its reporting of income statistics for Standard Metropolitan Statistical Areas to provide data for the units of general local government within such areas. The Commission recommends that Federal, State, and local Chapter 1 INTRODUCTION Much of the fiscal imbalance within our federal system can be traced to a revenue support for State and local governments that is something more than a three-legged stool, but less than a sturdy four-legged structure. Three powerful fiscal instruments now underpin most of State and local governments' response to America's major domestic government needs. These governments depend on property taxes ($26 billion), consumer levies ($21 billion), and Federal conditional grants ($17 billion) to finance their burgeoning obligations--the education of our youth, the care of the poor, the provision of streets and highways, and the maintenance of law and order in our communities. While increasing at a relatively fast rate, the revenue support provided by income taxes ($7 billion) still falls far short of that provided by the "big three" State and local revenue sources. The relatively poor support performance of the State income taxes has prompted "revenue sharing" advocates to urge the Congress to build up this "fourth" leg of the State-local revenue support system with some of the proceeds from the Federal income tax by earmarking it for State and local governments on a "no strings basis." In the view of these advocates, adoption of this policy would promote a more equitable and balanced use of revenue instruments, enhance the ability of State and local governments to solve their own problems, reduce State and local dependency on Federal conditional grants, and correct a growing fiscal imbalance between the National Government and State-local governments--an imbalance attributed to the National Government's superior tax gathering resources in general and to its intensive use of the income tax in particular. Its advocates view revenue sharing, the infusion of Federal income tax revenue into the State and local revenue system, as a fiscal innovation that is necessary to protect the political integrity of a decentralized system of government. Without a stronger revenue base State and local government will not be able to underwrite the nation's growing expenditure demands. Several significant developments strengthen the case for those urging a "new deal" in intergovernmental fiscal arrangements. Confronted with unremitting expenditure pressures, State and local policymakers have demonstrated remarkable political courage in raising taxes in general and property and consumer levies in particular. In less than 20 years State and local property and consumer levies have increased almost five fold, from $8 billion in 1946 to $47 billion in 1967. Over half of this unprecedented increase is directly attributable to new and increased taxes; less than half to the response of old taxes to national growth. This heavy pressure on property and consumer levies poses sharp equity and fiscal problems. Unless the subsistence of low income families is shielded from the reach of property and sales tax collectors, the productivity of these powerful revenue instruments is bound to be jeopardized by growing public protest. The demand of elderly homeowners for property tax relief is becoming especially strident, and public opposition to bond issues is becoming more apparent. The willingness of Congress to both support and stimulate State-local expenditure efforts has also generated considerable political and administrative concern. The increase in Federal conditional aid from $3 billion in 1956 to approximately $17 billion in 1967 has prompted political misgivings from persons favorably disposed to the dispersion of power and authority. They view with alarm State and local governments' growing dependence on Federal aid with expenditure strings attached because it permits the National Government to make many critical political decisions concerning the allocation of public sector resources in fieds heretofore the province of State and local government. Equally important, the rapid proliferation of Federal aid programs is causing apprehension even among those generally disposed in favor of a strong national position. Their concern runs to administration and problems of manageability as grant programs overlap and duplicate one another. The enormous productivity of the Federal income tax stands out in sharp contrast to a continually threatening State and local fiscal situation. Confronted with steadily rising expenditure demands, State legislators must rely upon a far less productive tax system and are hobbled by the fear of interstate tax competition. They must grope their way through the crossfire laid down by those urging greater outlay of State funds on services to their citizens and those demanding tax relief. The fiscal crisis in the Nation's major cities powerfully underscores the fact that even the construction of a balanced tax system at the State level will not insure an effective and equitable intergovernmental fiscal system. The growing fiscal disparities on the metropolitan front point up the unequal distribution of needs and resources among jurisdictions within the same economic community. In comparison with their suburban neighbors, many major cities are extremely short on tax resources and long on expenditure requirements. Increasingly these local jurisdictions are turning to the National Government for financial aid. However, as this Commission has warned in the past, if the States lose control over the metropolitan problem they lose the major responsibility for domestic government in the United States and in turn surrender any really significant role in the American federal system. These fiscal developments, singly and in combination, constitute a clear and present danger to both the spirit and substance of federalism--the systematic dispersion of political authority among Federal, State and local governments. Despite the powerful centralizing trends of the last five decades, the bases of American federalism remain strong. The eighteenth century political plan to diffuse political authority is still embedded in our Constitution. Indeed, this Commission necessarily proceeds from the assumption that for the foreseeable future there will be no basic changes in our formal constitutional arrangements for a National-State system, in contrast to a unitary or single-level form of government. It Federalism is also seared into the American political value system. is safe to assume that despite the growing administrative and financial involvement of the Federal Government in the domestic public sector, the concept of "grass roots" government will continue to enjoy strong popular support. Federalism also draws its strength from social reality. Despite the Nation's growing economic and cultural interdependence, our society is still pluralistic--a Nation of diverse regional and local attitudes and needs. The Commission placed the subject of fiscal balance on its study agenda at a time when there was a firm prospect of a Federal revenue surplus and an intensification of revenue stringency at the State and local level. In this context, "the fiscal balance" issue appeared to hinge largely on how best to deploy part of the Federal surplus to relieve State and local deficits and to improve the quality of the combined Federal-State-local tax system. During the intervening months, the preoccupation with excessive Federal surpluses was pushed to the background by the growing concern over a record Federal deficit and the threat of inflationary pressures culminating in the Administration's request for tax increases. There has been no lessening of fiscal pressure on the State and local front. That problem, especially the revenue pressures on the older industrial cities, is actually becoming more critical as the demands of the underprivileged become more strident. At this time, when the Nation is debating the appropriate response to the Administration's request for higher taxes and when the prospective budgetary situation remains uncertain, we are impressed with the hazards of prescribing a single, simple solution to the manifestations of fiscal tensions in the American federal system. We are convinced that the future of fiscal federalism must be built on firmer foundations than the fluctuating outlook for the Federal budget. Our need is for a broader, more balanced Federal-State-local approach to fiscal policy. In a very real sense, therefore, this study of the fiscal balance in our federal system entails an assessment of the contribution that Federal, State and local governments can make to our national objectives and aspirations--to the well-being of the American people. Our evaluation of more effective means of financing the nation's domestic requirements has unearthed a bewildering number of proposals to improve our intergovernmental fiscal arrangement. In evaluating relative merits of the variour proposals, we have been guided by the critical values we deem necessary for preserving a strong and viable federal system of government. We believe that, to the extent possible, any proposals calling for a substantial change in financing the intergovernmental a substantial role for the States. We believe further that any proposal calling for substantial increase in Federal assistance should: |