should recognize the potential coordinating role of the State by insuring that local governments do not spend Federal general support funds on projects or programs in conflict with comprehensive State plans.

A State planning requirement would encourage States to meet their responsibility for planning and coordinating the orderly and effective utilization of the State's physical and human resources. We do not view such a proviso as an invitation to discriminatory action by any State. It would not affect the components of any distribution formula laid down by the Congress. The money "due" the locality under such a formula could not be diverted to other localities or to the State itself. However, such funds could not be expended in ways prohibited by the State's development plans.

This Commission recognizes that the times are not auspicious for initiating the unconditional distribution of Federal Government resources, and that many recently enacted Federal programs are not adequately funded. However, Federal aid is projected to rise substantially over the next decade, affording an opportunity to channel part of this increase into general purpose grants to State and local governments.

Moreover, once we cut through the fiscal gloom occasioned by Vietnam requirements and take a realistic view of the revenue growth potential of the Federal income tax, it becomes readily apparent that a general support proposal makes good long-range fiscal sense. If military outlays decline, the National Government could conceivably be confronted with a surplus situation in a few years, assuming normal increase in existing Federal programs. Thus, due to the enormous growth potential of the Federal income tax, we could once again be confronted with the fiscal mismatch situation--affluence at the National level and relative stringency in State and local quarters--with its perverse tax corollary, Federal income tax reductions and State and local tax increases.

We do not share the concern, expressed by some, that general support grants would radically reduce the pressure on States to strengthen their own tax systems; nor do we share the fear of separating tax and expenditure responsibility. While it is true that each dollar of Federal general support aid reduces somewhat the need to raise tax revenue at the State and local level, for the foreseeable future there is no reason to believe that general support payments would reach such magnitudes or that the pressure to increase State and local expenditures would diminish to such an extent as to obviate the need for further State and local tax increases. Moreover, within this realistically modest range, a greater reliance on the income tax and somewhat less pressure on traditional State-local levies would add to the progressivity of the total tax system. Political realities will hold general support payments far below a level that would free the States and localities from pressure to raise revenue from their own sources. To put the issue more sharply, there is no reason to believe that the Congress would turn over the keys of the Federal Treasury to State and local officials.

In fact, under the Commission's proposal Congress is urged to build relative tax effort into the general support program as a precondition for receiving "no strings" Federal assistance. These natural lines of defense surely will suffice to encourage States and localities to exploit their own tax resources to the fullest extent practicable. Moreover, States and localities might be well advised to use general support funds to meet transitional costs of realigning the distribution of tax burdens on more equitable lines to the net benefit of the public.

By the same token, it is highly unlikely that Congress would permit "no strings" money to drive out categorical aid money. As long as Congress holds the purse strings, it will be under unremitting pressure to attach conditions to its grants in order to make sure that national expenditure policy objectives are realized with tax dollars collected from a national revenue system. This pressure will serve as a powerful countervailing force to the demands of State and local officials for ever larger shares of unconditional aid.

This Commission rejects the argument that unconditional assistance would be frittered away by the irresponsible and capricious acts of State and local officials. Even a cursory examination reveals that education, health and welfare, and highway needs determine State expenditure priorities in very much the same way as they influence Congressional aid decisions. Moreover, the charge of irresponsibility invariably rests on the highly questionable tendency to generalize from a few particular instances. There is also the obvious rejoinder that if we want State and local policymakers to assume a more responsible part in governing and servicing the needs of the American people they must be treated as responsible partners in our federal system.

While from a strictly budgetary standpoint it can be argued that the various methods for aiding State and local governments--i.e., revenue sharing, Federal tax credits, complete Federal assumption of welfare financing responsibilities and more generous Federal support of either narrow categorical or broad functional aids--are competitive, the point must be emphasized that it is necessary to take a broader view of these so-called alternatives. Each approach has its own fiscal and political strengths and weaknesses; none is a panacea for all the ills of our intergovernmental fiscal system.

The interests of fiscal federalism are best served by recognizing this fact and providing the proper combination of remedial ingredients necessary to strengthen our federal system. Categorical aids will undoubtedly continue to serve the Nation's needs well, especially for purposes of stimulation or demonstration, in those instances where the national interest in areas of traditional State-local concern are clearly identified. The Commission is heartened by the Partnership in Health Act of 1966 which was designed to "decongest the categorical arteries" with a functional bloc grant that allows States and localities necessary latitude to work out appropriate programs in a field where Federal support is warranted.

Recently, the Commission recommended a partial tax credit for State and local personal income taxes against the Federal income tax in order to offset the deterrent effect which intensive Federal use of this levy has had upon the State income tax movement. In effect the Advisory Commission's tax credit proposal in 1965 was designed to restore to the States the personal income tax option--a tax policy alternative that has become less attractive to State political leadership as Federal use of this tax has become more intensive. If States are to remain viable, they should have an opportunity to tap this first-rate revenue source under political conditions that make it no less attractive than general retail sales taxes.

But contemporary American federalism also requires another new approach: one in which there is the widest possible scope for developing State and local solutions to State and local problems in contrast to a solution prescribed by a Federal categorical grant. Such an approach is typified by the general support grant.

Opposing Views

Governor Bryant's Dissent on Recommendation No. 1:

In my view, the revenue sharing concept contains many far-
reaching fiscal implications for our federal system.
ceivably, in terms of its future effects upon fiscal feder-
alism, revenue sharing could rank in significance alongside
the adoption of the Sixteenth Amendment. In the absence of
widespread agreement as to the desirability of such a change
and in the absence of effective and specific checkpoints or
conditions governing revenue sharing, I cannot support the
concept at this time. Furthermore, the goal of complete fis-
cal equalization among States which is advanced by some of
the proponents of revenue sharing is one that I am not ready
to accept. I still believe in an intergovernmental system
that not only permits but encourages a reasonable degree of
fiscal self-determination by the States with consequent diver-
sity in their tax and expenditure policies.

Secretary Fowler's Dissent on Recommendation No. 1:

I am in agreement with this recommendation insofar as it calls for a more flexible grant-in-aid system and for consolidation of grants into broad functional areas. I also strongly favor more State and local participation in the development of joint governmental programs. The Administration is taking action along these lines in carrying out the President's directives in his message to the Congress on "Quality of American Government" on March 20, 1967.

As to methods of giving additional assistance to State and local governments beyond the present programs, many alternatives have been advanced including: substantial Federal tax credits for State income taxes; Federal assumption of a larger share of welfare costs (either directly or through such devices as guaranteed income or negative income tax); expanded urban programs with adequate funding of the Model Cities program and more flexibility provided through an urban development fund which merges different grant programs; and general support grants with a wide range of proposed formulas for distributing funds to States and to localities.

In my view, it would be premature to choose at this time between these and other alternatives, and, consequently I do not endorse making a recommendation in this area at this time. We are faced with extremely heavy demands on our Federal fiscal resources. Even in the post-Vietnam period there will be many claimants for Federal expenditures and for tax reduction. East of the alternatives proposed involves large amounts of money. Some of the new grant programs which are now small will certainly increase, and the plight of our cities, so well documented in this report, demands that our urban programs expand substantially. Furthermore, a proposal in principle is far from being a fully developed proposal. All the alternatives

involve difficult problems of implementation relating to tech-
niques, intergovernmental relationships, standards and the like,
and a wide difference of opinion presently exists as to the
proper solution of these problems.

Mayor Naftalin's Partial Dissent on Recommendation No. 1:

I am in complete agreement with this recommendation except for
that portion of the last sentence which introduces a comprehen-
sive State plan proviso.

I believe local governments, especially the large cities, are
in a far better position in terms of personnel capability,
knowledge and interest to establish needs and set program pri-
orities within their boundaries. States have yet to demonstrate
a sufficient sense of urgency about urban problems let alone
develop the competency to make this State planning requirement
work.

STRENGTHENING THE GRANT SYSTEM AT THE FEDERAL LEVEL

The Commission views the widespread dissatisfaction with aspects of the Federal aid system as a great opportunity to introduce new methods of channeling Federal funds to State and local governments. Even ardent conservatives concede that a number of categorical or functional grants are here to stay regardless of the make-up of future Congresses. Yet it would be desirable from their point of view to replace some of them with other forms of aid in order to promote State and local independence and individual self-reliance. Those who espouse general support payments as a means of inculcating a higher degree of progressivity into the Federal-State-local mix are quick to emphasize that many improvements could be made in the Federal aid system. Even the most staunch defenders of the categorical system have come to recognize that certain reforms are needed if the grant device is to continue as an effective vehicle for intergovernmental comity.

In the four years from 1962 to 1966 the number of separate grant authorizations more than doubled, from 161 to 379. Seventeen departments or agencies now administer one or more grants; and for eight departments or agencies, immediate administrative responsibility is assigned to 38 separate major subunits, such as bureaus or offices. Many of the grants are for closely related functions and activities.

Evidence from public officials at all levels of government indicates that the profusion and excessive categorization of grants has had adverse consequences. State and local officials complain of an "information gap"--confusion and uncertainty as to what grants are available, who administers them, what the varying requirements are, how closely related grants differ, how to go about making proper application. The information gap gives an advantage to the larger and better organized States and cities in getting Federal money. It encourages "grantmanship," a game which has attracted private consultants who, for a fee, guide the potential applicant through the maze of bureaucratic procedures and complicated catalogs of available grants.

The functional line agency specialists at State and local levels are likely to be well-informed about grants relating to their particular programs because of long-established channels to their counterparts in Federal bureaus. Chief executives, on the other hand--Governors, Mayors, county executives--have few built-in lines of communication. Consequently, they may find it difficult to carry out their basic responsibility for overall coordination and assessment of the impact of many individual grants on the total service needs and fiscal resources of their State or locality. Even where chief executives are properly informed, the inflexibility of many separate funds and requirements makes it difficult to mobilize available resources--local, State and Federal--for the most effective combined attack on community problems. This problem becomes more serious as we increasingly recognize the necessity for a comprehensive interfunctional approach to cope meaningfully with the most critical problems of human and physical development at the local level.

Excessive categorization increases the possibility of overlapping and duplication among grants. It may enable eligible applicants to "play off" two or more Federal agencies against one another, especially when the grants have different matching ratios.

Obviously, something must be done to simplify and reduce the number of separate grant categories; of late there are encouraging signs of concern and action at the Federal level.

Under the leadership of the Secretary of HEW, whose department administers over half of the 379 grants, the Comprehensive Public Health Planning and Public Health Services Amendments were developed in 1966 and were enacted by Congress. They provide for consolidating some 20 categorical grants, such as those for control and prevention of tuberculosis, cancer, heart disease and venereal disease, and establish a single set of requirements, a single authorization and a single appropriation.

Hearings of the Senate Subcommittees on Intergovernmental Relations and on Executive Reorganization in 1966 spotlighted the problems of coordinating the profusion of grants. Leading Administration officials have said that the proliferation in numbers hampers the effective execution of both new and continuing Federal programs.

In his message on "The Quality of American Government" in March 1967, President Johnson announced that he had requested the Director of the Bureau of the Budget to review the range of Federal grant-in-aid programs to determine additional areas ready for consolidation.

Despite these favorable portents, the prospect for reductions in the number of categorical grants is dim. Consolidation is a process fraught with difficulty. Categorical grants have evolved in response to certain policy and "practical" considerations, and while such considerations can hardly justify present excessive categorization, they can raise substantial obstacles of a congressional, bureaucratic and interest-group nature. The complexity and divergent program goals of the grant structure can also retard the development of workable consolidations.