Preserve and, if possible, enhance State and local fiscal effort; Further the achievement of national policy goals, including provision of positive support for Federal tax and expenditure policy objectives; and Compensate for the fiscal overburden imposed by the heavy concentration of high cost citizens in particular governmental jurisdictions and the increasing absence of selfsupporting taxpayers in those jurisdictions. Chapter 2 STRENGTHENING THE BASIC STRUCTURE OF FISCAL FEDERALISMFINDINGS AND RECOMMENDATIONS Whether measured in terms of the number of grants, their dollar magnitudes, or their effects on intergovernmental relationships, the Federal categorical grant-in-aid, the principal tool of fiscal federalism for a century, has had near explosive growth since 1963. The impact of Federal aid on State and local government over the past two decades has been felt more acutely by Governors, State legislative leaders and budget officers. Many of them believe that the increasing number of grant programs has led to greater Federal interference in their administrative and policy roles and that of late grants have tended to be less stimulative and most coercive in their impact. At the national level, there has also been a growing recognition of problems associated with manageability and administration of a large number of narrowly defined categorical aids. A hard look at the Federal aid system reveals a second major deficiency: a failure to sort out clearly the basic purposes for which the National Government should extend aid to State and local governments. The classic objectives of fiscal aid--equalization, stimulation, demonstration and general support-are not clearly differentiated under the present aid system. In the Commission's view, the need is urgent to sort out these basic aid objectives and to introduce a greater degree of "flexibility" into the entire aid system. NEW FEDERAL AID "MIX" Recommendation No. 1 The Commission concludes that to meet the needs of twentieth century America with its critical urban problems, the existing Federal categorical grants-in-aid, general functional bloc A new mix of Federal aid would have important advantages. First, the extension of broad functional Federal aid and the initiation of Federal general aid would maximize the advantages of decentralized decision-making by giving State and local policymakers greater freedom in setting their own expenditure priorities. Because of great diversity in domestic governmental needs across the nation, greater freedom at the State-local level is the necessary budgetary corollary to an efficient allocation of public resources. Second, this recommended policy would redirect the categorical system into those areas where each type of aid enjoys clear-cut advantages. Third, the call for general support grants clearly recognizes the revenue-raising superiority of the Federal Government--a superiority reflected both by the greater growth in the yield of the Federal income taxes as the economy expands and by the vulnerability of State and local governments to interjurisdictional tax competition. * Statements of reservation and dissent submitted by Chairman Bryant, Secretary Fowler, and Mayor Naftalin are presented on pages 11 and 12. Categorical Aid Overhaul The present grant-in-aid needs major overhauling. In terms of manageability at least, the law of diminishing returns applies to the steady proliferation of Federal categorical grants. Elsewhere in this report we emphasize the need for a drastic reduction in the number of separate aid categories. Beginning with such a reduction, the existing system could evolve toward a pattern of very broad categories, accompanied by planning and other requirements for the utilization of funds. But equally important, aid would have to be provided in magnitudes more commensurate with the intensity and seriousness of the problems. Broad Functional Grants The evolution in intergovernmental fiscal arrangements clearly points to more intensive use of the larger and broader functional grant. The Partnership in Health Act is an illustration of this kind of approach. This is a very effective method for reconciling national policy objectives with State and local fiscal and program requirements. An expanded program of grants in broad functional areas can zero in on critical problem areas such as urban poverty. This fact gives this approach the highest rating from an efficiency standpoint. A striking fact emerges from the Commission's analysis of fiscal disparities in metropolitan areas: between 1957 and 1965 the growth in State and Federal aid had the effect of slightly widening the disparities rather than narrowing them. This demonstrates the need to give our intergovernmental aid system greater equalization power below the State level. General Support Grant In the Commission's view, the case for Federal general support payments to State and local governments on a per capita basis adjusted for variations in tax effort is compelling and is supported by a broad range of considerations. It is the logical "next step" in the evolution of Federal assistance for domestic governmental purposes. Because general support payments would place State and local governments in a better financial position to solve their own problems, the federal system would be consequently strengthened. The infusion of this type of Federal aid would strengthen the financial base of State and local governments, while the unconditional character of the grant is in keeping with the objective of providing broad scope for decentralized decision-making. When adjusted to reflect variations in tax effort, it recognizes a substantial role for the State. The State that assumes financial responsibility for programs administered under its jurisdiction would be rewarded for going the extra mile on the tax-expenditure route. General support grants harmonize with one of the strengths of the American system--its diversity. States and localities must take different approaches to problems and all benefit by their experimentation. The National Government has a clearcut interest in creating a fiscal environment that is conducive to experimentation. If the benefits of diversity are to be exploited, and indeed enhanced, the National Government must help create a fiscal environment that will enable States and localities to exercise wide latitude in determining their budgetary priorities. Most States have made a rather impressive tax increase record, and a few States a commendable effort to make their highly regressive sales and property taxes somewhat more bearable for low income families. A general State and local fiscal problem of major proportions remains, however, so long as expenditures consistently outrun the natural growth in State and local tax yields. A program of Federal per capita general support grants would operate in the right direction from the standpoint of interstate equalization and could be adjusted to serve as a powerful equalization instrument below the State level. A per capita distribution formula would produce a moderate degree of equalization between wealthy and poor States, providing at the same time the most aid to the more populous States. If the poorer States were allowed to share more than proportionally in the per capita general support program, the equalization effect would be highly significant. More important, such a general support plan has the potential for substantially reducing disparities between the relatively affluent suburbs and fiscally hard-pressed cities. For example, if Federal general support were distributed to local governments on the basis of noneducational expenditures, it would go a long way toward relieving the central city "overburden" due in large part to the heavy concentration of low income persons in the major cities. New York City with approximately 45 percent of the State's population accounts for over 60 percent of all local governmental expenditure for noneducational purposes in New York State. Newark, with approximately 6 percent of New Jersey's population, accounts for almost 12 percent of all local noneducational expenditure in the State of New Jersey. In St. Louis, the ratio of noneducational expenditures to population is almost 2 to 1. That city has about 16 percent of the State's population but must finance 31 percent of Missouri's local noneducational expendi tures. If properly structured, general support grants could thus reinforce National Government urban policy objectives by reducing fiscal tensions between suburbia and the central city, and strengthen the fabric of an urban America. Moreover, because general support performs a vital equalization task, it is relatively free of the charge that it divorces tax and expenditure responsibilities. The reduction of intergovernmental fiscal disparities is a prime responsibility of the National Government, particularly in view of its superior fiscal capability. The general support technique holds real promise in terms of helping States and localities to defray the overhead costs of bundling many categorical and functional bloc grants into effective service packages. Thus, it could serve to emphasize the interrelationship between various types of aids. Moreover, general support assistance would overcome some of the handicaps said to occur in smaller and poorer communities that lack the talent for "grantsmanship" that is required to take optimum advantage of categorical aids. The "Pass-Through" Issue The most controversial aspect of this general support or revenue-sharing proposal is the manner in which Federal general support funds should be routed to local governments. The Commission does not take the doctrinaire position that all funds would have to be funneled through the State, nor on the other hand does it advocate a bypass-the-State policy. The Commission's position is that if Congress decides to distribute general purpose aid directly to local governments, it |