1/ "Equilibrium Full Employment Position," National Income and Product Accounts Basis--Mean of High and Low Projections. 2/ "Judgment Projection"--National Income and Product Accounts Basis. Orig 3/ "Funds Required"--Government Finances Framework. 4/ "General Expenditures"--Government Finances Framework. inal CED estimate of $131 billion, based on 1965 prices and using the "strengthened tax system, was inflated to 1975 prices for comparability with Tax Foundation estimate by assuming a price change of 1.5 percent per year. Source: ACIR Staff Estimates. However, National and State aggregates conceal wide variations in local revenue capabilities and expenditure requirements--a critical point that the authors of these studies both recognize and emphasize. Even if it is true that there will be no revenue-expenditure gap on the average, such gaps will develop in particular States--gaps which will have to be met from new tax and non-tax sources, increased rates, and more borrowing. One recent study, commissioned by the National League of Cities, actually projects an aggregate revenue gap for municipal governments alone of $262 billion over the next 10 years. 7/* The predictive value of expenditure and revenue projections diminishes as the focus of attention shifts from the nation to the State and particularly to the community. For example, many of our great cities appear to have a rather bleak fiscal prospect despite the finding that on the average States and localities should be able to make ends meet. The multiplicity of local governments adds a "third dimension" to any revenue and expenditure projection--an intergovernmental factor that tends to minimize the effectiveness of both the local property tax base and State equalization efforts and to maximize the effectiveness of forces pushing in the direction of greater expenditures. For example, the industrial assessments to be found in metropolitan tax havens or in "low rate" jurisdictions are locked up and thus enjoy a partial tax exemption privilege. On the expenditure side the multiplicity of school districts and units of general government create their own competitive demand for emulation--if one school district extends the school day or the school year, the neighboring jurisdictions will soon be confronted with the demand for comparable improvements. The multiplicity of governments and its political corrollary "home rule" can work against the most efficient allocation of resources--a "surplus" situation in one community ordinarily will finance projects of increasingly lower priority rather than underwrite a high priority function in a neighboring community confronted with a "deficit" situation. It should also be noted that the multiplicity of local governments creates a political milieu that makes State equalization efforts more costly than efficient. In order to help the poorer districts or communities, it is usually necessary to provide a measure of aid to all districts including the most wealthy. It is far easier to point out the policy limiations of National and State projections than to calculate a surplus or deficit for each major unit of local government in the United States. No organization has yet found it expedient to take on this painstaking task, and the Commission has not done so. Nevertheless, there is an imperative need for the type of information that will enable policymakers to draw reliable inferences about the shape of things to come at the local level in general and for metropolitan communities in particular. More specifically, what is the fiscal prognosis for our major central cities and their suburban communities? The Commission's assessment is presented in Volume 2. REVENUE SHARING Those troubled with the fiscal constraints with which State and local governments contend as they strive to respond to the people's burgeoning needs are understandably attracted to suggestions that the Federal Government deploy more of its resources to their needs. They received strong encouragement at the time of the 1964-65 Federal tax reduction, when much public discussion inside and outside the Federal Government focused on the striking revenue growth potential of the Federal tax structure and the long-run prospect of collections from present taxes outrunning anticipated Federal expenditure commitments. Revenue sharing is but one of several alternative methods for utilizing a Federal surplus (Appendix B, Table B-2). The idea of increased Federal financial assistance was given impetus by the suggestion, made by Chairman Walter Heller of the Council of Economic Advisors in 1964, that the Federal Government share some of its growing income tax collections with the States when another tax reduction opportunity presented itself. If State and local treasuries could be buttressed with general purpose financial aid they would be freer to shape responsive remedies to their particular local needs. To the extent that Federal taxes collected through the progressive income tax could be substituted for further increases in State and local collections from regressive sales and property taxes, the fairness of the overall American tax system would be improved. Federal tax sharing proposals had been sponsored inside and outside the Congress for some years. These earlier plans for general purpose revenue sharing, however, were on the basis of the place of collection and were criticized for failing to take account of State needs and resources and for ignoring the fact that people may pay their taxes in one State but live and work in one or more others. Dr. Heller proposed that the Federal Government share some of its income tax collections on the basis of population and that it depart from the long standing practice of limiting its aid to specifically identified purposes and functions. Key Features While the revenue-sharing idea has not been embraced by the National Administration, it has attracted strong Congressional interest. In the 89th Congress, at least 57 members sponsored or co-sponsored 51 tax-sharing bills. The 90th Congress in its first session alone almost doubled this number with other 110 Members sponsoring or co-sponsoring over 90 separate bills among which are 35 different variations on the tax-sharing theme (Appendix B, Table B-2). Basis of sharing--Most of the bills (69) introduced in the 90th Congress make provisions for sharing from one to five percent of federal income tax collections. Six bills use taxable income rather than actual tax collections in determining the amount set aside for distribution to the States. Two use total federal tax revenues and another two employ tobacco and alcohol tax collections. Allocation factors--Population, per capita income, and revenue or tax effort are the most popular allocation factors with 56 bills using a combination of these. Two bills use only population, two use population and per capita income, and one bill uses the combination of population and revenue effort. State shares based on each of these factors are set out in Table B-3. The return of Federal revenues directly to the States of collection was the most popular factor in the 89th Congress and still commands some support. Twelve bills use this factor, although it does not equalize among rich and poor States. Some proposals, most notably those advocating aid to education only, have other special allocation factors such as public school enrollment. Provision for local sharing--Thirty-two bills make no provision for local pass-through, leaving this to the individual States. Of the remaining number, forty-four specify that a certain percentage, generally 45-50 percent of the State allocation, go to local governments. One bill provides for direct sharing from the National Government to the metropolitan areas with at least 1.5 million people, under specified conditions. None of the bills introduced thus is directed explicitly to the reduction of fiscal disparities among jurisdictions in metropolitan areas. A per capita distribution formula would produce a moderate degree of equalization between wealthy and poor jurisdictions providing at the same time the most aid to the more populous jurisdictions. But in order to substantially reduce disparities between the relatively affluent suburbs and fiscally hardpressed cities, the population factor is not enough. Others may need to be included. If, for example, the local allocation formula were based on noneducational expenditures, central cities would receive greater aid than the suburban jurisdictions. The 35 largest central cities contain approximately 18.5 percent of the Nation's population, yet they would receive 28 percent of per capita funds adjusted for noneducational tax effort--a clear-cut method for compensating the central city for its municipal overburden. By the same token, the suburban communities in these 35 metropolitan areas, with 21 percent of the population in the United States, would receive 18.3 percent of the support grants. Thus, while coming to the aid of all communities, the most assistance would be extended to those communities with greatest need. State, local and selected city shares of a $4 billion support grant are set out in Table B-4. Expenditure controls--The great attraction for State governments is the prospect of "no-strings" use of the resulting funds. Both State and local administrators have long sought to obtain bloc grants, free from regulations as to matching and use, as described elsewhere in this Report. Expenditure controls on the Federal tax money being shared with States range from totally "free money" in nine bills to comprehensive and stringent State and local government modernization plans in another (Reuss H.R. 1166). The remaining bills provide controls ranging from compliance with certain Federal statutory requirements such as civil rights and fair labor practices to the submission of comprehensive State spending plans. Most bills call for periodic review of the program by the Federal executive and legislative branches. Relation to Federal grant-in-aid programs--Out of twenty-eight bills calling for a cut-back of existing grants-in-aid in the legislative preamble only three actually have a provision directing such a cut-back. Two other bills make such a cut back provisional. Illustrative Proposals The evolution of the concept of Federal general support for States and localities can be illustrated by several of the specific proposals pending in the 90th Congress. Javits bill (S. 482)--This bill focuses the shared revenues on expenditures for the major "people related" functions--health, education and welfare. It provides for one percent of taxable income reported on individual income tax returns to be set aside in a revenue-sharing fund, 85 percent to be distributed to the States on the basis of population and relative revenue effort with the remaining 15 percent used to supplement the shares of States with below average per capita incomes. A local pass-through provision requires the States to submit a local sharing plan each year but leaves the exact amount to be shared up to each State. The local allocation must take into consideration population, density, per capita income, local costs and any other relevant factors necessary to the individual State. The legislation prohibits the use of these funds for highways, property tax relief, debt service, disaster relief and administrative expenses. Tydings bill (S. 673)--This bill is unique in providing direct aid to metropolitan areas of 1.5 million people requesting a per capita allocation. A Commission on Federalism would be established to distribute to States a maximum of one percent of aggregate individual and corporate income tax receipts. The distribution would be on a population basis except where a Statelocal tax effort ratio is below the national average. Where direct allocation is made to a metropolitan area, the per capita amount allocated to the State for the area's population is reduced to two-fifths of the full amount it would have received--an incentive to a State for facilitating the creation of a metropolitan approach. Comprehensive State and local spending plans are to be submitted to the Federalism Commission acting in an advisory capacity only. It would, however, make an annual report to the Congress with an analysis and judgement as to the overall effectiveness of the plan as it operated in the previous year. Reuss bill (H.R. 1166)--This bill requires the modernization of State and local governments as a precondition of large scale Federal financial aid. It provides for a $50 million straight appropriation for initial planning grants to States to modernize State and local government; each State to receive a per capita share, but not less than a minimum of $250,000. This money is for developing a comprehensive State and local government modernization plan. The plan must meet certain requirements many of which parallel recommendations of the Advisory Commission on Intergovernmental Relations. The plan is subject to the approval of a regional coordinating committee, composed of representatives of Governors and this Commission. The National Government is to make available a sum of $5 billion annually for three years in the form of bloc grants to assist the States in implementing their plans. The distribution to States is on the basis of population, but up to 20 percent of the money can be redistributed to low-income States based on their relative poverty level, urbanization, and tax effort as determined by this Commission. Each State must distribute a minimum of 50 percent of its allocation to its local govern ments. Goodell bill (H.R. 4070) and Laird bill (H.R. 5450)--Two strong revenuesharing advocates have introduced bills that are similar in their sharing basis and their State distribution; both call ultimately for an appropriation of 5 percent of total individual income tax receipts. Both bills distribute 90 percent |