FEDERAL REVENUE SHARING

SHOULD THE FEDERAL GOVERNMENT SHARE ITS INCOME TAX REVENUES WITH THE STATE GOVERNMENTS? College Debate Issue

AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POL/CY RESEARCH 1 2 0 0 - 1 7 TH S T R E E T, N . W. - W A S H I N G T O N. D . C . 2 O O 3 6 THE AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH, established in 1943, is a nonpartisan research and educational organization which studies national policy problems. Institute publications take two major forms: 1. LEGISLATIVE AND SPECIAL ANALYSES-factual analyses of current legislative proposals and other public pol icy issues before the Congress·prepared with the help of recognized experts in the academic world and in the fields of law and government. A typical analysis features: ( 1) pertinent background, (2) a digest of significant elements, and (3) a discussion, pro and con, of the issues. The reports reflect no policy position in favor of or against specific proposals. 2. LONG-RANGE STUDIES - basic studies of major national problems of significance for public policy. The Institute, with the counsel of its Advisory Board, utilizes the services of competent scholars, but the opinions expressed are those of the authors and represent no policy position on the part of the Institute.

ADVISORY BOARD Paul W. McCracken, Chairman* Edmund Ezra Day University Professor of Business Administration University of Michigan

Karl Brandt Loy W. Henderson Professor of Economic Policy (Emeritus) Professor of Foreign Relations Stanford University American University George Lenczowski R.H.Coase Professor of Political Science Professor of Economics University of California, Berkeley University of Chicago Felix Morley Editor and Author Milton Friedman Paul S. Russell Distinguished Stanley Parry Service Professor of Economics Professor of Politics University of Chicago University of Dallas E. Blythe Stason Gottfried Haberler Dean Emeritus, Law School Galen L. Stone Professor University of Michigan of International Trade George E. Taylor Harvard University Professor of Far Eastern History and Politics C. Lowell Harriss Far Eastern & Russian Institute Professor of Economics University of Washington Columbia University

OFFICERS

Chairman Carl N. Jacobs Vice Chairmen Henry T. Bodman H. C. Lumb

President Treasurer William J. Baroody William G. McClintock

Thomas F. Johnson Joseph G. Butts Director of Research Director of Legislative Analysis

Earl H. Voss Director of International Studies

*On leave for government service October 21, 1969

FEDERAL REVENUE SHARING College Debate Issue

TABLE OF CONTENTS

Page PREFACE------v CHAPTER !--FEDERAL GRANTS-IN-AID------�------1 I. Introduction------1 A. Definitions and Characteristics------1 B. Types------2 II. The Development of the Grant System------3 A. Origins ------3 B. The Depression Decade------3 c. Post-World War II Era------3 D. Reasons �or Grants------5 III. Amounts and Trends in the Grant Program------6 A. Federal Grants Relative to Other Financial Trends---- 6 B. Regional Distribution of Federal Grants------8 c. Federal Grants to the Cities------9 D. Trends in Grant Expenditures by Major Functions------10 IV. The Future------12 A. Program Priorities------12

V. Sununary------.------14 Discussion Questions--Chapter 1------15

Footnotes--Chapter 1------lf CHAPTER !!--DEFINITIONS AND PLANS------18 I.Introduction------18

-i- II. Definitions------18

A. "grant annually a specific percentage of its income tax revenues------18 B. "income tax revenues"------21 C. "to th e state governments"------23 D. Summary------23

III. The Range of Recent Proposals------24

Discussion Questions--Chapter II------28 Footnotes--Chapter II------29

CHAPTER III--THE BURDENS OF STATE AND LOCAL GOVERNMENT------31

I. Historical Background------31

II. State-Local Government E xpenditures------32 A. Education------33 B. Highways------37 C. Aid to the Poor------37 D. Health Care and Hespitals------38 E. Miscellaneous Expenditures------�------39 III. State Burdens------39

A. State. Transfer P ayments------40

IV. The Cities------40

A. Metropolitan Growth------40 B. Future Cost Problems------41

V. Summary------42 Discussion Questions--Chapter III------43

Footnotes--Chapter III------44

CHAPTER IV--THE ECONOMICS OF REVENUE SHARING------47 .I. Introduction------47

II. State and Federal Financial Resources: A Comparative Analysis------47

A. The Pessimistic View of State Finances------48

-ii- Page B. The Optimistic View of State Finances------49 C. The Federal Revenue Situation------SO

III. The Relative Merits of State and Federal Taxes and Taxing Systems------52 A. The Possible State Responses to Revenue Needs------53 B. Competition For Industry and State Tax Policies------54 c. "Benefit Spill-Overs" and State Taxing Policies------55 D. Disparities Between Rich States and Poor States------57 E. Are State Taxes Regressive?------59 F. The Political Feasibility of Increasing State and Federal Taxes------61 G. The Comparative Elasticity of State and Federal Taxes------63 H. State Taxes and Economic Recession------64 I. Administrative Efficiency and the Choice of Tax Mechanism------65

IV. The Alternatives: Grants-in-Aid and Federal Tax Changes------67

A. Are Grants-in-Aid Inherently Unsatisfactory?------67 B. Federal Tax Changes------70

V. Revenue Sharing and State Fiscal Effort------71 VI. Concluding Comments------72

Discussion Questions--Chapter IV------73·

Footnotes--Chapter IV------75 CHAPTER V--REVENUE SHARING AND FEDERALISM------82

I. Introduction------82 II. Revitalized FederaHsm· ------82 A. Revenue Sharing and the Goal of Decentralization----- 82 B. Revenue Sharing and Governmental .Response to the Popular Will------83 c. Revenue Sharing and the Role of the States In Public Policy Innovation------� 86 D. Opportunities for Innovation at the Federal Level---- 89 E. Summary------94 III. The Dangers of Decentralization------94 A. The Competence of the State Legislative Process------95 B. The Character of the State Bureaucracy------99 C. The Position of the Governors------101 D. The States and the Cities------102

-iii- Page IV. Conclusion------.------108

Discussion Questions--Chapter V------109 Footnotes--Chapter V------111

Bibliography------.------i16

-iv- PREFACE This Special Analysis is concerned exclusively with the issues presented by the 1969-70 intercollegitate debate proposition: "Resolved: THAT THE FEDERAL GOVERNMENT SHOULD GRANT ANNUALLY A SPECIFIC PERCENTAGE OF ITS INCOME TAX REVENUES TO THE STATE GOVERNMENTS." It is published by the American Enterprise Institute in response to many requests from college debaters and coaches for background materials and references on the subject of the debate proposition. It was prepared by Professor John A. Lyn�h, Director of Debate at St. Anselm': College, Manchester, New Hampshire; and Professor Robert M. Shrum, Director of Debate at Boston College, Chestnut Hill, Massachusetts. Both authors come to the project w�th extensive backgrounds as intercolleg.iate debaters and debate coaches.

The authors wish to stress at the outset that they are not ex­ perts in the subject matter of the resolution. They have, however, tried to assemble, organize, and present authoritative material in such a way as to assist debaters seeking to delineate and explore the central issues raised by the national debate proposition. This Analysis is not intended to provide a complete review or an end to the debater's research, but is designed rather to serve as a guide to the start of research and a stim­ ulus to its continuation. To this end a bibliography has been included listing many more references than those quoted in ,the text and cited in the footnotes.

The American Enterprise Institute and the authors wish to ex­ press their appreciation to the following persons who have read the Analysis and offered useful suggestions during its final preparation: Mr. Paul Dowd, Director of Public Relations, St. Anselms's College; Pro­ fessor Robert M. O'Neil, Associate Professor of Law, Univer�ity of Cal­ ifornia at Berkeley; Dr. William M. Reynolds, Department of Speech, George Washington University; Professor George Schell, Director of Debate, Loyola University of Los Angeles; and Professor James J. Unger, Director of Debate, Georgetown University. A special note of thanks is due Mr. David M. White, Assistant Director of Forensics at Georgetown University, for his invaluable assistance in the preparation and editing of this analysis and the three that preceded it.

The Analysis should not be construed as reflecting any policy position on the part of the American Enterprise Institute.

-v- CHAPTER I FEDERAL GRANTS-IN-AID I. Introduction

In dealing with the debate proposition that the federal govern­ ment should grant annually a specific percentage of its income tax revenue to the state governments, we will begin with federal grants-in-aid because this is primarily how the federal government now shares its revenues with the states. After defining grants-in-aid, we will trace their growth and the way in which they are distributed among the states and localities. Finally, we will examine the spending trends in the various categories of the grants.

This chapter draws heavily from a study by Deil S. Wright, Professor of Political Science at the University of North Carolina. Pro­ fessor Wright's study, Federal Grants-In-Aid: Prospective and Alternatives, was published by the American Enterprise Institute for Public Policy Research. A. Definitions and Characteristics The principal forms of direct federal financial assistance to the states are grants, shared revenues, and loans. Grants, however, are estimated to account for 99 percent of total aid in fiscal 1970. lf A federal grant-in-aid is "the payment of funds by one level of government (the federal) to be expended by another level (the state or locality) for a specified purpose, usually on a matching basis and in accordance with prescribed standards or requirements." Y There are five principal characteristics of grants: 1. Basic authorizing legislation establishes a grant for a specifed number of years or on a continuing basis.

2. Annual congressional appropriations provide the grant funds (which may be less than the amotmts authorized) that are distributed among the states --usually in accordance with a legisla­ tively prescribed formula, --generally contingent on state or local matching funds, and --almost always based on conditions that the recipient state or local unit agrees to respect. 3/

!f See footnotes at end of chapter.

-1- 3. The grantor supervises, reviews, approves, and audits the receiving units.

4. Funds are generally allocated to units of government and not to individuals, specialized subsidiary public agencies, nonprofit and semi­ public groups, or private firms. 5. Grants provide for the purchase of goods or services and the payment of benefits to the public, in contrast to loans and repayable ad­ vances or payments for reimbursable services rendered to the federal government. 3/

B. Types Grants-in-aid are either formula grants or project grants. For­ mula grants are distributed to all state governments (or indirectly to local governments) in accordance with a formula enacted into law. The recipients are entitled to their share of grant funds as a matter of "right," subject of course to the ceiling imposed,by the amount of money appropriated. On the other hand, grants to meet specific problems--project grants-- are not necessarily spread uniformly among all states. Eligible jurisdictions are specified, but they must take the initiative in apply­ ing for the grant. Subject to congressional guidelines and within fund­ ing 0limitations, federal administrators use their judgment in making project grants, for exafnple, urban renewal programs, or Neighborhood Youth Corps contracts.

Both project and formula grants usually contain a cost-sharing or matching requirement. All of the latter and a few of the former also include formulas for apportionment of available grants among the states or localities. Some�imes the apportionment formula contains a factor for equalizing the grants among the recipients on a basis of need (such as population) or fiscal capacity (usually per capita personal income). Matching or cost-sharing are of two kinds: variable matching, reflecting differing abilties of the states or local recipients to support the aided function; and fixed ratio matching, under which each recipient is required to share the same proportion of the program costs.

Perhaps a distinction should also be made here between categor­ ical grants and block grants. Categorical grants are made for narrowly circumscribed purposes determined by Congress to be of national concern. Examples are grants for sewage treatment facilities or old age assistance. Block grants are either unconditional fiscal grants to a specified level of government, or grants earmarked for broad program purposes, such as education or welfare. Some of the proposals now receiving national attention (and probably some that debaters may employ) would distribute federal money in the form of block grants. At present, substantially all

-2- federal grants are categorical grants, although money provided to the states under the Partnership in Health Act of 1966, for example, is i n some respects a block grant for health purposes.� II. The Development of the Grant System

A. Origins For the most part, "federal grants-in-aid--complete with their features of apportionment formulas, matching requirements, and preparation of state expenditure plans--are a twentieth century phenomenon." 5/ But their roots are g_enerallytraced back to 1862 when Con2ress enacted the Morrill Act. The Morrill Act gave federal lands and later money to es­ tablish colleges in every state. 6/ These grants were outright donations with no matching requirement and no federal supervision. Not until 1887, when. the Hatch Act made grants to each state to establish agricultural experiment stations,did Congress impose the modest condition that a financial report be submitted annually, and not until 1911, by the Weeks Act, which offered grants for fo_rest fire protection, did Congress require advance federal approval of state plans and federal supervision of state performance.

B. The Depression Decade In the "Depression Decade" of the 1930s, the federal government vastly expanded its assistance to state and local governments although the number of program areas was not extensive. These new welfare and economic security measures were designed not only to help individuals but also to alleviate the intense pressures on shrunken state and local resources. Other measures were inaugurated to provide low-rent public housing and improve health services. Most of these grants, especially those authorized by the Social Security Act of 1935, provided for exten­ sive administrative supervision by the federal government. About a half dozen of the depression-born grant programs that provided emergency relief of various kinds expired in the late 1930s and early �940s; others con­ tinue in some form. C. Post-World War II Era

During the past 25 years, and particularly in the last ten, federal aid expenditures have grown at a rapid and accelerating rate. The 1970 Special Analysis prepared by the Bureau of the Budget-observes: The decade.ending in 1970 will have witnessed · a period of intergovernmental action unpara­ lleled in the history of this country. From 1960 to 1970, Federal aid will have reached a cumulative total of more than $135 billion, roughly half again as much as the cumulative amount provided from 1900 to 1960. In 1970

-3- total Federal aid to state and local governments is estimated to be $25 billion, $4.2 billion more than 1969, and more than triple the amount in 1960. ?J

Professor Deil S. Wright, Professor of Political Science at the University of North Carolina, notes five significant developments in the field of grant programs that have accompanied this growth in expenditures: First, federal grants have undergone "extensive proliferation in••. number and variety." Second, there has been a significant shift toward the kind of grant that either bypasses state governments or involves them only minimally, for example, as funnels for passing funds to units of local government. Some grants, notably those under the poverty program have even bypassed local governments. Moreover, increasingly, equalization for­ mulas have been used for allocating grant moneys among the states. Under these formulas, differences in state fiscal capacities are recognized and lower-income states receive more (on a per capita or some other basis) than wealthier ones. Fourth, in the newer programs the emphasis has shifted to urban problems. Finally, some programs established ostensibly and primarily for state and local governments have also been open to vol­ untary nonprofit groups performing a public function. This approach has been used in the fields of education, hospitals, ,and economic opportunity.!/

In assessing the significance of the growth in federal grants, it is difficult to avoid the "numbers game" because it is difficult to know what to count. For example, Wright cites one estimate, made in 1966, that counted "subcategories or separate authorizations" and came up with a total of nearly 400. 9/ Another estimate counted authorizations" and came up with a total of�79 as of January 1, 1967. 10/

A more widely use approach according to Wright is to count pro­ grams. But, here again,what constitutes a program? For example, should grants for the five different categorical aids in the public assistance area (aged, blind, dependent children, disabled, medical aid to the aged) be counted as one program or five? Fortunately, some consistency in the definition of programs is developing, as a result of a comprehensive catalog prepared by the Library of Congress at the request of the Sen­ ate Subcommittee on Intergovernmental Relations. This catalog counted programs or groups of closely-related programs, and came up with 115 as of April 1, 1964. .!.!/ The count of 115 programs is necessarily some­ what arbitrary. It refers to the number of separate statements in the catalog. The several Federal aids for highways are described in a single statement, and, therefore, counted together as one item. Likewise counted as a single program in each case are public assistance, community and environmental health activ­ ities, and vocational education--each encompassing numerous subcategories. If each subcategory in all

-4- the statements is counted as a separate program, the catalog identifies 216 authorizations for Federal assistance to State and local governments. In sev­ eral instances, particular subcategories actually are not separate programs, but in other cases even a subcategory may comprise aids for varied activities or services. 12/

Subsequently, a supplement to this catalog, based on data as of January 1966, brought the total number of programs to 162. 13/ D. Reasons for Grants

Why have federal grants grown so much? Some of the reasons will be explored later in this study. Generally, beginning with the Depression of the 1930s many state and local governments felt inexorable pressures to enlarge public expenditures beyond the willingness or ability of their citizens to pay higher taxes. It was argued that the federal government was able to raise funds--either by borrowing during the 1930s or, more recently, from a rapidly growing income tax--with less difficulty than states or localities. Supporters of federal grants argue that the federal revenue system utilizes taxes which come nearer to meeting the criteria of a good revenue system than do taxes of states and localities. Thus, one may ask why the federal government does not take over more of the functions now performed by lower levels of government. One reason is the traditional American view that the best government is that which is closest to the people. Another reason is the constitutional concept of federalism--the division of functions between the states and the national government. Congress apparently remains convinced that the grant system maintains the balance between higher and lower levels of government.

The federal government's use of grants may also reflect the belief that certain specific national objectives require additional public expenditures. It is argued, for example, the common responsibility for defense, the constant movement of the population and the interdepend­ ence of all parts of the economy--all combine to make health, education, reduction of poverty, mass transit, and so forth, more nationwide and less completely local matters than Americans once believed. When some areas fail to provide good quality public service, people in other areas, far removed, may suffer at least a little. Should all taxpayers be com­ pelled to help pay for service in other areas? It has been argued that some spillover benefits will develop and that the nation as a whole will benefit.

Probably some support for federal grants is based on the belief that the larger federal jurisdiction can and will direct performance to achieve better results than the smaller ones acting on their own. For instance, the growth of federal-to-state grants for public ·welfare xests in part upon a belief that the provision of relief aid is more properly the responsibility of the larger rather than the smaller units of

-5- government. As pointed o�t in Chapter III, the federal government now supBlies more than half of public welfare funds spent by the states .14/ Otherwise. some localities (or states) would have much greater burdens per capita than would others. And the sources of distress and the causes of poverty, it is argued, lie in forces operating on a broader scale than any single area can combat. Moreover, the ability to finance relief aid may be the least just where the need is greatest.

III. Amounts and Trends in the Grant Program

A. Federal Grants Relative to Other Financial Trends 15/

The Bureau of the Budget estimates that approximately $25 billion in federal aids will be distributed among state and local governments in fiscal 1970, compared to $4.9 billion in 1958. In 1969, it is estimated, such aids amounted to $20.8 billion, or more than one-fifth of federal outlays f(jjr domestic programs. 16/ In terms of direct cash flow, about seven-eighths of total grant fund�goes to the states, with the balance going to the localities. However, the states channel much of their share into metropolitan areas.

TABLE 1

FEDERAL-AID OUTLAYS IN RELATION TO TOTAL FEDERAL OUTLAYS Federal aid as a percent of

Federal aid: Total Federal Domestic $millions C:lutlays Federal Outlays 1

1gs8------$4,935 6.1 14,6 1959------6,669 7.4 16.6 1960------7,040 7.8 17.2 1961------7, 112 7.4 15.7 1962------7,893 7.5 16.4 1963------8,634 7.7 16.4 1964------10,141 8.6 18.2 1965------10,904 9.3 18.8 1966------12,960 9.9 20.3 1967------15,240 9.9 20.7 1968------18,599 10.4 20.9 1969 estimate------20,813 11.3 22.0 1970 estimate------25,029 12.8 23.6 1 Excluding expenditures for defense, space, and international programs, excludes trust funds and Government-operated enter­ prises. Source: Special Analyses: Budget of the United States Fiscal Year 1970 (Washington: Government Printing Office).

-6- I� the past 25 years, federal grants have represented a grow- ing. proportion . of both revenue and expenditure aggregates at the state and local level. From 1946 to 1965 grants inc-reased from less than 8 percent of state-local revenue to nearly 17 percent (see Tahle 2), and the £igure for 1969 is �stimated at approximately 18 percent. 17/ In general, the same upward trend can be observed for state-local�xpenditures. In the 1946-1965 period, grants as a percentage of state-local expenditures nearly doubled, and for state expenditure only (exalusive of local out­ lays) the increase was almost as great.

TABLE 2 FEDERAL GRANTS-IN-AID and STATE-LOCAL FISCAL AGGREGATES,! 1946-65 Grants as a Percent of State-Local State-Local General General 2 State General Revenue 2 Expenditures Expenditures 2 Year 1946------7.8 8.8 20.4 1948------10.5 10.2 20.9 1950------12.0 10.9 22.5 1952------10.5 10.1 21.2 1953------11.3 11.0 23.2 1954------11.4 10.7 23.0 1955------11.1 10.1 21.8 1956------11.5 10.8 23.2 1957------11.1 10.4 22.2 1�58------13.0 11.8 25.2 1959------16.2 14.9 32.0 1960------15.7 15.2 33.4 1961------15.6 14.9 32.7 1962------15.3 14.8 32.4 1963------15.4 14.9 32.0 1964------16.9 16.7 35.6 1965------16.8 16.7 35.5 I.The percentages in this table are slightly and uniformly higher than those for similar aggregates appearing in U.S. Budget and Special Analyses tabular presentation. These differences result from the inclusion of intergovern­ mental revenues in the Budget Bureau figures. 2 Excluding intergovernmental revenue, and also excluding revenue or expen­ diture items derived from utilities, liquor stores, employee retirement, and other insurance trust fund sources. Source: Deil S. Wright, Federal Grants-in-Aid: Perspectives and Alternatives (Washington: American Enterprise Institute, 1968), p. 70.

-7- Professor Wright concludes his discussion of the importance of grants to state and local budgets with the following comment:

The dominant feature of this time series, however, is the major reliance of the states on federal grants. More than one-third of state-financed general expend­ itures is derived from federal grants. Currently, the state-local sector is receiving more and spending more in proportionate terms from federal grants than at any other time since World War II. In other words, federal grants are increasing at a more rapid rate than state and local revenues or expenditures. 18/

B. Regional Distribution of Federal Grants

As table 3 shows, the distribution of federal grants on a reg­ ional basis ranges from a high of more than $3.6 bil lion in the southeast to a low of $535 million in the Rocky Mountain area. However, when account is taken of population differences, the Rocky Mountain area ranks highest with grant p�yments per capita reaching nearly $112:33 while the Great Lakes and mideast regions are the lowest with.$53.61 and $63.40 per capita, respectively. Population density and per capita income are the two major factors which account for this wide variation.19/

TABLE 3·

REGIONAL DISTRIBUTION OF FEDERAL AID, 1967 Percent of Total State and Region (in mil lions Per capita local govern­ of dollars) ment general revenue New England------­ 822.5 72.63 15.7 Mideast------­ 2,641.1 63.40 12.5 Great Lakes------2,101.3 53.61 12.7 Plains------1,207.1 75 .so 16. 3 Southeast------­ 3,629.6 83.74 22.2 Southwest------­ 1,379.9 86.16 20.9 Rocky Mountain------­ 534.8 112. 33 21.5 Far West------2,426.2 94.90 16.1

United States------15,239.sl 77.02 16.7 1 Includes $497 million for Puerto Rico, the Virgin Islands and other adjustments.

Sources: "Annual Report of the Secretary of the Treasury" and "Govern­ mental Finances in 1966-67," Bureau of the Census. These reports pro­ vide additional information concerning State distribution of Federal grants

-8- Population ?ensity �s inversely related to the level of per capita aid. The population density of the Rocky Mountain area is the lowest of the regions, while per capita aid is the highest. At the other end of the scale, per capita aid is lowest in the Great Lakes and mideast where po�ula!ion density is the g eatest. This inverse relationship stems primarily from grants for highway7 construction and other grants where program needs are related only indirectly if at all to population density. Per capita aid is also inversely related to per capita income� 20/ There are two reasons for this relationship. First, some grant programs,� such as grants for hospital construction, require lower matching by the relatively poorer states. Second, certain grant programs, such as those for public assistance and elementary and secondary education, are de- signed to aid the disadvantaged and, hence, tend to flow to the states having proportionately more individuals with lower incomes. This tendency probably reflects the growing impact of fiscal equalization found in sev­ eral recent grant programs. These provisions are designed to help states with relatively meager resources to participate more effectively in many jointly financed programs. On the whole, however, federal grants are probably only mildly equalizing because grant programs do not always take into account per capita income. C. Federal Grants to the Cities Federal grants made directly to local units of governments originated during the Depression. Ad hoc agencies such as the Public Works Administration (PWA), Works Progress Administration (WPA), and others were designed to'provide employment and other forms of relief to the hard-pressed localities. Many of these programs provided direct federal aid to the cities, bypassing the states in the process. 21/ Early in World War II, the economic crisis which created these programs abated and the agencies and the grants were liquidated. Gradually in the post-war years, a new limit in grant programs occurred, particularly in those programs emphasizing �uman and community development. Some of these programs provide grants directly to urban areas. Other programs, involving even larger amounts �f m�ney, us: the states as intermediaries to funnel moneys to the localiti�s.. For instance, direct federal aid to urban governments totaled approximately $1.5 billion in 1966. 22/ On the other hand, federal aid to urban areas, much of which was funneled through the states, was approximately $7.4 billion in the same year or 57 percent of total grant moneys.23/ In 1970, an estimated $16.7 billion is expected to go to urban areas or 67 percent of the total $25 billion. 24/ It is obvious that federal aid to urban areas is a sign:i..£.icant and growing factor in federal grant trends. The new grants providing aid to urban areas are often directly federal-local, bypassing the state�-· Some of the Office of Economic Opportunity programs even de-emphasize the role of the local government and stress involvement of unofficial local groups. 25/ Perhaps the most significant recent federal-local program is the Elementary� and Secondary Education Act of 1965. Previously, local governments looked to the states because federal aid was not very significant. 26/ The

-9- Elementary ·and Secondary Education Act authorizes grants to school districts with large numbers of children from low-income ±amilies. _The_alloc�tion grants for this program assign larger amounts to school d1str1cts with minimum resources and raise the share of the cost borne by the federal government. In some instances the school district does not have to match funds, and thus, the federal contribution is 100 percent. The growing trend of direct federal-local grants has obvious significance for the college debate topic. The debate topic requires the affirmative to support grants to "the state governments." Why is there a growing tendency toward federal-local grants which bypass the states? Are such grants more advantageous to national politicians? The argument has been advanced that most state governments have not been interested in urban renewal, airport construction, and the war-on-poverty and did not object to federal-local action. 27/ In any event, a federal­ local relationship developed and federal assistance is provided to numerous localities without an intervening state authority.

D. Trends in Grant Expenditures by Major Functions

What are the trends within each of the major functional areas? To answer this question, we will turn to Table 4 and offer a few general observations about the long-term trends for each major function.

1. Health, Labor, and Welfare Grants for health, labor and welfare have grown steadily since the end of World War II. During the early 1950s these grants ranged from 73 percent to 58 percent of all federal grants to state and local governments. The spending impact of urban renewal (1954) and the Federal Highway Act (1956) reduced this functional category to roughly 43 percent of total grants between 1959 and 1965 and raised commerce and transportation grants to the health, labor, and welfare level. Between 1963 and 1968, due to expanded economic opportunity and public assistance programs, this category doubled from $4 billion to about $8 billion and regained its lead as the largest spending area within federal grants.

2. Commerce, Housing, and Transportation Except for the 1959-65 period, when outlays in this field expanded to the health, labor and welfare level, this category has been the second largest in the grant field. Expanded programs in urban renewal (1954) and highways (1956) caused these outlays to rise rapidly by 1960 and to reach approximately $5.6 (estimated) billion in 1968, with highway funds ($3.8 billion) remaining dominant.

3. Education

Federal grants for educational purposes first exceeded $100 million in 1952, in response to 1950 legislation authorizing school aid

-10- TABLE 4 Federal Grants-In-Aid to State and Local Governments, by Functipnal Category, 1902-68 ( millions of dollars) Veterans Health, Education Agrjculture& Other Commerce, Services& Welfare,& &General Agricultural Natural Housing, & Year Benefits Labor Research Resources Resources Transportation Total• 1902 1.0 -0.0 1.2 0.8 -0.0 -0.0 3.0 1912 1.2 -0.0 2.5 1.6 -0.0 -0.0 5.3 1920 1.1 1.8 4.6 -0.0 20.5 33.9 1925 0.7 1.5 8.5 5.97.3 0.3 95.4 113.7 1929 0.6 1.5 9.4 11.0 1.1 86.0 109.6 1930 0.6 0.7 10.0 11.9 1.3 79.8 104.3 1931 0.5 21.2 10.6 13.0 1.6 138.1 185.0 1932 0.8 11.1 13.0 1.7 132.0 218.5 1933 0.8 63.159.9 10.3 13.0 1.5 104.2 b 192.9 1934 0.5 1,817.4 9.6 12.7 1.5 0.4 b 1,842.1 1935 0.5 2,243.7 12.6 12.7 1.5 0.3 b 2,271.3 1936 0.6 2,248.2 13.1 21.7 1.5 27.6 b 2,312.7 1937 0.6 2,546.8 13.8 22.0 1.5 79.2 b 2,663.9 1938 0.7 1,972.4 24.2 32.9 1.5 143.1 2,174.8 1939 0.7 2,622.5 24.7 92.4 2.5 161.3 2,904.1 1940 1.4 2,066.4 24.4 143.1 6.4 153.5 2,395.2 1941 1.4 1,771.3 25.2 110.1 4.1 170.6 2,082.7 1942 1.4 1,506.5 25.5 77.5 4.5 204.1 1,819.5 1943 1.2 902.6 26.1 47.7 9.0 299.8 1,286.4 1944 1.2 616.2 25.5 66.3 7.4 286.7 1,003.3 1945 1.2 570.2 25.0 81.9 218.2 904.0 1946 20.2 567.9 25.3 92.4 1.58.'3 180.5 894.6 1947 59.2 902.1 32.2 65.1 9.8 601.9 1,670.3 1948 85.0 1,024.5 37.2 70.9 11.5 387.5 1,616.6 1949 31.6 1,231.5 36.9 86.6 14.0 442.2 1,842.8 1950 15.3 1,562.3 38.6 106.3 17.0 475.0 2,214.5

·1yS't 9.0 1,637.2 48.8 98.3 17.7 434.0 2,245.0 1952 6.7 1,662.0 122.2 82.9 19.8 481.7 2,376.3 1953 6.3 1,811.1 231.0 97.3 22.8 594.4 2,762.9 1954 6.9 1,890.4 203.2 213.2 24.9 630.3 2,968.9 7.7 1,854.2 239.3 247.7 25.9 723.6 3,098.4 19561955 8.1 2,109.3 208.7 389.3 26.6 873.7 3,615.7 8.2 2,178.9 204.6 381.8 26.6 1,016.4 3,816.5 19581951 8.3 2,523.4 165.9 c 278.2 31.3 1,723.9 4,731.0 8.3 2,777.2 296.7 c 322.5 34.5 2,877.8 6,317.0 19601959 7.9 2,923.6 363.6 c 275.3 35.3 3,241.6 6,847.3 1961 d 9.0 3,133.8 378.2 c 398.2 33.3 3,355.9 7,308.4 1962d 6.5 3,540.0 405.2C 537.8 34.7 3,195.6 7,719.8 1963 d 8.2 3,813.4 465.2C 521.4 53.9 3,492.8 8,354.9 1964 d 7.6 4,259.1 479.4 656.0 44.9 4,430.7 9,877.7 1965 d 8.1 4,477.4 610.3 517.6 107.1 4,-945.2 10,654.7 1966 d 8.9 5,781.3 1,524.7 368.7 226.9 4,785.9 12,696.4 (est.) 1967d 11.4 7,012.4 2,228.5 525.1 261.3 5,024.5 15,063.2 (est.) 1968 d 15.0 8,042.0 2,497.9 559.0 405.3 5,588.1 17,107.3

a Data in this table are drawn from tabulations made in prior years by the Labor and Welfare Division, Bureau of the Budget and for more recent years from special analyses dealing with grants-in-aid and accompanying the President's Budget. Figures shown do not tally precisely with other fig­ ures used in the text of this report since Budget Bureau classifications encompass a few additional items not falling within the definition of grant­ in-aid. These differences in no way affect the orders ef magnitude or trends of federal grants-in-aid. Shared revenues� loans and repayable advances are excluded from these totals.(Footnotes continued on next page.)

-11- in federally-impacted areas. The second notable rise followed the National Defense Education Act of 1958, which caused these grants to reach about $380 million by 1961 and $610 million by 1965. The Elementary and Secondary Education Act of 1965 has had a profound recent impact, adding approximately $1.5 billion to this category in 1968.

4. Agriculture and Agricultural Resources

Grants in this area rose above $200 million for the first time in 1954 and, subsequently, they have ranged between $200 and $650 million. Spending levels depend largely on the value of donated agri­ cultural surplus commodities, a program that generally constitutes about three-fifths to three-fourths of grant amounts for agriculture.

Summing.up, in the post-war period, there has been a steady decline in the percentage of grants devoted to health, labor,and welfare. This decline is explained partly by increased emphasis on both education and agriculture but, more importantly, by a marked shift in spending emphasis back to commerce, housing,and transportation. In the last few years, however, this latter category, while it still remains the second largest (about a third of all grants) has declined in importance as a result of the rapid expansion in federal educational programs. These programs accounted for only 5 percent of grants in 1964, but reached approximately 15 percent by 1968.

IV. The Future

If the past is prologue, two things are clear: Federal outlays to state-local governments can be expected to rise; and the priorities among the functional categories will change. Secondly, if President Nixon's proposal for federal revenue sharing is enacted, the manner by which the federal government dispenses money to state-local governments will undergo substantial change. In this section we will examine the major programs and the Nixon proposal.

A. Program Priorities

A more recent approach for examining current grant programs is $ Federal aid highway program financed for these years out of emergency relief funds. c $5-$7 million for services to Indians embr�cing both education and welfare functions.

d Calculated from U.S. Budget, "Special Analysis: Federal Aid to State and Local Governments," 1963-1968.

Source: Wright, op. cit., pp. 62-63.

-12- the approach contained in the Special Analysis of the Budget for the Fiscal Year 1970 prepared by the Bureau of the Budget. This analysis uses dif­ ferent, but not substantially different, functional categories from those we employed in the previous section. 28/ It is based on actual figures for fiscal 1968 and estimated figures for 1969 and 1970. The basic thrust of the recent grant programs reflects a growing priority to human resource development--health and welfare, education and manpower, and community development and housing. 29/ It is estimated that grants in these areas will equal approximately 69 percent of all federal outlays to the states and localities in fiscal 1970. Let us examine the estimated rises in these functions individually.

1. Health and Welfare

Between 1964 and 1970, health and welfare grants will have risen some $6.3 billion--or 168 percent, mainly due to public assistance and "medicaid, 11 Two recent proposals could push costs even higher in the early 1970s. The first is the Family Allowance Plan proposed by President Nixon, In essence, this plan would replace Aid for Dependent Children with a program that would provide a family of four with a $1,600 per year benefit, to be reduced at a rate of 50 percent of earned income above $720 a year. One effect would be to add substantial numbers of people to the welfare rolls--for instance, members of families headed by unemployed fathers (who currently do not qualify for ADC in almost half of the states) as well as those classified as the "working poor." The Nixon Administration estimates that the plan would increase ·the cost of family assistance by about $4 billion in the first year (fiscal 1971). �30/ (Federal public assistance payments were $3 billion in 1968 and are estimated at $4.2 billion for fiscal 1970.) One estimate suggests the number of welfare recipients would more than double to over 22 million.31/

A more sweeping proposal is that made by Governor Nelson Rocke­ feller at the recent Governors' Conference. Governor Rockefeller's plan, adopted with one dissenting vote, calls on the federal government to assume the entire burden of public welfare costs. The total public welfare expenditure was approximately $10 billion in 1968, of which the states and local governments paid approximately $4 billion. It is not certain that either the Nixon or Rockefeller proposal will be accepted but both would have a substantial impact on federal spending priorities among states and localities.

2. Education and Manpower

It is estimated that education and manpower grants will rise to $4.7 billion in 1970, or nearly $3.5 billion over 1964. 32/ The cost of education and job training programs has been rising but the most substantial increase was caused by the Elementary and Secondary Education Act of 1965 whose annual federal cost has recently reached $1.5 billion a year. Overall, education grants are expected to continue to rise, but at a slower rate in the future. 33/

-13- 3. Community Development and housing Estimates of community development and housing outlays for 1970 show an increase of 546 percent since 1964--from $452 million in 1964 to $2.7 billion in 1970. Much of the estimated increase reflects substantial expansion in established programs, such as urban renewal and public housing plus the addition of the recent Model Cities program which will cost an estimated $480 million in 1970.

4. Commerce and Transportation The relative position of commerce and transportation grants has declined in recent years, from 40 percent of total grant spending in 1964 to an expected 22 percent in 1970. 34/ At the same time, expend­ itures in this category are estimated at $5�billion in 1970. The Nixon Administration has proposed a $10 billion mass transit program in the 1970s and if this program is adopted it will substantially affect federal spending priorities.

5. The Nixon Revenue Sharing Proposal

On August 13, 1969, President Nixon sent to Congress his proposal for federal revenue sharing with the state and local governments. The plan would distribute $5 billion to the states and localitites by 1975 and more every year thereafter. 35/ The funds would be distributed without strings, to be spent in any way the state and local governments desired. The mechanics of this plan are not relevant to our discussion at this point and will be dealt with in Chapter II. The President said that the basic philosophy of the plan was to reverse the "gathering of the reins of power in Washington."

While the President criticized the "staggering complexity and diversity" of current federal programs designed to assist the state and local governments, the administration made it plain that the new plan would supplement, not replace, the current categorical grant pro­ grams. 36/ Thus it is assumed that the Nixon plan will increase total federalgrants.

V. Summary In concludin� his discussion of the growth in federal grants, Professor Wright states that however grants are measured--whether in numbers of programs, in aggregate or functional outlays, or as a pro­ portion of state-local or federal finances--they have increased signifi­ cantly since the late 1940s and substantially in the past decade. 37/ To this we would add that they are expected to increase very sharply in the next several years. Having examined this aspect of the present system, we will now turn to an analysis of the debate proposition.

-14- DISCUSSION QUESTIONS--CHAPTER I

1. Describe the characteristics of grant-in-aid programs. How do apportionment formulas for grants-in-aid differ? Is any grant money extended in the form of bloc grants? Cite an example.

2. What event in recent American history contributed most to the growth of grants-in-aid? How often has Congress established new grant pro­ grams? Are all grants now given to state governments? How important a part of state revenues are federal grants-in-aid? Do they tend to concentrate in any one region? Explain.

3. What are the major areas aided by federal grants? Why have federal grants in the health-welfare area declined as a percentage of all grants? Can this trend be expected to continue?

4. Outline President Nixon's Family Allowance Plan. What is its likely impact on welfare costs? How many Americans would it cover? What alternative has been proposed by Governor Rockefeller? Discuss the relative merits of the Nixon and Rockefeller proposals? Would one cost more than the other? For the federal government? For the states?

5. What are the predictions for the future size of federal grants? What assumptions may underlie such predictions? Are the assumptions valid?

-15- FOOTNOTES--CHAPTER I y Special Analyses: Budget Analysis of the United States Fiscal 1970 (Washington: Government Printing Office, 1969), p. 203, hereafter cited as Special Analyses: Budge.t. 2/ Federal-State-Local Relations: Federal Grants-in-Aid, Thirtieth Report of the Conunittee on Government Operations, U.S. House of Representatives, 85th Congress, 2d Session, House Report No. 2533, August 8, 1958, p.7. Deil s: Wright, Federal Grants-in-Aid: Perspectives and Alternatives (Washington: American Enterprise Institute, 1968), p. 18. Advisory Conunission on Intergovernmental Relations, Fiscal Balance in the American Federal System, Vol. I (Washington: Government Printing Office, 1967), p. 138; hereinafter cited as ACIR, Vol. I, or ACIR, Vol. II. Wright, £P.· cit., p.5. James A. Maxwell, Financing State and Local Governments (Washington: The Brookings Institution, 1969), p. 52.

Special Analyses: Budget Wright, £P.· cit., p. 27. Wright, £P.· cit., p. 52. 10/ ACIR, Vol. I, p. 151. .!.!./ Wright, £P.· cit., p. 52. 12/ Catalogue of Federal Aids to State and Local Governments, Subconunittee on Intergovernmental Relations, U.S. Senate, 88th Congress, 2d Session (Committee Print), April 15, 1964. l3i Wright, £P.· cit., p. 53. 14/ Indeed the 1969 Governors' Conference adopted (with only one dissent­ ing vote) Governor Nelson Rockefeller's proposal that the federal government assume the burden of vaying the entire welfare cost. 15/ See Wright, £P.· cit., pp. 69-72. 1. 16/ Special Analyses: Budget, P· 203; See also Table 17/ Ibid. 18/ Wright, £P.· cit., pp. 70-71.

-16- 19/ Special Analyses: Budget, p. 210.

20/ Special Analyses: Budget, Ibid., p. 211. 'El Maxwell, �· cit., p. 54. 22/ Ibid., p.55. I. 23/ ACIR, Vol. P· 295. 24/ Special Analyses: Budget, p. 212.

25/ Maxwell, �. cit . , pp. 54-55.

Except for those areas where the federal government provided aid to impacted areas--those in which school enrollment was increased be­ cause of federal activities such as military bases.

Maxwell, �· cit., p. 56.

Special Analyses: Budget, P. 207. 1he functional categories are: Agriculture and Agricultural Resources, Natural Resources, Commerce and Transportation, Community Development and Housing, Education, and Manpower, Health and Welfare, and other. Special Analyses: Budget, p. 207. 1he increase could be more than $4 billion in its first year. The actual cost_would depend on how many recipients came into the system and the level of income support benefits finally agreed upon in Congress. See "If You Have Questions On Welfare Plan," U.S. N�ws and World Report, September 1, 1969, p. 54.

31/ Wall Street Journal, August 14, 1969.

32/ Special Analyses: Budget, p. 207.

33/ Ibid., p. 204.

34/ Ibid., p. 207.

35/ Wall Street Journal, August 14, 1969.

36/ New York Times, August 14, 1969.

37/ Wright, �· cit., p. 72.

-17- CHAPTER II

DEFINITIONS AND PLANS

I. Introduction

The concept·of federal tax sharing with the states is a recent development. Before his service as Chairman of President Kennedy's Council of Economic Advisers, Professor Walter Heller of the University of Minne­ sota discussed revenue sharing in a 1960 speech. The idea received in­ creasing attention after it appeared in Heller's Godkin Lectures published in 1966. 1/ Democratic and Republican leaders and study groups reacted with vary1ng degrees of warmth to the tax sharing idea. Then, in 1969, President Nixon asked the Congress to enact federal legislation in this area. He wrote:

Ultimately, it is our hope to use this mech­ anism to so strengthen state and local government that by the end of the coming decade, the politi­ cal landscape of America will be visibly altered, and states and cities will have a far greater share of power and responsibility for solving their own problems. The role of the Federal gov­ ernment will be redefined and redirected toward those functions where it proves itself the only or the most suitable instrument.'!:../ Despite the relative novelty of the Heller plan and the Pres­ ident's proposal, there is precedent in American history for revenue sharing. 3/ At the end of Andrew Jackson's term in the White House, the Congress authorized the return to the states of a portion of the bur­ geoning federal surplus. The national debt had been retired and the pro­ ceeds from tariffs and the sale of public lands were mounting. Technically, the dis.tribution was not a grant but a "deposit" which the states could spend as they wished. Transfers to the states ended when the recession of the late 1830s wiped out the surplus. 4/ Vestiges of Jackson's rev- enue sharing still remain. States share federal receipts from public lands located in their territories. Certain other similar and unimpor- tant revenues are also shared with the states. 5/ This year's debate resolution proposes expansion of the principle -of revenue sharing. The definitional problems involved in the proposition are explored in the next section. I I. Definitions

A. "grant annually a specific percentage of its income tax revenues

This language seems to call for the guarantee--possibly under certain conditions--of an automatically determined transfer of income tax proceeds each year. In advancing a revenue sharing proposal in 1966, the Task Force on the Functions of the Federal, State and Local Governments

-18- of the Republican Co-ordinating Committee noted:

Once instituted, however, it is imperative that the sharing of revenues continue. Future budgets of the national government should provide for the proportion of revenues to be distributed [as a first priority claim] .... To place the states in a posi­ tion where they would not know from year to year whether they will receive their share of tax col­ lections would place them in an agonizing plight, and create a crisis in state and local finance far more chaotic than anything we have seen to date. �

Thus, it appears that the grants proposed in the debate proposition would not be subject to the normal appropriations process. In other words, they would not be subject to year to year review by the Congress; like the Social Security benefits, state shares of income tax proceeds would be dispersed automatically according to an established formula. 7/

Contrary to popular impression, distribution of shared revenues under the Heller plan would not depend on a federal surplus. Under Heller's plan, the money would be paid out in good years as well as in bad; 8/ that is also what this resolution seems to require. The states must receive an established percentage every year regardless of competing demands on federal resources. The Nixon administration plan embodies that kind of guarantee. There would be a set formula for distribution; " .•. there will be no judgmental factors involved." 9/ The automatic nature of the system would be assured by a permanent and indefinite appropriation from the Treasury, similar to the appropriation presently made to pay interest on the national debt. 10/

In short, federal action under this proposition must at min­ imum provide for the automatic appropriation of a specific portion of income tax revenues. This differs from present federal assistance to the states. There are now two types of federal financial grants to the states, open end grants and closed grants. Clark University Professor James A. Maxwell explains the difference:

Most federal grants are closed, that is Con­ gress specifies the maximum annual amount to be provided for each state according to formulas which include such factors as population, area, per capita income, incidents of specific diseases, road mileage, and so on. But some federal grants are open end, for example, the annual amounts of old age assistance grants per state are deter­ mined by the number of needy persons 65 years and over placed on the welfare roles and the individual benefit payments... made by each state. !!.f So under present rules open and closed grants are dispersed without

-19- regard to the magnitude of income tax revenues. However, the amounts often do depend on the size of state contributions. Traditionally, federal grants to the states promised a dollar of federal help for every dollar of state effort in a specific problem area. There was a 50-50 matching requirement. Over a period of time, the 50 percent requirement was eroded, until today some grants require only a 10 percent state matching and some demand no matching at all. 12/ Of course, in the case of open grants there must be some matching requirement, since the dimensions of the federal expenditure are determined solely by the states' own efforts.

Under the present system, then, the amount of federal help to the states is determined in one of three ways: by annual appropriations; by a figure set prospectively at a fixed dollar amount; or, in the case of open grants, by the amount of state expenditures according to a matching formula operating within criteria established by congressional legislation. None of the present federal grant programs automatically peg benefit levels to the size of tax revenues. That is what this year's resolution calls for--and that will constitute a fundamental distinction between affirmative plans and the present system.

Do the terms of the debate resolution also require that revenue sharing take the form of unrestricted grants to the states? There is nothing on this point in the resolution's wording. But the absence of the word "unrestricted" may be important in this respect. It may be argued that the failure to add a qualifier that would have been grammatically and rhetorically appropriate indicates an intention to leave the prop­ ostion unqualifed. But, the topic on its face represents an inherent change from the present system; it calls £or the transfer of an automatic portion of income tax revenues to the states--something no existing pro- gram does. Thus, the question of restrictions is debatable as it stands. Does reference to "income tax revenues" imply simply collection and transmission of tax?

The proponents of traditional revenue sharing proposals have called for some restrictions on state use of the money. For example, Heller would not permit states to employ the funds in violation of Title 6 of the 1964 Civil Rights Act, would forbid their use for highway construction, and even suggests that their employment might be limited to broad areas like education, health, and welfare. He asserts that such limitations would not ".. . sully... the basic no-strings character of these grants.... " 13/ The resolution provides no mechanism for discriminating between permissible and allegedly impermissible restrictions on use. Thus, the affirmative, it seems, may propose restrictions on the use of the funds in any way it wishes, so long as the affirmative case justifies a guaranteed grant tied directly to income tax revenues. Finally, the presence of the word "grant" should be noted. The word "grant" is usually associated with restrictions. One need only look to the way the word is used in legislative and public policy contexts. Current federal grants-in-aid, for instance, contain numerous conditions. A state may have to contribute a certain amount, follow certain procedures, or avoid specified proscribed activities in order to retain eligibility for federal funds.

-20- If the affirmative plan restricts revenue sharing grants to a designated area or activity, the affirmative may be called upon to dem­ onstrate why an automatically determined and dispersed grant based on income tax revenues is preferable to a grant-in-aid for the same purpose. Carrying that burden may. not be easy. Presumably the dimensions of need in a designated area are ascertainable with relative ease. If so, a closed federal grant, perhaps without a matching requirement, could probably meet the need as well as revenue sharing. The affirmative must locate and establish an inherent reason why grants-in-aid are defective instruments for dealing with the problem in question. B. ''income tax revenues"

The topic requires that the affirmative propose grants of a portion of federal corporate and' personal income tax revenues. Personal income tax rates on the federal level now run from a minimum of 14 percent to a high of 70 percent on income in excess of $200,000. 14/ There is a basic corporate income tax of 22 percent and an additiona-r-tax of 26 per­ cent on taxable corporate income over $25,000. 15/ Both corporate and personal income are subject to an additional surcharge of 10 percent for 1968 and 1969. The income tax system is expected to result in personal income tax revenues of $90.4 billion and corporation income tax revenues of $37.9 billion in fiscal year 1970. 16/ It is t�e total of the cor­ porate and individual income tax receipts which the proposition requires be shared with the state governments.

Tax revenues are derived by applying percentage rates to tax­ able income--the. income- tax base--and deducting allowable credits. The size of the income tax base is determined by subtracting allowable deduc­ tions from gross income. Some authorities argue that any revenue sharing plan should grant the states a percentage based on the income tax base rather on than on income tax revenues. Heller explains:

First, taxable income is somewhat more stable than revenues. Second, since the states' share would be independent of the level and structure of federal rates, this approach would not create a vested interest in a particular set of rates (though it might do so in exemption levels). Third, for the same reason, it is less likely to interfere with federal use of the income tax and stabiliza- tion policy than a plan keyed to income tax revenue. 1Jj

The fear is that state governments, increasingly dependent on funds re­ ceived from income tax revenue, would fight tax reductions designed to stimulate a faltering economy. The Committee for Economic Development worries that such opposition might achieve at least partial success. 18/ Some state governments are actively involved in federal leg­ islation. A number of state governments have Washington offices and it has been said that the Council of State Governments functions as a

-21- "public pressure group." 19/ The Baltimore Sun recently reported that more than 50 states, cities,and local governments conduct active lobbying efforts in Washington. 20/ Would such governmental beneficiaries try to prevent a decline in federal income tax revenues, if it meant a signifi­ cant diminution in their proceeds from revenue sharing? Professor C, Lowell Harriss has warned that "..• state-local officials in their efforts to prevent change in the income tax exemption of municipal bond interest have given a foretaste of what to expect." 21/ Even if they were not altogether successful in preventing tax reduction, Harriss indicates, state opposition might delay prompt action at a time when delay would adversely affect the economy. 22/ In brief, the negative might argue that the affirmative plan, because it is based on tax revenues, could cripple the nation's ability to stave off recession or to promote pDos­ perity. Some of the congressionally-initiated revenue sharing proposals have included safeguards to prevent the diminution of state benefits in the event of a decline in federal revenues. 23/ Presumably, this would ameliorate state opposition to tax cutting as"'"a fiscal device.

The use of tax revenues rather than the tax base may present a second problem. As we have already noted, Heller states that the tax base is less subject to fluctuation than tax revenues. The personal in­ come tax base in 1968 was approximately $345 billion 24/ and it appears that revenue sharing based on it would provide a steadily rising source of income. On the other hand, the negative may contend that the use of tax revenues will make state benefit levels uncertain and advance planning more difficult. Personal income tax revenues have declined from one year to the next twice since 1954. There was a small drop of $60 million in the recession year of 1958 and a larger drop of almost $1.6 billion in 1964, when tax rates were cut. In other years the rate of increase in personal income tax collections has fluctuated widely, from 11.1 percent in 1955 to 3.8 percent in 1959. 25/

If the negative raises this problem, the affirmative might respond in two ways. First, the affirmative could challenge the negative to demonstrate that fluctuations in the amount of revenue shared would present serious problems for state finance. It may be said that the affirmative plan would give the states revenues they would not other­ wise obtain and that some fluctuation in the rate of increase should be tolerable. It has also been suggested that the problem of fluctuation could be avoided by the establishment of a trust fund. 26/ A study by the American Enterprise Institute summarizes this approach as follows: The problem of revenue stability could be solve� or alleviated, for the states througb a trust fund arrangement where by a fixed percentage of the grsnt base would be paid into a fund annually and.... re la­ ti vely stable grants would be made from this fund·. The level of out-payments would initially be some­ what lower than payments into the fund so a surplus could be built up to provide for future years when grant disbursements ( of the size equivalent

-22- to the preceding year) may exceed payments in� to the fund. 27/

The negative might question whether the trust fund argument is legitimate under the terms of the resolution. It may be argued that the resolution requires that the entire sum derived from applying a specific percentage to income tax revenues be turned over to the states each year; the topic, the negative could continue, provides no basis for withholding some of the money. The affirmative could reply that under its plan the whole sum would be granted to the states each year--that, once in the trust, the funds will have been granted although not disbursed.

C. "to the state governments"

One criticism, discussed in ChapterV, is that transferring money to the state governments will not assure that the funds will be used to deal with critical urban problems. States, according to some critics, are governed by institutions with a bias against the big cities and a reluctance to help them deal with their problems. To avoid the possibility of discriminati.on against urban areas, the affirmative may wish to include a pass-through requirement in its plan. A pass-through requirement would compel the states to turn over a stated proportion of their revenue sharing benefit to local governments. 28/ President Nixon's plan contains such a provision. 29/ The obvious question is whether a pass-through provision is consistent�ith the proposition. The affirmative can argue that if grants can be programmatically limited under the resolution, as it seems they can be, there is no good reason why they also cannot be limited to grants a part of which is earmarked for distribution to the cities or other local governmental units. If the states can be compelled, under the resolution, to spend revenue sharing benefits on program X, does it not follow that they can also be told to expend them through governmental division Y?

Just as the topic does not seem to preclude a pass-through requirement, it also does not appear to prevent a condition that revenue sharing grants be used by a specific part of the state government itself. The funds might be provided to the governor to spend at his discretion, though this might present some problems in terms of state constitutional strictures. The affirmative might also grant the money to a state for use by a higher education authority, arguing that state higher education systems should have funds free from review by state legislatures. It should be noted that despite provisions for programmatic restrictions in some legislative proposals, every bill introduced into Congress has called for a grant which will either be passed through to the cities or distributed through the normal state legislative decision-making process.

D. Summary

This section has been an attempt to point out some of the im­ plications of the terms of the proposition and to discuss some related issues. The affirmative team must justify an annual grant of a specific

-23- percentage of income tax revenues. Consistent with that requirement, the affinnative may develop its plan in one of at least four ways. First, the affinnative could argue for unrestricted grants to the state governments. Or, secondly, the affinnative could restrict state use of revenue sharing grants to broad areas of governmental concern like education. Thirdly, the affinnative could restrict the grants specifically and programmatically, just as many present federal grants-in-aid are dispersed for identified pur­ poses under detailed rules. Finally, revenue sharing benefits could be passed through state governments to the cities or could be turned over to a specific agency of state government.

In the next section, we will examine and discuss some of the specific tax sharing plans that have come to public and congressional attention in recent years.

III. The Range of Recent Proposals

In the early 1950s, President Eisenhower appointed the Kestnbaum Commission on Intergovernmental Relations to examine the allocation of responsibilities among the federal, state, and local governments. Roger A. Freeman, now of The Hoover Institution on War, Revolution, and Peace at Stanford University, who was affiliated with the commission, recommended that the federal government share revenue with the states. 30/ However, despite support for Freeman's recommendation by important members of Congress and the introduction of revenue sharing legislation, the concept did not achieve widespread public notice until 1964, when it was endorsed by the then Chainnan of the Council of Economic Advisers, Walter W. Heller. Later, President Johnson appointed a task force, directed by Joseph A. Pechman of The Brookings Institution, to examine and assess prospects for revenue sharing. The Commission's report was not released. 31/

Heller's plan had essentially four provisions. It provided for a distribution to the states each year of a grant equal to 1 to 2 percent of the federal individual income tax base. The funds were to be placed in a trust fund and distributed on the basis of population. Heller advocated that there be very few conditions on the grants. Finally, he indicated that it was possible to build in a penalty provision for states who lowered their fiscal effort on the heels of receiving federal revenues. 32/ The Heller plan was followed by a rash of similar proposals. Many of them embodied a somewhat tentative suggestion he had made--that " ...a percentage--say 10 to 20 percent--could be set aside for supplements to states with low per capita income, or a high incidence of poverty, dependency, or urbanization." 33/ However, the revenue sharing bills often differed in significant respects. Over 70 were introduced in Con- gress from January through June, 1967. Some of the bills would have dis­ tributed a share of personal and corporate income tax collections; some were confined to sharing personal income taK revenues; and others aimed to disburse amounts equal to a percentage of personal, or personal and corporate, taxable -income. Distribution formulas varied widely. For example, one bill provided that the money should be returned to the states where the tax had been collected. 34/ Although most of the bills

-24- provided for general revenue sharing, a few called for revenue sharing for particular purposes.

The legislation introduced by then Representative (now Senator) Charles E. Goodell ( R., N.Y.) was typical. It would have allocated to the states 3 percent of federal personal income taxes in the first two years, 4 percent in the third year, and 5 percent in the fourth year. Ninety percent of the funds would be distributed to all the states on the basis of population, adjusted for tax effort. Tax effort for a state was to be measured by the ratio of the sum of all taxes collected by the state and its political subdivisions to the state's personal income. In addition, 10 percent of the funds were to be paid, as an equalization payment, to the 17 states with the lowest per capita income in the most recent year for which satisfactory data were available. The distribution formula would be based on population, adjusted by an income index. 35/ Attention is now focused on President Nixon's recent revenue sharing legislation. The President's plan provides for distribution of amounts equal to percentages of the income tax base rather than of in­ come tax revenues. In the second half of fiscal year 1971, the states would receive an amount equal to 1/6 of 1 percent of the personal income tax base, rising in steps to 1 percent of the base in fiscal 1976. In dollars, the Treasury estimates that this would mean a grant to the states of $500 million in 1971 and approximately $5 billion in 1976, with increases thereafter due to economic growth. New York Times economic expert Edwin L. Dale, Jr., has explained the complicated formula for distributing the grants:

The basic principle is distribution according to population, with an adjustment for the total "tax effort" of the state and its local govern­ ments. Here several substeps in the calculation are necessary. First, a "national factor" must be established. This is done by dividing the total of the state and local general tax revenues--not including such items as revenues from state owned liquor stores or federal grants--by the national personal income. For the illustrative fiscal year, 1966-67, this comes to 13.1 percent. Mul­ tiply this by the national population. The result­ ing figure is 25,939,500. This will be the denomina­ tor in the calculation for each state. Next establish the stare's numerator. Divide state and local general revenues by the state's personal in­ come. For an illustrative state, Iowa, this comes to 13. 7 percent, meaii>.ing that Iowa has a slightly larger "tax effort" than the average for al 1 the states. Multiply this percentage by the state's population. The result is the Iowa numerator. Divide by the national denominator. The result for Iowa is 0.0146, meaning that Iowa would get 1.46

-25- percent of the national po-c. If distribution we,re based on population alone, Iowa would get [only] 1.39 percent. 36/

The Nixon plan includes a pass-through prov1s1on. The states would retain a percentage of the grant equal to the percentage of the total state and local tax effort represented by state tax collections, while defined local areas would receive the remainder in proportion to their tax efforts. 37/ Each state may, if two-thirds of the local gov­ ernments agree, establish a distribution formula in lieu of the one set up by the administration's bill. The states and localities would receive the money as a matter of right. It would not be subject to the annual appropriations and would not be conditioned on state fulfillment of any specific requirements for its use. 38/ Some of the standards for distribution utilized by the Nixon plan and by others have been the objects of criticism. Two such criticisms will be explained here. First, Professor James Maxwell has charged that the use of a per capita measure of expenditure is inadequate. He contends that certain states may have more than an average population of dependent groups like children and the aged and that this dispropor­ tion of dependent groups may require higher publ1ic expenditures and may indicate a lower tax base. Moreover, " ...a per capita expenditure basis is rough also because it makes no allowance for price or quality differ­ ences, state by state, of public goods." 39/ Robert F. Adams, assistant professor of economics at the University

... some comments on the use of fiscal effort as an aid allocater are in order... . the level of fiscal effort in any community is determined by many factors, and the use of fiscal effort would unjustifiably penalize many communities, ....com­ munities would be favored that are located in states where already existing aid programs favor the development of the public sector rather than the alleviation of the... costs of public services . ... such an allocative device would discriminate on the basis of differences in the amount of direct state and federal tax, expenditure, and individual transfer programs, would favor those areas which are able to export their tax bur- den, and would benefit those communities which are not vigilant about eliminating inefficiencies in the provision of service. 40/

Obviously any formula for distribution is going to encounter some difficulties. The affirmative can argue that although its formula may not achieve an ideal distribution, it is probably impossible to do so. In any case, states and localities clearly would benefit financially from federal revenue sharing. Honest efforts to distribute the funds equitably

-26- may miss the mark--but not by a margin significant enough to warrant the rejection of the entire proposal.

The financial impact of a typical revenue sharing proposal on different states is illustrated by the following model. Assume tax sharing legislation which will distribute a total $2 billion grant in a given fiscal year, with $1.8 billion distributed on a per capita basis adjusted for tax effort and $200 million set aside for special grants for the poorest third of the states. Professor C. Lowell Harriss has charted the impact of such a plan for each of the states. An examination of his conclusions yields three observations.

1. Without an adjustment taking into account state tax effort, the distribution of funds would be substantially different in many cases. For example, California's grant rises by $34.7 million when tax effort is taken into account; Minnesota's rises by $7 million; New York's rises by $21.9 million; and Illinois declines by $18.9 million. Only Florida among the fifty states receives the same amount of money whether or not tax effort is included in the disbursement formula.

2. Though wealthy states are consistently helped by the allowance for tax effort, they consistently receive a lower proportion of the total grant than their taxes contribute toward it. If the $2 billion were distributed on the basis of their percentage contributions to total federal income tax collections, California would receive an additional $21.6 million, Massachusetts an additional $18.2 million, New York an additional $64.2 million, Ohio an additional $31 million, and Pennsylvania an additional $28.8 million.

3. A number of the states classified as among the poorest third .suffer diminutions in the size of their grants due to less than average tax effort. However, in every case, this seems to be more than compensated for by the special grant extended to the poor states. Alabama loses $3.2 million on the basis of its tax effort, while it gains $14 million due to its poverty relative to other states in the Union. Georgia loses $2.9 million and gains $17.7 million, South Carolina's loss is $3.3 million; its gain is $10.3 million. Texas' tax effort causes it to forfeit $12.7 million, but its per capita income earns it a supplementary $42.8 million grant. 41/

-27- DISCUSSION QUESTIONS--CHAPTER II

1. Discuss the current and historical background to proposals for revenue sharing. Does the federal government share revenue under the present system? How? How may affirmative plans differ?

2. What is a "guarantee" of revenues? Does this year's resolution re­ quire a guarantee? Why? Distinguish between Social Security and expenditures subject to the normal appropriations process. What impact should a budget deficit have on revenue sharing?

3. Distinguish between open end and closed grants. Describe the �artic­ ul ar operational features of each. What determines the size of the federal contribution in an open end grant program? What is a matching ratio? What range do current matching ratios fall within?

4. Must the affirmative plan provide for revenue sharing in the form of unrestricted grants? Is a lack of restrictions necessary to distinguish the topic from the present system? What implications for the meaning of the topic stem from the use of the word "grant" in its phrasing? If the affirmative directs revenue shares toward a specific problem area, what additional burdens does it undertake?

5. What is the difference between income tax revenues and the income tax base ? Is the use of the income tax base as a determinant of the size�revenue sharing preferable to the use of income tax revenues? How is tax policy employed to stimulate a faltering economy? How might revenue sharing affect this?

6. What is a trust fund in relation to revenue sharing proposals? Does it have any advantages? Is it permissible under the resolution?

7. What is a "pass-through"? Can the affirmative legitimately provide for such a device? Can the affirmative designate a specific agency of state government as the recipient of revenue sharing benefits?

8. Describe the details of Dr. Heller's and President Nixon's revenue sharing plans. Outline the distribution formula in the Nixon plan. What criticisms have been directed against it?

-28- FOOTNOTES--CHAPTER II

y Walter W. Heller, New Dimensions of the Political Economy (Cambridge, Massachusetts: Harvard University Press, 1966). New York Times, August 14, 1969.

Baltimore Sun, August 14, 1969. Heller,�· cit., pp. 144-145.

Selma Mushkin, "Federal Grants and Federal Expenditures," National Tax Journal, September, 1957, p. 193.

Task Force on the Functions of Federal, State and Local Governments, Republican Co-ordinating Committee, "Financing the Future of Federalism: The Case For Revenue Sharing, 11 Republican National Committee, Wa shington, D.C., March, 1966, p. 3.

"Federal Revenue Sharing Proposals," Legislative Analysis No. 7. American Enterprise Institute (Washington, D.C., 1967), p. 27.

y Heller,�· cit., p. 146. Pl New York Times, August 14, 1969. 10/ Baltimore Sun, August 14, 1969. g/ Maxwell, �· cit., p. 54. 12/ Selma Mushkin and Robert F. Adams, "Emerging Patterns of Federalism," National Tax Journal, September, 1966, p. 223.

Heller, �· cit., p. 147. Inc. (Chicago, 1969 U.S. Master Tax Guide, Commerce Clearing House, Illinois), p. 8. Ibid., p. 115. The Budget of the United States Government (Washington, D.C.: U.S. Government Printing Office, January 15, 1969), p. 63.

Heller, �· cit., p. 146. Committee for Economic Development, A Fiscal Program for a Balanced Federalism (New York: Committee for Economic Development, June, 1967), p. 46.

Wright, �· cit., p. 33.

-29- Baltimore Sun, May 1, 1969. c. Lowell Harriss, Federal Revenue Sharing with the States (New York: The Tax Foundation, 1967), p. 10.

Ibid. Wright,�· cit., pp. 143-144.

Wall Street Journal, December 11, 1968. p. 38.

25/ Federal Revenue Sharing Proposals,�· cit., p. 43.

26/ Heller,�· cit., p. 146 •.

27/ Federal Revenue Sharing Proposals,�· cit., p.23.

28/ The Wall Street Journal, December 11, 1968.

29/ Baltimore Sun, August 14, 1969.

30/ Representative Melvin Laird in 113 Congressional Record, Hl331 (February 15, 1967, daily ed.)

31/ .Federal Revenue Sharing Proposals,�· cit., pp. 16-17.

32/ Heller,�· cit., pp. 145-147.

33/ Ibid., p. 147.

34/ Federal Revenue Sharing Proposals,�· cit., pp; 18-20.

35./ Ibid., p. 20.

New York Times, August 14, 1969.

Ibid.

Richard M. Nixon,. "Text of a Message on the Sharing of Federal Revenues" in Ibid. Maxwell,�· cit., p. 34.

Robert F. Adams, "The Fiscal Response to Intergovernmental Transfers in Less Developed Areas of the United States," The Review of Economics and Statistics, August, 1966, p. 313. Harriss,�· cit., p. 15-17.

-30- CHAPTER III

THE BURDENS OF STATE AND LOCAL GOVERNMENT

I. Historical Background

In the federal system, thousands of governments--state and local-­ provide public services and collect the money to pay for them. In this chapter, we . deal with services that state and local governments provide and the costs of such services. Subsequent chapters consider the ways these governments collect the dollars to finance these services, and examine alternative methods, such as revenue sharing, which might be used to pay for them.

It should be noted that as this is prepared the Nixon revenue sharing proposal has not been submitted in legislative form and that references to it in this analysis are based upon the President's message to Congress and other information released by the administration;

Until the 1930s, except in· time of war, most services to the . public were provided by local governments. The federal government pro­ vided only a few basic services: it ran the postal system, administered federal courts, maintained national defense and represented the country abroad. Various other functions--granting patents, regulating money, managing the huge public domain--though important, cost relatively little. In general, federal spending had little direct bearing on the day-to-day life of the individual, on state or local governments, or on business. ±f

Nor did state governments spend much on the services they pro­ vided . They financed state courts and prisons, mental and tubercular hospitals, state universities, and etc. State taxes by tod ay.'s standards were low. Gradually, state government aid to the localities increased. More money went into.highways as the growing use of automobiles and trucks required that localities be connected by hard-surfaced roads costing more than local governments were prepared to spend. Some �tates also contributed to local governments to help finance schools ahd, on some occasions, to provide other services.

As pointed out in Chapter I, the 1930s brought great change. The federal and most state governments increased their roles as pro­ viders of public services and as suppliers of funds for services carried out by the local governments. During the depression, local governments faced sharply rising demands for welfare aid at a time when their collection of revenues sharply declined.

During the past three decades, all government spending--federal, state, and local--has increased. Many forces have operated to raise state and local expenditures: America has become more urbanized and suburban­ ized, and the factors which lead to both also may tend to increase govern­ ment spending per person. As more and more people move to metropolitan

-3� areas they tend to seek additional governmental services which families in smaller communities and rural areas often do without, provide for themselves, or get from government in a limited degree. The current spread of population to the suburbs requires outlays on new streets, schools, sewers, and other facilities. Some of these are very costly per capita, if only because each mile of street or water main serves fewer families than do those in the central city. In addition, prosperity probably generated demand for better schools, highways, and other govern­ mental services. Rising income has enabled Americans to provide state­ local governments with more and more revenues to pay for these services, sometimes more or less automatically, or by higher taxes or even new taxes. Willingness to incur debt also makes higher expenditure levels possible and leads to rising burdens of interest and debt repayments. Finally, the federal government has induced the states and localities to spend more. 2/ By offering to pay a part of the cost through matching grants it has, in effect, compelled them to assume new functions and to enlarge older ones. At this point, we take a closer look at 'these state­ local expenditures.

II. State-Local Government Expenditures Since World War II, state-local government expenditures, whether from their own sources or combined with federal aid, show a dramatic rise. In 1949, from their own sources, total expenditures amounted to $10 billion, or 4.7 percent of the gross national product. 3/ In 1966, state-local expenditures amounted to $67 billion, or 9 percent of the gross national product. !/ State-local spending in 1967 increased 670 percent over 1946. � State-local expenditures ha.ve been growing more rapidly than population; the 1966 per capita expenditure of $423 was 249.6 percent larger than 1948. §.! These money figures represent only part of the story. State and local government employment has grown by leaps and bounds since 1946. In the past 20 years, with increasing demands for public services, state employment has jumped from about 800,000 to well over 2,000,000 and local government employment more than doubled from almost 3,000,000 to over 6,000,000. '!)

Services provided by state and local governments profoundly influence everyone's daily life. Our future--as individuals, as families, as communities, and as ·a nation--will depend in part on what states and localities spend on schools, streets, and other governmental functions. Pressures to increase state-local expenditures probably will remain powerful. How much will state-local expenditures grow?

In recent years a number of investigators have projected state and local expenditures. Because these groups use different basic approaches, it 'is difficult to place their projections into a common context. Generally, the projections for 1970 are similar, but those for 1975 diverge signif�cantly, The Advisory Commission on Intergovernmental Relations concludes that the divergence of 1975 projections probably stems from underlying assumptions. �

-32- Over the long pull, varying assumptions as to the rates of growth in the component expenditures can result in substantial differences in their total figures. Table I shows the various projections. These projections include federal financial assistance in the computed totals. They also were made before President Nixon's revenue sharing proposal. Despite all this, the common thread that runs through all the projections is obvious: state and local government expenditures will rise sharply over the next decade.

TABLE I

RECAPITULATION OF STATE-LOCAL EXPENDITURE PROJECTIONS, 1970 and 1975

Estimated State-Local Expenditures

1970 1975 Joint Economic Committee of Congress !f $119 $173 National Planning Association 2/- 117 172 Tax Foundation,Inc. 3/ 118 158 Council of State Governments 3/ 122 Committee for Economic Development if 152

"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.

� "Funds Required"--Government Finances Framework. ii "General Expenditures"--Government Finances Framework. Orignial CED estimate of $131 billion, based on 1965 prices and using the "strength­ ened 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, Vol. I, p. 65.

Because education, highways, public welfare, and health and hospitals claim 70 percent of all state-local expenditures, we now focus on them.

A. Education Public education is the costliest single state-local function. The 1966 outlay of $33.3 billion accounted for more than 40 percent of

-33- total state-local expenditure of $67 billion. 9/ Higher education (mainly for state-operated institutions) accounted for $7.2 billion of the total educational outlay and the remainder was for elementary and secondary education. Federal funds financed about 9 percent of state and local educational expenditures in 1966. States and localities divid- ed about equally the burden of financing the remaining 91 pe�cent. The burden of financing public higher education falls almost entirely on the states, while elementary and secondary education is a shared responsibility, with the states now paying approximately 40 percent of the cost of local education. Excluding federal aid, state and local spending for public elementary and secondary education has doubled in the past decade (from $12 billion in 1957 to $24 billion in 1966). 10/ During the same period, the state share increased from 38 to 40 percent. Even when educational expenditure increases are adjusted to include price increases, costs are rising rapidly. 11/ Spending for education has been rising steeply be­ cause enrollments°""have grown, costs per student have risen, and new de­ mands have been placed on our educational system. One index in the rising costs in elementary and secondary schools, current expenditures per stu­ dent in constant dollars, went up by 230 percent to $485 between 1948 and 1965 and at the same time enrollment rose by 18,000,000. 12/ Rising per student costs reflect higher teachers' salaries; changes in teaching techniques such as the use of language laboratories; and changes in curriculum like the "new math." What are the prospects for future public educational expenditures? There is general agreement that education will remain the most costly function of state and local governments and will continue to call for the largest dollar increases. If, however, future costs reflect future en­ rollment, the rafe of increase in future school spending may diminish. 13/ Elementary and secondary schools, along with colleges, now enroll about� a quarter of the nation's population. The vast majority--45,000,000-- are in state and local institutions. Relatively slow increases in enroll­ ment in local schools was predicted between 1965 and 1970, and a decline of some l,200,000 students is anticipated by 1975. For the decade, enroll­ ment gains will average out at 162,000 per year, in contrast with the experience of the 1955-1965 period, when additions averaged 1,187,000 a year. The Tax Foundation study states that the declining rate of growth will diminish the rise in expenditures for both current and capital purposes. 14/ Total state and local spending on education is projected at $52.9 billion in 1975, an increase of 83 percent in the next ten years, in comparison with a 144 percent rise between 1955 and 1965. But some observers see tough problems ahead for state-local education. Financial problems in central city schools are likely to remain acute. Others view education in terms of improved techniques that are likely to drive up costs per pupil, especially for deprived children. Finally, some stress the problem of equalizing educational opportunity between states, between rural and metropolitan areas, and between sub­ urbs and the central city.

-34- 1. Equalization Between States

During the past ten years schools have become central to pe7sonal and national aspirations. Beginning with the shock of Sputnik which sparked the passage of the National Defense Education Act increas­ ingly the tasks of education have become more and more vital to' our nation's goals. Schools have been assigned a central role in eliminating social prejudice and discrimination. Crime and delinquency are recognized as deeply rooted in ignorance and inadequate education and the schools are assigned a critical part in their eradication. As public and private attacks focus on poverty and unemployment, the lack of education is found to be a critical factor in blocking efforts toward solution. The Elementary and Secondary Education Act of 1965 placed primary emphasis in Title I on the task of the schools in educating the poor.

Despite increasing national attention and assistance, there remains considerable disparity of educational expenditures among states. While state aid to education can help reduce the inequities in educational opportunity among local school districts in the states, the amounts spent per child vary considerably among states. For example, in 1968-69, Mississippi spent $413 per child while New York state spent $1,125 per child. 15/ With.a national average per capita expenditure for total education of $170 in 1966, Mississippi spent $118, while New York state spent $190 per capita.16/ Per capita expenditure comparisons, however, may understate the effort on behalf of public education in those states with relatively large numbers of pupils in private and parochial schools. A comparison on the basis of per pupil public school expenditure removes the private school factor. Even by this measure, the Southeastern states are the lowest, averaging $390 per pupil in 1966, compared with a national average of $532. 17/ Such comparisons also ignore differences in costs in different part�of the country. Heating_and labor, for example, cost less in Mississippi than in New York. Significantly, as a group, the Southeastern state governments financed 59 percent of their local school bill in 1966 while the national average was 40 percent. Despite the great disparity in cost per pupil between New York state and Mississippi, state support of local education averages about 65 percent compared to around 54 percent in New York. 18/

2. Educational Expenditures Within States Not only are there expenditure variations in cost per stu­ dent among the states, but there often are considerable variations within states. In general, suburban areas spend more per pupil than the central city. 19/ A recent study by the Carnegie Foundation showed that in the 1964-6�school year the nation's 37 largest cities spent $121 per pupil less than the outlying districts. �20/ Two years before the gap had only been $62 per pupil. With few exceptions, school districts rely for their support mainly on a combination of local property taxes and state aid. In 1968,

-35- local truces provided $15.3 billion of the $31 billion for primary and secondary education and the rest came mainly from the federal government. The pupils big city schools must educate are �ften poor, �d �any are members of minority groups. Despite the lower expenditure per child in the central city, however, the city dweller generally pays a higher per capita true rate than suburban taxpayers. In 1966, New York City residents paid $44.26 per $1,000 of tax valuation for municipal services, compared with $21.83 for the four surrounding counties. 21/ The reason that cities spend less per pupil despite higher per capita"""taxes is that other local services also largely supported by the property true cost more in the central city than in the suburbs. This is partly due to higher payroll costs. In addition, cities may spend more than suburbs for such things as police protection and transportation facilities.

Most state school aid formulas seem to favor the poorer districts. The report of the Advisory Commission on Intergovernmental Relations charges however, that some states actually provide more money for the suburbs and that aid equalization formulas fail to produce equalization. 22/ In 1968, Chicago and Detroit schools filed suits to force their respec- tive states to provide more state aid to their schools. 23/ They argued that most state constitutions and the 14th Amendment of the federal Constitution require the states not just to support the public schools, but to treat all students equally--even if it means spending more per pupil in city than in suburban schools for such things as special courses to improve reading and study skills. But they were willing to settle for equal levels of expenditure.

Within the past few vears. manv cities have cut back educational formula designed to funnel federal money directly to school districts with con­ in some cities have eliminated driver training and remedial reading programs as well as piriched pennies on maintenance .. These and other forced economies reflect a hardening of public attitudes towards increases in educational outlays. According to the United States Office of Education, voters defeated one-third of the educational bond issues during the first seven months of 1967. Professor Richard Netzer, at New York University, states that schools are running into more resistance from trucpayers because school taxes have been rising at a faster rate than personal income.25/ In most states, school taxes, unlike other levies, must be approved b�popular vote.

Title I of the Elementary and Secondary -Education Act contains a designed to funnel federal money directly to schoof districts with con­ centrations of low income children. But this approach, according to Alice M. Rivlin, educational specialist at The Brookings Institution,may fall. short in providing real improvements in urban education. 26/ There is widespread agreement that current urban education is costly°""and unsatisfactory. Disenchantment with big city school systems makes even ardent educators reluctant to pour larger amounts into them. Experience with the Elementary and Secondary Education Act has not provided a basis for assuming that simply applying an extra billion dollars to the education of low-income children will make much difference. Making big city schools

-36- attractive and effective may require radically new methods, new attitudes, and a new breed of teacher. B. Highways

Management of the nation's 3.6 million miles of highways and streets rests largely in the hands of state and local governments a function ranking second only to education in financial requiremen�s. With the initiation of the interstate highway system in 1956, federal legislation established the national government as a prime source of highway spending. But state and local units have an extensive respon� sibility for the 2.8 million miles of city streets and local roads which are outside the federally-aided system. In 1966, federal aid provided about one-third of the $12.8 billion spent by the states and localities for road and street construction and maintenance.27/ The federal govern­ ment has two programs which supply funds for state-local road projects. 1he initial program still in operation provides money on a 50-50 matching basis for primary, secondary, and urban extension highways. The states share a significant portion of these funds with local units. The Interstate Highway Act of 1956 established a 90-10 m�tching program to construct a 41,000 mile federal-state highway system scheduled for completion by 1975. There is variation among the states in the level of highway spending. With a national average of $65 per capita in 1966, the range was from less than $50 in New Jersey, Illinois, and the Carolinas, to more than $140 in sparsely-settled Montana, Nevada, and Wyoming. Future highway and road construction costs will continue to rise. The Tax Foundation projection states that the volume of highway construction will drop somewhat following the completion of the federal-state interstate high- way system in 1975. 28/ Total highway expenditures in 1975 are projected at $16.6 billion, 36--i;-ercent above 1965. Future federal legislation will have an important bearing on state-local expenditures even after the current interstate system is complete. C. Aid to the Poor

Public welfare claims the third highest amount of state-local spending. Most state and local welfare falls under the federally-shared program of public assistance which has been in effect for over three decades. Assistance takes two forms: cash payments to the needy in support of living allowances and medical payments. Total state-local welfare spending amounted to $7.8 billion in 1967; over half of this total was financed with federal grants-in-aid. 29/ From their own sources the states spent $3.2 billion. Most of this expenditure provides monetary support for state and local programs aiding four impoverished groups: old persons, the blind, the permanently and totally disabled, and families with dependent children. Currently there are 8.5 million people receiving assistance under these programs. 30/ Public assistance for the poor who failed to qualify under any of th�above four categories is paid by some states and localities without federal participation under general

-37- assistance programs. In 1967, the states or local governments spen� $480 million on these so -called general assistance-programs. 31/ Fifteen of the states leave all financing of general assistance to local governments.

While the federal government provides over half the money for public welfare programs on a matching basis that favors the poorer states, each state has control over the size of the monthly payments and the number of eligible recipients. The range of benefits within the same category varies considerably between states. For instance, within the Aid for Dependent Children program, actual maximum payments to a mother with three children vary from $50 per month in Mississippi to $246 in New York. -32/ James Tobi� Sterling professor of economics at Yale University, argues -'fhat the higher benefits and wide difference in eligibility rules, and administrative practices encourage migration to the wealthier and more liberal states, compounding the problems of northern cities. AFDC cases have more than doubled in New York and California since 1961. 33/ Is there what is often called uneconomic migration? Tobin believes it likely that one of the reasons southern states keep their welfare benefits low is to encourage migration.34/ George F. Break, economist at the University of California, Berkeley, suggests that state welfare benefits are related to their resources and administrative decisions. 35/ He also suggests that the increasing welfare population and local welfare burdens in the larger cities are a factor in the flight of the affluent to the sub­ urbs. 36/ The Nixon family allowance proposal would provide assistance to many who do not presently receive benefits. The states would be required to maintain their present efforts and different benefit levels would re­ main among the states, with a new federally required minimum level in all states. Even before the President's proposal, the Tax Foundation estimated that future state-local welfare spending would rise more rapidly than payments for education or highways. 37/ Total welfare outlays in 1975 are estimated at $17.1 billion, or 170 percent more than in 1965, in comparison with the previous decade's advance of 99 percent. These projections are based on assumptions of generous federal assistance which the states will match. D. Health Care and Hospitals

State and local governments own and operate 2,041 hospitals and administer a variety of public health programs. Generally, mental insti­ tutions, .tuberculosis hospitals, and specialized rehabilitation centers are operated at the state level. Many local governments construct and operate general hospitals and also underwrite the provisions of general public health services with the states. These state and local functional responsibilities are federally aided. The $6 billion spent on health and hospitals by state and local governments in 1966 (federal aid contributed approximately 5 percent of this total) was contributed almost equally by both. 38/ There are, however, great differences from state to state in the wa�financial responsibility for health services is divided between state and local units. State contributions vary from 90 percent or more

-38- of the total state-local cost in Delaware to one-third or less in Nebraska, Georgia, and Nevada. The Tax Foundation estimates that total state-local health and hospital.expenditures will rise to the $10.6 billion level by 1975, a 97 percent increase over 1965, 39/ However, recent federal legislation such as "Medicare" and "Medicaid," affecting the overall financing of heaith services may have some influence on state-local cost of hospital and health services. State-local hospitals may become more self-sustaining. E. Miscellaneous Expenditures The previous sections examined state-local expenditures in the four largest spending areas: education, highways, public welfare, and health and hospitals. In total, these four categories account for 70 percent of state-local spending. Other services, of course, cover a wide range of activity, but no effort will be made here to examine specific categories in other areas, for expenditure patterns in these areas resemble the four major areas which we have just examined. In the 1955-65 decade, these expenditures increased 128 percent, from $10 billion to $22 billion. 40/ The Tax Foundation estimates that these expenditures will rise to $45 billion by 1975, an increase of 103 percent over 1965. III. State Burdens

With few exceptions, the prov1s1on of domestic public services has become the shared responsibility of several governmental levels. Indeed, if the sources of financing are taken into account, there is hardly a functional area, even among those that traditionally have been considered strictly local,like elementary and secondary education and sewerage and sanitation, in which the federal, state, and local governments do not all participate to some extent. As between state and local governments, the allocation of res� ponsibility for expenditures for particular functions varies. The states' share of state-local expenditures in 1966 among all the states was 35 per­ cent, but the state share varied from more than two-thirds in Hawaii and Alaska to less than a fourth in New Jersey and New York. The relation­ ships for the major functions of education, highways, and public welfare explain most of this variation. 41/ Both Alaska and Hawaii provide, as direct state services, much or all of elementary and secondary education, public welfare, and highway facilities. Some states, like North Carolina, Virginia, and West Virginia, build and maintain local roads; others, like New Jersey, leave this function to the local governments. The fact that administration of certain functions is left to local governments does not necessarily mean that financing those functions is assigned entirely to the localities. Public assistance, a particularly costly function in the more industrialized states, is administered at the local level in California and New York, and in about a third of the states. Most welfare expenditures occur at the local level in California and New York but these states still provide over 70 percent of the total money spent (about the national

-39- average among states). Although New York and N7w Jersey rank at th7 bottom in the state proportion of state-local direct general expenditures, they differ considerably in the way local spending for those functions is financed. For example, New York local units obtain about a third of their general revenues from the state while the localities in New J7rsey, until recently, received from the state only about a seventh of their general revenue.

In general, the states share the major expenditure burdens with the localities. Because of this, it is difficult to isolate specific burde.ns as purely state burdens. For the most part, public higher educa­ tion is almost entirely financed by the states. Public elementary and secondary education is mandated, regulated, and heavily financed by states. The states maintain hospitals and institutions, including those for mental health and correction. The administration of criminal justice depends primarily on state courts and, in increasing measure, on state police. I� addition to supplying an average of 75 percent of the funds, about half the states manage public welfare plans directly. High­ way and street construction is also a shared responsibility.

A. State Transfer Payments

State governments are both major recipients and major dis­ pensers of intergovernmental aid. In fiscal 1966, the states distributed some $16 billion to their localities, including federal aid channeled through the states, supplying an average of 31 percent of local general revenue. 42/ The percentage of state expense sharing with local govern­ ment varies considerably from state to state. The relationship of state aid t.o local general revenue ranged from a low of 10 percen.t in New Hampshire to a high of 52 percent in North Carolina. 43/ Generally, New England, with its tradition of strong local government,has the lowest percentage of state aid .to local government, 21 percent of local spending. By contrast, the Southeastern states provide._3-7 percent of local revenues. As a rule, the states which provided the least state aid were those states which lacked broad-based taxes--either personal income or sales taxes. 44/

IV. The Cities

A. Metropolitan Growth

The population explosion in metropolitan America is a well­ documented fact of twentieth�century life. In 1900, metropolitan areas had 42 percent of the United States population. They now have over 64 percent and this percentage is projected to grow in the future. 45/ From 1900 to 1920, metropolitan growth was most rapid in the central cities. This relative growth reflected the large migration from.both rural areas and foreign countries. By 1930, restrictions on foreign immigration and the spread of the automobile created a new pattern--the surrounding sub­ urban population grew faster than that in the central city. By 1962, total suburban population probably pulled abreast of the central city and by 1975 approximately 58 percent of metropolitan populations are expected to

-40- reside in the outer fringes of the cities. 46/

. While the central city population has actually been declining in recent years as more and more residents move to the suburbs, the problems of the central cities are receiving the most attention. Negro migration to the central cities has replaced much of the white population that moved to the suburbs. Although the Negro population grew in all areas, it was the smaller growth and, in fact, the decline of the white population in the central cities that made the Negro growth there most dramatic. Be­ tween 1950 and 1960, the white population in the central cities grew only 4.6 per�ent, while the Negro population grew 50 percent.47/ By 1965, the populations of 11 of the 30 largest cities in the United States contained more than 25 percent Negroes. The Negro population in Washington was well over half the total and that of Newark was fast approaching that mark. The growing concentration of Negroes and other minority groups in the central cities has had an important impact on the demand for public services in general and education in particular. The nonwhite population has a higher proportion of children under the age of 15 than the white population. As concentrations of minority groups increased so did public assistance case loads, the ne�d for police protection, and a variety of public services. 48/ With a few exceptions, the city's share of the welfare case load is dramatically higher than its share of the state's population. After assessing the relative levels of various social and economic indicators, the Advisory Commission on Intergovernmental Relations ·cone luded: ... it is clear that the Nation's central cities are becoming inhabited to an increasing extent by "high cost" citizens. The central city has a concen­ tration of the non-white, the elderly and the low income population often living in unsound housing without adequte education for today's world and without hope for the future. 49/ B. Future Cost Problems Many observers believe that American cities are currently confronte0 by complex problems that threaten to undermine their future usefulness as viable entities. Among the most pressing problems are spreading slums; intensification of education and health problems; hope­ lessness and hostility, especially among the nonwhites; increasing crime rates; increasing traffic congestion; and increasing air and water pollution. These problems are related to the rapid environmental and population changes during recent decades. In 1966, the National League of Cities had a study pre- pared which projected expenditure and revenue needs between 1966 and 1975. 50/ This study, "Project Tempo," concluded that cities should spend a total of $1,025 billion between 1966 and 1975. 51/ It was estimated that cities would raise $763 billion from theirown sources but that a revenue

-41- gap of $262 billion would remain. Project Tempo suggested that the gap could be narrowed to $125 billion by increases in state aid, local debt, and local non-tax charges. 52/ The study concluded that the remaining gap of $125 billion should be filled by federal aid through a federal revenue sharing plan. The next chapter discusses the arguments for and against federal revenue sharing with the states.

V. Summary Despite federal aid, state and local expenditures have risen drastically. Undoubtedly, rising prices an,d population increases have contributed to these rises, but when expenditures are adjusted in terms of constant dollars and population increases, the result shows that public services provided by state-local governments are becoming more expensive. Expenditures are expected to continue to rise. Will revenues be available to match these rising expenditures from either state-local government sources or from the federal government?

-42- CHAPTER III--DISCUSSION QUESTIONS

1. What factors create pressures for increased government spending for public services? How have state and local governments responded to 7uch pressures? What has happened in the area of educational expend­ itures? Are pressures in this area likely to abate? Enumerate and analyze the reasons which determine the answer.

2. How serious are interstate disparities in educational expenditures? Intrastate disparities? What circumstances are responsible for dis­ parities that do exist? Are there any factors militating against con­ tinued disparities?

3. Which level of government is principally responsible for the adminis­ tration of highway systems? What is the scope of federal participation and assistance? What role does local government play?

4. How much do the states spend annually on welfare? Does the federal government help? Are there wide variations in the level and avail­ ability of welfare assistance among the states?

5. What is the scope of state responsibility in the area of health-care'! Are state expenditures in this area likely to increase? What impact have "Medicare" and "Medicaid" had? Do they help or hurt the states financially? Explain.

6. How are responsibilities allocated between state and local governments? Do some states help localities more than others? Identify some characteristics shared by the states that are most willing to aid their local governments.

7. What factors have aggravated the plight of the central cities? Are the cities likely to have enough revenue to meet demands placed upon them?

-43- FOOTNOTES--CHAPTER III y There were some temporary exceptions to this, such as in time of war, the 19th century federal-state revenue sharing experiences, and the early income transfers to land grant colleges in the states. c. Lowell Harriss, Handbook of State and Local Government Finance (New York: Tax Foundation, Inc., 1966), p. 11. ACIR, Vol. I, p. 48 (see Table I). These annual figures have not been adjusted for either population growth or price rises which naturally contribute much toward the annual rises. Yet when federal expenditures were adjusted in terms of 1965 dollars and population increases, federal expenditure increases remain significant. See Special Analysis, The Price of the United States Government, 1948-1967 (Washington: American Enterprise Institute, 1967). If the $14.9 billion in federal aid is added, total 1966 state-local expenditures were approximately $82 billion. The increase between 1956 and 1966 was 107 percent, $67 billion for 1966 and $32.3 billion for 1956. If adjustments are made in terms of constant prices, the 1966 per capita expenditure was $328 and 80.2 percent larger than 1948. These figures include federal aid. (ACIR, Vol. I, p.58). ACIR, Vol. I, p. 52. In 1966, federal employment (excluding the Armed Forces,was 2,600,000.

� ACIR, Vol. I, p. 61. 9/ ACIR, Vol. I, p. 95. Federal aid to education of $3.1 billion is included in this total. 10/ ACIR, Vol. I, p. 278 (see Table A-9).

11/ Leonard A. Lecht, Goals, Priorities, and Dollars (New York: The Free Press, 1966), p. 143-44. 12/ Harriss, Handbook of State and Local Government Finance,�· cit., p. 20. 13/ Tax Foundation, Inc., Fiscal Outlook for State and Local Government to 197� (New York: Tax Foundation,Inc., 1966), pp. 12-13 or George E. Break, Intergovernmental Fiscal Relations in the United States (Washington: The Brookings Institution, 1967), p. 11. 14/ Tax Foundation, �· cit., p. 13. 15/ Ralph W. Tyler, "Investing in Better Schools," Agenda for the Nation (Washington: The Brookings Institution, 1968), p. 234.

-44- 16/ ACIR, Vol. I, p. 277 (see Table A-8).

1]j ACIR, Vol. I, p. 97.

� ACIR, Vol. II, p. 278.

19/ Ibid., pp. 64-65.

20/ Wall Street Journal, July 16, 1968.

IJ:./ Ibid.

22/ ACIR, Vol. II, p. 84.

23/ Wall Street Journal, July 16, 1968.

24/ Wall Street· Journal, April 13, 1967.

25/ Ibid.

26/ Washington, Post, August 22, 1969.

27/ ACIR, Vol. I, p. 101.

28/ Tax Foundation,.££.· cit., p. 15.

29/ ACIR, Vol. I, p. 279.

30/ New York Times, February 14, 1969.

31/ 1968 Statistical Abstract of the United States, p. 300.

32/ James Tobin, "Raising the Incomes of the Poor," Agenda for the Nation, .££.· cit., p. 100.

33/ Ibid.

34/ James Tobin and W. Allen Wallis, Welfare Programs: An Economic Appraisal (Washington: American Enterprise Institute, 1968), p. 16.

35/ Break,.££.· cit., P· 80. 36/ Ibid., p. 177.

37/ Tax Foundation,.££. · --cit. 38/ ACIR, Vol. I' p. 99.

39/ Tax Foundation,.££.· cit., P· 14.

-45- Tax Foundation,££.· cit., p. 91. The most significant areas here are police and fire, administration and general control, interest on the debt, sanitation and sewerage, and housing and urban renewal.

ACIR, Vol. I, p. 73. ACIR, Vol. I, p. 90. Total federal aid was $13 billion; some was routed to local projects through the states while other urban grants went directly to cities, thus bypassing the states.

43/ ACIR, Vol. I, P· 91. 44/ ACIR, Vol. II' p. 90.

45/ Ibid., p. 27.

46/ Ibid., p. 31.

47/ Ibid., p. 33. In the five largest cities, the whites declined 7 percent while Negro populations rose by 56 percent.

48/ ACIR, Vol. II, p. 40.

49/ Ibid., p. 55. U.S. Congress, Joint Economic Committee, Revenue Sharing and Its Alterna­ tives, July 1967, Vol. II, pp. 1022-50. Ibid., p. 1029.

Ibid., p. 1025.

-46- CHAPTER IV

THE ECONOMICS OF REVENUE SHARING I. Introduction

For more than a generation, arguments have been advanced that the states require more and more federal assistance in bearing their fiscal burdens. The vast growth of federal assistance to the states since 1933 has been at least in part, a response to such arguments. A decision to share federal revenue, unless it involved a concomitant decision to reduce other federal grants, would provide additional aid. This chapter focuses on the question whether the asserted inadequacy of state revenue sources (including present federal aid) justifies tax sharing. Specifically, we examine four major areas: (1) the relative financial resources of state and federal governments; (2) the relative merits of state and federal taxes and taxing systems; (3) the impact of grants-in- aid and federal tax changes; and (4) the likely effect of revenue sharing on state fiscal effort.

II. State and Federal Financial Resources: A Comparative Analysis

The question of how much money the states presently have--and in the future are likely to have--available is a crucial one. If present revenues are inadequate, the states either have to cut back on social services and capital expenditures, or raise more money through tax in­ creases, debt increases, or federal grants. 1/ Many states are required by their constitutions to balance their budgets. In this section, we seek to assess the health of state and federal revenues. Our concern here is whether the states can meet their needs in the years to come without significant increases in tax rates. If they cannot, will the federal government have excess revenues with which to help them? Can either the states or the federal government make funds available by cutting back on existing programs?

Before attempting to deal with these questions, we briefly re­ view the present fiscal position of the states: From 1946 to 1966, state and local government spending increased by 525 percent, from approximately 13 billion dollars to approximately $82 billion. At the same time, state and local tax receipts rose by only 432 percent, from $11 billion in 1946 to $58 billion in 1965, and gross state and local debt ballooned from $15.9 billion to $107.3 billion,an increase of 575 percent. 2/ These statistics are subject to different interpretations. The fact that the states have borrowed a great deal in the past may be taken to indicate that they can borrow more in the future--or it may be interpreted to mean that they have overextended themselves and cannot afford to borrow more. Professor Roger Freeman observes:

Federal financial assistance is ...needed, we are told, because state and local governments [are] hamstrung by obsolete constitutional limitations

-47- which prevent them from exercising adequate·... borrowing powers. These tight and unreasonable restrictions do not seem to have stopped state and local governments from... pushing their out­ standing debt from 17 billion dollars to 92 billion dollars. So ... the case for federal grants had to be slightly modified; state and local debt grew 428 percent in the past 20 years, federal debt only 16 percent, which apparently proves that state and local governments are dan­ gerously overexpanded while the federal debt has shrunk in relative terms and federal borrowing capacity is underused.... some observers feel that this is a "heads .. I win, tails you lose" proposi­ tion. '!!J.

It is also argued that any future assessment of state financial circumstan­ ces is rendered at least somewhat unreliable by the fact that it is de­ rived by measuring revenues against "unmet need." There is no objective definition of what unmet needs are; in one sense, socially responsible governments could always discern areas where further action might seem appropriate. Thus, it may be hard to decide whether states are presently in a good or bad fiscal posture, or in what kind of fiscal situation they will find themselves in the future. Arguments have raged back and forth for years, and we now examine them.

A. The Pessimistic View of State Finances

The Advisory Commission on Intergovernmental Relations wrote in October 1965:

Since reserves, accumulated during World War !!,disappeared about the time the Korean war began, many states have been confronted by continuous fiscal crisis. They have been able to struggle through the. past 15 years only by resorting to one expedient after another. They have doubled and re-doubled cigarette taxes, they have pushed sales taxes as high as 5 percent, they have asked for and received massive aid from the federal government, they have experimented with an ingenious arsenal of budgetary legerdemain, and they have even resort­ ed to the operation of lotteries. And still yields fall short of needs. if

The states are in trouble, it is argued, because expenditures are rising much faster than revenues, despite state efforts to catch up. 5/ The result of this situation is a state revenue gap. Brookings economist Joseph Pechman predicts the gap between revenues and expenditures for state and local governments at $15 billion in 1970. Diyk Netzer of the Committee for Economic Development believes that expendft.tures may exceed revenues by $10 billion. §.!

-48- n n n . Tho�e who are co cer ed about deterioratio of the states' bud­ getary situation contend that the situation may get worse. They believe that state and local expenditures, under the pressure of population in­ creases a�d demands for higher quality service, will continue to grow at �n unpr;cedented rat�. 7/ Revenues, it is feared j will not increase accord­ ingly,.§.; The result might well be a threat of serious deficits and a con­ sequent reduction in state action to ameliorate or solve pressing social problems.

B. The Optimistic View of State Finances

The Tax Foundation takes a very different view from the Advisory Commission on Intergovernmental Relations: it believes that the future fiscal outlook for the states and localities is a bright one. The Found­ ation concluded in 1966:

In recent years, it has become almost common­ place to assume that all state and local governments are in financial straits and will be increasingly hard pressed to meet their future responsibilities on their own. While some jurisdictions may be so afflicted, the conclusions of this study suggest they will be in the minority .... indeed the outlook suggests that there will be room for greater dis­ cretion on the part of state and local officials in shaping taxation and debt policies--the opportunity to choose among alternative means of financing to perhaps a greater extent than ever before in the postwar period. 9/

The Committee for Economic Development agrees: it predicts a $20.5 billion surplus for state and local governments in 1�75, a surplus that could provide opportunities for expansion of services, improvements in quality, and creative experimentation on the state and local level. 10/

Optimists point to increases in state revenues. From 1966 to 1967, sales tax receipts rose 13.4 percent; individual income tax receipts climbed by 14.1 percent; and corporate tax revenues rose almost 10 percent. l,1 The expectation that this trend will continue is one of the bases for predicting that state and local revenues will outstrip expenditures. How­ ever, it should be noted that most versions of this prediction assume a sharp rise in federal grants-in-aid. 12/ Nonetheless, there seem to be factors independent of federal action which might contribute to a continually improving outlook for states and localities. One authority has suggested that state and local expenditure growth will slow down over the next decade. The rate of increase in the number of school age children is expected to decline, as is the rate of increase in the number of persons over 65 years of age. Capital outlay expenditures will increase at a much slower rate than in the 1955-1965 period. 13/ With all of this in mind, Professor C. Lowell Harriss predicts tha�"... in both 1970 and 1975 state-local governments as a groups will have more funds to pay for the services projected." 14/

-49- All predictions of the state-local fiscal position are, of necessity, tentative and uncertain. Desp�te past op!imistic pr�je:tions, some states and localities have had to raise truces time and again Just to keep their heads above water; on the other hand, despite warnings of doom, virtually every state and locality has managed to carry its burdens; and in most cases, to expand its services. 15/ Of course, debaters who wish to justify tax sharing as a necessary means to alleviate state and local financial plight must attempt to predict the contours of the future fiscal situation. Persuasive predictions depend on the presentation of convincing rationales--reasons why the states will or will not confront a financial crisis. Debaters must locate, analyze, and argue relevant considerations. Certainty may not be attainable, but an attempt can be made to demonstrate what is likely.

Those who accept or advocate the pessimistic assessment of future state and local finances increasingly contend that the difficulties should be relieved by a program of sharing federal revenues. Two years before President Nixon's plan was announced, Pennsylvania povernor Raymond Shafer wrote the 49 other governors asking them to secure passage in their leg­ islatures of a resolution requesting that Congress call a convention to ,amend the Constitution to provide for revenue sharing. Shafer's proposal received little attention and less action. In making it, however, the Governor noted that Pennsylvania's share of a 3 billion dollar grant would resolve that state's financial crisis. 16/ The critical question in all this is whether the federal government has the revenue to share. Obviously, it could raise truces, but so could the states. The relative merits of either level of government taking this course of action will be considered later. For the moment, we assume that the states cannot meet their obli­ gations at present true rates; applying the same standard, we ask whether the federal government can share revenue without increasing taxes.

C. The Federal Revenue Situation Much of the original discussion of revenue sharing was predicated on the assumption that the federal government would enjoy a fiscal surplus-­ that its revenues would rise faster than its expenditures. In such an event, the surplus could be used to cut taxes, reduce the national debt, or aid the states. 17/ The rising expenditures occasioned by the Vietnam con­ flict temporarily smothered the hope for surplus federal revenues. How­ ever, a number of recent studies have argued that a fiscal surplus will develop at the conclusion O! the war. The Committee for Economic Develop­ ment observed in 1967 that " ... under normal peace-time conditions the national fiscal system generates such fast growing revenues that the ob­ jectives of rapid economic growth, high employment, and price stability might be threatened by fiscal drag." 18/ If a surplus occurs, the question becomes what should be done with it. -Xfter studying t�e alternative possibilities, Brooking's economist Joseph Pechman concluded that, due to the rate of private saving, the government should spend the money rather than use it to reduce the federal debt. 19/ The alternatives are tax reductions or expenditure increases. An

-50- How large is the surplus likely to be? Assuming (1) continued international tension but the absence of a major hot war; (2) an economic growth rate of 3 3/4 pe�cent a year in real terms; (3) continuation of the current .federal tax s�ructure, including existing tax rates; (4) contin­ uation of current federal expenditure programs; and (5) the absence of any new federal expenditure programs, Murray L. Weidenbaum concludes that "there would be a continuing and increasing potential surplus of the fed­ eral government's cash receipts over expenses during the next decade'.' and estimates the "potential budgetary surplus" at about $30 billion in 1975. 21/ In recent months, there have been warnings that the expected fiscal dividend might not materialize. In December, 1968, the Wall Street Journal indicated that not only the Vietnam war, but also rising demands for domestic programs, had made a fiscal dividend less likely. 22/ 'lb.en, in early August 1969, Administration sources warned that pending� tax revision might lead to a decline in revenues. One source believed that revenues might drop by as much as 1.5 billion dollars in 1971. 23/ Finally, after presenting his domestic proposals to Congress, President Nixon received a report prepared by a member of his Council of Economic Advisers on future fiscal prospects. 'Ib.e New York Times reported: A high-level Administrat�on economic study has termed an illusion the idea that an end to the Viet­ nam war will free large sums of money for new social programs, a senior White House official .said today. ..• the study predicted that budgetary savings from a cessation would be consumed through the mid 1970s by current and proposed military and domestic pro­ grams, given projected population. Virtually no money will be left over for new social projects ..•.24 / 'Ib.e following day, unidentified Administration sources stated that the report's pessimistic forecast had been unduly exaggerated, and that only under certain circumstances would future federal budgets be unavailable for new social programs. What are the implications to be drawn from these conflicting views? Will funds be unavailable for revenue sharing? A number of factors suggest that funds will be available. First, the Administration's projections assume the passage of President Nixon's revenue sharing bill, which will provide for revenue sharing, amounting to approximately 5 billion dollars a year by 1975. However, the Administra­ tion seemed to modify its position slightly: if all current proposals were approved, the new version went, there would be a smaller peace dividend. 25/ Finally, one source has reported that " ...the main new element in�he peace dividend analysis presented to President Nixon was the idea that a good part of the money to become available after the war in Vietnam ends would be used to reduce the national debt and not be spent." 'Ib.e rationale for this course of action is that a reduction in the national debt would lower interest rates and increase economic growth. 26/ So, if the affirmative were seeking additional funds to devote t�revenue sharing, it could turn to the portion of the peace dividend now slated for federal debt reducti�n.

-51- If it is asswned that additional funds to support revenue sharing will not become available from the growth in revenue due to prosperity, or that the Vietnam war will continue, the affirmative might attempt to show that its plan can be financed by reallocating federal resources rather than by raising truces. A nwnber of federal expenditures may offer an opportunity for budget cutting. In each of the following areas, of course, an affinnative argwnent for cutting back will have its disadvan­ tages. The affinnative might attempt to finance revenue sharing by re­ ducing the appropriation for agriculture, which is estimated at approx­ imately $5 billion in 1975. 27/ Or the affinnative could turn to the space program with an estimated annual cost of $7 billion from 1972 on. 28/ One item in the federal budget many affinnatives might be tempted to cite for reduction is the defense budget. For instance, the United States might forego ,an anti-ballistic missile system at a substantial saving, Expenditures,,for modernization and replacement in the wake of Vietnam might be sharply curtailed. However, as noted before, any affinnative who advocates reduction of costs in a particular program like defense must be prepared to justify such cost reductions. Defense Secretary Melvin Laird recently warned that any large cuts in defense spending could prove extremely dangerous to the national security. 29/ If the affinnative argues that the federal government can fin­ ance revenue sharing by cutting back on nonessential expenditures, the negative may reply that the states can raise their own resources by cutting back on nonessential expenditures of their own. Professor Harriss has noted: Governments almost never get rid of older func­ tions as new ones are added. Not often do voters, or leaders of government, exert strong pressure to re­ duce or terminate a service no longer worth its cost, so long as it seems to please some ·of the public .... a government agency can continue to provide services whose worth, in relation to cost is at best dubious .... insistence that the charges for a service, such as local transportation, be under cost has in some cases discouraged private suppliers to such an ex­ tent that government must take over if the service is to continue. 30/ Thus, it can be argued that state and local governments are maintaining unnecessary programs or incurring expenses for the provision of inefficient services. By adopting more sensible policies, they could go a long way toward meeting their own revenue needs.

III. The Relative Merits of State and Federal Taxes and Taxing Systems If the states have pressing social needs they cannot meet with their own resources at present true levels, and if the federal government does not receive the hoped for fiscal surplus. then either the federal government or the state and local governments preswnably will have to

-52- raise truces. The question we turn to now is whether tax increases should take place on a federal or state level. Are there factors which make an increase in state levies less desirable than an increase in federal rates? A. The Possible State Responses to Revenue Needs Some authorities believe that states can and will respond to the fiscal challenge to increase taxes, and the record of recent years tends to support that belief. Most states have followed a policy of pushing up rates. or adopting new types of truces. 31/ From January, 1965, through June, 1966, eight states increased sales true rates and five states adopted new s·ales taxes. Eight increased personal and corporate income truces and Nebraska and Oregon adopted new income and cigarette truces respectively. Similar actions were taken everywhere else in the Union. 32/ Moreover, most major state tax sources seem to show a potential for add-� itional increases. The Committee for Economic Development writes: "A more br-o.adly-based general retail sales.true particularly covering more services, can provide large amounts of revenue at a relatively low tax rate." 33/ Some scholars believe that the property tax is rife with underassessment and inequity; refonns here might provide a social as well as a financial advantage. 34/ Perhaps the single most promising area for state revenue increase�in the future is the income tax. In all but five states, receipts from sales and gross receipt truces exceeded receipts from state and local income truces in 1963. 35/ There is an increasing tendency on the part of the states to exploit potential income true sources. From 1950 to 1965, truces on individual and corporate income rose by $4.6 billion on the state level and accounted for 13 percent of .the total in­ crease in revenues. These revenue increases have come in part from the rising levels of income and consumer spending that are by-products of economic growth. But increases in rates as well as an increase in the number of states utilizing the income true have also been contributing factors. 36/ Despite the op1n1ons just cited and the array of statistics that can be presented in support of them ,other authorities are convinced that state and local governments are rapidly reaching the upper limits of their trucing capacities. Initially, we should note that the term "limited" applied to a taxation system is at best nebulous, for there are untapped tax revenues. Ten states have no general sales tax, though all have selective sales truces, including collection of taxes on motor fuels, alcoholic beverage�, t6bacco products, insurance, public utilities, parimutuels, amusements, and other selective sales taxes; fourteen states have no individual income tax; twelve states have no corporate income true; six states have no state property true; and 29 states have no severance true. 37/ Thus, it may be argued that the question is not whether in the strictest sense the states can do more; it is concerned with what they are willing-to do. In many cases, reliance on a steeper sales tax is substituted for the enactment of a state income true or vice versa. Yet it is said that state tax rates may have reached the highest bearable level. In respect to the property tax, Pechman has suggested that " ...in many cities and towns, property tax rates are already too high and further

-53- substantial increases in these rates is .undesirable." 38/ Nonetheless, the negative may reply, the fact is that in re7ponse to fiscal pressures the states have raised and will continue to raise taxes.

The states have an alternative revenue source--borrowing. In this area too there is dispute about the wisdom of the states' increasing their efforts. As we have already noted, state debt has risen sharply in the last two decades. However, the increase has been far from uniform. Twenty states experienced less than a $50 per capita rise in indebtedness . between 1948 and 1963, while 2 states, South Dakota and Arkansas ,owed more in 1948 than they did 15 years later. 39/ Almost without exception, state bonds and other obligations have remained remarkably safe investments. There have been only two major defaultson interest payments, the West Virginia turnpike commission in 1958 and the Calumet Skyway Toll Bridge in 1963. Such isolated instances do not appear to have damaged or impaired state credit to any significant degree. 40/ Three factors tend to limit the ability of the states to obtain additional resources by borrowing: first, the states have traditionally incurred debt only for capital ex­ penditures like highways and buildings. There is resistance to any use of the debt mechanism to .-finance current non-capital budgetary items. On the other hand, it might be argued, the states could free funds for operating and current needs by relying more heavily on borrowing for capital expenditures; at the present time, " ...only one-half to three­ quarters of all capital expenditure is financed by borrowing." 41/ State constitutional provisions also limit the potential for increasing revenues through borrowing. Inspired by periods of reckless and irresponsible overborrowing, the range of debt limitations is very wide. As of 1958, only eight states permitted their legislatures to make borrowing decisions at their own discretion. Twenty-one states required a constitutional amendment to authorize borrowing and twenty-one others demanded legislative enactment followed by popular approval in a·referendum. ·Furthermore, 34 states had constitutional restrictions on local borrowing. 42/ Of course, the public in each state can adopt constitutional amendment�to remove these restrictions if they wish to do so. Finally, present credit con­ ditions may make it more difficult for the states to borrow. High interest rates, inadequate savings, and the lack of available loan funds may make state reliance on greater borrowing realistic.

B. Competition For Industry and State Tax Policies One of the traditional argu�ents against state tax increases is that rising taxes hamper state efforts to attract new industry and revit­ alize ailing economies. The Committee for Economic Development has observed:

...it[is] unduly difficult for states to fin- ance increases in the level of public services which their citizens deem worthwhile. Tax competition makes it difficult for one state (or other governmental jurisdiction) to maintain a tax level much greater than that of a neighboring jurisdiction, for this could

-54- discourage business and persons with higher in­ comes from locating and remaining in the rela­ tively high tax area. 43/

Competition for industry based on tax advantage is vigorous. States ad­ vertise their low tax rates and sometimes maintain a corps of professional public relations men hired to lure new industry (and existing plants) to their areas. 44/ Statistical evidence indicates that industrial relocation has tended to""""¥avor the low income areas, many of which also have low tax rates. 45/

Industrial preference for low income areas may derive from factors other than tax rates. The availability of greater and more cooperative labor resources at lower cost may play a significant role. In other words, it may be argued that the evidence on the impact of tax rates on industrial locations is "inconclusive." 46/ Some authorities go even further, and reject the industrial migration thesis altogether. AFL-CIO President George Meany told the House Committee on Ways and Means in 1965:

... many states consciously pursue a policy of underfinancing as part of an industri�l development program to attract new industry through low payroll taxes. I doubt whether the small variation in rates between states actually has any significant influence on plant movement, but the lower rates effective in some states are frequently among the sales arguments of those states. 47/

Th.us, some maintain, the desire to attract new industry should not affect state taxing decisions. Others reply that regardless of what should happen, state ap­ prehensions about industrial migration militate against tax increases. One study notes that although the " ...influence of tax consideration on the location decisions of the business is grossly overstated ...its impact on state and local taxation is not ... fear of losing business to another juris­ diction haunts the mind and stills the pen of the state and local lawmakers, and the special pleaders have developed the skill of exploiting this fear to a high art." 48/ Senator Harold Hughes (D., Iowa), a two-term governor of his state, reports that fear of driving industry out does have a definite impact on state willingness to raise tax rates. 49/ Apprehensions and fears on the part of the states may be difficult barriers to overcome, for once convinced that the loss of economic growth opportunities is a likely result of raising taxes, even evidence to the contrary may have.little impact. States simply may not wish to take a chance. If �he evidence proves wrong, the harm will already have been done.

C. "Benefit Spill-Overs" and State Taxing Policies Some authorities maintain "benefit spill-overs" create pressures

-55- against increasing state truces. For example, according to one study, the fact that benefits of education are not confined to the areas that pay the costs of education has a depressing effect on state education appro­ priations; 50/ 1he rationale of the ben�fits spi�l-ov�r thesis is explained by Dr. Selma Mushkin of 1he George Washington University and Professor Robert Adams of the University of Maryland. 1hey write:

. , , taxpayers in a state evaluate the benefits that accrue to them from the public services provided. Accord­ ing to. the running argument on the subject, where there are large geographical spill-overs, the trucpayer rationally decides in favor of lower expenditures. 1hus spill-overs of benefits have an effect on the decision process and bring about an underallocation of resources for those ser­ vices that are characterized by large interstate external­ ities. g/

1hus, a state legislature considering increased expenditures on higher education may not spend as much as it should because many students who take advantage of public higher education will later move to another state.

At the heart of the benefit spill-over problem is the belief that massive shifts in population occur across state lines. Heller states that l/6th of the U.S. population moves from one state to another each decade. 52/ Former North Carolina Governor Terry Sanford questions the significance of this figure. He cites three facts to support his doubts: First, he reports that between March, 1959, and March, 1969, only three percent of the population changed their state of residence. Secondly, he indicates that even this figure is inflated, since it includes students and the military traveling from one state to another and persons moving within a metropolitan area which overlaps state lines. Finally, American population migration is smaller today than it was a century ago. 53/

Whatever benefit spill-over problems exist may be aggravated by the fragmented structure of the American governmental system. The major metropolitan areas of the United States are governed by a plethora of different administrative and legislative units. In some cases, the units for a single area may number in the hundreds. 54/

1he state governments are not immune from the difficulties posed by benefit spill-overs. Former Governor Sanford complains:

If cities spill across state lines, so do smog and smoke and dirty rivers. How can one state remove the filth in the air and water that comes from another state? To what expense will one state go to preserve the freshness of water flowing to another? ...New Jersey gets much of its smoke blowing south from New York City where Consolidated Edison is still allowed to burn bit­ uminous coal to generate electric power. What can New Jersey do? In New York, it was discovered that the pre-

-56- vailing winds from northern New Jersey bring the industrial fumes straight east to Manhattan. What can New York do? Jurisdictions stop at the bound­ aries drawn in colonial days, but the problems do not. 55/

Advocates of revenue sharing contend that one of its advantages is that it could be used to ease--if not eradicate--the inhibitions on problem solving created by benefit spill-overs. The President's National Commission on Urban Problems, headed by former Senator Paul Douglas (D., Ill.), urged in December, 1968, that the Federal government establish a revenue sharing system designed to "encourage" metropolitan consolidation. Tax sharing grants, whether passed through the states or not, would be available under this proposal only to governmental units with a population in excess of 50,000 and would be strongly weighted in favor of units with a population in excess of 100,000. 56/ However, the negative might argue that the same kind of "encouraged" consolidation might be attainable under the present system of federal grants. Two mechanisims could be utilized: 1. Federal grants-in-aid could be conditioned in the same way the Douglas Commission suggested conditioning revenue sharing. Though he thinks it unlikely to occur, Michigan State political scientist Charles Adrian suggests that Congress could start "... requiring metropoli tan--wide government or area planning backed by effective sanction ...." in order to receive grants-in-aid. 57/ Indeed some grant-in-aid programs are already designed to induce"""'"governmental cooperation on the state and local level. They provide financial incentives for such cooperation in areas like " ... land use plans, regional park and open space projects, and ... construction of storm drains and other public works having regional use." 58/ The affirmative might reply that grants-in-aid are an inappropriate mechanism for encouraging metropolitan and regional consolidation. They do so only on a piecemeal, program by program basis; what may be needed is a more general effort at consolidation and a more general federal incentive to consolidate.

2. Voluntary efforts might achieve the type of consolidation and cooperation on the state and local level that �ill substantially reduce the problem of benefit spill-overs. Interstate compacts and agreements in specific problem areas are a more and more widespread characteristic of intergovernmental relations. The New York Port Authority and the Upper Colorado River Basin Compact are examples of this trend. 59/ No one will deny that the states have the power to enter into such agreements. The affirmative will attempt to locate reasons why a revenue sharing system will help to induce them to do so, while the negative will argue that existing conditions arid pressures make continued reliance on voluntarism a viable course of action.

D. Disparities Between Rich States and Poor States

Some authorities contend that reliance on the states to solve their own revenue problems fails to take into account the fact that per

-57- capita income is much lower in some states than in others. Disadvantaged states would have to impose on a disadvantaged population very steep tax rates in order to obtain just an average per capita revenue. TI1ough he does not believe that the states in general are in unfavorable financial position, Professor Harriss concedes that aggregate and average state figures often conceal the special problems of some states. The wealthier states of the Union have a higher absolute capacity to tax than the poorer states. They receive more, even though they may be taxing less. 60/ Thus, one argument for revenue sharing;particular�y if it contains special provisions for the less well-off states, is that it would tend to equalize state burdens and capacities. Some poor states do not appear to be making an impressive tax effort. In 1963, five of the poorest states were making a revenue effort slightly under the average revenue effort for all states. 61/ Two qual­ ifications neeµ to be entered here. First, in these stateS:- per capita expenditures were much further below the average than per capita revenue effort. Secondly, some of these states would require an almost fantastic effort to achieve average per capita expenditure. For example, " ... South Carolina could lift its per capita expenditure (less federal grants) from $114.07 to $299.25 only by lifting its revenue·effort from 97 to 168 fpercent]." 62/ The dimensions of the problem of inequality are very great. George F. Break of the University of California reports that: Though the interstate distribution of per capita income is clearly less unequal now than it was in earlier years, it still shows a very wide disparity that implies major differences in state fiscal capacities. In 1963, for example, Mississippi per capita income of..$1,379 was only 56 percent of the national average... and barely 40 percent.,,[of the] averages enjoyed by the residents of the District of Columbia and Nevada ....63 / Moreover, some areas of the country bear a disproportionate amount of social problems. This is particularly true of many of the larger urban areas, where needs are multiplying while the tax base shrinks. 64/ The negative has available at least three levels of response to the foregoing analysis. It could begin by asking what is inherently and significantly wrong with inequality. Does the fact that some states must bear a larger burden than other states do any r�al damage? The negative may demand a demonstration that South Carolina, for instance, cannot make 168 percent of the average effort. Thus, simply to establish the presence of an inequality may not establish the absence of state ability to tax at higher levels. Moreover, the negative may argue that equalization may not always be desirable. In some depressed areas, es­ pecially in rural parts of the nation, the equalization may sustain an

-58- economic structure that, according to the canons of sound planning and efficiency, should be allowed to die. 65/ Finally, if equalization is desirable, the grants-in-aid mechanisminay be able to make at least sub­ stantial progress toward it. Harriss notes:

.•. equalization in its essentials is irrel­ evant so far as concerns revenue sharing. Almost any desired increase or decrease in equalization, however that term is interpreted, can be achieved by modifying the one or more existing revenue, grant, or spending programs. 66/

E. Are State Taxes Regressive?

State revenue producing systems have often been attacked as regressive. Heller argues that increases in state taxes have made the entire federal-state-local- taxing structure more and more regressive in recent years. 67/ Specific state taxes like the sales tax have been the objects of particularly strong denunciation. For example, it is said that sales taxes are a charge on consumption; the poor spend a greater proportion of their income on consumption than the rich. The sales tax costs the poor a larger percentage of their income. 68/ However, in re� cent years, there has been greater skepticism about the traditional view of state taxes as regressive. A Tax Foundation study found that in 1961 state and local taxes did not operate regressively for families in the $3,000 to $7,499 income bracket, which then included more than half the families in the nation. 69/ Even property taxes, thought of as regressive, now have defenders. Wit�minor shifts in the definition of the income base, " ...the incidence of the property tax on residential property [is] roughly proportionate." 70/ Some contend that a property tax may in fact have a progressive impact":-

In addition to denying the regressivi ty thesis, defenders of state and local taxation also maintain that minor repairs can eliminate most of whatever regressivity exists. Wisconsin has instituted a system whereby state income tax credits are designed to remove any regressive sting from the property tax. Indiana has adopted similar provisions in respect to the sales tax; even a family which has no state taxable income can receive through the income tax mechanism a refund for the sales taxes paid during the year. 71/ Heller points out that Colorado, Hawaii, and Massachusetts have all�dopted legislation similar to Indiana's. The negative could surely suggest repairing the present system by taking similar actions in other states; there is no inherent reason, the nega­ tive might conclude, why the sales tax must be regressive. Furthermore, income tax credits for sales tax payments are .administratively efficient and inexpensive. 73/

The regressivity of state taxation systems could also be curbed by a shift toward greater reliance on state income taxes as a source of revenue. The Committee for Economic Development claims:

-59- The personal income tax is the last major source of relatively untapped state revenue. Seventeen states have no broad based personal income taxes. Three-fourths of the states with the personal income tax have effective rates of less than 2 percent of personal income.... If all states with no personal income tax or with a relatively low rate of coverage were to adopt a personal income tax with the 1965 average rate and coverage, the estimated additional yield would be 6 billion dollars [in 1965 dollars] in 1975. 74/

Despite their potential, income taxes still accounted for only 12 percent of total state and local tax revenues in 1965. 75/ One factor contribu- ting to this is that local areas seem even more remiss in exploiting in- come tax opportunities than some of the states. Local income taxes accounted for only $400 million in revenue in 1965 and only 10 of the 43 largest cities levied a local income tax. For the most part, local income taxes are confined to a small number of cities in a small number of states. 76/

In the past, arguments for heavier state reliance on the income tax have been met with the response that the.federal government has pre­ empted that source of revenue. Heller describes the argument: " ...it seems clear that high federal income tax does inhibit the states and localities in the use of this progressive tax source, for how else would one explain the virtual halt in state income tax enactments in the 1940s and 1950s?" 77/ However, Heller also provides persuasive. reasons to doubt the preemption view. He writes:

References to the federal preemption of the income tax are not uncommon. Since the federal government allows the deduction of state income taxes, in arriving at taxable income--thus shield­ ing taxpayers, especially those in higher income groups, from the full impact of duplication--and since the states that are the heaviest users of the personal.income tax have effective rates (as a percent of federal adjusted gross income) eight times as high as those who make the lightest use of the tax, one �as difficulty in distinguishing between reason and excuse. 78/

A state income tax does not necessarily incorporate a large degree of progressivity. Four states have a flat rate income tax with personal exemption rather than a graduated income tax. In some other states, the graduation is not very steep. 79/ Often the reason for the lack of an income tax, no graduation, or minimal graduation is the presence or restrictions in state constitutions. Five of the sixteen non-income tax states could probably adopt an income tax only by constitutional amend- ment. The constitutions of others among the sixteen forbid rate graduation.SO/� In Alabama, Arkansas, Louisiana, and North Carolina--all states with an

-60- income tax, constitutional prov1s1ons either set rates or make it very difficult to raise them. 81/

The affirmative argument for relying on revenue sharing rather than regressive state taxation to finance increased state expenditures assumes that the federal income tax structure is progressive. Though traditionally accepted, that assumption has been recently questioned. Harriss, for instance, points out that the federal corporate income tax is more regressive than a sales tax. He explains: " .•. [the federal tax on corporation ·income] imposes about 3 times as much burden on families with income under $2,000 as do state general sales taxes. " 82/ Another tax scholar warns that, due to its inequities and loopholes,�he federal tax base is inferior to the income tax bases the states could create them­ selves. The latter, he believes, would be much more progressive.83/ Of course, if the currently pending federal income tax reform proposals are enacted, objections to the substitution of federal income tax revenues for greater state tax effort may diminish.

F. The Political Feasibility of Increasing State and Federal Taxes

The 1960s have witnessed a growing resistance to tax increases at the state and local levels. State and local officials who raise taxes immediately become vulnerable to their political opponents. The taxpayers' revolts in the states and localities may be creating pressures no prudent politician can ignore. Heller cites the example of former Governor Orville Fre�man of Minnesota, who told the voters in 1960 that taxes would have to be raised and lost his bid for re -election. 84/ A large number of other former governors are listed by one source oi:-another among the tax revolt casualties; some think that state governorships are now the most insecure major political positions in America. Those who achieve governorships are politicians who usually wish to retain their power and prestige, and past experience may make them less likely to support future tax increases. The tax revolt is not necessarily universal. There is evidence to support the proposition that some states and localities could increase taxes without encountering significantly adverse political reactions. 85/ Moreover, certain types of taxes available to the states are politically more feasible sources of revenue than others. Benefit levies such as gasoline taxes typically·do not arouse strong voter hostility. 86/ In general, indirect taxes have a lower visibility and thus create-"Tess hostility than taxes whose impact is visible. Resentment of the sales tax is likely to be moderated because it is paid out in very small sums over a long period of time and most individuals are ignorant of the total sales tax they.have paid during a given year. 87/

If rises in state taxes are restrained by political pressures, then the affirmative must ask whether these pressures are absent on the federal level? After all, the affirmative cannot argue that federal action is preferable because of political circumstances in the states and then

-61- ignore the question of whether or not the federal government is disabled by the same factors that inhibit state increases in revenue rates. The affinnative must be prepared to cure the inherent defects of the present system. If the affirmative argues that political circumstances prevent the states from achieving financial sufficiency, the negative may challenge the affinnative to prove that congressional action to finance revenue sharing will not be thwarted by the same political circumstances. It will be argued that the affinnative cannot apply a double standard, arguing that state efforts are inadequate because of political pressures, and, at the same time, argue that the affirmative plan should be adopted even though the same political pressures militate against effective federal action. Perhaps the pressures on state and local candidates are greater because they and their positions on taxes are better known. Tax policy is only one among many issues in campaigns at the federal level.

There is persuasive evidence to indicate that federal tax in­ creases will encounter at least as strong an adverse popular reaction as state tax increases. A recent Harris poll reports that the most resented taxes are the federal income tax, the local property tax, the state sales tax, and the federal excise tax. The comment accompanying the poll con­ cludes:

... [the American people]"have reached the break­ ing point on taxes" ... the experience [has] embittered them against the government for its seemingly profli­ gate ways ....wide publicity given to wealthy income tax dodgers and such loopholes as the oil depletion allowance have convinced so many people that "taxes are rigged for the rich" that even a lethargic Congress has roused itself to respond to the outcry and is now trying to trade off extension of the 10 percent surtax for a genuine attemp.t at reform. 88/

Before the recent tax revolt against federal levies, many believed that the federal government could raise taxes with relative political impunity. Congressmen it was contended, did not lose their seats for voting in favor of higher taxes; state legislators did. 89/ So the current situation is perhaps an apparition. After a flurry of protest, federal taxes may regain some of their insulation from popular resentment.

The depth of public resentment against increased federal out­ lays may depend on a number of factors. First, the public may favor a particular expenditure purpose. A January 1, 1967, Gallup Poll indicated that 70 percent of the American people were in favor of revenue sharing, while only 18 percent were opposed. 90/ In the period since then, public support has risen slightly. I"t"°now stands at 71 percent. 91/ Popular goodwill toward revenue sharing might be strengthened even further if the money were to be spent in areas like education and urban aid, for the public presently regards action in such areas as the most desirable function of federal spending. 92/ Secondly, popular willingness to adopt a program of revenue sharing, i°il"the view of some, might be reinforced

-62- if the program were paid for by cuts in funds for Vietnam, the space pro­ gram, or national defense. Those are, in addition to foreign aid, the areas where some segments of the public think federal spending should be cut. 93/ However, as already noted, affirmative proposals to finance the plan by spending reductions in items like national defense may encounter serious opposition. Finally, tax increases for revenue sharing might be more palatable if they took the form of closing existing income tax loopholes. 94/ The affirmative must be careful here that it does not end up robbing Peter to pay Paul. Some federal tax loopholes represent substantial financial gains for the states: for example, proposals to abolish the income tax exemption for interest on state and local bonds would deprive the states of needed revenue, even if the federal govern­ ment sweetened the action by permitting the states to tax interest on federal securities. According to Maxwell, " ...state and local governments would suffer a net financial loss, since the interest rates payable on their bonds would rise, while the additional revenue they might secure from taxation of.interest on federal debt would be modest." 95/

G. The Comparative Elasticity of State and Federal Taxes

The "elasticity" of a tax system refers to its ability to res­ pond to changes in economic conditions. How fast do revenues rise in relation to increases in the gross national product? Many authorities have expressed concern that state tax systems rely too. heavily on non-growth responsive taxes. Heller complains:

In contrast to federal reliance on growth-res­ ponsive taxes--taxes whose revenue rises proportion­ ately faster than gross national product--states and localities depend largely on taxes that respond sluggishly. They draw nearly four-fifths of their total tax revenues from sources--property taxes (45 percent) and sales and gross-roceipts taxes (33 percent) whose yields, at stable tax rates, barely keep pace with the growth of the economy, rising a trifle less than 10 percent for every 10 percent rise in GNP. 96/

More precisely, the elasticity co-efficient (the ratio·of tax yield in­ creases to GNP increases) is 1.0 for state revenues and 1.75 for federal revenues. 97/ Given this situation, the affirmative may contend that revenue sharing is the best way to meet increased state financial needs, since it would shift the states toward reliance on growth-responsive fed­ eral taxes.

The negative might reply that state tax inelisticity has its advantages: state revenues will not decline rapidly in the event of·a depression. In the words of the Advisory Commission on Intergovernmental Relations, " ... [from] 1929... [to] 1932, for example, when the GNP declined 44 percent, state income tax collections fell 47 percent, but state gasoline tax collections dropped only 4 percent between 1931 and 1932 ...." 98/ But

-63- the Advisory Commission also points out that changes in the national economy since the 1930s make another major depression highly unlikely; state tax "inelasticity may have no redeeming merit. 99/

The negative may also argue that revenue sharing is not required to achieve greater tax elasticity. Even some state taxes once thought of as inelastic are now manifesting a better response to economic growth. Revenue from the property tax doubled between 1955 and 1965 due principally to " ... the unanticipated responsiveness of the property tax to economic growth associated with growth from new construction, higher real property values, and improved assessment administration." 100/ Moreover, as we have already seen, the negative may be able to argue that there are no inherent barriers to greater state exploitation of growth responsive rev­ enue sources. The Advisory Commission on Intergovernmental Relations suggests just such a course of action. 101/ Despite present constitutional and statutory limitations, empirical evidence indicates that state income taxes may now have an elasticity close to 1.7. 102/

H. State Taxes and Economic Recession

The problem discussed here is closely related to the problem discussed in the preceding section. Some economists have worried that while state tax yields do not grow rapidly enough as the economy rises, they shrink too slowly in the event of economic downturn. The classic expression of this apprehension is the Hansen-Perloff perversity hypothesis. Their view was expressed in a study first published in 1944:

The taxing, borrowing, and spending activities of the state and local governments collectively and typically run counter to an economically sound fiscal policy. These governmental units have usually followed the swings of the business cycle, from crest to trough, spending and building in propperi ty periods and contract­ ing their activities during depression. In the boom of the late 1930s, they_ added· to tlie disp_osable income of the community, and bid up prices and building costs in large scale construction activities. In the de­ pressed 30s, the fiscal policies of these governments exerted a deflationary rather than an expansionary effect on the economy: expenditures, and especially construction outlay, were severely reduced, borrowing was restricted, and taxes weighing on consumption were substantially increased. 103/ Several objections have been raised to the fiscal perversity hypothesis of ·state finances. At the most basic level, some economists have questioned Hansen and Perloff's statistical interpretation of the· events of the 1920s and 30s. Others have argued that " ...institutional developments since World War II have brought about major changes in the cyclical performance in state and local governments." 104/ One scholar now contends· that state and local receipts have operated as a stabilizing

-64- factor in every post-war recession. 105/

State borrowing in the recent past has also moved in a counter­ cyclical fashion. During the 1950s,the peak of state indebtedness was reached during the lowest depths of economic recession. 1he reasons for this phenomenon are somewhat unclear in light of the fact that official and popular attitudes embody a reluctance to approve new debt except during a time of prosperity. 106/ Finally, it has also been suggested that state initiative to bring state income tax structures more closely in line with the federal structure would improve the fiscal impact of state finances. 107/

I. Administrative Efficiency and the Choice of Tax Mechanism

Some have argued for greater reliance on federal funds to fin­ ance state activities on the basis that federal tax collection is more efficient. 1hat is, administrative expenses of collecting federal rev­ enues through the income tax mechanism are significantly less than the costs states incur in raising revenues. 1he negative may ask two basic questions about such a contention. First, the negative may demand that the affirmative demonstrate some significant advantage to saving money, i.e., that it be utilized effectively. Efficiency of operation may be a goal of any tax system, but negatives are likely to argue that efficiency alone is not a reason to abandon the present system. If savings traceable to efficiency are unlikely to be utilized effectively, the financial case for greater reliance on the federal tax system would probably be weakened. Secondly, the negative will maintain that state taxing systems are relatively efficient and could be made more efficient.

On an absolute scale, the administrative costs of collecting state sales and income taxes are very low. Maxwell points out:

With respect to cost of administration, probably the income tax has a modest advantage over the sales tax--1 percent to 1 1/2 percent of receipts as a cost compared to 1 1/2 percent to 2 percent. With respect to compliance the income tax puts cost chiefly upon the payers of the tax, while the sales tax puts them on retailers. 108/

Property tax assessment has been attacked as particularly in­ efficient. There are over 18,000 assessment districts in the United States, and assessors often lack professional expertise and staff. Con­ sequently, assessments are often inaccurate, and usually infrequent. 109/ However, administrative streamlining and reform could make the property tax relatively efficient; it could yield the states an additional 2 billion dollars in revenue by 1975. 110/

Perhaps the best hope for improving the efficiency of state tax structure rests in the improvement of state income tax machinery. One frequently advocated change is for increased coordination of federal and state income tax administration. Developments in this direction have

-65- already occurred. Since 1957, federal and state authorities have-entered into a number of "agreements on the coordination of tax administration," and thirty-five states are presently parties to such agreements, whose terms permit widescale information exchanges. In 1960, the agreements cost the federal government $50,000 and resulted in increased federal revenues of $10.6 million. In 1959, California's gain was $4 million. 111/

One authority has suggested that federal-state coordination should go even further. University of Hawaii economics professor Robert M. Kamins advocates joint auditing of both federal and state income tax returns by the Internal Revenue Service. There would still be some need for independent state administration--for example, in ".. . apportionment between sources taxable and not taxable by the state•... " but both state and federal governments would likely experience savings in administrative costs and more effective enforcement of the tax laws. 112/ Under the foregoing proposal, the state would still set its own tax rates. Other modifications such as federal withholding of s.tate income taxes have been suggested as a means of promoting increased coordination and efficiency. 113

The states, of course, can act independently to bring their own income tax codes into conformity with federal legislation. Vermont has adopted the federal income tax base virtually without deviation: Utah, Mexico, and Alaska, have, to varying degrees, "•.. completely in­ integrated their income taxes with that of the national government by imposing a levy computed as a fraction of the current federal tax." 114/ It should be noted, however,. that a state utilizing the rules and reg:­ ulations of the federal income tax system to govern its own income tax is confronted with frequent ·congressional changes in federal tax law. To solve this problem a number of states have prospectively adopted federal income tax amendments by reference in their own tax statute.s. There is some apprehension that such a procedure may be subject to constitutional challenge, although there seems little likelihood that a challenge would be successful in most states. For instance, the Federal Circuit Court of Appeals indicated by way of dicta in the case of Alaska Steamship Co. vs. Mullaney 180 F. 2d 805, 1950, that prospective incorporation of fed­ eral changes was legitimate. There are, however, some holdings to the contrary. 115/

State use of the federal tax code has tended to be more theoretical than real. The Advisory Commission on Intergovernmental Relations ob­ serves: In an effort to maximize taxpayer convenience and administrative efficiency, West Virginia and Nebraska define their ·tax base by reference to the federal treat­ ment of net taxable income, while Indiana uses as its tax base the federal definition of adjusted gross in­ come...• [but] both Indiana and Nebraska have abandoned the graduated tax rate concept in favor of the flat percentage approach. Even more significantly, Indiana has jettisoned one of the most cherished and question-

-66- able features of the federal income tax allow­ ance of nonbusiness expenses ••..religious, ed­ ucational, and charitable contributions; interest payments on personal loans and mortgages and med­ ical expenses. 116/ Such deviations have been criticized as inconsistent with the goal of administrative efficiency, although some are perhaps justified by the states' desire not to duplicate alleged federal tax loopholes. 117/ An affirmative team that unfavorably compares the efficiency of state tax systems with the federal collection system might present a revenue sharing plan which seeks to substitute federal benefits for state taxes. A condition of receiving a share of federal revenues would be abolition of the state income tax system or abolition of state taxes altogether. In addition to the difficulties involved in establishing a significant advantage to such a proposal, the affirmative could en­ counter some serious plan workability problems. Some authorities believe it would be very difficult to arrive at a sensible allocation formula. For example, under a system which would abolish state corporate income taxes and cede a portion of the federal corporate income tax to the state, North Carolina would have to receive 15.4 percent of all federal corporate taxes in order " •..to leave the state's fiscal position un­ altered (neglecting whatever saving in administrative cost the state might enjoy as a result of the change) , " 118/ IV. The Alternatives: Grants-in-Aid and.Federal Tax Changes

A. Are Grants-in-Aid Inherently Unsatisfactory? As indicated in chapter I, federal grants-in-aid constitute the principal channel for funneling federal funds to the states. In the next chapter, we examine grants-in-aid to assess their impact on the relative rights and responsibilities that accrue under the federal system. In this section we are concerned with.determining if there are factors that render grants-in-aid inherently ineffective in providing financial assistance to the states. To put it another way, if there are state fiscal problems, why are grants-in-aid incapable of relieving them as least as well as revenue sharing? Federal grant expenditures have been growing at an average annual rate of 34.3 percent. Total federal aid to the states and localities has risen from $4.billion in fiscal 1957 to an estimated $25 billion in fiscal 1970. President Johnson predicted in 1967 that the aid could be as high as 60 billion dollars annually within 5 years. 119/ The future of grants-in-aid to the states seems assured: they will grow steadily in the years to come. Those who regard this trend as inadequate present three principal indictments of the grants-in-aid mechanism. Selection of those states and localities receiving grants-in-aid is likely to be made on arbitrary grounds that may be more political than

-67- economic, because there are simply not enough funds to satisfy the requests that are made on most, if not all, of the federal programs. "... [T]he city or community or district that finally gets approval has usually obtained it through political pressure." 120/ Acknowledging the validity of this observation , former--Interior Secretary Stuart L. Udall told a Senate subcommittee studying various aspects of federal grants that "we are sort of scattering a little grant here and there across the countryside depending on.the readiness of communities or the type of pressure that comes from the Hill." 121/

The negative might reply that, to the extent political choice is a byproduct of inadequate funding, the problem is not inherent; Con- gress could appropriat� additional funds for the program. Moreover, the negative might suggest that clear standards impartially applied would short-circuit the influence of political considerations on the distribu- tion of grants-in-aid. Both of these repairs might fail to deal effectively with what the affirmative might point to as the real culprit--the conditional and programmatic nature of grants-in-aid. As long as grants are extended for a specific purpose, and depend on annual or periodic appropriations, the affirmative may contend that the Administration and the Congress will be able to devise and utilize rationalizations permitting the politically oriented allocation of grant aid. Perhaps only a guarantee of an auto­ matically determined amount.of money to each state can avoid the problem.

Secondly, it has been charged that grants-in-aid are inefficient and wasteful. The grants are often characterized by red tape and delays. 122/ What are the results? As described by Harley L. Lutz:

Confusion, duplication and overlap are charac­ teristic of a government too big to be managed efficiently. The grant system has provided an ex­ cellent opportunity for the development of this well nigh impenetrable jungle. In some cases ad­ ministrative costs absorb more than half of the available funds. 123/

The negative may ask for more specific evidence than this. In how many grant programs is there such an unreasonable administrative overhead? Is the overhead an inherent product of the grants-in-aid system or is it caused by ancillary features which could be discarded? Negative doubts find support in a somewhat outdated article by Selma Mushkin. In 1957, she reported that total administrative overhead for grants-in-aid pro­ grams was 1.6 percent of grant expenditures and that the overhead ranged from 1/lOth of 1 percent in some programs to a maximum of 11 to 13 percent in the low rent public housing program. 124/

Finally, it is argued that the conditional nature of grants-in­ aid often prevents them from helping those most in need. Syndicated col­ umnist James J. Kilpatrick has presented some statistics illustrative of the complications of grants-in-aid prograJils: 170 separate grants-in-aid programs, funded by ·400 different appropriations, are administered by

-68- 21 different. federal agencie!?, through 150 bureaus in Washington and 400 regional offices throughout the country. 125/ Quite often, programs administered by these agencies overlap while criteria for eligibility differ. A state or city may need money from two different agencies, each of which will require different actions on the part of the recipient 126/ Confused and discouraged, the "slow and backward cities" may not even apply for federal help. Their needs, which are often the most serious of all, are not met. 127/ The situation is typified by the rise of the "grantsmen." Specialists in the details and complexities of federal programs, they are hired by states and cities to obtain the maximum available federal aid. The results apparently justify the grantsmen's often high salaries. Cities employing them do very well--perhaps far better than they should-- in the competition for federal funds. In 1956, there were 400 grantsmen; by 1967 the number had probably doubled. No one suggests that they are responsible for the complex problems created by federal grants-in-aid. They are mere symptoms of those problems. The Wall Street Journal reports that " some critics of the poverty program cl.aim the abilities of the grantsmen rather than the needs of the communities are determining where the money is going." 128/

A number of reforms have been advocated to improve grants-in­ aid. Perhaps the most widely accepted is the concept of consolidated grants. Early in 1968, the Republican Coordinating Committee argued for " ...consolidation of the 400 plus individual grant programs into nine broad grant categories covering major fields of domestic activities." 129/ Presumably, consolidation c,ould cut most of the time-consuming red tape, simplify the eligibility requirements, and enable disadvantaged areas to qualify more easily for ·federal assistance. At the same time, however, too broad category grants might endow the federal bureaucracy with more power to distribute the money on a political basis. In any case, steps toward cpnsolidation have already taken place. Heller cites the Elementary and Secondary Education Act of 1965 which allows considerable discretion to state and local boards of education as one example of con­ solidation. 130/ The Committee for Economic Development provides another example--the Comprehensive Health Services Act of 1966, which had provisions similar to those of the 1965 Education Act. 131/

A more general effort to consolidate federal grants-in-aid was made in 1968 with the enactment of P.L. 90-577--the Intergovernmental Cooperation Act of 1968. The act Gontains five principal provisions: (1) it establishes the right of any state governor to be fully informed about federal aid dispensed in his state; (2) the requirement that federal grant programs be administered by a single state agency is waived in some circumstances; (3) federal agencies are authorized to provide technical services to states and local communities; (4) the President is required to issue regulations requiring federal development assistance programs to be carried out in such a way as to promote sound and orderly development of both urban and rural areas; and (5) review is required every four years of federal grants-in-aid programs for which no expiration date is specified by law.

-69- Many authorities agree that the solution to the complications and problems of grants-in-aid may be found in better executive organization cutting aeross federal departments. 132/ Such coordination would not necessarily remove all the problems of grants-in-aid. As already noted, disbursement in response to political pressures rather than economic needs might continue. Nor would coordination and simplification by themselves correct the fact that grants-in-aid programs do not presently act as equal­ ization devices among the states. In 1962, only 19 percent of grants-·in-aid money contained �pecial provisions for the poorer states. 133/ Of course, the negative could suggest the inclusion of equalization procedures in all grants-in-aid programs. That course of action, the affirmative might counter,would be unwise both economically and politically. Professor Break explains:

Though they have been increasingly exploited in this country in recent years, the equalization powers of functional federal grants are strictly limited. Basically, the reason is that the grants themselves have a restricted role to play in the federal fiscal system--mainly, to raise interpersonal equity and increase economic efficiency by·paying for the ex­ ternal benefits generated by the spending programs of state and local governments. Properly used,there fore, functional grants cannot help to equalize the abilities of these governments to support activities of purely local interest. To employ them for that purpose would be to interfere unjustifiably with state and local prerogatives to manage their own fiscal affairs. When equalization is the goal, it is unconditional grants-in-aid which should be the center of attention. 134/

B.- Federal Tax Changes

Two alternatives to revenue sharing as a financial aid to the states are frequently suggested. The first is to cut federal income taxes. When federal taxes are cut, the reasoning goes, the states receive not only the benefits of faster economic growth and higher per­ sonal incomes, but also are able to raise their own tax rate. It is es­ timated that the increased_ state tax yield due to the economic growth generated by a tax cut would be approximately 16 to 24 percent of the initial federal reduction in taxes. 135/ Additional yields due to state tax increases cannot be predicted, although a substantial federal reduction might make state tax increases easier. Any suggestion that further tax cuts be used now to help the states will surely provoke the response that such a course might damage the national economy. A tax cut would stimulate the economy at a time when most economists agree that the need is for restraint. The Nixon Administration is currently attempting to achieve a balanced budget and is cutting back on feder�l expenditures in order to do so. In the wake of a tax cut, the Administration would have one of two choices: run a deficit and allow inflation to take its toll or cut

-70- federal programs back even further, thus allowing some pressing economic and social problems to grow worse.

The Committee for Economic Development has advocated a program of tax credits as an alternative to revenue sharing. 136/ The federal government would permit an individual to subtract from his federal income tax the total amount of money paid in state income taxes. Maxwell declares that " ...no doubt can exist that the device could be used to ease state­ local finances." 137 I Two objections can be raised to a negative argument in favor of tax credits: the first relates to their economic impact; the second, to the place of such an argument in a debate context. The first objection is that tax credits tend to favor rich states rather than poor states 138/ Moreover, there is the question of whether the negative can safely su6gest tax credits as a minor repair to the present system, The debate relates to the present system and a proposed system. Normally the negative defends the status quo--the present system; the affirmative is oblih 'd to prove its plan superior to what we now possess. It can be argued, ·at the affirmative does not have an obligation to demonstrate that i1 : proposal is better than any conceivable alternative. On the other ham•, the neg­ ative may contend that it does have the right to sugges� minor repairs to the present system. However, would the establishment of federal tax credits for state income tax payments fall into that category? Groups like the Committee for Economic Development view this as a proposal for a major policy change. Thus, if the negative wishes to arguf' in favor of tax credits, it may have to assume the burden of presen ti .1g a counter­ plan and concede the need for a change in the present system. and to demonstrate that its plan is a better way of attaining the benefits sought by the affirmative proposal.

V. Revenue Sharing and State Fiscal Effort

Some concern has been expressed that state fiscal effort is likely to decline if the federal government shares revenues with the states. The Committee for Economic Development points to empirical studies of the impact of state aid to local education and of the impact of fed­ eral assistance to poorer states, both of which indicate that " ...funds transferred from higher levels of government to lower levels which are not restricted in usage and which do not require matching funds by the lower level may substitute for revenue--raising efforts at the lower level." 139/ Those who share the Committee's apprehension could point to North Carolina which hoped to convert a state budgetary surplus into a tax cut rather than devoting it to education--an area in which North Carolina's efforts were close to the bottom among the 50 states. 140/ If the states did cut back their own revenue efforts, revenue sharing might prove little more than a meaningless exercise although Heller would deny this assertion. He believes that even if the states do cut back, tax sharing will have accomplised a beneficial purpose. Any state tax cuts are likely to reduce the existing regressivity of the state taxing systems and increase the progressivity of the tax structure as a whole. 141/

-71- There is evidence tending to contradict the hypothesis that state fiscal effort will decline in the wake of federal help. Experience with federal grants-in-aid programs has convinced at least one scholar that they do not substitute for state efforts--either they are additions to what the states would otherwise spend or they stimulate even more state spending. 142/ Indeed, during the period when federal grants have been expanding at a remarkable rate, state and local expenditures have risen by 125 percent, while federal expenditures have risen by only 65 percent. 143/

Finally, the affirmative plan might attempt to assure continued vigorous state fiscal effort by the inclusion of certain provisions in the affirmative plan. President Nixon's proposal builds into its dis­ tribution formula a reward for states carrying the heaviest tax burdens. This functions as an incentive rather than a penalty. The affirmative could go further and condition receipt of the funds on the maintenance of state fiscal effort, or could penalize a state for a decline in fiscal effort. VI. Concluding Comments

This chapter has sought to identify some of the financing problems currently confronting the states and to elucidate the alleged defects of the present grants-in-aid program. Proponents of revenue sharing have offered many different reasons to warrant its adoption but it may be argued that some of them are inconsistent. It has been asserted that revenue sharing could be used as a tool to relieve the states' financial plight, as a lever to induce governmental changes such as metropolitan consolidation, and as an inspiration for a new and more creative federalism. In the next chapter, we examine the point regarding federalism from two perspectives. Is revenue sharing likely to lead to progressive innovation? Alternatively, it is likely to subsidize irresponsible state allocation of resources?

-72- CHAPTER IV--DISCUSSION QUESTIONS

1. What is the implication to be drawn from statistics indicating massive increases in state expenditures and debt? What are the "unmet needs"? Are there any standards to identify them? Suggest some.

2. What is a "fiscal dividend"? Does one exist? Why or why not? What, if any, are the dangers of a fiscal dividend? Would a termination of hostilities in Viet Nam create a "peace" surplus? Take into account projected programs and possible tax reform. Can the affirmative plan increase the dimensions of the peace surplus? What program priorities might be altered to do so? Could the states save money by eliminating non-essential or wasteful expenditures? In what areas?

3. Are there any absolute limits to the extent to which states may exert themselves to raise revenues? Are there relative limits? What functions is state debt usually incurred to finance? Are there constitutional impediments to increased state borrowing?

4. What is the impact of industrial location on state taxing powers? What does the empirical evidence reveal? What do state officials think? Is that important?

5. What are "benefit spill-overs"? How do they influence expenditure decisions? Have they had an impact in the educational area? Do benefit spill-overs affect both state and local governments? Explain. Would metropolitan consolidation help to ease the problem? How might revenue sharing help to achieve consolidation? Could the present system of grants-in-aid bring about consolidation?

6. What are the dimensions of fiscal inequality among the states? Are the poorer states making a maximum taxing effort? If they did, would they solve their financial difficulties? Is fiscal inequality per� a harm? Can the present system contribute to solving fiscal inequality?

7. Are state taxes presently regressive? Is regressivity an inherent problem? What devices can be used to remove the regressivity of certain types of taxes? How widespread is state-local exploitation of income tax possibilities? Is there room for heavier reliance on the income tax mechanism? What are the barriers to state adoption of income taxes? Are all federal income taxes necessarily progressive?

8. Is there political resistance to increased state taxes? How has that resistance expressed it�elf? Does the same resistance operate with equal strength on the federal level? Is the resistance selective-­ more inclined to favor one type of program than another? What is the popular attitude toward revenue sharing? Toward tax "loopholes"? How might closing loopholes harm the states?

-73- 9. What is "tax elasticity"? Why have federal taxes usually been more elastic than state taxes? What is the "Hansen-Perloff perversity hypo­ thesis"? Is the problem it suggests inherent in state finance?

10. Are some taxes more efficiently collected than others? What is the value of efficiency? Is efficiency alone an advantage? Is the prop­ erty tax inefficient? What could be done to improve it? Do the states and the federal government cooperate in income tax administration? How might the cooperation be improved? Discuss the merits of state incorporation of federal income tax rules by reference in state sta­ tutes.

11. What factors influence decisions concerning the allocation of grants­ in-aid benefits? How might the affirmative plan alter the situation? What is the role of the "grantsman"? Would consolidation help? What has prevented consolidation in the past? What might executive reorg­ anization do to deal with the problem?

12. In what two specific ways might a federal tax cut lead to an increase in state revenues? Would tax credits do the same thing? Can the negative suggest tax credits as a minor repair? Explain.

13. Would revenue sharing diminish state and local fiscal effort? Has federal assistance done so in the past? What safeguards could an affirmative include in its plan?

-74- FOOTNOTES--CHAPTER IV

Heller, �· cit., p. 119.

Federal Revenue Sharing Proposals,�· cit., p. 1.

Freeman, .££.· cit., p. 3. Advisory Commission on Intergovernmental Relations, Federal-State Co-ordinati0n of Personal Income Truces (Washington, D.C.: Advisory Commission on Intergovernmental Relations 1965), p. 45.

Ibid.

Federal Revenue Sharing Proposals,�· cit., p. 24.

Mrucwell,�· cit., p. 231.

� Ibid., p. 233.

� Tax Foundation,�· cit., pp. 11-12,_18. 10/ Committee for Economic Development,�· cit., p. 26 .

.!.!/ Baltimore Sun, March 27, 1968.

12/ Federal _Revenue Sharing Proposals,�· cit., p. 29. 13/ Harriss, Federal Revenue Sharing With the States,�· cit., p. 4. 14/ Ibid., p. 5.

15/ Terry Sanford, Storm Over the States (New York: McGraw-Hill Book Co., 1967), pp. 148-149.

16/ Washington Post, March 24, 1967. lJ.j Heller, �· cit., p. 117. 18/ Committee for Economic Development,�· cit., p. 43. 19/ Joseph A. Pechman, "Financing State and Local. Government," Proceedings of a Symposium on Federal Taxation, sponsored by the American Bankers Association (1965), reprinted by the Brookings Institution, Washington, D.C. 1965, p. 77.

20/ Ibid.

Ef Murray L. Weidenbaum,Prospects for Reallocating Public Resources, (Washington, D.C.: American Enterprise Institute, November, 1967), pp. 7-8.

-75- 22/ 'Ihe Wail Street Journal, December 11, 1968.

23/ 'Ihe Wall Street Journal, August 7, 1969.

24/ New York Times, August 26, 1969.

25/ Washington Post, August 27, 1969, p. 1.

26/ New York Times, August 28, 1969.

27 I Weidenbaum, �· cit. , p. 62.

28/ Ibid., p. 60.

29/ Baltimore Sun, Augµst 27, 1969.

30/ Harriss, Handbook of State and Local Government Finance, EE.· cit., p. 11.

31/ Baltimore Sun, March 27, 1968.

32/ Heller, EE.· cit., p. 131.

33/ Committee for Economic Development, EE.· cit., p. 34.

34/ Maxwell, EE.· cit., p. 141.

35/ Ibid., p. 47.

36/ Federal Revenue Sharing Proposals,�· cit., p.5.

37/ Tax Foundation, Inc., Facts and Figures on Government Finance (New York: Tax Foundation, Inc., 1967), pp. 176-177.

38/ Pechman, EE.· cit., P· 75. 39/ Maxwell, EE.· cit.' P· 184. 40/ Ibid., pp. 184-185. 41/ Ibid., P· 185. 42/ Ibid., pp. 194-195.

43/ Committee for Economic Development,�· cit., p. 44.

44/ Sanford, �· cit., pp. 26-27.

45/ Break, EE.· cit., pp. 111-112. 46/ 'Fecleral Revenue Sharing With the States, EE_· tit. , p. 6.

-76- 47/ Testimony of George Meany in House Committee on Ways and Means, Hearings, Employment Security Amendments, 1965, and other pending proposals on unemployemnt compensation statutes, 89th Cong., First Sess., 1965, p. 832.

48/ Ecker--Racz, "Fiscal Crisis in An Affluent Society," City Problems of 1966, the Annual Proceedings of the United States Conference of Mayors (Washington, D.C., 1966), pp. 103-109.

49/ "Should Uncle Share the Wealth?" Nation's Business, April, 1967, p. 101.

50/ Burton Weisbrod, External Benefits of Public Education (Princeton, N.J.: Princeton University Industrial Relations Section, 1964).

51/ Mushkin and Adams , �. cit., p. 241. 52/ Heller, �· cit., p. 122. 53/ Sanford, �· cit., PP· 64-65. 54/ Mushkin and Adams, �· cit., p. 228. 55/ Sanford, �· cit., pp. 24-25. 56/ New York Times, December 15, 1968.

57/ Charles R. Adrian, "State and Local Government Participation in the Design and Administration of Intergovernmental Programs," The Annals of the American Academy of Political and Social Science, May, 1965, p. 42.

58/ Winston W. Crouch, "Conflict and Cooperation Among Local Governments in the Metropolis, " The Annals, May, 1965, p.69.

59/ Mushkin and Adams, �· cit., p. 229. 60/ Federal Revenue Sharing With the States, �· cit., p. 5.

61/ Maxwell, �- cit., p. 43.

Ibid.

George F. Break, Intergovernmental Fiscal Relations in the United States (Washington, D.C.: The Brookings Institution, 1967), p. 113.

64/ Mushkin and Adams,�· cit., pp. 225-226.

65/ Break, �· cit.' p. 145. 66/ Federal Revenue Sharing With the States, �· cit., p.5.

67/ Heller, �· cit., p. 136.

-77- � Maxwell,�· cit., p. 96. 69/ Federal Revenue Sharing With the States,�· cit., p.9.

70/ Maxwell, �· cit., p. 132.

71/ Donald J. Currin, S.J., and John Shannon, "Positive and Negative Tax Credits--A New Dimension in Intergovernmental Relations," National Tax Journal, March, 1966, pp. 20-21.

Heller, �· cit., p. 131.

Currin and Shannon,�· cit., p. 20.

Committee for Economic Development,�· cit., pp. 35, 37. 75/ Ibid., p. 21.

Advisory Conunission on Intergovernmental Relations Federal-State Coordination of Personal Income Taxes,�· cit., p. 69.

Heller, �· cit., p. 128.

Ibid., p. 127.

Federal�State Coordination of Personal Income Taxes, op. cit., p. 58.

80/ Ibid .• , p. 161.

81/ Ibid., pp. 155-157.

82/ Federal Rev�nue Sharing With the States, �· cit., p. 9.

83/ Dean Ellis, "The Battle for Income Tax Simplification--The Oregon Story," National Tax Journal, September, 1962, p. 246.

84/ Heller, �· cit., p. 121.

85/ Federal Revenue Sharing With the States, op. cit .• p. 6.

86/ Break,�· cit., p. 40.

87/ Ibid., p. 41.

88/ Louis Harris, "The New Ma th of Inflation," Life, August 15, 1969.

89/ Sanford,�· cit., p. 144.

90/ Federal Spending Facts, Bulletin No. 234 of the Council of State Chambers of Conunerce, March 27, 1967, p.1.

-78- 91/ Washington Post, August 31, 1969. 92/ Harris, �· cit., p. 22. 93/ Ibid., p. 23. 94/ Ibid., pp. 22-23. 95/ Maxwell,�· cit., p. 193. 96/ Heller,�· cit., p. 127. Wright, �· cit., p. 30. Advisory Conunission on Intergovernmental Relations, Federal-State Coordination of Personal Income Taxes, 2P· cit., p. 105. 99/ Ibid., p. 106. 100/ Committee for Economic Development,�· cit., p. 20. 101/ Advisory Commission on Intergovernmental Relations, Federal-State Coordination of Personal Income Taxes, op. cit., pp. 47-48. Maxwell, �· cit., p. 81. Alvin H. Hansen and Harvey S. Perloff, State and Local Finance in the National Economy (New York: W.W. Norton & Co., 1964), p. 49. Robert W. Rafuse, Jr., "Cyclical Behavior of State-Local Finances" in Richard A. Musgrave, ed., Essays in Fiscal Federalism (Washington, D.C.: The Brookings Institution, 1965), pp. 64-65. Richard A. Musgrave, "Introduction" in Ibid., p. 5.

106/ Maxwell,�· cit., pp. 186-187.

107/ Robert M. K�ins, "Federally-Based:state.Income Taxes,11 • National Tax Journal, March, 1956, pp. 52-53. 108/ Maxwell, �· cit., p. 102. 109/ Committee for Economic Development,�· cit., p. 31. 110/ Ibid., p. 37. 111/ Break,�- cit., pp. 32-33. 112/ Kamins, �- cit., pp. 51-52. 113/ See Advisory Commission on ·Intergovernmental Relations, Federal-State Coordination of Personal Income Taxes, op. ci�., pp. 123-141.

-79- Kamins,�· cit., p. 48.

Ibid., pp. 49-50.

Advisory Conunission on Intergovernmental Relations, Federal-State Coordination of Personal Income Taxes,�· cit., p. 63.

Ibid., p. 125.

Break, �· cit., p. 48.

American Enterprise Institute, Federal Revenue Sharing Proposals, p. 11.

120/ A Consulting Engineer quoted in "Should Uncle Share the Wealth?" �· cit., p. 37.

121/ Ibid., p. 36 .

.122/ Los Angeles Times, January 21, 1968. 123/ Wall Str�et Journal, December 12, 1966.

124/ Mushkin,�· cit., p. 195.

125/ Washington Star, November 22, 1966.

126/ Baltimore Sun, May 1, 1969.

127/ Washington Post, March 26, 1967.

128/ Wall Street Journal, November 22, 1966.

129/ Los Angeles Times, January 21, 1968.

130/ Heller,�· cit., pp. 142-143.

131/ Conunittee for Economic Development,�· cit., p. 42.

132/ Washington Post, March 26, 1967.

133/ Break,�· cit., pp. 120-121.

134/ Ibid., p. 127.

135/ Ibid., p. 150. 136/ See Committee for Economic Development,�· cit.

137/ Maxwell, �· cit., p. 235.

138/ Ibid.

-80- 139/ See Committee for Economic Development,�· cit., p. 47.

140/ New York Times, December 4, 1966.

141/ Heller,�· cit., p. 152.

142/ Wright,�· cit., p. 48.

143/ Heller, �.cit., p. 128.

-81- CHAPTER V

REVENUE SHARING AND FEDERALISM

I. Introduction

Our discussion in this chapter will assume that the revenue sharing grants under the affirmative proposal are not programmatically conditioned. States--or the cities, if there is a pass-through require­ ment--will be allowed to spend the money as they see fit. Some observers welcome and others.decry the proposal. While some believe it will cut the fiscal bonds which have restrained creative state action and bring government closer to the people, others fear that it will constitute a colossal waste of federal funds, and that irresponsible governmental units will ignore some of our most pressing social problems and divert the funds to relatively unimportant uses. This chapter surveys each of these positions in turn. II. Revitalized Federalism

A. Revenue Sharing and the Goal of Decentralization

There has been widespread concern expressed that the states are dying as independent governmental units. Both the states and the localities seem increasingly to rely on federal help. Federal power grows as programs proliferate and the President and the Coniress yearly mount new attacks of some kind on social ills. One study argues:

It does not follow... that all additions to national power have been necessary or desirable, or that the continuing enlargement of national authority should go unchallenged. Many prob­ lems--for example, those relating to education, urban transit, and neighborhood improvement--re­ tain a distinctly local or regional character. Yet it is in precisely these areas that Washing­ ton's role is most rapidly expanding. lJ

The ultimate result of such a trend might be that "... if present trends continue for another quarter century, the states may be left hollow shells, operating primarily as the field districts of federal depart­ ments and dependent upon the federal Treasury for their support."'!:../

Revenue sharing might promote decentralization in either of two ways. As we shall see in the following sections, it might provide the states--or local governmental units--with much needed power to make more decisions independent of the federal government in a number of vital areas. However, those who are deeply worried about the trend towards centralization would go beyond the Heller proposal. Professor Roger Freeman explains:

-82- ... the basic difference between liberals and conservatives who support unconditional grants to states in some form or other is the former want the funds on top of the present (and future yet to be enacted) specified grants while the conservatives what them in lieu of progranunatic grants. Liberals such as Walter Heller favor them because they feel (or felt three years ago, prior to Vietnam and the enactment of many of the Great Society programs)that federal revenues were growing faster than expend­ itures which might cause Congress to enact several successive tax cuts. They regarded unconditional grants as a new spending program with unlimited potential which would soon develop its own politi­ cally powerful lobby of governors, mayors, etc. Conservatives who favored tax sharing were less concerned with the money aspects of grants but with the concentration of power in the national govern­ ment (particularly in the executive branch and the bureaucracy) through closely controlled and condi­ tional grants. They tend to view unconditional grants as the less�r of two evils because they leave the decision-making power in the hands of state and local authorities (as we do income tax credits which follow a similar principle). �

Decentralization of governmental authority is advocated out of an often unvoiced fear that centralized government is prone to abuse liberty, while strengthened state and local governments would offer at least some modicum of defense against such abuse. jj To all this, the negative may offer two replies. First, it may demand that the affirmative demonstrate real and significant dangers in the degree of centralization that presently exists at the national level. What threat to liberty does the federal government currently present due to its position of _preeminence? More importantly what substantial threat or threats are likely to arise in the future? How will decentralization specifically prevent such threats from materializing? Secondly, the negative may argue that revenue sharing will increase congressional power over the states. As one study points out, "Congress, by threatening to alter the program, could coerce state and local governments even more effectively." y

B. Revenue Sharing and Governmental Response to the Popular Will

One of the most frequent arguments heard in favor of revenue sharing is that it will lead to greater popular control over government decisions. The states and localities, it is contended, are closer to the diverse interests and needs of citizens living in diverse areas of the nation; they can reflect the popular will better than the federal government. §.!

-83- Funneling federal money through them allows those immediately affected by a governmental decision to influence its outcome. By virtue of its size and interests, the federal government is often "insulated" from such in­ fluence. 7/ Moreover, if states and localities are required to make hard decisions-about allocating large amounts of federal funds, citizen political participation at state and local levels is likely to increase. This might have the impact of strengthening the quality of state government; it would also increase "... the ti�s of the citizens to the political process."�

During the 1968 campaign, political leaders of all philosophical persuasions expressed apprehension about a growing feeling of alienation among Americans. In the midst of his campaign for the nomination, Richard Nixon argued that this alienation was due in large part to a popularly­ held feeling that individuals could no longer influence the outcome of decisions that affected their lives. Government seemed a distant and unresponsive force. 9/ One view expressed is that revenue sharing, by placing condition-free funds at the disposal of governmental units smaller than the national government, would guarantee each citizen a larger role in the decision-making process and would constitute at least a step toward reestablishing faith in the workings of the democratic system.

The negative has at least two options in challenging the affirm­ ative position here. It could question first whether revenue sharing would actually reduce popular frustration over the distant and unresponsive character of government. Unless revenue sharing was substituted for fed­ eral grants rather than added to them, federal authorities would still make countless decisions affecting the economic and social welfare of millions of individuals. Moreover, federal control over individuals through mechanisms like the _income tax and the draft obviously would remain. Revenue sharing might marginally allay alienation; it would not do so in any significant degree. Furthermore, there is some dispute about just how close to the people state and local governments really are. Former Presidential advisor and Brandeis political scientist John P. Roche claims:

...the national government may be somewhat unresponsive and remote but public opinion analyses make it clear that the average American feels a far closer bond to Washington than he does to his state government� How many... know the names of their state representatives? Their state senators? 10/

Though the affirmative may reply that revenue sharing will lead to height­ ened citizen interest and participation in state government, the negative could answer that, despite an already large stake in the outcome of state government decisions, ignorance and apathy persist. Revenue sharing might lead to greater popular control of govern­ mental decision making in a second way. By a pass-through requirement, the affirmative could assure that unrestricted funds would go to locally controlled community groups. Senator Robert Kennedy, explaining the

-84- rationale for local control in 1964 congressional hearings on the poverty program, stated: Part of the sense of helplessness and futility comes from the feeling of powerlessness to affect the operations of these organizations. The Community Action Programs must basically change these organ­ izations by building into the program real represen­ tation for the poor... this means the involvement of the poor in planning and implementing programs: giving them a real voice in their institutions. !!I Proponents of this view cite experiences under the Community Action Pro­ gram. CAP, they believe, succeeded in creating "... an urban Negro leader­ ship echelon at just the time when the Negro masses and other minorities were verging toward extensive commitments to urban politics." llJ The affirmative may argue that revenue sharing with a pass­ through provision to local community groups is the. ideal way to attempt to create the kind of leadership CAP allegedly did. Revenue sharing would provide a guarantee of funds: because CAP did not, some argue, its effectiveness was seriously underminded,' CAP funds were often used to create a Community Action organization that pursued policies which in­ spired retaliation from the larger communities. Radical demands, apparent waste of money, and the mounting of challenges to the traditional power structure led to the imposition of increasing federal direction and threatened cutbacks in appropriations,13/ Presidential advisor Daniel Moyn­ ihan describes one incident� In Mayorrfichard J. Daley's view, the Chicago Community Action Program represented a threat to the viability of his political organization. Mayor Daley appealed to the White House, requesting that he be given a larger share of control over the allocation of CAP money in America's second largest city, and his request was complied with. In a relatively short period of time, the sought after standard of deci­ sion-making by the indigenous poor lost its central place in the poverty program. The New York Times commented: The Budget Bureau, fiscal arm of the White House, has told the Office of Economic Opportunity that it would prefer less emphasis on policy making by the poor in planning community projects. "Max­ mum feasible participation" by the poor in the anti-poverty program is called for by the law. In the Bureau's view, this means primarily using the poor to carry out the program, not to design it. 14/ The negative can argue that decentralization to a specific local interest group like the poor simply will not work. First, the poor are apathetic; many of them seem uninterested in either attaining or exercising power. Election figures for the CAP boards in major American cities may be revealing: In Philadelphia, only 2.7 percent of the eligible poor turned out to vote; in Los Angeles, the figure was .7 percent; in Boston, 2.4

-85- percent; in Cleveland, 4.2 percent and in Kansas City, 5,0 percent. 15/ Moreover, there is extensive evidence available that even the leadership class among the poor have managed many Community Action Programs incomp­ etently and in some cases corruptly. There were charges that large por­ tions of CAP money were wasted on exorbitant salaries, while only small amounts were devoted to coping with social and economic problems. One CAP operation in Syracuse, New York, spent $7 million of an $8 million appropriation for salaries alone. In July, 1967, the Syracuse program was placed in trusteeship by the direction of the Office of Economic Opportunity. 16/ C, Revenue Sharing and the Role of the States In Public Policy Innovation

It has been said that one of the beneficial features of the federal system has been its tendency to encourage public policy innovation. At one time, the SO states and many local communities were regarded as laboratories for experimenting with new solutions to persistent problems. Before the federal government acted, it could examine and assess the results of alternative policies pursued in different s�ates. What worked in one state might be adopted on a national level; failures could be discarded with any damage confined to a single state or locality. Some believe that there has been a reduction in the innovative tendencies of state and local governments; a loss the nation can ill-afford. They argue that the tradition of experiment should be reinvigorated. Heller writes:

There are also more positive reasons why the states and their subdivisions should have a stronger role. Creative federalism requires diversity and dissent and innovation. Yet these cannot simply come down from on hig�. They have to well up from below. The danger if they do not is that the cen­ tral government will grow stronger in authority and weaker in ideas. 17/

The states may be uniquely well-situated to act as innovators, for the insistent problems they confront create rising pressures for solutions. The response of each state or locality could have implications for policy making far beyond its own borders. 18/

The strongest impediment to state innovation may be lack of funds. With the states hard pressed to meet current demands, with leg­ islatures engaged in a constant race to find new revenues just to keep already established programs going, and with governors and other state politicians fearful of the political cost of raising taxes, state govern­ ments may be reluctant to conunit funds to a program that may not work and is not supported by a federal grant. What the states may need is the leeway that adequate funds would provide to enable them to act creatively. 19/ Such leeway may now be missing. The Conunittee for Economic Development states:

-86- How much change in scope and quality of public services takes place depends on political decisions made by people acting in their role as voters and government officials. Improvements in scope and quality of public services are limited by the willing­ ness of citizens to give up private claims for public claims, by their willingness to accept increasing redistribution of economic resources, and by limits on the speed with which real resources can be effi­ ciently directed to new•uses. 20/

Given this situation, proponents of revenue sharing have advanced it as a way to encourage state innovations. It would permit, they contend, the trial of new and uncertain programs without requiring state politicians to face the old and certain prospects of a tax revolt. 21/

The record of the states can be cited to support the view that innovation will result if fiscal pressures are removed. Wisconsin, for example, pioneered many of the progressive reforms of the early 20th century, establishing the country's first unemployment compensation system. 22/ The first work release programs for prisoners were set up by the states; after a trial period there, they were adopted at the federal level. 23/

The capacity for creative experimentation has not entirely disappeared from the states, even though financial pressures may work against innovative solutions to the problems confronting t�e states. The provisions of the federal highway program are built upon state ex­ perience with similar programs. The states have instituted creative changes in the mental health field, which have spread from one state to another, and the quality of mental care has climbed remarkably.24/ Cal­ ifornia initiated a program designed to apply advanced aerospac�tech­ niques to the solution of community problems. New York State has under­ taken the largest and most comprehensive campaign against water pollution in recent decades. 25/

For the future, a number of problems exist to test the creative resources of the states. The public service problems of poverty areas may be best dealt with by unrestricted grants, leaving to the states the decision how specifically to spend the money. Independent state decision­ making in this area is likely to achieve faster results. 26/ In some fields, independent state action may be a necessity. Pennsylvania political scientist James Charlesworth notes:

To charge the federal government with the sole or chief responsibility for developing science and, technology is to run the great risk of losing one's eggs by putting them all in one basket. There is need for competition and stimulation, which can be realized from independent state programs, subsidized in part by the shared income tax mentioned above. 27/

-87- The picture of the states as innovators can be assailed by the negative in four ways:

1. The negative may argue that the states are poor innovators-­ that they need guidelines prescribed by the federal government if they are to perform effectively. Senator Edmund Muskie (D., Maine) has warned that the archaic character of state governmental machinery means that there must be substantial federal regulation to govern the expenditure of joint federal-state funds. 28/ The conditions attached to school aid, rather than independent state action, led to the consolidation of school districts across the country. 29/ Moreover, some states have been denounced for failing, despite federal incentives, ·to take action to improve the appearance of their highways and aid citizens displaced by the building of new roads. 30/

2. Charges have been made that even when the opportunity exists to do so, state governments often do not wish to innovate. Only 17 states have followed the joint federal-state action committee's recommendation that they " ...assume a greater share of the responsibility for the health and safety regulation of nonmilitary application of atomic energy." This failure to seize the initiative has occurred despite the Atomic Energy Commission's attempts to induce more widespread state action. 31/ However, it should be noted that the failure of some states to experiment does not necessarily defeat the affirmative's claim. As long as some states do experiment when they have the money and opportunities arise, the values of federalism may be at least substantially advanced. Fifty decision­ makers almost certainly will not make the same decisions. Some will discard an idea; others will implement it only half-heartedly; but still others will adopt programs providing instructive lessons for the nation and the states. That may be all that the affirmative claims.

3. The states may be tempted to utilize revenue sharing benefits to meet ,pressing problems in present state programs or to obtain a larger share of federal matching funds. In either case, the likelihood of innovative action may diminish or disappear. U.S. News and World Report indicated in 1966:

Some officials admit to a haunting fear of tax sharing on other grounds. Many existing fed­ eral aid programs, they say, are "open-end." The cost to the U.S. Government is limited only by the ability and willingness of states to come up with matching funds. What would happen if states were to use their tax sharing money to match fed­ eral grants under old programs? Says one official: "They could bleed the Treasury white with its own money." 32/

Thus, revenue sharing may encourage the exploitation of federal grant opportunities rather than creative state innovations.

-88- 4. Revenue sharing might do a disservice to the cause of innovation if it relieved financial pressures on the states. Such pres­ sures often lead to useful experiments in tax structures and mechanisms, and we have already discussed innovations like income tax credits or sales tax payments, which might not have occurred if unrestricted federal aid had relieved state burdens. Dean Ellis, former Commissioner of the Oregon State Tax Commission, outlines the benefits of state tax experimentation as follows: If it be true that reform at the state level means little dollarwise compared to the unreformed federal law, is it not also true that individual states are in a much better position to blaze the trail [in changing tax laws]? ...not only is the federal structure unwieldy and rendered some­ what inert by its size, but the Congress is sub­ ject to a much greater pressure than are state legislatures by organized special interest groups that have a stake in maintaining existing prefer­ ential [tax] treatment. 33/ D. Opportunities for Innovation at the Federal Level The negative may contend that there is no necessity to promote creative state action; that the federal government can achieve and has achieved the same objective. There are two major ways in which the fed­ eral government may act innovatively on the domestic scene--through its own programs or grants-in-aid programs. Former Governor Sanford cites an example of the federal government's capacity for innovation. He writes:

When some naturalists wanted forestry prac­ tices controlled and some insisted that control would destroy nature's balance in the wilderness, our untidy response was to have both. The U.S. Forest Service follows the first alternative, the U.S. Park Service follows the other, and the future has been better served. 34/ Grants-in-aid have also been structured , on occa�ion, to encourage state independence and experimentation. Most programs contain provisions for demonstration projects--projects to test " ... new ideas, new methods, and new arrangements.... " Demonstration projects, however, must be approved in advance by federal authorities. 35/ On a broader scale, President Johnson in 1966 pledged that a number of grant programs would leave greater latitude to the states and localities in determining how the funds could best be allocated to specified problems. 36/ A grant program in Appalachia exemplified the Presid�nt's aim. Governors were granted the authority, subject to Washington's informal approval, to dispense funds to programs developed by state or local governments for private groups. 37/ Grants-in-aid, through additional alterations and

-89- reform, might do even more to exploit state-local innovative capacities. Freer grants would also provide an opportunity to test the thesis that underlies block grants and revenue sharing before embarking on either course of action. 38/

Other federal actions may create "elbow room" for state creativity. For example, some have argued for federal take-over of wel­ fare programs because such a move would free state funds for other uses. 39/ To the extent that new federal grants-in-aid operate in areas previously� the province of the states alone, this should be their normal impact. 40/ Indeed, it might be interesting to find out what states have done in � the past with money freed by new federal aid. Perhaps state problems are so pressing that financial pressures precluded new approaches even then; if so, the negative may respond that the same fate is likely to await revenue sharing.

Thus, independent federal programs and correctly structured grants-in-aid may make a contribution to the cause of innovation. However, some authorities deny that they can ever do a really effective job. Un­ conditional grants in the form of revenue sharing may be the only solution. To maintain that position, the affirmative must indict both categorical grants and the capacity of the federal government to permit creative action in its own agencies or by the states.

There are two principal indictments of categorical grants-in-aid:

1. By virture of the matching requirement, grants-in-aid may distort priorities and stifle creativity at the state level. Heller puts the case in the following terms: The aids that so admirably serve the national purpose may put state-local finance at cross pur­ poses. In drawing on a limited supply of resources to finance and staff particular functions, the matching grant tends to siphon them away from the non-aided programs. And the poorer the state, the greater the tax effort that must be made to achieve any given amount of matching, and hence the less that is left over for the non-aided function. To some extent,then, the state-local governments trade fiscal free.dom for fiscal strength. 41/

Empirical evidence validates., at least partially, Heller's analysis. In the poorer states, public welfare expenditures tend to be used almost exclusively to pay matching requirements under federal public assistance grants: general assistance , which is not fed�rally aided, is vir�ually ignored. For example, .Mississippi spends 199 times as much on public assistance matching programs as it does on general assistance; New York only spends 1.6 times as much. Poorer states like Mississippi are forced to divert available funds to federally-aided programs, thus leaving little room for independent state action. 42/

-90- Those who decry the effects of matching grants contend that they distort state priorities and often lead to the expenditure of state funds on programs which, in a particular state, may have a relatively low priority. There may be other areas of need in which the states could develop creative solutions to serious problems, but it is very difficult for state politicians to turn down an offer of federal assistance, even if there is a matching requirement; thus, state resources are too often tied up in matching programs. 43/ States lose the independent power to make decisions even about the disposition of their own resources, and opportunities for creative federalism are continually lost. One authority sums up the situation in these words:

One possible hypothesis is that, if the grant is extended in a particular functional area for a subfunction, the money necessary to meet the match­ ing requirements will be taken from other subfunc­ tions in the same area. Thus, a federal program for venereal disease control may result in the state government!s cost being taken from other state health agency programs. The result may be a pattern of appropriation at the lower level which does not accord with the ideological preferences of the legislative decision-makers and possibly may not be in accord with the preferences of the members of the bureau­ cracy at that level. 44/

Diverse ideological preferences and bureaucratic assessments at the state level may well be the essential elements for successful experimentation and innovation. Federal gxants-in-aid, however, with their matching requirement, may prevent the states from acting on those preferences and assessments.

To this, the negative may respond that matching is not an in­ herent feature of grants-in-aid. If necessary, the present system could be repaired by eliminating matching requirements. It should be noted, however, that open-end grants depend on matching to determine the total size of the federal expenditure in any given year. Without matching, open-end grants simply could not operate. The same is not true of closed grants and some of them already require no matching. For fiscal year 1967, unmatched grants for as�istance to schools in federally impacted areas, for elementary and secondary education, for the administration of employ­ ment security programs, and for vocational rehabilitation totaled about 2 billion dollars. 45/ This same approach, the negative might argue could be expanded t�include other closed grants. States would no longer have to abandon attempts at innovation and devote funds to matching closed federal grants, although problems probably would continue to persist in the. case of open-end grants.

2. Due to their functional orientation, the negative might contend, grant programs prevent creative state utilization of federal assistance. Experience with federal grant programs indicates that their

-91- direction is usually toward the solution of a specific, often urgent, problem. "Relatively little consideration is given generally to the impact on other programs.••• " 46/ Proliferation of rules and regulations govern­ ing the use of federal grant assistance testifies to this tendency: the states must use the money exactly as the federal government directs. In a survey of state program administrators "..• a majority .•.indicated they would have allocated the federal funds differently in the absence of strings, and nearly half of them ... favored unrestricted grants or revenue sharing." 47/ Indeed, the program bias is so strong in many federal grants that state authorities like the governor and the legislature have little or no chance to influence policy at all, for federal grant adminis­ trators tend to deal with their bureaucratic counterparts at the state level. 48/ Coleman Ransone concludes:

In practice, therefore, the Governor finds that his policy decisions are conditioned by the policy decisions which have been made in Washing­ ton•.. The Governor, to a considerable extent, is by-passed in the line of communication and finds that his control over both policy and management of the agencies which administer.•. [federal grant] programs at the state level is weakened consider­ ably. 49/

Such a situation, New York Governor Nelson Rockefeller argues, prevents useful state innovation. Grant funds might be better utilized--even in the same general area like education--if the states had more leeway. 50/ Federal regulation of grants-in-aid programs deprive them of that leeway; creativity is stifled. A new program of unrestricted revenue sharing might revitalize the states' ability to experiment.

Of course, as we have indicated, grants-in-aid could be reformed by diluting their programmatic specificity or by reducing or eliminating the matching requirement. Furthermore, federal programs functioning independently of the states could encourage innovation. To deal with this analysis, the affirmative must turn to a discussion of the federal bureaucracy to assess the impact of its character on creative planning and to examine the sources of its power.

The affirmative may argue that no matter how well programs are designed, whether they are independent federal programs or cooperative ventures with the states, bureaucratic pressures at the federal level work against innovation and change. Professor Wright describing the im­ pact of the bureaucracy on proposed changes in grants-in-aid programs, writes:

The significance of grant administrators' per­ spectives deserves emphasis. These administrators constitute more than just one of the three legs of the "triple alliance" of grant enactment. They are a prime source of ideas for program changes and their

-92- views often make the critical difference in de­ cisions on pending legislation.... In the grant­ in-aid field this means a bias toward more specialized, categorical grants. Important al­ ternative approaches are ignored, as are margin­ al adjustments such as new program coordination mechanisms.� Federal bureaucratic bias against change may be explained by a number of factors: first, the bureaucracy is characterized by specialized perspec­ tives. Bureaucrats tend to think that the immediate problem with which they are dealing is the most important one. They may completely ignore related problems, and fail to take into account complicating factors outside their own immediate jurisdictions. They are often jealous of their own authority, resistant to attempts at coordination, and opposed to new organizational structures which might lead to better problem solving. 52/ They view " ...as intruders any outsiders (legislators, top administrators, or study groups) who.•. [raise] difficult questions con­ cerning policy consistency, interlevel administrative procedures, inter­ agency coordination, and structural reorganization." 53/

Secondly, according to some observers the federal grants-in-aid bureaucracy evidences a curator mentality: they defend their programs and their approaches long after the latter may have outlived their use­ fulness. The result is that present grants-in-aid programs tend to be self-perpetuating. In the words of James Maxwell, "Once put·into operation, grants live on, even though the original national purposes behind them have been altered or been achieved." 54/ Federal aid might be employed in a useful and innovative fashion bu�for the bureaucratic barriers to change. The urge to retain control over the allocation of funds is per­ haps best illustrated by the fact that 90 percent of all federal program administrators surveyed oppose the loosening of restrictions involved in revenue sharing or block grants. 55/

Defenders of the federal grants-in-aid bureaucracy argue that it is not uniformly opposed to innovation or independent state action. For example, the federal Bureau of Roads prefers that state and local officials select the routes for new interstate highways. Federal urban renewal administrators try to encourage state and local decision-making on a host of issues; the consensus is that the federal agency simply lacks the necessary, detailed knowledge about local conditions. However, one could explain the bureaucratic cession of power here in terms of practical political considerations. It could well be that the federal bureaucracy does not want to incur the wrath of citizens angered by the wrong choice of a highway route or an urban renewal site.

Some authorities believe that the very nature of the congressional legislative process often leads to a piecemeal grants-in-aid approach. Wright explains:

Congress is organized into committees, primarily

-93- along functional lines. The result, too often, is an overemphasis on functional problems and an under­ emphasis on matters of form, such as governmental structure or administrative coordination .•..The Con­ gress, with its problem-oriented approach is not structured to give adequate consideration to either the individual or the cumulative impact of its actions on governmental forms and operations. Inherent in its approach is an implicit faith that more and more grants dealing with particular problems will add to a meaningful and manageable prescription for the many ills besetting society. 56/

Moreover, even when attempts at original, creative, and coordinated attacks on problems are made, the bureaucracy is allegedly able to under­ mine them. The anti-poverty program may be a case in point. Interagency rivalries and refusals to cooperate supposedly nullified the OEO's mandate to oversee and coordinate at the local level the anti-poverty efforts of different federal agencies. 57 I .Grant program administrators involved in the planning of the war on poverty took great care to protect the special interests of their own agencies. 58/ Engaged in the competition for power, the anti-poverty agencies themselves apparently began to take on the bureaucratic attributes of their rivals. 59/ Thus, in the view of many, attempts at original and innovative federa�approaches are undermined, subverted, and ultimately transformed by the federal grants-in-aid bureau­ cracy. The affirmative may argue that, in light of this situation, any attempt at reform short of automatic grants to the states ·is likely to fail.

E. Summary Thus far,. this chapter has reviewed the arguments in favor of a revitalized federalism and has examined the advantages of decentralization to the states and the defects of existing federal programs. However, there is another side to the coin. Many resist unrestricted revenue sharing on the grounds that the states are incompetent, unrepresentative, or ineffective. Thus, even if the present system is inherently flawed, an affirmative plan may offer no better solutions. It would do little good to avoid the allegedly stifling impact of the federal bureaucracy by turning to a state bureaucracy plagued by the same or similar defects. In the next section, then,·we examine some of the criticisms raised against independent .state disposition of federal assistance. The negative will surely advance such arguments in many debates--and the affirmative must be prepared to deal with them.

III. The Dangers of Decentralization The affirmative plan must provide for federal grants to state governments. In the absence of a pass-through requirement, this gives the affirmative three major options: its plan can leave it to the state legislative process to distribute the money--the most natural choice--or

-94- it can choose to direct funds specifically toward the governors or the specialized bureaucracies which have evolved to administer state programs. This opens up several opportunities for negative analysis. If state distribution structures prove inferior to the federal mechanism, the neg­ ative can argue that the affirmative plan is comparatively disadvantageous. On the other hand, if state faults merely duplicate federal failings, the negative may contend that the plan will not meet the need. It is all a question of degree here. Unique or aggravated problems at the state level create disadvantages, duplicative problems, raise practicality and workability arguments. A. The Competence of the State Legislative Process

State legislatures have several alleged faults which might hinder an affirmative plan. In some states, legislative sessions are relatively infrequent. When lawmakers meet, it is often only long enough to renew old acquaintances and voice vote enough bills so that the state government can function in their absence. The Committee for Economic Development complains: "twenty-nine legislatures still meet in regular session only once in two years. Time limits of forty to 195 days are im­ posed in thirty-three states." 60/ In fact, " ... [o]nly eight states-­ Alaska, California, Massachusetts, Michigan, New Jersey, New York, Oklahoma, and South Carolina--now provide for annual general sessions of unrestricted duration." 61/ The only way to pass' enough legislation in some states--even the smallest--is to rush hastily prepared and fleet­ ingly considered bills through the legislative chambers, critics contend. At times, hard-pressed members are forced to cast forty or more votes in a single day. 62/ The negative could reasonably suggest that this type of legislative�eliberation is hardly suited for the national priority adjustments and forceful innovation the affirmative plan seeks to obtain. Congress, the negative could maintain, has developed certain interests in many state and local problems through its review of grants-in-aid; continued congressional supervision would be preferable to periodic spurts of activity in state capitals across the country.

In support of this position, the negative could cite other alleged defects of the state legislative process. It is generally agreed that most legislators are embarrassingly underpaid--" ... $5,000 or less [annually] in thirty five states, and under $2,000 in 18 of these." 63/ New Hampshire pays its lawmakers $100 for coming to the state capitar- once every two years, 64/ and salaries in some states are so low that "... members are payed Tess than legislative doorkeepers or capital janitors. Others are known to supplement salaries through unemployment compensation or even as race track ushers." Raising the legislators' compensation is an uncommonly difficult task in some states because salaries are often fixed by the state constitution. 65/ Thus, legislators are faced with the unpleasant choice of either continuing to accept pittances for their services or asking the electorate to pass a seemingly selfish constitutional amendment which would pay lawmakers a better salary. Due to the political consequences of the latter act, many state legislatures have contented themselves with present arrangements.

-95- The facilities provided most state legislatures may also hinder responsible policy making. Nation's Business reports: "The average state legislator doesn't have an office when the legislature is in session, much less one in his home district." 66/ When a constituent comes to the state capital with an urgent request or""confidential plea, his elected represen­ tative must huddle with him in the corners outside the legislative chamber. Consequently, serious consideration of issues may be difficult, and the legislator must either follow the leader or react quickly to what he hears on the floor during hurried debates over major issues.

The final structural difficulty with many present legislatures is their size. Although experts have recommended that no state have a legislature with more than 100 members, 67/ only ten have less than 100 in their larger house. Eight have over 200 and New Hampshire has one legis­ lator for every 1500 people or a total of 400 lawmakers. 68/ This leads to less individual participation, less deliberation, and,�erhaps, a lower quality in state. legislative representatives. When legislative service is a part-time job, "... attorneys, farmers, retired persons, housewives, labor leaders, realtors, and insurance agents... " have predominated. 69/ For a variety of reasons, critics contend, service in the state legislature has not been sufficiently attractive to command the needed amount of the kind of talent required to run a modern state. When a promising member is elected, he usually views his state service as a proving ground for future political success, and rarely considers' state legislative leader­ ship a long-term goal.

The foregoing shortcomings may lead to additional inadequacies in many state houses. Because members have no office space, or are too embarrassed to vote adequate staff assistance appropriations, many leg­ islatures are characteristically understaffed. One poll of state assembly speakers revealed that, except for California, the single most desperate need was for adequate staff--for the members, for research, and for committees. 70/ Charges of corruption at th.e state level have been made from time to�ime throughout the nation's history. In 1962, Massachusetts set about cleaning house with a blue ribbon crime commission. Harvard political scientist James Q. Wilson reported: "Attorney General Edward Brooke, on the basis of information furnished by the commission brought indictments against 53 individuals and 15 corporations. About two dozen of the individuals were (or had been) state officials. 71/ In the words of one accusing observer, "one can be reasonably confident that much the same results could be produced by similar commissions in many other states, particularly industrial states of the northeast such as Pennsylvania, Ohio, and the like." 72/ The causes of official corruption are difficult to describe and probably varied. They may spring from poor pay, low esteem, or unprofessional working conditions which plague many legislators. Wilson theorizes that the remote location of many state capitals accounts for the fact that the governments of some states and not the cities are gen­ erally associated with charges of corruption. 73/ It may be argued that the public has lost confidence in state governments. Despite the 1962 inquest in Massachusetts, John Roche says that "Massachusetts •.. is tottering on the abyss of bankruptcy because we cannot get approval for an effective,

-96- progressive income tax. Why not? Because the people of the Commonwealth do not trust the governor or the general court to s�end the �oney."7�/ Thus, it may be argued that state legislatures are inappropriate vehicles for an affirmative bent on changing our federal system for the better.

Another frequent flaw in state politics, critics point �ut, has been a significant erosion of the 'political party system. While there can be disputes over the consequences of one-party ascendency in state politics, there can be little question of its existen�e. In some cases this may be due merely to the overwhelming popularity of one major part;, but in others it may result from the prerogativ� of the legislature--and thus of the majority party--to d�aw boundaries for .. election districts. By carefully drawing.these lines so that opposition votes are "wasted " electing weakly-challenged members, or contesting a foregone conclusion in a majority stronghold, the majority party may virtually guarantee its continued control of the legislature. Neg-. atives might argue that because one-party politics may be unrepresentative, state action is an undesirable alternative to congressional control. It could also maintain that no contest elections are unresponsive to pop­ ular shifts in opinion and that the policies resulting from them might serve self interest rather than the public interest. Thus, governmental decisions about allocation of resources would be more--rather than less-­ insulated from popular control.

The affirmative can reply to all of these charges, but before reviewing the specific issues, it is useful to consider the overall frame­ work in which the arguments fall. Both the affirmative and the negative will cite particular faults--or virtues--in one or more states in attempt­ ing to construct a general indictment--or defense--of state governments as a whole. In some cases these arguments may not reflect the true sit­ uation in the fifty states. For example, some states do have large and poorly paid legislatures, but others have manageable and prestigious assemblies. Thus, the overall situation must be kept in mind.

Solving the defects of state governments might require amend- ments to state constitutions. Some states have a tradition of liberalizing constitutional amendments and conventions while others are bound strongly to their original charters. Louisiana has adopted ten different con­ stitutions in its history and has amended its present one 460 times since it was adopted in 1921. New York, Alabama, and South Carolina have each ratified six different charters, while Georgia has changed constitutions eight times. Yet Massachusetts has remained satisfied with the same constitution since 1780 and Tennessee has amended its basic law only. ten times since 1870. 75/ One study concludes that, "... few states will authorize a convention"'"or ratify its propos�ls unless there is broadbased citizen interest in reform, This requires a massive educational program. " 76/ Even the governments in those states that have received public support for a convention have not been universally successful in achieving reform. While Michigan was able to secure voter approval for its constitution, both New York and Maryland recently saw their proposed new charters defeated at the polls. The affirmative could seek to assure necessary.constitutional alterations by conditioning receipt of revenue shares on state actioti to modernize and perfect the legislative process: states that did not act would not receive funds. Similarly, the plan could condition the benefits on statutory changes by the states in the rules and regulations governing legislative structures. For example, short state legislative sessions need not pose insuperable difficulties if appropriations provide staffs available on a year-round basis to examine issues and provide legislators with several reasoned alternatives when sessions actually begin. Though the restrictions on members' salaries may require constitu­ tional revision in some states, in others the legislators may just be too cautious about enacting a sensible salary scale. Conditional revenue sharing might cure the timidity. The same remedy might also cure the facility shortages to which the negative might point.

Statutory and constitutional changes might not necessarily improve the quality of the state legislative process. Additional appropriations for staff help, for instance, might be wasted, and the negative could maintain that: ... lack of funds cannot explain the failure of most legislatures to employ able assistance. The California legislature spent $11.6 million in 1965; New York $10.4 million;Massachuse.tts $6.0 million and Pennsylvania $5.S.. million. Mere than half the states spent over one million dollars on their leg­ islatures. Legislative funds are often used to support numbers of messengers and doorkeepers-­ patronage positions for the majority party. 77/

In reply, the affirmative argues that California,for example,did spend its legislative funds wisely and deveioped an. effective staffing system. On a general level, however, alterations in state legislatures might be easy to achieve in a formal statutory sense and difficult to establish in actual practice. The law may change--and legislatures may not. Some of the alleged problems with the state legislative process may disappear--or may not be as serious as the affirmative claims. Pres­ sures which led to over-populated chambers might be expected to abate in the future. The previous rationale for additional members was that each governmental1unit deserved equal representation: thus, as counties mul­ tiplied and divided to reflect genuine growth or political opportunities, the number of representatives also increased. The recent reapportionment decisions should eliminate these pressures. When people, not geographic entities, are represented, the ratio of people to representatives may be relatively unimportant. Presumably, one legislator can speak for a group of citizens as effectively as ten can, if the overall head count in the state house is apportioned equally.

The affirmative can deal with the charge of corruption by

-98- insisting on a comparison between Congress--where federal funds are now allocated--and state legislatures--where the affirmative plan would have them ailocated. While some isolated instances of· corruption inevitably arise in both institutions, Sanford claims:

.•• the over-whelming majority in both places are conscientious and diligent and attempt to re­ flect what they believe best for their states and country. They are not corrupt as institutions, as groups, as legislatures. Only a handful are question­ able as individuals. These charges do an injustice to the 95 percent who serve honorably. 78/ One party control of state legislatures should become less fre­ quent after full implementation of the Supreme Court's reapportionment decisions. Of course, there may be some district carving to suit the wishes of the party in power, but there are indications that opportunities for such manipulation will probably decrease. However, eliminating the structure for one party control will not automatically usher in a new era of two-party competition, for strong opposition parties must be developed in many states. The difficulties of the past may have caused opposition political infrastructure to fall into disrepair in some states, and time may be necessary to revitalize opposition forces there. How much time is a matter for speculation and, appropriately,for debate.

B. The Character of the State Bureaucracy

The second major conduit for the affirmative's shared revenues could be state bureaucracies. While this might be an unorthodox method of distribution, it is nevertheless theoretically available to the affirmative and should be considered by the negative. In addition, indict­ ments of state bureaucracies will apply with equal force to the other methods of distribution if the legislatures or governors allocate funds through the mechanism of state agencies.

The negative can maintain that state bureaucracies are the creatures of state officials and naturally embody the attitudes of their creators. Where state governments and legislatures have been dominated by small town representatives, the bureaucracies which have developed seem to embody similar attitudes. Critics argue that rural representatives distrust professional "experts" who have answers for everything, and prefer to retain the system of patronage that rewards friends, not experts.79/ Because of this tradition, "... [in] most states ..• the spoils system still � runs rampant (more than 95 percent of federal employees are under federal civil service pro_cedµres) ." 80/ In fact, "· .. [there are few] states with any semblance of a modern personnel system. There are 18 states without a general civil service system: in many of these coverage is limited to programs requiring it as a condition for obtaining federal grants." 81/ This observation points to one way for the affirmative to deal with the alleged incompetence of state bureaucracies; it could condition gr�nts on reform. States characterized by the spoils system would receive no

-99- share of federal revenues,

In the absence of federal inducements, are the states likely to upgrade their bureaucracies? While some states have introduced a modern personnel system, "••. state governments have been the slowest of all to professionalize." 82/ A curious situation has developed which makes up­ grading of positions, particularly with respect to salary, difficult to foresee. One commentator claims: "A vicious cycle is established, in which mediocrity attracts mediocrity, and •..leg1slators refuse to raise salaries or hire enough men to do the work that needs doing ..•because •.• people already on the payroll seem idle and undeserving of raises." 83/

The affirmative can also assert that the attitudes of state bureaucratic officials create substantial doubts about the wisdom of granting them administrative powers over unrestricted federal assistance. In one recent survey of state administrators in all fifty states, "··· when asked whether they thought'current overall level of services and expenditures in your state should be expanded and increased' 30 percent replied 'no' and two thirds responded 'yes.' The size of the 'no' pro­ portion is significant." 84/ While the value of increasing state expend­ itures can and will be debated this year, affirmatives may be wary of turning additional funds over to administrators who do not think they need them, or perhaps do not know how to utilize them effectively.

The affirmative can respond to charges of state bureaucratic ineptitude in several ways. It can argue that regardless of the structure for hiring at the state level, hiring practices are closer to civil ser­ vice practices than to a spoils sytem. The nature of the personnel problem has changed because government has changed. The problem for an incoming administration is no longer finding top jobs for friends, but convincing people to serve. It is no longer "cleaning house" of enemies, but finding capable people to do increasingly complex and challenging jobs. Party label is less relevant. Ability is the new pre­ mium. 85/

Salaries could be raised to acceptable levels if state legislators wished to do so. Perhaps the fiscal pressures t�e states face.prevent them from raising salaries to attract competent personnel. The affirmative plan might propose to solve that. Moreover, the surver of state administrators referred to above also indicated that state officials, no matter how selected, appear to share one possible index of competence: 85 percent had attended college; 64 percent had at least one college degree; and 40 percent had advanced degrees. 86/ Furthermore, while it may be admitted that large numpers of state administrators do not want to spend more money, they may have useful ideas on how present funds can be better spent. 'l'he same survey that revealed the satisfaction of many administrators with present appropriations also concluded that " '..• state administrators hold 'progressive' views regarding the roles of state government." 87/

-100- Finally, it may be argued, the record gives cause for confidence in the capacity of present state bureaucracies. State administrators seem to have performed reasonably well in dispensing federal grants-in-aid funds; there is little reason to anticipate that they would falter if called upon to dispense unconditional grants. C. The Position of the Governors The third major recipient. of revenue sharing funds could be the governor of a state. This approach would also be somewhat unusual, but for an affinnative looking for innovation state governors might pro­ vide the answer. The idea of a "governors fund" is an intriguing one. It could operate outside the nonnal appropriation process and exist immune from the effects of state bureaucracies. By spending imaginatively and wisely, a far-sighted state executive could develop new programs that would enable his state to become a model for others. But before the office of governor is given unrestricted use of federal funds, its strengths and weaknessess should be carefully evaluated. The negative could point to the structural restrictions which many states have placed on their chief executives. The first one which immediately strikes an observer is a limitation on the governors' terms of office. Ten states elect their governors for two year tenns only, a restriction that makes campaigning a time consuming job for an executive who has many other important'tasks. Consequently, survival in the governor's mansion for more than four years is rare. 88/ In two states there is a limit to two two-year tenns, and of the 40�tates that provide for a four-year tenn, 12 provide that the governor may not succeed-himself.89/� These time limits may be unrealistically short in an era when long-range planning is crucial. In those states where the governor is limited to one term, long range planning is difficult because his successor may have different ideas. Even short-range administration may be difficult in many states. A President is able to appoint his hand-picked associates to fill key posts in his administration. Not so with many governors. Often the lieutenant governor and the attorney general are elected on separate ballots. In some states, several other top executive posts are filled on election day. "Only Alaska, Hawaii, New Jersey, and Pennsylvania elect no other executive official independently (excluding the auditor)." 90/ As for other administrative posts: Slightly more than half the seven hundred and thirty major administrative posts are filled by gubernatorial appointment... only five governors can appoint their own superintendents of education; only half can choose their own men to run state de­ partments of agriculture. 91/ Gubernatorial power is further diluted, it has been argued, by numerous independent commissions which fonnulate policy on an independent

-101- basis. These bodies often hold the key to state administration and they guard their prerogatives jealously. The governor may be put in the awkward position of either reigning quietly as an executive without a plan, or of speaking out boldly for new ideas only to see his ideas disregarded by the commissions which must carry them out. In some cases the governor does have the power of appointment to these boards, but the terms of members are characteristically designed so that they are too long for any one governor to appoint a majority. Thus, the contribution of a governor to his state·' s future may be only accidental, and he may be able --with luck--to add a few of his associates to the roster of the bodies that actually make a difference in state government.

The affirmative can counter these observations by arguing that they are extreme examples, and that the problems involved, while not nec­ essarily encouraging, are certainly not as bleak as that painted by the negative. In recent years, Massachusetts, Michigan, Nebraska, and North Dakota have moved to four-year gubernatorial terms, with no limit­ ations on the number of terms that an incumbent may serve. Louisiana and Missouri have substituted a two-term limit for the one-term limit previously allowed. 92/ The affirmative can also advance the argument that the states are realizing the difficulty the negative has high­ lighted, and are correcting it so that future governors can be stronger executives. Furthermore, the affirmative plan may condition revenue sharing on state constitutional amendments to consolidate the executive branch under the governor, with either several pa�ty members running on the same ticket or with a governor free to appoirit his own subordinates once he is in office. The same procedure could be followed with respect to independent commissions. Finally, the affirmative could argue that unconditional grants to the governor will liberate him from the constrict­ ing structures of the state �xecutive branch, and that he could create new agencies and authorities to administer the funds.

D. The States and the Cities If state governments prove administratively capable of handling the tasks which revenue sharing proposals involve, the next major question is whether they are attitudinally appropriate for the job. Many of the social problems contemporary commentators identify are concentrated in large urban areas: certainly traffic and housing congestion are spawned by city life, and most welfare burdens fall on city government. Therefore, it might be argued that the government which is most likely to have to deal with these problems should be the one to allocate funds earmarked for revenue sharing. Yet over-generalization about the geography of social problems can be dangerous; " .•. many ignore the fact that slums are by no means confined to cities. Decaying rural areas are often deficient in both material and cultural advantages." 93/ Thus, concentration on urban areas--when rural areas suffer the same �lls--may not be justified.

Urbanoligists may respond that rural problems of a like nature are relatively infrequent since we are "a nation of cities" to begin with, and that, by definition, rural life and rural problems are a small

-102- part of1 that which is America. This is.true, however, only if the census bureau s definition of "urban place" is adhered to. By the census criterion, any settlement over 2,500 is an "urban place." 94/

However, the commonly accepted minimum density for an urban area is 1,000 persons per square mile, while a suburb is considered to be any area containing 500 persons per square mile. Yet indices reveal that 17 states do not have one county with an overall population density of 500 per square mile. 95/ Thus, it can be demonstrated that not all areas classified as "urban" deserve such a label. If a more accurate standard is used, many areas of the country do not have even large suburban con­ centrations.

After the dimensions of urban America are ascertained, further refinement is in order, since some observers argue that not all urban centers suffer from the commonly assumed urban ills. News media depict the worst conditions in some cities and describe them as "city problems," the implication being that all cities suffer similar social difficulties. Traffic jams, slum housing, polluted atmospheres, and a growing street crime problem are cited as problems confronting the "city." However, some cities have free flowing traffic, acceptable housing, and relatively clean air. Their streets are still considered safe after dark. Obviously, these cities do not fit into the portrait of urban America that has been so vividly painted, 96/ and may not require special help. In those cities where serious problems do exist, some observers have intimated that the only workable solution is to dismantle the cities, not to concentrate more funds in an attempt to eliminate the problems where they now exist. Dis­ tribution of populations may well be a possible solution to the problem, for pumping additional funds into efforts to help city dwellers may just draw more people to the cities and further complicate the urban crisis. When Mayor John Lindsay estimated that it would take $50 billion over the next 10 years to rejuvenate New York City, Lewis Mumford replied:

Not merely would [SO billion dollars] sky rocket already inflated land values so that a disproportionate amount would go to property owners and real estate speculators; but even worse--it would invite greater megamachines to invade the building industry.... with the aid of their system analyzers and computers, these high powered organizations would design housing units even more prison-like in character than those we now have, and as unfit for permanent human habitation. 97/

Finally, some of the problems associated with urban living, especially those of the "inner" cities, may not require large new sums of money: solutions cannot be purchased. Answers may lie in radical new approaches which would require present outlays of money to be applied in imaginative ways. One area that lends itself to this approach, Alice M. Rivlin contends, is education:

Disenchantment with big city school systems makes

-103- even ardent educationalists reluctant to pour more funds into the same old channels. The experience with the Elementary and Secondary Education Act has not provided a basis for statements that simply applying an extra billion or two to the education of low income children will make much difference. 98/

Thus, advocates of urban-oriented programs must not, ·only prove that such problems exist, but that money is a significant part of the answer.

Once agreement is reached that there are significant urban problems which can be alleviated--or eliminated--with additional funds, the question becomes whether the states are likeiy to utilize revenue sharing funds for the resolution of such problems. Many policy makers contend that state governments traditionally have an anti-urban bias. Since the turn of the century, cities have sprouted in areas that once were completely rural. The demand which new population concentrations have put on local government are novel and often difficult to explain to those who have not experienced them. Sanford comments: "Local governments unable to answer these deman

Ignorance is not the only difficulty, according to some. Be� cause cities may be underrepresented in state legislatures, it is often charged that many states continue policies that can only be described as anti-urban: they tax cities more and help them less--even as city problems grow larger: For several years the United States Conference of Mayors, composed of the elected leaders of the nation's urban governments, singled out unequal rep­ resentation as the major source of trouble for munici­ palities in general. The organization has asserted that most urban residents were "virtual second class citizens" and were the victims of taxation without representation.... City spokesmen have pointed speci­ fically to discriminatory practices regarding tax­ ation policies, state services and grants-in-aid, and state interference with local freedom of action. 100/

A classic example of the friction which can develop between a state gov­ ernment and a large metropolis is the perennial feud between New York City and the New York state Legislature. The posture of New York City officials has usually been one of a powerless suppliant coming to Albany with "hat in hand." Frustration with this situation actually provoked the City Council to consider separating and applying for statehood. 101/ While the secession threat has never been taken seriously, the ire of New York City's leaders has not subsided.

-104- To assess the. inherency--if any--of such an unbalanced sit- uation, basic causes must first be ascertained. Although a complete analysis might be extremely complex, a working outline is relatively straight forward. Small towns were--and still are--heavily represented in state legislatures. Because of po'litical and constitutional circum­ stances which prevailed in most states, this rural domination of state legislatures persisted after cities began to grow: rural problems were dealt with first; they were the ones which were easiest to understand; they were the ones that affected most legislators and their constituents. Cities were seen not only as distant but also as corrupt: they bred crime and disease; their inhabitants were foreign to agrarian life, were different, were merely secondary objects of concern.

In contrast, the federal government has traditionally been more urban-minded. In recent years the commitment to urban problems has been institutionalized at the cabinet level. 102i The impetus for this urban consciousness has come from Congress--and especially from the Senate. Of course,the Executive Branch has been sensitive to city problems, but the crucial difference in emphasis placed on urban problems between the states and the federal government lies in the legislative branches at the two levels. In the case of the United States Senate as opposed to state legislatures, urban consciousness has not been accidental, since "... 11 in most states [United States] Senators cannot win without city votes. 103/ Furthermore, lobby groups which represent urban interests appear to have been more successful at the national leve�partially a result of a corresponding lack of success at the state level. When rejected at the state house, the only recourse left was Capitol Hill. New interest groups have found it more efficient to concentrate their energies 1n Washington lobbying for national reforms rather than diluting their pressure by seeking the assistance of fifty state governments.

The existing pattern of lobbying reinforces the impression, it has been argued, that only the national government cares about the cities. In Sanford's words, "The super-cities, with populations larger than those of some states, have and should have direct lines to Washington from their mayors." 104/ Yet, despite growing communication between great cities and Washington, the image of an apathetic state government pervades every conference where mayors and senators discuss current problems.

In reply, some argue that even the most responsive state leg­ islatures would not be able to solve the problems of the nation's largest cities. Therefore, national intervention should not be viewed as an in­ dication of state indifference; rather, it is a recognition of the magnitude of the problems to be solved.

While the affirmative can defend the states' traditional attitude toward the cities and produce evidence of their willingness to share the wealth with urban poor, the defense must be raised in context. If money is the turning point in the argument, both sides can probably concede that the state and national governments are willing to allocate money to the cities.

-105- Which level, however, is going to give a greater margin of the shared revenues to the cities? Of course, this approach begs the question of whether the cities need more money, for perhaps there are other problems which rank higher in order of priority. If so, then that mix which seeks to balanee priorities ought to be favored. Moreover, a discussion which centers only around fiscal considerations may miss the mark, for the willingness to take action and the capacity to be effective may be two very different things. As already noted, many have argued that national planners are ill-equipped to deal with most local problems, and that urban problems are extremely diverse from one locale to another. Thus, even if the federal government were willing to give "a, little bit more" to the cities, state administration may still be preferable when the balance of fiscal contribution and sensitive management is set. The affirmative should be prepared to meet each of the negative's attacks on state sensitivity to urban problems with a specific answer. It can first point out that the states are already giving one-third of their revenues to local governments. 105/ Combined with local tax collections, this constitutes a substantial sumdirected to local problems. More significantly, in Sanford's words " ... [the states] have increased their intergovernmental grants and expenditures to local governments from $52 million in 1902 to $506 million in 1927, to $1.5 billion in 1938, to $3.3 billion in 1948 and to $14.2 billion in 1965. As a percentage of local government revenues, the rise has been from 6.1 percent to nearly 30 percent in 1965." 106/ Of more importance than the actual dollar con­ tributions is the point that the states have apparently not turned their backs on local problems. Rather, it may be argued that they have responded to the best of their financial abilities. Proponents of revenue sharing could argue that increased urban awareness will precipitate larger trans­ fers to cities if federal funds are made available. The affirmative can also argue that the basic cause of state in­ difference has been eliminated by recent Supreme Court decisions, and that as the cities are given greater representation, their problems will be given greater consideration. This phenomenon may stem the flow of direct pleas to Washington and may further enhance state responsibilities in the urban field. As James W. Fesler argues: Apportionment 'by population will give urban and suburban people a much stronger voice in the legisla­ ture and will make state government more attentive to the problems such people feel strongly about. This opens the possibility of a change in the trend of the American federal system, for it should reduce the need for cities and metropolitan areas to go directly to Congress and national agencies for sympathetic hearing and action._ It could also cast the state governments in the role of spokesmen to Washington for such fed­ eral legislation and grants as are required to meet urban and metropolitan problems.... these governments would be in a position to recapture the interest and confidence of long-alienated urban people. 107/

-106- Finally, an affirmative worried about the states' concern for urban problems can construct its plan so that urban areas will be guaran­ teed funds. As chapter II noted, the affirmative may utilize a "pass­ through" requirement. Through this device, each participating state would be forced to grant a specific portion of its revenue sharing funds to local governments .. President Nixon's proposal includes a pass-through on the basis of local tax effort, but the affirmative may devise different criteria.

The negative may find fault with each of the three solutions the affirmative offers to deal with the question of state anti-urban bias: it may argue that trends in state-local revenue transfers are irrelevant because most local governments are not "urban" centers. As indicated earlier, there are literally thousands of local units of government; most of them can be helped by legislatures without compromising an anti-urban philosophy. But the most specific statistics may be required to convince a critical negative that the states are already concerned sufficiently with city maladies.

The negative may also question the real impact of reapportionment. Arguing that r�apportionment will solve the problems implies that the problems were a result of malapportionment, an argument open to question. Fesler states: "How much effect malapportionment had on the policy output of state legislatures is almost impossible to determine. No effects whatever were found in several studies of roll call voting or in studies comparing the degree of malapportionment in the legislatures with the degree of urban and rural bias in the policies they adopted." 108/ More­ over, when legislators are elected on the basis of population, it will be the suburbs and not the inner city which will gain the greatest increase in representation:

•.. the suburbs, often pieces of a metropolitan area and generally reckoned as part of the urban part of the dichotomy, in fact often have interests differ­ ent from those of the major cities. Voters in those suburbs have higher than average incomes and differ­ ent ethnic compositions from those of the core cities and may choose legislators who are natural allies of the usually conservative legislators from rural and small-town constituencies. 109/

Thus, reapportionment may raise the hopes of urban dwellers, while actually reducing the chances .of massive help from the states.

The final indictment of reliance on reapportionment goes to the rationale of equal representation as applied to the cities. Once the concept that each man deserves equal representation in legislative assemblies is acc�pted, there is an almost unconscious corollary which may develop: each man also deserves to be represented equally when funds are distributed. Acceptance of this corollary would create pressures to see that everyone gets something at budget review time. Needs can

-107- always be shown. Priorities among competing claims may often be decided by asking how much each section of the state already has before deciding which section will be given the next portion of state revenues, The consequences for the cities are obvious. and Heller worries that "··· central cities will be represented in proportion to their population, but not to their problems." 110/ Urban problems may require special emphasis in the future, not the even-handedness which equal representation implies, acc0rding to urbanologists. Thus, the affirmative may have to demonstrate the states are willing to emphasize urban difficulties after reapportionment is complete. Anything less may foreshadow the demise of the cities as their ills multiply.

The negative can fault suggestions for a pass-through formula on the same basis that many observers criticize the federal approach today--it is inflexible. According to Alice Rivlin:

States differ widely in the way in which they share functions between state and local governments. In New Jersey, the localities bear the main bur­ den of government and the state has few functions. In North Carolina, the state runs the ·school system. Requiring states to pass-through, say fifty percent to local governments would be too much in some states and not enough in others. 111/

Secondly, giving money to "local" governments involves little precision, for the United States includes forty thousand general purpose local governments. 112/ Money would go to units which were hundreds of miles from a standard statistical metropolitan area. The urge to help the cities in a special way might guarantee that their problems would be bypassed in a special way.

IV. Conclusion

Unrestricted revenue sharing is an aspect of a controversy in­ volving fundamental American values. Proponents of decentralization worry about the danger of concentrated power and the constriction of innovative impulses. Opponents believe that the new pattern of government--more and more responsibility at the federal level, less and less independence at the state level--protects the nation from corrupt and parochial gov­ ernments better suited to a subordinate than to a creative role. This is an exciting and perhaps a vital controversy. It involves the question of what institutions best advance American social interest consistent with protecting creative policy, dissent, and change. It is probably the most intriguing aspect of this year's debate proposition.

-108- DISCUSSION QUESTIONS--CHAPTER V

1. Describe the two different approaches to decentralization by means of revenue sharing. What is the harm of concentrated power? Is it a present or potential harm? Does it make any difference?

2. How might revenue sharing bring government decision-making closer to the people? Is the average citizen interested in state and local government? Could revenue sharing encourage the growth of new community power structures? Is this desirable? Will it work? What was the experience under the poverty program?

3. Why is public policy experimentation useful? What role have the states historically played as laboratories for experimentation? What factors now inhibit state creativity? In what areas could state experimenta­ tion make a useful contribution in the future? Is state experimentation likely to produce substantial benefits?

4. Are federal grants and demonstration projects necessarily inadequate vehicles for experimentation? How does the matching requirement restrain state impulses toward innovation? Suggest reforms in grant programs to convert them into instruments for innovation.

5. How does the bureaucracy affect the chances for creative experimentation? Describe the alleged characteristics of the federal grant bureaucracy. What are the sources of the bureaucracy's power? How does the frag­ mented structure of Congress contribute to the influence of the grant bureaucracy? Cite examples of bureaucratic encouragement of experimen­ tation on the state and local levels. Are the examples atypical?

6. Describe conditions in state legislatures. What factors constrain state legislative reform? How do popular attitudes affect the prospects for reform? Are state legislatures desirable mechanisms for the dis­ tribution of federal revenue sharing benefits? How could an affirma­ tive plan assure improved state legislative quality? Could present grants-in-aid be employed to accomplish the same objective?

7. What are the characteristics of the state bureaucracies? Are the states still afflicted by the spoils system? Have federal grant programs in duced some improvements in this area? Could they do more? Could the affirmative plan embody a similar device to assure competent bureaucratic administration of revenue sharing benefits? Are state bureaucracies improving in quality now? What facts indicate that improvements are likely to continue or accelerate?

8. What may make the governors uniquely qualified to use revenue sharing for creative experimentation? Describe some of the institutionalized restraints on gubernatorial initiatives. Is the position of the governors improving? Could conditional revenue sharing further the trend toward improvement?

-109- 9. What is an "urban area"? Are supposedly traditional state antipathies toward the cities mellowing'? Will reapportionment help the cities? How might it hurt them at the state legislative level? How has the federal government responded to urban problems? Does it seem more sympathetic than state governments? Is the federal government as capable of comprehending local problems as the states? Assess the merits and demerits of a required pass-through provision in a revenue sharing plan.

-110- FOOTNOTES--CHAPTER V y "The Financial Dilemma of American Federalism," The Morgan Guaranty Survey, September, 1966, pp. 4-5.

'!:J Leonard D. White, The States and The Nation (Baton Rouge, La.: Louisiana State University Press, 1953), p. 3.

� Roger A. Freeman quoted in American Enterprise Institute, Federal Revenue Sharing Proposals,�· cit., pp. 14-15. if Sanford,�· cit., pp. 108-109.

§.! Federal Revenue Sharing Proposals,�· cit., p. 31. , §_/ Ibid. p. 25. 7/ Los Angeles Times, January 21, 1968. y Wall Street Journal, December 11, 1968.

� Washington Post, July 1, 1968. lU/ Washington Post, August 22, 1969. .!11 Robert F. Kennedy quoted in Daniel P. Moynihan, Maximum Feasible Mis­ understanding (New York: Free Press, 1969) pp. 90-91.

12/ Moynihan, Ibid., p. 129.

13/ Ibid., pp. 134-136.

14/ New York Times, November 5, 1965.

15/ Moynihan,�· cit., p. 137.

16/ Ibid., pp. 130, 133.

17/ Heller, �· cit., p. 124.

18/ New York Times, September 11, 1966.

19/ Sanford,�· cit., p. 77.

20/ Committee for Economic Development,££.· cit., pp. 26-27.

21/ Heller,�· cit., p. 169. 22/ Ibid., p. 124. 23/ Sanford,�· cit., p. 59.

-111- 24/ Ibid., p. 60. 25/ Ibid., pp. 57-58.

26/ Break,�· cit., pp. 108-109.

27/ James C. Charlesworth, "Allocation of Responsibilities and Resources Among the Three Levels of Government," The Annals, ££.· cit., p. 76.

28/ Baltimore Sun, February 6, 1967.

29/ Allen K. Campbell, "National-State-Local Systems of Government and Intergovernmental Aid " The Annals,££.· cit., p. 106.

30/ William Buchanan, "Politics and Federalism: Party or--Antiparty?" �-, pp. 108-109.

31/ Sanford,�· cit., p. 162.

32/ "If Washington Shares Tax Revenue With the States," U.S. News and World Report, December 5, 1966, p. 87.

33/ Ellis,££.· cit., p. 247.

34/ Sanford, ££.· cit. ,p. 3. 35/ Mushkin and Adams,'�· cit., p. 235.

36/ Wall Street Journal, March 16, 1966.

37/ Ibid.

38/ Sanford, �· cit., p. 155.

39/ Baltimore Sun, January 30, 1969. 40/ Campbell,�· cit., p. 105.

41/ Heller, �· cit. , p. 142.

42/ Maxwell, �· cit., p. 58.

43/ Council of State Chambers of Conunerce,££.· cit., p. 2.

44/ Adrian,££.· cit., pp. 39-40. 45/ Mushkin and Adams,�· cit., p. 234.

46/ Wright,�· cit., p. 80.

47/ Ibid., p. 10.

-112- 48/ William G. Coleman, "The Role of the Federal Government in the Design and Administration of Intergovernmental Programs," The Annals, �· cit., p. 29. 49/ Coleman D. Ransone, Jr., The Office of Governor in the United States (University of Alabama: University of Alabama Press, 1956), pp. 249-50. 50/ Baltimore Sun, February 6, 1967. 51/ Wright, �· cit., pp. 88-89. 52/ Sanford,�· cit., pp. 80-82. 53/ Wright, �· cit., p. 82.

54/ Maxwell,�· cit., p. 57. 55/ Wright,�· cit., p. 82. 56/ Ibid., p. 81. 57/ Wall Street Journal, March 16, 1966. 58/ Sanford,�· cit., p. 82. 59/ Moynihan, �· cit., p. 139. 60/ Committee for Economic Development, Modernizing State Government (New York: The Committee for Economic Development, July, ·1967), p. 15. 61/ Ibid., p. 37. 62/ Ibid.

93/ Ibid., p. 39. 64/ Ibid., p. 81. 65/ Ibid., p. 39. 66/ "There's Ferment in the State House," Nation's Business, June, 1967, p. 80. 67/ Committee for Economic Development, Modernizing State Government, �· cit., p. 38. 68/ Ibid., pp. 36,100. 69/ Ibid., p. 38. 70/ "There's Ferment in the State House,"�· cit. , p. 80.

-113- 71/ James Q. Wilson, "Corruption: The Shame of the States," The Public _Interest, Winter, 1966, p. 29.

72/ Ibid., pp. 29-30.

73/ Ibid., pp. 32-33,

74/ Washington Post, August 22, 1969.

75/ Conunittee for Economic Development, Modernizing State Governments, �· cit., p. 85.

76/ Ibid., p. 68.

77/ Ibid., p. 42.

78/ Sanford,�· cit., pp. 40-41.

79/ Adrian,�· cit., pp. 40-41. 80/ Washington Post, August 22, 1969.

81/ Conunittee for Economic Development, Modernizing State Governments, �· cit., p. 58.

82/ Adrian,�· cit., p. 40.

83/ Christopher Jencks, "Why Bail Out the States?" New Republic, December, 12 , 1964 , p • 9 . 84/ Wright,�· cit., p. 117.

85/ Sanford,�· cit., p. 198.

86/ Wright, �· cit., p. 124.

87/ 'Ibid.

88/ Conunittee for Economic Development, Modernizing State Government, -�. cit., p. 46. 89/ Sanford, �· cit., p. 190.

90/ Conunittee for Economic Development, Modernizing State Government, �· cit., p. 51. Wilson,�· cit., p. 35.

Sanford, �· cit., p. 191. Gordon E. Baker, The Reapportionment Revolution (New York: Random House, 1966), p. 55.

-114- 94/ Daniel J. Elazar, "Are We a Nation of Cities?" Public Interest, Summer, 1966, p. 42. 95/ Ibid., p. 43.

96/ Ibid. , p. 44.

97/ Lewis Mumford quoted in Sanford,�· cit., p. 131.

98/ Washington Post, August 22, 1969.

99/ Sanford', �· cit., p. 127.

100/ Baker, �· cit., p. 61.

101/ Ibid., pp. 62-64.

Sanford, �· cit., p. 128.

Richard Lee Strout, "The Next Election is Already Rigged," in Glendon Schubert, ed., Reapportionment (New York: "Charles Scribner's Sons, 1965), p. 7.

104/ Sanford, �· cit., p. 129.

105/ Wright,�· cit., p. 145.

106/ Sanford, �· cit., ,pp . 123-124. 107/ James W. Fesler, "The Future of State and Local Government" in Fesler, ed., The Fifty States and Their Local Governments (New York: Alfred A. Knopf, Inc.,1967), p. 563. 108/ Ibid.

109/ Ibid., p. 564. llO/ Heller,�· cit., p. 160.

111/ Washington Post, August 22, 1969. ll2/ Ibid.

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Rivlin, Alice M. "President Nixon and the Cities," Washington Post, August 22, 1969. Sacks, Seymour and Harris, Robert. "The Determinants of State and Local Government Expenditures and Intergovernmental Flows of Funds," National Tax Journal, 17, March, 1964, pp. 75-85.

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-128- III. GOVERNMENT PUBLICATIONS

Advisory Commission on Intergovernmental Relations. Apportionment of State Legislatures. Washington: U.S. Government Printing Office, 1962. Federal, State Coordination of Personal Income Taxes. Washington: U.S. Government Printing Office, 1965. Fiscal Balance in the American Federal System. 2 Vols. Washington: U.S. Government Printing Office, 1967.

Governmental Structure, Organization and Planning in Metropolitan Areas. Printed by House Committee on Government Opera­ tions, 87th Cong., 1st Sess., July, 1961.

Impact of Federal Urban Development Programs on Local Govern­ ment Organizations and Planning. Printed by Senate Committee on Government Operations, 88th Cong., 2d Sess., 1964. Committee Print. Measures of State and Local Fiscal Capacity and Tax Effort. Washington: U.S. Government Printing Office, 1962. Periodic Congressional Reassessment of Federal Grants-in­ Aid to State and Local Governments. Prepared for the Subcommittee on Intergovernmental Operations of the Senate Committee on Govern­ ment Operations, 90th Cong., 1st Sess., July 10, 1967.

Periodic Congressional Reassessment of Federal Grants-In­ Aid to State and Local Governments. Washington: U.S. Government Printing Office, June, 1961.

The Role of Equalization in Federal Grants. Washington: U.S. Government Printing Office, January, 1964.

State and Local Taxes, Significant Features, 1968. Washington: U.S. Government Printing Office, 1968.

Urban and Rural America: Policies for Future Growth. Washington: U.S. Government Printing Office, April, 1968.

Freeman, Roger. "Grants without Strings." An article reproduced in the Congressional Record, June 25, 1959, pp. A5506-07. "Federal Grants and the Decline of the Federal System." A paper delivered to the 58th Annual Conference on Taxation, Na­ tional Tax Association, New Orleans, Louisiana, November 9, 1965. Reproduced in the Congressional Record, July 12, 1966, pp. 14672-76. Hirsch, Werner. Analysis of the Rising Costs of Public Education. Joint Economic Committee Study Paper No. 4. Washington: U.S. Gov­ ernment Printing Office, November, 1959.

-129- McBreen, Maureen. Analysis of President Johnson's Proposal to Share Ris­ ing Tax Revenues with State and Local Governments. Washington: Legislative Reference Service, Library of Congress, November 23, 1964.

Republican Governors' Association and the Ripon Society. Government for Tomorrow: a Proposal for the Unconditional Sharing of Federal Tax Revenues with State and Local Governments. Reproduced in the Congressional Record, August 25, 1965, pp. A4785-89. U.S. Bureau of the Budget. "Federal Aid to State and Local Government," Special Analyses of the Budget of the United States: Fiscal Year 1967. Washington: U.S. Government Printing Office, 1966.

U.S. Congress, Joint Economic Committee. Employment and Manpower Problems in the Cities: Implications of the Report of the National Advisory Commission on Civil Disorders. 90th Cong., 2d Sess., September 16, 1968. U.S. Congress, Joint Subcommittees on Intergovernmental Relations of the Committees on Government Operations. Hearings on Five Year Record of Advisory Commission on Intergovernmental Relations and its Future Role, 89th Cong., 1st Sess., May 25-27, 1965. U.S. Con2ress, House. Committee on Government Operations. Advisory Com­ mission on Intergovernmental Relations: The First Five Years. 27th Report. 89�h Cong., 2d Sess., April 28, 1966.

Subcommittee on Executive and Legislative Reorganization of Committee on Government Operations. The Budget Process in the Federal Budget. 9lst Cong., 1st Sess., 1969.

Subcommittee of Committee on Government Operations. Hearings on Congressional Review of Federal Grants in Aid. 87th Cong., 1st Sess., July 25, 27, 1961.

Committee on Government Operations. Federal-State-Local Re­ lations: Federal Grants-in-Aid. Report No. 2533. 85th Cong., 2d Sess., August 8, 1958.

Committee on Government Operations. Hearings on Federal­ State-Local Relations: State and Local Officials. 85th Cong., 1st Sess., 1959.

Committee on Government Operations. Hearings on Intergov­ ernmental Cooperation. 90th Cong., 1st and 2d Sessions, July 31, August 1-3, November 7-9, 14, 15, 1967 and June 12-13, 1968.

-130- Committee on Science and Astronautics. Science and Tech­ nology in the Cities. 91st Cong., 1st Sess., February 4-6, 1969. U.S. Congress, Senate. Subcommittee on Intergovernmental Relations. Catalogue of Federal Aids to State and Local Governments. Com­ mittee Print. 88th Cong., 2d Sess., April 15, 1964. Subcommittee on Intergovernmental Relations of the Committee on Government Operations. The Condition of American Federalism. 89th Cong., 2d Sess., October 15, 1966.

Subcommittee of the Committee on Government Operations. Hearings on Creative Federalism. 89th Cong., 2d Sess., and 90th Cong., 1st Sess., November 16-18, 21, 1966 and January 31, February 1-2, 6-7, 9, March 21-22, 1967. Subcommittee on Intergovernmental Relations of the Committee on Government Operations. Criteria for Evaluation on Planning State and Local Programs. 90th Cong., 1st Sess., July 21, 1967.

Subcommittee on Executive Reorganization of the Committee on Government Operations. Hearings on tpe Federal Role in Pro­ grams for the Handicapped. 89th Cong., 2d Sess., July 13-14 and August 3-4, 11, 1966.

Subcommittee on Executive Reorganization of the Committee on Government Operations. Hearings on Federal Role in Urban Af­ fairs. 89th Cong., 2d Sess., and 90th Cong. 1st Sess., August 15, 1966-June 28 ,· 196 7. 20 parts. Subcommittee on Intergovernmental Relations of the Com­ mittee on Government Operations. �earings on Metropolitan Planning. 89th Cong., 1st Sess., May 21-23, 1963. Subcommittee on Intergovernmental Relations of the Com­ mittee on Government Operations. National Survey of Metropolitan Planning. 89th Cong., 1st Sess., December 16, 1963. (A Study prepared by the U.S. Housing and Home Finance Agency.)

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