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 Expenditures---------------------- 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 Payments------------------------------ 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