Revenue Sharing and the City

Revenue sharing was one of the topics covered by a conference on Issues in Urban Economics, sponsored in 1967 by the RFF Committee on Urban Economics. The well-known Heller-Pechman proposal for revenue sharing was debated and the five papers dealing with this were recently published for RFF by The Johns Hopkins Press as Revenue Sharing and the City. The following excerpts give some indication of the range of opinions on this controversial subject.

—Walter W. Heller

Before anyone reaches the complacent conclusion that state and local governments can meet future needs without undue restraint, let him at knock on any fiscal door or scratch any fiscal surface at the state and local levels. Let him look beyond today's scope and quality of services to the aspirations that grow out of abundance. Let him find a single major city or state that can meet these aspirations without fiscal heroics. In his own suburb he will find unmet needs for school facilities, sewers, sidewalks, street lights, green space, more frequent garbage and trash collection. In his central city, let him look closer at the rutted streets and crumbling curbs; at the deteriorating parks and miserable housing in the urban ghettos; at delinquency, crime, and poverty. And lest he be misled by some temporary surpluses growing out of the unexpected surge in revenues from an economy overheated by Vietnam, let him look dead ahead in the near-doubling of higher education expenditures in the next five years, at the crying needs for better prisons and mental hospitals, and at the fight—only just begun—against air, water, and land pollution.

The core of the revenue-sharing plan is the regular distribution of a specified portion of the federal individual income tax to the state primarily on the basis of population and with next to no strings attached or, at least, no hamstrings attached. This distribution would be over and above existing and future conditional grants. The federal government would each year set aside and distribute to the states an eventual 2 percent of the federal individual income base (the amount reported as net taxable income by all individuals). The states would share the income tax proceeds on the basis of population, thus transferring some funds from states with high incomes—and therefore high per capita income tax liabilities—to low-income, low-tax states. States would be given wide latitude in the use of their revenue shares.

A spur to greater state-local tax effort could be built in by weighting the per capita grants to each state by the ratio of that state's tax effort to the average tax effort in the country—tax effort being defined as the ratio of state-local general revenues to personal income.

Whether to leave the fiscal claims of the localities to the mercies of the political process and the institutional realities of each state or to require a pass-through to them is not an easy question. But in the light of urgent local needs, especially in urban areas—and observing the tendency of many state legislators to hew to more generous service standards at the state than at the local level—I have been persuaded that setting a minimum percentage pass-through (preferably 50 percent) is desirable in order to recognize the legitimate claims of local government. This would put pressure on the states to recognize local needs while letting each state adopt the precise form and division of the local share to its particular pattern of local needs.

—Richard Ruggles

The central problem is that within states and local communities, substandard schools, hospitals, prisons, and blighted areas do exist alongside wealth. Much of the increase in state and local expenditures can be demonstrated to have gone to provide better facilities in areas where the level of facilities is already high, and the problem areas continue to be neglected. Instead of suggesting that the federal government should provide state and local governments with additional resources, which would be similarly utilized, it may be more fruitful to ask whether or not some of the problems that state and local governments are currently neglecting are not in fact better solved by some other means.

As a review of the past development of federal, state, and local government functions has indicated, these functions have been subject to major evolutionary changes. For example, the introduction of the social security system in the 1930's has had considerable impact on the 1960's. The county poorhouse for the aged is essentially a thing of the past. Today, millions of aged are receiving as a matter of right a monthly social security check which supports them in their old age. More recently, the establishment of the Medicare program is also having a major impact on the need for state and local support of health services for the aged.

In effect, these federal programs are removing the problem of the aged population from the concern of state and local governments, and have made it the concern of national policy administered by the federal government. It is not only that state and local governments were relieved of expenditures in this area; they were relieved of the major responsibility of providing for the minimum level of requirements of the aged population.

One of the major functions of the federal government should be to guarantee every citizen access to an adequate level of education and health care. To the extent that redistribution of income is involved for the solving of social problems, the effectiveness of purely state or local programs is limited. In other problem areas, such as transportation, air and water pollution, and natural resources, the federal government should, in cooperation with state and local governments, develop coordinated programs aimed at solving the associated problems.

Federalism as a conscious division of functions between levels of government is a reasonable approach, but the encouragement of federalism which absorbs public funds through federal tax credits and revenue sharing without meeting the critical needs of the nation constitutes an avoidance of the basic problems rather than an acceptable solution to them.

—Lyle C. Fitch

The essence of the issue is in the public decision making processes of allocating resources and whether the state and local governments, as now constituted, are the best decision makers we can command to dispose of the "national dividend."

The crucial question is: Who will determine the course of future urban expansion and set standards therefor? Can adequate leadership be expected from the fifty states and beyond them, from the 90,000 local governments? Thus far, most of the urban population growth has been accommodated by short-run market forces. The result is the specter of endlessly sprawling urban development, careless of efficiency, indifferent to beauty, heedless of any human values save the immediate need for a roof and four walls.

The questionable ness of the states as instruments of fiscal salvation does not stem alone from the historic disinterest in urban affairs. They and their subordinate local governments are characterized by fragmented responsibilities, political weakness, and antiquated organization which greatly impair them for useful service as decision making instruments to meet the problems of this high-flying age.

If funds are handed out to bodies without competent planning and administrative machinery, there is no particular reason to think that they will be disbursed by any system of considered priorities. If we are going to depend, as I think we must, on the decision making and innovation capacities of state local governments, let us seek to improve those capacities. Let us fashion federal grants to achieve this end.

—Carl S. Shoup

The states can no longer be assumed to be willing or able to pass through all the funds from the federal level that the urban areas want to supply themselves with (using the federal taxing mechanism as an intermediary, producers' good) by their joint action. The chief reason for this unwillingness and inability on the part of any given state is that the joint action must be taken by all the urban areas of the country. It must be more than joint action of all the urban areas within any one state. The beneficial effects of reapportionment emphasized by Walter Heller will not, in this view, be enough. Accordingly, direct financial contact between the federal government and the several urban areas will have to increase if the urban centers are to act effectively in this joint effort of theirs.

Annexation of suburbs to a core city is not needed, at least not universally; many other forms of joint action within a given urban area are available. If a given core city and its suburbs, or a cluster of such core cities and their suburbs, are to expect all other similar aggregates in the United States to work with them through the federal machinery of increased federal taxation and increased federal grants, they must not themselves act as a jostling group of fragmented economic units.

—Harvey S. Brazer

Distribution of funds to cities, or a uniform proportion required to be distributed to local governments, involves serious and perhaps insuperable difficulties. The states vary widely in the distribution of functional responsibilities between the state and its local subdivisions. In 1965, in the United States as a whole, the states accounted for 35 percent of total state-local direct general expenditure for all functions, but this proportion ranged from 22 and 24 percent in New York and New Jersey to between 60 and 75 percent in West Virginia, Vermont, Alaska, and Hawaii. Thus, a requirement that, say, 50 percent of a federal block grant be distributed to local jurisdictions within each state would be overly generous for those jurisdictions in the latter group of states, whereas it would fall far below the proportion of expenditure obligations now carried by local jurisdictions in New York and New Jersey, as well as many other states. It is only within each of the states taken as a whole that all state-local functions are more or less uniformly assumed. It follows, therefore, that block grants or unconditional subsidies should be distributed to the states for further distribution, as they may choose, to their local subdivisions. . . . In my judgment, the states and, through the states, the federal government should contribute far more than they do to meeting the costs of public services supplied by cities and other local jurisdictions. It seems equally clear to me, however, that direct federal grants to local governments should remain limited in scope and designed, in the form of grants-in-aid, to cope with specific deficiencies relating to functional areas that are of overwhelming concern to the nation as a whole.